Book keeping and accountancy Textbook.pdf

BOOK-KEEPING & ACCOUNTANCY 212.00  The Constitution of India Chapter IV A Fundamental Duties ARTICLE 51A Fundamental Duties- It shall be the duty of every citizen of India- (a) to abide by the Constitution and respect i...

BOOK-KEEPING & ACCOUNTANCY 212.00  The Constitution of India Chapter IV A Fundamental Duties ARTICLE 51A Fundamental Duties- It shall be the duty of every citizen of India- (a) to abide by the Constitution and respect its ideals and institutions, the National Flag and the National Anthem; (b) to cherish and follow the noble ideals which inspired our national struggle for freedom; (c) to uphold and protect the sovereignty, unity and integrity of India; (d) to defend the country and render national service when called upon to do so; (e) to promote harmony and the spirit of common brotherhood amongst all the people of India transcending religious, linguistic and regional or sectional diversities, to renounce practices derogatory to the dignity of women; (f) to value and preserve the rich heritage of our composite culture; (g) to protect and improve the natural environment including forests, lakes, rivers and wild life and to have compassion for living creatures; (h) to develop the scientific temper, humanism and the spirit of inquiry and reform; (i) to safeguard public property and to abjure violence; (j) to strive towards excellence in all spheres of individual and collective activity so that the nation constantly rises to higher levels of endeavour and achievement; (k) who is a parent or guardian to provide opportunities for education to his child or, as the case may be, ward between the age of six and fourteen years. The Coordination Committee formed by GR No. Abhyas - 2116/(Pra.Kra.43/16) SD - 4 Dated 25.4.2016 has given approval to prescribe this textbook in its meeting held on 30.01.2020 and it has been decided to implement it from the educational year 2020-21. Book - Keeping and Accountancy STANDARD XII 2020 Maharashtra State Bureau of Textbook Production and Curriculum Research, Pune - 411 004 Download DIKSHA App on your smartphone. If you scan the Q.R.Code on this page of your textbook, you will be able to access full text and the audio-visual study material relevant to each lesson provided as teaching and learning aids.  First Edition : 2020 © Maharashtra State Bureau of Textbook Production Second Reprint : 2022 and Curriculum Research, Pune- 411 004. Maharashtra State Bureau of Textbook Production and Curriculum Research reserves all rights relating to the book. No part of this book should be reproduced without the written permission of the Director, Maharashtra State Bureau of Textbook Production and curriculum Research, Pune. Commerce Stream Commitee Members Cover, Illustrations and Computer Drawings Dr. Narendra Pathak (Chairman of Commerce Commitee) Shri. Sandip Koli, Artist, Mumbai Shri. Ganesh Channa, Solapur Shri. Surendra Nirgude (Member) Dr. Mukund Tapkir (Member) Dr. Prashant Sathe (Member) Co-ordinator CS. Mahesh Athawale (Member) Ujjwala Shrikant Godbole Shri. Narayan Patil (Member) I/C Special Officer for Mathematics Dr. Jyoti Gaikwad (Member) Shri. Mohan Salvi (Member) Shri. Anil Kapare (Member) Smt. Anantlaxmi Kailasan (Member) Smt. Laxmi Pillai (Member) Production Smt. Mrinal Phadke (Member) Sachin Mehta Dr. Sangeeta Mandke (Member) Chief Production Officer Smt. Ujjwala Godbole (Member-Secretary) Sanjay Kamble Production Officer Prashant Harne Book-keeping and Accountancy Asst. Production Officer Study Group Members Shri. Surendra Nirgude (Chairman and Coordinator) Paper CA. Vilas Potdar Dr. Anagha Kale 70 GSM Cream wove Smt. Lakshmi R. Iyer Shri. Sanjeev More Print Order No. Shri. Appasaheb Dorkar Shri. B.S. Kumbhar Smt. Jyoti Bhore Shri. Ganesh Channa Printer Shri. Abdul Rauf Shri. Sanjay Pandikar Shri. Anil Kadam Shri. Subhash More Dr. D. R. Baheti Typesetter Publisher Baladev Computers, Mumbai Vivek Uttam Gosavi, Controller Maharashtra State Textbook Bureau, Prabhadevi Mumbai- 400 025  PREFACE We are happy in introducing the text book for Std. XII based on revised syllabus from the academic year 2020-21. The Std. XI syllabus covers topics related to Sole Proprietorship firm and basic accounting concepts. The syllabus for Std. XII covers topics related to Partnership Firm, Not for Profit Organization, Accounting of Company Accounts-Issue of Shares, Financial Statement Analysis, Bills of Exchange and Computer in Accounting. Due care has been taken to present the subject matter in a simple manner so that the students can easily understand the relating accounting concepts and contents. Similarly the students who do not have a commerce background but are going to pursue further education in commerce the text book will be of great help to understand the subject in a lucid manner. Various practical problems based on skill and application are included in the textbook. The exercises given at the end of each topic contains different types of questions to test conceptual clarity and accuracy and encourage the students to cultivate the skills and applications required for their future education. Also to make learning interesting additional information and activities for the students are given at the end of every chapter and also in QR code on the title page. We would like to bring to your notice that the illustrations and exercise problems are designed comprehensively. While setting the question paper one is expected to modify the questions according to the marking scheme. We are thankful to the subject committee members, study group members, translators, reviewers, quality reviewers and all those who have taken efforts in designing this text book. We hope the text book will be well received by the academicians and students. ( Vivek Gosavi ) Pune Director Date : 21 February 2020 Maharashtra State Bureau of Textbook Bharatiya Saur : 2 Phalguna 1941 Production and Curriculum Research, Pune.  Book-keeping and Accountancy Competency Statement Standard XIIth Unit Topic Competency Statements No. Students are able to understand the meaning of Partnership. know the important features of Partneship understand the meaning of The Indian Partnership Act, 1932. Introduction to understand the importance of Partnership Deed. Partnership and understand the provisions applicable in absence of Partnership Deed 1 partnership final know how to maintain Capital Accounts of Partners Accounts understand the meaning of Partnership Final Account know the need and importance of Final Accounts know the effects of adjustments in Final Accounts know the meaning of Trading Account, Profit and Loss Account and Balancesheet know how to find out financial results of the business Students are able to understand the meaning and features of Not for Profit Concerns know the meaning of Receipts and Payments Account Accounts of Not For understand the meaning of Income and Expenditure Account and its 2 difference from Profit and Loss Account Profit Concerns understand the difference between Profit and Not for profit Organisations learn to acquire the skills for preparing Income and Expenditure Account and Balancesheet of Not for profit concern Students are able to understand the meaning and different ways of reconstitution to understand the meaning and need of admission of partner Reconstitution of to learn the adjustments required on admission of a Partner Partnership to calculate the new profit sharing ratio and sacrifice ratio 3 to know the methods of valuation of goodwill and treatment of (Admission of Partner) goodwill to learn the accounting treatment of accumulated profits/ losses to make necessary adjustment for revaluation of assets and liabilities to learn to adjust the capitals according to new profit sharing ratio Students are able to understand the meaning of retirement of partners in partnership business learn to calculate