2nd Year Accountancy Cm2 Accountancy

Bureau’s
Higher Secondary
ACCOUNTANCY
CLASS- XII
(For Commerce Students)
(Prescribed by the Council of Higher Secondary Education, Odisha)
Written By
Dr. Ajoy Mohanty Dr. Uma Chand Lal
Retd. Principal Retd. Associate Prof. Of Commerce
Sushilabati Govt. Women's College, Rourkela B.J.B. Autonomous College, Bhubaneswar
Dr. Ram Chandra Jena Dr. Prafulla Kumar Parida

Retd. Associate Prof. Of Commerce Associate Prof. Of Commerce
B.J.B. Junior College, Bhubaneswar S.C.S. Autonomous College, Puri
Reviewed by
Prof. (Dr.) Gunanidhi Sahu
Former Director, Higher Education, Odisha
Published by
Odisha State Bureau of Textbook Preparation and Production
Pustak Bhavan, Bhubaneswar
Published by :
The Odisha State Bureau of Textbook Preparation & Production,
Pustak Bhavan, Bhubaneswar, Odisha, India
First Edition : 2017/ 3000 copies

Publication No. : 209
ISBN : 978 - 81 - 8005 - 404 - 4
© Reserved by The Odisha State Bureau of Text Book Preparation and Production,
Bhubaneswar. No part of this publication may be reproduced in any form without the
prior written permission of the publihser.
Type Setting & Design : M/s Jagannath Process Pvt. Ltd., Cuttack
Printed at : M/s Jagannath Process Pvt. Ltd., Cuttack
Price : Rs. 160/– (Rupees One hundred sixty) only

FOREWORD
The Odisha State Bureau of Textbook Preparation and Production, Bhubaneswar

has made a pioneer attempt to publish text books for Commerce Stream with an excellent
team of teachers in different subjects.
The present book ‘‘Accountancy’’- Class-XII is meant for Higher Secondary

Commerce Students. This book has been written by a team of learned academicians
namely Dr. Ajoy Mohanty, Dr. Uma Chand Lal, Dr. Prafulla Kumar Parida and Dr. Ram
Chandra Jena and reviewed by Prof. (Dr.) Gunanidhi Sahu. I would like to record my
sincere gratitude to all them for accomplishing this venture in time. The main purpose of
developing this text book is to provide a thorough exposure to the students of Commerce
in this subject. The book prepared according to the new syllabus prescribed by the CHSE,
Odisha shall cater to the needs of young students.
I believe that the students and teachers of commerce stream shall welcome and
appreciate the book. Constructive suggestions for further improvement of the book will be
highly appreciated.
Sri Umakanta Tripathy

Director
The Odisha State Bureau of Textbook
Preparation and Production,
Pustak Bhavan, Bhubaneswar
(iii)
PREFACE
The book on 'Accountancy' has been written for the Twelfth (XII) class students of
Commerce Stream. It has been written according to the syllabus prescribed by the Council
of Higher Secondary Education (CHSE), Odisha. Keeping in view the standard and
requirements of the students, the book has been written in a very simple, lucid and
comprehensive manner. We do not claim that the book is an original one. We have taken
the help of publications by many renewed authors. We express our gratitude to all of
them.
Sufficient care has been taken to see that the students can be well-acquainted with
the types of questions usually set by the CHSE, Odisha. Accordingly, large number of
typical examples and illustrations have been given in each chapter. At the end of each
chapter, varied type of questions such as : on multiple choice, one word, rectification of
errors, filling up the blanks, one sentence, 30 words, 50 words, long questions and practical
problems, have been incorporated. We are confident that the students will find this book
quite useful. We have taken all possible care to see that the book is complete in every
respect. Despite our best possible efforts, errors might have crept in inadvertently and
there might have been some deficiencies as well. We shall highly appreciate the
suggestions from the different quarters for imporvement of the book in the next edition.
We are extremely thankful to the authorities of the CHSE, Odisha and the Odisha
State Bureau of Text Book Preparation and Production, Bhubaneswar for entrusting this
work to us. We also express our deep sense of gratitude to Prof. (Dr.) Gunanidhi Sahu,
former Director of Higher Education, Odisha, who has taken pains to go through the entire
manuscript throroughly and suggested imporvements to make the publication complete
and perfect as far as possible. We express our sincere thanks to staff members of the
Bureau, who have taken keen interest for bringing out the publication. We also express
our thanks to the Jagannath Process Pvt.Ltd. but for whose efforts, the book could not
have seen the light of the day.
Board of Writers
(iv)
SYLLABUS
Objectives :
- To enable the students to understand and analyze the financial Statements of Profit &
Non-Profit Making Organizations.
- To help the students in understanding the concepts and applications of depreciation.
- To develop and understanding about Accounting from Incomplete Records and its
application.
- To help the students in learning the process of accounting for reconstitution and
dissolution of partnership firms, and
- To help students understand the concept of accounting for companies specially about
issue of shares and debentures :
Course Inputs :
Unit-I Financial Statements of Sole Trade and Not for Profit Organizations :
Sole Trade form of Organizations
Meaning, objectives and importance of preparing Trading, Profit and Loss Account
and Balance sheet. Preparation of Trading, Profit and Loss Account and Balance Sheet of
sole trader without and with adjustments relating to closing stock, outstanding expenses,
prepaid expenses, accrued income, income received in advance, depreciation and bad
debts, provision for doubtful debts, provision for discount on debtor/creditor, manager's
commission, goods distributed as free samples and goods taken by the owner for personal
use, abnormal loss, interest on capital and drawings.
Not for profit organizations
Meaning, objectives, necessity treatment of some important items such as legacy,
donations, entrance fees, life membership fees, sale of assets, sale of old news paper,
subscriptions, endowment fund, honorarium, expenses relating to a specific fund. Receipts
and Payments Accounts-meaning, features, differences between Receipts and Payments
Account and Cash Book. Income and Expenditure Accounts-meaning, features, difference
between Income and Expenditure Account and Profit and Loss Account Preparation of
Income and Expenditure Account and Closing Balance Sheet.
Unit-II Accounting for Depreciation and from Incomplete Records (Single Entry
System)
Depreciation :
Meaning, need, causes, objectives and characteristics of depreciation. Methods
of Charging Depreciation- Simple depreciation, method and provision for depreciation
method. Method of calculating depreciation Straight Line and Written down Value method.
(v)
Accounting from Incomplete Records (Single Entry System)
Meaning, charateristics and limitations of single entry system. Difference between
single entry and double entry system. Difference between balance sheet and statement
of affairs. Ascertainment of profit and loss by the statement of affairs method only.
Unit-III Accounting for Partnership Firm :
Meaning, Features, Partnership Deed and Provisions of Partnership Act, 1932 in the
absence of partnership deed. Fixed vs Fluctuating Capital Accounts, preparation of Profit
and Loss Appropriation A/c.
Goodwill- Meaning, nature and Factors affecting Goodwill. Methods of Valuation of
Goodwill (Average profit, super profit method and capitalization method).
Reconstitution of partnership firm - Meaning, Circumstances Leading to
Reconstitution : Change in Profit Sharing Ratio, Sacrificing Ratio, Gaining Ratio. Accounting
for revaluation of assets and liabilities and distribution of reserves and accmulated profits
and loss.
Admission of a Partner - Simple Problems without Adjustment of Capital
Unit-IV Accounting for Companies :
Accounting for Share Capital :
Shares and share capital : Nature and types as per Companies Act 2013.
Issue of Shares at Par, Premium and Discount, Calls in Advance, Calls in Arrear,
over subscription and under subscription of shares. Accounting for Forfeiture of shares
and re-issue of shares. Disclosure of share capital in companies balance sheet (Vertical
Format).
Accounting for Debenture :
Issue of debentures at par, at premium and at discount and issue of debentures for
consideration other than cash.
Unit-V Project Work with Viva :
Suggested Areas for Project Work :
- Collections of source documents preparation of Vouchers, recording of transactions
will the help of vouchers.
- Preparation of Bank Reconciliation Statement with the given cash book and the
pass book with ten to fifteen transactions.
- Comprehensive project starting with journal entries regarding any sole proprietorship
business, posting them to the ledger and preparation of Trial balance. The students
will then prepare Trading and Profit and Loss Account and Balance Sheet on the
basis of the prepared trial balance Expenses, incomes and profit (loss), assets and
liabilities are to be depicted using pie chart / bar diagram.
-o-
(vi)
CONTENTS
CHAPTER TITLE PAGE

1 FINANCIAL STATEMENTS OF SOLE TRADING ORGANISATIONS 1-122
2 FINANCIAL STATEMENTS OF ‘NOT FOR PROFIT’ ORGANISATIONS 123-195
3 DEPRECIATION 196-241
4 ACCOUNTING FROM INCOMPLETE RECORDS 242-281
5 ACCOUNTING FOR PARTNERSHIP FIRM 282-328
6 ACCOUNTING FOR PARTNERSHIP FIRM (GOOD WILL) 329-345
7 RECONSTITUTION OF PARTNERSHIP FIRM 346-378
8 ADMISSION OF A PARTNER 379-418
9 ACCOUNTING FOR COMPANIES : ACCOUNTING FOR SHARE CAPITAL 419-578
10 ACCOUNTING FOR COMPANIES : ACCOUNTING FOR DEBENTURES 579-632

(vii)
(viii)
CHAPTER-1
FINANCIAL STATEMENTS OF
SOLE TRADING ORGANISATIONS
STRUCTURE
1.0 Meaning of Final Accounts
1.1 Objectives of Financial Statements
1.2 Importance of Financial Statements
1.3 Distinction Between Capital and Revenue
1.3.1 Capital Expenditure
1.3.2 Revenue Expenditure
1.3.3 Deferred Revenue Expenditure
1.3.4 Distinction between Capital and Revenue Expenditure
1.3.5 Capital Receipts and Revenue Receipts
1.3.6 Capital Profits and Revenue Profits
1.3.7 Capital Loss and Revenue Loss
1.4 Preparation of Financial Statements without adjustment
1.4.1 Preparation of Trading Account
1.4.2 Preparation of Profit and Loss Account
1.4.3 Preparation of Balance Sheet
1.5 Preparation of Financial Statements with Adjustments
1.6 Questions
Accountancy
2
Chapter-1
Financial Statements of Sole Trading Organisations
1.0 MEANING OF FINAL ACCOUNTS
The accounts and/or statements prepared at the end of the year (accounting
period) are called final accounts. The final accounts are prepared from the Trial balance.
Trial balance is the last step of Book-keeping and preparation of final accounts is the
first step of Accounting. Final accounts are also interchangeably called the financial
statements. Final accounts are usually prepared at the end of the accounting period to
convey, the stakeholders/users, the financial health and operating efficiency of the
business.
Finacial statements are the summary of the accounts showing the result of
operations and financial position of a business enterprise. These are the reports of
incomes and expenditures of a business at the end of the year.
Traditional concept of financial statements include the Income Statement
(Trading account and Profit and Loss account) and the Balance Sheet/Position
Statement. The modern concept of financial statements includes Cash Flow Statement
and Value Added Statement in addition to the above two traditional statements. Our
study, in this chapter, is limited to only the traditional concept of financial statements,
i.e., the Trading and Profit and Loss Account and Balance Sheet.
1.1. OBJECTIVES OF FINANCIAL STATEMENTS
The basic objectives of preparing financial statements are :
(a) to present a true and fair view of the operational efficiency of the business in
financial terms;
(b) to present a true and fair view of the financial position of the business. Besides
the above, the other objectives are:
(i) to help in the comparison of financial performance of the current year with that
of the previous years,
3
(ii) to help in ascertaing the financial ratios for controlling the expenses and
maximising/optimising revenues,
(iii) to monitor the use of debts and capital in acquisition of assets, etc.
1.2 IMPORTANCE OF FINANCIAL STATEMENTS
Financial statements are regarded as the financial barometers of a business
enterprise. It measures the financial health, efficiency, soundness of the business.
The various accounts are fed into the final accounts at the end of the year to make the
business operations meaningful. The objective of a business is to earn profit besides
the other social and cultural objectives. The importance of final accounts is to ascertain
the profit, profitability and financial soundness of the business. The business
enterprises are bound to prepare the final accounts annually, otherwise they will remain
in dark. Final accounts are the summary of all accounts at the end of the accounting
period. These are the means to communicate information to various stakeholders in
the business so that they can take proper decisions. The stakeholders have diverse
requirements of financial information from the business. They get better insight into
the financial strengths and weaknesses of a business. The financial statements are
most important for the informational needs of investors and providers of risk capital.
1.3 DISTINCTION BETWEEN CAPITAL AND REVENUE
It is essential to distinguish between capital and revenue items in order to prepare
the final accounts. The revenue items form part of the Trading and Profit and Loss
Account; while the capital items go to the Balance Sheet. The Going Concern Concept
and Accounting Period Concept prompt the accountant to draw the distinction between
capital receipts and revenue receipts; and payments as capital expenditure, revenue
expenditure and deferred revenue expenditure. A failure or negligence to distinguish
between the two items will falsify the entire results of accounting.
1.3.1 Capital Expenditure
It is an expenditure incurred to acquire fixed assets. Capital expenditure increases
the earning capacity of business. It is necessary for the operations of any business. It
Accountancy
4
normally yields benefits for more than one accounting period. A particular capital
expenditure is debited to the specific asset account. For example, acquisition of land
and building, plant and machinery, furniture and fixtures are all capital expenditures.
Assets acquired through capital expenditures are not meant for resale and are supposed
to remain in the business for a long period (more than one year) with the help of
which the business is carried on. These are subject to depreciation. Depreciation is
charged to Profit and Loss Account every year and is shown as a deduction from the
value of the concerned asset (Capital expenditure) in the Balance Sheet. An expenditure
can be treated as capital expenditure in the following situations:
1. When an expenditure results in the acquisition of an asset, for example,
purchasing land and building, plant and machinery, furniture and fixtures,
etc.
2. When an expenditure is incurred whose benefits will last for a long time,
for example, preliminary expenses, cost of research and development, cost
of acquisition of patents, trade mark, development expenditure on
plantations, etc.
3. When an expenditure is incurred to put a newly purchased asset in the
working condition, for example, cost of transportation, installation,
registration, etc.
4. When an expenditure results in creation of extra capacity, for example,
extension or addition of new rooms to an existing building.
5. When an expenditure reduces the cost of production, for example,
replacement of petrol engine by a diesel engine of a passenger car, etc.
1.3.2 Revenue Expenditure
This expenditure is incurred for the the day-to-day conduct of the business.
If helps in maintaining the earning capacityof the business. Revenue expenditure is
recurring in nature and gives benefit to the business for a maximum period of one
year. For example, manufacturing expenses, office and administrative expenses, selling
5
and distribution expenses- all these are charged/debited to Trading and Profit and
Loss Account of the year during which these are incurred. An expenditure is treated
as revenue expenditure in the following situations:
1. Expenditure incurred to purchase raw materials, or finished products, for
example, carriage inward, octroi duty, customs duty, etc.
2. Expenditure whose benefit will expire during the same accounting year for
example, salary, rent, postage, printing and stationery, etc.
3. Expenditure for maintaing the capacity of a fixed asset, for example, repairs and
maintenance, renewals, etc.
4. Expenditure incurred to defend one's right to an asset or product in the interest
of the business, for example, renewal of licence.
5. All types of losses, i.e., whether stock-in-trade or any current or fixed asset, for
example, loss of stock by theft or fire, loss of any asset by accident, etc.
1.3.3 Deferred Revenue Expenditure
Sometimes it is difficult to correctly demarcate between capital expenditure
and revenue expenditure. Deferred Revenue Expenditure is one which is normally
treated as revenue expenditure but it gives benefits to the business for more than one
accounting period. For example, a heavy expenditure on advertising for launching a
new product or opening a new brand, preliminary expenses, etc. are likely to give
benefit for more than one accounting period. The impact of advertisement on
consumers will remain for more than one accounting year. Deferred revenue
expenditure is of non-recurring and special in nature and a heavy amount is spent on
it. So, it may be spread over a number of years during which the benefit is received by
the business. A proportionate amount of expenditure is charged to the Profit and Loss
Account every year. The balance is carried forward to the subsequent years as deferred
revenue expenditure and is shown on the asset side of the Balance Sheet, till it is fully
written off.
Accountancy
6
1.3.4 Distinction between Capital and Revenue Expenditure
The following are the distinctions between capital and revenue
expenditure :
(a) Capital expenditure improves the earning capacity of the business but revenue
expenditure is incurred to maintain the earning capacity.
(b) Capital expenditure is incurred to acquire fixed assets for operation of business
but revenue expenditure is incurred for day-to-day conduct of the business.
(c) Capital expenditure is non-recurring in nature but revenue expenditure is
recurring in nature.
(d) Capital expenditure gives benefit for more than one accounting year but revenue
expenditure normally benefits one accounting year.
(e) Capital expenditure represents unexpired cost and its benefits are taken to the
future. But revenue expenditure represents expired cost and its benefits are
exhausted within the year of expenditure.
(f) Capital expenditure is subject to depreciation while revenue expendure is subject
to adjustment for outstanding and prepaid amounts.
(g) Capital expenditure is shown on the asset side of Balance Sheet but revenue
expenditure is closed by transfer to the debit side of Trading or Profit and Loss
Account.
1.3.5 Capital Receipts and Revenue Receipts.
Receipts of a business enterprise comprise of capital receipts and revenue
receipts. When the receipts of a business imply an obligation to return the money,
these are capital receipts. For example, capital invested in the business, long-term
loans and sale proceeds of fixed assets are capital receipts. But when a receipt does
not imply an obligation to return the money or is not in the form of a sale of fixed
asset, it is treated as revenue receipts. For example, money received from sale of
goods/merchandises, interest, commission, discount, interest on drawings, income
from other sources are revenue receipts. Capital receipts are reflected in the Balance
Sheet whereas the revenue receipts are transferred to Profit and Loss account.
7
1.3.6 Capital Profits and Revenue Profits

The profits earned by selling or revalution of old fixed assets, profits earned at
the time of procuring share capital at premium on issue of shares or debentures,
profit made on the reissue of forfeited shares or profits made prior to the
incorporation of a company are called capital profits. Capital profits are usually
shown as capital reserve on the liability side of Balance Sheet but in practice,
capital profit like profit on sale of fixed assets is credited to Profit and Loss
Account. For example, a machinery purchased for `1,00,000 is sold at `85,000
after two years of use at a depreciation rate of 10% on straight line method, the
excess of `5,000 over the book value of `80,000 is capital profit. Capital profits
are non-recurring in nature.
The profits earned during the normal course of day to day business is called
revenue profits. The net result of the Trading Account and Profit and Loss Account
is revenue profit. It is the profit earned by selling goods and merchandises of
the business. In other words, the excess of net sales over the cost of goods sold
plus indirect expenses is called revenue profit. Both gross profit and net profit
come under the purview of revenue profit. Revenue profits are recurring in nature.
1.3.7 Capital Loss and Revenue Loss
The losses incurred by selling old fixed assets, revaluation of fixed assets, loss/
discount on issue of share or debentures, premium on redemption of preference
shares or debentures are called capital losses. Capital losses are non recurring
in nature i.e. do not occur in the ordinary course of the business. Capital losses
may be treated as deferred revenue expenditure or fictitious assets which may
be written off during a few years.
Revenue losses occur in the normal course of the business. These losses are
incidental to the day to day business operations. Revenue losses are the excess
of revenue expenditure over the revenue incomes. Loss of stock by fire,
pilferage, bad debts, misappropriation of goods and embezzlement of cash are
treated as revenue losses.
Accountancy
8
Illustration 1
1. State with reasons whether the following are Capital or Revenue items :
(a) Freight and insurance on new machinery.
(b) Wages paid for erection of a new machinery.
(c) `2,000 paid on repairing a second hand machine purchased newly.
(d) `8,000 paid as compensation to employees who are retrenched.
(e) `5,000 spent on repainting the factory.
(f) Discount allowed to debtors `200.
(g) Discount allowed by creditors `300.
(h) Legal expenses paid `3,000 to purchase a building.
(i) Carriage paid on goods purchased.
(j) A building costing `1,00,000 sold for `1,20,000.
(k) Plant costing `60,000 is sold for `58,000.
(l) Dividend received on shares `5,000.
(m) Raised a Loan of `5,00,000 from IDBI.
(n) Additional capital invested in the business `1,00,000.
(o) Misappropriation of cash by cashier `7,000.
(p) Bad debts written off.
(q) Bad debts previously written off now recovered.
Solution:
(a) Capital expenditure as it is incurred to make the machinery ready for use.
(b) Capital expenditure since it makes the machinery fit for use.
(c) Capital expenditure as it makes the second hand machinery ready for use.
(d) Revenue expenditure since it is neither giving extra benefit nor increasing
the value of any asset.
9
(e) Revenue expenditure as it is incurred to maintain the asset (factory) in
working order.
(f) Revenue expenditure as it is incurred in the ordinary course of the business.
(g) Revenue receipts since it is earned in the ordinary course of the business.
(h) Capital expenditure as it is spent to acquire a fixed asset which is a capital
expenditure.
(i) Revenue expenditure because it is incurred in connection with the purchase
of goods which is revenue expenditure.
(j) Building sold at `1,20,000 is a capital receipt. Profit on sale of building
`20,000 is a capital profit.
(k) Plant sold at `58,000 is a capital receipt. Loss on sale of plant `2,000 is
capital loss.
(l) Revenue receipt since it is received regularly on investment in shares.
(m) Capital receipt as the loan is raised from the bank which increases the liability
of the business.
(n) Capital receipt as it increases the liability of the business to the proprietor.
(o) Revenue loss because it is incidental to the business.
(p) Revenue loss as it is incidental to the business.
(q) Revenue receipt since bad debts written off was treated as a revenue loss.
1.4 PREPARATION OF FINANCIAL STATEMENTS WITHOUT
ADJUSTMENT
Financial statements are the summaries of information about the operating result
and financial position of a business enterprise. Traditionally the term 'Financial
Statements' is used to denote mainly two statements :
(i) Income Statement (Trading and Profit and Loss Account) which shows the
financial performance of an enterprise during an accounting period;
Accountancy
10
(ii) Position Statement (Balance Sheet) which shows the financial position of the
business at a particular point of time.
Now a days as per the International Financial Reporting Standard (IFRS) two
more financial statements are to be prepared by the business enterprises, i.e.,
(a) Cash Flow Statement and (b) Value Added Statement.
The traditional financial statements are to be prepared on the basis of trial balance
and additional information, if any. Financial statements are the means of
conveying to management, present and potential investors, lenders, short term
creditors, employees, customers, government and their various agencies, a
concise picture of earning capacity and financial soundness of the business.
1.4.1 Preparation Trading Account (without adjustment)
Trading account is one of the financial statements prepared on the basis of trial
balance to show the results of buying and selling of goods and services during
an accounting period.
It is prepared to ascertain the Gross Profit/Gross Loss by matching the net
sales with the cost of goods sold or services rendered, as the case may be.
Gross Profit = Net Sales – Cost of goods sold
Net Sales = Gross Sales – Sales Return.
Cost of Goods Sold = Net Purchases + Stock at the begining + Direct expenses
on purchases – Stock at the end.
A Trading Account is prepared by passing of entries to transfer the balances of
revenues and expenses accounts to it. These transferring entries so made to
close the concerned nominal accounts are called "Closing Entries". A closing
entry may be either simple or compound closing entry. A simple closing entry
only affects two accounts, i.e., one account is debited and another account is
credited with an equal amount. A compound closing entry involves several
accounts which are either debited or credited to Trading account.
11
Relevant Items in Trading Account

The relevant items of revenue and expense appearing in the trading account are
explained below:
Items on the debit side :
(i) Opening Stock - This is the amount of goods in hand at the begining of the
accounting period. It has been carried forward from the closing stock of the
previous year. It remains unchanged during the year and appears on the debit
side of the trial balance. It appears on the debit side because it forms a part of
the cost of goods sold during the current year. There is no opening stock for a
new business. Opening stock consists of raw materials, work-in process and
finished goods in case of a manufacturing concern while it is only one item of
goods traded by the business, in case of a trading concern.
(ii) Net Purchase- It includes both cash and credit purchases of goods meant for
resale or further processing or production, as the case may be, less purchase
returns, if any.
(iii) Direct expenses- These expenses are incurred in order to make goods ready
and fit for sale. The various direct expenses are :
(a) Wages (or wages and salaries) : When wages have been incurred on
manufacturing the goods or making the goods better saleable, they become direct
expenses and are debited to Trading account.
(b) Carriage/Cartage/Freight- inward : These expenses are incurred to carry the
goods from the godown of the supplier to the godwon of the purchaser. If such
expenes are incurred in carrying the fixed assets from supplier to purchaser,
carriage/cartage should be capitalised and debited to relevant asset account.
(c) Import duty and Dockdues : When goods are imported from abroad import duty,
customs duty and dock charges, etc. have to be paid. These direct expenses are
debited to Trading Account.
(d) Octroi : Sometimes goods are purchased outside the municipal area (local self-
government area) which are to be sold within the area of municipality. Octroi
Accountancy
12
duty is to be paid on such goods by the purchaser at the octroi gate. This expense
is shown on the debit side of the Trading Account.
(e) Motive Power, Coal, Gas and Water : These direct expenses are shown on the
debit side of the Trading Account if Manufacturing Account is not prepared.
otherwise these expenses are normally debited to the Manufacturing Account.
(f) Manufacturing expenses : Expenses incurred in manufacturing the goods in the
factory such as factory rent, insurance, depreciation, lighting, are debited to
Trading Account if no Manufacturing Account is prepared.
(g) Consumable stores : Expenses incurred to keep the machineries in ready working
conditions are called consumable stores. It includes grease, engine oil, soap,
rags, etc., are debited to Trading Account if Manufacturing Account is not
prepared.
(h) Royalty : Royalty is the expense incurred for using patent right, copyright or
ownership right of land to their owners. If royalty is paid on the basis of
production, it is direct expense and debited to Trading Account when
Manufacturing Account is not prepared. When royalty is paid on the basis of
sales, it is debited to Profit and Loss Account, being an indirect expense.
(i) Packaging : Ordinary or primary packaging is one which forms part of the
manufacturing expenses. It is a direct expense and debited to Trading Account,
when Manufacturing Account is not prepared.
Items on the credit side :
(i) Sales : Sales mean the sale of goods purchased for resale. Sales account on the
credit side of Trial Balance shows gross total sales made during the year. It
includes both cash and credit sales. Goods returned by customers are called
sales return or return inwards and are shown as a deduction from total sales.
Gross total sales less return inwards is the net sales.
Sale of fixed assets, goods sold on consignment or on hire-purchase or on sale-
or-return basis, if included in sales, are to excluded and shown separately.
(ii) Closing stock : It is the unsold goods at the end of the current accounting
period. Closing stock is shown usually under adjustment outside the trial balance,
13
it will be credited to the Trading Account and shown on the asset side of Balance
Sheet. But when purchases are adjusted (adjusted purchases) through opening
and closing stock, it will be shown on the debit column of trial balance. When
closing stock is given outside the trial balance, it will be credited to the Trading
Account and shown on the asset side of Balance Sheet. But when it is under the
debit column of trial balance, it will appear as an asset on Balance Sheet only.
Value of the closing stock is always shown at cost or market price which ever is
less.
Closing Entries
Trading Account is prepared by transferring the balances of opening stock,
purchases, sales, returns, direct expenses and closing stock to it through a journal
entry. The journal entry made to transfer the balances of such accounts to Trading
Account is called 'closing entry' The closing entry closes the balances of such
accounts in the particular accounting year. The closing entries passed to give
effect to such transfers are cited below:
(a) For transferring opening stock, purchases, sales return, wages, carriage inwards
and all other direct expenses to Trading Account :
Trading Account Dr.
To Opening Stock A/c
To Purchases A/c
To Sales Return A/c
To Wages A/c
To Cariage Inward A/c
To All other direct expenses A/c
(b) For transferring sales, purchases returns, closing stock to Trading Account :
Sales A/c Dr.
Purchases Returns A/c Dr.
Closing Stock A/c Dr.
To Trading A/c
Accountancy
14
Sales Returns and Purchases returns A/c are respectively credited and debited
in the closing entries in order to close these accounts in the ledger. But in actual
practice, sales return is shown as deduction from sales on the credit side of the
Trading A/c to arrive at the net sales. Similarly purchases return is shown as
deduction from purchases in order to arrive at the net purchases.
(i) For transferring Gross Profit :
Trading Account Dr.
To Profit and Loss Account
(ii) For tranferring gross loss :
Profit and Loss Account Dr.
To Trading Account
Typical Proforma of a Trading Account.
Trading Account of M/s XYZ
Dr. for the year ending...... Cr.
Particulars ` Particulars `
To Opening Stock XXX By Sales :
To Purchases : Cash Sales XXX
Cash Purchases XXX Credit Sales XXX
Credit Purchases XXX Total Sales XXX
Total Purchases XXX Less :
Less : Sales Returns XXX
Purchase Retruns XXX XXX
Abnormal Loss XXX By Closing Stock XXX
Goods for Personal use XXX By Gross Loss c/d to
Goods as free sample XXX Profit & Loss Account XXX
(-) XXX XXX
To Wages XXX
To Carriage Inward XXX
To Other Direct expenses XXX
To Gross Profit c/d to P&L A/c XXX
XXX XXX
15
Illustration 2
From the following balances, prepare the Trading Account for the year ending
on 31.12.2016: Opening stock `80,000, cash sales `2,00,000, credit sales
`5,00,000, returns outward `6,000, wages and salaries `8,000, carriage inwards
`3,000 cartage inward `1,000, cash purchases `1,00,000 credit purchases
`2,50,000, returns inward `5,000, closing stock `86,000 whose market value
`82,000.
Solution :
TRADING ACCOUNT
for the year ending 31st December, 2016
Dr. Particulars ` Particulars ` Cr.
To Opening Stock 80,000 By Sales : `
To Purchases : (`) Cash Sales 2,00,000
Cash Purchases 1,00,000 Credit Sales 5,00,000
Credit Purchase 2,50,000 Total Sales 7,00,000
Total Purchase 3,50,000 Less
Less Returns Outward 6,000 3,44,000 Returns Inward 5,000 6,95,000
To wages and Salaries 8,000 By Closing Stock 82,000
To Cariage Inwards 3,000
To Cartage Inward 1,000
To Gross profit transferred to P&L A/c 3,41,000
7,77,000 7,77,000
N.B.:Here gross profit will be transferred to the credit side of Profit and Loss
Account, closing stock is to be shown on the asset side of the Balance Sheet.
Illustration 3
From the following information, prepare the Trading Account for the year ending
30th June 2016 :
Adjusted purchases `10,26,000, Sales `13,95,000, closing stock `87,000,
freight and cartage inwards `7,000, wages `3,000, Freight outwards `4,000,
octroi `1,000, clearing charges `8,000, Coal, gas and water `11,000, motive
power `10,000.
Accountancy
16
Solution:
Trading Account
for the year ending 30th June 2016
Dr. Cr.
To Adjusted Purchase 10,26,000 By Sales 13,95,000
To Freight & Cartage Inward 7,000
To Wages 3,000
To Clearing charges 8,000
To Coal, gas and water 11,000
To Motive power 10,000
To Octroi 1,000
To Gross Profit transferred 3,29,000
to P & L A/c
13,95,000 13,95,000
Note :
(i) Adjusted Purchases = Net purchases + Opening Stock – Closing stock
(ii) Opening and closing stock are not shown in the Trading Account separetely as
opening stock has been already added to purchases and closing stock has been
deducted from purchases for computing adjusted purchases.
(iii) Freight outwards are indirect expenses, hence excluded from being debited to
Trading Account.
Illustration 4
From the following particulars, you are required to prepare Trading Account
for the year ending 30th September 2016:
Cost of goods sold `7,70,000
Sales `11,28,000
Closing stock `75,000
17
Solution :
Trading Account
for the year ending 30th September 2016
Dr. Cr.
To Cost Goods sold 7,70,000 By Sales 11,28,000
To Gross Profit transferred to
Profit and Loss Account 3,58,000
11,28,000 11,28,000
1.4.2 Preparation of Profit and Loss Account. (Without adjustment)

Profit and Loss Account is one of the income statements showing the financial
performance of a business during an accounting period. The aim of preparing
Profit and Loss Account is to ascertain the net profit/loss of a business for the
year. There are certain items of revenues, expenses and losses of the business
to be taken into consideration for preparing profit and loss account. All revenues,
both operating and non-operating and all indirect expenses are taken for
calculating net profit/loss. Indirect expenses are those expenses which relate to
the whole business and are incurred for the purpose of making the goods available
to the customers. Broadly, these expenses may be management expenses, legal
expenses, financial expenses, selling and distribution expenses, extraordinary
expenses, losses, etc. Profit and Loss Account is prepared by taking all the
(indirect expenses and losses) nominal accounts from the trial balance.
Relevant items in Profit and Loss Account
(i) Gross profit/Loss : Gross profit or Gross Loss is the first item of the Profit
and Loss Account which is brought down from Trading Account.
Accountancy
18
(ii) Salaries : Salaries paid to employees of office, sales and advertising department
is an indirect expense and debited to Profit and Loss Account. When net salary
is paid after deduction of income tax, employees contribution to provident fund,
the gross salary is charged to Profit and Loss Account. Even the employers’
contribution to provident fund is added to salary of the employees.
Both employees’ own contribution and contribution of employer to provident
fund will be payable to the employees at the time of their retirement. So, these
two items of provident fund contribution are to be shown on the liability side of
Balance Sheet.
(iii) 'Salaries and wages' / ‘wages and salaries’ : As salary is an indirect expense and
wages are included in salary account, such wages are treated as indirect expenses.
Hence, ‘salaries and wages’ are debited to Profit and Loss Account and 'wages
and salaries' are direct expenses and debited to Trading Account.
(iv) Interest : Interest may be received or paid. Interest received being income is
credited to Profit and Loss Account and interest paid being an expense is debited
to Profit and Loss Account.
(v) Commission : Commission paid to effect sales is an indirect expense and debited
to Profit and Loss Account. Commission received from agency services are
income of the business and credited to Profit and Loss Account. When
commission is paid on purchase of goods being a direct expense is debited to
Trading Account.
(vi) Discount : Discount may be either credit or debit. Discount allowed is debit
and discount received is credit. Discount allowed on cash sales or on collections
from sundry debtors being an indirect expense is debited to Profit and Loss
Account. Discount received from sundry creditors at time of early payment to
them is credited to Profit and Loss Account.
(vii) Apprenticeship premium : It is the fee received from trainees on various trades
by the business for providing them skill enhancement and practical oriented
training facilities. This, being an income of the business, is credited to Profit
and Loss Account.
19
(viii) Printing and stationery: Printing and stationery expenses include ink, pen,
pencils, files, registers, bills, vouchers, invoices, letter pads, threads, gums,
carbon papers, etc. and are debited to Profit and Loss Account.
(ix) Insurance premium : Insurance premium paid on the assets of the office, godown
and warehouse, showroom are debited to Profit and Loss Account. But when
insurance premium is paid on the assets of factory and production department,
it is debited to Trading Account, being a direct expense.
(x) Sales Tax/Goods and Services Tax : Sales tax/Goods and services tax are paid
on goods and services sold. It may appear in the trial balance either with a debit
balance or with a credit balance. When it shows a debit balance, it is debited to
Profit and Loss account. But when it shows a credit balance, it means that Sales
Tax/Goods and Services Tax is not paid and remains outstanding. It is to be shown
as a current liability in the Balance Sheet.
(xi) Income Tax : Income tax is paid to the Central Government on the profit and
gains of a business. It is a personal expense of the proprietor and not debited to
Profit and Loss Account. If it appears in the trial balance, it is to be deducted
from capital as a drawing of the proprietor in the Balance Sheet.
(xii) Depreciation : Depreciation of fixed asset is charged to Profit and Loss account
as an indirect notional expense.
(xiii) Advertisements : Advertisement charges are debited to Profit and Loss Account.
When a lump sum amount is paid to an advertising agency for providing benefits
for more than one year, a proportionate amount is charged to Profit and Loss
Account for the current accounting period and the balance is to be transferred
to Balance Sheet as an asset under the head 'Deferrded Revenue Expenditure'.
(xiv) Samples : Free samples are distributed by the business for the purpose of
advertisement, hence, debited to Profit and Loss Account.
(xv) Stable Expense : Expenses incurred on rearing horses in the stable are treated
as indirect expenses, hence debited to Profit and Loss Account.
Accountancy
20
(xvi) Abnormal losses : Loss on sale of fixed assets, misappropriation of cash, goods
destroyed by fire not covered under insurance are treated as abnormal losses,
hence, debited to Profit and Loss Account.
(xviii)Rent, Rates and Taxes : Rent may be paid either for office or for factory or for
warehouse. Rates are the cess or taxes paid to the local authority. When rent,
rates and taxes are paid for the factory, those are debited to Trading Account.
But when such expenses are paid for the office or warehouse, these are to be
debited to Profit and Loss Account. Sometimes rent is received on subletting
of the building, which is an income of the business and credited to Profit and
Loss Account.
(xix) Bad debts : The debtors remain uncollected for a long period are to be treated
as bad as it is unrecoverable. Hence, it is an indirect expense and debited to
Profit and Loss Account.
(xx) Life insurance premium :Life insurance premium is a personal expense of the
proprietor. If it is paid out of the business cash, it is not to be debited to Profit
and Loss Account. It is to be debited to drawings account and deducted from
capital in the Balance Sheet.
(xxi) Private expenses : Any private expenses of the proprietor, if paid out of business
cash, is debited to drawings account and deducted from capital in the Balance
Sheet.
(xxii)Interest on capital and on drawings : Interest on capital being an expense for the
business is charged at a normal rate and debited to profit and loss account. Interest
on drawing is charged by the firm to the proprietor. Interest on drawing is a gain
to the business and credited to Profit and Loss Account. Interest on capital is
added to capital in the Balance Sheet and interest on drawings is added to drawings
and shown as a deduction from capital in the Balance Sheet.
Closing Entries
The entries required to bring down the net profit/loss by transferring the indirect
expenses and incomes to Profit and Loss Account, are called closing entries.
21
The purpose of passing closing entry is to close the indirect and direct expenses
(nominal accounts) at the end of the accounting period. For a sole trade
organisation, Profit and Loss Account is closed by transferring the net profit/
loss to capital account. The closing entries for indirect expenses/incomes are :
(a) To close the accounts of indirect expenses and losses-
To various Items of Expenses and Losses Account (individually)
(b) To close the accounts of indirect incomes and gains (other than those shown on
the credit side of Trading account)-
Various Items of Gains and Incomes Account. (Individually) Dr.
(c) To Close the Profit and Loss Account -
(i) For net profit
To Capital Account
(ii) For net Loss
Capital Account Dr.
To Profit and Loss Account.
Accountancy
22
Typical Proforma of Profit and Loss Account
Profit And Loss Account of (M/s ABC Traders)
for the year ending on (31st March 2017)....
Dr. Cr.
Particulars Amount Particulars Amount
To Gross Loss b/d XXX By Gross Profit b/d XXX
To Salaries and Wages XXX By Interest received XXX
To Rent, Rate and Taxes XXX By Commission received XXX
To Fire Insurance Premium XXX By Rent from subletting XXX
To Repairs and Maintenance XXX By Discount received XXX
To Depreciation XXX By Apprenticeship Premium XXX
To Audit Fees XXX By Dividend received
To Bank Charges XXX By Recovery of bad debts XXX
To Legal Charges XXX By Sale of old news papers
To Cariage, freight outward XXX By Profit on sale of fixed assets XXX
To Commission XXX By Interest on drawings XXX
To Discount XXX By Profit on sale of short-term
To Trade Expenses XXX marketable shares XXX
To Advertisements XXX By Sundry receipts XXX
To Packaging Expenses (secondary) XXX By Net loss transferred
To Bad debts XXX
to Capital Account XXX
To Printings and Stationeries XXX
To Postage and telephone XXX
To Bonus to Staff XXX
To Office heating, cooling and lighting XXX
To Rent of showroom XXX
To Free samples XXX
To Interest on Loan XXX
To Charity, Donations XXX
To Loss on sale of fixed assets XXX
To Loss of goods by fire/theft XXX
To Employees State Insurance (ESI) XXX
To Employer's Contribution
to Provident fund XXX
To Loss by pilferage XXX
To Net profit transfered
to Capital A/c XXX
XXX XXX
23
Illustration-4
From the following particulars, prepare Profit and Loss Account
for the year ending 31st March 2017 :
(`)
(`) Bank charges 2,000
Gross Profit 1,13,000 Legal charges 9,000
Discount allowed 2,000 Audit fees 11,000
Discount received 3,000 Entertainment expenses 7,000
Salaries and wages 7,000 Depreciation on office furniture 3,000
Wages and salaries 5,000 Depreciation on office machinery 10,000
Carriage inward 2,000 Loss by Embezzlement of cash 1,000
Carriage outward 4,000 Sundry incomes 2,000
Commission allowed 6,000 Apprenticeship premium 11,000
Commission received 3,000 Sales of old newspapers 1,000
Interest on loan paid 2,000 Fire insurance premium 8,000
Interest received 5,000
Rent paid 10,000
Rent received 8,000
General Expenses 1,000
Freight outward 9,000
Profit on Sale of fixed assets 7,000
Loss by Fire 6,000
Income from Investment 2,000
Miscellaneous expenses 1,000
Trade Expenses 3,000
Bad debts 7,000
Sales promotion expenses 5,000
Loss on sale of fixed assets 2,000
Brokerage allowed 6,000
Repairs and maintenance 1,000
Travelling expenses 3,000
Office heating, cooling and lighting 5,000
Postages and Telephone 3,000
Packaging expenses (Primary) 2,000
Packaging expenses (secondary) 6,000
Accountancy
24
Solution :
Profit and Loss Account
for the year ending 31st March 2017
Dr. Cr.
(`) (`
To Discount allowed 2,000 By Gross Profit b/d 1,13,000
To Salaries and wages 7,000 By Apprenticeship premium 11,000
To Carriage outward 4,000 By Income from Investments 2,000
To Commission Allowed 6,000 By Profit on sale of fixed assets 7,000
To Interest on Loan paid 2,000 By Interest received 5,000
To Rent Paid 10,000 By Sundry incomes 3,000
To General Expenses 1,000 By Sale of old newspapers 1,000
To Freight Outward 9,000 By Rent received 8,000
To Loss by fire 6,000 By Discount Received 3,000
To Loss by Embezzlement of cash 1,000 By Commission Received 3,000
To Loss on sale of fixed asset 2,000
To Miscellaneous expenses 1,000
To Trade Expenses 3,000
To Bad debts 7,000
To Sales Promotion Expenses 5,000
To Brokerage allowed 6,000
To Repairs and maintenance 1,000
To Travelling Expenses 3,000
To Office heating, cooling and lighting 5,000
To Postage and Telephone 3,000
To Packaging (secondary) 6,000
To Bank Charges 2,000
To Legal Charges 9,000
To Audit Fees 11,000
To Entertainment Expenses 7,000
To Depreciation :
Office Furniture 3,000
Office Machinery 10,000 13,000
To Fire Insurance 8,000
To Net Profit transferred
to Capital A/c 16,000
1,56,000 1,56,000
25
1.4.3 Preparation of Balance Sheet (Without adjustments)

Balance Sheet is prepared after the preparation of Profit and Loss Account. It is
a statement of financial position of the business on a particular date. It shows
assets, external liabilities, capital, reserves and surplus. Balance Sheet is also
called the "Position Statement" of a business. It is a statement of the balances of
ledger accounts which are carried forward to the next year. The nominal accounts
are closed by transferring to Trading Account and Profit and Loss Account. But
the personal accounts and real accounts including fictitious assets accounts,
not yet written off, are never closed on the last day of the accounting period.
These three types of accounts are shown as a statement called Balance Sheet. A
Balance Sheet is also called a statement showing the sources and applications
of funds.
Features of Balance Sheet : The features of a balance sheet are stated as under -
(a) Balance Sheet is a ‘statement’, not an ‘account’. It has two sides, i.e., assets and
liabilities. It has neither debit side nor credit side, as it is not an account.
(b) Balance Sheet is prepared and presented on a particular point of time or on a
particular date but not over a period of time.
(c) It is a summary of balances of those ledger accounts which have not been closed
by transfer to either Trading Account or Profit and Loss Account.
(d) Balance Sheet shows the assets and liabilities in a classified manner such as
current and fixed assets and liabilities on a particular point of time.
Purpose of Preparing a Balance Sheet :
The purpose of preparing a balance sheet is to -
(i) ascertain the nature and value of assets of a business on a particular date,
(ii) ascertain the nature and extent of liabilities of a business on the same date, and
(iii) ascertain the financial solvency of the business. If assets exceed the liabilities,
Accountancy
26
the enterprise is financially sound and solvent. It can pay off the external liabilities
on due date. On the other hand, if the liabilities exceed the assets, it is a situation
of insolvency and the business cannot pay off the external liabilities fully.
Relevant items shown in a Balance Sheet :
Following items are generally shown in a balance sheet :
(i) Assets side - The debit balances of personal, real and fictitious assets accounts
are not closed after the preparation of Trading Account and Profit and Loss,
Accounts. These are to be shown as assets on ‘Assets’ side of the Balance Sheet.
Classification of various assets shown in a Balance Sheet is given below:
Assets

 
Fixed Assets Current Assets

 
Tangible Assets : Intangible Assets: Fictitions Assets:
Land, Building, Plant, Goodwill, Preliminary
Machinery, Furniture, Copyright, Expenses,
Fixtures, Wasting assets Patent, Heavy Advertising
like mines, quarries etc. Trademark, Expenditure, Profit and
Licence etc. Loss Account
(Debit Balance), etc.

Cash, Bank, Debtors,
Stock, Bills receivable,
Prepaid Expenses,
Income
Receivables, etc.
Different kinds of assets are described below:
a) Fixed assets : The assets are acquired and held permanently with a view to
carrying on the business. Such assets are land, building, plant, machinery,
furniture, fixtures, mines, quarries, timber yards, etc. Fixed assets collectively
are also known as “Block”.
27
b) Current assets : Current assets are the assets which are likely to be converted
into cash within a maximum period of one accounting year. These assets are
held in the business in the form of cash or cash equivalents such as bank balances,
bills receivable, debtors, stock, etc. Current assets can be realised to discharge
the short term liabilities within one accounting period. Adequate current assets
prove the short-term solvency of an organisation.
c) Intangible fixed assets : The assets which can neither be seen nor touched without
having physical substance, are called intangible assets. The intangible assets
held for use in production or supply of goods and services of a business enterprise
for a long period of time, are called intangible fixed assets. Such assets are
goodwill, copyright, patent, trademark, licence, etc.
d) Wasting assets : The fixed assets whose value are gradually reduced or which
are physically depleted or exhausted in the course of regular use are called
wasting assets. These assets are finally exhausted completely. Mines, quarries,
oil wells, etc. come under this category of assets.
e) Investments : These are assets held by a business for earning income in the
form of dividends, interests, rentals, capital appreciation etc. Investments may
be made in Shares, Debentures, Bonds, Immovable Properties, etc. When
investments are held for a short period, it is a short-term investment and treated
as current asset. But when investment is held for a long period with a profit
motive, it is a long term investment and treated as fixed asset.
f) Contingent assets : These assets are not in the immediate possession of the
business and hence, not shown in the Balance Sheet. These assets may be acquired
and possessed on the happening of an uncertain event in future. For example,
claim for damages from the supplier for which the matter is subjudice in the
court of law. If the judgement of the court goes in favour of the business
enterprise, the claim for damages will be received in the form of a compensation
in future. Such assets are shown as footnotes under the Balance Sheet.
Accountancy
28
g) Fictitious assets : Some assets are fictitious in nature and these assets are not
virtual assets. These may be past accumulated losses or expenses incurred once
in the life time of a business, etc. These losses and expenses are capitalised for
the time being. Such assets are profit and loss account debit balance, preliminary
expenses, heavy advertising expenditure, etc.
(ii) Liability Side
The credit balance of ledger accounts, i.e., personal accounts which are not
closed after preparation of Trading Account and Profit and Loss Account, are
called liabilities. These are shown in the ‘liabilities’ side of Balance Sheet. A
classification of various liabilities shown in a Balance Sheet is given below:
Liabilities
  
Fixed liabilities Longterm labilities Current Labilities
  
Capital Long Term Loans, Sundry creditors, out
Debentures, etc. standing expenses,
Income received in
advance, Bills payable,
short-term loans,
Bank overdrafts, etc.
Liabilities are the claims of owners and outsiders on the assets of a business.
The liabilities of a business are to be paid legally as and when they become due.
The various liabilities are :
a) Fixed liabilities : The liability of the business is to pay the owner on the closure
of the business. The capital invested by him may increase by the amount of
profit earned or may decrease by the amount of loss suffered and the amount of
drawing either in cash or in kind or in both. The liability of the business to the
owner is called ‘capital’ which is payable only after the winding up of the business.
This is why it is termed as fixed liability.
29
b) Long-term liabilities : A long term liability is one which is not payable within
one accounting period. It is payable after more than 12 months from the date of
a Balance Sheet. Long-term loan from financial institutions, debentures, etc are
examples of long-term liability of a business. A long-term liability is also called
non-current liability.
c) Current liabilities : A liability expected to be paid within one accounting period
by the business, is called a current liability. Current liabilities are to be settled
normally within 12 months from the date of Balance Sheet.Such liabilities are
sundry creditors, bills payable, outstanding expenses, bank overdraft, income
received in advance, etc.
d) Contingent Liability : The liability which may or may not arise in future, the
occurrence of which depends on the happening of an uncertain event in future,
is called a contingent liability. If the uncertain event occurs, the contingent
liability becomes a liability, otherwise it is not a liability. As the contingent
liability is not a real liability, it is not shown in the Balance Sheet. But it is
shown as a footnote under the Balance Sheet.
Marshalling and Grouping of Assets and Liabilities
The presentation of groups of assets and liabilities in a Balance Sheet in an
orderly manner is called ‘marshalling and grouping’ of assets and liabilities.
The assets and liabilities are arranged either in order of liquidity or in order of
permanence. Liquidity refers to the early convertibility of a current asset into
cash and the urgency of payment of a current liability in cash or near cash. If
order of liquidity is followed, Current assets are shown first followed by fixed
assets and current liabilities are shown on the top of the Balance Sheet, the
long-term liabilities being shown thereafter.
Accountancy
30
An example of the balance sheet arranged in order of liquidity, is given below:
Balance Sheet of ....
as on.....
Liabilities Amount Assets Amount
Outstanding Expenses XXX Prepaid Expenses XXX
Bills Payable XXX Cash in Hand XXX
Sundry Creditors XXX Bills Receivable XXX
Bank Overdraft XXX Debtors XXX
Longterm Loan XXX Stock XXX
Capital : Furniture XXX
Opening Balance XXX Plant & Machinery XXX
Add / Less : Profit/Loss XXX Landand Building XXX
Less : Drawings XXX Goodwill XXX
XXX XXX
Total XXX Total XXX
In an order of permanence, the arrangement is reversed. The least liquid assets
are shown at the top and the most liquid asset is shown at the bottom of the
Balance Sheet. Goodwill is shown at the top, followed by land and buildings,
plant and machinery etc, and cash is at the bottom of the Balance Sheet on the
assets side. So also the least urgent liabilities for payment remain at the top of
the Balance Sheet on the liability side.Capital (Owner’s equity/liability) being
least urgent for payment is shown at the top and current liability, outstanding
expenses being most urgent for payment are shown at the bottom of the Balance
Sheet on the liabilities side.
Proforma of Balance Sheet
A Balance Sheet may be presented either horizontally or vertically. The
horizontal presentation of Balance Sheet is in the form of an ‘account’ In a sole-
trading and partnership business, the Balance Sheet is presented horizontally or
in the “T” shape. It has two sides, i.e., left hand side known as liabilities side and
the right hand side known as assets side. Horizontal form of presentation of
Balance Sheet is shown as above in page 30.
31
The vertical presentationof a Balance Sheet is in the form of a ‘report’.
Under this method of presentation, the items are presented in a “single column
statement” in a meaningful sequence. The vertical presentation of Balance Sheet
has been made compulsory for the company form of business under the
Companies Act 2013. A model vertical form of Balance Sheet is shown below.
Vertical Form
Balance Sheet...............
Particulars (` ) (`)
A. Sources of Funds :
(a) Proprietor’s Funds
Capital in the beginning XXX
Add : Net Profit XXX
Less : Drawings XXX
Less : Income Tax XXX
XXX
(b) Longterm Loan XXX XXX
B. Application of Funds :
(a) Networking Capital
(i) Current Assets :
Cash in Hand XXX
Cash at Bank XXX
Bills Receivable XXX
Sundry Debtors XXX
Stock XXX
Prepaid Expenses XXX
Income Receivable XXX
Less: Current Liabilities XXX
Accured Expenses XXX
Income received in advance XXX
Bank overdraft XXX
Sundry Creditors XXX
Bills Payable XXX XXX XXX
(b) Investments XXX
Accountancy
32
(c) Fixed Assets :
Goodwill XXX
Land and Building XXX
Plant and Machinery XXX
Patents and Trademark XXX
Furniture & Fittings XXX
XXX
Distinction between Trial Balance and Balance Sheet

Followings are the points of distinction between Trial Balance and Balance Sheet :
Sl No. Basis of Distinction Trial Balance Balance Sheet
1. Format It has two columns It has two columns
for recording debit for recording assets
and credit balances. and liabilities.
2. Contents It contains real, personal It contains only personal
and nominal accounts. and real accounts.
3. Objective Its objective is to check Its objective is to ascertain
the arithmetical accuracy the financial position of the
of the recorded transactions. business on a particular date.
4. Compulsion It is not compulsory It is compulsory to prepare.
to prepare.
5. Opening stock Opening stock is shown in Opening stock is not shown
Trial Balance. in Balance sheet.
6. Closing stock Generally, closing stock is Closing stock is always
not shown in Trial Balance shown on the asset side of
except at the time of Balance Sheet.
‘adjusted purchase’.
7. Net Profit/Loss It does not give information It gives information on net
on net profit/loss. profit/loss.
8. Use by outsiders It is of no use to outsiders. It is of utmost use to
creditors, bankers, tax
authorities, etc.
9. Order of presentation There is no order in the There must be an order
presentation of items in the in the presentationof items
Trial Balance. in Balance Sheet.
33
Distinction between Trading Account, Profit and Loss Account and Balance Sheet
Trading Profit and Loss Account and Balance Sheet are different from each other on
the following points :
Sl. Basis Trading, Profit and Balance Sheet
No. Loss Account
1. Nature It is an account. It is a statement.
2. Objective It is prepared to It is prepared to
ascertain the financial ascertain the financial position
performance (gross profit / on a particular date.
gross loss and net profit /
net loss during an
accounting period.
3. Contents All nominal accounts are All personal and real
recorded in this account. accounts are recorded in
Balance sheet.
4. Period It is prepared for a particular This is prepared on a
accounting period. particular date.
5. Balancing It is balanced to show either Balance sheet does not show
profit or loss. any balance. Its two sides
are tallied.
6. Sides It has two sides, i.e., debit It has also two sides i.e.,
and credit. assets and liabilities.
7. Manner of All expenses are recorded All real and personal
recording on debit side and all incomes accounts with debit balance
and revenues are recorded are recorded on the assets
on credit side, prefixed by side and only personal
“To” and “By” respectively. accounts with credit balances
are recorded on the liabilities
side without any prefix “To”
and “By”.
Illustrations 13
From the following Trial Balance, prepare the Trading and Profit and Loss Account
of Messrs. Jaga Balia Garments for the year ending 31.03.2017 and Balance Sheet as
on that date :
(Dr.) (Cr.)
Particulars `
( ) ( `)
Opening stock 55,000 --
Purchases 3,50,000 --
Accountancy
34
Sales -- 4,26,000
Purchases Return -- 2,000
Sales Return 2,000 --
Capital -- 3,00,000
Commission -- 4,000
Sundry Creditors -- 1,00,000
Bank Overdraft -- 28,000
Cash in hand 32,000 --
Sundry Debtors 1,40,000 --
Furniture 1,28,000 --
Machinery 60,000 --
Carriage on Purchases 12,000 --
Wages 7,000 --
Rent 10,000 --
Bad debts 16,000 --
Drawings 18,000 --
Stationery 6,000 --
Travelling Expenses 8,000 --
Insurance 10,000 --
Discount 3,000 2,000
Office Expenses 5,000 --
Total 8,62,000 8,62,000
Closing stock as on 31st March 2017 was valued at `64,000.
Solution :
Trading, Profit and Loss Account of Messers Jaga Balia Garments for the year
Dr. ending 31st March 2017 Cr.
Particulars (`) Particulars (`)
(`) By Sales 4,26,000
To Opening Stock 55,000 Less
To Purchases 3,50,000 Sales Return 2,000 4,24,000
Less By Closing Stock 64,000
Purchase return 2,000 3,48,000
To Carriage on Purchases 12,000
To Wages 7,000
To Gross Profit c/d 66,000
4,88,000 4,88,000
To Rent 10,000 By Gross Profit b/d 66,000
To Bad debts 16,000 By Commission 4,000
35
To Stationery 6,000 By Discount 2,000
To Travelling Expenses 8,000
To Insurance 10,000
To Discount 3,000
To Office Expenses 5,000
To Net Profit transferred 14,000
to Capital A/c
72,000 72,000
Balance Sheet of Messrs Jaga Balia Garments

as on 31 March 2017
Current Liabilities : Current Assets :
Bank Overdraft 28,000 Cash in Hand 32,000
Sundry Creditors 1,00,000 Debtors 1,40,000
Capital : Closing Stock 64,000
Opening Balance 3,00,000 Fixed Assets :
Add : Funiture 1,28,000
Net Profit 14,000 Machinery 60,000
3,14,000
Less :
Drawings 18,000
2,96,000
4,24,000 4,24,000
Illustrations 14
From the following Trial Balance of Mr Jayant, Prepare the Trading, Profit
and Loss Account for the year ending 31st December 2016 and Balance Sheet
as on that date :
(Dr.) (Cr.)
Particulars (` ( `)
Bills Payable -- 6,600
Sundry Creditors -- 99,000
Sales -- 6,32,000
Accountancy
36
Loan from Bank -- 50,000
Capital -- 5,54,000
Returns outward -- 5,000
Discount 3,000 2,000
Bad debts Recovered -- 4,500
Bad debts 4,000 --
Fixed Assets 4,50,000 --
Opening stock 80,000 --
Sundry Debtors 1,50,000 --
Bills Receivale 10,000 --
Investments 60,000 --
Cash in Hand 5,000 --
Returns Inward 10,000 --
Carriage 2,000 --
Drawings 19,000 --
Duty on Purchases 1,600 --
Primary Packing Charges 2,000 --
Rent 3,000 --
Insurance 3,400 --
Office Expenses 15,200 --
Interest Bank Loan 2,400 --
Delivery Van Expenses 7,000 --
Income Tax 3,000 --
Goods and Service Tax (GST) -- 5,500
Loose Tools 4,000 --
Apprentice Premium -- 3,000
Total 13,61,600 13,61,600
Closing stock was `90,000.
Note: (a) Goods and services Tax : Goods Services Tax (GST) is replacing the Value
Added Tax (VAT) and Central and State Sales Tax Excise Duty from the Financial
year 2017-18. If Goods and Services Tax is collected and paid to the Central
and State Government, it is to be shown under the debit column of Trial Balance
and will be debited to Profit and Loss Account as an expenses. But when GST
is collected and not paid to the Government, it is a liability of the business and
shown under the credit column of the Trial Balance and will be shown in the
Balance Sheet as a liability. (b) Income Tax - It is a personal expenditure of the
proprietor levied by the Central Govt on his personal income. If it is shown in
the debit column of Trial Balance, it is treated as drawings of the proprietor
and debited to his capital Account, i.e; to be deducted from his capital in the
Balance Sheet.
37
Trading, Profit and Loss Account of Mr. Jayant
for the year ending 31st December 2016
To Opening Stock 80,000 By Sales 6,32,000
To Purchases 5,27,000 Less :
Less : Returns
Returns Outward 5,000 5,22,000
Inward 10,000 6,22,000
To Duty on Purchases 1,600
To Carriage 2,000 By Closing Stock 90,000
To Primary Packing Charges 2,000
To Gross Profit c/d 1,04,400
7,12,000 7,12,000
To Bad debts 4,000 By Gross Profit b/d 1,04,400
To Rent 3,000 By Discount 2,000
To Insurance 3,400 By Bad debts Recovered 4,500
To Office Expenses 15,200 By Apprentice Premium 3,000
To Discount 3,000
to Interest on Bank Loan 2,400
To Delivery Van Expenses 7,000
1,13,900 1,13,900
Balance Sheet of Mr. Jayant
as on 31st December 2016
Capital : Fixed Assets : 4,50,000
Opening Balance 5,54,000 Investments : 60,000
Add : Net Profit 75,900 Current Assets :
Less : Drawings 19,000 Cash in Hand 5,000
Less : Income Tax 3,000 6,07,900 Sundry Debtors 1,50,000
Loans :
Bills Receivable 10,000
Loan from Bank 50,000
Loose Tools 4,000
Current Liabilities :
Bills payable 6,600 Closing Stock 90,000
Sundry Creditors 99,000
Goods and Services Tax 5,500
7,69,000 7,69,000
Accountancy
38
Illustrations 15
From the following Trial Balance of Ruma Textiles, as on 30th September 2016,
prepare Trading and Profit and Loss Account for the year ending 30th September
2016 and Balance Sheet as on that date :
Particulars Dr. (`) Cr. (`)

Capital -- 1,00,000
Opening Stock 20,000 --
Carriage Inwards 2,500 --
Sales -- 2,28,000
Salaries 20,000 --
Commission -- 13,000
Wages 8,000 --
Interest on Investments -- 7,000
Creditors -- 28,000
Bills Payable -- 2,300
Rent and Taxes 3,800 --
Repairs 4,000 --
Telephone Charges 2,400 --
Legal Expenses 2,300 --
Sundry Debtors 30,000 --
Machinery 50,000 --
Investments 40,000 --
Drawings 18,000 --
Bank overdraft -- 10,000
Miscellaneous Incomes -- 2,700
3,91,000 3,91,000
39
Closing stock was valued at `30,000.

Solution :
Trading and Profit and Loss Account of
Ruma Textiles for the year ending 30th September 2016
Dr. Cr.
Particulars Amount(`) Particulars Amount (`)
To Purchases 1,78,000 By Closing Stock 30,000
To Carriage Inwards 2,500
To wages 8,000
2,58,000 2,58,000
To Salaries 20,000 By Gross Profit b/d 49,500
To Rent and Taxes 3,800 By Commission 13,000
To Repairs 4,000 By Interest on Investment 7,000
To Telephone Charges 2,400 By Miscelloneous Incomes 2,700
To Legal Expenses 2,300
To Net Profit
transferred to Capital A/c 39,700
72,200 72,200
Balance sheet of Ruma Textiles
as on 30th September 2016
Dr. Cr.
Bills Payable 2,300 Cash in Hand 12,000
Creditors 28,000 Sundry Debtors 30,000
Bank Overdraft 10,000 Closing Stock 30,000
Capital : Investments 40,000
Opening balance 1,00,000 Machinery 50,000
Add : Net Profit 39,700
Less : 1,39,700
Drawings 18,000 1,21,700
1,62,000 1,62,000
Accountancy
40
1.5 PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
In the previous section, we learnt about the preparation of simple final accounts
without any adjustments. In the absence of any business complexities, simple final
accounts can be prepared. But in fact, during the normal business operations, one will
come across the complexities as the preparation of final account is based on accrual
basis of accounting It is necessary to consider all the incomes and expenses relating
to the year for ascertaining true profit or loss and financial position of a business.
Revenue recognition concept requirs that the revenue should be recognised in the
period in which the sale is deemed to have taken place. Again matching concept requires
that expenses should be recognised in the same period in relation to the revenues.
Expenses recognition is linked to revenue recognition during a particular accounting
period.
According to accrual concept of accounting the final accounts are to be prepared
by taking into account the incomes earned, not the incomes received in cash and the
expenses incurred, not the expenses paid in cash. Adjustments are made in final
accounts for all those items which have not been included in the trial balance. It implies
that certain expenses of the current period are to be recorded which are incurred but
not yet paid; and certain incomes of the current period are to be recorded which are
earned but not yet received.
The rationale of adjustment in final accounts is that some receipts of incomes
and payments of expenses in cash during the current year may partially relate to the
previous year or to the next year. Also there may be some revenues and expenses
relating to the current year which are still to be brought into the books of account.
For example, outstanding expenses (expenses incurred but not paid), accrued incomes
(incomes earned but not received), prepaid expenses (expenses paid but partially relate
to next year), incomes received in advance (income received in the current year but
partially relate to next year), non-cash items like depreciation on fixed assets, interest
41
on capital, interest on drawings), anticipated losses (like provision for bad debts,
provision for discount on debtors), anticipated gains (like reserve for discount on
creditors), need adjustment in the final account to ascertain true profit/loss and the
correct financial position.
1.5.1 Important Adjustments
The various adjustments made in final accounts by means of journal entries at
the end of the trading period called adjustment entries. The items, which need
adjustments, are :
(a) Closing Stock
(b) Outstanding expenses
(c) Prepaid expenses
(d) Accrued Income
(e) Income received in advance/Unearned income
(f) Depreciation
(g) Opening stock
(h) Interest on Capital
(i) Interest on drawings
(j) Interest on loan
(k) Bad detbts
(l) Provision for Bad and Doubtful debts
(m) Provision for Discount on Debtors
(n) Reserve for Discount on Creditors
(o) Loss by accident (Abnormal Loss)
(p) Charity in the form of goods
Accountancy
42
(q) Distribution of goods as free sample
(r) Goods taken by the owner for personal use.
(s) Manager’s commission
(t) Deferred revenue expenditure
(a) Closing Stock :
Closing stock is the stock which remains unsold at the end of the current
accounting period and is carried forward to the next accounting period as opening
stock. Closing stock is valued at cost or market price which ever is lower as per the
principle of prudence and conservatism concept. In case of manufacturing
organisations, closing stock consists of finished products, work-in-progress and raw
materials. While, in case of trading organisations, it is only of one type, i.e. the
products that is traded in. It is ascertained only at the end of the accounting period and
therefore, it is not included in trial balance and shown as an additional information
below the trial balance. The following adjustment entry is passed for closing stock :
Closing Stock A/c.... Dr.
To Trading A/c
(Being closing stock transferred to Trading Account)
Closing stock is shown on credit side of Trading Account and on the asset side
of the Balance Sheet as a current asset.
If closing stock is given in the trial balance, no adjusting entry is required to be
passed, as it has already been taken into account for computing the amount of Adjusted
purchase or cost of goods sold. Closing stock will be shown as a current asset in the
Balance Sheet only and not in the Trading Account.
Illustration 16
Closing stock on 31st December 2016 amounting `15,000 was shown outside
the Trial Balance. Pass an Adjustment entry and show how this will appear in final
accounts if accounts are closed on 31st December every year.
43
Solution :
Adjustment Entry
Particulars Dr. Cr.
` `
Closing Stock A/c Dr 15,000
To Trading A/c 15,000
(Being closing transferred to Trading A/c)
Trading Account
for the Year ending 31.12.2016
Dr. Cr.
By Closing Stock `15,000
Balance Sheet
as on 31.12.2016
` `
Current Assets :
Closing Stock 15,000
(b) Outstanding Expenses :

Outstanding expenses refer to those expenses which are incurred but not paid
during the accounting period. The benefit of those expenses have already been derived
by the business during the current accounting period. Such expenses must be taken
Accountancy
44
into the books of account in order to find out the true profit/loss and show the true
financial position of the business. Outstanding expenses are normally incurred for
salaries, wages, rent and utility expenses like water, electricity, cess, ctc. The following
adjustment entry is passed for recording outstanding expenses :
(Relevant) Expenses A/c Dr.
To Outstanding Expenses A/c
(Being outstanding expenses brought into books)
Accounting Treatment
(i) Treatment in Trading A/c Added to the relevant expenses i.e. suppose
(If it is a direct expense) wages on the debit side.
(ii) Treatment in P & L A/c Added to the relevant expenses like salary
(If it is an indirect expense) on the debit side.
(iii) Treatment in Balance Sheet. Shown on the liabilities side as a
current liabilities.
If any item of outstanding expenses already appears in the Trial Balance, then
adjustment entry is not required to be passed. Because these expenses have already
been taken into account for recording the amounts. Such outstanding expenses will
be shown on the liability side of the Balance Sheet as a current liability and it will never
be shown in either Trading Account or Profit and Loss Account (Income Statement).
Illustraion 17
Rent paid for 10 months @A5,000 during the year 2016-17. Pass an adjustment
entry and show how this will appear in final accounts if books are closed on 31st
March every year.
Solution :
Adjustment Entry
Particulars Dr. Cr.
( ` )) ( ` ))
Rent A/c Dr 10,000
To Outstanding Rent A/c 10,000
(Being rent not paid for two months)
45
for the year ending 31.03.2017
Dr. Cr.
Particulars (`) Particulars (`)
To Rent A/c (Paid) 50,000
Add : Outstanding 10,000 60,000
Balance Sheet as on 31st March 2017

Liabilities ( `)) Assets (`)
Outstanding Rent 10,000
(c) Prepaid Expenses :

Prepaid expenses refer to those expenses which have been paid in advance but
the benefits are not received during the period. These are the expenses paid in advance
in the current accounting period, but their benefit will be realised in the next accounting
period. The unexpired (prepaid) part of these expenses will be taken over to the next
accounting year in order to get the correct amount of profit of the current year and
true financial position of the business. The adjustment entry to be passed for recording
the prepaid expenses is as follows :
Prepaid Expenses A/c Dr
To (Relevant) Expenses A/c
(Being prepaid expenses brought into books)
(i) Treatment in Trading A/c Deducted from the relevant Expense
(If it is a direct expense) say wages on the debit side.
(ii) Treatment in P & L A/c Deducted from relevant expense, i.e.,
(If it is an indirect expense) Insurance on the debit side.
(iii) Treatment in Balance Sheet Shown on the assets side as a current asset.
Accountancy
46
If any item of prepaid expenses already appears in the Trial Balance then
adjustment entry is not required to be passed. Because this expense has already been
excluded from the relevant expense. Such prepaid expense will be shown as a current
asset in the Balance sheet only and not in the Income Statement.
Illustration 18
Salary paid in advance for one month @ A10,000 per month in the year ending
31.12.2016. Pass an adjustment entry and show how this will appear in final accounts.
Solution :
Adjustment Entry
Particulars Dr. Cr.
Prepaid Salary A/c Dr. 10,000
To Salary A/c 10,000
Profit and Loss Account for the
year ending 31st December 2016
Dr. Cr.
Particulars (A) Particulars (A)
To Salary 1,30,000
(Paid)
Less: Prepaid 10,000 1,20,000
Balance Sheet as on 31st December 2016
Liabilities (A) Assets (A)
Current Assets :
Prepaid Salary 10,000
(d) Accrued Income : The income which has been earned during the current year
and is due, but has not been received in the current accounting period, is called accrued
income. Income like interest on investment, rent receivable, commission, etc. are
normally earned, due in a year but received in the following year. Such incomes require
adjustment to get a true picture of the financial statements. The treatment of such
47
incomes in accounting is based on the accrual concept. The adjustment entry to be
passed for recording the accrued income is as follows :
Accrued Income A/c Dr.
To (Relevant) Income A/c
(Being income earned, due but not received yet)
(i) Treatment in P & L A/c Accrued Income is added to the
relevant income on the credit side.
(ii) Treatment in Balance Sheet Shown on the assets side
as a current asset.
If accrued income appears in the trial balance, then adjustment entry is not
required to be passed as these incomes have already been taken into account while
recording such income. Such accrued income will be shown as a current asset in
Balance sheet and not to be shown in the Income Statement.
Illustration 19
An amount of A20,000 received on account rent for the year ending 31st
December 2016 @ A2,000 p.m. Pass an adjusting entry and show it in the
final accounts.
Solution :
Adjustment Entry
Particulars Dr. (A) Cr. (A)
Accrued Rent A/c Dr. 4,000
To Rent receivable A/c 4,000
(Being rent earned, due but not received yet)
Accountancy
48
Dr. Cr.
By Rent (Received) 20,000
Add : Accrued 4,000 24,000
Balance Sheet as on 31.12.2016

Current Assets :
Accrued Rent (Receivable) 4,000
(e) Income received in Advance/Unearned Income :

The income received in advance or unearned income is one which is received
but not earned during the current accounting period. It is that part of the Income
which has been received before the sale of goods or services rendered. The unearned
income relates to the next year or any future year but has been received during the
current year. The adjustment entry to be passed for recording the unearned income is:
Relevant Income A/c Dr.
To Income received in Advance A/c
or
To Unearned Income A/c
(Being Income received in advance recorded)
(i) Treatment in P& L A/c Deducted from the relevant Income
on the credit side.
(ii) Treatment in Balance Sheet Shown on the liabilities side
as a current liability
If unearned income already appears in the Trial Balance, no adjustment entry is required
as it has already been deducted from the relevant income. Such accrued income will
be shown as a current liability in the Balance Sheet only and not to be shown in the
Income Statement.
49
Illustration 20
X & Co. received a rent of A13,000 from his tenant during the year ending 31st
March 2017 out of which A1000 belongs to the next year. Pass the necessary
adjustment entry and show it in the Income Statement and Balance Sheet.
Solution :
Adjustment Entry
Particulars Dr. (A) Cr. (A)
Rent A/c Dr. 1,000
To Unearned Rent A/c 1,000
(Being unearned rent recorded)
Profits Loss Account for the year

Dr. ending 31st March 2017 Cr.
By Rent Received 13,000
Less : Unearned 1,000 12,000
Unearned Rent 1,000
(OR Rent Received in Advance)
(f) Depreciation : Depreciation is the charge against profit for the use of fixed
assets in the business. The value of fixed assets decreases due to wear and tear, passage
of time, obsolescence etc. Depreciation is treated as a business expense for income
generation like other expenses. The adjustment entry for recording depreciation is :
Depreciation A/c Dr.
To Fixed Assets A/c
or
To Provision for Depreciation A/c
(Being depreciation provided on fixed asset)
Accountancy
50
According Treatment
(i) Treatment in P& L A/c Shown on the debit side like
any other expenses.
(ii) Treatment in the Balance Sheet Shown on the asset side by deduction
from the value of relevant fixed asset.
If depreciation already appears in the trial balance, then no adjustment entry is
required to be passed as it has already been recorded and deducted from the relevant
fixed asset. Only such depreciation will be shown in debit side of the Income Statement
and not in the Balance sheet. When fixed assets are to be shown at their original cost
in the Balance Sheet, depreciation will not be deducted from the relevant fixed asset.
Provision for Depreciation Account will be opened and shown in the liability side of
the Balance sheet.
Illustration 21
On 1.7.2016 a machinery was purchased at a cost of A1,00,000. Depreciation
is to be charged @10% per annum. The books are closed on 31st December 2016.
Pass necessary adjustment entry and show in the final accounts.
Solution :
Adjustment Entry
Particulars Dr. Cr.
A A
Depreciation A/c Dr 5,000
To Machinery A/c 5,000
(Being depreciation provided on machinery)

for the year ending 31st December 2016
Dr. Cr.
To Depreciation 5,000
51
Balance sheet as on 31st December 2016
Fixed Assets : (A)
Machinery 1,00,000
Less : Depreciation 5,000
95,000
(g) Opening Stock : Opening stock normally appears in trial balance and is debited
to Trading Account. In some cases, opening stock appears outside the trial balance as
an information and closing stock and Adjusted Purchases account appear in the trial
balance simultaneously. It is implied from the situations that the opening stock is
added to and closing stock is deducted from the net purchases in order to arrive at the
Adjusted Purchases Account. As such opening stock appearing outside trial balance
will not be taken for adjustment and it is given for the sake of information.
(h) Interest on Capital : The proprietor should charge the interest on capital to
profit at a normal rate in order to arrive at the real profit. As a man of prudence, the
proprietor should consider the interest on the capital invested by him in the business.
Interest on capital of the proprietor is a notional expense and should be charged to
profit. The adjustment entry is as follows :
Interest on Capital A/c Dr.
To Capital A/c
(Being interest on capital allowed)
(i) Treatment in Profit and Loss Debited to Profit and Loss
Account Account as an expense of the business.
(ii) Treatment in Balance Sheet Added to Capital as a gain to the
proprietor on the liabilities side.
(i) Interest on Drawings : Sometimes the proprietor withdraws cash or goods
from the business for his personal use. Such withdrawals by the proprietor is called
Accountancy
52
drawings and interest on drawings is charged on the proprietor. It is treated as a notional
income of the firm. The adjustment entry is as given below :
Drawings A/c Dr.
To Interest on Drawings A/c
(i) Treatment in Profit and Loss Account. Credited to Profit and Loss Account as
an income of the firm.
(ii) Treatment in Balance Sheet. Added to Drawings and deducted from
Capital in the liabilities side
of Balance Sheet.
Interest on drawings is calculated at a fixed rate from the date of drawings to the
end of the accounting period. But practically, all the drawings are made on different
dates as and when the proprietor requires money or goods for personal use. That is
why, interest is calculated by taking the individual date of drawings by applying the
product method. But when the date of drawings are not available for each drawings,
interest on total drawings is calculated for 6 months.
(j) Interest on Loan : The proprietor borrows money for the purpose of expansion
for a long period from outside persons, banks and financial institutions. Loan is a
liability of the firm and the interest on such loan is an expense. Normally the interest
on such loan remains unpaid at the end of the accounting period, so interest on loan
remains outstanding.
Sometimes, the firm advances loans to emplolyees and other outside persons.
The loan, in these cases, is an asset of the firm and any interest on such loan is treated
income of the firm.
The adjustment entry for interest on loan (as liability) is as follows :
Interest on Loan A/c Dr.
To Loan A/c
(Being interest on loan provided for)
The reverse adjustment entry is passed when the firm advances loan as an asset.
53
(i) Treatment in P & L A/c Shown on the debit side of P &L A/c
(as an expense)
Shown on the credit it side of P&L A/c
(as an income)
(ii) Treatment in the Balance sheet (a) Shown in liabilities side of Balance
Sheet as current liability.
(b) Shown in the assets side of Balance
Sheet as current asset.
Illustration 22
The proprietor S. Das charges interest @6% on his capital of A2,00,000 for the
accounting year ending 31.03.2017. Make necessary accounting treatment in the books
of S. Das.
Adjustment Entry
Particulars Dr. Cr.
A A
Interest on Capital A/c Dr. 12,000
To Capital A/c 12,000
(Being interest on capital provided)

Dr. Cr.
To Interest on capital A/c 12,000

(A)
Capital 2,00,000
Add :
Interest on Capital 12,000 2,12,000
Accountancy
54
Illustration 23
The capital and drawings of a soletrader Mr. A given in his trial balance are
A2,00,000 and A10,000 respectively as on 31.12.2016. He decided to charge interest
on drawings A600 for the accounting period ending 31.12.2017. Pass necessary
adjustment entry, show them in Final Accounts.
Solution :
Adjustment entry
Particulars Dr. Cr.
A A
Drawing A/c Dr. 600
To Interest n Drawings A/c 600
(Being Interest charged on drawings)

Dr. of Mr. A for the year ending 31.12.2016 Cr.
By Interest on Drawings A/c 600
Balance Sheet of Mr. A as on 31.12.2017

(A)
Capital 2,00,000
Less : Drawings 10,000
Add: Interest 600
10,600 1,89,400
Illustration 24
A borrowed from his wife A1,00,000 @71/2% interest per annum at the begining
of the year ending on 30th June 2017 Show the adjustment entry for the interest on
drawing and treatment in final accounts.
55
Solution :
Adjustment entry
Particulars Dr. Cr.
A A
Interest on Loan A/c Dr. 7,500
To Mrs. A’s Loan A/c 7,500
(Being Interest on loan provided)
Dr. Cr.
To Interest on Loan 7,500

Mrs. A’s Loan : 1,00,000
Add : Interest on Loan 7,500
1,07,500
Illustration 25
From the trial balance of Mr. X, a sole trader as on 30.06.2017, prepare Trading,
Profit and Loss Account for the yer ending 30.06.2017 and the Balance sheet as on
that date :
Trial Balance as on 30.06.2017
Particulars Dr. Cr.
A A
Opening Stock 70,000 --
Capital -- 2,00,000
Drawings 20,000 --
Fixed Assets 4,00,000 --
Purchases and sales 7,00,000 13,00,000
Accountancy
56
Sales Return 15,000 --
Carriage 28,000 --
Wages 50,000 --
Salaries 30,000 --
Rent -- 20,000
Insurance 3,000 --
Audit Fee 1,500 --
Debtors and creditors 80,000 1,00,000
Bills Receivable and Bills Payable 60,000 40,000
Printing & Stationary 3,000 --
Commission -- 1,000
Cash at Bank 3,38,000 --
Bank Loan -- 1,50,000
Interest on Bank Loan 2,500 --
18,21,000 18,21,000
Additional Information :
1) Closing stock was A90,000
2) Rent received in advance A2,000
3) Commission due A200.
4) Depreciation to be provided @10% on fixed assets.
5) Interest on Bank Loan outstanding A500
6) Allow 8% interest on capital
7) Charge A2,000 as interest on drawings
8) Wages outstanding A2,000
Solution :
Trading and Profit and Loss Account of Mr. X
Dr. for the year ending 30.06.2016 Cr.
(A) (A)
To Opening Stock 70,000
To Purchases 7,00,000 By Sales 13,00,000
Less:
Purchases Return 10,000 6,90,000 Less: Sales Return 15,000 12,85,000
57
By Closing Stock 90,000
To Carriage 28,000
To Wages 50,000
Add : Wages
outstanding 2,000 52,000
13,75,000 13,75,000
To Salaries 30,000 By Gross Profit b/d 5,35,000
To Insurance 3,000 By Commission 1,000
To Audit fee 1,500 Add: Accrued Commission 200 1,200
To Interest Bank on Loan2,500
Add : Outstanding Interest 500 3,000 By Rent 20,000
To Printing and Stationary 3,000 Less :
To Depreciation fixed assets 40,000 Rent received in Advance 2,000 18,000
To Interest on Capital 16,000 By Interest on Drawings 2,000
to Capital A/c 4,59,900
5,56,200 5,56,200
Balance Sheet of Mr. X as on 30.06.2017
(A) (A)
Capital 2,00,000 Fixed Assets 4,00,000
Less :
Add : Interest 16,000 Depreciation 40,000 3,60,000
Net Profit 4,59,700 Closing Stock 90,000
Less : 6,75,700 Accrued Commission 200
Drawings 20,000 Bills Receivable 60,000
6,55,700 Debtors 80,000
Interest on drawings 2,000 6,53,700 Cash at Bank 3,38,000
Bank Loan 1,50,000 Cash in Hand 20,000
Add : Interest
outstanding 500 1,50,500
Accountancy
58
Rent Received in
Advance 2,000 2,000
Creditors 1,00,000
Bills Payable 40,000
Wages outstanding 2,000
9,48,200 9,48,200
(k) Bad Debts : Finished goods are sold to the customers both in cash and on credit.
The customers to whom the goods sold on credit are called debtors. Sometimes the
amount due from the customers could not be recovered/realised and becomes bad.
The reasons of debts being bad may be death or insolvency of the customers or any
other reasons. As such, bad debt is the amount of unrealised debt due from the
customers. The adjustment entry for bad debts is as follows :
Particulars Dr. Cr.
A A
Bad debts A/c Dr. 7,500
To Debtors A/c 7,500
(Being bad debts provided for)
(i) Treatment in P & L A/c Shown on the debit side as a loss
(ii) Treatment in the Balance Sheet Shown on the asset side of the Balance
Sheet by way of deduction if bad debt is
given outside the Trial Balance. If baddebt
is given inside the Trial Balance, it should
not be taken to Balance Sheet.
Illustration 26
Out of A50,000 total debtors, A2,000 became bad because of the insolvency of
one of the debtors. Pass an adjustment entry and show how this will be treated in final
accounts.
59
Solution :
Adjustment Entry
Dr. Cr.
Particulars A A
Bad debts A/c Dr. 2,000
To Sundry Debtors A/c 2,000
(Being bad debts provided for)
P & L A/c for the year ending 31.12.20.....

Dr. Cr.
(A) (A)
To Bad Debts 2,000
Balance Sheet as 31.12.20....

(A) (A)
Sundry Debtors 50,000
Less :
Bad Debts 2,000 48,000
When bad debts appear in the trial balance, these should not be deducted from
sundry debtors in the Balance Sheet. In these cases, bad debts will be debited to Profit
and Loss A/c. But when bad debts are given as additional information, then only the
bad debt is treated as additional/further bad debt and deducted from sundry debtors in
the Balance Sheet and shown in the debit side of Profit and Loss Account.
(l) Provision for Bad and Doubtful Debts : Normally, the debtors of the trader
are divided into three groups, i.e., good, doubtful and bad. A part of total debtors are
good and there is certainty of their realisation, and some debtors are doubtful of their
realisation and some other debtors are bad which cannot be realised. After deducting
the bad debts from the total debtors, the remaing debtors could not be taken as good
debtors. Therefore, a provision for bad and doubtful debts should be made on these
Accountancy
60
debtors by means of a predetermined percentage/rate on the net debtors. If some of
the net debtors (Total Debtors less bad debts) do not pay the dues in future, then the
loss can be recovered from this provision. The adjustment entry for provision for bad
and doubtful debt is as follows :
Profit and Loss A/c Dr.

To Provision for Bad Doubtful Debts A/c
(Being provision for bad and doubtful debts created)
(i) Treatment in P & L A/c Shown on the debit side as a separate
item like any other expense/loss.
(ii) Treatment in Balance sheet Shown on the Asset side by way
of deduction from net debtors.
Illustration 27
An extract of a Trial Balance as on 31.03.2015, show sundry debtors at A52,000
and bad debts at A1,000. Besides it is revealed that after preparation of Trial Balance,
a debtor owing A2,000 died and nothing could be recovered from him. It is also decided
to create a provision of 5% on debtors for doubtful debts.
Pass the necessary journal entries and show the relevant ledger accounts along
with final accounts.
Solution :
Particulars L.F. Dr. Cr.
A A
Bad Debts A/c Dr. 2,000
(Being the amount bad now written off)
61
Profit an Loss A/c Dr. 3,000
To Bad Debts A/c 3,000
(Being transfer of bad debts to P&L A/c)
Profit & Loss A/c Dr. 2,500
To Provision for Bad and doubtful debts A/c 2,500
(Being the provision created for
doubtful debts on {(52,000-2000)×5%}
Sundry Debtors A/c
Dr. Cr.
(A) (A)
To Balance b/d 1,000 By profit and loss A/c 3,000
To Sundry Debtors A/c 2,000 (transferred)
3,000 3,000
Provision for Bad and Doubtful Debts Account
Dr. Cr.
(A) (A)
To Balance c/d 2,500 By profit and loss A/c 2,500
2,500 2,500
By Balance b/d 2,500
(A) (A)
To Bad Debts 1,000
Add: Further
Bad Debts 2,000 3,000
To Provision for Bad and
Doubtful Debt A/c 2,500
Accountancy
62
(A) (A)
Current Assets :
Less :
Further Bad Debts 2,000
Less : 50,000
Provision created 2,500
47,500
Illustration 28
Following balances have been extracted from the Trial Balance as on 31.12.2016 :
Particulars Debit Credit
A A
Bad Debts 1,000
Provision for Bad and Doubtful Debts 1,500
(i) Additional Bad Debts A2,000
(ii) Create a provision for doubtful debts @5% on debtors.
Pass the necessary jourbal entries and prepare relevant ledger accounts and show
them in final accounts.
Solution :
Journal
A A
(Being the additional bad debts written off)
63
Provision for Bad and Doubtful Debts A/c Dr. 3,000
(Being the bad debts transfered to provision
for Bad an Dobtful Debts A/c)
Profit and Loss A/c Dr. 4,000
To Provision for Bad and Doubtful Debts A/c 4,000
(Being the provision for Bad debts
credited and charged to P&L A/c)
Sundry Debtors A/c

Dr. Cr.
(A) (A)
To Balance b/d 52,000 By Bad Debts A/c 2,000
By Balance c/d 50,000
52,000 52,000
To Balance b/d 50,000
Bad Debts A/c
(A) (A)
To Balance b/d 1,000 By Provision for Bad
To Sundry Debtors A/c 2,000 and Doubtful Debts A/c 3,000
(transferred)
3,000 3,000
Provision for Bad and Doubtful Debts Account
Dr. Cr.
(A) (A)
To Bad Debts A/c 3,000 By Balance b/d 1,500
To Balance c/d 2,500 By Profit and Loss A/c 4,000
5
{(52,000-2000)× 100 }
5,500 5,500
Accountancy
64
Dr. Cr.
To Provisional for Bad Debts A/c:
Bad Debts 1,000
Add : Additional
Bad debts 2,000
New provision required 2,500
5
{(5200-2000)× 100 }
5,500
Less : Existing
provision 1,500 4,000
Balance Sheet
as on 31.12.2016
Liabilities (A) Assets (A) (A)
Current Assets :
Less : Additional
Bad Debts 2,000
Less : 50,000
New Provision Required 2,500 47,500
(m) Provision for Discount on Debtors :
Traders usually allow cash discount to those customers who make prompt
payment. At the end of a financial year, there may be some credit customers who may
make payment in the next financial year. They may be allowed cash discount. Such
discount should be treated as a loss for the trader only for the financial year in which
sale was effected. Hence, at the end of the year, a provision for discount on debtors
account wills be created. Such provision is made only on good debtors only. The
adjustment entry is given as below :
65
Profit and Loss A/c Dr
To Provision for Discount on Debtors A/c
(Being provision for Discount on Debtors created)
(i) Treatment in P & L A/c Shown on the debit side as a separate item.
(ii) Treatment in the Balance Sheet Shown on the Assets side
by way of deduction from Sundry Debtors
after deduction of further bad debt and new
provision created.
Illustration 29
From the extracts of a Trial Balance as on 31.03.2016 as given below, you are
required to pass the necessary journal entries and show the treatment in relevant
accounts and in the final accounts :
Particulars Dr. Cr.
A A
Sundry Debtors 1,06,500
Bad Debts 2,000
Discount 1,000
Provision for Bad and Doubtful Debts A/c 1,500
Additional Information:
(a) Create a provision for bad and doubtful debts @5% on debtors
(b) A further bad debt of A6,500 to be written off.
(c) Create a provision on for Discount on Debtors @2% on debtors.
Solution:
Journal
A A
(Being further bad debts written off)
Accountancy
66
Provision for Bad and Doubtful Debts A/c . Dr. 8,500
(Being bad debts transferred to
provision for Bad and doubtful debts A/c)
To Provision for Bad and Doubtful Debts A/c 12,000
(Being the provision for Bad and Doubtful
Debts created)
To Provision for Discount
on Debtors A/c 1,900
(Being the Provision for Discount on Debtors created)
i,e., 95,000×2%=1900
Dr. Sundry Debtors A/c Cr.

To balance b/d 1,06,500 By Bad debts A/c 6,500
By Balance c/d 1,00,000
1,06,500 1,06,500
To balance b/d 1,00,000
Dr. Bad Debts A/c Cr.

To Balance b/d 2,000 By Provision for Bad
To Sundry Debtors 6,500 Debts A/c 8,500
8,500 8,500
67
Provision for Bad and Doubtful Debts A/c
Dr. Cr.
To Bad Debts A/c 8,500 By Balance b/d 1,500
To Balance c/d 5,000 By Profit and Loos A/c 12,000
(1,00,000×5%)
13,500 13,500
Discount (Allowed) A/c
Dr. Cr.
To Balance b/d 1,000 By Profit and Loss A/c 1,000
1,000 1,000
Provision for Discount on Debtors A/c
Dr. Cr.
To Balance c/d 1,900 By Profit and Loss A/c 1,900
2
{(1,06,500 – 6,500–5,000)× }
100
1,900 1,900
Profit and Loss Account for the year ending 31.03.2016

Dr. Cr.
To Provision for Bad and Doubtful Debts A/c
Bad Debts 2,000
Add : Further Bad Debts 6,500
New Provision required 5,000
Less 13,500
Old Provision 1,500 12,000
Accountancy
68
Profit & Loss A/c (continued)
Dr. Cr.
To Discount 1,000
To Provision for Discount
on Debtors A/c 1,900

Dr. Cr.
Current Assets :
Less :
Further Bad Debt 6,500
1,00,000
Less Provision
for Bad Debts @5% 5,000
on 1,00,000. 95,000
Less :
Provision for Discount 1,900
on Debtors (@2% onA95,000) 93,100
(n) Reserve for Discount on Creditors : A trader also expects to receive discount
from his creditors by making early payment. So he creates a provision/reserve for
discount on creditors. If he pays off the creditors before the agreed date, he may
receive some discount which is an income for him. The Provision for Discount on
Creditors is popularly named as Reserve for Discount on Creditors as it is an income
of the business. The adjustment enty is as given below :
Reserve for Discount on Creditors A/c Dr.
To Profit and Loss A/c
(Being a reserve created on Sundry Creditors)
69
(i) Treatment in P & L A/c Shown on the credit side as a separate
item of income.
(ii) Treatment in Balance Sheet Shown on the Liabilities side as a
deduction from Sundry Creditors.
Illustration 30
On 01.01.2013, a provision for Doubtful Debts showed a credit balance of
A7,200. During the year, the bad debts amounted to A5,600. The debtors on 31.12.2013
amounted to A1,92,000 and a provision of 5% for Doubtful Debts was to be maintained.
In 2014, the bad debts amounted to A2,400 and the debtors at the end of the year
amounted to A80,000 on which a provision of 5% for Doubtful Debts was to to be
maintained.
Make journal entries and prepare the provision for Doubtful Debts Account.
Also show the items in Profit and Loss Account and Balance Sheet for the periods.
Solution :
Journal Entries
A A
2013 Bad Debts A/c Dr. 5,600
Dec,31 To Sundry Debtors A/c 5,600
(Being the additional bad debts written off)
Provision for Doubtful Debt A/c Dr. 5,600
(Being the transferd of Bad Debts to
Provision for Doubtful Debt A/c)
To Provision for Doubtful Debts A/c 8,000
(Being the provision created and
charged to P&L A/c)
Accountancy
70
2014 Bad Debts A/c Dr. 2,400
Dec,31 To Sundry Debtors 2,400
(Being debts written off)
Provision for Doubtful Debts A/c Dr. 2,400
(Being Bad debts transferred to
Provision for Doubtful Debts A/c)
Provision for Doubtful Debts A/c Dr. 3,200
To Profit and Loss A/c 3,200
(Being excess provision
credited to P&L A/c)
Provision for Doubtful Debts A/c
Dr. Cr
Date Particulars (A) Date Particulars (A)
31.12.2013 To Bad Debts A/c 5,600 1.1.2013 By Balance b/d 7,200
To Balance c/d 31.12.2013 By Profit and Loss A/c
(1,92,000×5%) 9,600 (Balancing figure) 8,000
15,200 15,200
31.12.2014 To Bad Debts A/c 2,400 1.1.14 By Balance b/d 9,600
(Balancing figure)
To Balance c/d
(80,000×5%) 4,000
9,600 9,600
Profit and Loss A/c for the year ended 31.12.13 and 31.12.14
Dr. Cr.
2013 :
To Provision for Doubtful
Debts A/c :
Bad Debts 5,600
71
And New provision
required 9,600
15,200
Less Old Provision 8,000 7,200
2014
By Provision for Doubtful Debts A/c
Old Provision 9,600
Less Bad Debts 2,400
7,200
Less New Provision required 4,000 3,200
Balance Sheet as on 31.12.2013 and 31.12.2014
Dr. Cr.
2013
Sund Debtors 1,92,000
Less Provision
for Doubtful Debts 9,600 1,82,400
2014
Less
Provision for
Doubtful Debts 4,000
76,000
Illustration 31
Mr. A maintained reserve for Discount @4% on creditors which on 1st January
2013 was A4,000. His balances on 31.12.2013 and 2014 were as given below :
31.12.2013 31.12.2014
(A) (A)
Discount Received 3,000 300
Sundry Creditors 50,000 40,000
Show the necessary ledger accounts and show how the items would appear in
the final accounts of 2013 and 2014.
Accountancy
72
Solution :
Dr. Discount (Received) A/c Cr.

Date Particulars (A) Date Particulars (A)
31.12.2013 To Reserve for 31.12.2013 By Sundry Creditors A/c 3,000
Discount on Creditors A/c 3,000
3,000 3,000
31.12.2014 To Reserve for Discount 31.12.2014 By Sundry Creditors A/c 300
on Creditors A/c 500
Dr. Reserve for Discount on Creditors A/c Cr.

(A) (A)
31.12.2013 To Balance b/d 4,000 31.12.2013 By Discount Received A/c 3,000
To Profit and Loss A/c 1,000 By Balance c/d 2,000
(Balancing figure) 5,000 (50,000×4%) 5,000
31.12.2014 To Balance b/d 2,000 31.12.2014

By Discount Received A/c 300
By Profit and Loss A/c 100
(Balancing figure)
(40,000×4%)
2,000 2,000
(o) Abnormal Loss (Accidental Loss) : Losses of goods and assets may occur
due to accident, natural calamity, fire, theft, pilferage, leakage, spoilage, etc. The
cost of such stock or asset lost is abnormal loss. The abnormal loss of stock or asset
is an avoidable loss. The adjustment entries for abnormal loss of stock is as follows :
(i) When goods are lost due to accident
Loss by Accident A/c Dr.
To Trading A/c
(Being goods destroyed in accident)
73
(ii) If goods are not insured
To Loss by Accident A/c
(Being loss of goods charged to P&L A/c
(iii) If goods are fully insured
Insurance claim A/c Dr.
(Being amount due from Insurer)
(iv) When goods are partially insured
Insurance Claim A/c Dr.
(Being claim received from insurer and balance
transferred P&L A/c as a loss)
(i) Treatment in Trading A/c The value of abnormal loss is credited
(ii) Treatment in Profit & Loss A/c The cost of goods if not insured, all or
partially uncovered is debited
(iii) Treatment in Balance Sheet If goods are insured fully or partly, the
claim amount received from the insurer
is shown as Insurance claim.
When some fixed asset is lost in accident, this abnormal loss is reflected only
in Profit and Loss Account and Balance Sheet. The Adjustment entries for such loss
is :
Loss by Accident A/c Dr.
To Fixed Asset A/c
(Being the asset lost in accident)
Accountancy
74
(i) Treatment in P&L A/c The amount of abnormal loss for the
fixed asset is debited.
(ii) Treatment in Balance sheet The amount of such abnormal loss is
deducted from the fixed asset.
Illustration 32
Goods lost in transit during the year ending 31.12.2016 of M/s T Krishna Patra
& Sons worth A2,00,000. Give the adjustment entries and accounting treatment in
final accounts
(a) If goods were not insured.
(b) If the goods were fully insured.
(c) If the goods were partially insured (70%).
Solution :
(a) If goods were not insured
Adjustment Entry
Date Particulars L.F. Dr.(A) Cr. (A)
31.12.2016 Loss in Transit A/c Dr. 2,00,000
To Trading A/c 2,00,000
(Being goods lost in transit)
Trading Account of
M/s. T. Krishna Patro & Sons for the year ending 31.12.2016
Dr. Cr.
Particulars (A) (A)
By Loss in Transit A/c 2,00,000
Profit and Loss A/c of M/s T. Krishna Patro & Sons

To Loss in Transit A/c 2,00,000
75
(b) If goods were fully insured.
Adjustment Entry
Loss in Transit A/c Dr. 2,00,000
Insurance Claim A/c 2,00,000
(Being claim accepted fully by Insuer)
Balance sheet of M/S T. Krishna Patra & Sons
as on 31.12.2016
Insurance Claim 2,00,000
(c) If goods were Partially (70%) Insured :

Adjustment Entry
Date Particulars L.F. Dr. (A) Cr. (A)
31.12.16 Loss in Transit A/c Dr. 2,00,000
Insurance Claim A/c Dr. 1,40,000
(Being 70% of loss
claimed was accepted)
Trading Account of M/s. T. Krishna Patro & Sons
Particulars (A) (A)
By Loss in Transit A/c 2,00,000
Profit & Loss Account of M/s T. Krishna Patro

To Loss in Transit A/c
(2,00,000-1,40,000) 60,000
Accountancy
76
Balance Sheet of M/s T. Krishna Patro & Sons
as on 31.12.2016
Insurance Claim 1,40,000
(70% of 2,00,000)
(p) Charity (in the form of Goods) : Sometimes, the businessman gives some goods
as charity from his stock. It is taken as an expense of the business. The adjustment
entry is as follows:
Charity A/c Dr.
To Purchases A/c
(Being goods issued as charity)
(i) Treatment in Trading A/c Shown as a deduction from total
purchases
(ii) Treatment Profit and Loss A/c Shown as an expense on the debit side
(q) Distribution of goods as free samples :
The trader distributes goods as free sample for the sake of advertisement. The
free samples are taken as a business expense. It reduces the stock position of the
trader. The adjustment entry for distributing goods as free sample is as follows :
Advertisement A/c Dr.
or
Free samples A/c Dr.
To Purchases A/c
(Being the goods distribuded as free sample for advertisement)
(i) Treatment in Trading A/c Shown as a deduction from total
purchases
(ii) Treatment Profit and Loss A/c Shown as an expense on the debit side
77
(r) Goods taken by the owner for personal use :
Sometimes the trader takes away goods from the business for personal use. It is
called drawing of goods by the owner / trader. The adjutment entry for this is given
below
Drawings A/c Dr.
To Purchases A/c
(Being goods withdrawn for personal use)
(i) Treatment in Trading Account Shown as a deduction from
total purchases.
(ii) Treatment in Balance sheet Deducted from Capital Account as
Drawings for Goods.
Further sometimes cash is withdrawn by the trader for paying off personal
expenses.
The adjustment entries for withdrawing cash for private use is as follows :
Adjustment Entry
(i) Drawings A/c Dr.
To Cash/Bank A/c
(Being drawings made in cash)
(ii) Capital A/c Dr.
To Drawings A/c
(Being drawings adjusted in Capital)
(i) Treatment in Balance Sheet Deducted (i) from relevant Cash/Bank
A/c and also (ii) from Capital Account.
If Income Tax or Life Insurance Premium is paid out of the business cash, the
adjustment entries are :
Adjustment Entry
(i) Income Tax/Life Insuracne Premium A/c Dr.
To Cash/Bank A/c
(Being Income Tax/Life Insurance Premium Paid)
Accountancy
78
(ii) Drawings A/c Dr.
To Income Tax/Life Insurance Premium A/c
(Being income tax / life insurance premium
transfered to Drawings A/c)
(iii) Drawings A/c Dr.
To Capital A/c
(Being Capital A/c is reduced by Drawings amount)
The accounting treatment of income tax / life insurance premium paid out of
the business cash is like that of the withdrawings of cash by the trader to pay off his
personal expenses.
Illustration 33
From the following extracts from Trial Balance of M/s X & Co. as on
31.03.2017, you are required to give adjustment entries and also show the treatment
in final accounts :
Dr. Cr.
A A
Advertisement 10,000 --
Charity 1,500 --
Adjustments
(i) Goods worth A2,000 distributed as free samples;
(ii) Goods worth A800 were given as charity.
Solution :
Advertisement A/c Dr. 2,000
Charity A/c Dr. 800
To Purchases A/c 2,800
(Being goods issued as free samples and charity)
79
Trading Account of M/s X & Co.

To Purchases 2,00,000
Less :
Free Samples - 2,000
Charity - 800
2,800
1,97,200
Profit and Loss Account of M/s X & Co.

Particulars (A) Particular (A)
To Advertisement 10,000
Add :
Free Samples 2,000 12,000
To Charity 1,500
Add : Charity of goods
800
2,300
Accountancy
80
(s) Manager’s Commission :
Sometimes, the manager is allowed commission on profits earned by the trader.
The commission is allowed on the basis of the service conditions and job profile. The
commission is calculated as a percentage of profit either before charging such
commission or after charging such commission. If commission is payable at fixed
percentage on net profit before charging such commission, then :
Manager’s Commission  % of commission  Net profit before charging such commission

100
If commission is payable on net profit after charging such commission, then
% of commission
Manager’s Commission   Net profit before charging such commission
(100 + % Commission)
The adjustment entry for Manager’s Commission is as follows :
Manager’s Commission A/c Dr.
To Outstanding Commission A/c
(Being Manger’s commission remains outstanding)
(i) Treatment in P&L A/c Shown on the debit side as a separate
item of expense.
(ii) Treatment in the Balance Sheet Shown on the liabilities side as a current
liability.
(t) Deferred Revenue Expenditure :
There are some expenditures of a trader which is revenue in nature but gives
benefit to the business for a long period. For example, a heavy expenditure incurred
in launching a new product will give benefit to the trader for more than one year. Such
a revenue expenditure is partially revenue and partially capital in nature. This revenue
expenditure is of specialised in nature and called Deferred Revenue Expenditure. The
adjustment entry for deferred revenue expenditure is :
81
Profit and Loss Account Dr
To Relevant Expense A/c
(Being a part of the relevant expense written off)
(i) Treatment in P&L A/c A part of the relevant expenses say
( 18 th) is written off and shown on the
debit side as a revenue expense.
(ii) Treatment in the Balance Sheet Remaining part of the relevant expenses,
(say 1- 18 th) 78 th is shown as an asset
under the heading Deferred Revenue
Expenditure.
Illustration 34
On 31st December 2015, goods costing A5,000 were taken by the proprietor
for his private use for which no record was made. Purchases were A1,00,000 and
capital A2,00,000. Pass the adjusting entry and show the accounting treatment for
drawings in final accounts for the year ending 31.12.2015.
Solution :
Adjustment Entry
Particulars L.F. Dr.( A) Cr. (A)
Drawings A/c Dr. 5,000
To Purchases A/c 5,000
(Being the goods withdrawn for private use)
Trading Account for the year ending 31.12.2015

Dr. Cr.
Less : Goods
taken for private use 5,000 95,000
Accountancy
82

Liabilities ( `) Assets (`)
Capital :
Opening Balance
2,00,000
Less :
Drawings
for goods 5,000 1,95,000
Illustration 35
The net profits of M/s AB & Co. for the year ending 31.03.2017 are `2,10,000
before charging any commission. The manager is allowed a commission of 5% on
the net profits (i) before/ (ii) after charging such commission. Calculate the
commission payable to the manager and also show it in Final Accounts of the year.
Solution :
(i) Manager’s commission before charging such commisson.
Rate of Commission
Commission = Net profit ×
100
5
= `2,10,000 ×
100
= `10,500
(ii) Manager’s commission after charging such commission.
Rate of Commission
Commission = Net profit ×
100 + Rate of Commission
5
= `2,10,000 × = A10,000
105
83
(i)
Particulars ( `) Particulars ( `)
To Manager’s Commission 10,500

Manager’s Commission Due 10,500
(ii) Profit and Loss Account

Dr. Cr.
To Manager’s Commission 10,000

Manager’s Commission Due 10,000
Illustration 36
From the “following trial balance of Ajay as on 31.12.2016, prepare the final
accounts :
Particulars Dr. Cr.
(`) (`)
Accountancy
84
Cash at Bank 10,600 --
General Expenses 10,000 --
Insurance 3,600 --
Capital -- 3,50,000
Debtors and creditors 60,000 48,000
Sales -- 5,00,500
Sales return 4,500 --
Wages 45,200 --
Fuel and Power 5,700 --
Cariage on sales 5,100 --
Cariage Inwards 2,600 --
Stock on 01.01.2016 40,000 --
Building and Land 3,00,000 --
Machinery 1,00,000 --
Salaries 12,500 --
Trademark 35,000 --
9,00,500 9,00,500
Adjustments :
(a) Closing stock amounted to `85,000.
(b) Salaries Outstanding `2,500.
(c) Insurance prepaid for the next years `1,200.
(d) Depreciate Building & Land by 5% and Machinery by 10%.
Solution :
Trading A/c, Profit & Loss A/c of Ajay
Dr Cr.
To Purchases 2,62,500 Less : Sales Return 4,500 4,96,000
Less : Returns 2,000 2,60,500 By Closing Stock 85,000
To wages 45,200
85
To Fuel and Power 5,700
To Carriage Inwards 2,600
5,81,000 5,81,000
To General Expenses 10,000 By Gross Profit b/d 2,27,000
To Insurance 3,600
Less : Prepaid 1,200 2,400
To Carriage on Sales 5,100
To Salaries 12,500
Add :
Outstanding 2,500 15,000
To Depreciation :
On Building and Land 15,000
On Machinery 10,000 25,000
To Net profit transferred
2,27,000 2,27,000
Balance Sheet of Ajay

as on 31.02.2016
Liabilities ( `) Assets ( `)
Outstanding Salaries 2,500 Cash in Hand 3,200
Creditors 48,000 Cash at Bank 10,600
Capital : Debtors 60,000
Opening Balance 3,50,000 Closing Stock 85,000
Add : Prepaid Insurance 1,200
Net Profit 1,69,500 Machinery 1,00,000
5,19,500 Less : Depreciation 10,000 90,000
Building & Land 3,00,000
Less : Depreciation 15,000 2,85,000
Trademark 35,000
5,70,000 5,70,000
Accountancy
86
Illustration 37
From the following trial balance of M/s Raj Traders, prepare Trading and Profit
and Loss Account for the year ending 31.03.2017 and the Balance Sheet as on that
date :
Name of Accounts Dr. Cr.
Opening Stock 30,000
Purchases 2,70,000
Sales Return 7,000
Cariage Inward 2,000
Plant and Machinery 1,00,000
Furniture & Fixturess 60,000
Freehold Property 50,000
Cash in Hand 6,000
Carriage Outwards 1,000
Wages 33,000
Salaries 20,000
Lighting-factory 2,000
Travelling Expenses 2,500
Rent & Taxes 5,000
Drawings 6,000
Insurance 2,000
Capital 1,50,000
Sales 4,00,000
Purchases Return 6,500
Bills payble 20,000
Commission 10,000
6,26,500 6,26,500
Adjustments :
(a) Stock on 31.03.2017 was valued at `40,00,000 (market price `35,000)
(b) Wages `2,000 were outstanding.
(c) Commission received in advance `3,000.
87
(d) Provide depreciation on plant and machinery at 5% and on furniture and fixtures
at 10%.
Solution :
Trading and Profit and Loss Account of
M/s Raj Traders for the year ending 31.03.2017
Dr Cr.
To Purchases 2,70,000 Less : Returns 7,000 3,93,000
Less : Returns 6,500 By Closing stock 35,000
2,63,500
To Wages 33,000
Add :
Outstanding Wages 2,000 35,000
To Carriage Inward 2,000
To Factory Lighting 2,000
4,28,000 4,28,000
To Salaries 20,000 By Gross profit b/d 95,500
To Travelling Expenses 2,500 By Commission 10,000
To Carriage Outwords 1,000 Less : Received
To Rent & Taxes 5,000 in Advance 3,000 7,000
To Insurance 2,000
To Depreciation :
Plant and Machinery 5,000
Furntiture and Fixture 6,000 11,000
To Net profit transferrred
1,02,500 1,02,500
Accountancy
88
Balance Sheet of M/S Raj Traders
as on 31.03.2017
Outstanding wages 2,000 Cash in Hand 6,000
Bills Payable 20,000 Sundry Debtors 30,000
Sundry Creditors 40,000 Closing Stock 35,000
Commission Received in Advance 3,000 Furnitures Fixture 60,000
Capital : Less:Depreciation 6,000 54,000
Opening Balance1,50,000 Plant and Machinery 1,00,000
Add : Net Profit 61,000 Less:
2,11,000 Depreciation 5,000 95,000
Less : Freehold Property 50,000
Drawings 6,000 2,05,000
2,70,000 2,70,000
Illustration 38
From the following Trial balance of Sri Ganpati Ram, prepare the final accounts
for the year ending 31.12.2016 and the Balance Sheet on that date :
Trial Balance
Ledger Accounts Dr. (`) Cr.(`)
Capital -- 5,00,000
Drawing 35,000 --
Plant and Machinery 2,50,000 --
Land and Building 3,00,000 --
Patents 1,50,000 --
Purchases & Sales 7,50,000 13,00,000
Return Inward/Outward 15,000 14,000
Carriage 28,000 --
Wages 60,000 --
Salaries 40,000 --
Rent received -- 35,000
Insurance 2,500 --
89
Audit Fees 6,000 --
Debtors and Creditors 80,000 40,000
Printing and Stationery 9,000
Opening Stock 1,50,000
Cash in Hand 13,500
18,89,000 18,89,000
Adjustments :
1. Closing stock was `95,000.
2. Accrued Rent `7,500
3. Insurance paid in advance `500
4. Allow 10% interest on capital and charge `2,000 on drawings.
5. Provide 5% depreciation on plant and machinery and 10% on patents.
Solution :
Trading and Profit and Loss Account
of Sri Ganpati Ram for the year ending 31.12.2016.
Dr. Cr.
To Opening Stock 1,50,000 By Sales 13,00,000
To Purchases 7,50,000 Less: Returns Inward 15,000 12,85,000
Less : Returns 14,000 By Closing stock 95,000
7,36,000
To Carriage 28,000
To Wages 60,000
To Gross profit c/d 4,06,000
13,80,000 13,80,000
To Salaries 40,000 By Gross profit b/d 4,06,000
To Insurance 2,500 By Rent Received 35,000
Less : Prepaid 500 2,000 Add :
To Audit fees 6,000 Accrued Rent 7,500 42,500
To Printing and Stationery 9,000 By Interest on Drawings 2,000
To Interest on Capital 50,000
Accountancy
90
To Depreciation :
Plants machinery 12,500
Patents 15,000 27,500
4,50,500 4,50,500
Balance Sheet of Sri Ganpati Ram

as on 31.12.2016
Capital 5,00,000 Land and Building 3,00,000
Add : Plant and Machinery 2,50,000
Interest on Capital 50,000 Less:Depreciation 12,500 2,37,500
Net profit 3,16,000 Patents 1,50,000
8,66,000 Less : Depreciation 15,000 1,35,000
Less : Drawings 35,000 Closing stock 95,000
8,31,000 Debtors 80,000
Less : Cash in Hand 13,500
Interest Accrued Rent 7,500
on Drawings 2,000 8,29,000 Prepaid Insurance 500
Creditors 40,000
8,69,000 8,69,000
Illustration 39
From the following Trial balance of Mr. Bohidar on 31.03.2015, prepare Trading,
Profit and Loss Account for the year ending 31.03.2015 and the Balance Sheet as on
that date.
Debit Balances ( `) Credit Balances ( `)
Opening Stock 50,000 Purchases Return 2,000
Purchases 1,80,000 Bank Loan 20,000
Cash in Hand 300 Creditors 70,000
Bank Balances 10,000 Capital 1,68,000
91
Plant and Machinery 50,000 Provision for bad debts 1,000
Manufacturing wages 10,000 Sales 3,22,800
Freight Inward 2,500
Freight Outward 3,000
Salaries 15,000
Furniture 30,000
Insurance & Taxes 7,000
Debtors 90,000
Bad debts 2,700
Discount 1,300
Sales Return 4,000
Stable Expenses 3,000
Live Stock 15,000
Fuel & Power 2,000
Building 1,00,000
5,83,800 5,83,800
Adjustments :
(a) Closing stock was `40,000.
(b) Maintain a provision for bad debts @5% on Debtors
(c) Create a reserve for discount @2% on creditors.
(d) Depreciate Plant and Machinery by 10%, Furniture by 5% and Live Stock by
`2,000.
(e) Prepaid insurance `800
(f) Commission to factory manager allowed @10% on net profit before charging
such commission.
Solution :
of Mr. Bohidar for the year ending 31.03.2015
Dr. Cr.
Accountancy
92
To Purchases 1,80,000 Less : Sales Return 4,000 3,18,800
Less: Purchases Returns 2,000 1,78,000 By Closing stock 40,000
To Manufacturing wages 10,000
To Freight Inward 2,500
3,58,800 3,58,800
To Freight Outward 3,000 By Gross Profit b/d 1,16,300
To Salaries 15,000 By Reserve for Discount
on creditors 1,400
To Insurance & Taxes 7,000
Less :
Prepaid Insurance 800 6,200
To General Expenses 8,000
To Discount 1,300
To Stable Expenses 3,000
To Depreciation :
Plants & Machinery 5,000
Furniture 1,500
Live stock 2,000 8,500
To Provision for Bad debts :
Bad debts 2,700
Add :
New Provision Required 4,500
7,200
Less: Existing Provision 1,000 6,200
To Balance c/d (Profit before 66,500
charging manager’s commission)
1,17,700 1,17,700
To Factory Manager’s Commission 6,650 By Balance b/d 66,500
To Net profit transferred (Net profit before charging
to capital A/c 59,850 such commission)
66,500 65,100
93
Balance Sheet of Mr. Bohidar
as on 31.03.2015
Bank Loan 20,000 Cash in Hand 300
Creditors 70,000 Bank Balances 10,000
Less : Debtors 90,000
Reserve for discount
on creditors 1,400 68,600 Less : Provision
Factory Manager’s Commission Provision for bad debts 4,500 85,500
outstanding 6,650 Closing stock 40,000
Capital : Prepaid Insurance 800
Opening Balance 1,68,000 Furniture 30,000
Add : Net Profit 59,850 2,27,850 Less : Depreciation 1,500 28,500
Live stock 15,000
Less : Depreciation 2,000
Plant and Machinery 50,000 13,000
Less : Depreciation 5,000 45,000
Building 1,00,000
3,23,100 3,23,100
Illustration 40
From the Trial Balance of M/s Purohit & Sons, prepare the final accounts for
the year ending 31.03.2017 and the Balance Sheet as on that date.
Trial Balance
as on 31.03.2017
Dr. Balances ( `) Cr. Balances ( `)
Opening Stock 25,000 Capital 1,60,000
Purchases 2,55,000 Return Outwards 4,000
Plant and Machinery 1,30,000 Sundry Creditors 20,900
Sundry Debtor 60,000 Sales 3,41,000
Furniture 15,000 Rent Received 4,000
Customs duty 5,000 Loan from Bank @10% 29,000
Life Insurance Premium 3,000
Accountancy
94
Carriage Inward 1,500
Carriage Outward 1,700
Trade Expenses 2,000
Return Inward 3,500
Discount allowed 3,000
Bank Interest 500
Office Expenses 3,000
Cash in Hand 5,700
Salaries 45,000
5,58,900 5,58,900
Adjustments :
(i) Closing stock was `35,000
(ii) Stock of `5,000 was burnt by fire. It was fully insured and the insurance company
admitted the claim in full.
(iii) Goods worth `3,000 were distributed as free samples and goods worth `1,000
were taken by the proprietor for personal use.
(iv) Maintain a reserve of 2% on sundry creditors.
(v) Provide a depreciation @10% on Plant and machinery.
Solution :
Trading and Profit and Loss Account of M/s Purohit and Sons
Less:
Return outward 4,000 Return Inward 3,500 3,37,500
Less: 2,51,000 By Closing Stock 35,000
Lost by fire 5,000
2,46,000
Less:
Free samples 3,000
2,43,000
95
Less:
Drawings in goods 1,000 2,42,000
To Customs duty 5,000
3,72,500 3,72,500
To Carriage Outward 1,700 By Gross Profit b/d 99,000
To Trade Expenses 2,000 By Rent Received 4,000
To Discount allowed 3,000 By Reserve for Discount
To Bank Interest 500 on Creditors 418
Add :
Outstanding interest 2,400
(29,000×10% – 500) 2,900
To Free Samples 3,000
(or Advertisements)
To Office expenses 3,000
To Salaries 45,000
To Depreciation on Plant and
Machinery 13,000
1,03,418 1,03,418
Balance Sheet of M/s Purohit and Sons as on 31.03.2017

Sundry Creditors 20,900 Cash in Hand 5,700
Less : Sundry Debtors 60,000
Reserve for Closing Stock 35,000
Discount on creditors 418 20,482 Insurance Claim Admitted 5,000
10% Bank Loan 29,000 Furniture 15,000
Add : Plant and Machinery 1,30,000
Outstanding Interest 2,400 31,400
Capital : Less :
Opening Balance 1,60,000 Depreciation 13,000 1,17,000
Add : Net Profit 29,818
1,89,818
Accountancy
96
Less :
Drawings for Life
insurance Premium 3,000
1,86,818
Less :
Drawings for Goods 1,000 1,85,818
2,37,700 2,37,700
Illustration 41
Prepare final accounts from the following Trial Balance for the year ending
31.12.2016 :
Drawings 20,000 Provision for bad debts 8,000
Carriage Inwards 8,000 Purchases Return 4,500
Wages 7,500 Sundry Creditors 70,000
Power 2,700 Capital 2,00,000
Advertisement 25,000 Sales 3,95,500
Purchases 3,80,000
Return Inward 3,500
Cash in Hand 17,000
Cash at Bank 15,000
Salaries 12,500
Prepaid Insurance 1,200
Rent and Insurance 20,000
Goods services Tax 6,700
Bad debts 900
6,78,000 6,78,000
Adjustments :
(i) Closing stock was `1,00,700
(ii) Depreciate machinery by 10%.
(iii) Write off advertisement by 20%.
97
(iv) Further bad debts `2,000 and make provision for bad debts by 5%.
(v) Charge 10% manager’s commission on net profit after charging such
commission.
Solution :
Particulars ( `) Particulars (`)
To opening stock 28,000 By Sales 3,95,500
Less : Return Inward 3,500 3,92,000
Purchases Return 4,500 3,75,500 By Closing stock 1,00,700
To Wages 7,500
To Power 2,700
4,92,700 4,92,700
To Advertisement written off 5,000 By Gross Profit b/d 71,000
To Depreciation on Machinery 7,000 By Provision for Bad debts :
To Salaries 12,500 Existing Provision 8,000
To Rent and Insurance 20,000 Less :
To Goods Services Tax 6,700 Bad debts 900
To Balance c/d 22,000 Further Bad debts 2,000
(Profit before charging New Provision
Manager’s Commission) {(60,000-2,000)×5%}2,900
5,800 2,200
73,200 73,200
To Manager’s Commission 2,000 By Balances b/d 22,000
10
(22000× 110 )
22,000 22,000
Accountancy
98
Balance Sheet as on 31,12.2016
Sundry Creditors 70,000 Cash in Hand 17,000
Capital : Cash at Bank 15,000
Opening Balance 2,00,000 Closing Stock 1,00,700
Add : Net Profit 20,000 Prepaid Insurance 1,200
2,20,000 Plants and Machinery 70,000
Less : Drawings 20,000 Less : Depreciation 7,000 63,000
2,00,000 Advertisements 25,000
Manager’s Commission 2,000 Less : Written off 5,000 20,000
Less: Further bad debts 2,000
58,000
Less : Provision Required 2,900 55,100
2,72,000 2,72,000
Illustration 42
From the following Trial Balance of M/s Prabhu Traders prepare final accounts
for the year ending 31.03.2017.
Opening Stock 30,000 Discount 3,700
Purchases 1,50,000 Apprentice Premium 6,000
Manufacturing Wages 9,000 Creditors 25,000
Fuel & Power 3,000 Interest on Loan 1,500
Salaries 10,000 Capital 1,00,000
Income Tax 2,500 Sales 2,23,800
Loan to Ambika @10% p.a. 20,000
Furniture 8,000
Plants and Machinery 85,000
Debtors 32,400
Cash 3,700
Rent 6,400
3,60,000 3,60,000
99
Adjustments :
1. Closing stock was `38,000
2. Depreciate plant and machinery by 10% and furniture by 5%.
3. Create a reserve for discount on creditors by 5% and provision for discount on
debtors by 5%.
4. Sundry debtors include `400 due from a customer who became insolvent.
5. Goods worth `3,000 were destroyed by fire and the insurance company admitted
claim for `1,800.
6. Outstanding salaries were `2,000.
Solution :
Trading and Profit and Loss Account of M/s Prabhu Traders
To Opening stock 30,000 By Sales 2,23,800
Less: By Closing Stock 38,000
Goods lost by fire 3,000 1,47,000
To Manufacturing wages 9,000
2,61,800 2,61,800
To Salaries 10,000 By Gorss profit b/d 72,800
Add : By Reserve for discount
Outstanding Salaries 2,000 12,000 on creditors. 1,250
To Depreciation : By Apprentice Premium 6,000
Plant & Machinery 8,500 By Interest on Loan 1,500
Furniture 400 8,900 Add : Accured Interest 500 2,000
To Bad debt 400 By Discount 3,700
To Provision for discount
on debtors {(32,400–400)×5%)} 1,600
To Loss by fire (A3000–A1,800) 1,200
To Rent 6,400
85,750 85,750
Accountancy
100
Balance Sheet of M/s Prabhu Traders
as on 31,03.2017
Creditors 25,000 Cash 3,700
Less : Debtors 32,400
Reserve Less :
for discount on creditors 1,250 23,750 Bad debts 400
Provsion for
Discount 1,600 2,000 30,400
Salaries Outstanding 2,000
Capital : Closing Stock 38,000
Opening balance 1,00,000 Loan to Ambika 20,000
Less : Drawings Interest on Loan Accrued 500
(for income tax) 2,500 Furniture 8,000
97,500 Less : Depreciation 400 7,600
Add : Plant & Machinery 85,000
Net Profit 55,250 1,52,750 Less : Depreciation 8,500 76,500
Insurance claim admitted 1,800
1,78,500 1,78,500
Illustration 43
Following is the Trial balance of PJ Brothers on 31.12.2016
Purchases (adjusted) 3,49,600 Capital 20,000
Salaries 2,100 Bills Payable 5,000
Lighting 150 Loan 10,000
Carriage on Sales 250 Sales 3,60,000
Building 13,500 Commission 250
Carriage on Purchases 200 Sundry Creditors 10,000
Rates & Taxes 200
Furniture 3,000
Cash in Hand 125
Bills Receivable 750
Closing stock 30,625
Bank balance 750
4,05,250 4,05,250
101
Adjustments :
(i) Rates have been prepaid `60
(ii) During year, bad debt amounted to `250.
(iii) A provision of 10% is to be made on debtors.
(iv) Buildings have to be depreciated by 2% and furniture by 1%. Prepare the final
accounts for the year.
Solution :
Trading and Profit and Loss Account of P.J. Brothers
Dr. Cr.
To Adjusted Purchases 3,49,600 By Sales 3,60,000
To Carriage on purchases 200

3,60,000 3,60,000
To Salaries 2,100 By Gross Profit b/d 10,200
To Lightining 150 By Commission 250
To Carriage on sales 250
To Rates & Taxes 200
Less : Prepaid Rates 60 140
To Bad debt 250
To Provision for bad debts 375
{(4,000-250)×10%
To Depreciation :
Building 270
Furnitures 30
To Net profit transfered 300
10,450 10,450
Accountancy
102
Balance of PJ Brothers as on 31,12.2016
Sundry Creditors 10,000 Cash in Hand 125
Bills Payable 5,000 Bank balance 750
Loan 10,000 Bills Receivable 750
Capital : 20,000 Sundry Debtors 4,000
Net Profit 6,885 26,885 Less : Bad debts 250
3,750
Less : Provision
for doubtful debt 375 3,375
Closing Stock 30,625
Prepaid Rates 060
Furniture 3,000
Less : Depreciation 30 2,970
Buildings 13,500
Less: Depreciation 270 13,230
51,885 51,885
1.6 Questions
1. From the alternatives given below, write the correct answer along with its serial
number against each bit :
(i) Revenue expenditure is one which gives benefits for :
(a) Current year (c) Future year
(b) Previous year (d) First two years
(ii) Capital expenditure is one which gives benefits for :
(a) Current year only (c) Future years
(b) Previous year only (d) Less than one year
(iii) Heavy amount spent on advertisement of new product is :
(a) Capital expenditure (c) Revenue loss
(b) Revenue expenditure (d) Deferred revenue expenditure
103
(iv) Wages spent for installation of machinery is a :
(a) Capital expenditure (c) Deferred revenue expenditure
(b) Revenue expenditure (d) Capital loss
(v) Expenditure incurred in manufacturing goods is :
(a) Capital expenditure (c) Revenue expenditure
(b) Capital loss (d) Revenue loss
(vi) Trading Accounts reveals :
(a) Gross profit/Loss (c) Financial position
(b) Net profit /loss (d) Appropriation of profits
(vii) Profit and Loss Account reveals :
(a) Gross profit/loss (c) Appropriation of profits
(b) Net profit/loss (d) Financial position
(viii) Balance Sheet of a trader reveals :
(a) Balances of all ledger accounts (c) Balance of Net profit
(b) Balance of Gross profit (d) Financial Position
(ix) Closing stock appearing in the Trial Balance is transferred to :
(a) Trading Account only (c) Trading Account and Balance sheet
(b) Balance sheet only (d) Trading Account and Profit and Loss
Account
(x) Income tax paid by a sole trader is shown in :
(a) Debit side of Trading A/c (c) Asset side of Balance Sheet
(b) Debit side of Profit and Loss A/c (d) Deducted from capital on the
liability side of Balance Sheet
(xi) An example of intangible asset is :
(a) Machinery (c) Prepaid Expenditure
Accountancy
104
(b) Mines (d) Copyrights
(xii) Marshalling of Balance Sheet means :
(a) the arranging assets and liabilities
(b) the arranging assets only
(c) the arranging liabilities only
(d) the totalling assets and liabilities
(xiii) Direct expenses are shown in :
(a) Balance Sheet (c) Trading Account
(b) Profit and Loss Account (d) Trading Account and Balance sheet
(xiv) Indirect expenses are shown in :
(a) Balance sheet (c) Trading Account
(b) Profit and Loss Account (d) Profit and Loss A/c and Balance
Sheet
(xv) One of the following, which is not shown in the Balance Sheet is :
(a) Current Liability (c) Current Asset
(b) Non-current liability (d) Contingent liability
(xvi) One of the following, which is not deducted from capital, is :
(a) Net Loss (c) Income Tax
(b) Drawings (d) Loan
(xvii)Accrued Income is a/an :
(a) Asset (c) Income
(b) Liability (d) Expense
(xviii) Income received in advance is a/an :
(a) Asset (c) Income
(b) Liability (d) Expenditure
105
(xix) Prepaid expense is an example of :
(a) Current Asset (c) Intangible asset
(b) Fixed Asset (d) Fictitious asset
(xx) Prepaid Insurance appearing in the Trial balance is shown in :
(a) Profit and Loss A/c only (c) Balance Sheet only
(b) Balance Sheet & Profit and Loss A/c (d) Balance Sheet and Trading A/c
(xxi) A manager’s commission of 10% on net profit of `2,20,000 after charging
such commission is :
(a) `22,000 (c) `20,200
(b) `20,000 (d) `22,020
(xxii) A manager’s commission of 5% on net profit A2,10,000 before charging such
commission is :
(a) `10,500 (c) 10,050
(b) `10,000 (d) 10,505
(xxiii) Closing stock is shown in final accounts at :
(a) cost price (c) cost or market price which ever is
more
(b) market price (d) cost or market price which ever is
less
[Answers : (i) a, (ii) c, (iii) d, (iv) a, (v) c, (vi) a, (vii) b, (viii) d, (ix) b, (x) d, (xi)
d, (xii) a, (xiii) c, (xiv) b, (xv) d, (xvi) d, (xvii) a, (xviii) b, (xix) d, (xx) c, (xxi) b,
(xxii) a, (xxiii) d.]
2. Answer the following questions in one word / term each :
(a) Where will you show in final accounts the prepaid Insurance if appearing in
the Trial balance ?
Accountancy
106
(b) Where will you show the income received in advance in the Balance sheet ?
(c) Where will show in final accounts if the closing stock appears in Trial
Balance ?
(d) Which item is an expense to the firm but income to the proprietor ?
(e) Which item is an income to the firm but expense to the proprietor ?
(f) What is the term used for income earned but not received during the current
accounting period ?
(g) How do you term the expense which has been paid during the current
accounting period but benefit will accrue in the sabsequent account period ?
(h) Where will you show in final accounts, if depreciation appears in the Trial
Balance ?
(i) What is that amount which is due from a customer but cannot be recovered ?
Ans : (a) Balance Sheet (b) Liability side (c) Balalnce Sheet (d) Interest on
capital (e) Interest on drawings (f) Accrued income (g) Prepaid expense
(h) Income Statement (i) Bad debts.
3. Rectify the underlined portions of the following sentences :
(a) An expenditure, the benefit of which is consumed in the current year is
capital expenditure.
(b) An expenditure, the benefit of which is consumed in more than one
accounting period is revenue expenditure.
(c) Provision for discount on debtors sometimes shows a credit balance.
(d) Depreciation appearing in Trial balance will appear in Balance Sheet.
(e) Prepaid expenses appearing in Trial balance is shown on the liabilities side
of the Balance sheet.
(f) Outstanding salary, if appears in Trial balance will be shown in the Profits
Loss A/c.
107
(g) The manager’s commission is an income for the business firm.
(h) Closing stock is always recorded at cost or market price whichever is higher.
(i) Depreciation is charged on fictitious assets only.
(j) Interest on capital is considered as an expense of the proprietor.
(k) Interest on capital is considered as an income of the business.
(l) Interest on drawing is considered as an income of the proprietor.
(m) Interest on drawing is considered as an income of the proprietor.
(n) For goods withdrawn by proprietor for personal use, purchase account is
debited.
(o) For goods distributed as free samples /charity purchase account is debited.
(p) For abnormal loss of stock, insurance claim admitted by insurer is treated
in Profit and Loss Account.
(q) All direct expenses are charged to Profit and Loss A/c.
(r) Income Statement depicts the financial position of the business at the end
of the year.
(s) Income Statement is also known as the Position Statement of a business.
[Ans. : (a) Revenue (b) Capital (c) Always (d) P&L A/c (e) asset (f) Balance
Sheet (g) expense (h) lower (i) fixed (j) income (k) proprietor (l) expense
(m) business (n) credited (o) credited (p) Balance Sheet (q) Trading (r) Balance
Sheet (s) Balance Sheet.]
4. Fill up the blanks.
(a) Bad debts is a ______ .
(b) Discount received from creditors is an ______ .
(c) An expenditure incurred in achieving economy in operation is a ______
expenditure.
(d) An amount spent on white washing a new factory is a ______ expenditure.
Accountancy
108
(e) Royalties paid on sales is charged to ______ A/c.
(f) Royalities paid on production is charged to ______ A/c.
(g) Bad debts recovered are transferred to ______ side of Profit and Loss A/c.
(h) All indirect expenses are taken to ______ A/c.
(i) All direct expenses are taken to ______ A/c.
(j) Depreciation is charged on ______ assets.
(k) If prepaid expenses are shown in the Trial Balance, it will be shown onlyin
the ______ .
(l) Income received in advance is a ______ for the business firm.
(m) Manager’s commission payable is shown on the ______ side of Balance
Sheet.
(n) Accrued Income is an ______ for the business.
[Answer: (a) loss (b) income (c) capital (d) capital (e) Profit and Loss (f)
Manufacturing (g) credit (h) Profit and Loss (i) Trading (j) Fixed (k) Balance
Sheet (l) liability (m) liability (n) asset.]
5. Answer the following questions in one sentence each :
(a) What do you mean by capital expenditure ?
(b) What do you mean by revenue expenditure ?
(c) What is meant by deferred revenue expenditure ?
(d) To which account will the item ‘salaries and wages’ be transferred ?
(e) What is meant by marshalling of Balance Sheet ?
(f) Why is Balance Sheet also called Position Statement ?
(g) Why is the Trading and Profit and Loss Account called Income Statement ?
(h) What do you mean by adjusted purchase ?
(i) Under which circumstances closing stock is given in Trial Balance ?
(j) What do you mean by doubtful debts ?
109
6. Answer the following questions within thirty words each :
(a) Distinguish between revenue expenditure and capital expenditure.
(b) What is cost of goods sold ?
(c) Differentiate between Balance Sheet and Tril Balance.
(d) What are the direct expenses ?
(e) What are the two ways of arranging the items of Balance Sheet ?
(f) Differentiate between current asset and fixed asset.
(g) Distinguish between gross profit and net profit.
(h) Name five items appearing in Profit and Loss Account.
(i) Name five items appearing in Trading Account.
(j) Give two examples of fictitious asset.
(k) Give two examples of deferred revenue expenditure.
7. Answer the following questions in fifty words each :
(a) Why is it necessary to distinguish between capital expenditure and revenue
expenditure ?
(b) Explain the difference between capital expenditure and capitalised
expenditure.
(c) Distinguish between deferred revenue expenditure and prepaid expenditure.
(d) How will you treat ‘Outstanding expenses’ and ‘Prepaid expenses’ appearing
in the Trial balance ?
(e) How is managers commission on net profit calculated while preparing final
account ?
(f) How is abnormal loss treated in final accounts if :
(i) stocks are not insured (ii) fully insured and (iii) partly insured, on the
presumption that insurance claim is admitted.
Accountancy
110
(g) How are accrued income and unearned income treated in final accounts if
they appear is the Trial Balance ?
(h) Give adjustment entries for provision for discount on debtors.
(i) Give adjustment entry for provision for bad and doubtful debts.
(j) Define closing entries.
(k) Define adjustment entries.
8. Explain the accounting treatment of outstanding expenses, prepaid expenses,
accrued income and unearned income in final accounts with imaginary figures.
9. Give the accounting treatment of goods destroyed by fire under different
situations with suitable examples.
10. Show the treatment of goods used for personal use of proprietor, goods
distributed as free samples and also for charity in final accounts with suitable
examples.
11. What is meant by provision for doubtful debts ? How are the relevant accounts
prepared and what journal entries are passed in final accounts ?
12. Is it necessary to pass two entries for every adjustment ? Explain with suitable
examples.
13. Calculate gross profit from the extract of Trial Balance of Mohan for the year
ending 30.09.2016 :
` `
Opening stock 15,000 Purchase return 5,000
Closing stock 25,000 Purchases 20,000
Net Sales 40,000 Direct expenses 8,000
(Ans. Gross profit `27,000)
14. From the ledger balances given below, prepare the Trading Account for the year
ending 31.12.2015 :
` `
Opening stock 7,000 Returns outward 2,400
Purchases 21,000 Carriage Inwards 3,500
Sales 90,000 Freight & Customs duty 4,600
Returns inward 2,000 Stock on 31.12.2015 10,000
(Ans. Gross profit `60,300)
111
15. From the following Trial Balance, prepare Trading and Profit and Loss Account
and Balance Sheet as on 31.12.2016 :
Dr. Balances (`) Cr. Balances ( `)

Plant & Machinery 27,000 Capital 60,000
Sundry Debtors 21,600 Bills Payable 1,400
Drawings 2,700 Sundry Creditors 2,800
Purchases 59,000 Sales 73,500
Wages 14,500
Sundry Expenses 600
Rent and Taxes 1,350
Carriage Inwards 450
Bank 4,500
Opening stock 6,000
1,37,700 1,37,700
Closing stock as on 31.12.2016 was `22,400 (Ans. Gross profit `15,950 Net
profit 14,000 B/s Total 75,500)
16. From the following Trial Balances of M/s Chahar on 31.03.2017, you are required
to prepare Trading and Profit and Loss Account and Balance Sheet as on that
date :
Name of the Accounts Dr. Bal.(`) Cr. Bal (`)
Opening stock 12,000
Purchases and sales 38,000 80,000
Returns 900 600
Productive wages 6,000
Dock and clearing charges 4,000
Donation and charity 600
Delivery van expenses 6,000
Lighting 500
Goods and Services Tax 800
Accountancy
112
Bad debts 600
Miscellaneous incomes 6,000
Rent from Tenants 2,000
Royalty 3,200
Capital 40,000
Drawings 2,000
Debtors and Creditors 6,000 8,000
Cash 3,000
Investment 6,000
Patents 4,000
Machinery 43,000
1,36,600 1,36,600
Closing stock 15,000
(Ans. Gross profit 31,500, Net profit 31,000 B/s Total 77,000)
17. From the following balances, prepare Trading and Profit and Loss Account for
the year ended on 31st March 2016 and Balance Sheet as on that date :
Insurance 750 Capital 1,52,000
Bad debts 1,250 Discount 2,980
Book debts 82,740 Loans 15,000
Plant & Machinery 31,640 Sales 2,81,500
General expenses 3,630 Provision for bad
Drawings 6,300 and doubtful debts 4,650
Cash at Bank 13,870
Buildings 41,580
Furniture 5,130
Discount 3,960
Bank Charges 100
Salaries 6,420
Purchases 1,99,080
Sales Return 1,870
113
Carriage 5,170
4,74,250 4,74,250
Adjustments :
(a) Closing stock was `70,000.
(b) Create a provision for bad and doubtful debts @10% on debtors.
(c) Insurance prepaid `50.
(d) Rent outstanding `150.
(e) Interest on Loan is due @6% p.a.
(Ans. Gross Profit 86,610; Net Profit `61,176; B/S Total `2,39,596.)
18. The following balances have been extracted from the Trial balance of Bijoy. You
are required to prepare Trading, Profit and Loss Account for the year ending
30th September 2016 and the Balance Sheet on that date from the given data :
Dr. Balances Amount Cr. Balances Amount
(`) ( `)
Drawings 20,000 Sales 2,76,000
Bad debts 1,000 Returns outward 2,000
Sundry Debtors 80,000 Capital 2,50,000
Printing and Stationery 2,000 Bank Overdraft 12,000
Freight Inwards 4,000 Provision for bad debts 4,000
Trade Expenses 2,400 Sundry Creditors 20,000
Returns Inward 7,000 Bills Payable 5,400
Purchases 1,80,000
Rent, Rates and Taxes 5,000
Furniture & Fixtures 20,000
Wages 10,000
Cash 6,000
Discount 2,000
Investment 40,000
Land and Buildings 51,000
5,69,400 5,69,400
Accountancy
114
Adjustments :
(1) Closing stock was `45,000.
(2) Provision for doubtful debts is to be made @5% on debtors.
(3) Depreciation charged on Furniture and Fixtures @5% p.a., Plant and
Machinery @6% p.a., and on Land and Buildings @10% p.a.
(Ans.Gross profit `97,000; Net profit `72,500; Balance sheet Total `3,39,900.)
19. Prepare Trading, Profit and Loss Account of Mr Sujit for the year ending
31.12.2016 from the following trial balance :
(`) ( `)
Investment 23,100 Sales 2,50,000
Bed debts 3,500 Returns Outward 6,000
Discount 3,500 Creditors 10,000
Lighting and Heating 5,000 Bills Payable 20,000
Machinery 70,000 Discount 1,000
Cash 10,000 Provision for Bad Debts 4,500
Debtors 50,000 Capital 75,000
Insurance 4,000 Interest Received 5,400
General Expenses 400
Packing (Primary) 500
Rent & Rates 1,000
Wages 3,000
Salary 12,300
Postage 600
Returns Inward 5,000
Purchases 1,45,000
3,71,900 3,71,900
Adjustments :
(1) Closing stock was `25,000.
(2) Wages Outstanding `1000.
(3) Insurance Prepaid `400
(4) Provide for doubtful debt @5% on debtors subject to further bad debts of
`1,000.
115
(5) Depreciation on machinery 10% p.a.
(Ans. G.P. `86,500, N.P. `62,050, B/S Total `1,68,050)
20. From the following extracts of a Trial balance of Mr. Sajjan Kumar, prepare
Trading, Profit and Loss Account for the year ending 30.06.2017 and the Balance
sheet as on that date :
( `) ( `)
Opening Stock 20,000 Capital 1,06,000
Building 50,000 Sales 2,20,000
Furniture 6,000 Returns Outward 2,000
Purchases 90,000 Discount 500
Carriage Inward 2,000 Sundry Creditors 10,000
Returns Inward 7,000 Bills Payable 4,000
Plant 50,000
Cash 6,000
Carriage Outward 500
Wages 33,000
Salaries 20,000
Lighting-factory 1,000
Travelling Expenses 1,500
Rent & Taxes 5,000
Drawings 6,000
Insurance 12,500
3,42,500 3,42,500
Adjustments:
1. Provide depreciation on plant @5% and on furniture @ 10% p.a.
2. Wages outstanding `2,000 and Salaries outstanding `1,800.
3. Prepaid Insurance `2,00.
4. Stock on 31.06.2017 `28,000, its market value is `25,000.
(Ans. Gross Profit `92,000; Net Profit `46,300; B/S Total `1,64,100.)
Accountancy
116
21. Prepare Trading Account, Profit and loss Account for the year ending 31.12.2016
and the Balance Sheet on that date from the Trial Balance of Suraj given below :
(`) ( `)
Rent 1,000 Capital 46,000
Plant and Machinery 40,000 Creditors 30,000
Horses & Carts 34,000 Sales 20,000
Debtors 10,000 Bills Payable 9,250
Cash in hand 2,600
Purchases 8,000
Wages 1,000
Salaries 1,000
Repairs 950
Stock 2,400
Coal, gas and water 600
Bad debt 200
Carriage 300
Octroi 200
Drawings 3,000
1,05,250 1,05,250
Adjustment:
1. Rent paid in advances `120.
2. Wages due `300.
3. Depreciate plant and machinery @10% and horses and carts @15% p.a.
4. Interest on capital is charged @10% p.a.
5. Closing stock `4,100.
(Ans. Gross Profit `11,300; Net Loss `5,430; Balance sheet Total `81,720)
22. From the trial balance given below, prepare Trading and Profit and Loss Account
for the year ending 31.03.2017 and the Balance Sheet as on that date :
(`) ( `)
Opening Stock 2,000 Capital 10,000
Machinery 4,000 Creditors 1,000
Debtors 2,400 Bills Payable 700
117
Drawings 1,000 Returns Outward 500
Purchases 11,500 Sales 17,400
Returns Inward 300
Wages 4,800
Manufacturing expenses 1,000
Bank 1,000
Rent 450
Carriage 250
Bad debt 900
29,600 29,600
Adjustments :
1. Closing stock was valued at `2,450.
2. Depreciate machinery by 8% p.a.
3. Allow interest on Capital @5% p.a.
4. Rent outstanding `50.
(Ans. Gross Profit `500; Net Loss `1,720; Balance sheet Total `9530)
23. From the following Trial balance of Rajat Traders, prepare Trading, Profit and
Loss Account for the year ending 31.03.2017 and the Balance Sheet as on that
date :
(`) ( `)
Adjusted Purchases 3,80,000 Sales 5,40,000
Sundry Debtors 1,40,000 Sundry Creditors 1,00,000
Returns Inward 3,600 Returns Outward 6,400
Trade Expenses 2,000 Capital 2,00,000
Production expenses 6,000 Commission 16,500
Plant and Machinery 40,000 Bills Payable 2,900
Rates and Taxes 10,000 Loan 30,000
Productive wages 44,000
Repairs and Maintenance 14,400
Land and Building 70,000
Cash 19,000
Power 14,000
Office Salaries 11,000
Bad debts 2,800
Accountancy
118
Drawings 12,000
Sundry Expenses 4,800
Closing Stock 1,00,000
8,95,800 8,95,800
Adjustments :
1. Salaries outstanding `1,000
2. Commission accrued but not received `3,500
3. Provide depreciation on plant & machinery @10% p.a.
(Ans. Gross Profit `94,200; Net Profit `61,800; B/s Total `3,83,700.
24. Prepare Trading, Profit and Loss Account for the year ending 30.09.2016 from
the extracts of a trial balance given below :
(`) ( `)
Purchases 3,33,950 Sales 4,52,160
Opening Stock 27,400 Returns Outward 1,150
Returns Inward 2,005 Creditors 12,000
Carriage Inward 7,715 Discount 110
Wages 59,840 Capital 1,00,000
Coal, gas and water 40,860
Production expenses 6,840
Debtors 67,900
Bad debt 1,000
Salaries 3,305
Rent, Rates & Taxes 2,910
Cash 4,805
Drawings 3,000
5,65,420 5,65,420
119
Adjustments :
1. Closing stock `45,820
2. Salaries outstanding `695.
3. Rent, Rates & Taxes paid in advance `910.
(Ans. Gross Profit `20,520; Net Profit `9,740; B/S `1,19,435.)
25. From the following Trial balance of Mr Amit, prepare Trading, Profit and Loss
Account for the year ending 30th June 2017 and the Balance Sheet as on that date :
`
( ) ( `)
Opening stock 8,000 Sales 37,000
Purchases 20,000 Returns Outward 1,455
Returns Inward 1,350 Capital 30,000
Wages 1,000 Sundry Creditors 20,000
Carriage 500
Salaries 1,700
Printing and stationery 800
Drawings 3,000
Machinery 32,000
Cash 105
88,455 88,455
Adjustments :
1. Wages outstanding `300
2. Goods destroyed by fire `2,000; Insurance claim was not admitted for the loss.
3. Depreciate machinery by 5% p.a.
4. Closing stock `18,000.
(Ans. Gross profit `27,305; Net profit `21,205; Balance sheet `68,505.)
26. From the following trial balance of Kamlesh, prepare final accounts for the
year ending 31.03.2017 :
(`) ( `)
Plant and Machinery 52,000 Capital 75,000
Furniture 8,000 Sales 1,27,500
Sundry Debtors 10,000 Sundry Creditors 12,000
Accountancy
120
Trade Expenses 1,000 Purchases Return 1,000
Depreciation 2,000 Rent 3,200
Cash at Bank 7,500 Bills Payable 4,000
Wages and Salaries 6,000 Interest 1,000
Purchases 90,800
Discount 1,200
Drawings 17,000
Bad debts 700
2,23,700 2,23,700
Adjustments :
1. Closing stock `35,000
2. Wages due `2,000
3. Create a reserve for discount @ 5% on creditors.
(Ans. Gross Profit `41,200; Net Profit `41,100; Balance sheet Total
`1,16,500.)
27. From the following trial balance taken from the books of Bimal Kumar, prepare
Trading, Profit and Loss Account for the year ending 31.12.2016 and a Balance
Sheet as on that date :
(`) ( `)
Opening stock 9,700 Bank overdraft 7,000
Purchases 30,250 Creditors 15,000
Bank charges 050 Capital 60,000
Freehold Premises 10,000 Sales 50,920
Fixed Deposit 3,000 Bills Payable 18,000
Furniture 4,000
Legal Charges 200
Insurance 600
Telephone 600
Wages 6,300
Factory Fuel 2,900
121
Drawings 5,000
Office Expenses 600
1,59,920 1,50,920
1. Closing stock was A15,750
2. Prepaid insurance A300
3. Wages due A700
4. Interest accrued on Fixed Deposits @10% p.a.
[Ans. Gross Profit A16,820; Net Profit A8,970; Balance sheet Total A1,04,670.)
28. From the following Trial balance extracted from the books of Pooja Stores,
prepare the final accounts for the year ending 31.03.2017 :
(A) ( `)
Cash in hand 10,500 Sales 4,30,000
Plant & Machinery 1,20,000 Capital 2,50,000
Furniture 20,000 Bills Payable 5,000
Bad debts 2,000 Discount Received 4,000
Printing 2,500 Sundry Creditors 40,000
Patents 20,000
Income Tax 5,000
Debtors 45,000
Stock as on 01.04.2016 22,000
Salary Paid 45,000
Wages 15,000
Land and Building 1,00,000
Commission 23,000
Purchases 2,80,000
7,29,000 7,29,000
Accountancy
122
Adjustments :
1. Closing stock was `35,000
2. Goods worth `15,000 were destroyed by fire but insurance company accepted
a claim of `10,000 only.
3. Depreciate Plant and Machinery by 10%, Patents by 5% and Buildings by 7 1/2%.
4.Wages due ` 3,000
(Ans. Gross Profit `1,50,000; Net Profit `47,000; Balance sheet total
`3,40,000.)
CHAPTER-2
FINANCIAL STATEMENTS OF
‘NOT FOR PROFIT’ ORGANISATIONS
STRUCTURE
2.0 INTRODUCTION
2.1 MEANING
2.2 OBJECTIVES
2.3 NECESSITY OF PREPARING FINANCIAL STATEMENTS
2.4 BOOKS OF ACCOUNTS AND ACCOUNTING PROCEDURE
2.5 RECEIPTS AND PAYMENTS ACCOUNT
2.5.1 Meaning of Receipts and Payments Account
2.5.2 Features of Receipts and Payments Account
2.5.3 Format of Receipts and Payments Account
2.5.4 Difference between Receipts and Payments Account and Cash
Book
2.6 INCOME AND EXPENDITURE ACCOUNT
2.6.1 Meaning of Income and Expenditure Account
2.6.2 Features of Income and Expenditure Account
2.6.3 Difference between Receipts and Payments Account and
Income and Expenditure Account
2.6.4 Difference between Income and Expenditure Account and
2.6.5 Format of Income and Expenditure Account
2.7 TREATMENT OF SOME IMPORTANT ITEMS
2.8 PREPARATION OF INCOME AND EXPENDITURE ACCOUNT
AND BALANCE SHEET
2.9 QUESTIONS
Accountancy
124
2.0 INTRODUCTION
Some organisations are set up with an objective either for making profit or for
providing service to the society. Thus, from the point of view of objectives of any
legal and accounting entity, one can divide the organisations into two categories such
as : (a) Trading/Manufacturing or Profit making organisations, and (b) Non-trading or
‘Not for Profit’ making organisations. The trading organisations are the common
business organisations such as sole trading units, partnership firms and corporate
houses like Reliance Industries Ltd., Tata Iron and Steel Company Ltd., National
Alumunium Company Ltd., Parle Agro Private Ltd., etc. The main objective of
commercial organisations is to earn profit. On the other hand, non-trading or ‘not for
profit’ making organisations primarily provide services to the society at large and
also to its meambers without any objective of making profit. These organisations are
mainly set up for social, religious, cultural, scientific, charitable, recreation and
entertainment purposes. Social organisations are non-governmental organisations like
clubs, societies and associations. The charitable organisations are like hospitals,
religious organisations like temples, mosques, churches, educational and cultural
organisations like schools, colleges, universities, libraries, etc. These organisations
mainly render services to the society and also to its members. They carry on their
activities for promoting their objectives of raising the standard of living and other
socio-cultural and economic conditions of the society.
2.1 MEANING
‘Not for profit’ organisations are those organisations whose main objective is
not to earn profit but to render services to its members and to the society at large.
These organisations help in promoting art, science, culture, religion, charity,
recreation, entertainment, etc. Their intention is to spend their earnings in promoting
their organisational objectives. They restrict on distributing dividend to its members.
The examples of some organisations are, Board of Cricket Control of India, Cricket
Associations of different states, Institute of Chartered Accountants of India, Federation
of Indian Chambers of Commerce and Industries, charitable educational institutions
like DAV group of educational institutions, etc.
Financial Statements of ‘Not for Profit’ Organisations
125
2.2 OBJECTIVES
The primary objective of ‘not for profit’ organisations is to render valuable
services to its members and to the society. They carry out their activities without an
intention to make profit. The main objectives of such organisations are :
(a) to render valuable services to its members and to the society;
(b) to work without any motive to earn profit;
(c) to promote art, culture, religion, etc;
(d) to create awareness on social evils like untouchability, child marriage,
animal sacrifice, etc;
(e) to promote health and education in remote, hilly and mountaineous regions;
(f) to promote and protect socio-economic status of its members and the
society;
(g) to provide entertainment facility and charity.
2.3 NECESSITY OF PREPARING FINANCIAL STATEMENTS
The ‘not for profit’ organisations do not exist for earning profit. They simply
render services to the public. The primary sources of income of such
organisations are by way of fees, donations, subscriptions, grants, etc. These
incomes do not belong to any person in particular. There are chances of fraud
and mismanagement of cash and other valuable assets of such organisations. An
Executive Committee or Governing Body or Trust is formed by taking a group
of persons as members to organise and manage the activities and funds of the
organisation. An individual works as the Chairman or Director or CEO (Chief
Executive Officer) or Trustee of the organisation. It becomes essential to record
and maintain the books of accounts regularly and periodically.
Accounting for ‘not for profit’ organisations is a particular accounting
system. This accounting system accumulates, communicates and interpretes
the historical data useful for the purpose of ascertaining the financial position
and operating results of such an organisation.Accumulating of data refers to
Accountancy
126
collection, recording and summarising the historical data and finding out the
operating results and financial position of the organisation, communicating the
accumulated data to the stakeholders of the organisations like members, society,
government, donors by preparing Income and Expenditure Account and Balance
Sheet.
2.4 BOOKS OF ACCOUNTS AND ACCOUNTING PROCEDURE
As most of the transactions of ‘not for profit’ organisations are in cash,
they normally maintain a book to record the receipts and payments of cash. It is
known as Receipts and Payments Account. Besides this book, they maintain
other books, such as :
(a) Members’ Register: It is a record of all the members of ‘not for profit’
organisations. This register contains the name, address and date of admission
as member in the organisation. It also records, whether a member is a Life
member or Annual member.
(b) Personal Ledger : It consists of :
(i) Collection Register : It records the collection of fees, subscriptions from
members, etc.
(ii) Donors’ Register : It shows the amount paid by the donors - how much is
received and how much is outstanding and for which purpose the amount is
donated, i.e., whether it is a general donation or a specific donation.
(c) Stock Register : It keeps the record of all properties purchased, i.e., purchase
of land and buildings, machineries, furniture, investments, books, consumable
stores, sports materials, etc.
(d) Minutes Book : It is a record of the proceedings of the meetings of Executive
Committee or Governing Body or any other body as may be named.
At the end of each accounting period, the ‘not for profit’ organisations
prepare :
(i) Receipts and Payments Account;
127
(ii) Income and Expenditure Account; and
(iii) Balance Sheet
2.5 RECEIPTS AND PAYMENTS ACCOUNT
Usually, the ‘not for profit’ organisations prepare a Receipts and Payments
Account at the end of each accounting period. It is simply a summary of Cash
Book. This account is prepared on the basis of transactions recorded in the
Cash Book. Each item of receipt and payment recorded chronologically in the
Cash Book is summerised and totalled. The total amount of an item is recorded
in the Receipts and Payments Account. For example, salary paid to the
employees are recorded in the cash book on different dates of different months.
Then individual salary item is totalled for the year and recorded in the payment
side of the Receipts and Payments Account. Similarly, subscriptions and fees
collected from members on different dates of different months are recorded
in the Cash Book. The fees/suscriptions received for the year is totalled and
recorded on the receipt side of Receipts and Payments Account.
2.5.1 Meaning of Receipts and Payments Account
A Receipts and Payments Account is a Real Account. It records the classified
summary of transactions of a Cash Book alongwith cash and bank balances in
the beginning and end of an accounting period. All receipts are recorded on the
debit (receipts) side and all payments are recorded on the credit (payments)
side of this account.
According to William Pickles “Receipts and Payments Account is nothing more
than a summary of cash book (cash and bank transactions) over a certain period,
analysed and classfied under suitable headings. It is the form of account most
commonly adopted by the treasurers of societies, clubs, associations, etc. when
preparing the results of the year’s working.”
2.5.2. Features of Receipts and Payments Account
The main features of Receipts and Payments Account are as follows :
Accountancy
128
(i) It is a Real Account and is based on the golden principle of double-entry system
of book-keeping, i.e., debit what comes in and credit what goes out.
(ii) It starts with an opening balance of cash in hand and cash at bank at the beginning
of the accounting period.
(iii) It ends with a closing balance of cash in hand and cash at bank at the end of the
accounting period.
(iv) It is a summary of Cash Book. It represents the totals of all transactions of Cash
Book under different heads.
(v) It ignores the time period of cash transactions. The receipts and payments made
in the current year may relate to the previous year, current year or the next year.
(vi) The transactions are recorded in this account without any date.
(vii) All receipts are recorded on the debit side and all payments are recorded on the
credit side.
(viii) It ignores the cash or bank status by summing up both cash and bank transactions
as similar transactions. Contra entries are not passed for a cash and bank
transaction.
(ix) It does not record non-cash items like depreciation, outstanding expenses or
accuced incomes.
(x) It ignores the nature of the transactions while recording. It records all receipts
and payments whether they are of revenue or capital in nature.
2.5.3. Format of Receipts and Payments Account
Receipts and Payments Account of...
Dr. for the year ending 31.12.20.... Cr.
Receipts (A) Payments (A)
To Balance b/d By Balance b/d
Cash ............. (in case of
Bank ............. Bank overdraft) .............
To Subscriptions : By Rent, Rates and Taxes .............
129
Previous year ............. By Salaries .............
Current year ............. By Printing and Stationery .............
Next year ............. By Postage and Telephone .............
To Dividend received ............. By Purchase of News
To Interest received ............. Papers/periodicals .............
To General donations ............. By Electricity and Water .............
To Govt. grants ............. By Travelling and Conveyance .............
To Lockers rent ............. By Repairs and Maintenance .............
To Rent of club ............. By Upkeep of Lawn .............
To Rent of Hall ............. By Charity Show expenses .............
To Rent of playground ............. By Advertisement .............
To Sale of old newspaper ............. By Honorarium to
and periodicals ............. Secretary/coach/doctors .............
To Proceeds from charity show ............. By Bar Payments .............
To Tuition fees ............. By Catering payments .............
To Sale of Assets ............. By Restaurant Expenses .............
To Bar takings receipts ............. By Entertainment .............
To Legacies ............. By Tournament Expenses .............
To Entrance fees ............. By Office Expenses .............
To Lifemembership fee ............. By Library Books .............
To Specific Donations ............. By Purchase of Land and
To Endowment Fund receipts ............. Building, flat
To Prize Fund machinery, and furniture
To Sports Fund By Payment of Bank Loan .............
To Scholarship Fund By Billiard Table .............
To Bank Loan By Mowing Machine .............
To Sundry Receipts By Balance c/d
To Restaurant takings Cash .............
To Tournament proceeds ............. Bank ............. .............
Accountancy
130
2.5.4 Difference between Receipts and Payments Account and Cash Book
Basis of Receipt and Cash Book
difference Payments A/c
1. Nature It is a ledger account. It is a journal as well as
ledger account
2. Prepared by It is prepared by ‘not It is prepared by trading and
for profit’ organisations. manufacturing organisations
with profit motive.
3. Manner of recording Transactions of similar Transactions are recorded
nature are recorded in chronologically as and
summarised form and when they occur.
put under one head.
4. Contra Entries It ignores contra entries. It records contra entries for
a transaction in cash and bank
5. Side Left side is Receipt and Left side is debit and right
right side is Payment. side is credit.
6. Columns There is only one column There is separate column
for recording both cash for recording cash, bank
and bank transactions. and discount transactions.
2.6 INCOME AND EXPENDITURE ACCOUNT
The ‘not for profit’ organisations are interested to know the financial performance
of their activities at the end of each year, like the trading organisations. While the
trading organisations prepare Trading Account, Profit and Loss Account, ‘not for profit
organisations’ prepare Income and Expenditure Account, at the end of each accounting
period. They are interested to know whether their incomes are sufficient to meet the
expenditures or not.
2.6.1 Meaning of Income and Expenditure Account
Income and Expenditure Account is a Nominal Account, It is a summary of
revenue incomes and revenue expenditures of a ‘not for profit’ organisation in
131
an accounting period. All expenses and losses of revenue nature are recorded
on the debit side and all incomes and gains are recorded on the credit side.
If the credit side of the account is more than its debit side, it is known as surplus
or excess of income over expenditure. But if the debit total of this account is
more than its credit total, it is known as deficit or excess of expenditure over
income.
Income and Expenditure Account is prepared on accrual basis and not on
cash basis.That is why all the incomes earned during an accounting period are
recorded in this account. The incomes earned both received and accrued are
taken into account. The incomes received in advance is deducted from the total
of incomes received in cash during the accounting period. Similarly, all expenses
incurred in the relevant period, whether paid or not, are taken into consideration.
Any prepaid expenditure is deducted from the total expenditure paid during an
accounting period. The excess of income over expenditure or the excess of
expenditure over income is transferred to Capital Fund, shown in the Balance
Sheet.
2.6.2. Features of Income and Expenditure Account
1. It is a nominal account.
2. It is debited with all expenses and losses of revenue nature.
3. It is credited with all incomes and gains of revenue nature.
4. It is prepared on accrual basis.
5. If records only income and expenditures of the current accouting period.
6. It takes into account all outstanding expenses and accrued incomes.
7. It records both cash and non-cash items like depreciation, bad debt, expenses
payable and incomes receivable for the current accounting period.
8. Its balance at the end of the accounting period is either surplus, i.e., excess of
incomes over expenditures or deficit, i.e., excess of expenditures over incomes.
9. The balance either surplus or deficit is transferred to Capital Fund in the Balance
Sheet.
Accountancy
132
2.6.3 Difference between Income and Expenditure Account and Receipts and
Payments Account
Basis of Receipts and Income and
differences Payments Account Expenditure Account
1. Types of Account It is a Real account It is a Nominal account.
2. Objective Its objective is to provide a summary Its objective is to ascertain the
cash receipts and payments of similar surplus or deficit of its financial
transactions during an accounting operations.
period.
3. Form It is a summarised form of cash It is in the form of an Income state-
book. ment, i.e., profit and loss account.
4. Opening Balance It starts with opening balances of It does not start with any opening
cash in hand cash and at bank. balance.
5. Closing Balance It ends with closing balances of cash It ends with a closing balance of
in hand and cash at bank. surplus i.e. excess of income over
expenditure or deficit, i.e., excess
of expenditure over income.
6. Debit All receipts of cash-both revenue and All revenue expenses/ losses are
capital are debited. debited.
7. Credit All payments of cash are credited. All revenue incomes and gains are
credited.
8. Cash items It ignores non-cash items It records non-cash items
9. Revenue/Capital If records both revenue and capital It records only revenue items.
items.
10. Transfer Closing balance is transfered to next Closing balance is transferred to
year. capital fund.
2.6.4 Difference between Income and Expenditure Accoutnt and Profit and
Loss Account
Both the accounts one prepared for the purpose of ascertaining the results of
financial operations. Both record only the revenue items. Adjustment entries are passed
in both the accounts for transactions not taken care of.
133
Inspite of such similaries between the two, there are some differences which
are discussed below :
Basis of Income and
differences Expenditure Accoutnt
1. Organisation It is prepared by ‘not for profit’ It is prepared by trading and
organisation. commercial organisations.
2. Basis It is prepared on the basis of data It is prepared on the basis of data
from Receipts and Payments from the Trial balance.
Account.
3. Objective Its objective is to ascertain the excess Its objective is to ascertain the net
of income over expenditure or profit or net loss.
excess of expenditure over income.
4. Opening balance It does not have any opening It starts with gross profit/loss as
balance. opening balance.
5. Transfer of Closing balance is transferred to Closing balance is transferred to
closing balance Capital fund. Capital Account.
2.6.5 Format of Income and Expenditure Account
The typical proforma of Income and Expenditure Account is given below :
Income and Expenditure Account of ......
Dr. for the year ending 31st....... 20...... Cr.
Expenditure (A) Income (A)

To Salaries ............. By Subscriptions .............
To Wages ............. By Entrance Fees .............
To Rent, Rates and Taxes ............. By Donations .............
To Purchase of news papers,
magazines ............. To Dividend and Interest .............
To Repairs and maintenance ............. By Proceeds from Lectures .............
To Charity ............. By Income from charity show .............
To Expenses on Lectures ............. By Profit on sale of
To Upkeep of lawn ............. fixed Assets .............
Accountancy
134
To General Body Expenses ............. By Profit on sale of sports
To Land Revenue ............. equipment / materials .............
To Entertainment Expenses ............. By Sales of Periodicals
To Tournament Expenses ............. and Journal .............
To Printing and Stationery ............. By Visiting Fees
To Ground Rent ............. (Received by doctors) .............
To Honorarium to CEO/ By Sale of Grass .............
Coach / Doctors ............. By Fees from Non-members .............
To Purchase of Bars ............. By Locker Rent .............
To Cost of Refreshments ............. By Income from
To Annual function Expenses ............. Restaurants .............
To Audit Fees ............. By Receipts from
To Help to Poor Students ............. Annual Function .............
To Conveyance and Travelling ............. By Bar Takings (Collections) .............
To Electricity and Water ............. By Income from
To Bank Charges ............. Billiard Rooms .............
To Grass seeds By Grants from Governments
To Surgery and Dispensary and Local Authority .............
To Loss from Annual Dinner By Souvenir Advertisement .............
To Loss from sale of By Deficit transferred to
Fixed Assets Capital Fund .............
To Loss on sale of sports
Equipment / materials .............
To Miscellaneous Expenses .............
To Insurance Premium .............
To Depreciation on
Fixed Assets .............
To Surplus transferred to
Capital Fund .............
135
2.7 TREATMENT OF SOME IMPORTANT ITEMS
1. Legacy : Legacy is the amount received from property of a deceased person
as per his ‘will’ prior to his death. It is a type of donation received by the ‘not for
profit’ organisations under a ‘will’ on the death of the donor. It appears on the receipt
side of the Receipts and Payments Account. If the amount of the legacy is very small
and not for any specific purpose, it is treated as ‘revenue’ receipt and credited to
Income and Expenditure Account. On the other hand, if the amount of legacy is
significantly large and for a specific purpose, it is a ‘capital’ receipt and credited to
Capital Fund in the Balance sheet.
2. Donations : Donation is an amount received by the ‘not for profit’
organisations from a donor. The donor may be a member of the organisation or an
outsider. The purpose of the donation may be either general or specific.
If the amount of ‘General’ donation is small, it is treated as a ‘revenue’ receipt
and credited to Income and Expenditure Account. On the other hand, if the amount of
general donation is significantly large, it is treated as a ‘capital’ receipt and credited
to Capital Fund in the Balance Sheet, Whether the general donation is small or large,
it depends on the nature and size of the organisation. If the question is silent on the
nature of donation, it is treated as a general donation and the students should specify
it under foot note.
Any donation received for a specific purpose is treated as a ‘capital’ receipt
and is credited to that specific fund and shown on the liabilities side of the Balance
Sheet. The specific funds are like Building Fund, Prize Fund, Tournament Fund, etc.
Any income from the specific fund is credited to that fund and any expenditure of
revenue in nature is deducted from the specific fund. Sometimes a part of the specific
fund is transferred to Capital Fund in the Balance Sheet. When the amount of the
specific fund is invested outside the business, a Specific Fund Investment Account is
opened and shown on the assets side of the Balance Sheet.
Illustration 1
From the extracts of the Receipts and Payments Account of an Orphanage,
treat the amount of donations :
Accountancy
136
Receipts and Payments Account (extracted)
Dr. Cr.
To Balance b/d -----------
To Donations for
Building Fund 1,00,000
To Donations 7,000
To Legacy 70,000
Additional Information : (1) An amount of A9,000 is spent on building (2)
Capital Fund stood at A2,00,000.
Solution :
Dr. Cr.
By Donations 7,000

Capital Fund : 2,00,000
Add Legacy 70,000 2,70,000
Building Fund 1,00,000
Less :
Building Expenses 9,000 91,000
137
3. Entrance Fees : Entrance fee is received from the new members only at
the time of admission into the organisation. The entrance fee received is non-recurring
in nature. So it is treated as a Capital receipt and shown on the liability side of the
Balance Sheet.
Some accountants are of the view that entrance fees are received regularly
from the members and hence, it is recurring in nature and treated as revenue receipt
and credited to Income and Expenditure Account. In the absence of any specific
information, the students are advised to justify the accounting treatment by giving a
foot note.
4. Life membership fees : It is a lump sum amount received once only from
the members for their permanent/life membership. It is non-recurring in nature. It is
a capital receipt and should be shown on the liability side of Balance Sheet either as
an independent item or added to Capital Fund on the liability side of Balance Sheet.
5. Sale of Assets : Sale of old and obsolete assets like equipment, sports
materials, waste papers is treated as revenue receipts and credited to Income and
Expenditure Accounts. Normally the sale of old current assets are revenue in nature
and credited to Income and Expenditure Account.
The sale proceeds of the fixed assets are credited to the relevant Fixed Asset
Account as a capital receipt. But the profit/loss on sale of the fixed asset is credited/
debited to Income and Expenditure Account. The profit or loss sale of fixed asset is
the difference between the sales proceeds and its written down value.
6. Sale of old news papers : The sale proceeds of old news papers and
periodicals are treated as revenue receipts. It is a recurring source of revenue. It is
credited to Income and Expenditure Account.
7. Sale of consumble stores : The ‘not for proft’ organisations have some
consumbale items for sale during their normal course of operations. These are : sale
of eatable refresments, medicines, stationeries, etc. These are treated as revenue
receipts and credited to Income and Expenditure Account.
8. Subscription : Subscription is a periodical contribution of specific amount
by the members to a ‘not for profit’ organisation. It is a regular/recurring income of
Accountancy
138
the club or society. The subscriptions may be collected from the members monthly,
quarterly, half-yearly or annually. It is a revenue receipt and is credited to Income and
Expenditure Account.
9. Endowment Fund : Endowment Fund is a permanent fund created by the
‘not for profit’ organisations from receipts in the form of gifts, bequests, etc. It is a
capital receipt and shown on the liability side of the Balance Sheet. It represents a
permanent source of income to a ‘not for profit’ organisation. Any interest received
from the Endowment Fund Investments is credited to Income and Expenditure Account.
10. Specific Fund : ‘Not for profit’ organisations create some specific funds
like Tournament Fund, Prize Fund, Building Fund, Entertainment Fund, etc. Any receipt
from this type of fund invested in various securities, is credited to the specific fund
account while the expenses on those specific funds are debited to the fund account
and the balance is shown on the liabilities side of the Balance Sheet.
When the expenses of the specific fund are more than the balance of the fund
account, the difference is debited to the Income and Expenditure Account.
As and when the purpose of the specific fund is fulfilled, the balance in the
specific fund is transferred to Capital Fund.
11. Honorarium : An amount paid to the invitees, guest lecturers, doctors,
artists, singers for their voluntary services is called honorarium. This amount is paid
to them in their honour for visiting the ‘not for profit’ organisation and providing
service to the public. It is a revenue expenditure and is debited to Income and
12. Capital Fund : The excess of assets over the total outside liabilities is
called Capital Fund of a ‘not for profit’ organisation. It is shown on the liabilities side
of the Balance Sheet. Capital Fund is also called the General Fund. Capital Fund is
increased by addition of surplus and decreased by deduction of deficit. Sometimes,
the amount of special funds are transferred to this fund and some receipts are
capitalised.
Capital Fund is the major source of funds of every ‘not for profit’ organisation.
It accumulates year after year. The capital fund at the end of the year becomes the
139
opening Capital Fund for the following year. The increase/decrease in Capital Fund is
shown as below :
Opening Capital Fund at the beginning of the year XXX
Add : Surplus (excess of income over expenditure) XXX
Capitalised portion of Entrance Fees/Life membership Fees XXX
Amount transferred from special fund, if any XXX
XXX
Less : Deficit (Excess of expenditure over income) XXX
Closing Capital Fund XXX
13. Government Grant : Grant from the Government is an important source
of revenue for a ‘not for profit’ organisation. Grants from the Governemnts are received
for (i) maintenance and for (ii) development. The grants for maintenance is meant for
day-to-day expenses of the organisation. It is treated as a revenue income and credited
to Income and Expenditure Account. The grants for development are meant for
acquiring any fixed asset. The grants for development are non-recurring and are capital
receipts. So it is shown on the liabilities side of the Balance Sheet as an independent
item.
2.8 PREPARATIN OF INCOME AND EXPENDITURE ACCOUNT AND
BALANCE SHEET
(A) The preparation of Income and Expenditure Account is followed by the
preparation of Balance Sheet of a ‘not for profit’ organisation. The Income and
Expenditure Account is prepared on the lines of Profit and Loss Account prepared
by the profit-making organisations. The revenue expenses are debited and revenue
incomes are credited to this account on the basis of the information from the
Receipts and Payments Account. The steps in the preparation of Income and
Expenditure Account are :
1. Ignore the opening balance of cash and bank.
2. Ignore all capital receipts and all capital expenditures.
Accountancy
140
3. Ascertain the revenue incomes of the current accounting period and credit them
to Income and Expenditure Account. The revenue income of the current
accounting period is to be calculated as follows :
Calculation of Revenue Income
Revenue receipts as per Receipts and Payments A/c XXX
Add : Accrued Income at the end of curent year XXX
Income received in Advance in the previous year XXX XXX
XXX
Less : Accured Income in the Previous year XXX
Income received in Advance at the end of the current year XXX XXX
Revenue Income for the current accounting period XXX
4. Ascertain the revenue expenses of the current year and debit them to Income
and Expenditure Account. The revenue expense of the current year is to be
calculated as follows :
Calculation of Revenue Expenses
Revenue payments as per Receipts and Payments Account XXX
Add: Outstanding expenses at the end of the current year XXX
Prepaid expenses at the end of the previous year XXX XXX
XXX
Less Outstanding expenses at the beginning of the previous year XXX
Prepaid expenses at the end of the current year XXX XXX
Revenue Expense of the current accounting year XXX
5. Ascertain the non-cash expenses such as depreciation or loss on sale of fixed
assets. These non-cash expenses are to be debited to Income and Expenditure
Account.
6. Ascertain profit or loss from the trading activities such as Restaurant Bar,
Canteen, etc. separetely. Show them on the credit side (if profit) or on the debit
141
side (if loss) of Income and Expenditure Account. A Separate trading account is
to be prepared for each trading activity. Debtors Account and Creditors Account
are to be prepared for credit sales and credit purchases repectively.
7. Ascertain the difference between the total of credit side and total of debit side
of the Income and Expenditure Account.
(a) If the total of the credit side is more than the total of the debit side, it is
surplus. The surplus is transferred and credited to ‘Capital Fund’.
(b) If the total of the debit side is more than the total of the credit side, it is
deficit. The deficit is transferred and debited to ‘Capital Fund’.
Illustration 2
Calculate the subscription income and show it in Income and
Expenditure Account and in Balance Sheet from the data given below :
Subscription received during 2016 A25,000
01.01.2016 31.12.2016
Subscription Accrued A5,000 A3,000
Subscription Received in Advance A3,000 A2,000
Solution :
Dr. Cr.
By Subscription 25,000
Add : Accrued 31.12.16 3,000
Advance on 01.01.16 3,000
31,000
Less: Accrued on 1.1.16 (-) 5,000
Advance on 31.12.16 (-) 2,000 24,000
Accountancy
142
Subscription received in Advance Subscription Accrued 3,000
(Closing) 2,000 (Closing)
Illustration 3
Ascertain the Rent expenses and show it in Income and Expenditure Account
and in Balance Sheet from the information given below :
(A)
Rent paid during the year ending 31.12.15 22,000
Rent outstanding as on 31.12.2015 5,000
Rent outstanding as on 01.01.2015 3,000
Rent prepaid as on 31.12.2015 4,000
Rent prepaid as on 01.01.2015 2,000
Solution :
(A)
To Rent 22,000
Add : Outstanding 5,000
(on 31.12.15)
Prepaid (on 01.01.15) 2,000
29,000
Less :
Prepaid on 31.12.15 (-) 4,000
Outstanding on 01.01.15 (-) 3,000 22,000
143
Rent outstanding (31.12.15) 5,000 Rent prepaid (31.12.15) 4,000
Illustration 4
From the following Receipts and Payments Account, prepare Income and
Expenditure Account for the year ending 31st December 2016 :
Dr. Cr.
(A)
To Balance b/d By Salary 8,000
Cash in Hand 1,000 By Insurance Premium 2,000
Cash at Bank 9,000 10,000 By Printing and Stationery 1,000
To Subscriptions By Electricity 1,500
2015 4,000 By Furniture 12,000
2016 30,000 By Mowing Machine 18,000
2017 6,000 40,000 By Annual Drama Expenses 7,000
To Entrance Fees 4,800 By Subscription to Journals 3,000
To Sale of old New papers 300 By Investments 15,000
To Locker Rent 2,900 By Balance c/d (A)
To Hire of Ground 2,000 Cash in Hand 800
To Sale of Annual Drama Tickets 10,000 Cash at Bank 2,200 3,000
To Interest on Investments 500
70,500 70,500
Accountancy
144
Solution :
To Salary 8,000 By Subscriptions 30,000
To Insurance Premium 2,000 By Entrances Fees 4,800
To Printing and Stationery 1,000 By Sale old news papers 300
To Electricity 1,500 By Locker Rent 2,900
To Subscription to Journal 3,000 By Hire of Ground 2,000
To Excess of Income
over Expenditure 25,000 By Interest on on Investment 500
By Profit from Annual
Drama : (A)
Sale of Tickets 10,000
Less : Expenses 7,000 3,000
40,500 40,500
(B) After preparation of Income and Expenditure Account, a Balance Sheet has to
be prepared by the ‘not for profit’ organisations. The Balance Sheet of these
organisations is prepared on the lines of preparation of Balance Sheet of any
Trading and profit-making organisations. The excess of assets over liabilities is
treated as ‘Capital Fund’ or ‘General Fund’. No members contribute to the Capital
Fund of the ‘not for profit’ organisations. Capital Fund. is increased with capital
receipts, receipts which are capitalised and surplus of the Income and Expenditure
Account. If Capital Fund is not given in the beginning, it is to be ascertained by
preparing the opening Balance Sheet.
Balance Sheet is prepared from the items remaining in the Receipts and Payments
Account after transfer of all revenue incomes and expenses to the Income and
Expenditure Account. The Balance Sheet contains only the capital items, i.e., capital
expenditures and capital receipts, liabilities and Capital Fund.
Assets and liabilities are to be arranged either on the basis of ‘permanence’ or
on the basis of ‘liquidity’.
145
The following points should be taken into consideration at the time of preparing
the Balance Sheet :
(i) Recording of Fixed Assets : The fixed assets in the opening balance sheet are to
be adjusted for assets purchased, sold and depreciation charged during the year.
The new fixed assets purchased shown on the credit (payment) side of Receipts
and Payments Account is to be added to the balance of fixed assets of opening
Balance Sheet while preparing the new balance sheet. If only asset is sold, its
book value/written down value is to be deducted from the relevant asset of the
previous year. The amount of depreciation is to be charged after adjustment of
purchase and sale of fixed assets.
(ii) Recording of Prepaid Expenses and Accrued Incomes : The prepaid expenses
and accrued incomes at the end of the accounting period are to be shown on the
assets side of the closing Balance Sheet. Similarly, the prepaid expenses and
accrued incomes of the previous year are taken to the assets side of the opening
Balance Sheet.
(iii) Recording of Balances of cash in hand and cash at bank : The opening balance of
cash in hand and cash at bank shown in the receipts and payments account, are
to be transferred to the assets side of the opening Balance Sheet. Similarly, the
closing balnaces of cash in hand and cash at bank shown in the receipt and
payments account are transferred to the assets side of the closing Balance Sheet.
(iv) Balance of consumable items: The balances of consumable items like
stationeries, sports materials, medicines, stock of bars, refreshments at the
end of the accounting period are to be shown on the assets side of the closing
Balance Sheet.
(v) Recording of Capital Fund : The capital fund of the opening Balance Sheet is
adjusted with curent year’s surplus/deficit and transfer from Special Fund
Account, Capitalised portion of Entrance Fees and Life Membership Fees in
the closing Balance Sheet.
(vi) Recording of Loans : The loan appearing on the liability side of the opening
Balance Sheet is to be taken to the closing Balance Sheet. Any repayment of
Accountancy
146
loan shown on the credit side of the Receipts and Payments Account is taken
for deduction in the closing Balance Sheet. Similarly, if some additional loan
is raised from the banks or other financial institutions, are added to the loan
account in the closing balance sheet. The fresh loan taken during the current
year is found on the credit side of Receipts and Payments Account.
(vii) Recording of Capital Receipts : The capital receipts like donations for specific
purpose are shown on the liabilities side of the Balance Sheet. