Depreciation UNIT. Learning Objectives

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

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

Paper - II Accountancy - II 111 4. Inadequacy of Assets : The increase in the size or growth of the business may cause inadequacy of the asset. As a result the asset may be terminated. 5. Obsolescence : When the asset become outdated, it becomes useless in the business. So it is to be replaced by new and modern assets with the latest technology. Thus the old asset losses its value. 6. Depletion : Asset may be exhausted through its working e.g., mines, minerals, oil etc. These assets get exhausted because of extraction and exploitation. Hence the assets become useless. Factors influencing depreciation 1. Wear and tear due to constant use. 2. Decrease in the market value of the asset. 3. Due to obsolescence i.e., permanent change in the asset may be result in the uselessness of the asset. 4. Non-functioning of a machine may cause depreciation. 5. Accident and damage of an asset will cause depreciation. Methods of Providing depreciation The following are the main methods of providing depreciation. 1. Fixed Instalment Method. 2. Diminishing Balance Method. 3. Depreciation Fund Method. 4. Insurance Policy Method. 5. Revaluation Method. 6. Annuity Method. 7. Depletion Method. 8. Machine Hour Rate Method. 9. Global Method. 10. Sum of Digits Method.

112 Office Assistantship Fixed Instalment Method This method is also known as Straight Line or Original Cost Methods. Under, this method a fixed percentage of original value of the asset is written off every year. In this method depreciation is charged equally every year throughout the life of the asset. The depreciation charged on the asset is fixed throughout the effective life of the asset. At the end of the working life of the asset, balance in the asset account will be Zero. The amount of depreciation is calculated as follows : Illustration 1 Cost of the Asset - Scrap Value Estimated Life of the Asset If a machine costing Rs 20,000 is estimated to have a life of 9 years and the value is estimated Rs. 2000 at the end of its life, the amount of depreciation will be Cost of the Asset - Scrap Value Estimated Life of the Asset 20, 000 2000 Annual Depreciation = = 2000 9 Method of a Calculation of Rate of Depreciation Advantages Annual Depreciation = Annual Depreciation = Annual Depreciation Rate of Depreciation = x 100 Total cost of the Asset If annual depreciation is Rs. 2,000 and the cost of the asset is Rs 20,000 2 0 0 0 Rate of Depreciation = x 100 = 10% 2 0, 0 0 0 1. This method is simple and easy to understand. 2. Calculation if deprecation is very easy. The value of asset can be written down to zero 3. This method is very suitable to those which have a fixed life e.g., furniture and fixtures, lease etc.

Paper - II Accountancy - II 113 Disadvantages Date 1. It is difficult to estimate the life of certain assets with accuracy e.g. machinery. 2. The interest on the amount invested in the purchase of asset is not taken into consideration. 3. In this method, it becomes difficult to calculate the depreciation on additions made during the particular year. 4. The same amount of depreciation is charged every year irrespective of the use of the asset. Thus, it does not take into account the effective utilization of the asset. Journal Entries Particulars Dr. Cr. xx When the asset is purchase Asset Account To Bank Account Dr. --- --- (Being the asset purchased) xx When the depreciation is provided on the asset Depreciation Account Dr. To Asset Account --- --- (Being the depreciation calculated) xx When the depreciation is transferred to P&L A/c. Profit & Loss A/c Dr. to Depreciation A/c --- --- (Being the depreciation transferred to P & L A/c) xx When the asset is sold after its working life Bank Account Dr. To Asset Account --- --- (Being the asset sold)

114 Office Assistantship xx xx Profit earned on sale of Asset transferred to P&L A/c Asset Account Dr. To Profit & Loss A/c (Being the profit tranferred to P&L A/c) When loss occured on the sale of an Asset Profit & Loss Acount Dr. To Asset Account (Being the loss on sale transferred to P&L A/c) --- --- --- --- Illustration 2 : On 1 st January 2008, a firm purchased plant and machinery costing Rs. 52,000. It is estimated that its working life is 5 years and at the end of which it will fetch Rs.2,000. Show Plant and Machinery account for 3 years, if depreciation is charged according to straight line method. Cost of Asset - Scrap Value Solution : Annual Depreciation = Estimated life of the asset 52, 000-2, 000 Annual Depreciation = 5 = A 10,000 Dr. Plant and Machinery Account Cr. Date Particular Date Particular 1.1.2008 To Bank 52,000 31.12. 08 By Depreciation 10,000 By Balance c/d 42,000 52,000 52,000 1.1.2009 To Balance b/d 42,000 31.12.09 By Depreciation 10,000 By Balance c/d 32,000 42,000 42,000 1.1.2010 To Balance b/d 32,000 31.12.10 By Depreciation 10,000 By Balance c/d 22,000 32,000 32,000 1.1.2011 To Balance b/d 22,000

Paper - II Accountancy - II 115 Illustration No. 3 A machine was purchased on 1st July 2006 at a cost of A 18,000 and A 2,000 was spent on its installation. The depreciation was written off at the rate of 10% on its original cost. The books were closed on 31 st December every year. Show the machinery account and depreciation account for three years. Dr. Plant and Machinery Account Cr. Date Particular Date Particular 1.7.2006 To Bank 18,000 31.12.06 By Depreciation 1,000 To Bank 2,000,, By Balance c/d 19,000 20,000 20,000 1.1.2009 To Balance b/d 19,000 31.12.07 By Depreciation 2,000,, By Balance c/d 17,000 19,000 19,000 1.1.2008 To Balance b/d 17,000 31.12.08 By Depreciation 2,000,, By Balance c/d 15,000 17,000 17,000 1.1.2009 To Balance b/d 15,000 Dr. Depreciation Account Cr. Date Particular Date Particular 31.12. 06 To Machinery a/c 1,000 31.12.06 By P & L a/c 1,000 31.12.07 To Machinery a/c 2,000 31.12.07 By P & L a/c 2,000 31.12.08 To Machinery a/c 2,000 31.12.08 By P & L a/c 2,000

116 Office Assistantship Illustration no 4 Jagadish purchased a second hand machine for A 57,000 on 01.05.2008 and spent A 3,000 for its repairs. On 31.12.2011 the machine became unsuitable and sold for.a 40,000. The books were closed on 31 st December every year. Prepare machinery account from 2008 to 2011 charging depreciation @ 12% p.a. Under fixed installment method. Dr. Machinery Account Cr. Date Particular Date Particular 1.5.2008 To Bank 57,000 31.12.08 By Depreciation 4,800 To Bank (Repairs) 3,000,, By Balance c/d 55,200 60,000 60,000 31.11.09 To Balance b/d 55,200 31.12.09 By Depreciation 7,200,, By Balance c/d 48,000 55,200 55,200 1.1.2010 To Balance b/d 48,000 31.12.10 By Depreciation 7,200,, By Balance c/d 40,800 48,000 48,000 1.1.2011 To Balance b/d 40,800 31.12.11 By Depreciation 7,200 31-12-11 To P&L A/c (Profit on sale) 6,400 47,200,, By Balance c/d 40,000 47,200 Calculation of profit or loss on the sale of the asset : Cost of the Asset (57,000 + 3000) 60,000 Less : Total Depreciation (4800 +(7200+7200+7200) 26,400 Written down value (W.D.V) 33,600 Less : Sale of machinery on 31.12.2011 40,000 Profit on Sale 6,400

Paper - II Accountancy - II 117 Note : If the sale value is more than the W.D.V of the asset, it is profit. If the sale value is less than the W.D.V. of the asset, it is loss. Diminishing Balance Method This method is also known as Written Down value Method or Reducing balance method The depreciation under this method is calculated at a fixed percentage on the diminished value of the asset i.e. depreciation is calculated on the brought down balance of the asset. So the amount of depreciation at the beginning year will be more when compared to the later year. So the depreciation charged on every year goes on decreasing. Advantages 1. Fresh calculation of depreciation is not necessary as and when addition are made. 2. The Asset is never completely written off, so that charged is made to revenue every year 3. Higher repair charges at the end of life of the asset are offset by lower amounts of depreciation. 4. The method is recognised by income tax authorities as well as Companies Amendment Act,1988. Disadvantages 1. In this method, the calculation of depreciation is slightly complicated. 2. The value of the asset cannot be brought down to zero. 3. This method lays too much emphasis on the historical cost. 4. It is difficult to determine the suitable rate of depreciation. 5. It does not provide funds to replace the assets. Illustration No. 5 A trader purchased machinery for A 10.000 on 1.1.2009 Calculate depreciation@ 10% per annum under diminishing balance method for the first 4 years. Show the Machinery account.

118 Office Assistantship Dr. Machinery Account Cr. Date Particular Date Particular 1.1.2009 To Bank 10,000 31.12.09 By Depreciation 1,000,, By Balance c/d 9,000 10,000 10,000 1.1.2010 To Balance b/d 9,000 31.12.10 By Depreciation 900,, By Balance c/d 8,100 9,000 9,000 1.1.2011 To Balance b/d 8,100 31.12.11 By Depreciation 810,, By Balance c/d 7,290 1.1.2012 To Balance b/d 8,100 7,290 31.12.12 By Depreciation 8,100 729,, By Balance c/d 6,561 1.1.2013 7,290 6,561 7,290 Illustration No. 6 Mr. Rao purchased a machine for A 44,000 on 1.7.2009 and spent A 6,000 on it erection on 31.12.2011 the machine became obsolete and was sold for A 40,000. Calculate depreciation @ 10% p.a. under diminishing Balance Method. Show the Machinery account. Profit Loss on sale of Assets : Cost of Assets (44,000+6,000) A 50,000 Less depreciation 2009 2,500 2010 4,750

Paper - II Accountancy - II 119 2011 4,275 W.D.V. as on 31.12.2012 A 38,475 Less amount realized on sale A 40,000 Dr. Machinery Account Cr. Profit on the sale of machine A 1,525 Date Particular Date Particular 1.7.2009 To Bank 44,000 31.12.09 By Depreciation 2,500 To Bank 6,000,, By Balance c/d 47,500 50,000 50,000 1.1.2011 To Balance b/d 47,500 31.12.10 By Depreciation 4,750,, By Balance c/d 42,750 47,200 47,500 1.1.2011 To Balance b/d 42,750 31.12.11 By Depreciation 4,275 To P&L A/c (Profit on sale) 1,525 44,275,, By Bank 40,000 44,270 Illustration No 7 On 1.1.2009 X purchased furniture worth A 25.000. on 1 st July 2010 He purchased additional second hand furniture worth A 5,000 and spent A 2,000 for its repairs. Assuming the annual depreciation is charged @ 10% p.a. Prepare machinery account under diminishing Balance method for 3 years. Purchased furniture on 01-01-2009 = 25,000 Purchased second hand furniture On 01-07-2010 = 5,000 + Repairs = 2,000 A 7,000

120 Office Assistantship Dr. Furniture Account Cr. Date Particular Date Particular 1.1.2009 To Bank 25,000 31.12.09 By Depreciation 2,500,, By Balance c/d 22,500 25,000 25,000 1.1.2010 To Balance b/d 22,500 31.12.10 By Depreciation 2,600 1.7.2010 To Bank 5,000,, By Balance c/d 26,900 To Bank (Repairs) 2,000 29,500 29,500 1.1.2011 To Balance b/d 26,900 31.12.11 By Depreciation 2,690,, By Balance c/d 24,210 1.1.2012 To Balance b/d 26,900 24,210 26,900 Illustration No. 8 On 1.4.2010 a company purchased a machinery for A 30,000. Depreciation was provided @10% per annum on straight line method at the end of each year. With effect from 1.1.2011 the company decided to change the method of depreciation to Diminishing Balance Method @12% per annum. On 31.3.2012 the machinery became useless and sold for A 21,000. Prepare Machinery Account. Working Notes: Machinery purchased on 1.4.2010 : A 30,000 Rate of depreciation 10% From 1-1-2011 depreciation charged 12% under diminishing balance method. On 31-03-2012, Machinery sold for A 21,000

Paper - II Accountancy - II 121 Dr. Machinery Account Cr. Date Particular Date Particular 1.4.2010 To Bank 30,000 31.12.10 By Depreciation 2,250,, By Balance c/d 27,750 30,000 30,000 1.1.2011 To Balance b/d 27,750 31.12.11 By Depreciation 3,330,, By Balance c/d 24,420 27,750 27,750 1.1.2012 To Balance b/d 24,420 31.03.12 By Depreciation 733,, By Bank 21,000 By P&L A/c. ( Loss) 2,687 24,420 24,420 Short Answer Type Question 1. Define depreciation. 2.What are the causes of depreciation? 3. Write the main method of charging depreciation? 4. What is the need for providing depreciation? 5. How is the depreciation calculated in the fixed installment method? 6. How is the depreciation calculated in the diminishing Balance Method? 7. How do you calculate the rate of depreciation under fixed installment method? 8. How is a profit & loss on sale of assets is calculated? 10. Distinguish between fixed installment and Diminishing Balance Method?

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

Paper - II Accountancy - II 123 9. A company purchased a plant a worth A 25,000 on 01.7.2009 is calculated @ 10% per annum. Under diminishing Balance Method. Show the machinery account up to 31 st Dec 2012. (Ans. Balance A 17,313) 10. Lee & Co. purchased a second hand machine costing A 45,000 on 1 st Jan. 2009 and spent Rs. 5,000 on its repairs. The depreciation is charged @ 15% p.a. on diminishing balance method. Prepare machinery account for the first four years. (Ans. Balance A 26,400) Sales of Asset 11. Machinery bought on 1 st Jan 2009 for A 20,000 has become obsolete and sold on 31 st Dec, 2012 for A 13,000. Calculate the profit or loss assuming depreciation is charged @ 15% p.a. on straight line method. (Ans. Profit A 5,000) 12. Machinery purchased on 1.7.2009 for A 10,000 was sold on 31.12.2011 for A 5,000. Calculate the profit or loss of sale assuming depreciation is charged @ 10% per annum under fixed installment method. (Ans. Loss A 2,500) 13. Furniture worth A 10,000 was purchased as on 1.1.2009. The furniture was sold on 31.12.2012 for A 6,000. Find the profit or loss on the sale of furniture charge depreciation @ 10% p.a under diminishing balance method. (Ans. Loss A 925) 14. A second hand machine was purchased for A 12,000 on 1.1.2009 and A 3,000 spent towards repairs. On 30.6.2012 the machine became unsuitable and was sold for A 10,000. Charge depreciation @ 15% on Diminishing Balance Method. Show the machinery account. (Ans. Loss. A 4,202) 5. Furniture worth A 20,000 was purchased on 1.1.2010 and on 1.4.2011 additional furniture worth A 8000 was purchased and A 2,000 was spent on its perfection. On 31.12.2011 furniture purchased on 1.1.2010 was sold for Rs. 15,000. Prepare the furniture account up to 31.12.2012 charging depreciation @ 12% p.a. as per diminishing balance method. (Ans. Loss A 488, Balance : A 8008).

124 Office Assistantship UNIT Accounts of Non-Trading Concerns 2 Learning Objectives After completing this unit, the student will be able to Understand the meaning and purpose of depreciation Understand different methods of providing depreciation Meaning of Non-Trading The purpose of every trading or manufacturing activity is to make profit. But there are certain charitable and social institutions which are not created with a profit making object but for promoting and development and welfare activities; both for the general and public and for its members. Educational institutions, hospitals, clubs, charitable trusts.., are called Non-Trading Concerns. These non-profitable institutions are not interested in the quantum of profit earned by them during the year but certainly they are interested in the quantum of profits earned by them during the year, but certainly they are not interest in knowing their Income and expenditure during the year and their financial positions at the end of each year. To achieved these objectives they prepare the following statements. 1. Receipts and payments account. 2. Income and expenditure account. 3. Balance Sheet.

Paper - II Accountancy - II 125 These concepts of capital revenue are very important in the preparation of Final Accounts of non-trading concerns. Therefore, it is necessary to know the distinction between capital and revenue items. Capital and Revenue One of the objects of accounting is to determine whether the business has earned profit or not. For this purpose a proper distinction has to made between capital and revenue as regards expenditure, receipts and losses are required. Failure to distinguish capital from revenue will affect the whole results. For example, plant purchased may be charged to the purchases account, proceeds from the sale of fixed assets may be treated as income. In each case both the profit and loss account and balance sheet will be affected. While preparing the final accounts all revenue items are included in the revenue account i.e. Income and expenditure A/C and balance sheet. Any error committed in distinguishing between Capital and Revenue will Effect the as ascertainment of correct profit. It is very difficult to give clear cut rules as to make a distinction between the capital and revenue expenditure. However the following rules may serve as guide for making distinction between capital and revenue expenditure. Capital Expenditure Capital expenditure is such an expenditure which benefits the business over a long period it include assets acquired for the purpose of earning and not for resale, improving extending fixed assets, increasing the earning capacity of the business and rising capital for the business. Purchase of new plant, additions to the buildings brokerage and commission paid for procuring long term loans are a few examples of such expenditure. All items of capital expenditure appear on the assets side of the balance sheet. Revenue Expenditure Revenue expenditure is the expenditure incurred in one accounting period and the full benefit is enjoyed in the same period. Therefore, it is normally of recurring nature. Such an expenditure does not increased the earning capacity of the business and is does not bring into existence and assets. It includes expenses incurred for acquiring assets for resale at a profit or for conversion into finished product, for maintaining fixed assets in good working order e.g., normal repairs and renewal of plant, White washing of building, replacement of machinery etc., for keeping the organization going e.g. rent, rates and taxes wages and salaries, insurance and other trade charges. All items of revenue and

126 Office Assistantship other trade charges. All items of revenue expenditure appear in the trading and profit and loss account. Revenue expenditure becoming capital expenditure An expenditure which is primarily of revenue nature but incurred for the purpose of acquiring any asset or adding to its value, is termed capitalized expenditure. The following are some of the examples of revenue expenditure becoming capital expenditure. 1. Repairs : Repairs are usually revenue expenditure but, if we purchase a second hand machinery and pay for repairs necessary as capitalized expenditure. The following are some of the examples of revenue expenditure becoming capital expenditure. 2. Wages : Wages are usually based as a revenue charge but if paid to the employees for the construction or erection or installation of fixed assets of the business, then these will be become capital expenditure and should be added to the cost of the fixed asset concerned. 3. Legal Expenses : These are usually a revenue charge but, if incured on acquiring a property, should be added to the cost of the asset acquired cost of the asset. 4. Freight And Carriage : These are usually a revenue item, but payments made for transporting newly acquired asset will be treated as a capital expenditure and will from additional cost of the asset. 5. Interest : Interest on borrowing and capital are generally a revenue item and is allowed to be treated as capital item if paid during the period of construction. 6. Preliminary expense : Initial expenses, connected with the formation of a company through revenue in nature are allowed to be capitalized and can be shown as an asset in the balance sheet 7. Brokerage and stamp duty : Normally these are revenue items, but brokerage and stamp duty paid on the purchase of a property may be treated as capital expenditure. 8. Development expenditure: In concerns line mines, tea plantations, collieries, horticulture rubber plantation etc,. a sizeable is spent during the period of development and such expenses incurred up to the time they begin to earn, must to be treated as capital expenditure.