various ratios connected to retirement of Reconstitution of partnership 4 Partnership understand the treatment of goodwill know the effect of reserves, accumulated profit/ loss (Retirement of partner) learn the effect of revaluation of assets and liabilities understand the adjustments to be made for remaining partners capital to know the various modes of final payment to be made to retiring partners  Students are able to learn how to calculate various ratios Reconstitution of know how to calculate share of profit up to the date of death of a 5 Partnership (Death of a partner Partner) learn how to calculate share of goodwill of deceased partner know how to calculate amount due to deceased partner’s executor understand how to settle the account of an executor Students are able to understand the meaning and reasons of dissolution of partnership firm Dissolution of 6 Partnership Firm know the effects of dissolution of partnership firm learn various accounting treatment for settlement of accounts learn accounting procedure under simple dissolution and insolvency of partner Students are able to know the meaning of bill of exchange understand the different concepts used in bills of exchange 7 Bills of Exchange Prepare a draft of bill of exchange and know the various types of bills of exchange understand retaining, sending bill for collection, discounting, endorsing, honour, renewal and retiring of the bill learn various accounting treatment of bills of exchange Students are able to learn the types of shares and share capital Company Accounts - understand the concept of public subsription and private placement 8 Issue of shares know the concept of under and over valuation of shares and accounting of shares issued at par, at premium and at discount know the different accounting treatment for under and over subscription of shares as well as calls in arrears and calls in advance Students are able to understand the meaning, objectives and limitations of financial Analysis of Financial statement analysis 9 Statements learn various tools for financial statements analysis understand objectives and classification of Accounting ratios and Ratio Analysis Students are able to understand the computarized Accounting and its components 10 Computer in understand features, importance and limitations of computarised Accounting accounting system learn application of computerised accounting statements learn various accounting packages  INDEX Sr. Chapter Page No. No. 1. Introduction to Partnership and Partnership Final Accounts 1 2. Accounts of ‘Not for Profit’ Concerns 63 3. Reconstitution of Partnership (Admission of Partner) 125 4. Reconstitution of Partnership (Retirement of Partner) 168 5. Reconstitution of Partnership (Death of Partner) 187 6. Dissolution of Partnership Firm 206 7. Bills of Exchange 251 8. Company Accounts - Issue of Shares 309 9. Analysis of Financial Statements 344 10. Computer In Accounting 381 Answer-Key 392  Introduction to Partnership and 1 Partnership Final Accounts Content 1.1 Meaning and Definition of Partnership 1.2 The Indian Partnership act 1932. 1.3 Methods of Capital Account Competency Statements o The students will be able to:  Understand meaning of Partnership  Know the important features of Partnership  Understand the meaning of "The Indian Partnership Act, 1932."  Know the importance of Partnership Deed.  Understand the provisions applicable in absence of Partnership Deed.  Know how to maintain Capital Accounts of Partner. Introduction : The sole proprietorship has its limitations such as limited capital, limited managerial ability, unlimited liability, no stability, absence of specialization etc. Hence when a business is to be set up on a scale which needs more capital and involves more risk, two or more persons come together to run it. They agree to share the capital, the management, the risk & profits of business, such mutual relationship based on an agreement amongst these persons is termed as "Partnership". The persons who have entered into the partnership are individually known as "Partners" and collectively as a "Firm". 1.1 Meaning and Definition of Partnership : Partnership is an organization where there is an association of two or more persons coming together to carry on a business with a view to share Profit or Losses of a firm. Definition : Indian Partnership Act 1932 Section 4 defines the partnership as, "It is the relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all." According to Prof. Handy, "Partnership is the relation existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to earn private gain. 1  Features of Partnership Firm Dissolution Principal & Agent Agreement Joint Ownership Principal & Features of Management & Agent Partnership Firm Lawful Registration Business Sharing Unlimited of Profits & Liabilities Losses 1) Agreement :- Partnership is a result of agreement between partners. It could be written or oral. A written agreement is preferred so that it can be used as a proof in the court of law & such written agreement is known as “Partnership Deed.” 2) Number of Partners :- Minimum two partners are needed to start partnership firm and the maximum number of partners are fifty according to companies Act 2013 (Amended in 2014) 3) Lawful business :- Business undertaken by partnership should be lawful. It cannot undertake business which is not allowed by state. The definition of Partnership also does not permit any illegal business. 4) Sharing of Profit and losses :- The purpose of partnership is to earn maximum profits. Partners have to share profits & losses according to the ratio given in the agreement. If the agreement is silent about the ratio then profit and loss sharing will be equal. 5) Unlimited Liability :- The liability of partners is unlimited joint and several that is, partners are liable till the last rupee in their pocket. If assets of business is not sufficient to pay liabilities, then personal property of partners can be used. If anyone of the partner is declared in solvent then his liability will be borne by the solvent partner. 6) Registrations :- Registration of partnership firm is compulsory only in the state of Maharashtra with effect from 1st April 2005. According to Indian Partnership Act, 1932, registration of partnership firm is optional it means a firm may or may not be registered. Registration of firm merely certifies its existence and it is a process of entering the name of Partnership Firm in the register of Registrar. 7) Joint Ownership & Management :- Each partner is joint owner of the property of the firm, so no partner can use property for personal use. All partners have equal rights in managing the firm. So all partners are jointly responsible for the management of firm. 8) Principal and Agent :- Each partner works in two fold capacities i.e. principal and Agent. A partner acts as a principal of the firm with outsiders and with other partners he acts as an agent. 2 9) Dissolution :- A partnership firm can be dissolved through agreement between the partner. If a partner wants to close the firm he can dissolve the firm by giving fourteen days notice. The firm can also be dissolved if a partner dies or retires, becomes insolvent or insane. PARTNERSHIP DEED The document containing the Partnership Deed partnership agreement among partners is called Partnership Deed. It contains the terms and conditions which are agreed upon by all the partners. An agreement may be written or oral but when it's written, it's called a deed. The Partnership Act doesn't make it compulsory to have a written agreement. However, in case of dispute among the partners, it is always in the best course to have a written agreement duly signed (by all the respective partners) and registered under the Act. Partnership Deed contains the rules and regulation framed for the internal Management of the firm. It is also an Article of Partnership. Contents of the Partnership Deed 1) Name and address of the firm and its main business. 