B.Com Financial Accounting - II Study Materials PDF

ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ----------------------------------------------------------------------------------------------------------------------------------...

ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING -II SEMESTER – II ACADEMIC YEAR 2023-24 PREPARED BY COMMERCE DEPARTMENT Page 1 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- INDEX UNIT CONTENT PAGE NO I HIRE PURCHASE ACCOUNTING 3-14 II BRANCH ACCOUNTING 15-22 III PARTNERSHIP ACCOUNTING I 23-36 IV PARTNERSHIP ACCOUNTING II 37-54 V ACCOUNTING STANDARDS 55-63 Page 2 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- UNIT I HIRE PURCHASE AND INSTALMENT SYSTEM Hire purchase and instalment systems are considered as a special system, since they are combination of purchase and sale. These systems are considered as a revolution in bringing durable goods of high value to middle and lower middle class people, which were once available only to the rich and upper class people. These two systems have made the market expend. 17.1HirePurchaseSystem Goods which are purchased under hire purchase system are not immediately bought, but the purchaser has to pay the price in instalments. Goods are immediately delivered but ownership of the goods comes only when the last payment is paid and all the terms and conditions of the contract are fulfilled.Till then the goods are treated as on Hire. It is clear that Hire purchase is a trading system of retail business which agrees to sell the goods on the condition that the buyer pays the purchase price along with interest for a deferred fixed number of instalments. As the good are not legal sold out the ownership of the goods are not transferred along with the delivery of goods. According to the Hire Purchase Act 1972-Section2(c) “Hire purchase Agreement means an agreement under which goods are let on hire and under which the hire has an option to purchase them in accordance with the terms of the Agreement and includes an agreement under which (i) Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments, (ii) The property of the goods is to pass on to such person on the payment of the last of such instalment and (iii) SuchpersonhasarighttoterminatetheAgreementatanytimebeforethepropertyso passes.” 17.4 Important Terms in Hire Purchases system (i) Hirer-Hirer is a person who buys or in this case who obtains the possession of the goods from the owner as per the Hire purchase Agreement. (ii) Hirer Vendor-Hirer vendor or the owner is a person who lets or who has delivered or delivers the goods to hirer under an agreement. Hire vendor is the seller of the goods on the hire purchase system. (iii) Cash Price- The cash price is the price of the goods which can be purchased by cash or there tail price, if not purchased under hire purchase system. (iv) Hire Purchase Price-It is the total amount payable by the hirer under the hire purchase agreement, in the agreed number of instalments for the purchase of goods. Hire purchase price is the total of cash price and interest. Hire purchase price=Cash price +Interest Page 3 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- (v) Interest-Interest is the amount which is payable in addition to the actual cash price of the goods. It is the amount paid by the buyer for the delayed and postponed payment. (vi) Hire Instalment-It is the amount payable periodically by the hirer or the buyer, instalment may be an equal amount or different amounts which are based on the agreement. Down Payment or initial amount-The amount is a lump-sum out of the total Hire purchase price, payable to the vendor in advance while the agreement is signed, which does not carry any interest on it. 17.6AccountingTreatmentofHirePurchase System The records in hire purchase system depend on the value of goods that are delivered. High value goods like Machinery, trucks etc, have a different treatment from those having small value having many individual customers like televisions, refrigerators, washing machine, motor cycles etc., Accounting Treatment for High Value Goods The high value goods with less number of customers for whom individual ledgers can be maintained by the hire-vendor. At the same time the Hire also maintain the asset A/c. For such high value goods, two methods of records can be maintained. (i) First method –Capitalising only the portion of cash price paid or as set accrual method. (ii) Second method –Capitalising the full cash price or credit purchase with interest method. Before recording the transactions in Hire purchase system, one has to be clear regarding the calculation of interest, hire purchase price and cash price of the Hire purchase Agreement. Interest calculations are common for both the methods, which has to be calculated before passing journal entries. Hire purchase price–As already explained, Hire purchase price includes cash price and interest. Hire purchase price= Cash Price +Interest Cash price=Hire Purchase price– Interest Interest= Hire Purchase price –Cash price Cash price = Cost price + Profit therefore, Hire purchase price=Cost price+ Profit +Interest. Page 4 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- To solve the problems, one should make sure that all the three information are available i.e., cash price, interest and hire purchase price. First method In this method cash price paid is alone capitalized. The asset account is debited with the amount of cash price paid in that instalment. This method as use that the title pages two the buyer only after the last instalment is paid. Unit then the seller is the owner. So as and when the instalment amount is paid the case price in the instalment is capitalized. In this method the goods are consider to the acquired only gradually when the cash price is paid each time. Journal entries In the books of Hire-Purchaser or Hirer Date of signing 1. For down payment due the agreement Asset A/c Dr. To Hire vendor’s A/c Date of sign only 2.Fordownpaymentpaid The agreement Hire vendor’s A/c Dr. To Cash A/c Date of the 3.For1stInstalmentamount due 1stinstalment Asset A/c Dr.