Paper - II Accountancy - II 127 9. Advertising : A huge sum spent on advertising in a year, the benefit of which shall accrue in future years, also may have the affect of creating a future goodwill, therefore such sums may be capitalized. For example, lakhs of rupees spent in changing the name from Binaca to Cibaca. 10. Raw materials and stores : They are usually a revenue charge, but if consumed to make a fixed asset, they must be treated as part of the cost of the asset. Deferred Revenue Expenditure It is the expenditure which would normally be treated as revenue expenditure, but it is not written off in one year as a benefit is not completely exhausted in the year during which it is incurred as it may as it may be spread over a number of year. Therefore, a proportionate amount will be charged to the profit and is account of each year and the balance is carried forward to subsequent yea as differed revenue expenditure and is shown as an asset in the balance sheet. Sometimes extra ordinary losses are also treated as deferred revenue expenditure and charged to profit and loss account for four to five years. Usual items of capital Expenditure The following items usually represent capital expenditure : 1. Cost of acquisition of fixed asset like goodwill, land, building, leasehold premises, tools and equipment, furniture, trademarks etc. 2. Expenses of putting a new asset in working condition like installation and erection expenses of any fixed asset. 3. Additions or extensions or structural improvement to the existing assets leading to increase in their working efficiency or revenue earning capacity or cost reduction e.g., refurnishing of the seating accommodation of a cinema hall etc,. 4. Expenses incurred for the development of mines and plantation. 5. Formation expenditure of a business i.e. preliminary expenses like preparing and filling the legal documents required for starting a business etc. Usual items of Revenue Expenditure The following are usual items of revenue expenditure 1. Expenses incurred in the ordinary conduct and administration of the business e.g. rents, salaries, wages, advertisement etc.

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

Paper - II Accountancy - II 129 3. A receipts on account of sale of a fixed asset is a capital receipt while a receipt on account of a sale of current asset is a revenue receipts for e.g. sale proceeds of building plant etc. Constitute receipt while sale if stock intrade is revenue receipts. 4. If the receipts is in substitution of a source of income then it Is capital receipts but, it is in substitution of income alone it is revenue receipt. For e.g. if a railway passenger meets with an accident and dies, or is permanently disabled, the compensation received from the railway department is capital receipt because this receipts is in substitution of source of income i.e., his life but if he temporarily disabled the receipts will be revenue as it is in substitution of income i.e. loss of earning as during the period of disablement. 5. If a sum is received for the surrender of certain right, it is capital receipts but if the sum is received is a compensation for loss of future profits then it is a revenue goods for e.g. A, the railway company for working on the field adjacent to the railway lines, amount paid by the railway company to A is a revenue receipt because the receipts is in lieu if his right to work upon the clay field. Example of Capital Receipts 1. Compensation received for the loss of right of future remunerations. 2. Compensation received for suspension of export license. 3. Compensation received by a partner of a partnership firm from another partner for relinquishing all his rights in the partners firm. Example of Revenue Receipts 1. Receipts of annuity for transfer of a capital asset. 2. Lump-sum received in consideration of reduction of remuneration. 3. Compensation received for premature termination of contract. 4. Considerations received for transfer of permits etc. Capital and Revenue Losses Revenue loss is the of some revenue receipts in the course of the business and in incidental to it. Any loss which is termed as revenue loss is a capital loss for e.g. loss of stock-in-trade by fire of white ants by theft is a revenue loss whereas loss of fixed asset like building, plant etc by fire or earth quake is a capital loss.

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

Paper - II Accountancy - II 131 Receipts and Payments Account of...for the year ending 31.03.2012 Dr. Receipts A Cr. Payments A To Balance b/d By Rent To Subscriptions To Entrance fee To Legacy To Donations for building To Interest received To Sale of furniture To Sale of old sports materials To Match fund To Life membership fees To Balance b/d By Fixed Assets By Sports material purchased By Building By Ground maintenance By Salaries By Honorarium By Stationery By Investments By Entertainments By Balance c/d Illustration 1 Stadium club kept its account on cash basis and the figures for the year 2011 are given below. You required to prepare Receipts and Payments Account. Subcription Received A A 2010 800 Salaries 4,800 2011 7,200 Postage 480 Receipt from Stationery 1,200 Common Room 5,000 Rent 2000 Hiring Rooms Billiards Rooms Supplies from entertainment room Wages to Watchman s 400 2,400 3,400 2,720 Cash in hand 01-01-2011 Electricity 720 1600

132 Office Assistantship Receipts and Payments Account of stadium club for in the year ending on 31 st Dec 2011. Dr. Cr. To Balance b/d Receipts To Subscriptions 2010 2011 To Receipt from c.room To Hiring of rooms To Billiards rooms A 720 800 7,200 5,000 400 2,400 Payments By Supplies for entertainment By Watchman s wages By Salaries By Postage By Stationery By Rent By Electricity By Balance c/d A 3,400 2,720 4,000 480 1,200 2,000 1,600 1,120 To Balance b/d 16,520 1,120 16,520 Income and expenditure Account It is prepared by Non-trading concerns of profit and loss account to know whether during a particular period the income of the concerns or organization has exceeded or fallen short of the expenses, this account is prepared. In this account current expenses are compared with current incomes. The feature of this account are. 1. It is not start with any opening balance. 2. It is a nominal account. Expenses are shown in the debt side and incomes in the credit side. 3. Only revenue items are recorded in it. Capital items are totally excluded. 4. Only incomes and expenses of the concerned year are recorded in it and income and expenditure relating to the proceeding or succeeding periods are included while preparing this account.

Paper - II Accountancy - II 133 5. This account is prepared on mercantile system of accountancy. Therefore all adjustment relating to the proceeding or succeeding periods are excluded while depreciations and doubtful debts will be made. 6. Only adjustment accounts are taken into consideration for the preparations of this account. For personal and real accounts a balance sheet must be prepared along with this account. 7. The balance in the account shows either surplus i.e., excess of income over expenditure or deficit i.e. the excess of expenditure over income. Difference between receipts and payments Account and Income and Expenditure Account Receipts and Payments Account Income and Expenditure Account 1. It is a real account 2. It is like cash book prepared by trading concerns 3. It starts with a balance being cash at the begining of the year 4. Receipts are shown on the debit side and payments on credit side. 5. All items whether of capital or revenue nature are shown in this account. 6. All receipts and payments whether they are of preceding current or succeding period are entered in it. 7. Outstanding receipts and payments are not shown in it as it is prepared on cash basis. 8. The closing balance represents cash in hand on that date. 9. It is not necessary to prepare balance sheet along with this account 1. It is a nominal account 2. It is like profit and loss account prepared by trading concerns. 3. It does not start with any opening balance 4. Income are shown on the credit side and expenditure on the debit side. 5. Only revenue items are shown in this account. 6. Income and expenditure of the current year are shown in it. 7. Income and expenses are shown after including outstanding income and expenses on accrual basis. 8. The closing balance, represents surplus or deficit for the period. 9. In addition to this account balance sheet must be prepared in order to accomodate real and personal ` account.

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

Paper - II Accountancy - II 135 Preparations of Income and Expenditure account from Receipts and Payments Account The following steps are to be taken to convert a Receipts and Payments account into an Income and Expenditure account. 1. Leave the opening and closing balance of cash given in the receipts and payments account. 2. Only revenue items of income and expenditure should be taken leaving all those items which are of capital nature. 3. Make all adjustment for outstanding and prepaid incomes and expenses, provision for depreciations or bad debts etc. 4. Take items of the current period only i.e., items relating to the proceeding and succeeding periods are to be ignored. 5. In the Incomes and Expenditure account, expenditure is recorded in the debit side and income is recorded on the credit side. 6. Once income and expenditure account is balanced it shows either surplus of defect If credit balance is more than debit balance it is called surplus and If the debit balance is more than credit balance it is called as Deficit. Illustrations 2 For the following particulars, prepare income and expenditure account of Hyderabad Golf Club for the year ending 31-March 2011. Subscriptions received for 2010-2011 11,000 Entrance fees received for 2010-2011 1,500 Subscriptions and entrance fee for 2009-2010 realized 560 Subscriptions and entrance fees for 2012 3,100 Miscellaneous fees 4,200 Expenses for 2010-2011 14,200 Expenses unpaid 460 Audit fees for 2010-2011 not paid 400 Interest on Loan Paid 640

136 Office Assistantship Capital expenditure in 2010-2011 4,120 Provide for depreciations for this year 340 Cash in hand 3,600 Hyderabad Golf Club Income and Expenditure Account for the year ended 31 st March 2011. Dr. Cr. Expenditure Income To Expenses 14,000 By Subscriptions 11,000 Add : Unpaid 460 14,460 By Entrance Fee 1,500 To Audit fees 400 By Miscellaneous fees 4,200 To Interest on loan 640 To Depreciation 340 To Surplus 860 16,700 16,700 Balance Sheet The Income and Expenditure Account is accompanied by the balance sheet. In trading concerns, a balance sheet is to be prepared even by nontrading concerns to complete the double entry. The balance sheet covers all those items such as Assets, Liabilities and Capital fund. Capital Fund Capital fund is similar to capital account of trading concerns, Non-trading concerns do not have formal capital like that of trading concerns. Hence, excess of income over expenditure, capital receipts that are capitalized are accumulated under the heading Capital Fund and shown as liability in the Balance Sheet. Some special terms pertaining to non-trading organization While preparing final accounts of non-profit organizations the following items are often used.

Paper - II Accountancy - II 137 1. Legacy : When an account is received as per will of some person, it is called Legacy. As it non-recurring and capital in nature it is to be capitalized. But if the amount is small it can be taken as an income. 2. Donations : Donations are often received by these organizations from both individuals and institutions. Donations is the amount received as a gift. Donations may be broadly classified into two categories viz; specific donations and general donations. a. Specific Donations : A donations received for a specific purpose, whether big or small is capitalized an is taken to the liabilities side of the balance sheet. For example, a donations for the construction of a building. This amount should be utilised only for the purpose for which it is received i.e, construction for building. b. General Donations : A general donation is the amount given by parties without specifically mentioning the purpose for which it should be utilized. This amount can be spent for any purpose. However, normally general donation of big amounts are capitalized and small amounts are treated as revenue income 3. Endowment Fund : Endowment is the money or property given by parties so as to provide a permanent source of income to support the institution. For ex. The corpus fund of university. Since the fund provides a permanent means of support any amount received on account of this is capitalized and shown as a Liability. But the in interest or divided received on account of this fund is treated as revenue. 4. General Fund : s which are received for no Specific purpose and which are capitalized are shown under this head on the liabilities side of the balance sheet But the income obtained on account of this fund is taken to the credit side of income and expenditure account. 5. Specific Funds : received for a specific purpose are capitalized and shown in the balance sheet on its liabilities side e.g. prize fund, buildings fund. Receipts and income on account of these specific fund should be added to the fund account and should not be taken to income and expenditure account. All expenses on account of these funds should be deducted from the particular fund in the balance sheet only. In case the expenses exceed the fund amount the excess expenses should be charged to the debit side of the income and expenditure account. 6. Subscription : s agreed to the paid by the member or subscribers regularly at periodical interval are called subscription. They are a

138 Office Assistantship regular source of income to the organization. Hence subscription are shown as income. Balance Sheet Proforma Balance Sheet as at... Liabilities Rs. Assets Rs. Outstanding Expenses Income Recieved in advance Bank Loan or Overdraft Special Fund Less : Expenses Specific Donations Capital Fund Add Surplus Less Deficit (if any) Cash in Hand Cash At Bank Investments Outstanding subscriptions Interest Receivable Rent Receivable Prepaid Expenses Stock of stamps and stationery Stock of sports material Library books Furniture and fixtures Land and Buildings Club ground and pavilion 7. Admission or Entrance Fees : This is the amount received from a member at the time of his initial admission or readmission into the organization. There is a different of opinion about the treatment of this items in accounts. Some people argue that is should be capitalized. Since it is not a recurring items as each member pays it once only. However, there are others who argue that, though it is paid by each member only once the club or association received.it regularly there fore it should be treated as income. Leaving the arguments a side, in the absence of specific instructions to capital entrance of admission fee must be treated as revenue income i.e. shown in the credit side of income and expenditure account.

Paper - II Accountancy - II 139 8. Honorarium :It is taken payment made to certain people for their services. It is generally treated as revenue expenditure and charged to the Income and Expenditure account. But if he amount is paid on account of a specific programme conducted in connections with a specific fund, the amount should be deducted from the specific fund in the balance sheet. 9. Sale of Old Assets : Any receipt from the sale of old asset such as furniture is a capital receipt and as such it should not be taken income and expenditure account. It should be deducted for the concerned asset In the Balance sheet. However, any loss on the sale of asset in charged to income and expenditure account. In case of gain on the sale of an asset, if the amount is small, it is taken to the income and expenditure account, but if it is a big, it is treated as a capital gain and shown in the Balance Sheet. 10. Sale of Old Newspapers : The amount received of in account of selling old news papers or old sport materials etc, is treated as revenue income. Questions 1. What is Capital Expenditure Illustrate? 2. What is Revenue Expenditure Illustrate? 3. Distinguish Capital and Revenue Expenditure. 4. What is Deferred Revenue Expenditure? 5. What are Capital and Revenue? 6. Explain the importance of distinguishing the capital and Revenue items while preparing final accounts of Non-trading concerns. 7. What types of accounts are prepared by non-trading concerns? 8. What is Receipts and Payments accounts? 9. What is Income and Expenditure account? 10. Discuss the main characteristics of Income and Expenditure account. 11. What is opening Balance Sheet? With purpose it is prepared? 12. From the following particulars prepare a Receipts and Payments account. Cash in hand 1,000 Cash at Bank 5,000

140 Office Assistantship Subscription received 33,000 Donations received 2,600 Investments purchased 10,000 Rent Paid 4,000 General expenses 2,000 Postage & Stationary 700 Sundry expenses 300 Cash balance at close 200 (Ans : Closing Bank balance A 24,300) 13. Prepare a Receipts and Payments account from the following particulars. Rs. (A) Opening balance of cash in 1,800 Rent Paid 450 Stationary purchased 540 Subscriptions received Previous year 1,800 Current year 4,050 5,850 Honorarium Paid 810 Sale of old furniture 1,890 Flood relief expenses 684 Repairs 756 (Ans : Cash balance A.6,300) 14. From the following particulars prepare Income and Expenditure account. Fee collected (including Rs. 24,000 on account of last year) 2,24,000 Fee outstanding for current year 40,000 Advertisement 3,200

Paper - II Accountancy - II 141 Salary Paid (including Rs.2,400 on account of last year) 19,200 Salary outstanding (current year) 4,000 Tournament expenses 8, 000 Meeting expenses 16,000 Travelling & Conveyance 6,000 Purchase of books 16,000 Periodicals 8,000 Rent 9, 600 Postage, Telephone and Telegrams 13,600 Printing & Stationary 4,000 Donations received 6,400 (Ans : Surplus A 1,56,800) 15. Following is the Receipts and Payments account of Vishakhapatnam cultural club for the year ended 31.12.2012. Dr. Cr. Receipts To Donation 25,000 Payments By Salaries (Rs.)A 900 To Life membership To Sports competition fund To Subscription (Including A50 for 2012) To Locker rent To Interest on securities To Cricket To Billiards To Tennis 2,000 5,000 1,600 50 200 150 100 100 By Cricket By Tennis By Insurance By Billiards By Printing By Telephone By Investments By Balance c/d 300 270 180 85 15 125 9,000 23,325 34,200 34,200

142 Office Assistantship Subscription receivable for 2012 A 150, outstanding salaries A 100, Half of the donations are to be capitalized, accrued interest A 300. Prepaid Insurance A 30. Prepare Income and Expenditure account for the year ended 31.12.2012. (Ans : Surplus A 13,155) 16. From the following Receipts and Payments accounts of Youth Society prepare an Income and Expenditure account for the year ended 31.3.2012. Receipts and Payments Account for the year ended 31.3.2012 Dr. Cr. To Balance b/d Receipts To Entrance fee To Donations To Subscriptions To Interest on Investment To Sale of furniture To Sale of old news paper To Preceeds from entertaiment To Miscellaneous receipts 3,485 650 6,000 6,865 1,900 685 465 865 125 By Books Payments By Printing & Stationery By News Papers By Sports Material By Repairs By Investments By Furniture By Salaries By Balance c/d 6,150 465 1,110 5,000 650 2,000 1,000 1,500 3,165 21,040 21,040 The Entrance fees and Donations are to be capitalized. Sports materials are valued at A 4,000 on 31.3.2012. (Ans : Surplus A 5,495) 17. From the following Receipts and Payments account for the year ending 31.3.2012. Prepare an income and expenditure account for the period ending 31.3.2012 and Balance Sheet as on that date.

Paper - II Accountancy - II 143 Dr. Cr. Receipts To Donations received To Subscriptions To Life membership fee To Legacy To Interest received 35,000 1,15,000 50,000 75,000 4,000 By Salaries Payments By Help to poor students By Expenses on free dispensary By Postage and Stationery By Furniture By Investments By Cash in hand 37,500 37,000 34,500 3,500 50,000 75,000 41,500 2,79,000 2,79,000 Additional Information : 1. Subscription outstanding for the year A 5,000. 2. Salaries unpaid A 5,000. 3. Help to poor students promised but unpaid A 16,000. 4. Expenses of dispensary outstanding A 3,000. 5. Postage and Stationary expenses yet to be paid A 4,000. (Ans: Surplus : A 18,500, B/S Total : A 1,71,500) 18. Vijayawada sports club was started on 1.4.2011. Their Receipts and Payments a/c for the year 2011-2012 is given below. The following Adjustments 1. Subscription receivable for the year A 300/- 2. Salaries Unpaid A 170/- 3. Entrance fee is to be capitalized. 4. Insurance is for one year and is premium paid up to 31 st Dec 2012. Prepare the income and Expenditure account for 2011-2012.