2) Name and address of all partners and duration of the partnership. 3) Capital contribution of all the partners 4) Ratio in which profits (and losses) are to be shared. 5) Rights, duties and liabilities of the partners. 6) Provisions related to admission, retirement, death etc. of a partner. 7) Rate of interest on capital, loan, drawings etc. 8) Salaries, commission, etc. if payable to any partners. 9) Settlement of accounts on dissolution of the firm. 10) Method of settlement of disputes among the partners. 11) Any other matter relating to the conduct of business. Importance of Partnership Deed Partnership deed is a very important document because it is the written agreement which contains all the terms and conditions of the partnership business. It forms the basis of mutual relationship among the partner. Moreover, partnership deed regulates the rights, duties and liabilities of all the partners as well as of firm. So by having partnership deed partners disputes in future may be avoided. 3  Hence it is always in favour, to have a written agreement i.e. partnership deed duly signed by all the partners and registered under the Indian Partnership Act 1932. 1.2 Provision of the Indian Partnership act 1932: At the time of formation of partnership firm, a document is prepared called as partnership deed and all terms and conditions are mentioned into the deed, but if the partnership deed is silent about any point then this issue is solved as per the provisions in Partnership Act 1932 section no 12 and 17 are made applicable to determine the following issues. 1) Distribution of profit : If the partnership deed is silent about the profit sharing ratio, then the profit and losses are distributed among the partners is equal ratio. 2) Interest on drawings : As per the provision of Indian Partnership Act 1932, if the date of drawing is not given then average of six month's interest is charged on drawings. 3) Interest on partner's loan : If the partner provides additional amount to the business as loan, but rate of interest on loan is not given then 6% p.a. interest is allowed. 4) Interest on capital : If the partnership deed is silent about interest on capital then interest is not allowed. 5) Salary or commission to Partners : As per the provision made in the Indian Partnership Act 1932 no salary, commission, allowance or any remuneration is to be given to any of the partners for any extra work done for the firm, However, if any provision is made in partnership deed, then partners are entitled to get commission or salary as per the agree- ment. 6) Admission of a new partner : As per the provisions of the Indian Partnership Act 1932, no outside person can be admitted into the firm as a partner without the consent of other partners. 1.3 Methods of Capital Accounts Amount in cash or kind brought in by the partner to manage business activities is termed as Capital. Partners maintain and operate some methods of the Capital Accounts. The two methods of Capital Accounts are discussed below. Methods of Capital Account Fixed Capital Fluctuating Capital Method Method Capital Account Current Account Capital Account 4 Fixed Capital Method: In this method amount of capital of a partner remains the same at the end of that financial year. There is no addition or subtraction from capital during the year. When this method is adopted partner's open a new account in name of partner's Current Account and all the related to capital adjustments are solved through Partner's Current Account. For example, Drawings. Interest on Drawings, Interest on Capital, Partner's Salary, Commission, Brokerage, Share of Profit and Losses are recorded in to Current Account. Proforma of Fixed Capital Method Partner's Capital Account Dr. Cr. Particulars X Y Particulars X Y Amount Amount Amount Amount (`) (`) (`) (`) To Balance c/d XXX XXX By Balance b/d XXX XXX By Cash/Bank A/c XXX XXX [Additional capital] By Assets A/c XXX XXX [Capital in kind] Total XXX XXX XXX XXX By Balance b/d XXX XXX Journal Entries 1) When additional capital is introduced by a partners Cash / Bank A/c..................... Dr. To Partners Capital A/c (Being additional capital introduced into the business) 2)When capital amount is brought in by a Partner in form of Assets Assets A/c.................. Dr. To Partners Capital A/c (Being additional capital brought in kind) Partner's Current Accounts: When fixed capital method is adopted by the partnership firm, a new separate account is opened i.e. 'Partner's Current Account'. In this account all adjustments related to capital are recorded. Partner's Current Account may show debit or credit balance. 1) Drawings made by the partner in the current accounting year 2) Goods or any assets taken over by the partner. 3) Interest on partners capital allowed by the firm. 4) Interest on partners drawings charged by the firm. 5) Salary, Commission etc. payable to the partner. 6) Distribution of Profit or Loss of the firm. 5  Partner's Current Account: Dr. Cr. Particulars X Y Particulars X Y Amount Amount Amount Amount (`) (`) (`) ( `) To Balance b/d (Dr. Bal) XXX XXX By Balance b/d (Cr. Bal) XXX XXX To Drawing A/c XXX XXX By Interest on Capital A/c XXX XXX To Interest on Drawing XXX XXX By Salaries A/c XXX XXX To Profit and Loss A/c XXX XXX By Commission A/c XXX XXX (Share in loss) By Profit and Loss A/c XXX XXX To Balance c/d XXX XXX (Share in Net profit) By Balance c/d XXX XXX XXX XXX XXX XXX To Balance b/d XXX XXX By Balance b/d XXX XXX 1) Interest allowed on partner's capital a) Interest on Capital A/c.............................................................Dr. XXX To Partners Capital A/c/ Current Account XXX (Being interest due on capital) b) Profit and Loss A/C.................................................................Dr XXX To interest on Capital A/C XXX (Being interest on Capital transferred to profit and loss account) 2)Salary or Commission allowed to partners a) Salary or Commission in Partner A/c......................................Dr. XXX To Partners Current A/c / Capital Account..................... XXX (Being Salary or Commission due for payment) b) Profit and Loss A/C.................................................................Dr XXX To Salaries/ Commission A/C.........................................../ZXXX (Being Salary/ Commission transferred to Profit and Loss A/C) 3)Cash or Goods taken over by the partners for their personal use. a) Drawing A/c.............................................................................Dr. XXX To Cash or Goods A/C XXX (Being cash or goods withdrawn for personal use) b) Partners Current A/c / Capital A/c...........................................Dr XXX To Drawing A/c XXX (Being balance on account transferred to current A/c) 4)Interest charged on drawing of the partners a) Partners Current A/c / Capital A/c...........................................Dr. XXX To Interest on Drawing account XXX (Being interest charged on Drawing) b) Interest on Drawings A/C........................................................ Dr XXX To Profit and Loss A/C XXX (Being interest on Drawings transferred to profit and loss account) 6 5)Transfer of Net Profit Profit and loss A/c...........................................................................Dr. XXX To Partners Current A/c / Capital A/c XXX (Being profit transferred to Partner's Current / Capital Account) 6)Distribution of Net loss : Partners Current A/c / Capital A/c...................................................Dr. XXX To Profit and Loss A/c XXX (Being loss adjusted to Partners Current / Capital Account) Effects in Profit and Loss Account Dr. Cr. Particulars Amount Amount Particulars Amount Amount (`) (`) (`) ( `) To Interest on Capital XXX By Interest on Drawings XXX To Salary to Partner XXX To Commission to Partner XXX XXX XXX Fluctuating capital method : In this method, amount of capital balance changes every year. It is called as fluctuating capital method. In this method the partner's current account is not opened. Hence all adjustments are solved through Capital Account. Following are the general adjustment related to capital. 