(Cash price in 1stinstalment) Interest A/c Dr. (Interest due in 1st instalment) To Hire vendor’s st A/c(1 Instalmentamount) ,, 4.For the1stInstalment paid Hire vendor’s A/c Dr. To cash A/c At the end of 5.Forprovidingdepreceiatinthe accounting Depreciation A/c Dr. Year To Asset A/c ,, 6.Fortransferringdepreciationandinterestto P&LA/c P&LA/c Dr. To Interest A/c To Depreciation A/c Page 5 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Note: Entries number:3,4,5 and 6 are to be repeated for second year and subsequent years till the last instalment is paid off. Second method: In this method the full case price is capitalised. The hire purchaser debits the Asset account A/c with full case price and credits the higher vendor A/c. this method assumes that the assets are consider to be acquired immediately when the position is taken. The purchaser enters into an agreement with the intention of fulfilling it. Journal entries In the books of Hire purchaser or Hirer Date of signing 1.For the cash price of Asset purchased the agreement Asset A/c Dr. To Hire vendor’s A/c (Total cash price) ,, 2.FordownPaymentpaid Hire vendor’s A/c Dr. To Cash Date of the 3.ForInterest payable on the1stInstalment 1stInstalment Interest A/c Dr. To Hire vendor ’s A/c ,, 4.Forpaymentof 1stInstalment Hire vendor’ s A/c Dr. To Cash A/c Date of closing 5. For providing the depreciation the accounts Depreciation A/c Dr. To Asset A/c ,, 6.For transferring Interest and depreciation to P&LA/c Profit& loss A/c Dr. To Interest A/c To Depreciation A/c Note: Entries no: 3,4,5 & 6 are to be repeated for 2nd year and subsequent years till the last instalment is paid off. Page 6 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- In the books of Hire vendor Journal entries in hire vendor books are common for both the methods. Journal Entries In the Books of Hire vendor 1. For goods sold on hire purchase Hire purchaser A/c Dr. To hire sale a/c 2. For receipt of down payment Cash A/c Dr. To Hire purchaser A/c 3. ForInterestreceivableon1st Instalment Hire Purchase A/c Dr. To Interest A/c 4. For receiptof1stInstalment Cash A/c Dr. To Hire purchaser A/c 5. For transferring interest to P&LA/c Interest A/c Dr. To P & LA/c Note: Entries 3, 4 & 5 are to be repeated for 2 nd year and subsequent years till the last instalment is received. Interest Calculation As already discussed on hire purchase price and cash price, we know that Interest amount (total) is the difference between hire purchase price and cash price. Hire purchase price is an higher amount than cash price since the interest payable is included. Interest is paid by the hire purchaser for the delayed payments that he makes. Interest receivable is the main source of income in hire purchase business. The seller gets Interest amount for the sacrifice he makes by receiving the amount after certain period but delivering the goods immediately. Total Interest= Hire purchase price–Cash price Each Instalment amount includes cash paid towards the total amount and Interest due for that period Instalment amount=Cash price paid +Interest for the period Page 7 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- While calculating the interest make sure that the Instalment amount and cash price paid for the period are ascertained. The followings are the situations under which interest is calculated:- 1. When rate of interest, the total cash price and Instalment amounts are given. Interest is calculated on the outstanding balance at a particular rate. Down payment does not carry Interest.Cash price paid (Instalment amount (given)- Interest) is deducted from the total cash price each year. The Interest for the last year is found by the difference between cash price outstanding and the amount of last Instalment. Illustration1 Mr. Nirmal purchased a machine on hire purchase system on 1.1.2007.The total cash price of the machine is Rs. 29800, payable Rs. 8000 on 31st December of every year for 3 years Rs. 8000 is payable on signing the agreement. Interest is charged at 5% p.a. Calculate interest payable by the buyer. Solution Table Showing Calculation of Interest Particulars Total cash Interest Instalment Cash price Price @5%p.a. (given) Paid (Inst-Int) Total cash price 29,800.00 - (-)Down 8,000.00 1090.00 8,000 8,000 payment 21,800.00 (21800×5%) 6,910.00 744.50 8,000 6,910.00 (-) I Instalment 14,890.00 (14890×5%) (-)II Instalment 7,255.50 8,000 7,255.50 7,634.50 365.50 (-)III Instalment (8000-7634.50) 7,634.50 8,000 7,634.50 Nill 2,200.00 32,000 29,800.00 This method can be identified with the help of the following calculation. Total amount payable Rs. Down payment= 8,000 Instalment amount (8000x3) 24,000 32,000 Page 8 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- (-)Total cash price 29,800 Total Interest 2,200 The total payable amount is more than the total cash price payable, so the difference is the total amount of interest.Therefore Rs. 8000 payable for 3 years is Instalment amount. Cash price paid has to be found out i.e.(Instalment amount – Interest). Illustration 2 On 1.1.2006 Sujatha bought a machine from Chirtra & Co on hire purchase system Rs. 1,20,000wasthecashprice,Rs.30,000downpaymentandattheendof1yearRs.34,500,II year Rs. 33000 and III year Rs. 31,500 was payable. The vendor charged interest @ 5% and depreciation is provided @ 10% annually.Journalise the entries in the books of both the parties Solution Table Showing the Calculation of Interest Particulars Total cash Interest Instalment Cash price Paid Price @5% (given) (Instalment -Interest) Total cash price 1,20,000 (-)Down 30,000 - 30,000 30,000 payment 90,000 30,000 4,500 34,500 30,000 I Instalment 60,000 30,000 3,000 33,000 30,000 II Instalment 30,000 1,500 31,500 30,000 30,000 III Instalment - 9,000 1,29,000 1,20,000 Page 9 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- II Journal Entries in the Books of Sujatha Date Particulars 2006 2007 2008 Debits Credit Debits Credits Debits Credits Rs Rs Rs Rs Rs Rs Jan1 Machinery A/c Dr 1,20,00 0 To Chitra&CoA/c 1,20,000 - - - - [Total cash price] “ Chitra & Co A/c Dr 30,000 30,000 - - - - To Cash A/c [Down payment] Interest A/c Dr 4,500 4,500 3,000 3,000 1,500 1,500 Dec31 To Chitra & Co A/c [Instalment amount paid] “ Chitra & Co A/c Dr 34,500 34,500 33,000 33,000 31,500 31,500 To Cash A/c [Instalment amount paid] “ Depreciation A/c Dr 12,000 12,000 10,80 10,800 9,720 9,720 To Machine A/c 0 [Depreciation charge] 16,500 4,500 11,220 13,80 P & L A/c Dr 12,000 3,000 1,500 0 “ To Interest A/c 10,800 9,720 To Depreciation [transferred to p&L A/c] Page 10 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- III Journal Entries in the Books of Chitra&Co Date Particulars 2006 2007 2008 Debits Credit Debits Credits Debits Credits Rs Rs Rs Rs Rs Rs Jan1 Sujatha A/c Dr 1,20,000 To Hire sales A/c 1,20,000 - - - - “ Cash A/c [TotalCashprice] Dr 30,000 To Sujatha A/c 30,000 - - - - Dec 4,500 3,000 1,500 Sujatha A/c [DownPayment] Dr 31 To Interest A/c 4,500 3,000 1,500 Cash A/c [Interestdue] Dr 34,500 33,000 31,500 “ 34,500 33,000 31,500 To Sujatha A/c Interest A/c [Instalmentreceived] Dr 4,500 3,000 1,500 To P & L A/c 4,500 3,000 1,500 [transferred to p & L A/c] 10 Instalment–purchase system Instalment purchase system where an agreement to purchase and sale is made between the