144 Office Assistantship Receipts and Payments account as on 31.03.2012 Dr. Cr. To Donations Receipts To Entrance fee To Tournament fund Revenue Receipts To Subscriptions (Incl. A 100/- for 2012-13) To Rent To Other Receipts To Cricket fee 50,000 4,000 10,000 3,200 100 700 400 68,400 By Buildings Payments By Tournament expenses By Furniture Revenue Payments By Salaries By Cricket expenses By Insurance By Gardener salary By Investments By Balance c.d 40,000 900 2,100 1,800 1,140 360 600 18,000 3,500 68,400 (Ans : Excess of income over expenditure A800) 19. The Receipts and Payments account of the Hyderabad Friends Club for the period ending 31.3.2011 is given below. Subscription fee outstanding for the year 2010-2011 Rs. 150. Salaries unpaid for the year Rs.85. From the above particulars prepare an Income and Expenditure account of the club for the year ended 31.3.2011 and the balance sheet in that date. Dr. Cr. Receipts To Donation received To Reserve Fund (Being life member fee received) 25,000 2,000 By Buildings By Furniture Payments By Trounament expenses from match fund 20,000 1,050 450

Paper - II Accountancy - II 145 To Match fund 5000 Revenue Receipts : Revenue Payments : To Subscriptions (Including Rs. 50 for 2011-12) To Lockers Rent To Interest on securities To Cricket 1,600 50 50 200 By Salaries By Cricket By Tennis By Insurance (paid upto 31st Dec. 2011) 900 300 270 180 To Sundries 25 By Gardening 85 To Tennis 175 By Printing 15 To Billiards 100 By Telephone 125 By Sundries 75 By Investments (at cost) 9,000 By Blance c/d 1,750 34,200 34,200 (Ans : Excess of Income over expenditure A 400/- Balance Sheet Total : A 32,085) 20. Tarnaka Sports Club s Receipts and Payments account for the year ending 31.3.2012 is given here under. Additional Information : 1. Subscriptions receivable for 2010-2011 were A 1000/- and for 2011-2012 A 1,050. 2. Games equipment in the beginning was Rs.1,000/- and at the end A 1,250 /- 3. Provide depreciations at 10% 0n grass cutting machine. Prepare Income and Expenditure for the year ending 31.3.2012 and opening and closing balance sheet.

146 Office Assistantship Dr. Cr. Receipts Payments To Cash in hand To Cash in Bank To Subscription 250 2,250 6,750 By Salary to workmen By Grass cutting machine By Rent 2,000 1,000 450 To Tournment fund To Life membership fee To Entrance fee 2,500 1,500 250 By Games expenditure By Tournment expenditure By Office expenditure 3,500 1,000 2,250 To Donation for pavilion To Sale of grass 4,000 200 By Games equipment By Balance c/d 1,500 Cash in Hand 750 Cash at Bank 5,250 17,700 17,700 (Ans: Deficit A. 2,300. Balance Sheet total A 9,200) 21. Prepare Income and Expenditure account and balance sheet of Hyderabad Club from the particulars is given below for the year ending 31.3.2012. Dr. To Balance b/d Receipts and Payments account as on 31.3.2012 Receipts To Subscriptions (Including A 400 2012-13) To Interest on investment (Investment cost A 40,000) To Bank Interest To Sale of furniture TABLE 1,200 6,400 2,500 50 500 By Salaries By Rent Payments By Printing & Stationery By Postage By Cycle purchased By Govt. Bonds By Balance c/d Cr. 6,500 1,200 180 50 800 1,000 920 10,650 10,650

Paper - II Accountancy - II 147 Additional Information 1. Subscription received included A 200 of 2010-2011. 2. Rent paid included A 100 for March 2012 monthly rent is Rs.100. 3. Subscriptions due for 2001-2002 A 300. 4. Salaries Payable sold was A 600. 5. Cost of furniture sold was A 640. (Ans : Deficit : A 20 capital fund 41,940 Balance Sheet total A 43,020).

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

Paper - II Accountancy - II 149 3. There must be a business. 4. There must be sharing of profits of the business. 5. There must be a mutual agency i.e. business must be carried on by or any them for all, In other words, a partner is both an agent and the principle. A partner is an Agent in the sense that he can bind by his acts of other partners. A Partner is a Principal in the sense that he can be bound by the acts of the partners. The name under which the business carried is called the firm name and the partnership has no separate legal entity apart from the partners constituting it. Partnership Deed The document containing the terms of agreement is called it Partnership Deed. The deed usually includes the following particulars. a. Name of the firm and names and addresses of all partners. b. Capital to be provided by each partner. c. Interest on capital and drawings. d. Salary to be paid to partners, if any e. Profit sharing ratio. f. Rights and duties of partners. g. Method of revaluation of asset and liabilities, whenever required. h. Procedure for settlement of account at the time of dissolution. i. Mode of settlement of accounts in case of retirement or death of a partner. Accounting Treatment and Partnership Act In case partnership deed does not contain required information on any point, the provisions of the partnership act will be applicable. According to the Act. a. All partners should be share the profit or loss equally among themselves. b. No interest is allowed on capital amounts and no interest is charged in drawing. c. A partners is not entitled to any salary from the firm, for his work as a partner.

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

Paper - II Accountancy - II 151 Under fixed capital method, for each partner two accounts namely capital account current account are maintained. The transaction relating to introduction or withdrawal capital are recorded in capital account and other transaction like interest on capital, Drawings, salary, commission, share to profit or loss are recorded in current account. As result of these, the capital account will continue to show the same balance from year to unless some amount of additional capital is introduced is withdrawn while the balance current accounts keeps of fluctuating. The specimen of capital and current accounts under fixed capital method are given below Partners Capital A/C Particulars To Cash / Bank (Withdrawal of capital) To Balance c/d x Particulars By Balance b/d By Bank/Cash a/c (Additional Capital) By Balance b/d Partner current a/c is then maintained which as follows. Particulars To Balance b/d (Can be seen on the asset side of the balance sheet) To Bank a/c (Drawings) To Interest on drawing a/c Partner s Current A/C x Particulars By Balance b/d (can be seen on the liabilities side of the balance sheet) By Interest on capital a/c By Salaries a/c

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

Paper - II Accountancy - II 153 2. The incoming partners brings goodwill amount in cash into the partnership firm in additional to his a capital. The goodwill amount received by the firm is distributed between the existing partners and their respective capital accounts are credited accordingly. In this case one journal entry is recorded with the amount of goodwill received and another entry to transfer this amount to the capital accounts of existing partners. (a) Cash Account To Goodwill Account (b) Goodwill Account Capital accounts To (existing ) partners Dr. ( Dr. in the sacrificing ratio) It should be noted that the goodwill account will get closed but the amount remains in the firms and is used as additional capital. 3. The goodwill amount brought by the incoming partners is distributed among the existing partners and credited to their respective capital accounts. Later withdraw the amount credited to the capital accounts. In this case time journal entries are recorded in the books. (a) Cash Account.. To Goodwill Account (b) Goodwill Account To (existing) partner s capital Accounts (c) ( Existing ) Partner Capital Account To cash Account The only difference between this and the proceeding methods is, in the proceeding method the amount of goodwill is retained in the business where as in this method partner withdraw that amount. 4. Goodwill amount is not bought in the form of cash by the incoming partner. The Goodwill account is raised in the books of the firm giving corresponding credit to the capital accounts of the existing partners. Goodwill Account To (Existing) Partners Capital Account In this method goodwill appears in the balance sheet as an asset. Dr Dr Dr. Dr.

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

Paper - II Accountancy - II 155 (a) Cash Account Dr. 16,60,000 -- To Sahiti capital Account -- 15,00,000 To Goodwill Account --- 1,60,000 (b) Goodwill Account. Dr. 1,60,000 --- To Shanti s Capital Account --- 1,20,000 To Kranti s Capital Account --- 40,000 3. When the goodwill amount brought by Sahiti distributed between shanti and kranti and they withdraw the amounts credited to their capital accounts, the entries required are : (a) Cash Account Dr. 16,60,000 --- To Shanti s Capital Account --- 15,00,000 To Goodwill Account --- 1,60,000 (b) Good will Account. Dr. 1,60,000 --- To Shanti s Capital Account --- 1,20,000 To Kranti s Capital Account --- 40,000 (c) Shanti s Capital Account.. Dr. 1,20,000 --- Kranti s Capital Account. Dr. 40,000 --- To Cash Account --- 1,60,000 4. When Sahiti does not bring her share of goodwill in the form of cash and goodwill account is raised in the books of accounts with its full value the following entry is made. Goodwill Account Dr. 8,00,000 To Shanti s Capital Account --- 6,00,000 To Kranti s Capital Account --- 2,00,000 In this method goodwill appears in the Balance Sheet it full value i.e. A 8,00,000. 5. When Sahiti does not bring any cash goodwill and when it is decided that the goodwill should not appear in the Balance sheet of the firm it is first raised and then written off thus giving the necessary advantage to the existing partners.

156 Office Assistantship For raising the goodwill account an entry is recorded debiting the goodwill accounts and crediting the existing partners capital accounts. Goodwill Account. Dr. 8,00,000 --- To Shanti s s Capital Account --- 6,00,000 To Kranti s Capital Account --- 2,00,000 Subsequently when the goodwill account is proposed to be written off all the partners capital accounts (including the incoming Shanti s Capital Account) will be debited and goodwill account will be credited. For this purpose the partners new profit sharing ratio should be calculated. Shanti s and Kranti s new share After Sahiti s admission = Total share- Sahiti Share 1 4 = 1- = 5 5 This combined new share of Shanti and Kranti will be distributed between both of there in their original profit sharing ratio. Shanti s Share 4 = 3 x 3 = 5 4 5 Kranti s Share = 4 1 x 1 = 5 4 5 The new profit sharing ratio of partners would thus be Shanti : Kranti : Sahiti 3 : 1 : 1 5 5 5 3 : 1 : 1 (Calculation of new profit sharing ratio is discussed in detail subsequently in this chapter itself). To write off goodwill account raised earlier. The partners capital accounts should be debited and goodwill account credited. Goodwill when distributed in the new profit sharing ration would be as under.

Paper - II Accountancy - II 157 3 Shanti = 8,00,000 x = 4,80,000 5 Kranti = 8,00,000 x 1 = 1,60,000 5 Sahiti = 8,00,000 x 1 = 1,60,000 5 The following entry is recorded to write off the goodwill account. Shanti s Capital Account Dr. 4,80,000 --- Kranti s Capital Account Dr. 1,60,000 --- Sahiti s Capital Account Dr. 1,60,000 --- Profit Sharing Ratio To Goodwill --- 8,00,000. Calculation new profit sharing ratio becomes necessary whenever there is a change, either in the number of partners in a partnership firm or merely a charge in the profit sharing ratio without any change in the number of partners. Different methods of providing information for this purpose and calculation of new profit sharing ratio are discussed below. Method-(i) : If this share of incoming partner is known the remaining profit must be shared by existing in their original profit sharing ratio. Method (ii) : If the incoming partner purchased his share from the existing partners in a particular ratio, the new sharing of new share of existing partners will be decided by deducting that portion which they have surrendered ( in favour of incoming partner) from their original share. Method (iii) : In some cases, existing partners surrender a particular fraction of their shares in favour of incoming partners and the fraction that is surrendered may require additional calculation. What is surrendered should be calculated first and then it should be deducted from the original share of existing partners to get their new profit sharing ratio. The incoming partners share will be the total of all fractions surrendered by existing partners.

158 Office Assistantship Illustration 2 (Method 1) Sathyam and sundaram are partners sharing profit in 7:3 ratio. They admit Shivam allowing as share of 3/7 in the profits. Calculate new profit sharing ratio of the partners. Solution Total profit = 1 Shivam s share = 3 7 1 3 Share of Sathyam and Sundaram together = - 1 7 = 4 7 Sathyam and Sundaram will share this 4 / 7 profit in their original profit sharing ratio i.e.; 7:3. 4 7 4 Sathyam share = x = 7 10 10 4 3 Sundaram = x = 7 10 New profit of sharing ratio of Sathyam, Sundaram and Shivam would be Illustration (Method -2) 4 : 12 : 10 70 28 12 = : : 70 70 = 28 : 12 : 30 = 14 : 6 : 15 Sahityam and Nrityam are partners sharing the profit in 7:3 ratio. Manikyam secures admission I the firm by purchasing 2/7 th share from Sahityam and 1/7 th share from Nrityam. Calculate new profit sharing ratio of the partners. 12 70 3 7 30 70

Paper - II Accountancy - II 159 Solution Sahityam new share = Sahityam s original share portion surrendered in favour of Manikyam. 7 2 29 = - = 10 7 70 Nrityam s new share = Nrityam original share portion surrendered in favour of manikyam. 3 1 11 = - = 10 7 70 Manikyam s Share = Portion purchased From Sahityam 2 1 3 = + = or 7 7 7 New profit sharing ratio of the partners would be Portion purchased From Nrityam Sahityam Nrityam Manikyam 29 : 11 : 30 Illustration (Method- 3) Ram and Shyam are partners sharing profit in 7:3 ratio. They admit Bhim as their partner. Ram surrendered 1/7 th of his share and Shyam surrendered 1/3 rd of his share I favour of Bhim calculate the new profit sharing ratio of the partners. Solution 29 70 Ram surrendered 1/7 th of his share sharing at 7/10 11 70 7 1 Share surrendered by Ram will equal to x = 10 7 + 30 70 30 70 1 10

160 Office Assistantship Ram s new share = Ram s old share - portion surrendered = 7-1 = 10 10 Shayam surrendered 1/3 rd of his share standing at 3/10 There fore share surrendered by Shyam will be equal to 3 1 = x = 10 3 Shyam new share = Shyam s old share portion surrendered 3 1 2 = - = 10 10 10 Bhim s new share = Share he gets from Ram + Share he gets from Shyam = 1 + 1 = 2 10 10 10 New profit sharing ratio of Ram, Shyam and Bhim Sacrificing Ratio 1 1 2 = : : = 6 : 2 : 2 10 10 10 = 3 : 1 : 1 When the partners of a firm invite a new a person to join them as a partner, it is but nature that the existing partners should be prepared to sacrifice a portion of their share in the profit in favour of the incoming partner. This obviously means that the share of the existing partner gets reduced when a new partner is admitted. The ratio in which the existing partners lose a portion of tier share is called sacrificing ratio. Different methods followed to calculate the sacrificing ratio are as follows. Method 1.1. When original profit sharing ratio of existing partners and the ratio of incoming partner is known, and nothing is mentioned about the sacrificing ratio of existing partners, it is assumed that they have contributed to the mentioned partners share In their original profit sharing ratio. 6 10 1 10

Paper - II Accountancy - II 161 Method (II). If original profit sharing ration of existing partners and the new profit sharing ration of all the partners (Including incoming partner) are known new share of the existing partners should be deducted from their original share to find out their sacrificing ratio. This can be done in two different methods. Illustration 4 (Method 1) Kousalya and Sumithra are partners sharing profit in 3:2 ratio. They admit Kaikeyi and allow here 1/7 share in the profit of the firm. Calculate the sacrificing ratio of Kousalya and Sumithra and their new profit sharing ratio along with Kaikeyi. Solution In this problem, no mention is made as to the extent of Sacrifice made by Kousalya and Sumithra when they admitted Kaikeyi with 1/7 share in the profit. Hence it is presumed and they (Kousalya & Sumithra) contributed to the share of Kaikeyi in their original profit sharing ratio viz.3:2. No. Calculation is required to obtain the sacrificing ratio. Their original profit sharing ratio itself id the sacrificing ratio. New profit sharing ratio is calculated as under. Share of Kaikeyi = and they share this 6 / 7 of the profit in 3:2 ratio (their original profit sharing ratio) Kousalya s new share = 6 3 x = 18 7 5 35 Sumithra s new share = 6 2 x = 7 5 New profit sharing ratio of Kousalya, Sumithra and Kaikeyi would be 1 7 1 1 6 What remains for Kousalya and Sumithra is - = 1 7 7 18 : 12 : [ 1 x 5 ] 35 35 7 5 12 35

162 Office Assistantship = 18 : 12 : 35 35 5 35 = 18 : 12 : 5 Illustration (Method 1&2) Rohini and Devaki are sharing profit in 4:3 ratio. Yashoda is admitted as partner and now Rohini, Devaki and Yashoda share profit in 7 : 4 : 3. Calculate the sacrificing ratio. Methods (i) Sacrificing ratio can be calculated in two different methods in such cases. Sacrifice by Rohini = Rohini s original share Rohini s new share = 4-7 4 =[ x 2 7 ]- = 8-7 = 7 14 7 2 14 14 14 1 14 Sacrifice by Devaki = Devaki s original share Devaki new share = 3-4 3 =[ x 2 4 ]- 6 = - 4 = 7 14 7 2 14 14 14 2 14 Method (ii) Sacrificing ratio of Rohini and Devaki would be 1/14 : 2/14 = 1:2 Rohini Devaki Yashoda Total of Ratios Original share of partner 4 : 3 : ---- = 7 New ratio of partners 7 : 4 : 3 = 14 Both original and new ratio s should be arranged that in both the cases total is equal to one another. In this case the total of original ratios is 7 and the total of new ratio is 14. If all the original ratios( including total ) are multiplied by 2 the total of ratios will be same in both the cases. Then the difference between the original and new ratios will be the sacrifice ratio. After rearranging the above ratios multiplying the original ratios with 2 they will be.

Paper - II Accountancy - II 163 Rohini Devaki Yashoda Total of Ratios Original share of partner 8 : 6 : ---- = 14 New ratio of partners 7 : 4 : 3 = 14 Sacrificing ratio 1 : 2 Note : If the total of the ratio cannot be made by equal by rearrangement be set of ratio both (original ratio & new ratios ) can be rearranged. If the total of the original ratios is 10 and the new ratios add up to 4, the set of original ratios can be multiplied by 2 and the other set (new ratio) can be multiplied by 5 to make both the total equal viz. 20. If the total of the original ratios is 7 and the new add up to 22, the set of original ratios can be multiplied by 22 and the others set (new ratios) can be multiplied with 7 make both the totals equal to 158. Revaluation of Asset and Liabilities when a new partner is admitted As time passes, the value of some assets may fall and simultaneously some other assets may rise in value. Whenever a change In the number of partners is taking place it becomes necessary have been already done by the partnership firm, every year by transferring the depreciation on assets to the profit and loss account. However is review of adequacy of adjustments made becomes necessary at the time of admission / retirement death of a partner. In case a new Partner admission of the incoming partner. When the revised value are required to be shown in the books. Adjustment required in the value of assets and liabilities are effected through opening an account called Revaluation Account. Sometimes this account is also called profit and loss adjustment account. The increase in the value of assets is recorded through a journal entry debiting the asset account concerned and crediting the Revaluations account. In case of fall in the value of an asset, revaluations account is debited and the assets concerned is account of liability concerned. An increase in liability is debited to revaluations account and credited in the account of liability concerned. When a liability is required to be decreased the liability account is debited and revaluations account credit. After adjusting the values of all the assets adjustment made. This should be distributed among the partners of the form in their profit during ratio and transferred to their capital accounts when they are in correct from the entries will be following. (a) For a decrease in the value of assets and increase in the value of liabilities.