1) Initial or Opening Balance of capital 2) Additional Capital brought in by the partners in Cash or in kind. 3) Salary / Commission payable to partner 4) Interest payable on capital balance to partner 5) Drawings made during the year and interest payable on drawings by the partner 6) Withdrawal of part of the capital by the partner 7) Division and transfer of net disposable profit or net adjustable loss of the firm. Proforma of Fluctuating Capital Method. Partners Capital Account Dr. Cr. Particulars X Y Particulars X Y Amount Amount Amount Amount (`) (`) (`) ( `) To Balance b/d (Dr. Bal) XXX XXX By Balance b/d (Cr.Bal) XXX XXX To Drawing A/c XXX XXX By Cash A/c XXX XXX To Interest on Drawing XXX XXX [Addition made] To Profit and Loss A/c XXX XXX By Interest on capital A/c XXX XXX (Share in loss) By Salaries A/c XXX XXX To Balance c/d XXX XXX By Profit and Loss A/c XXX XXX (Net Profit) XXX XXX XXX XXX By Balance b/d XXX XXX 7 Examples 1) Anand and Bharat are partners sharing profits and losses in the ratio 2 : 3. On 1.4.2019 the capital balance are Anand ` 60,000 and Bharat ` 30,000 their drawings are ` 12,000 and ` 10,000 respectively. As per the agreement partners are allowed 10% interest on capital and interest on Drawings is to be charged at 12% p.a. Anand gets salary of ` 2,500 per month and Bharat is entitled to get commission @ 3% on net sales which is ` 5,00,000. The firm's profit is ` 60,000. Prepare partners capital account for the year ended 31st March 2019 under : 1) Fixed Capital Method 2) Fluctuating Capital Method Solution : 1) Fixed Capital Method Dr. Partner's Capital A/cs Cr. Particulars Anand Bharat Particulars Anand Bharat (`) (`) (`) (`) To Balance c/d 60,000 30,000 By Balance b/d 60,000 30,000 60,000 30,000 60,000 30,000 By Balance b/d 60,000 30,000 Dr. Partner's Current A/cs Cr. Particulars Anand Bharat Particulars Anand Bharat (`) (`) (`) (`) To Drawing A/c 12,000 10,000 By Interest on capital A/c 6,000 3,000 To Interest in Drawing 720 600 By Salaries A/c 30,000 - To Balance c/d 47,280 43,400 By Commission A/c - 15,000 By Profit and Loss A/c 24,000 36,000 60,000 54,000 60,000 54,000 2) Fluctuating Capital Method Dr. Partner's Capital A/cs Cr. Particulars Anand Bharat Particulars Anand Bharat (`) (`) (`) (`) To Drawing A/c 12,000 10,000 By Balance b/d 60,000 30,000 To Interest in Drawing A/c 720 600 By Interest on capital A/c 6,000 3,000 To Balance c/d 1,07,280 73,400 By Salaries A/c 30,000 - By Commission A/c - 15,000 By Profit and Loss A/c 24,000 36,000 1,20,000 84,000 1,20,000 84,000 1) Interest on Capital Anand 60,000 × 10 = ` 6,000 100 10 Bharat 30,000 × 100 = ` 3,000 8 2) Interest on Drawings 12 6 Anand 12,000 × 100 × 12 = ` 720 12 6 Bharat 10,000 × 100 × 12 = ` 600 (Interest on Drawing always to be taken for 6 months In case date on Drawings in not mentioned) 3) Anand = 2500 x 12 = ` 30,000 3 4) Commission to Bharat = 5,00,000 × = `15,000 100 5) Distribution of Profit ` 60,000 2:3 2 Anand = 60,000 × = ` 24,000 5 3 Bharat = 60,000 × = ` 36,000 5 2) Karan and Kiran are partners in M/s Mehta Enterprises. They have started business of ready made garments on 1st April 2019 on which date they contribute ` 5,00,000 each as their initial capitals. Karan has withdrawn ` 20,000 and Kiran has withdrawn ` 15,000 for their personal use. Interest on capital is allowed @ 12% and interest on drawing is charged @ 3% p.a. Karan is entitled to get salary, ` 1800 per month, Kiran is allowed to get commission @ 5% on net sales. During the year net sales is ` 2,50,000 and net profit earned during the year is ` 60,000. Prepare partners capital accounts under i) Fixed capital Method ii) Fluctuating Capital Method Solution : In the books of M/s Mehta Enterprises 1) Fixed Capital Method Dr. Partner's Capital A/cs Cr. Particulars Karan Kiran Particulars Karan Kiran (`) (`) (`) (`) To Balance c/d 5,00,000 5,00,000 By Cash/Bank A/c 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 Dr. Partner's Current Accounts Cr. Particulars Karan Kiran Particulars Karan Kiran (`) (`) (`) To Drawing A/c 20,000 15,000 By Interest on Capital A/c 60,000 60,000 To Interest on Drawing 300 225 By Salaries A/c 21,600 - To Balance c/d 91,300 87,275 By Commission A/c - 12,500 By Profit and Loss A/c 30,000 30,000 1,11,600 1,02,500 1,11,600 1,02,500 9 2) Fluctuating Capital Method Dr. Partner's Capital Accounts Cr. Particulars Karan Kiran Particulars Karan Kiran (`) (`) (`) (`) To Drawing A/c 20,000 15,000 By Cash/Bank A/c 5,00,000 5,00,000 To Interest on Drawing 300 225 By Interest on capital A/c 60,000 60,000 By Salaries A/c 21,600 - To Balance c/d 5,91,300 5,87,275 By Commission A/c - 12,500 By Profit and Loss A/c 30,000 30,000 6,11,600 6,02,500 6,11,600 6,02,500 By Balance b/d 5,91,300 5,87,275 1) Interest on capital is calculated as follows : Karan : On Opening balance i.e. ` 5,00,000 for 1 year 12 12% p.a. interest = ` 5,00,000 ×1years = ` 60,000 100 Kiran : On Opening balance i.e. ` 5,00,000 for 1 year 12 12% p.a. interest = 5,00,000 ×1years × = ` 60,000 100 2) Interest on Drawing is charged @3% 6 3 Karan : 20,000 × × = ` 300 12 100 26 3 Kiran : 15,000 × × = ` 225 12 100 5 3) Commission paid to Karan = 2,50,000 × = ` 12,500 100 4) Profit of ` 60,000 is distributed equally between Karan and Kiran 1 Karan = 60,000 × 2 = ` 30,000 1 Kiran = 60,000 × 2 = ` 30,000 3) Mr. Amey and Mr. Ashish are partners in a partnership firm titled as M/s. Anand Enterprises sharing profit and losses in the ratio 3 : 2 respectively. On 1st April 2018 their capital balance were: Mr. Amey ` 1,00,000 and Mr. Ashish ` 50,000. Their drawing during the year were : Mr. Amey : ` 20,000 and Mr. Ashish ` 25,000. As per partnership deed 10% p.a. interest is allowed on capital and 12% p.a. interest is charged on drawing Mr. Amey gets salary ` 3000 p.m. and Mr. Ashish is entitled to get commission @ 5% on net sales which is ` 4,00,000. The divisible profit is ` 90,000. Prepare partners capital Accounts for the year ending 31st March 2019 under 1) Fixed capital method 2) Fluctuating Capital Method. 10  In the books of M/s. Anand Enterprises 1) Under Fixed Capital Method Dr. Partner's Capital Accounts Cr. Particulars Amey Ashish Particulars Amey Ashish Amt. (`) Amt. (`) Amt. (`) Amt. (`) To Balance c/d 1,00,000 50,000 By Balance b/d 1,00,000 50,000 1,00,000 50,000 1,00,000 50,000 Dr. Partner's Current Accounts Cr. Particulars Amey Ashish Particulars Amey Ashish Amt. (`) Amt. (`) Amt. (`) Amt. (`) To Drawing A/c 20,000 25,000 By Interest on Capital A/c 10,000 5,000 To Interest on Drawing A/c 1,200 1,500 By Salaries A/c 36,000 - To Balance c/d 78,800 34,500 By Commission A/c - 20,000 By Profit and Loss A/c 54,000 36,000 1,00,000 61,000 1,00,000 61,000 By Balance b/d 78,800 34,500 2) Under Fluctuating Capital Method Dr. Partner's Capital Accounts Cr. Particulars Amey Ashish Particulars Amey Ashish Amt. (`) Amt. (`) Amt. (`) Amt. (`) To Drawing A/c 20,000 25,000 By Cash/Bank A/c 1,00,000 50,000 To Interest on Drawing A/c 1,200 1,500 By Interest on capital A/c 10,000 5,000 By Salaries A/c 36,000 -------- To Balance c/d 1,78,800 84,500 By Commission A/c -------- 20,000 By Profit and Loss A/c 54,000 36,000 2,00,000 1,11,000 2,00,000 1,11,000 By Balance b/d 1,78,800 84,500 1) Interest on capital : 10 Mr. Amey = 1,00,000 ×1 Year × 100 = ` 10,000 10 Mr. Ashish = 50000 ×1 Year × 100 = ` 5,000 2) Interest on Drawings : Interest on Drawing is calculated for the average. Period of 6 months as date of drawing is not given. 