buyer and the seller, here there is an immediate sale on signing the agreement. In actual purchase the price of the goods is paid in lump-sum, but in instalment system instead of paying in a lumpsum, it is spread over a period, interest is being paid on the unpaid balance. This interest amount is determined at the time of signing the agreement itself. The possession of the goods is taken by the buyer after signing the contract itself. The basic difference between instalment system and hire purchase system is the transfer of ownership. In instalment system the title or the ownership is immediately passed to the purchaser, but in the hire purchase system until the entire amount to the last instalment is paid the ownership with the vendor. In case the purchaser makes default of any payment, the seller has no right to repossess like in the hire purchase system, but he can recover the amount due to him by filing a suit in the court of law and can recover the unpaid amount since the buyer is the legal owner of the goods he has every right to sell, transfer, exchange or even destroy it. Page 11 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- 17.11Different between Hire Purchase and Instalment purchase system Hire Purchase Instalment System 1.In Hire purchase system In Instalment purchase system the , ownership of the goods lies with the ownership is transferred to the buyer on vendor until the buyer pays his last signing the agreement. instalment. 2. The agreement of hire purchase is The agreement of Instalment purchase is that contract of hire but later on it becomes of agreement of sale. sale. 3. In hire purchase system the relation In Instalment purchase system the relation between the parties is that of Hirer and between the parties is that of buyer and Hire vendor. seller. 4.The relationship between the parties are The relationship between the parties are that of Bailor and Bailee. that of debtor and creditor until the last instalment is paid. 5.The hirer has no right to sell the goods The buyer has all the right, to sell, exchange until the ownership is transferred to or transfer the goods at the time of paying him. instalments. 6.In case of default by the hirer, the hire In case of default by the buyer, the seller vendor has the right to repossess the cannot repossess the goods, but he can goods. legally recover the dues. 7.In hire purchase both the parties can In Instalment purchase the agreement cannot terminate the agreement and return be terminated. the goods. 8.The hire purchase system is under Hire The Instalment purchase comes under the purchase Act of 1972. sale of Goods Act of 1930. 9.The Instalment in hire purchase has hire The Instalment here consists of the part of charges plus capital part and interest. capital and interest on the outstanding capital. Page 12 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Accounting Treatment Journal entries In the book of Buyer When the goods is purchased 1year Jan 1 Asset A/c Dr. (Total cash price) Interest suspense A/c Dr.(Total interest) To seller A/c. (Total instalment Purchase price) 1. When the down payment is paid: Seller A/c Dr. To cash A/c 2. When the interest is due for the year Dec 31 Interest A/c Dr. To interest suspense A/c 3. When the instalment amount is paid Dec 31 Seller A/c Dr. To cash A/c 4. When depreciation is charged on the asset Depreciation A/c Dr. To Asset A/c 5. When the interest and depreciation is transferred to P&LA/c P&LA/c Dr. To Interest A/c To Depreciation A/c Note:ForsecondandsubsequentyearsentriesNo(3),(4),(5)and(6)aretoberepeated In the books of seller 1. When the goods are sold Jan1 Buyer A/c Dr. (Total Instalment Purchaser) To Sales a/c (Total cash price) To Interest suspense A/c (Total interest) 2. When the down payment is received Cash A/c Dr. To Buyer A/c Page 13 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- 3. When Interest is due for the year Dec 31 Interest suspense A/c Dr. To Interest A/c 4. When the Instalment amount is received Cash A/c Dr. To Buyer A/c 5. When the interest is transferred to P&LA/c Interest A/c Dr. To P&LA/c Note: For second and subsequent years entries no(3),(4), and(5) are to be repeated Page 14 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- UNIT – II BRANCH ACCOUNTING Meaning of Branch Accounting Branch Accounting is a system in which separate accounts are maintained for each branch. These branches are divided by geographical location, and each department has its profit and cost centres. In this accounting system, separate Trial Balance, Profit & Loss Statements, and Balance Sheets are prepared by each branch. Types of Branches Dependent Branch Hanging branches do not maintain separate accounts. Ultimately, the Head Office collectively manages its profit & loss statements and balance sheets. Only a few pieces of information have been supported by separate branches like Cash Accounting, Debtors Accounting, and Inventory. Independent Branch Independent branches maintain separate books of accounts. Ultimately, the branches keep their profit & loss statements and balance sheets separate from their Head Office. Therefore, the head office and branches are treated as separate entities in this case. For example:- If the Head Office sends material to its branch, the Head Office will record sales in the HO book and raise an invoice in the name of the component, and the department will mark this as a purchase in-branch books of accounts. Advantages of Branch Accounting It helps to ascertain the profit & loss of each branch. It helps to know each branch’s debtors inventory and cash position. It helps to determine each branch’s wages, rent, salary, and expenses separately. Separate accounting of each chapter helps to make decisions according to branch requirements. By separate branch accounting, it is easy to track the progress and performance of each unit. It helps to control the overall branch operation. Disadvantages of Branch Accounting Due to a separate account for each branch, it requires more work force. It requires an individual branch manager for each branch. Page 15 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- It requires other infrastructure at each location or unit. It increases the company’s expenses because of a different setup at each location. There is a chance of delay in decision-making in this accounting system because of multiple authorities. There is a chance of mismanagement in this accounting system because of decentralized operation and minimum control of the head office. Prepare Branch Account in the books of head office after taking into account the following information also: Page 16 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- DEPARTMENTAL