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

Paper - II Accountancy - II 165 2. Buildings to be raised in value of 75,000. 3. A provision for bad debts to be credited with 5 percent of Sundry debtors. 4. An investment not recorded earlier in the books worth A 21,500 should be brought into books. 5. A contingent liability worth A 6,000 became a certain liability. Write necessary journal entries, prepare important accounts and show the balance sheet of the firm after Goverdhan admission. Balance Sheet of Govind and Gopal as on 31-03-2012. Liabilities Assets Capital Govind 3,40,500 Gopal 3,40,500 Sundry Creditors 6,81,000 1,24,350 Cash Bank Sundry Debtors Stock 7,100 1,19,250 55,000 1,80,000 Furniture 44,000 Buildings 4,00,000 Solutions Date 2012 March 31 8,05,350 Before Admitting Goverdhan into Partnership Firm Journal Entries Dr. Particulars LF Rs. (A) Revaluatoin A/c... To Stock A/c To Furniture A/c To Provision for bad debts A/c To Liability A/c 33,450 --- --- --- --- 8,05,350 Cr. Rs. (A) --- 22,500 2,200 2,750 6,000

166 Office Assistantship Date Particulars LF Dr. Rs. (A) Cr. Rs. (A) (Being depreciation on assets and provision for bad debts and liability) March 31 Building A/c... Dr. Investment A/c... Dr. 75,000 21,500 -- To Revaluation A/c -- 96,500 March 31 (Being appreciation on building and for recording the investments not entered earlier) Revaluation A/c 63,050 -- To Govind s Capital A/c -- 37,830 To Gopal s Capital A/c -- 25,220 (Being profit on revaluation distributed between the partners) Revaluation Account Dr. Cr. Particulars Particulars To Stock Account To Furniture Account To Provision for bad debt. To Liability Account To Govind s Capital A/c. To Gopal s Capital A/c. 22,500 2,200 2,750 6,000 37,830 25,220 By BuildingAccount By Investment Account 75,000 21,500 96,500 96,500

Paper - II Accountancy - II 167 Govind s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 3,78,330 By Balance b/d 3,40,500 By Revaluation A/c 37,830 3,78,330 3,78,330 By Balance b/d 3,78,330 Gopal s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 3,65,720 By Balance b/d 3,40,500 By Revaluation A/c 25,220 3,65,720 3,65,720 By Balance b/d 3,65,720 Date 2012 April 1 After Admitting Goverdhan as a partner Cash A/c... Journal Entries Particulars To Goodwill A/c To Goverdhan s Capital A/c (Being the amount brought by the incoming partner as goodwill and capital) Dr. Rs. (A) 3,85,000 -- -- Cr. Rs. (A) -- 85,000 3,00,000

168 Office Assistantship Date Particulars LF Dr. Rs. (A) Cr. Rs. (A) 2000 Goodwill A/c... Dr. 85,000 -- April 1 To Goving Capital A/c To Gopal s Capital A/c -- -- 51,000 34,000 (Being goodwill distributed between the partners and transferred to their capital accounts) Goodwill Account Dr. Cr. Particulars Particulars To Govind A/c 51,000 By Cash Account 85,000 To Gopal s Capital A/c 34,000 3,65,720 85,000 Govind s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 4,29,330 By Balance b/d 3,78,330 By Goodwill A/c 51,000 4,29,330 4,29,330 By Balance b/d 4,29,330

Paper - II Accountancy - II 169 Gopal s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 3,99,720 By Balance b/d 3,65,720 By Goodwill A/c 34,000 3,99,720 3,99,720 By Balance b/d 3,99,720 Goverdhan s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 3,00,000 By Balance b/d 3,00,000 3,00,000 By Balance b/d 3,00,000 3,00,000 Cash Book Dr. Cr. Particulars Particulars To Balance b/d To Goodwill A/c 7,100 85,000 By Balance c/d 3,92,100 To Goverdhan Capital A/c 3,00,000 3,92,100 3,92,100

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

Paper - II Accountancy - II 171 On 1-1-2013 Mr. N is to be admitted on the following terms and conditions (1) N is to bring Rs.2,00,000 for 1/4 th sharing in the profits. (2) The firm s assets as to be revalued as follows. Land & Building is to be brought to Rs.1,80,000/- Plant & Machinery is to be reduced by 10%. R.D.D is to be created @ 10% on Sundry Debtors. Stock is to be reduced by 20%. Goodwill is to be revalued at Rs.35,000/-. (3) The outstanding expenditure is need not be paid. Show Revaluations Account, Partners Capital accounts, Goodwill Account and the Balance sheet after the admission of N. Solutions : Revaluation Account Dr. Cr. Particulars To Plant and Machinery A/c To Res. for D.Debt A/c To Stock A/c To L s Capital A/c 34,200 To M s Capital A/c 22,800 To (Profit on Revaluation transferred to Capital A/c in 3:2 ratio) 12,500 2,500 10,000 57,000 Particulars By Land & Buildings By Outstanding Expenses 80,000 2,000 82,000 82,000

172 Office Assistantship Goodwill Account Dr. Cr. Particulars Particulars To balance b/d 50,000 By L s Capital A/c (3/5 x 15000) 9,000 By M s Capital A/c (2/5 x 5000) 6,000 50,000 By Balance c/d 35,000 35,000 50,000 Note : Revaluations of Overvalued goodwill or undervalued goodwill of the old firm is concerned only to the old partners, hence to be debited or credited (as the case may be ) only to old partners Capital Account in old ratio. Capital Accounts of Old Partners Dr. Cr. Particulars L M Particulars L M To Goodwill A/c 9000 6,000 By Bal b/d 300000 200000 To Bal c/d 331200 220800 By Res. Fund A/c 6,000 4,000 By Revaluation A/c 34200 22800 340200 226800 340200 226800 By Balance b/d 331200 220800

Paper - II Accountancy - II 173 Capital Accounts of N (New Partner) Dr. Cr. Particulars Particulars To balance c/d 2,00,000 By Cash 2,00,000 2,00,000 2,00,000 By Balance b/d 2,00,000 Balance sheet of L,M and N as on 1-1-2013 Liabilities Sundry Creditors Bills payable Capital A/c s : L s Capital 3,31,200 M s Capital 2,20,800 N s Capital 2,00,000 20,000 18,000 7,52,000 7,90,000 Assets Cash in hand (1,00,000+2,00,000) Stock 50,000 Less : Dep 10,000 Sundry Debtors25,000 Less : RBD 2,500 Bills Receivables Land & Building 1,00,000 Add: Appr. 80,000 Plant & Machinery 1,25,000 Less : Dep 12,500 Goodwill 3,00,000 40,000 22,500 1,00,000 1,80,000 1,12,500 35,000 7,90,000

174 Admission of a partner Exercises Office Assistantship 1. A and B are carrying on business in a partnership, sharing profit & Losses in the ratio of 2 : 3. There Balance sheet as at 31-3-2010 was as under. Balance Sheet Liabilities Assets Sundry Creditors 50,000 Cash in hand 30,000 Capital Accounts : Cash at Bank 20,000 A 2,80,000 Sundry Debtors 1,00,000 B 4,20,000 7,00,000 Stock 2,00,000 Furniture 50,000 Buildings 3,50,000 7,50,000 7,50,000 On that date they admit C on to partnership and given him 1/4 th share in the future profit on the following terms. (a) C is to bring in A 3,00,000 as his Capital and A 1,00,000 as good will, which sum is to remain in the business. (b) Stock and Furniture are to be reduced in value by 10% (c) Buildings are to be appreciated by A 50,000 (d) A provision of 5% to be created on sundry Debtors for doubtful debts. Write journal Entries to recorded the above arrangement and show the opening Balance Sheet of the new firm. (Balance Sheet A 11,70,000, Revaluations profit A 20,000)

Paper - II Accountancy - II 175 2. The Balance Sheet of Srinitha & Srihitha who are partners sharing profit & losses in the ratio 2:1, on 31-3-2012 was a under. Liabilities Sundry Creditors Bills payable General Reserve Capitals Srinitha 3,00,000 Srihitha 1,50,000 Balance Sheet 1,00,000 3,20,000 1,80,000 4,50,000 10,50,000 Cash Assets Sundry Debtors 4,00,000 Less : Provision for D.D 5,000 Stock Furniture Buildings 5,000 3,95,000 2,50,000 1,00,000 3,00,000 10,50,000 On that date Srinidhi was admitted for 1/3 share to profit on the follows terms (a) That Srinidhi brings in Cash A 90,000 for Goodwill & A1,50,000 as Capital. (b) That half of the goodwill shall be withdrawn by the holds partners. (c) The provision for bad and doubtful debts is to be increased by A10,000. (d) That a liability for A 8,500 be created against outstanding salaries. (e) That the Stock & Furniture to reduced by 5%. (f) That the value of Building s be appreciated by 10 %. Prepare Revaluation a/c, Partners Capital Account & Balance Sheet of new firm. (Balance Sheet A 12,47,500, Revaluations Loss A 6,000)

176 Office Assistantship 3. Naveen and Kiran are partners sharing their profits in the ratio of 3:2 on 31-12-2012. The Balance Sheet is as under. Liabilities Creditors Bank O.D Bills Payable Capitals A/cs : Naveen 48,000 Kiran 24,000 Balance Sheet 16,000 10,000 12,000 72,000 Assets Cash in hand Cash in Bank Debtors Stock Furniture Buildings Machinery 2,000 10,000 20,000 18,000 10,000 30,000 20,000 1,10,000 1,10,000 Adjustments : 1-1-2012 Rajesh was admitted as partners in the following conditions. (a) Firm s Goodwill valued for A10,000 (b) Depreciate stock, furniture, machinery @ 10%. (c) Appreciate Buildings @ 10%. (d) Provide Reserve for Bad Debts at 5% on the debtors. (e) Rajesh has to brings A 16,000/- in cash for his share of Capital. Prepare necessary accounts & the new balance sheet of the firm after Rajesh s entry. (Ans : Revaluations loss A2,800; Capital A/C Balance- Naveen A 52,320 ; Kiran A 26,880; Rajesh A 16,000- B/s Total A 1,33,200.

Paper - II Accountancy - II 177 4. X, Y Share profit in the ratio of 1:1. Their Balance Sheet as on 31-12-2012 is given below. Liabilities Assets Outstanding expenses 10,000 Cash in hand 4,000 Creditors 48,000 Cash in Bank 38,000 Overdrafts 40,000 Debtors 40,000 Bills payable 20,000 Furniture 12,000 Capital Accounts Buildings 57,000 X 45,000 Machinery 42,000 Y 30,000 75,000 1,93,000 1,93,000 They admitted Z on the following conditions. (a) Depreciations on Machinery, Buildings, Furniture by 5%. (b) Provision for bad debts 5% in debtors. (c) Create Goodwill A30,000/- (d) She Should brings A 45,000/- as capital for ¼ th Share. Prepare profit & Adjustment account & new Balance Sheet on 1.1.13 (Ans : Revaluations Loss A 7,550 ; Capital Balance X-A 56,225; Y- A 41,225; Z- A 45,000; B/s Total A 2,60,450) 5. Given below is the Balance Sheet of A and B who are carrying o a partnership business as in 31-12-2012. A and B share profits and Losses in the ratio of 2:1.

178 Office Assistantship Balance Sheet Liabilities Assets Bills payable 10,000 Cash in hand 10,000 Creditors 58,000 Cash in Bank 40,000 Outstanding 2,000 Sundry Debtors 60,000 Capitals A/cs : Stock 40,000 A 1,80,000 Plant and Machinery 1,00,000 B 1,50,000 3,30,000 Buildings 1,50,000 4,00,000 4,00,000 C is admitted as a partner on the date if the Balance Sheet ion the following terms. (a) C will brings in Rs.1,00,000 as his capital & A 60,000 as his share of Goodwill for ¼ share of profit. (b) Plant and Machinery is to be appreciate to A 20,000 &. The value of Building is to be appreciated by 10%. (c) Stock is found overvalued by A 4,000. (d) A provision for bad & doubtful debts is to be created at 5% on debtors. (e) Creditors were unrecorded to the extent of A 1,000 /- Pass the journal entries, prepare the profit & Loss adjustment account and show the Balance Sheet after the admission of C. (Ans : Revaluations profit A 27,000; Capital Account Balances A- A 2,38,000; B A 1,79,000; C - A 1,00,000; Balance Sheet Total A 5,88,000)

Paper - II Accountancy - II 179 6. X and Y were sharing profits in the positions of 2/3 and 1/3 showed the following as their Balance Sheet on 31-12-2012. Liabilities Assets Sundry Creditors 29,950 Buildings 25,000 Bills payable 3,000 Plant and Machinery 17,500 Capital Accounts Stock 10,000 X 15,000 Sundry Debtors 4,850 Y 10,000 25,000 Cash in hand 600 57,950 57,950 They agreed to admit Z into partnership on the following terms (a) Z was to bring A 7,5000 as his Capital & A 3,000 as goodwill for ¼ share in the future profits of the firm. (b) That the Value of stock, Plant & Machinery were to be reduced by 5%. (c) That a reserved of A 375 was to be created in respect of sundry debtors. (d) That the Building account was to be appreciated by 10%. (e) That the Good will was to be retained in the business. Prepare profit & Loss Adjustment Account, the Capital Account, & the new balance sheet of the firm. (Ans : Revaluation Profit A.750 ; Capital A/c Balance X A 17,500; Y A 11,250; Z A 7,500; Balance sheet Total A 69, 200)

180 Office Assistantship 7. On 31-12-12 the Balance Sheet of equal Partner P,Q and R is given below. Balance Sheet Liabilities Assets Sundry Creditors 29,950 Buildings 41,000 Bills payable 3,000 Furniture 3,200 Capital Accounts Stock 25,200 P 15,000 Sundry Debtors 32,000 Q 10,000 Cash in hand 4,200 R 18,000 82,000 1,05,600 1,05,600 They admitted Mr. S on the following conditions. (a) S has to bring A 24,000 towards Good will and A 30,000 as Capital for his 1/4 th Share. (b) ½ (half) of the Good Will be taken away by the old Partners, from the business. (c) Depreciation @ 5% to be Provided on Stock & Furniture. (d) 5% provision for Bad debts Reserve on debtors required. (e) Buildings is to be valued at A 59,000/- Prepare Profit and Loss adjustment account, Capital Account and Balance Sheet as on 1-1-2011 (Ans : Revaluation Profit A 14,980, Capital A/C Balance P- A 43,993; Q - A 37,993; R- A 26,994; S- A 30,000; Balance Sheet Total A 1,62,580.)

Paper - II Accountancy - II 181 Short Answer Type Questions 1. Ram, Laxman were partners sharing Profits & Loss in the ratio of 3:2: They admit Bharath giving him 1/5 th share in the future profits. Calculate the new profit sharing ratio. 2. X and Y were partners in a firm. They shared Profit and Losses in the ratio 3:1; Z was admitted on 1-1-2013 & the new profit sharing ratio is 5:1:4. Find the sacrificing ratio. 3. P and Q were partners sharing profits & losses in 5:3 ratio. R got admitted by purchasing 2/8 share from P and 1/8 share from Q. Find the profit sharing ratio of all the partners. 4. Calculate Goodwill by 3 years purchase of average profits. Profit for 2001-2002, 2003-2004 & 2005 were A 509,000, A 75,000, A 65,000 & A 20,000.

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

Paper - II Accountancy - II 183 (5) Adjustments Capital balances of partners in proportion to their profit sharing ratio if there is change it. In addition to the above mentioned issues there could be one more issue for considerations at the time of retirement of a partner. Of the partner retires in the middle of any accounting year, profits of the firm for the period beginning from the first day of that accounting year till the date of retirement has to be ascertained. The retirement partner s share in such amount should be credited to his capital account. Profits of the firm, in such Circumstances is generally calculated based on the profits earned by the firm in the preceding few years. The issues are discussed hereunder in brief as they already discussed in details while dealing with admission of a partner. 1. Goodwill : There are different ways in which the accounting of goodwill carry be completed at the time of retirement of a partner. Once the goodwill amount is ascertained ( in any method discussed at the time of admission) one of the following procedure can be adopted. (a) Goodwill account is debited with the full value crediting account of the partners (including retiring partner) in their sharing ratio. This is done when there is no goodwill account will account books stated earlier. In this method goodwill appears in the balance sheet of the firm. (b) I f the goodwill account is already there which is proposed to be increased now and entry is recorded with the amount of difference between the purposed amount and existing amount. In this entry goodwill account is debited and Capital account of the partners credited. (c) If the existing goodwill account is proposed to be reduced an entry is recorded with the difference amount debiting the partner s capital accounts and crediting the goodwill account. (d) If the remaining partners desire that goodwill should not appear in the balance sheet, good will account can be closed by debiting the existing partner s Capital account and crediting the goodwill account. (e) Another method of ensuring that the goodwill should not be appears in the balance sheet is to recorded an entry debiting the remaining partner s Capital account and crediting retirement partner s capital account. In this method goodwill account is not opened at all. 2. New Profit Sharing Ratio : When one of the partners retires, remaining partners will share the profit in the same ratio. There will be no

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

Paper - II Accountancy - II 185 : ¼ after striking off of B s share. Remember it was 3:2:1. Now it is only 3:1 and hence ¾ : ¼. It means the total profit is made into 4 parts of which A gets 3 parts and C gets one parts. Illustration 1 : Keshav, Govind and Madhav are three partners and Losses in the ratio of ½ : 2/5 : 1/10.Keshav retires from the firm. Find the new profit sharing ratio of remaining partners. Solutions : Simply the ratio by taking the common denominator i.e. ½ : 2/5 : 1/10 can be expressed as 5/10 : 4/10 ; 1/10 i.e. 5:4:1. Now strike off Keshav s share and what remains is 4:1 which is the new ratio of Govind and Madhav i.e. 4 / 5 : 1 / 5. Similarly if Govind is retiring, the new of Keshav and Madhav is 5:1, 1.e, 5 / 6 and 1 / 6. If Madhav is retiring, then the new ratio of Keshav and Govind would be 5 : 4 i.e. 5 / 9 : 4 / 9. Case (2) : The share of retiring partner may be purchased by the new partner. In such a case, the remaining partners will be getting their old share of profit plus what is purchased from the retiring partners share. It shall be made clear from the following illustration. Illustration 2 : A,B, and C partners sharing profits and losses in the ratio of 1 / 5 : 1 / 3 : 7 / 15 respectively. C retires and his share is purchased by A & B in the ratio of 3:2. Calculate the new profit sharing ratio of A & B. A gets 3/5 th of C s share = 7 / 15 x 3 / 5 = 21 / 75 B gets 2/5 th of C s share = 7 / 15 x 2 / 5 = 14 / 75 Hence A s new share will be his old share + the portion of C s share. i.e.. A s new share = 1 / 5 + 21 / 75 = 15+ 21 / 75 = 36 / 75 B s new share = 1 / 3 + 14 / 75 = 25+14 / 75 = 39 / 75 Hence the new ratio of A,B = 36 : 39 = 12:13 Gaining Ratio : When a partner retries, his share Will be adjusted among the other partner Who continue the business. That means, there is an increased in the