6 12 Mr. Amey = 20,000 × 12 × 100 = ` 1200 6 12 Mr. Ashish = 25,000 × 12 × 100 = ` 1500 11 3) Distribution of profit 3 Mr. Amey = 5 × 90,000 = ` 54,000 2 Mr. Ashish = 5 × 90,000 = ` 36,000 4) Sun and Moon were partners with capital of ` 10,00,000 and ` 5,00,000 respectively. They agree to share profits in the ratio 3 : 2. Show how the following transactions will be recorded in the capital accounts of the partners in both the cases when i) Capitals are fluctuatin and ii) Capitals are fixed. They also introduced additional capital of ` 2,25,000 and ` 1,50,000 Particulars Sun Moon (`) (`) Interest on Capital 5% 5% Drawing A/c (during 2016) 22,500 15,000 Interest on Drawings 1,350 900 Salaries 15,000 - Commission 7,500 5,250 Share in Loss for the year 2016 45,000 30,000 Solution : i) Fluctuating Capital method Dr. Partner's Capital Accounts Cr. Particulars Sun Moon Particulars Sun Moon (`) (`) (`) (`) To Drawing A/c 22,500 15,000 By Balance b/d 10,00,000 5,00,000 To Interest on Drawing 1350 900 By Cash/Bank A/c 2,25,000 1,50,000 To Profit & Loss A/c 45,000 30,000 By Interest on Capital A/c 55,625 28,750 (Loss) By Salaries A/c 15,000 - To Balance c/d 12,34,275 6,38,100 By Commission A/c 7,500 5,250 13,03,125 6,84,050 13,03,125 6,84,050 ii) Fixed Capital method Dr. Partner's Capital Accounts Cr. Particulars Sun Moon Particulars Sun Moon (`) (`) (`) (`) To Balance c/d 12,25,000 6,50,000 By Balance b/d 10,00,000 5,00,000 By Bank 2,25,000 1,50,000 (Additional Capital) 12,25,000 6,50,000 12,25,000 6,50,000 12  Partner's Current Accounts Dr. C r. Particulars Sun Moon Particulars Sun Moon (`) (`) (`) (`) To Drawing 22,500 15,000 By Interest on capital 55,625 28,750 To Interest on Drawing 1350 900 By Partner's Salaries A/c 15,000 - To Profit & Loss A/c 45,000 30,000 By Commission A/c 7,500 5,250 To Balance c/d 9,275 - By Balance b/d - 11,900 78,125 45,900 78,125 45,900 Calculation of Interest on Capitals Sun: 5% on ` 10,00,000 for one year will be 10,00,000 × 5 = 100 = ` 50,000 5% of ` 2,25,000 for 6 months will be 2,25,000 × 5 × 6 = 100 × 12 = ` 5,625 Total will be 50,000 + 5,625 = 55,625 Moon: 5% on 5,00,000 for one year will be 5,00,000 × 5 100 = ` 25,000 5% of ` 1,50,000 for 6 months will be 1,50,000 × 5 × 6 = 100 × 12 = ` 3,750 Total will be 25,000 + 3,750 = ` 28,750 Note : 1. Current Account balance may appear in either side i.e. Debit or Credit side 2. In the absence of any instruction the Capital Account should be prepared by Fluctuating capital methods 3. Interest on loan of partners is treated as liability so it is credited to partners current ac- count. But when there is no current account and partners are maintaining Fluctuating capital method than interest on loan of partner is credited to Pratners Capital A/c 13  Partnership Final Accounts Contents - 2.1 Introduction and necessity of preparation of Final Accounts. 2.2 Preparation of Trading Account, Profit and Loss Account and Balance Sheet with following adjustments. a) Closing Stock b) Outstanding expenses c) Prepaid expenses d) Income received in advance e) Income receivable f) Bad debts g) Provision for doubtful debts h) Reserve for discount on Debtors and Creditors i) Depreciation j) Interest on capital, drawings and loan. k) Interest on Investments and loans given 1) Goods destroyed by fire/accident (Insured & Uninsured) m) Goods stolen n) Goods distributed as free samples o) Goods withdrawn by partners p) Unrecorded purchases and sales q) Capital expenditure included in revenue expenses and vice versa r) Bills Receivable dishonoured s) Bills Payable dishonoured t) Deferred expenses u) Capital receipts included in revenue receipts and vice versa v) Commission to working partners on the basis of Gross Profit, Net Profit/Sales etc. Competency Statements - The students will be able to : Understand the meaning of Final Accounts. Know the need and importance of Final Accounts. Know the effects of adjustments in Final Accounts. Know the meaning of Trading Account, Profit and Loss Account and Balance Sheet. Know how to find out financial results of the business. 2.1 Introduction : As per the sole proprietary concern we will also prepare the Final Account of partnership firm, the income statement and position statement. Final Account is the last stage of accounting procedure. Generally following steps are followed in the accounting. 14 Various Steps in Accounting : Preparation of Journal/Subsidiary Books. Preparation of Ledger. Preparation of Trial Balance considering adjustments. Preparation of Final Accounts which consist of a) Trading A/c b) Profit and Loss A/c c) Balance Sheet As per Income Tax Act, 1961 financial year starts on 1st April and ends on 31st March every year. Necessity of Preparation of Final Accounts : Final account is prepared for the following various purposes. 1. To find out the Gross Profit or Gross Loss incurred during the year. 2. To find out the Net Profit or Net Loss of the business. 3. To know the financial position of the business at the end of every year. 4. To find out the amount of debtors and creditors. 5. To prepare various accounts for future planning. 6. To find the sources and application of fund. 7. To find out the value of goodwill for the purpose of reconstruction of firm. 8. To calculate various taxes of firm like income tax, etc. 2.2 Preparation of Partnership Final Accounts: Trial Balance and adjustments are important in preparation of Final Account. The list of debit and credit balances of all ledger account is called as "Trial Balance". The Final Account is prepared at the end of every financial year. Trading Account shows the Gross Profit or Gross Loss and Profit and Loss Account shows the Net Profit or Net Loss of the firm. The Balance Sheet shows the financial position of the business in the form of assets and liabilities at the end of year. Trading Account : Trading Account is a Nominal Account. Trading Account is opened in the trading organization for the purpose to find out the Gross Profit or Gross Loss incurred during the year. In the debit side of this account all direct expenses are recorded and in the credit side of account all direct incomes of the firm's are recorded. If the trading account's credit side is more than debit side then account shows the Gross Profit and vice versa. The Gross Profit or Loss is transferred to Profit and Loss Account. J. R. Batliboi : “The Trading Account indicates the results of buying and selling of goods while preparing this account, the general establishment charges are ignored and only the transactions related to goods are included.” 15  Trading Account for the year ended... Dr. Cr. Particulars Amt. (`) Amt. (`) Particulars Amt. (`) Amt. (`) To Opening Stock xxx By Sales xxx To Purchases xxx Less : Return Inward xxx xxx Less : Return Outward xxx xxx To Carriage Inward xxx By Goods lost by fire xxx To Freight xxx By Goods lost by theft xxx To Dock Charges xxx By Goods distributed To Custom Duty xxx as free samples xxx To Wages Productive xxx By Goods lost in Accident xxx To Manufacturing Wages xxx By Goods withdrawn by To Wages & Salaries xxx Partners xxx To Import Duty xxx By Closing Stock xxx To Coal/Coke/Gas/ By Gross Loss c/d xxx Motive Power/Oil/ Water /Grease xxx To Royalty on Purchase/Production xxx To Primary Packing Charges xxx To Factory Lighting & Heating xxx To Factory Rent & Rates xxx To Factory Insurance xxx To Works Manager's Salary xxx To Gross Profit c/d xxx xxx xxx In the case of combined term of wages and salaries following treatment should be given : a) When the item Wages and Salaries is given in which Wages are appearing first, it should be transferred to Trading A/c debit side. b) When the item Salaries and Wages is given in which Salaries appear first, it should be transferred to Profit and Loss A/c – Debit side. Profit and Loss Account : Profit and Loss Account is the type of Nominal Account. Profit and Loss account is a main account of income statement. It is prepared to ascertain the Net Profit earned or Net Loss suffered by a business concern during the accounting year. All indirect expenses are to be recorded to the debit side where as all indirect incomes are to be recorded to the credit side of this account. The credit balance on this account shows Net Profit which is to be transferred to Capital Accounts credit side or added in capital. The debit balance of this account shows, Net Loss which is to be transferred to Capital Account debit side or deducted from Capital. 