ACCOUNTS A departmental business is one which has a number of departments under one roof and under the control of one management. Accounts are prepared for each department. Departmental accounts are accounts relating to the several departments or sections of a business, drawn up in order to ascertain the individual performance. That is, accounts which are prepared to find out the profit or loss of each department are known as departmental accounts. Department means the section of a large business. Generally, departmental accounts are employed in large business like insurance companies. To compare the trading activities of each department, trading profit and loss account of each department are prepared. Purposes: Following are the purposes of preparing departmental accounts. I) To find out the profit loss of each department. ii) To find out the efficiency of each department iii) To formulate new policies in the departments. Page 17 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- iv) To discontinue the unprofitable department. v) To maximise the overall profitability of the business as a whole. Vi) To measure the profitability of each department. vii) To compare the results of a particular department with previous year. viii) To compare the results of a particular department with the other departments of the same concern. ix) To allow departmental manager commission on the basis of the profits of their departments. Differences between Branch and Departmental accounts: 1) Location: Branches are located in different places whereas Departments are Located under one roof in a particular place. 2) Control: Branches are controlled by its Head office whereas departments are not so. 3) Opening in foreign countries: Branches may be opened in foreign countries. But there is no foreign department. 4) Types: Branches may be classified into different types but there is no such classification in departments. 5) Purpose: Branch account is to be prepared to know the profit or loss of each branch. But departmental accounts are prepared in order to find out the profit or loss as well as to know the efficiency of the business. 6) Transfer: Some times, Branches may receive goods from its head office but in departments it is not so. Advantages of Departmental Accounting: i) Preparation of Departmental accounting helps to find out the profit or loss of each department on a reliable basis. ii) With the help of profit of each department, efficiency of each department may be calculated. iii) On the basis of efficiency of the departments, incentive systems may be introduced to its employees. iv) Departments which have more efficiency may be expanded and departments which have lesser efficiency may be discontinued. So departmental accounts help to take remedial measures. Page 18 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Accounting procedure: There are two methods of keeping departmental accounts. 1) Independent Basis: Under this method, each department prepares its accounts separately. The profit or loss of each department is transferred to general profit and loss account of the concern. It is an expensive one. 2) Columnar Basis: Under this method, accounts of all departments are maintained together in a columnar form. Various subsidiary books are also prepared in a columnar form for each department. Departmental Trading and Profit and Loss accounts: When a concern maintains its books and records on columnar basis, Trading, profit and loss account can be prepared on columnar basis. The problem arises with regard to allocation of expenses. Direct expenses are debited to trading account. But in case of indirect expenses, they are to be apportioned on some suitable basis. After the allocation, net profit of each department is to be calculated. Types of expenses: Departmental expenses are divided into two types. 1) Direct expenses 2) Indirect expenses 1) Direct expenses: Direct expenses are those expenses which can be identified to a particular department or departments. Example: Wages, carriage inwards etc. These expenses are charged directly to the respective departments. 2) Indirect expenses: Indirect expenses are those expenses which cannot be identified to particular departments. These expenses are incurred for their common benefit. Indirect expenses are again sub divided into two groups. i) Examples which can be apportioned: These expenses are apportioned on some suitable basis among the departments. Page 19 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Basis Expenses 1. Purchase ratio Carriage, Freight, Duty, Octroi 2. Sales ratio Selling Commission, Bad debts, Discount allowed, Advertisement, Carriage outwards 3. Floor area occupied Rent, Rates, and Lighting expenses 4. Value of machines Depreciation, repairs, etc 5. H.P of machines Power expenses, Electricity 6. Value of stock Insurance on stock 7. No. of employees Welfare expenses, canteen expenses 8. Time Ratio Rent, salary ii) Expenses which cannot be apportioned: There are some expenses which cannot be apportioned to different departments on some suitable basis. So these must be shown in the general profit and loss account of the concern. Following expenses are to be debited to General profit and loss account. These expenses cannot beapportioned on suitable basis. Debenture interest General manager’s salary Director’s fees Income tax Dividend paid Legal expenses 2.From the following figures, prepare accounts to disclose total profit and the profit of the two departments, A and B: Particulars ` Particulars ` Opening Stock: A B Purchases: A B Page 20 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Carriage inward Discount Received Salaries: A B General Rent and rates Advertising Insurance General expenses Discount allowed Accountancy charges 15,200 10,800 75,100 69,800 2,860 1,430 9,000 8,500 11,600 6,000 8,100 1,000 5,400 1,800 500 Sales: Page 21 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- A B Purchase Returns: A B 1,00,000 80,000 1,100 800 The following further information is supplied: (a) Goods transferred from department A to B were ` 5,000. This has not yet recorded. (b) General salaries are to be allocated equally. (c) The area occupied is in the ratio of 3 : 2. (d) Insurance premium is for comprehensive policy, allocation being inconvenient. (e) The closing stock of the two departments were: A, ` 17,800 and B, ` 15,600. Page 22 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- UNIT III PARTNERSHIP ACCOUNTS-I Introduction The simplest form of organization is the sole trading organization as it is owned and carried by a person, at his risk. There arises situation where the business needs more capital, more persons, better decision making etc., due to expansion of the business. To meet these requirementstwoormorepersonsjointogethertocarrythebusiness,wheretheyarecalled as joint owners. Theses joint owner’s twice some amount of capital to run the business and agree to share the profits in the agreed proportions. The relationship between the interested person is called as partnership. Partnership is regulated under the Indian Partnership Act, 1932.This Act come into effect from 1st October 1932.According to section A of the Indian partnership Act, 1932 “Partnership is the relation between persons who have agreed to share the profit of the matching for all”. Each person of partnership is called as partner, collectively called as Firm. The name under which their business is carried on is called Firm’s name. Essential of Partnership: 1. Partnershipcomesintoexistenceasaresultofanagreementbetweenparties,this agreement can be expressed or implied. 