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

Paper - II Accountancy - II 187 Illustration 4: X,Y & Z are partners with 6 : 7 : 8 ratio Y retires from the firm. X and Z share the profit in the ratio of 10 : 11. Calculated the gaining ratio and X and Z. Solution : In this problem the new ratio of X and Z is mentioned. Hence, gaining ratio = New ratio Old Ratio. X s gaining ratio = 10 / 12 6 / 21 = 10-6 / 21 = 4 / 21. Y s gaining ratio = 11 / 21-8 / 21 = 3 / 21 Gaining ratio f X,Z = 4:3 Surrendered by Y is shared by X and Z as 4 to X and 3 to Z. Journal Entries at the time of retirement Journal Entries, certain and Accounts in the ledger At a glance (1) For any increase in the value of any Asset on revaluation. Asset A/c To Revaluation A/c Dr. (2) For any decrease in the value of any asset Revaluations A/c. To Assets A/c Dr (3) For any increase in the value of Liabilities. Revaluation A/c.. To Liabilities A/c Dr (4) For any decrease in the value of any liabilities Liabilities A/c To Revaluation A/c Dr (5) Balance in Revaluation A/c (a) In case of profit (Excess of credit over debit ) Revaluation A/c.. To All Partners capital A/c Dr

188 Office Assistantship (including the retiring partner in the old ratio) (b) In case of Lose. (Excess of Debit over credit ) All partners Capital A/c.. Dr To Revaluation A/c * Note. Revaluation A/c is also called P&L adjustment A/c (6) Transfer of general reserve and Accumulated profits. General Reserve A/c Dr Accumulated profits A/c.. Illustration No. 5 To All partner Capital A/c A,B,C and D are partner In a firm is sharing profit and losses in the ratio of 4:3:2:1. The Balance Sheet as on 31-12-2012 is as follows. Balance Sheet Dr Liabilities Assets Sundry Creditors 10,000 Lease hold land 30,000 Bills payable 8,000 Buildings & Presmises 20,000 Bank Loan 12,000 Furniture 1,200 Capital Accounts Plant & Machinery 8,800 A 10,000 Stock 1,000 B 8,000 Sundry debtors 800 C 9,000 Cash & Bank 200 D 5,000 32,000 62,000 62,000

Paper - II Accountancy - II 189 terms. On the above date A decided to retire from the firm on the following (a) Goodwill of the firm to be raised at A 10,000 (b) Lease hold and buildings & premises should be appreciated by 20% and 30% respectively. (c) Furniture,Plant, & Machinery and stock are to be reduced by 10%. (d) Provision is to be created on Sundry Debtors at 10% for bad debts. (e) The amount payable to A s retirement and Balance Sheet of the new firm. Also journalize the transactions. Revaluation Account Dr. Cr. Particulars Particulars To Furniture A/c 120 By Leasehold land A/c 6,000 To Plant & Machinery A/c 880 By Building & Premises A/c 6,000 To Stock A/c 100 To P.B.D.D A/c 80 To Capital A/cs A = 4,328 B = 3,246 C = 2,164 D = 1,082 10,820 (Profit on revaluation transferred to partners) 12,000 12,000

190 Office Assistantship A s Capital Account Dr. Cr. Particulars Particulars To Loan A/c 18,328 By Balance b/d 10,000 By Goodwill 4,000 By Revaluation a/c 4,328 18,328 18,328 B s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 14,246 By Balance b/d 8,000 By Goodwill 3,000 By Revaluation a/c 3,246 14,246 14,246 By Balance b/d 14,246 C s Capital Account Dr. Cr. Particulars Particulars To Balance c/d 13,164 By Balance b/d 9,000 By Goodwill 2,000 By Revaluation a/c 2,164 13,164 By Balance b/d 13,164 13,164

Paper - II Accountancy - II 191 Dr. D s Capital Account Cr. Particulars Particulars To Balance c/d 7,082 By Balance b/d 5,000 By Goodwill 1,000 By Revaluation a/c 1,082 7,082 By Balance b/d Balance Sheet of B,C and D as on 1-1-2013 Liabilities Assets Sundry Creditors 10,000 Lease hold land 30,000 Bills payable 8,000 +Appreciation 6,000 Bank Loan 12,000 Bldgs & Pre. 20,000 Capital Accounts + Appreciation 6,000 B 14,246 Furniture 1,200 C 13,164 - Dep 120 D 7,082 34,492 P & Machinery 8,800 A s Loan A/c 18,328 -Dep 880 Stock 1,000 -Dep 100 Sundry Debtors 800 -P.B.D.D 80 Cash & Bank Goodwill 82,820 7,082 7,082 36,000 26,000 1,080 7,920 900 720 200 10,000 82,820

192 Office Assistantship Illustration A, B and C were carrying on business in partnership sharing profits and losses in the ratio of 3:2:1. On 31st December 2012, Balance sheet of the firm stood as follows. Balance Sheet Liabilities Assets Sundry Creditors 13,590 Cash 5,900 Capital Accounts Debtors 8,000 A 15,000 Stock 11,690 B 10,000 Buildings 23,000 C 10,000 35,000 Plant and Machinery 10,000 General Reserve 12,000 Furniture 2,000 60,590 60,590 B retired on the above mentioned date on the following terms. i. Buildings be appreciated by A 7,000 ii. Provision for bad debts be made @ 5% on debtors iii. Goodwill of the firm raised at A 9000 and immediately written off. iv. A 5,000 be paid to B immediately and the balance due to him be treated as a loan carrying interest @ 6% per annum. Prepare revaluation account, Partners capital account and new Balance Sheet. Revaluation Account Dr. Cr. Particulars Particulars To P.D.D To Profit (Transfer to Partners) 400 6,600 7,000 By Building A/c 7,000 7,000

Paper - II Accountancy - II 193 A s Capital Account Dr. Cr. Particulars Particulars To Goodwill A/c 6,750 By Balance b/d 15,000 To Balance c/d 22,050 By Goodwill 4,500 By Revaluation a/c 3,300 By General reserve 6,000 28,800 28,800 By Balance b/d 22,050 B s Capital Account Dr. Cr. Particulars Particulars To Cash 5,000 By Balance b/d 10,000 To Loan A/c 14,200 By Goodwill 3,000 By Revaluation a/c 2,200 By General reserve 4,000 19,200 19,200 C s Capital Account Dr. Cr. Particulars Particulars To Goodwill A/c 2,250 By Balance b/d 10,000 To Balance c/d 12,350 By Goodwill 1,500 By Revaluation a/c 1,100 By General reserve 2,000 14,600 14,600 By Balance b/d 14,600

194 Office Assistantship Balance Sheet of A & C as on 01-01-2013 Liabilities Assets Sundry Creditors 13,590 Cash 5,900 Capital Accounts Less : B s Cap. 5,000 900 A 22,050 Debtors 8,000 C 12,350 34,400 Less: P.D.D 400 7,600 B s Loan A/c 14,200 Stock 11,690 Building 23,000 + App. 7,000 30,000 P. & Machinery 10,000 Furniture 2,000 62,190 62,190 Exercises 1) X,Y,Z were partners sharing profits in the ratio of ½, 1 / 6, 1 / 3 / Their Balance Sheet on 31-12-2012 was as follows. Liabilities Assets Sundry Creditors 20,500 Buildings 50,000 Bills Payable 10,000 Plant and Machinery 25,000 Capital Accounts Furniture 2,500 X 15,000 Stock 22,500 Y 10,000 Debtors 20,000 Z 10,000 80,000 Reserve 1,000 19,000 Reserve fund 12,000 Cash 3,500 1,22,500 1,22,500

Paper - II Accountancy - II 195 Z retires, so the following adjustment were agreed upon for ascertainment of the payment be made to him (1) Appreciate the Buildings by 10% and Stock by 15%. (2) Depreciate Plant by 10% and furniture by 7 ½ %. (3) Reserve for Doubtful debts to be made up to A 1,500. (4) Create Goodwill with A 20,000 (5) The amount pay able to should be transferred to Loan account. (6) It is assumed that goodwill credited to retiring partner is being reduced from X and Y s Capital Balance Sheet. (Ans : Revaluations profit A 5,187; Z s Loan A/c A 47,396 Balance Sheet Total A 1,27,687) (2) Ram, Seetha, Geetha are sharing profits and losses in the ratio of 5:3:2 on 31 st December, 2012. The balance sheet was as follows. Liabilities Assets Sundry Creditors 21,000 Cash 50,500 Bills payable 10,000 Debtors 31,000 General Reserve 20,000 (-) Res. for b.debt 500 30,500 Capital Accounts Stock 20,000 A 80,000 Machinery 40,000 B 60,000 Building 80,000 C 30,000 1,70,000 2,21,000 2,21,000 On 1st January, 2013 Geeta retired on the following terms 1. Value of buildings to be appreciated by 10% 2. Bad debts reserve to be increased to A 1,200 3. Goodwill is to be created A 40,000

196 Office Assistantship name. 4. due to Geeta is to be transferred to 8% loan account in her (Ans. Revaluation Profit - A 7,300; Geeta s 8% Loan A/c - A 43,460 Balance Sheet Total A 2,68,300) (3) Suryam, Chandram, Viswam are partners sharing profit and losses in the ratio of 5:3:2. Their Balance Sheet as on 31.12.2012 is given below. Liabilities Assets Sundry Creditors 1,21,000 Buildings 80,000 Bills Payable 10,000 Machinery 1,40,000 Capital Accounts Stock 20,000 Suryam 80,000 Debtors 31,000 Chandram 60,000 Reserve 500 19,000 Viswam 30,000 1,70,000 Cash 50,500 Reserve fund 20,000 1,22,500 3,21,000 3,21,000 Viswam retries on the following adjustments. (1) Appreciate Buildings by 10% and depreciate, Machinery by 20% and stock revalued at A 15,000. (2) Bad debts reserve is to be increased up to A 1.200 (3) Goodwill is to be created for A 49,000. Prepare profit and loss adjustment account and ne balance sheet. (Ans : Revaluations Loss A 25,700 : V s Loan A/c A 39,660; Balance Sheet total A 3,44,300). (4) Mythill, Mayuri and Mounica are partners sharing profits and losses equally. Their Balance Sheet on 31 st March 2011 is given below.

Paper - II Accountancy - II 197 Liabilities Assets Sundry Creditors 20,000 Cash & Bank 18,000 Reserve fund 18,000 Debtors 30,000 Capital Accounts Stock 24,000 Mythili 50,000 Machinery 40,000 Mayuri 40,000 Buildings 46,000 Mounica 30,000 1,20,000 1,58,000 1,58,000 On the above date, Mounica decided to retire from the firm on the following conditions. (i) Goodwill of the firm be valued at A 24,000. (ii) Depreciate stock & Machinery by 10%. (iii) Buildings will be appreciated to A 56,000 (iv) Provide 5% on the debtors towards reserve for doubtful debts. Write Revaluations Account, Capital Account and Balance Sheet after due to amount is paid to be cash in,mounica to the extent possible and Balance transferred to a plan A/C. (Ans : Revaluations profit A 2,100; Mounica Loan A/c A 26,700; Balance sheet A1,66,100). 5. Manasa, Madhuri and,madhavi are partners sharing profit and losses equally. Their Balance Sheet as on 31 st March, 2011 is given below.

198 Office Assistantship Liabilities Assets Sundry Creditors 1,00,000 Cash & Bank 90,000 Profit & Loss A/c 90,000 Debtors 1,50,000 Capital Accounts Stock 1,20,000 Manasa 2,50,000 Machinery 2,00,000 Madhuri 2,00,000 Buildings 2,30,000 Madhavi 1,50,000 6,00,000 7,90,000 7,90,000 On above date Madhavi, decided to retire from the firm on the following conditions (a) Goodwill of the firm to be valued at A 1,20,000. (b) Depreciate stock and Machinery by 10 %. c. Buildings to be appreciated up to A 2,80,000. d. Provide 5% on debtors towards reserve for doubtful debts. Pass journal entries, ledger accounts and new balance sheets of the firm as on 1.4.2012. (Balance sheet Total A 9,20,500, Revaluations profit A 10,500).

UNIT 5 Hire Purchase and Installment Purchase System Learning Objectives After studying this unit, the student will be able to Understand the concept of hirepurchase Understand about characteristics features of hirepurchase Difference between hire purchase and installment purchase Understand about defaulters and repossession of assets Hire Purchase and Installment Purchase System According to section 2(c) of the Hire Purchase act, 1972 Hire Purchase agreement means an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of agreement and include an agreement under which (i) possession of good is delivered by the owner thereof to a person on condition that such persons pays the agreed amount, in periodical installment, (ii) the property in the goods is to pass to such a person on the payment of the last installment and (iii) such person has a right to terminate the agreement any time before the property so passes. Features of Hire Purchase Agreement 1. Hire purchaser obtain only possession of the goods. 2. Ownership of the goods remains with the hire vendor while signing the agreement.

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

Paper - II Accountancy and Tally - II 201 (e) Description of the goods sold on hire purchase basis. Installment Purchase System Under the installment purchase system, both the possession and ownership of the goods are transferred to the buyer immediately on signing the agreement. It is a credit sale where in the buyer agrees to pay the price in installment over a period of time. In case the buyer makes a defaults in payment of installment, the seller cannot take back the goods sold, he can only sue for non payment of the installments due. Features of the Installment Purchase Agreement 1. It is outright credit sale of goods. 2. The buyer gets immediate ownership and possession of the goods. 3. In case of default, the seller cannot repossess the goods. 4. In case of default, the installment paid by buyer are not forfeited. The seller can sue the buyer only for unpaid installments. Common features of hire purchase agreement and installment purchase system 1. Price is paid in installments. 2. Possession is given to the buyer. 3. Total price paid is more than the cash price. Distinction between Hire Purchase System and installment purchase system 1. 2. 3. 4. Hire Purchase System Instalment Purchase System It is governed by Hire Purchase Act, 1972 It is an agreement of hiring The parties to the contract are called Hire Purchaser and Hire- Vendor The ownership of the goods is transferred to the buyer only after the payment of the last instalment. 1. 2. 3. 4. It is governed by sale of Goods Act, 1930 It is an agreement of sale The parties to the contract are called buyer and seller. The ownership of the goods is transferred to the buyer as soon as the contract is signed.

202 Office Assistantship 5. 6. 7. 8. 9. The relation between hire purchaser and hire vendor is that of a bailee and a bailor. The buyer cannot hire out, sell transfer, pledge, destroy the goods. The buyer may return goods without further payment, except for instalments already due. If the buyer fails to pay any instalment, the goods can be repossessed by the seller. In case of default, the total instalments paid is forfeited and treated as hire charges. 5. 6. 7. 8. 9. The relation between the buyer and seller is that of debtor and creditor till last instalment is paid. The buyer can hire out, sell, transfer, pledge the goods. Unless there is default on the part of the seller, goods cannot be returned. The seller cannot repossess teh goods. He can sue the buyer for the amount due. In case of default, total amount of instalment paid by the buyer cannot be forfeited Calculation of Interest 1. When rate of Interest, Cash price and Hire Purchase Price are given When cash price, rate of interest etc are given interest is calculated on the total cash price remaining unpaid at the time of paying the installment. While calculating interest for the last installment, the difference between the installment payable and the unpaid cash price is taken to be the interest, interest on unpaid price it not to be calculated. The calculations are explained with the help of an example. Example : Solution Cash price A 17,430. Rate of interest 10% Down payment A 5,000. Three annual installment of A 5,000 each. Note : Interest at 10% on 4,540 amounts to A 454 where as the interest taken is A 460. The difference is because the installments are rounded off.

Paper - II Accountancy and Tally - II 203 Cash Price Less initial payment Add : Interest (10% on A 12,430) Less : First instalment Add : Interest (10% on A 8,673) Less : Second Instalment Add : Interest (5000-4540) Less : Third Instalment 17430 5000 12430 1243 13673 5000 8673 867 9540 5000 4540 460 5000 5000 2. When rate of interest is not given When rate of interest is not given, total interest payable will be divided in the ratio of outstanding balance of hire purchase price. this is explained with help of an example. Example : Cash price R 30,000 Down payment R 6,000. Balance in three annual installment of R 10,000 each. Find interest in each installment. Solution Cash price 30,000 Less down payment 6,000 Cash price paid in installments 24,000 Total payment = 10,000 x 3 = 30,000 + Down payment. R 6,000 = R 36,000.