16  R.N. Carter, "A Profit and Loss Account is an Account into which all gains and losses are considered in order to ascertain the excess of gain over the losses or vice versa.” Pro-forma of Profit and Loss Account for year ended... Dr. Cr. Particulars Amt. Amt. Particulars Amt. Amt. ` ` ` ` To Salaries xxx By Gross Profit b/d xxx To Salaries & Wages xxx By Commission Received xxx To Rent & Rates xxx By Discount Received/ Earned xxx To Insurance xxx By Interest Received xxx To Electricity/Lighting xxx By Dividend Received xxx To Telephone, Postage xxx By Rent Received xxx To Printing & Stationery xxx By Sundry/Miscellaneous Receipts xxx To Travelling Expenses of Salesman xxx By Profit on Sale of Asset xxx To Depreciation on Assets xxx By Net Loss transferred xxx To Loading Charges xxx to Partners' Capital A/c / To Audit Fees xxx Current A/c To Entertainmen Exp. xxx To Repairs / Renewals / Maintenance xxx To Interest on Loan xxx To Sundry/Miscellaneous Expenses xxx To Conveyance xxx To Loss by Fire / Theft / Accident xxx To Warehouse Rent xxx To P.F. Contribution xxx To Goods distributed as free sample xxx To Commission Allowed/ Given xxx To Discount allowed xxx To Allowances xxx To Advertisement xxx To Carriage Outward xxx To Sale Charges xxx To Bad Debts xxx To Export Duty xxx To Taxes xxx To General Expenses xxx To Trade Expenses xxx To Legal Charges xxx To Professional Charges xxx To Bank Charges xxx To Solicitor's Fees xxx To Secondary Packing Charges xxx To Loss on sale of Fixed Assets xxx To Net Profit transferred to xxx Partners' Capital A/c/ Current A/c xxx xxx xxx 17 Balance Sheet : Balance Sheet is a statement showing financial position of the firm on a particular day. All liabilities are recorded to its left hand side where as all Assets are recorded to its right hand side. The Balance Sheet is not an account but a statement showing the financial position of a firms, as on a given date in the form of Assets and liabilities. A. Palmer defines Balance Sheet as : "The Balance Sheet is, a statement on a particular date showing on one side the traders property and possessions and on the other side the liabilities". Proforma of Balance Sheet is given below Balance Sheet as on....... Liabilities Amt. ` Amt. ` Assets Amt. ` Amt. ` Capital Accounts : Goodwill xxx A xxx Land and Building xxx B xxx Less : Depreciation xxx xxx C xxx xxx Plant & Machinery xxx Partners Current A/c Less : Depreciation xxx xxx (Credit Balance) xxx xxx Furniture & Fixtures xxx General Reserve xxx Less : Depreciation xxx xxx Profit & Loss A/c xxx Equipment xxx Loan on Mortgage xxx Less : Depreciation xxx xxx Bank Loan xxx Delivery/Motor Van xxx Loan from Partners xxx Less : Depreciation xxx xxx Bills Payable xxx Leasehold / Freehold xxx Bank Overdraft xxx Premises Sundry Creditors xxx Less : Depreciation xxx xxx Add/Less : Any other Patents xxx adjustment Less : Depreciation xxx xxx Less : Provision for xxx xxx Loose Tools xxx Discount on Creditors Less : Depreciation xxx xxx Outstanding Expenses xxx Investments xxx Income received in xxx Stores & Spare Parts xxx Advance xxx Less : Depreciation xxx xxx Provision for Taxes xxx Prepaid Expenses xxx Reserve fund xxx Outstanding Incomes xxx Providend fund xxx Loans and Advances xxx Add : Interest on P.F. Closing Stock xxx Investment xxx Sundry Debtors xxx + Any adjustments Less : Bad Debts(New) xxx xxx Less : Provision for Discount xxx xxx on Debtors Insurance Claim Receivable xxx Bills Receivable xxx Cash in Hand xxx Cash at Bank xxx Partners Current A/c (Debit Balance) xxx 18 Notes : 1) Every item in the Trial Balance must be shown only one time and in just one part of the Final Accounts, excluding silent/ hidden adjustments. 2) Every adjustment must have two effects in Final Accounts i.e. debit and credit. 3) We have already studied this topic in XI standard as “Final Account of Proprietary Concern.” Most of the theory part, explanation of journal entries, and effects of journal entries are similar. To avoid repetition common explanation is not given in the XII stan- dard. But explanation and Journal Entries of new adjustments are given. For common references / explanation teachers and students can refer textbook of standard XI. First topic in this book i.e Introduction to Partnership is also correlated with Partnership Final Account. Students can refer topic no.1. Adjustments : Adjustment 1st Effect 2nd Effect 1. Closing Stock Balance Sheet Asset side Trading A/c credit side 2. Outstanding Expenses Add to the particular Balance Sheet Liability Expenses on the debit side of Side Trading/Profit and Loss A/c 3. Prepaid Expenses Deduct from the particular Balance Sheet Asset Side expenses on the debit side of Trading/Profit and Loss A/c 4. Income received in advance Deduct from the particular Balance Sheet Liability (Pre-received Income) income on the credit side of Side Profit and Loss A/c 5. Income receivable Add to the particular income Balance Sheet Asset Side on the credit side of Profit and Loss A/c 6. Bad debts (Additional or Show to the debit side of Profit Deduct from Sundry New Bad debts) and Loss A/c (add to old bad Debtors in Balance Sheet debts if any) Asset Side 7. Provision for Doubtful Show to the debit side of Deduct from Sundry Debts (Reserve for Doubtful Profit and Loss A/c Debtors in Balance Sheet debts, new R.D.D.) Asset Side 8. Reserve for discount on Show to the debit side of Deduct from Sundry Debtors Profit and Loss A/c (Add to Debtors discount allowed) Balance Sheet Asset Side 9. Depreciation Show on the debit side of the Less from the particular Profit and Loss A/c asset in Balance Sheet Asset Side 10. i) Interest on capital Show to the Debit Side of Profit Partners Capital/Current and Loss A/c A/c Credit Side or add to Capitals/ Current Account 19  ii) Interest on Drawings Show to the Debit Side of Show to the Credit Side of partners Capital/Current A/c Profit and Loss A/c or less from Capital/ Current Account iii) Interest on loan taken Show to the Debit Side of Add to loan taken in the Profit and Loss A/c Balance Sheet Liability Side 11. Interest on investment Show to the Credit Side of Balance Sheet Asset Side and on loan given Profit and Loss A/c 12. i) Insured goods destroyed Trading A/c Credit Side (gross 1. Balance Sheet Asset by fire/accident amount) Side (Claim amount) 2. Profit and Loss A/c Debit side (Amount of Loss) ii) Uninsured goods Profit and Loss A/c Debit Side Show to the Credit Side of destroyed by fire/ Trading A/c accident 13. Goods stolen Profit and Loss A/c Debit Side Show to the Credit Side of Trading A/c 14. Goods distributed as free Profit and Loss A/c Debit Side Show to the Credit Side of samples (Add in Advertisement if any) Trading A/c 15. Goods withdrawn by Show to the Credit Side of Partners Capital/Current Partners for personal use Trading A/c or deduct from A/c Debit Side Purchases A/c 16. i) Unrecorded Purchases Add to Purchases on the Debit Add to Creditors on the Side of Trading A/c Liability Side of Balance Sheet ii) Unrecorded Sales Add to Debtors on the Asset Add to Sales on the credit Side of the Balance Sheet Side of Trading A/c 17. i) Capital Expenditure Deduct from that particular Add to that particular asset included in Revenue Revenue Expenses on the Debit in Balance Sheet Asset Side Expenditure Side of Trading or Profit and Loss A/c ii) Revenue Expenditure Add to that particular Revenue Deducted from that included in Capital Expenditure particular Asset in Balance Expenditure Sheet 18. Bills Receivable dishonored Add the amount of bill Deduct the amount of bill dishonored to Sundry Debtors dishonored from Bills in the Balance Sheet Asset Side Receivable. 