2. Agreement must be to earn profit of the business sand share among its partners. 3. This is created in order to run business lawfully. 4. Such business should be carried on by all or any of the matching for all. 5. Theremustbeatleasttwopersonstorunthepartnershipmaximumoftwenty,but maximum of ten in case of banking business. 6. There must be mutual and implied agency, every partner is an agent as well as principal of the other partners. Types of partners In a partnership firm there may different types of partners and some of them are 1. Active partner – Such partners are actively engaged in the business, they are also called as actual partner’s f ostensible partners. 2. Sleeping partner – Such partner who does not take part in the conduct of the business, they are also called as dormant partner. 3. Nominal partner – This type partner lends his name to the firm without any actual interest in terms of investing capital. 4. Partner in profit only – This type of partner agreed to be partner for profit amount, he Page 23 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- does not takes risk of sharing losses. Partner by Estoppel – Such partner becomes partner by words, spoken or words written or by represents itself or permits to be represented to be a partner in the firm, who is not a real partner in the firm, who is not a real partner. 5. Sub – partner – If a partner agrees to give his share of partner to an outsider, such outsider who gets the share in profit of the firm is called as sub-partner. Partnership Deed Partnership is an outcome of an agreement created orally or in writing between two or more persons. It is not essential that agreement must be in writing, but to avoid any disputes between the parties in future, it is better to put in writing. This document which contains the terms and conditions of the partnership in writing is called as partnership deed. It is a stamped document which usually contains the following. 1. The name of the firm. 2. Name and address of the partners 3. Name of the partnership business. 4. The period of the business, if any. 5. The commencement of business. 6. Capital contributed by each partner. 7. Nature of the capital Fixed or fluctuating 8. The proportion of sharing the profits or losses. 9. Amount and period of drawings. 10. Interest on capital, drawings etc., 11. Commission salary, allowance etc payable to partners, if any. 12. Valuation method of goodwill and its treatments on admission, retirement or death of partners. 13. Procedure by which a partner’s account has to be settle and mode of payment. 14. Rights and duties of partners. 15. Under what situation the firm stands dissolved. The ways of keeping accounts, their audit etc. Admission of Partners Admission of a Partner When a Partnership firm expands, additional capital, managerial expertise and special skills are required. In this case a firm decide to admit a new partner in order to fill this gap. A new partner can be admitted into the firm with the consent of the existing partners. The incoming partner has the right to share the profit and acquires the right to share the assets of the firm, since he has to contribute his capital. But the Indian Partnership Act does not makes it compulsory to bring in capital by the incoming partner. Page 24 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- As a new partner is admitted into the firm, the relation of the existing partners changes. Therefore it becomes necessary for reconstitution of the existing firm. Whenever a new partner is admitted, or a partner retires or dies or partners become insolvent, the firm has to be reconstituted. This reconstitution of partnership mainly leads to the revision of profit sharing ratio of the existing partners. The new partner is not liable for any liabilities of the firm incurred before his admission. Now it can be said that a new partner is admitted for additional capital or managerial skills or technical know-how in the process of expansion.Such admission reconstitutes the existing firm and he will not be liable for the liabilities before his admission, but the new partner is entitled to the share of profit or loss that arises from the date of his admission. Thefollowingareproceduresthataretobefollowedbyafirmwhenanewpartnerisadmitted: 1. Adjustment in profit sharing proportion 2. Adjustment for Goodwill 3. Adjustment for Revaluation of the assets and liabilities of the firm. 4. Adjustment relating to the accumulated profits or losses and reserves. 5. Adjustment regarding the Capital Accounting aspects 1. Calculation of new profit sharing ratio As already stated, when a new partner is admitted into the firm, the profit sharing ratio is adjusted, since the new partner has to be given his share of profit, which will result in reducing the profit share of existing partners. This reduction is called as sacrifice by the old partners to admit a new person. Thus the profit sharing ratio changes when a new partner is admitted. This New Profit sharing has to be calculated in order to share to future profit or loss. In the absence of any terms in the agreement regarding the profit sharing ratio, it has to be divided equally. But when the agreement specifically mentions the sharing of Ratio, the new ratio has to be computed. When the share of new partner is given, but the sacrificing propositions is not mentioned. 