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

Paper - II Accountancy and Tally - II 205 Solution due before 4th instalment Less interest ( 10 /110 x 10000) Add : Third Instalment due before 3rd instalment Less interest ( 10 /110 x 19091) Add : Second Instalment due before 2nd instalment Less interest ( 10 /110 x 27,355) Add First Instalment due before Instalment Less interest (( 10 /110 x 34,868) Add Down payment Cash Price 10,000 909 9,091 10,000 19,091 1,736 17,355 10,000 27,355 2,487 24,868 10,000 34,868 3,169 31,699 5,000 36,699 The accuracy of the above calculation can be checked by starting the calculations from the cash price. Cash Price Less initial payment Add Interest (10% of A 31,699) Less First instalment 36,699 5,000 31,699 3,170 34,869 10,000 24,869

206 Office Assistantship Add Interest (10% on A 24,869) Less : Second Instalment Add Interest (10% on A 17,356) Less : Third Instalment Add Interest (10% on A 9092) Less Fourth Instalment 2487 27,356 10,000 17,356 1,736 19,092 10,000 9,092 908 10,000 10,000 Hire Purchase System Journal Entries in the books of the Buyer There are two methods of recording transaction in the books of the buyer. Under the first methods every time an installment in paid, asset account is debited with the portion of installment which is paid towards cash price of the asset. Under the second method the asset accounts is debited with the total cash price of the asset at the time of signing the contract. First method At the time of making down payment (or initial payment) Asset Account To Bank Account (i) When instalments become due Asset Account Interest Account To Hire Vendor Account (ii) When instalment is paid Hire Vendor Account Dr. Dr. Dr. (with the intial payment) (with payment towards cash price) (with the interest due) (with the amount of instalment) Dr. (with the amount paid)

Paper - II Accountancy and Tally - II 207 To Bank Account (iii) When depreciation is charged Depreciation Account To Asset Account Dr. Dr. (With the depreciation charged) Note : While providing depreciation total cash price of the asset and not the debit balance of the asset account should be taken into consideration. (iv) When interest and depreciation are closed by transfer to profit and loss account. Profit and Loss Account Second method To Depreciation A/c To Interest A/c At the time of making down payment Dr. (i) Asset Acount To hire Vendor A.c (ii) For making initial payment Hire Vendor Account To Bank Account At the time of paying each installment (iii) For interest due Interest Account To Hire Vendor Account (iv) For payment of instalment Hire Vendor Account To Bank Account Dr. (With cash price of the asset) Dr. (With amount paid) (With the interest due) Dr. Dr. (With the amount paid)

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

Paper - II Accountancy and Tally - II 209 Defaults and Repossession If the buyer does not pay the installment when they become due, he commits defaults and the seller has a right to take back the goods sold on hire purchase system. He may take possession of complete goods or only part of the total assets sold to buyer. The accounting treatment is as follows. I. When he takes back the possession of complete goods In the books of buyer Taking the second method as the basis, all usual entries up to the date of defaults are passed. Entry for the interest due up to the date of defaults should be passed, but the entry for receiving the installment defaulted should not be passed. The seller s accounts should be closed by transferring it to the Asset Account by debiting Seller s account and crediting asset account. The balance left in the asset account should be closed by transferring it to profit and loss account. In the books of seller : All usual entries up to the date of defaults are passed except the entry for receiving the installment which is defaulted. The buyer s accounts is closed by crediting his account and debiting goods returned accounts. This account is debited with expenses incurred for repairs of the goods returned and credited with amount received on resale. Any balance left in the account being profit or loss, is transferred to profit and loss account. II. When seller takes possession of only part of the total assets sold to buyer In the books of the buyer : 1. The seller s account is debited and asset account is credited with the agreed values of the asset taken over by the seller. The basis for calculating the agreed values of the asset taken over by the seller will be given in the problem. As a results of this entry the seller s account in the books of the buyer will not be closed, the balance left in seller s account represent the amount still payable by buyer to seller. 2. The value of the asset not taken over by the seller is ascertained by providing depreciation at the normal rate. This is shown as balance in the asset account. After the above adjustment, the difference in the asset account is transferred to profit and loss account.

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

Paper - II Accountancy and Tally - II 211 Note : Balance of Interest Suspense Account will appear on the asset side of the Balance sheet (i) When goods are sold on Instalment system Purchaser s A/c To Sales A/c To Interest Suspense A/c (ii) For receiving down payment Bank Account To Purchaser s A/c At the time of receiving each instalment (iii) For interest due Interest Suspense A/c To Interest A/c (iv) For receiving instalment Bank Account To Purchaser s A/c (v) For transfer of interest to P&L Account Interest Account To P & L A/c Dr. (With instalment price) Dr. (With Cash price) (With total interest receivable) Dr. Dr. Dr. Dr. Illustration Salman purchased a van on Ist January, 2008 the cash price being A 1,12,000. The purchase is on hire purchase basis, A 30,000 being paid on signing the agreement and there after A 30,000 being paid annually for 3 years. Interest was charged at 5% p.a. Depreciation was written off at the rate of 20% p.a. on the reducing installment system. Give necessary ledger account in the books of Salman.

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

Paper - II Accountancy and Tally - II 213 Date Dr. Particulars Rs (A) 71,680 Date,, Particulars By Balance c/d Cr. 57,344 2011 Jan-1 To Balance b/d 57,344 71,680 Dr. Date 2008 Jan 1,, Dec. 31 To Balance c/d 2009 Dec. 31,, 2010 Dec. 31 2008 Dec 31 2009 Dec 31 2010 Dec 31 Particulars To Bank-Initial payment To Bank - First instalment To Bank Second Instalment To Balance c/d To Bank Third Instalment To Hire Vendor To Hire Vendor To Hire Vendor Hire Vendor Account Rs (A) 30,000 30,000 56,100 1,16,100 30,000 28,905 58,905 30,000 30,000 Date 2008 Jan 1 Dec 31 2009 Jan 1 Dec 31 2010 Jan 1 Dec 31 Particulars By Van A/c By Interest A/c By Balance b/d By Interest By Balance b/d By Interest Rs (A) Interest A/c 2008 4,100 Dec 31 By P & L A/c 2,805 1,095 2009 Dec 31 2010 Dec 31 By P & L A/c By P & L A/c Cr. 1,12,000 4,100 1,16,100 56,100 2,805 58,905 28,905 1,095 30,000 Rs (A) 4,100 2,805 1,095

214 Office Assistantship Illustration 2 A Ltd purchased on Ist Jan, 2008 from B Ltd a machine on installment purchase system whose cash price was Rs. 74,500. Payment was to be made in four installment of Rs.20,000 each, the first payment to be made immediately and the other three at the end of 2008, 2009 & 2010. Interest was taken to be 5% p.a. depreciation is 10% p.a. on the diminishing value. Give ledger account in the books of A ltd. Solution Cash Price of the machine Less : Initial payment Balance due Add : Interest @ 5% on A 54,500 74,500 20,000 54,500 2,725 57,225 Less : First Instalment Balance due Add : Interest @ 5% on A 37,225 20,000 37,225 1,861 39,086 Less : Second Instalment Balance due Add : Interest (A 20,000-A 19086) 20,000 19,086 914 20,000 Less : Third Instalment 20,000 Dr. 2008 Jan 1 To B Ltd Ledger Accounts in the books of A Ltd. Machinery Account 74,500 2008 Dec 31 By Dep. A/c Cr. 74,500,, By Balance c/d 67,050 74,500 74,500

Paper - II Accountancy and Tally - II 215 2009 Jan 1 To Balance b/d 67,050 2009 Dec 31 By Dep. A/c 6,705,, By Balance c/d 60,345 67,050 67,050 2010 Jan 1 To Balance b/d 60,345 2010 Dec 31 By Dep. A/c 6,0355,, By Balance c/d 54,310 60,345 60,345 2011 Jan 1 To Balance b/d 54,310 Dr. 2008 Jan 1 To Bal Ltd Interest Suspense Account 5,500 2008 Dec 31 By Interest A/c Cr. 2,725,, By Balance c/d 2,775 5,500 5,500 2009 Jan 1 To Balance b/d 2,775 2009 Dec 31 By Interest A/c 1,861,, By Balance c/d 914 2,775 2,775

216 Office Assistantship 2010 Jan 1 To Balance b/d 914 2009 Dec 31 By Interest A/c 914 914 914 B Ltd Account 2008 Jan 1 To Bank 20,000 2008 Jan 1 By Machine A/c 74,500 Dec 31 Dec 31 To Bank To Balance c/d 20,000 40,000,, By Interest Suspense A/c 5,500 80,000 80,000 2009 Dec 31 To Bank 20,000 2008 Jan 1 By Balance b/d 40,000 Dec 31 To Balance c/d 20,000,, 40,000 40,000 2010 Dec 31 To Bank 20,000 2010 Jan 1 By Balance b/d 20,000 20,000 20,000

Paper - II Accountancy and Tally - II 217 Interest Account 2008 Dec 31 To Interest Suspense A/c. 2,725 2008 Dec 31 By P&L A/c 2,725 2,725 2,725 2009 Dec 31 To Interest Suspense A/c. 1,861 2008 Dec 31 By P&L A/c 1,861 1,861 1,861 2010 Dec 31 To Interest Suspense A/c. 914 2010 Dec 31 By P&L A/c 914 1,861 914 Illustration 3 A purchased an Asset from B for A 60,000. Payment to be made A 20,000 down and three installment of A 15,000 each at end of each year. Rate of interest charged is 5% p.a. Buyer depreciates asset at 10% p.a. on written down value method. Because of financial difficulties, A, after having paid down payment and first installment till the end of first year, could not pay second installment and seller took possession of the truck. Seller after spending A 500 on repairs of the asset, sold it away for A 32,000. Show ledger account in the books of both parties.

218 Office Assistantship In the books of A (Buyer) Asset Account 1st Year To B (cost price) 60,000 1st Year By Dep. A/c 6,000 By Balance c/d 54,000 60,000 60,000 2nd Year To Balance b/d 54,000 2nd Year By Dep. A/c 5,400 By B A/c 28,350 54,000 By P & L A/c 20,250 54,000 Dr. 1st Year To Bank initial payment To Bank (first installment B s Account 20,000 15,000 1st Year By Asset A/c By Interest Cr. 60,000 2,000 To Balance c/d 27,000 62,000 62,000 2nd Year To Asset A/c 28,350 2nd Year By Balance b/d 27,000 By Interest 1,350 28,350 28,350

Paper - II Accountancy and Tally - II 219 In the books of B (Seller) A s Account Dr. 1st 1st Cr. Year To Sales A/c 60,000 Year By Bank (initial payment ) 20,000 To Interest 2,000 By Bank (first installment By Balance c/d 15,000 27,000 62,000 62,000 2nd Year To Balance b/d To Interest 27,000 1,350 2nd Year By Goods repossessed A/c 28,350 28,350 28,350 Goods Repossessed Account or Asset A/c Dr. Cr. To A A/c 28,350 By Bank 32,000,, Bank exp. of repairs 500,, Profit & Loss A/c (Profit) 3,150 32,000 32,000

220 Office Assistantship Short Answer Type Questions 1. Calculate the amount of interest include in the three installments in hire purchase, given the following information. Cash price of the asset is A 14,900 interest is at 5% per annum,, payments made were: 2008 January 1 Cash down A 4000 2008 December 31 I Installment A 4000 2009 December 31 II Installment A 4000 2010 December 31 III Installment A 4000 ( Ans. Interest 2008 A 545, 2009 A 372 & 2010 A 183) 2. Ramu purchased asset on hire purchase system. Ascertain the amount of interest included in three installments on the basis of the following information. Cash price of the asset A 11,175 Initial payment A 3,000 Balance in three installment of A 3,000 Each at the end of each year Rate of interest 5% p.a. (Interest : First year A 408.75, Second year A 279.18, 3rd year A 137.07) 3. Mohan purchases a motor cycle on hire purchase system. The total cash price of the motor cycle is A 15,980, payable A 4,000 as down payment and three further installment of A 6,000, A 5,000 and A 2,000 payable at the end of first, second and third year respectively. Interest is charged at 5% per annum. You are required to calculate the interest paid by sri ram to the seller each year. (Interest A 599, A 329, A 92) 4. Muneer purchased machinery under hire purchased system from Salman. The cash price of the machinery was A 15,000. The payment for the purchase is to be made as under On signing the agreement A 3,000. First Year end A 5,000. Second year end A 5,000. Third year end A 5,000. Calculate the interest included in each installment.

Paper - II Accountancy and Tally - II 221 5. On the basis of the following information ascertain the interest included in each installment. Cash price A 9,000 Initial payment A 3,000 Balance in three installment of A 3,000 Each payable at the end of each year. (Ans. Interest 1st year A1, 500, 2nd year A 1,000, 3rd year A 500) 6. A Machine the Cash price of which is A 1,800 is sold on hire purchase system for A 2,000 payable in four quarterly installment of hire 500 each. The first installment is paid at the end of the first quarter. Show the amount of interest included in each installment. (Ans. A 80, A 60, A 40 and A 20) 7. An asset is purchased on hire purchase system. The term of payment are as follows. A 2,000 to be paid on signing the agreement. A 2,800 at the end of the first year. A 2,600 at the end of the second year. A 2,400 at the end of the third year. A 2,200 at the end of the fourth year. Interest is charged at the rate of 10% p.a. Calculate the cash price of the asset. (Ans. Cash Price A 10,000, Interest 1st year A 800, 2nd year A 600, 3rd year A 400 and 4th year A 200) 8. Ram prasad purchased an asset on hire purchase system. Payment was to be made as under On signing the agreement 20,000 At the end of the first year 15,000 At the end of the second year 15,000 At the end of the Third year 10,000 A

222 Office Assistantship Interest is charged at the rate of 10 percent p.a. Determine the cash price of the asset. (Ans. Cash Price A 53,546) 9. On 1-1-2008 K and sons purchased a Machine on installment system, A 6,000 payable on delivery and three annual installment of A 6,400, A 8,900, and A 8,800. The vendor A and Co. charged interest at 10% p.a. Calculate cash price of the machine. (Ans. Cash Price 25,785) 10. The payment schedule of a color TV purchased on hire purchase system is as follow. T.V. A 4,400 on signing the agreement A 6,160 at the end of first year A 5,720 at the end of second year A 5,280 at the end of third year and A 4,840 at the end of fourth year Interest is charged @ 10% per annum. Calculate the cash price of the (Ans. A 22,000) 11. On 1 st January 2008 the company sold an Autorickshaw on hire purchase system for A 20,000 to be paid as follows. On signing the agreement A 2,400; at the end of the first year A 3,400, second year A 3,200 third year A 11,000; interest included in A 20,000 being charged on the cash value at per 10 per cement annum. Ascertain the cash value of the autorickshaw and write up the purchaser s account in the book of the Hire Sales Company. (Ans. A 16,400) 12. Give journal entries to be passed in the books of purchaser and vendor under hire purchase system. 13. State what journal entries will be passed in the books of buyer and seller under Installment purchase system.

Paper - II Accountancy and Tally - II 223 Problems 1. The Hyderabad Transport company purchased motor car from the Tata motor co. on hire purchase agreement on 1 st January 2008 paying cash A 10,000 as down payment and agreeing to pay further three installment of A 10,000 each on 31 st December each year. The cash price of the car is A37,250 and the Tata Motor Company charges interest at 5 percent p.a. the Hyderabad Transport Company writes off 10 percent p.a. as depreciation on the reducing installment system. Journalize these transaction in the books of both the parties. (Interest 2008, A 1,363; 2009 A 931 & 2010 A 456) 2. On 1 st January 2005 Messrs. Ram & CO. took from Auto car Ltd. Delivery of a Motor Van on hire purchase system. A 2,000 being paid on delivery and the balance in five installment of A 3,000 each payable annual on 31 st December. The vendor company charges 5 percent p.a. interest on yearly balances. The cash down value of the van is A 15,000. Show the necessary ledger account in the books of Ram & Co. the company provides 10% p.a. depreciation according to reducing Installment system. (Ans. Interest 1st year, A 650, Second year A 533, 3rd year A 409, 4th year A 280 and 5th year A128) 4. A company purchased a motor cycle on hire purchase system on 1 st January 2008. The first installment of A 6,000 was paid immediately and the balance by four equal installment of A 6,000 was each to be paid on the last date of each year. The vendor charged 5% per annum interest on the unpaid balance. The cash price of the press on delivery was A 27,300. Depreciation is to charged at 10% on the diminishing balance of the asset. Draw up Vendor s Account, Motor cycle account, interest account and depreciation account in the books of the buyer. (Ans. Interest A 1,065, A 818, A 559 and A 258) 5. Ashaaz Purchased a machine on hire purchase system, the cash price of which was A 14,6000. A 11,400 were paid at the time of contract on 1 st July 2000 and the balance was to paid by half-yearly installment of A 800 plus interest at 5 percent p.a. Depreciation charged by Ashaaz is 10 percent p.a. on diminishing balance method. Accounts are closed on 30 th June. Prepare machinery account, hire vendor account, interest account and depreciation account in Ashaaz s Ledgers. (Ans. Interest A 80, A 60, A 40 and A 20)

224 Office Assistantship 4. Muneer purchased an asset for A 60,000 payment to be made year. Rate and three installment of A 18,000 each at the end of each depreciates asset at 10% p.a. on written down value method. Due to financial difficulties Muneer could not pay installment after the first installment and the selling company took possession of the asset. The selling company after spending A 1,500 on repairs of the asset sold it away for A38,000. Prepare the necessary ledger accounts in the books of both the parties. (Ans. Loss on default transferred to Profit and Loss Account A13,950. Seller s account transferred to asset account A 34,650, Profit on resale A 1,850) 6. Lallu purchased a Lorry from Kishen for A 1,50,000 payable A50,000 down and the balance in four annual equal installments for A 25,000 each at the end of each year, together with interest @ 10% p.a. The lorry is depreciated at 20% p.a. on the reducing balance system. Lallu pays cash down and three successive installment but fail to the last installment. Consequently Kishens reclaims the lorry. He spends, A 5,000 on repair and sell it for A50,000. Show the ledger account in the books of Lallu (Ans. Loss on default A 33,940)

UNIT 6 Learning Objectives Company Accounts After studying this unit, the student will be able to Understand characteristic of company Understand types of companies Learn about classification of shares Issue of shares According to Justice Marshall a company is an artificial being, invisible, intangible and existing only in the contemplation of Law. According to Sec. 3(1) of the Companies Act defines a company as company formed and registered under this Act, or an existing company. An existing company means a company formed and registered under any of the former companies Acts. Characteristics of a Company 1. It is a voluntary association of person 2. A company has a separate legal existence. It can hold, purchase and sell property, can enter into contracts with others in its name. 3. It has a perpetual or continuous existence. Its existence is not effected by the death, lunacy or insolvency of any member. Members may be changing from time to time, but the company goes on for ever. 4. The liability of the members is limited to the extent of the face value of shares held by them.

226 Office Assistantship 5. The shares in a joint stock company are freely transferable, except in case of private companies. 6. It has a common seal. Being an artificial person it can act only through natural persons, called Directors. All documents prepared by directors will be valid only when it contains the common seal. 7. There is a separate of ownership and management. A company is owned by share holders and managed by a separate body called Board of Directors. 8. In a public limited company, the manimum number of members are seven and there is no maximum limit. In case of private limited companies the minimum number is two and the maximum number is fifty. 9. A company comes into existence only after its registration under the companies Act. A company from incorporation to liquidation is governed by various provisions of the companies Act. Kinds of Joint Stock Companies Companies can be classified on the basis of certain characteristics like (i) incorporation (ii) liability and (iii) membership. 1. Statutory Companies : Statutory companies are formed by the special Act passed by the parliament or state assemblies examples : Reserve Bank of India, Life Insurance Corporation etc. 2. Registered Companies : These are the companies formed and registered under the Companies Act. Classification on the basis of liability 1. Companies limited by shares : In case of such companies liability of each member is limited to the extent of the face value of shares held by him. 2. Companies limited by Guarantee : In case of such companies liability is limited to the extent of the guarantee given to contribute to the assets of the company in the event of its wound up. If the guarantee is given to addition to the shares then the total liability shall be equal to the unpaid amount on shares and the amount of guarantee given. 3. Unlimited Companies : In case of unlimited companies the liability of the members is unlimited and the members are personally liable to the creditors of the company for making up the deficiency. Such companies are rarely formed these days.