19. Bills Payable Dishonored Add the amount of bill Deduct the amount of bill dishonored to Sundry Creditors dishonored from Bills in the Balance Sheet Payable 20. Deferred Expenses of Advertisement Expenses Remaining amount of Advertisement paid for 5 related to current year debited Advertisement is shown years to Profit and Loss A/c on asset side of the Balance Sheet as prepaid Advertisement 20 21. Revenue Receipts included Add to sales on the credit side Add to Furniture on the in Capital Receipts e.g. sale of Trading A/c. Asset Side of the Balance of goods included in sale of Sheet Furniture 22. Commission to partners Show to the Debit Side of Show to the Credit Side of as percentage of Gross Profit and Loss A/c Partners Capital/Current Profit/sales. A/c or Add to Partners Capital A/c. Hidden Adjustment Given in Trial Balance Sr. Adjustment Given in Trading and Profit and Balance Sheet No. Trial Balance Loss A/c 1. Salaries/Rent Paid Add the amount of Salaries/ Show separately the amount (For 10 months) Rent for 2 months to Salaries/ of Salaries/Rent for 2 months Rent respectively on the Liabilities Side of the Balance Sheet 2. Insurance premium paid Deduct the proportionate Show separately the amount for 1 year ending 30th amount of Insurance Premium of prepaid insurance on the June, 2019 (Accounting for 3 months from insurance Assets Side of the Balance year ends on 31st March on the Debit Side of Profit Sheet 2019) and Loss A/c 3. Advertisement expenses Show 1/4th amount of Show the remaining i.e. 3/4th (for 4 years) Advertisement expenses on of Advertisement expenses the Debit Side of Profit and (not written off) on the Assets Loss A/c Side of the Balance Sheet 4. Rent received Add the proportionate amount Show the same amount on the (for 11 months) of Rent for one month to Rent Assets Side of the Balance received on Credit Side of Sheet Profit and Loss A/c 5. 10% Loan (Borrowed on Show the amount of Interest Add the amount of Interest 1st Jan. 2018)(Accounting Payable on Loan for 3 months Payable on Loan on the year ends on 31st March on the Debit Side of the Profit Liability Side of the Balance 2018) and Loss A/c Sheet 6. 16% Investment Show the amount of Interest Add the amount of Interest (Purchased on 1st Jan. Receivable on Investment for Receivable on Investment on 2019) (Accounting year 3 months on the Credit Side the Assets Side of the Balance ends on 31st March 2019) of the Profit and Loss A/c Sheet 7. 10% Government Bonds Show the amount of Interest Add the amount of Interest Receivable on the Credit Side Receivable to Government of Profit and Loss Account Bonds on the Assets Side of the Balance Sheet or show seperately in Balance sheet Asset Side. 21 Important Points : 1) Each item from Trial Balance will be included only once in the Final Accounts i.e. either in Trading or in Profit & Loss A/c or in Balance Sheet or in working section. 2) Each adjustment has two effects for the similar amount. 3) Debit balances of Trial Balance will appear on the debit side of Trading Account or Profit & Loss A/c or on the asset side of the Balance Sheet. 4) Credit balances of Trial Balance will appear on the credit side of Trading Account or Profit & Loss A/c or Capital Account or on the Liabilities Side of the Balance Sheet. 5) If Salaries and Wages are given as separate items, Wages are shown on the debit side of Trading Account while salaries are shown on the debit side of Profit and Loss A/c. If the item is “Wages and Salaries”, it is shown on the debit side of Trading A/c and if the items is “Salaries & Wages”, it is shown on the debit side of Profit & Loss A/c. 6) If the Trial Balance contains only “Trade Expenses”, the item will be shown on the debit side of Profit & Loss A/c. If the Trial Balance contains “Trade Expenses” and also other items like “Sundry Expenses” or “Office Expenses” or “General Expenses” or “Miscellaneous Expenses”, the item “Trade Expenses” is shown on the debit side of Trading A/c while the other items of expenses are shown on the debit side of Profit &Loss A/c. 7) The adjustment for Bad Debts and Provision for Bad and Doubtful Debts should be effected after other adjustments for Debtors are given effect to. Such adjustments can be unrecorded sales, drawings included in Debtors, drawings treated as sales, etc. 8) Reserve for Discount on Debtors should be given effect after the adjustments for Bad Debts and Provision for Bad and Doubtful Debts. 9) Reserve for Discount on Creditors should be given effect after making all the other adjustments concerning Creditors. 10) Hidden / Self-explanatory adjustments are to be given effect even if there is no special instruction in the problem in this respect. 11) Closing Stock should be taken at “Cost or Market Price, whichever is less." 12) If a manager or a partner is allowed commission at a certain percentage on Net Profit, such commission should be calculated in the following manner depending upon how the commission is quoted : a) If it is on Net Profit before charging such commission : Rate of Commission × Net Profit Commission Amount = 100 b) If it is on Net Profit after charging such commission : Rate of Commission × Net Profit Commission Amount = 100+ Rate of Commission 13) When the date of drawings are not given Interest on drawings should be calculated on average basis or for six months Drawings × Rate × 6 100 12 14) If a partner introduces capital in the middle of the accounting year, then interest on capital should be calculated on proportionate time period only. (This complication is not expected at your Std. XII level). 22 Treatment of some important Items appearing in Trial Balance only : i) Any outstanding expenses Liability Side of Balance Sheet ii) Any Prepaid Expenses Asset Side of Balance Sheet iii) Any outstanding income Asset Side of Balance Sheet iv) Income Received in Advance Liability Side of Balance Sheet v) Depreciation Debit Side of Profit & Loss A/c vi) Loss on Sale of any Asset Debit Side of Profit & Loss A/c vii) Goods withdrawn by partner Debit Side of Capital/Current A/c viii) General Reserve / Reserve Fund Liability Side of Balance Sheet ix) Deposit from Public Liability Side of Balance Sheet x) Goods distributed as free samples Debit side of Profit & Loss A/C xi) Suspense Account: a) If it is on Debit Side Show the same figure on Asset Side b) If it is on Credit Side Show the same figure on Liability Side xii) Bank for Collection of Bills Asset Side of Balance Sheet Steps for solving problem : 1) Prepare the necessary accounts, including the working notes. 2) Place some mark on Trial Balance items for external as well as internal adjustments. 3) Go through Trial Balance items and give only one accounting effect sequentially. 4) Go through Adjustments and give two accounting effects. 5) Close Ledgers in the working notes, except capital. 6) Find Gross Profit, Net Profit and transfer it to individual capital accounts. 7) Find the closing balance in capital and transfer it to Balance Sheet. 8) Tally the Balance Sheet. 