1. Assuming that the remaining profit to be shared by the old partners in the old ratio, where the profit is taken as Rs.1 Page 25 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Illustration1 A & B are sharing profits in the ratio of 4:2.They admits C into partnership for 1/3rd share in future profit. Calculate the new profit sharing ratio. Solution: Old ratio = 4:3 Let the profit be =Re.1 Remaining share = 1- = 4 A’s new share = 7 3 33 2 8 × = 3 21 2 6 B’s new share = × = 7 3 21 1 7 7 C’s new share = ×= 3 7 21 The new profit sharing ratio 8:6:7 When the share of new partner is given, the sacrifice is done b one of the partners (One of the old partners from whom his proportion of profit in favour of the new partner) Page 26 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Illustration2 X&Yarepartnersandtheirprofitsharingratiois3:2.TheyadmitZintothefirmwith1/6th Share in profit which is borne by X. Find out the new profit sharing ratio. Solution Old ratio=3:2 1 Z’s share= 6 Z’s share of profit borne by X only 1 X’s new share - = 5618−5 13 = 30 30 Y’s new share(no change) =2x6 12 = 5x6 30 Z’s new share =1x5 5 = 6x5 30 New Profit sharing ratio =13:12:5 When the share of the new partner is given and sacrifice is done equally by the old partners in favour of the new partner. Illustration3 P & Q are partners sharing Profit & Loss in 3:2 ratio. R is admitted with 1/6th share in profit which P & Q sacrifice equally. Find out the new profit sharing ratio. Solution Old ratio=3:2 1 R’s share = 6 11 1 P&Q sacrifice equally i.e, = × = 62 12 Page 27 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- 1 P’s new share 3= - = 51236−5 31 = 60 60 2 1 24−5 19 Q’s new share = - = = 512 60 60 Z’s share =1x10 10 = 6x10 60 New Profit Sharing ratio =31:19:10 2. Calculation of Goodwill or adjustment for Goodwill Goodwill – Goodwill is an intangible asset with some commercial value.Goodwill is the reputation gained by the business over the year. Goodwill arises when a business enjoy more customers than that of the other businesses of same nature. The differential value may arise due to special location, technical efficiency, better quality products, better services, trade- mark etc. The Goodwill is an intangible asset, which is the most intangible of the all the intangible assets. Goodwill is the present value of a firm’s anticipated excess earnings. Definition: According to Spicer and Pegler.“Goodwill may said to be that element arising from the reputation, connection or other advantages possessed by a business which enables it to earn greater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business”. Methods of valuing goodwill or calculation of goodwill Goodwill is mainly valued under two methods. (1) Average profit method (2) Super profit method Average profit method – Under average profit method goodwill is computed based on the purchase of certain number of year’s profit on the average profit of the number of past years. Goodwill=Average Profit× No. Of year of purchase Page 28 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Total Profits Average Profit= No.of Years 1. Super Profit method – Under Supper Profit method, the goodwill is valued on the firm’s anticipated excess profit. Super profit is nothing but the excess earning over the normal earning i.e. ,excess of average profit over normal profit (normal profit based on normal rate of return of that industry).Super profit with the number of years of purchase gives the amount of goodwill under this method. Good will =Super profit ×No. of years of Purchase Super Profit = Average Profit – Normal Profit Normal Profit=Capital employed ×Normal rate of return 19.4Revaluation of Asset and Liabilities When a new partner is admitted, the assets and liabilities are subjected to be revalued, since there may be profit or loss on revalued, of assets and liabilities which has to be shared by the old partners. This is done to avoid any undue gain or loss to the newly admitted partner. The asset and liabilities would have been valued when the account were closed and appears in the last Balance Sheet. After the last balance sheet dare, the assets and liabilities may be increased or decreased or new assets may be incorporated or eliminated, the same in the case of liabilities on the date of admitting a new partner. The assets and liabilities on the date of last balance sheet is compared with that of assets and liabilities valued on the date of admitting a new partner. The difference or the changes in value are recorded in an Account called as Revaluation A/c or Profit or loss adjustment Account. The balance of Revaluation Account may be either profit or loss on revaluation of the assets and liabilities which is transferred to the old partner’s capital A/c in their old profit sharing ratio. The revaluation of assets and liabilities are done in two forms: 1. When the assets and liabilities are revalued, the new revised values are shown in the books. When the assets and liabilities are revalued, the new revised values are not shown in the books Page 29 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Specimen of Revaluation Account Revaluation Account Particulars Rs. Particulars Rs. To increase in value of By Decrease in value of Liabilities xxx Liabilities xxx To Decrease in value of By Increase in value of Assets Assets xxx xxx To Unrecorded Liabilities By Unrecorded assets To Profit (transferred to old By Loss(transferred to old partners capital A/c in old ratio) Partners capital A/c in old xxx xxx Ratio) Illustration21 XandYarepartnerssharingprofitintheratioof3:1.TheirBalanceSheetason31stDec 2000 is as under: Particulars Rs. Particulars Rs. Capital X 30000 Cash 22500 Y 16000 Bills Receivable 3000 General Reserve 4000 Stock 20000 Sundry Creditors 37500 Debtors 16000 Furniture 1000 Building 25000 87500 87500 On1.1.2001 they admit Z into their firm as new partner on the following arrangements. (i) Z to bring Rs. 10000 as capital for1/5 share of profit. (ii)The new firm to have goodwill of Rs.10,000 StockandFurnituretobereducedby10%andareserveof5%ondebtorsfor doubtful (iii) debts to be created. (iv) Buildings to be appreciatedat20% Give the necessary ledger account sand Balance sheet. Page 30 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Solution: Dr. Revaluation Account Cr. Particulars Rs. Particulars Rs. To Stock 2000 By Buildings 5000 To Furniture 100 To Reserve for doubtful Debts 800 To X’s Capital A/c 1575 Y’s Capital A/c 525 2100 (Profitin3:1) 5000 5000 Dr. Capital Account Cr. Particulars X Y Z Particulars X Y Z To X’s Capital 1500 By Balance b/d 30000 16000 - To Y’s Capital 500 By General Reserve 3000 1000 - (Goodwill) By Revaluation(Profit) 1575 525 - By Z’s Capital(Goodwill) 1500 500 - To Balance c/d 36075 18025 8000 By Cash - - 10000 36075 18025 10000 36075 18025 10000 Note: Goodwill account should not be raised in the books, when no consideration is paid for it.The new partner Z’s share of Goodwill (Rs.10,000 × 1/5) – Rs,2,000 is adjusted as below; Z’s Capital A/c Dr. 2,000 To X’s Capital A/c 1,500 To Y’s Capital A/c 500 (Being the new partner’s share of Goodwill adjusted