Paper - II Accountancy - II 227 Classification on the basis of membership 1. Private Companies : A private company means a company which by its articles (i) restricts the right to transfer its shares (ii) limits the number of its members to fifty excluding past or present employees of the company who are members of the company and (iii) prohibits any invitation to the public to subscribe for any shares or debentures of the company. 2. Public Companies : Public companies are those companies which are not private companies. Classes of Shares : Total capital of the company is divided into units of small denomination. Each unit into which capital of the company is divided is called a share. If the total capital of the company is Rs. 50,00,000. It can be divided 5,00,000 units of Rs. 10 each then unit of Rs. 10 is a share of Rs. 10 each. According to Companies Act, 1956 a company can issue two classes of shares, namely preference shares and equity shares. Preference Shares : According to companies Act, preference share is that part of the share capital of the company which enjoys preferential rights as to (a) payment of dividend at a fixed rate and (b) return of capital on the winding up of the company. Types of Preference Shares 1. Cumulative and Non cumulative Preference shares : If a company does not each sufficient profits during a particular year, dividends on preference shares may not be paid for that year. But if preference shares are cumulative, such unpaid dividends are treated as arrears and are carried forward to subsequent years. When the company wants to pay any dividend to equity share holders, it must first pay arrears of such dividend to cumulative preference share holders. If the company goes into liquidation, arrears of dividend are not payable unless they are either declared or articles of association contain express provision in this regard. A non-cumulative preference share is that share where the arrears of dividends do not accumulate. If a dividend is not declared in any year then it lapses. Unless otherwise stated, in the articles of association preference shares are cumulative. 2. Participating and Non Participating preference shares A participating preference share is a share which carries the right of sharing profits left after paying equity and preference dividends at specified rates. A non participating preference share is that share which does not carry the right

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

Paper - II Accountancy - II 229 Classes of Shares Uses of companies Act, 1956, a public company can issue only two classes of shares namely preference shares and equity shares. Preference shares have preference over equity shares for (i) Payment of dividends and (ii) Repayment of capital in the event of windings up. Equity shares do not have any preference for payment of dividend or repayment of capital. Their clamps arise only after satisfying the claims of preference shares. Presentation of information relating to share capital in the Balance sheet of a company. The prescribed form of the balance sheet of company given in schedule IV of the companies act 1946, requires the description of share capital under followings categories. 1. Authorized or Nominal or Registered Capital : It refers to that amount which is stated in the memorandum of association as the share capital or the company. This is the maximum limit of capital which the company is authorized to issue and beyond which the company cannot issue shares unless the capital clause in the memorandum is altered. 2. Issued Capital : It refers to that part of the authorized capital of the company which has actually been offered to the public for subscription. 3. Subscribed Capital : It refers to that part of that issued capital which has actually has been subscribed by the public and subsequently allotted to them by the directors of the company. 4. Called up Capital : It refers to that part of the subscribed capital which has been called up by the company for payment. 5. Paid Up Capital : That part of the called-up capital which is actually paid by the share holders is known as paid-up- capital. The sum which is still to be paid Is known as Calls in Arrears.

230 Office Assistantship Issue of Shares : Journal Entries. 1. For receiving application money Bank Account To Share Applicaiton A/c 2. For transferring the application money to Share Capital Account. Share Application A/c To Share Capial A/c 3. For the amount due towards allotment Share Allotment A/c To Share Capital A.c 4. On receipt of allotment money Bank A/c To Share Allotment A/c 5. For the amount due towards first call Share First Call A/c To Share Capital A/c 6. On receipt of First Call Money Bank A/c To Share First Call A/c Dr. Dr. Dr. Dr. Dr. Dr. (With the money received on application) (With the application money on shares alloted) (With the amount due on shares alloted) (With amount received on allotment) (With the amount due on first call) (With the amount received on First Call) Similarly entries are made for second and final calls. Each time entries are made first for the amount due and then for the amount received. Note : If cash book entries are asked for 1, 4 and 6 entries should be shown only in cash book and not in the journal. Adjustment of excess application money If the number of shares applied for is more than the number of shares issues, the shares are said to be oversubscribed. If the applications are rejected the application money be refused. The entry is

Paper - II Accountancy - II 231 Share Application Account To Bank Account Dr. (With the application money refunded on shares rejected) When the shares are allotted on prorata basis (i.e. less shares are allotted to the person applying for more shares rateably) then excess application money may be adjusted towards allotment and other calls. For utilization of application money towards allotment. Share Application Account To Share Allotment A/c Dr. (With the amount transferred from application account to allotment account) For transfer of application money to Calls in Advance Share Application Account To Calls in Advance Account Dr. (With the amount transferred to Calls in Advance) In future whenever calls in advance money is adjusted towards some call due then the following journal entry is made. Calls in Advance Account To Calls Account Dr. (With the amount adjusted towards relevant call) Interest on calls on Advance : A company has to pay interest on calls in advance from the date of receipt of the amount till the date when calls is due for payment. The rate of interest is determined by the articles of association. If articles association is silent then provisions of table a will apply which provides for payment of interest on calls in advance at the rate of 6 percent p.a. The entry for payment of interest in calls in advance is Interest calls in advance A/c To Bank Account Dr.. Interest on calls in advance account appears on the asset side of the balance sheet till it written off.

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

Paper - II Accountancy - II 233 Share Capital Account Dr (With the No. of shares forfeited x amount called up per share excluding premium). Share premium account To share Forfeited A/c To various call accounts Dr (With the premium money remaining unpaid on the shares forfeited). (With the amount already received from the shares forfeited). (With the amount that remains unpaid on calls) If premium on shares is already received on the shares forfeited then share premium account should not be debited. Re-Issue of Shares Forfeited : The entry is The entry is : Bank Account Shares Forfeited account Dr. (With the amount received on reissue) Dr. (With the discount allowed) To share capital A/c (With the paid up value of shares) Profit on shares forfeited is transferred to Capital Reserve A/c. Shares Forfeited account To Capital Reserve a/c Note : The amount forfeited on shares not yet reissued will remain in the shares Forfeited account. Dr. Issue of Shares for consideration other than cash (a) To vendors for the purchase of assets. (i) Sundry Assets A/c. Dr (With the purchase price good (individually) upon) To Vendors Accounts (ii) Vendors account To Share Capital a/c.

234 Office Assistantship Illustration : 1 To Share Premium Account (if any) (b) To promoters for the services rendered by them. Goodwill A/c Dr (With the nominal value of share allotted). To Share Capital A/c.. Base Informatics Ltd. offered 1,00,000 Equity shares of the nominal value of A 10 each. The amount payable on the shares were on application A 4.00, On allotment A 3.00, on first and final call A 3.00. The actual subscription was only for A 90,000 shares. All money payable by share holders were received except form Sudhakar who has taken 1,000 shares but failed to pay the final call. His shares were forfeited and reissued to Prabhakar at A 6.00 each. Show journal entries in the books of the Company in respect of the above (including cash transaction). Journal Entries in the books of Base Informatics Ltd. Debit Credit S.no. Particulars L.F. Rs. Rs. 1 Bank A/c Dr. - 3,60,000 - To Equity Share Application A/c - 3,60,000 (Being application money received) 2 Equity Share Application A/c Dr. - 3,60,000 - To Equity Share Capital A/c - 3,60,000 (Being Cash deposited in bank) 3 Equity Share Allotment A/c Dr. - 2,70,000 - To Equity Share Capital A/c - 2,70,000 (Being amount due towards allotment) 4 Bank A/c Dr. - 2,70,000 To Equity Share Allotment A/c 2,70,000 (Being allotment money received)

Paper - II Accountancy - II 235 5 Equity Share First & Final call A/c Dr. 2,70,000 -- To Equity Share Capital A/c -- 2,70,000 (Being the amt. due towards first & final call) 6 Bank A/c Dr. 2,67,00 -- To Equity Share first and final call A/c -- 2,67,000 (Being first & final call money received on 1,000 shares) 7 Equity Share Capital A/c Dr. 10,000 -- To Equity Share first and final call A/c -- 3,000 To Share Forfeited A/c -- 7,000 (Being the forfeiture of 1,000 shares on which first and final call money was not recieved) 8. Bank A/c Dr. 6,000 -- Share Forfeited A/c 4,000 -- To Equity Share capital A/c -- 10,000. (Being the reissue of forfeited Shares @ Rs. 6 per share) 9. Shares Forfeited A/c Dr. 3,000 -- To Capital Reserve A/c -- 3,000 (Being balance of shares forfeited A/c transferred to capital reserve A/c) Exercises 1. PQR limited issued 10,000 shares of A 10 each payable A 2 on application A 5 on allotment and the remaining balance on call. Applications were received for 9,000 shares and the shares were duly allotted. All cash due

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

Paper - II Accountancy - II 237 The public applied for 30,000 shares. These were allotted. All the money due on allotment and call was received except the first call on 1,000 shares on final call on 1,500 shares. Pass journal entries and prepare the opening balancing sheet. (Ans. Balance Sheet Total A 2,94,000) 2. Mahesh Company Limited, Issued 5,000 shares of A 100 each The shares were payable as under. (Rs) A On Application 25 On Allotment 20 On First call 30 On Final Call 25 The public applied for 3,000 shares. The directors did not make the final calls. All money called on shares were received except first call money on 200 shares. Pass journal entries and prepared the opening balance sheet of the company. 3. A limited company was formed on January 1, 2012 with an authorized capital A 3,00,000 divided into 1,000 shares of A 100 each. On the same date, the company issued a prospectus asking for subscriptions to 900 shares payable A 25 per share on applications A 40 on allotment and the remainder on a call. All share were applied for and allotted and the call cash due on allotment and call was received. Give the entries necessary to record the above in the books of the company and show how share capital will appear in the balance sheet. (Ans. Balance sheet total A 90,000) 4. ABC Company LTD, Issued 10,000 shares of A 100 each payable as under A 30 on application A 20 on Allotment

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

Paper - II Accountancy - II 239 allotment were collected and against first call director had received A 5,00,000. Give journal entries and the balance sheet of the company on 31 st December 2012 assuming the directors he paid interest due to share holders in cash at the rate of 6 percent per annum. (Balance Sheet total A17,80,000) 7. X ltd issued 25,000 equity shares of 10 each at a discount of 10 percent payable as follows On Application A 2.00 On Allotment A 2.00 On First Call A 2.50 On Final Call A 2.50 Application were received for 20,000 shares and all of these were accepted. All money due was received except the final call on 1,000 shares. Pass necessary journal entries and show how these transactions would appear in Balance sheet of the company. (Ans. Balance Sheet total A 1,97,500) 8. Chaya Ltd issued 2,000 Equity shares of A 100 each payable as follows, A 20 on application A 30 on allotment A 20 on first call money and 30 on the final call were received with the exception of first and final calls on 50 shares. These shares were forfeited and reissued at later date at the rate of A 70 per share. Give journal to record the above transaction and prepare balance sheet of the company. (Ans. Balance Sheet A 1,51,000)

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

Paper - II Accountancy - II 241 2. Purchases This is the value of the goods purchased in the current year. 3. Purchases Return This is the value of the goods returned to the sellers. Purchases return reduce the value of goods purchased. So it is deducted from the purchases. 4. Carriage or Freight Inward This includes all charges of bringing purchased goods to the business place. They are transport charges and also loading and unloading charges. If in any trial balance only carriage or freight is given then it should be treated as carriage inward only. 5. Import Duty and Excise Duty Import duty increases the cost of the goods imported, and excise duty increases the cost of the goods manufactured. 6. Marine and Factory Insurance Marine Insurance is for the safety of the goods imported and factory insurance is for the safety of the goods manufactured. These are also add to the cost of the goods. 7. Clearing Charges Goods, which come by ship or railway require complicated procedure, before it is delivered to its owner. The expenses incurred to complete this procedure are called, clearing charges. These are also a part of the cost of the goods. 8. Factory Rent & Lighting These are direct expenses for the manufacture of the goods. So they are also added to the cost of the goods. 9. Fuel and Power These are the expenses incurred to move machines for production. So these expenses are also debited in the trading account, as cost of the goods. 10. Manufacturing Wages Manufacturing wages or simply wages are paid for the production of the goods. This is a part of the cost of the good manufactured. If in a trial balance productive wages are separately given, then only the productive wages should

242 Office Assistantship be debited in Trading account, as cost of the goods. If in a trial balance wages and salaries are given together then it should not be included in the Trading account as the cost of the goods. It is a general expense Other Expenses Apart from the above mentioned expenses all other expenses which are considered as the direct cost of the goods, either purchased or manufactured are debited into the trading account. Items to be Written on the Credit Side of the Trading Account 1. Sales It represents the amount realised or the sale proceeds from the sale of the goods, during the year. 2. Sales Return It represents the value of the goods returned by our customers. Sales return reduce the actual sales. So it is deducted from the sales. 3. Closing Stock It is the value of the unsold goods at the end of the trading period. It is credited into the trading account. Closing stock usually does not appear in the trial balance. At the end of the trading period the unsold stock or closing stock is valued. It is called Stock taking. Closing stock is valued at the cost price or the market price, whichever is lower. It should not be valued at the selling price. It should be noted that the closing stock of the current year, will be the opening stock for the next year. After debiting and crediting various items, the trading account is balanced as any other account. Credit balance in the trading account shows the Gross profit and debit balance the Gross loss. The Gross profit or the Gross loss of the trading account is transferred to profit and loss account, to find the Net Profit or Net Loss of the business. This will close the trading account.

Paper - II Accountancy - II 243 PROFORMA OF TRADING ACCOUNT Trading Account of... for the Year ending... Dr. Cr. Particulars R R Particulars R R To Opening Stock To Purchases Less Returns To Carriage Inward To Wages To Freight & Cartage To Import / Excise Duty xx xx xx xx By Sales Less : Returns By Closing Stock By Goods destroyed by fire By Gross loss (Transfer to P&L A/c) xx To Factory Expenses xx To Gross Profit C/d xx Closing Entries in Relation to Trading Account Trading account is prepared by transferring into it some of the ledger account balances, given in the trial balance. For transferring the ledger balances in to trading account, some journal entries are necessary. These entries are called Closing Entries. It is because these entries close the ledger accounts, whose balances are transferred to trading account. The following are the closing entries in relation to the trading account. 1. Trading account is debited and the accounts whose debit balances are transferred account are credited. This closes these accounts in the ledger. 2. The account whose credit balances are to be transferred to trading account are debited and the Trading account is credited. This closes these accounts in the ledger. 3. Closing stock is debited and trading account is credited. This opens the closing stock account in the ledger. This entry is actually an adjusting entry. But is made at the time, when the other accounts are closed. So it is included in the closing entries.

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

Paper - II Accountancy - II 245 In case of company it is not necessary to split the profit and loss account into three sections (i.e. Trading Account, profit and loss account and profit and loss appropriation account). Only profit and loss account may be prepared which may cover items appearing in Trading Account and profit and loss appropriation account. It is desirable to split the profit and loss account into three sections so that Gross Profit, Net Profit and Net Profit carried to the balance sheet may be ascertained. Profit and loss appropriation section of the profit and loss account shows the appropriation of profit and is popularly known as Below the line. It is prepared as follows. Dr. To Transfer to Reserves To Dividends Paid (interim or Final) To Dividends proposed To Surplus Carried to Balance sheet Profit and Loss Appropriation Account By Last year s Balance By Current Year s Net Profit (Transferred from profit and loss A/c) By Excess provisions (which are no longer required) By Reserves withdrawn (if any) Cr. Important adjustments relating to company final accounts 1. Interest Outstanding on Debentures In case of debentures interest for full year should be debited to profit and loss account, whether paid or not. Example : The trial balance of a company shows 6% of. Debentures at A 1,00,000 and interest paid on debentures at A 3,000 then the profit and loss account will be debited debentures interest will be shown as a liability along with debentures under the headings Secured Loans. 2. Preliminary Expenses These are expenses incurred at the time of this foundation of a company. It is fictitious asset. It appears in the balance sheet on the asset side under the headings Miscellaneous Expenditure (to the extent not written off). It is written off over a period of years by debiting profit and loss account. For example it in trial balance of a company Preliminary Expenses appear at A 20,000 and A 5,000 are to be company off then profit and loss account will be debited

246 Office Assistantship with A 5,000 as Preliminary Expenses written off. In balance sheet preliminary expenses will appears art A15,000 under Miscellaneous Expenditure (to the extent not written off or adjusted). 3. Discount on the Issue of Debentures It is fictitious asset and is shown in balance sheet on the asset side. This should be written off as early as possible and in any case not later than the date of redemption of debentures. Whenever it is written off, profit and loss account is written off, Profit and loss account is debited and discount (or loss ) on tissue of debentures is credited. Suppose in the trial balance of a company prepared on 31-12-2009, 8 percent Debentures ( to be redeemed on 31-12-2012) appears at A 1,00,000 and discount on debentures at A 4,000. Then it is ad visible to write off 1/4 of discount on debentures i.e., A 1,000 in 2009 because after four year (commencing from 2009) there will not be debentures in the company so there cannot be discount on debentures account in the books. In 2009 profit and loss account will debited with A 1,000 as Discount on Debentures (1/4 written off). In balance sheet prepared on 31-12-2009 discount on debentures will appear at A 3,000 on the asset side under the headings Miscellaneous Expenditure ( to the extent not written off or adjusted). 4. Income Tax Provision Since the actual amount payable as Income Tax will known only when the assistant is made by Income-Tax department, the liability for income-tax has to be estimated and provided for the books. The entry is Profit and Loss A/c. To provision for income tax A/c The provision for income tax given as adjustment in a problem will appear in profit and loss account on the debit side and again in balance sheet on the liabilities side under the heading Current Liabilities and provisions. Sometimes the provision for income tax made in the last year and income tax paid is given balance with a note that there is not further liability in respect of Income tax for previous year. In such a case if the income tax paid is more than provision made the balance should be debited to profit and loss appropriation account. Similarly it the income tax paid is less than the amount provided for, the difference is credited to profit and loss appropriation account.

Paper - II Accountancy - II 247 5. Dividends Dividends paid, interim dividends paid. Final dividends paid, given in trial balance will appear only in profit and loss appropriation account. Students should not get confused between dividends paid and unclaimed dividends. Dividends paid will appear in profit and loss appropriation account. Whereas unclaimed dividends will appear in balance sheet under Current Liabilities. Proposed dividends given in adjustments will appear in profit and loss appropriation account debit side and again in Balance sheet on the liabilities side. Dividends on equity shares cannot be paid unless preference dividends is paid in full. Dividends should be always calculated on the paid-up capital of the company. 6. Transfer to Reserve Fund If any amount is given in adjustment as to be transferred to Reserve Fund, dividend equalization fund, Sinking Fund etc., then first it is to be taken in profit and loss appropriation account debit side and then added to the concerned fund reserve account in balance sheet on the liabilities side. Other points to be noted while preparing final accounts. 1. Interest of Sinking Funds Investments should be credited to profit and loss account (and only directly fund). Then the amount should be debited to appropriation and credited to Sinking fund account together with the annual installments. 2. In case of fixed asset, original cost, addition made during the year cost of the asset sold during year and depreciation written off against the asset should be shown clearly in Balance Sheet. 3. In case of investment stock, stock loose tools mode of valuation (cost or market price) is to be shown. 4. In case of sundry debtors and loans and advances, amounts outstanding for more than six months must be shown separately. The amounts which are secured and unsecured and which are doubtful and amounts due from director should be shown. 5. In case of share capital information has to be given regarding different classes of shares, right of redemption if any, shares issued for consideration other than cash and shares issued as bonus shares and the source from which these have been issued.

248 Office Assistantship Illustration 1 : From the under mentioned Trial Balance of Kranthi Ltd. Prepare Trading and Profit and Loss Account for the year ended 31st March 2012 a at that date. Purchases 75,000 Sales 1,35,00 Salaries 3,000 Discount received 1,200 Plant and Machinery 40,000 Transfeees 150 Sundry Debors 22,500 General Reserve 5,000 Wages 5,000 P& L A/c as on 1-4-2011 40,000 Rent 1,800 Share Capital Bad Debts Stock 1-04-2011 250 10,500 10,000 Equity Shares of (A) 10 each. 1,00,000 Income Tax 12,000 Dividend 13,000 Interim Dividend 8,000 Insurance Premium 90 The following adjustments are necessary (a) Depreciate Plant and Machinery at 7 1/2 % (b) Stock on 31st March 2012 amounted to A 18,000 (c) Bad Debts Reserve at 2 1/2 % on Debtors. (d) One quarter s insurance premium is to be provided for.

Paper - II Accountancy - II 249 Trading and P&L Account of Kranthi Ltd. for the year ended 31st March 2012 Dr. Cr. To Op. stock 10,500 By Sales 1,35,000 To Purchases To Wages To Gross profit To Salaries To Rent To Income Tax To Insurance 90 + Outstanding 30 To Dep on P&L Mach. To Provision D.D 563 + Bad Debts 250 To Net Profit 75,000 5,000 62,500 1,53,000 3,000 1,800 12,000 120 3,000 813 43,117 63,850 By Closing Stock By Gross profits By Discount By Transfer fees 18,000 1,53,000 62,500 1,200 150 63,850 Profit and Loss Appropriation Account Dr. Rs. (A) Cr. To General Reserves 5,000 By Balance b/d 40,000 To Dividends 13,000 By Net Profit b/d 43,117 To Interim Dividends 8,000 To Surplus 57,117 (Transfer to Balance sheet) 83,117 83,117

250 Office Assistantship Exercises 1. The following Trial Balance of Wipro Ltd was extracted from their books on 31st December 2012 Rs. (A) Rs. (A) Purchases 3,04,000 Share Capital 1,44,000 Plant and Machinery 28,800 Provision for B.D.D 1,120 Stock in trade on 1-1-12 25,600 Returns outwards 14,400 Salaries 14,400 Sales 4,11,200 Carriage outwards 2,000 Discount 4,480 Carriage inwards 8,000 P & L A/c (Credit balance) 25,000 Discount allowed 5,600 Return inwards 12,800 Insurance 4,000 Dividends 20000 Interim dividends 22,400 Rates & Taxes 6,400 You are required to prepare the Trading and P & L appropriation account for the year ended 31-12-2012, in doing so take the following adjustments into account. (a) Plant and machinery is to be depreciated by 10 percent (b) Stock in trade on 30th June 2005 is A 28,800. (c) Salaries due but not paid amounts to A 1,200 (d) The Provision for bad debts is to be raised to A 2,400 (e) Insurance paid in advance amounts to A 800 (f) Rates paid in advance amounts to A 1,600 (Ans. Gross Profit 1,04,000, Net Profit A 73,120, Surplus A 55,720)

Paper - II Accountancy - II 251 2. The Goodluck manufacturing company was registered with a nomial capital of A 6,00,000 in equity shares of A10 each. The following is the list of balances extracted from its books on 31st December 2012. Plant and Machinery Interim Divident paid on Aug. 1, 2012 Stock, 1st January 2012 Sundry Debtors Purchases Preliminary Expenses Wages General Expenses Freight and Carriage Salaries Directors Fees Bad Debts Debenture Interest Paid Subscribed and fully called-up capital 6 % Debentures Profit and Loss Account (Cr. Balance) Sales General Reserve Bad Debts Reserve on 1st Jan 2012......................................................... Rs. 3,30,000 37,500 75,000 87,000 1,85,000 5,000 84,865 16,835 13,115 14,500 5,725 2,110 9,000 4,00,000 3,00,000 14,500 4,15,000 25,000 3,500 Prepare Trading and P&L account and P&L appropriation A/c in proper form after making the following adjustments. Depreciate Plant and machinery 10%, write off A 500 from preliminary expenses, provide half year debentures interest due, leave bad and doubtful debts reserve at 5 percent on sundrydebtor. Stock as on 31st December 2012 was A 95,000. (Ans. Gross Profit 1,52,020, Net Profit A 60,500, Surplus A 37,500)

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

Paper - II Accountancy - II 253 The following adjustments have to be made before closing the accounts (a) Value of closing stock is A 1,40,200 (b) Depreciation on Plant and Machinery has to be written off at 10% per annum, on patent at 15 percent and on premises at 5 percent per annum. (c) Provide for Bad and Doubtful Debts at 5 percent. (d) Carry forward A 500 on account of Rates and Taxes. (e) Proposed dividends 10% on Share Capital. (Ans. Gross Profit 168,175, Net Profit A 85,557, Surplus A 72,557) Format of the revised Schedule VI - Profit and Loss Account Part II Form of Statement of Profit And Loss Name of the Company Statement of Profit and Loss for the year ended 31 March, 20X2 Particulars Note As at 31st As at 31st No. March 20X2 March 20X1 A (Rs.) A (Rs.) A. CONTINUING OPERATIONS 1. Revenue from operations (gross) Less: Excise duty Revenue from operations (net) 2. Other income 3. Total revenue (1+2) 4. Expenses (a) Cost of materials consumed (b) Purchases of stock-in-trade (c) Changes in inventories of finished goods, work-inprogress and stock-in trade (d) Employee benefits expense

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

Paper - II Accountancy - II 255 12.iii Add / (Less): Tax expense of discontinuing operations (a) On ordinary act ivit ies attributable to the discontinuing operations (b) On gain / (loss) on disposal of assets / settlement of liabilities 13. Profit / (Loss) from discontinuing operations (12.i + 12.ii + 12.iii) C 14. TOTAL OPERATIONS Profit / (Loss) for the year (11 + 13) 15. Earnings per equity share: (1) Basic (2) Diluted

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

Paper - II Accountancy - II 257 property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses. (Simplified) Proforma of Balance Sheet Liabilities (Rs.) A Assets (Rs.) A Share capital (With all particulars of Authorised, Issued, Subscribed Capital, Called up Capital Less : Calls in Arrears Add Forfeited Shares Reserves and Surplus 1. Capital Reserve 2. Capital Redemption Reserve. 3. Share Premium 4. Other Reserver Less : Debit balance of Profit and Loss A/c (if any) 5. Profit & Loss Appropriation Account 6. Sinking Fund Secured Loans Debentures Add : Outstanding Interest Loans from Banks Fixed Assets 1. Good will 2. Land and Buildings 3. Leasehold property 4. Plant and machinery 5. Furniture and Fittings 6. Patents and Trade marks 7. Vehicles Investments Current Assets Loans and Advances (A) Current Assets 1. Interest Accrued on Invesment. 2. Loose Tools 3. Stock in Trade 4. Sundry Debtors Less : Provision for doubtful debts 5. Cash in hand 6. Cash at Bank

258 Office Assistantship Unsecured Loans (B) Loans and Advances Fixed Deposits 7. Advances to subsidiaries Short term loans and advances Current Liabilities and Provisions (A) Current Liabilities 8. Bills receivable 9. Prepaid expenses M i s c e l l a n e o u s Expenditure (to written off or adjusted) 1. Bills Payable 1. Preliminery expenses 2. Sundry Creditors 3. Income received in advance 2. Discount on Issue of Shares and debentures 3. Underwriting Commission 4. Unclaimed Dividends 5. Other liabilities Profit and Loss Account (loss, if any) (B) Provisions 6. Provision for taxation 7. Proposed Dividends 8. Provident fund and pension fund A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities. Another way to look at the same equation is that assets equals liabilities plus owner s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner s money (owner s equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections balancing.

Paper - II Accountancy - II 259 The Central Government, in exercise of the powers under section 641(1) of the Companies Act, 1956 has replaced the existing Schedule VI with the revised Schedule VI on the 28th February, 2011 pertaining to the preparation of Balance Sheet and Profit and Loss Account under the Companies Act, 1956. This revised Schedule VI has been framed as per the existing non converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006. The Revised Schedule VI shall come into force for the Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after 1.4.2011. Form of Balance Sheet Name of the Company Balance Sheet as at 31 March, 20X2 Particulars Note As at 31st As at 31st No. March 20x2 March, 20x1 A EQUITY AND LIABILITIES 1 Shareholder s Fund (a) Share capital (b) Reserves and surplus (c) Money received against share Warrants 2 Share application money pending allotment 3 Non-current liabilities (a) Long-term borrowings (b) Deferred tax liabilities (net) (c) Other long-term liabilities (d) Long-term provisions 4 Current liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions

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

Paper - II Accountancy - II 261 The following balances appeared in the books of Docomo company Ltd as on March 31, 2012. Prepare a balance sheet Rs. (A) Buildings Plant and Machinery Furniture Motor vehicles Cash in hand Bills receivable Sundry Debtors Investments Share Capital (Issued and Subscribed capital 15,000 shares of A10/- each fully paid up) Pention fund Dividend Equalization fund Taxation provision Unclaimed dividends Public Deposits Trade Creditors 8% Debentures Cash at bank Adjustments : 1. The authorised capital of the company consists of 20,000 shares of A10 each 2. Stock on March 31, 2012 A 73,200 3. Outstanding expenses : manufacturing expenses A 45,000 and salaries A 3,000 4. Interest accrued on securities A 200. 1,01,000 70,400 10,200 40,800 30,000 45,000 1,14,000 8,000 1,50,000 40,000 20,000 17,000 2,000 3,200 1,48,000 1,00000 1,06,600

262 Office Assistantship 5. General charges prepaid A 1,600. 6. Provide depreciation on building at 2% p.a. on plant and machinery at 10% p.a. on furniture at 10% p.a. and on motor vehicles at 20% p.a. 7. Outstanding interest on debentures for 6 months A 4,000. 8. The directors propose a dividend @20% for current year. 9. The taxation provision shown in the trial balance is after payment of taxes for assessment upto last year. For the current year a provision of A 20,000 is to be made. and Balance sheet as on March 31, 2012. Balance sheet of Docomo Co. Ltd as on March 31, 2012 Liabilities Share Capital Authorised Capital 20,000 Shares of Rs. 10/- each 2,00,000 Issued, Subscribed Capital 15,000 shares of A10 each, fully called and paid up. Reserves and Surplus Profit & Loss A/c Dividend Equalisation Fund Secured Loans 8% Debtures 1,00,000 Add out. Int. 4,000 Unsecured loans Public Deposits Current Liabilities and Provisions Rs (A) 1,50,000 17,560 20,000 1,04,000 3,200 Particulars Assets Fixed Assets Buildings 1,01,000 Less Depr 2% 2,020 Plant & Mach. 70,400 Less. Depr 10% 7,040 Furniture 10,200 Less. Depr. 10% 1,020 Motor Vehicle 40,800 Less : Dept. 20% 8,160 Investments Current Assets, Loans and Advances (A) Current Assets Interest accrued Stores and spare parts Stock in Trade Sundry Debtors 98,980 63,360 9,180 32,640 8,000 200 30,000 73,200 1,14,000

Paper - II Accountancy - II 263 Liabilities Rs (A) Particulars (A) Current Liabilities Cash at Bank 1,06,600 Trade Creditors 1,48,000 (B) Loans and Advances Unclaimed Dividends 2,000 Bills receivables 45,000 Outstanding Expenses Prepaid expenses 1,600 Manufacturing exp. 45,000 Salaries 3,000 (B) Provisions Provision for taxation 48,000 20,000 M i s c e l l a n e o u s Expenditure (to the extent not written off or adjusted.) Proposed dividends 30,000 Pension Fund 40,000 5,82,760 5,82,760 Exercise No. 1 The Mahesh manufacturing company ltd. was registered with a nominal capital of A 6,00,000 in equity shares of A 10 each. The following is the list of balances extracted from its books on 31st December 2012. Subcribed and fully called-up capital Calls in Arrears Premises Plant and Machinery Fixtures and Fittings Sundry Debtors Goodwill Cash in Hand Cash at Bank 4,00,000 7,500 3,00,000 3,30,000 7,200 87,000 25,000 750 39,900

264 Priliminary expenses 6 % debentures Bills payable Sundry Creditors General Reserves Investment P&L Appropriation A/c (Credit Balance) Office Assistantship 5000 3,00,000 38,000 50,000 45,000 20,000 37,500 Prepare a balance sheet in proper form after making the following adjustments. 1. Depreciation on Plant and Machinery 10% 2. Write off A 500 from preliminary expenses 3. Provide half years debenture interest due. 4. Provision for doubtful debt 5% on debtor. 5. Stock on 31st December 2012 A 95,000 Exercise No. 2 (Ans. Balance sheet Total A 8,72,000) The following is the Trial balance of A.B.C Ltd. as at 30th June 2012. Prepare Balance sheet in the form prescribed under the companies Act. Authorised capital 50,000 Shares at A10 each. Subscribed Capital 10,000 shares at A10 each. Calls in Arrears Land Building 5,00,000 1,00,000 6,400 10,000 25,000

Paper - II Accountancy - II 265 Plant and Machinery Furniture and fixtures Investments Bills Receivable Sundry Debtors Sundry Creditors Cash at Bank Cash in Hand Share premium General reserve Debentures Provision for Taxation Profit and loss adjustment account (Deficit) 15,000 3,200 21,400 1,200 42,800 13,200 13,000 2,500 6,000 24,000 15,000 6,400 2,465 Adjustments : 1. Charge depreciation on Buildings at the rate of 2 1 / 2 %. 2. Charge depreciation on Plant and machinery at 10% 3. Charge depreciation on Furniture and fixture at 10%. 4. Provision of 5% on Sundry Debtors for bad debts 5. Carry forward Fire Insurance A 120. 6. Provide for the following outstanding liabilities (a) Wages A 3,200 (b) Salaries A 500 (c) Rent and Taxes A 200 7. The value of stock on 30th June 2012 A 30,000

266 Office Assistantship Exercise No. 3 Ramada Co. Ltd was registered with an authorised Capital of A 10,00,000 divided into 10,000 ordinary shares of A 50 each and 5,000 10% preference shares of A 100 each. The following Trial balance was extracted from the books of the company as on 31st December 2012. Prepare balance sheet as on 31 December 2012. Plant and Machinery Lease hold premises Calls in Arrears on ordinary shares Sundry Debtors Prepaid advertisement expenses Furniture and fixtures Cash in hand Ordinary shares capital (8,000 shares fully called up) Preference Shares Sundry Creditors Profit and loss adjustment account (Surplus) Bank overdraft Debentures 2,85,000 7,00,000 5,000 3,00,000 1,40,000 29,000 1,000 4,00,000 5,00,000 60,000 1,14,000 25,000 5,00,000 Adjustments : 1. Depreciate Plant and Machinery at 10% 2. Raise bad debts Reserve at 2.5% of Sundry Debtors 3. Closing stock amounted to A 2,50,000 4. Provision for taxation A 75,000 required.

Paper - II Accountancy - II 267 Base Informatics Ltd. was registered under the companies act. The following particulars are given, prepare a balance sheet as on 31st March 2012. Particulars Share Capital General Reserve Land and Building P & L appropriation account (Credit balance) Plant and Machinery Long term borrowings Furniture Long term liabilities Goodwill Short term borrowings Non current assets Trade payable Long term loans and advances Other current liabilities Short term provisions Premises Current investments Inventories Trade receivables Cash in hand Cash at bank Prepaid insurance Other current assets in Rs. (A) 2,50,000 5,000 1,00,000 20,000 50,000 1,00,000 20,000 50,000 15,000 18,060 14,000 30,900 45,000 39,800 1,240 10,000 58,000 45,000 1,00,000 15,000 34,000 500 4,000

268 Office Assistantship Solution Base Informatics Ltd Balance Sheet as at 31 March, 2012 Particulars As at 31st March, 2012 A EQUITY AND LIABILITIES 1 Shareholder s Fund (a) Share capital (b) Reserves and surplus (c) Money received against share Warrants 2 Share application money pending allotment 2. 3 Non-current liabilities (a) Long-term borrowings (b) Deferred tax liabilities (net) (c) Other long-term liabilities (d) Long-term provisions 4 Current liabilities B ASSETS (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions 1 Non-current assets 1. 3. 4. TOTAL ( 1 + 2 + 3 + 4) 2,50,000 25,000 ---- 2,75,000 ---- 1,00,000 --- 50,000 --- 1,50,000 18,060 30,900 39,800 1,240 90,000 5,15,000

Paper - II Accountancy - II 269 (a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under devp.. (v) Fixed assets held for sale (b) Non-current investments (c) Deferred tax assets (net) (d) Long-term loans and advances (e) Other non-current assets 2 Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets TOTAL (1 + 2) 1. 2. 1,70,000 15,000 --- --- --- 14,000 --- 45,000 10,000 2,54,000 58,000 45,000 1,00,000 49,000 5,000 4,000 2,61,000 5,15,000