23  Illustrations 1. Daya and Kshama are Partners sharing Profits and Losses in the ratio of 1:1 from the following Trial Balance and additional information prepare Trading and Profit and Loss account for the year ended 31st March 2019 and Balance Sheet as on that date. Trial Balance as on 31st March, 2019 Debit Balance Amt. ` Credit Balance Amt. ` Stock (1/4/2018) 65,000 General Reserve 14,500 Bills Receivable 28,000 Capital: Wages and salaries 9,000 Daya 1,60,000 Sundry Debtors 1,32,500 Kshama 1,20,000 Bad debts 1,000 Creditors 98,000 Purchases 1,48,000 R.D.D. 1,800 Motor car 68,000 Sales 2,85,500 Machinery 1,14,800 Outstanding Wages 700 Audit Fees 1,200 Purchases Returns 4,000 Sales Return 2,000 Discount 1800 Discount 2,300 Building 75,000 Cash at Bank 12,000 10% Investment 20,000 Advertisement(Paid for 9 months) 4,500 Royalties 3,000 6,86.300 6,86.300 Adjustment and Additional Information : (1) Closing Stock ` 40,000. (2) Depreciate Building and Machinery @ 5% and 3% respectively. (3) Bills Receivable included dishonoured bill of ` 3000. (4) Goods worth ` 1000 taken by Daya for personal use was not entered in the books of accounts. (5) Write off ` 1800 as Bad debts and maintain R.D.D. at 5% on Sundry Debtors. (6) Goods of ` 6000 were sold but no entry was made in the books of accounts. 24  IN THE BOOKS OF DAYA AND KSHAMA Trading, Profit and Loss Account for the year Ended 315 March 2019 Dr. Cr. Particulars Amt Amt Particulars Amt Amt ` ` ` ` To Opening Stock 65,000 By Sales 2,85,500 To Purchases 1,48,000 Add :Unrecorded Sales 6,000 Less - Purchases Return 4,000 1,44,000 2,91,500 To Royalties 3,000 Less : Sales Return 2,000 2,89,500 To wages and Salaries 9,000 By Goods take over by 1,000 Daya for Personal Use To Gross Profit c/d 1,09,500 By Closing Stock 40,000 3,30,500 3,30,500 To Advertisement 4,500 Add : o/s for 3 months 1,500 6,000 By Gross Profit b/d 1,09,500 To Audit fees 1,200 By Interest Accrued on 2,000 To Depreciation on : Investment Building 3,750 By Discount 1,800 Machinery 3,444 7,194 To Bad debts (old) 1,000 Add : New Bad Debts 1,800 Add : New R.D.D. 6,985 9,785 Less : R.D.D.(old) 1,800 7,985 To Discount 2,300 To Net Profit (Transferred to Capital A/c's) Daya 44,311 Kshama 44,310 88,621 1,13,300 1,13,300 25  Balance Sheet as on 31st March, 2019 Liabilities Amt. Amt. Assets Amt. Amt. ` ` ` ` Capital : Daya 1,60,000 Building 75,000 Add : Net Profit 44,311 Less : Depreciation 5% 3,750 71,250 Less: (Goods taken over by 1,000 2,03,311 Machinery 1,14,800 Daya for personal use) Less : Depreciation 3% 3,444 1,11,356 Capital Kshama 1,20,000 Bills Receivable 28,000 Add : Net Profit 44,310 1,64,310 Less : Bills Receivable 3,000 25,000 General Reserve 14,500 Dishonoured O/s Advertisement Exp. 1,500 Motor Car 68,000 (3 months) Cash at Bank 12,000 Creditors 98,000 Closing Stock 40,000 Outstanding Wages 700 Sundry Debtors 1,32,500 Add : Bills Receivable 3,000 Dishonoured 1,35,500 Add : Unrecorded Sales 6,000 1,41,500 Less : Bad debts (New) 1,800 1,39,700 Less : R.D.D. 5% (New) 6,985 1,32,715 10% Investment 20,000 Add : Interest Accrued 2,000 22,000 4,82,321 4,82,321 Working Notes : (1) Adjustment No. 3, 5 and 6 are co-related with sundry Debtors. So, while calculating R.D.D. 5% on sundry Debtors, Amount of dishonour of Bills ` 3,000) and goods sold but not recorded (` 6000) will be added into the sundry Debtors, then new Bad Debts will be deducted and then Less R.D.D (New) 5% 6985 after 5% R.D.D should be calculated. 1st effect Sundry Debtors 1,32,500 Add : Bills dishonoured 3,000 Add : Unrecorded sales 6,000 1,41,500 Less Bad debts (New) 1,800 1,39,700 Less R.D.D (New) 5% 6,985 ` 1,32,715 (Shown on Assets side of Balance Sheet) 26  ` 2nd Effect To Bad debts (Old) 1,000 Add Bad debts (New) 1,800 Add New R.D.D 6,985 9,785 Less R.D.D. (Old) 1,800 ` 7,985 - (Shown on Debit side of Profit and Loss A/C) 2. From the following Trial Balance and Adjustments given below you are required to prepare Trading and Profit and Loss Account for the year ended 31st March, 2019 and Balance Sheet as on that date in the books of Shilpa and Katrina. Trial Balance as on 31st March, 2019 Debit Balance Amount ` Credit Balance Amount ` Land and Building 37,800 Capital Furniture 17,250 Shilpa 45,000 Sundry Debtors 40,000 Katrina 45,000 Stock (1/4/2018) 65,000 Bills payable 17,500 Bad Debts 400 Bank Over draft 10,000 Printing and Stationary 4,000 Purchases Return 1,480 Wages 3,000 Sundry Creditors 22,000 Salaries 5,000 Bank Loan 15,000 Carriage Inward 4,000 Interest received 1,500 Sales Return 2,000 R.D.D 1,000 Drawings : Sales 1,20,000 Shilpa 2,000 Katrina 3,000 Discount 2,030 Advance Given to Shaharukh 10,000 Cash in hand 20,000 Cash at Bank 8,000 Interest 1,000 Commision 2,000 Royalties 2,000 Purchases 50,000 2,78,480 2,78,480 Adjustments (1) The Stock in Hand was valued at ` 58,000 on 31st March, 2019. (2) Outstanding Expenses : Royalties ` 1,500 and Wages ` 800. 27  (3) Salaries paid in advance to staff ` 2,000. (4) Create a provision for Bad Debts ` 1,000 and Reserve for Doubtful Debts 3% on Sundry Debtors. (5) Depreciate Land and Building by 5% and Furniture by 10%. IN THE BOOKS OF SHILPA AND KATRINA Trading and Profit and Loss Account for the year ended 31st March 2019 Dr. Cr. Particulars Amount Amount Particulars Amount Amount ` ` ` ` To Opening Stock 65,000 By Sales 1,20,000 To Purchase 50,000 Less : Sales Return 2,000 1,18,000 Less : Purchases Return 1,480 48,520 By Closing Stock 58,000 To Wages 3,000 Add : O/s Wages 800 3,800 To Royalties 2,000 Add : O/s Royalties 1,500 3,500 To Carriage Inward 4,000 To Gross Profit c/d 51,180 1,76,000 1,76,000 To Salaries 5,000 By Gross Profit b/d 51,180 Less : Advance Salary 2,000 3,000 By Interest Received 1,500 To Bad debts (Old) 400 Add : Bad Debts (New) 1,000 Add : R.D.D. (New) 1,170 2,570 Less - R.D.D. (Old) 1,000 1,570 To Depreciation : Land and Building 1,890 Furniture 1,725 3,615 To Printing And Stationary 4,000 To Discount 2,030 To Interest 1,000 To Commission 2,000 To Net Profit (Transfered to Capital A/c) Shilpa 17,732 Katrina 17,733 35,465 52,680 52,680 28  Balance Sheet as on 31st March, 2019 Liabilities Amount Amount Assets Amount Amount ` ` ` ` Capital : Land and Building 37,800 Shilpa 45,000 Less : 5%Depreciation 1,890 35,910 Add : Net Profit 17,732 Furniture 17,250 62,732 Less :10% Depreciation 1,725 15,525 Less : Drawings 2,000 60,732 Sundry Debtors 40,000 Katrina 45,000 Less : Bad debts 1,000 Add : Net Profit 17,733 39,000 62,733 Less : R.D.D. 3% 1,170 37,830 Less : Drawings 3,000 59,733 Cash in Hand 20,000 Bills Payable 17,500 Cash at Bank 8,000 Outstanding Expenses : Closing Stock 58,000 Wages 800 Advance Salary 2,000 Royalties 1500 2,300 Advance to Shaharukh 10,000 Bank Overdraft 10,000 Sundry Creditors 22,000 Bank Loan 15,000 1,87,265 1,87,265 3. Rucha and Juili are partners sharing Profits and Losses in their Capital Ratio. From the following Trial Balance and adjustments you are required to prepare Final Accounts. Trial Balance as on 31st March, 2019 Debit Balance Amount ` Credit Balance Amount ` Purchases 48,000 Capital A/c Trade Expenses 3,000 Rucha 80,000 Salaries 4,500 Juili 40,000 Wages and Salaries 2,800 Sundry Creditors 22,000 Advertisement (2 Years) 4,000 Sales 1,48,000 Sales Returns 8,000 R.D.D. 1,200 Freehold Property 23,000 Bills Payable 12,000 Office Rent 5,000 Purchases Return 6,000 Motor Van 40,000 Stock (1/4/2018) 89,500 General Expenses 2,500 Sundry Debtors 62,000 Coal, Gas, Fuel 1,000 Carriage Inward 800 Carriage Outward 1,300 Plant and Machinery 13,800 3,09,200 3,09,200 29 Adjustments : (1) Closing Stock is valued at ` 88,000 (Cost Price) and ` 90,000 (Market Price) (2) Rucha and Juili withdrawn Goods from business ` 3000 and ` 2000 respectively for their personal use. (3) Depreciate Motor Van by 5% and Plant and Machinery by 7%. (4) Reserve for Doubtful Debts on Debtors @ 5% is to be created. (5) Outstanding Wages ` 800. (6) Goods of ` 6000 were purchased on credit and credit sales of ` 6000 but no entry was found in the Books of Account. IN THE BOOKS OF RUCHA AND JUILI Trading and Profit and Loss Account for the year ended 31st March 2019 Balance Sheet as on 31st March, 2019 Dr. Cr. Particulars Amount Amount Particulars Amount Amount ` ` ` ` To Opening Stock 89,500 By Sales 1,48,000 To Purchases 48,000 Add : Unrecorded 6,000 Add : Unrecorded 6,000 Sales Purchases 1,54,000 54,000 Less : Sales Return 8,000 1,46,000 Less : Purchases Return 6,000 48,000 By Closing Stock 88,000 To Wages and Salaries 2,800 By Goods withdrawn