to the old Partners sacrificing ratio– 3:1) Page 31 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Balance Sheet of X, Y& Zas on 1.1.2001 Liabilities Rs. Assets Rs. Capital Cash 22500 X 36075 (+)R’s Capital 10000 32500 Y 18025 Z 8000 Bills Receivable 3000 Creditors 37500 Stock(20000-2000) 18000 Debtors(16000–800) 15200 Furniture(1000–100) 900 Building(25000+5000) 30000 99600 99600 Retirement and Death of a Partner Retirement of a partner A partner can retire from the firm. Indian Partnership Act 1932, states that a partner may retire from a firm with the consent of all the other partners in accordance with the expressed agreement by the partners of by giving notice in writing to all the other partners expressing his/her intention to retire. When a partner retire from the firm, his/her intention to retire. When a partner retires from the firm, he/she is called as the “retiring partner” or “outgoing partner”. The retirement may be due to old age, disagreement with the other partners, better opportunity, ill-health etc. However on retirement of a partner, the other partners or the remaining partners can continue the business, but the old partnership comes to an end, due to the retirement of a partner. A new partnership between the remaining partners is formed. This partnership is said to have dissolved the and a new or reconstituted partnership is formed. The retiring partner has to give a public notice that he has retired from the particular firm and that he will not be held accountable for the debts incurred by the firm after his retirement. A sleeping partner need not give any such notice. Page 32 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Illustration11 RamandShyamarepartnerssharingprofitsandlossesintheratioof3:2.TheirBalance sheet is as follows: Liabilities Rs. Assets Rs. Capital Accounts: Machinery 30000 Ram 30000 Stock 24000 Shyam 22500 Debtors 22500 Reserve 22500 Bank 9000 Sundry Creditors 11250 Cash 750 86250 86250 Shyam retires and the following revaluation are made: DepreciateMachineryby7.5% andstockby15% (i) ABaddebtsprovisionisraisedagainstdebtorsat5%andadiscountreserve (ii) against creditors at 2% (iii) The goodwill of the firm is valued at Rs.37500 PrepareRevaluationA/c,Partner’sCapitalA/candBalancesheetafterShyam’s retirement. Solution Dr. Revaluation Account Cr. Particulars Rs. Particulars Rs. To Machinery 2250 By Reserve for creditors 225 (7.5%@ Rs.30,000) (2% @ Rs. 11,250) To Stock (15%@ Rs.24000) 3600 By Revaluation Loss: To Provision for Bad debts 1125 Ram 4050 (5%@ Rs.22,500) Shyam 2700 6750 6975 6975 Page 33 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Journal Entry(adjustment for Goodwill) For Goodwill adjusted only to the extent of the retiring partner’s share Ram’s Capital A/c Dr. 15,000 To Shyam’s Capital A/c 15,000 Dr. Capital Account Cr. Particulars Ram Shyam Particulars Ram Shyam Rs. Rs. Rs. Rs. To Shyam’s Capital A/c 15,000 By Balance b/d 30,000 22,500 To Revaluation(loss) By Reserve 13,500 9,000 To S’s loan 4,050 2,700 By Ram’s Capital 15,000 To Balance c/d - 43,800 24,450 46,500 43,500 46,500 Balance sheet of Ramason (after Shyam’s retirement)……… Liabilities Rs. Assets Rs. Capital Account Ram 24,450 Machinery 30,000 (-)Depreciation 2,250 27,750 Shyam’s LoanA/c 43,800 SundryCreditors11250 Stock 24,000 (-)Reserves@2% 225 11,025 (-)Depreciation 3,600 20,400 Debtors 22,500 (-) Provision 1,125 21,375 Bank 9,000 Cash 750 79,275 79,275 Page 34 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- 20.4Deathof a Partner Death of a partner dissolves the partnership but the surviving partners usually carry on the business by purchasing the deceased partner’s share. Under these circumstance, similar situation arises as at the time of retirement of a partner, but the difference is retirement maybe planned one, death is a permanent retirement. Generally the date of retire endcoincides with the last date of accounting year, but death may occur during any day of the accounting year. In short, in case of a retirement of a partner, his share to transferred to this loan account (if not paid in cash immediately) after his retirement. But in case of a death of a partner, the deceased partner’s share including a share of profit and goodwill is transferred to his executor’s account. Joint Life Policy In the event of death of a partner, the partnership firm will have to paya heavy sum of money to his/her legal representative. The firm may not have adequate working capital and hence it unable to pay the representative of the deceased partner. To overcome this situation, the partners would take out a “joint life policy” on the lives of all the partner. Every year premium is payable and in case of death of the partner(s), the Insurance company would pay the sum insured. This would help the firm to pay the representative of the deceased partner. It should be noted that the “amount of Insurance” received is an asset and any profit or loss on such assets should be shared by all the partners including the deceased partner is their profit sharing ratio. Accounting Treatment of Joint Life Policy The firm pays Joint Life Policy premium in the name of partners when a partner dies, the firm gets the policy amount from the insurance company and the same has to be paid to the representatives of the deceased partner, this has to be treated by the firm in their books. There are three methods of accounting treatment of Joint Life Policy. Page 35 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Accounting Treatment of Joint Life policy Method1 Method2 Method3 Premium paid is treated Premium paid is treated When Premium paid Asan ‘expense’ As an asset Is treated as an asset And reserve is Maintained [Joint Life policy Account [Joint Life policy is is not maintained] Treated is maintained At its surrender value] Page 36 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- UNIT IV PARTNERSHIP ACCOUNTS – II Dissolution, Dissolution means discontinuance, Dissolution may be of two types. Dissolution Dissolution of a partnership Dissolution of Firm [Admission/Retirement/Death [Cessation of discontinuation of} Of a Partner] Partnership among all Partners After dissolution of a firm, the partnership firm ceases to exist and no business would be carried on by the partners. But in the case of dissolution of partnership, only the partners change and the firm is reconstituted to carry on the business. Gajal and Arora in their ‘Accounting Book’ bring out the main grounds for dissolution as D - Death [Death of a Partner] I - Incapacity S - Transfer of ‘share’ [Partnership share] to some other person S - ‘Serious misconduct’ of partnership O - Completion of ‘Object’ of the firm, for which it was formed. L - ‘Lunacy’ of a partner U - ‘Unexpected Losses’ of a firm T - Expiry of the ‘Term’ of partnership I - ‘Insolvency’ of one/all of the partners O - Unlawful ‘object’ of the firm N - ‘Notice’ given by all partners. In this chapter we would be dealing with ‘Dissolution of firms’ as the dissolution of partnership has been explained in previous chapters. Page 37 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Modes of Dissolution of a firm According to sec.40 to 44 of Partnership Act, 1932. The following are the modes of dissolution of a firm. Compulsory Dissolution (sec.41) (i) By the adjudication of all the partners or one of the partner as insolvent. (ii) By the happening of an event which makes it unlawful for the firm to be carried on the business. Dissolution of agreement: (Sec.42) A firm may be dissolved with the consent of all the partners or in accordance with a contract among them. Dissolution by notice: (Sec.43) Any partner can dissolve the partnership by giving notice in writing to all other partners if the partnership is at will. Dissolution by court: (Sec.44) A court may dissolve a firm on any one of following: (i) Where a partner has becomes unsound mind, [i.e. of in same mind] (ii) Where a partner becomes permanently incapable of doing his duties (iii) Where a partner is found guilty of misconduct while carrying on the business. (iv) Where a partner will fully or persistently commits breach of agreement. (v) Where a partner transfers all his shares to a third party (vi) Where the court of law finds that the business cannot be carried without loss. On any other grounds which the court of law thinks just and equitable to wind up the business. 21.1 Accounting Treatment Normal Dissolution The following accounts are usually opened n case of dissolution of a firm: Accounts in Dissolution Realisation Capital Account Cash/Bank Account Account Page 38 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Realisation Account All assets and Liabilities are transferred to this account. When assets are realized they are credited to this account and when liabilities are paid they are debited to this account. The difference would represent either profit or loss on realization, which would be transferred to partner’s capital account in their profit sharing ratio. Capital Account After incorporating all the adjustments (including transfer of current accounts to capital accounts), the balance would represent either amount due to or due from partners. This capital Account would be closed either by payment of cash or by bringing in cash. Cash/Bank Accounts After incorporating all the adjustments relating to cash or Bank, the balance of this account must be equal to the amounts due to or due from partners. Technically, the cash and bank account would close, when payment is made/received from partners. Journal Entries to close books of accounts : For closing Assets Accounts: Realisation A/c Dr. xxx To Plant & Machinery A/c xxx To Furniture & fixtures A/c xxx To Stock A/c xxx To Debtors A/c xxx To Investments A/c xxx To Goodwill A/c xxx [Being assets transferred to Realisation Account] The following points are to be noted while transferring the assets:- (a) All assets [except cash & bank] are to be transferred at “Book Value” only. (b) Assets against which provision or reserve are created. These asses should be transferred at gross figure. [i.e without deducting the amount of provision / reserve]. Separate entry has to be passed to transfer the provisions : ie Provision for Bad & doubtful doubtful debts A/c Dr. xxx Provision for Depreciation A/c Dr. xxx To Realisation A/c xxx Page 39 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- (a) Cash and bank balance would be transferred to Realisation Account if the firm is dissolved due to sale of business, unless specifically mentioned. (b) When an of the assets is being taken over by a partner Partner’s Capital A/c Dr. xxx To realization A/c xxx [Being asset taken by a partner] (c) Treatment of Goodwill. (i) Good will treatment does not have much impact in cases of dissolution. If it appears in the balance Sheet and it is treated like any other asset and is transferred to realization account at the book value. (ii) If the goodwill does not appear in the balance sheet, it is not calculated. (iii) If same amount is realized for Goodwill, then it is credited to Realisation Account. Cash A/c Dr. xxx To realization A/c xxx [Being cash realised for Goodwill] (i) If any of the partner’s agree to pay for goodwill then it is recorded by the following entry; Partner’s Capital (or) Current A/c Dr. xxx To Realisation A/c xxx [Being Goodwill taken by partner] For closing liabilities : All liabilities are to transferred to Realisation account at their book value. Liabilities A/c Dr. To Realisation A/c [Being transfer of liabilities to realisation account] Liabilities can be discharged by any of the following ways. (i) When cash is paid for any liability Realisation A/c Dr. xxx To Cash / Bank A/c xxx Page 40 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- [Being cash paid for payment of liability] (ii) When any of partner agrees to discharge the liabilities Realisation A/c Dr. xxx To Partner’s Capital (or) Current A/c xxx [Being Liability take over by partner] Normal dissolution Illustration 1 Ram, Rahim and Suresh share profit in the ratio 3 : 2 : 1. On 31st December, 2008 their Balance Sheet was as follows: Liabilities Rs. Assets Rs. Creditors 12000 Machinery 25000 Genera Reserve 3000 Stock 11000 Capital : Debtors 9500 Ram 20000 Goodwill 13000 Rahim 15000 Cash 1500 Suresh 10000 60000 60000 On the above date, the firm was dissolved. The assets, except cash, realized Rs. 60,000. The creditors were settled at Rs. 11,500. Dissolution expenses amounted to Rs. 800. Give necessary ledger A/c’s Solution Realisation Account Dr. Cr. Particulars Rs. Particulars Rs. To Machinery 25000 By Creditors 12000 To Stock 11000 By Cash [assets realized] 60000 9500 To Debtors 13000 To Goodwill 11500 800 To Cash [Creditors paid] To Page 41 of 63  ACADEMIC YEAR 2023-2024, SEMESTER – II STUDY MATERIAL FOR B.COM FINANCIAL ACCOUNTING - II ---------------------------------------------------------------------------------------------------------------------------------------------- Cash [Realisation Exp] To Partner’s capital A/c 1200 [Realisation of profit] 72000 72000 Ram 600 Rahim 400 Suresh 200 Capital Account Dr. Cr. Particulars Ram Rahim Suresh Particulars Ram Rahim Suresh Rs. Rs. Rs. Rs. Rs. Rs. To Cash A/c 22100 16400 10700 By Balance b/d 20000 15000 10000 (cash paid to 1500 1000 500 partners) By General Reserve 600 400 200 (3 : 2 : 1) 22100 16400 10700 22100 16400 10700 By Realisation A/c Cash Account Dr.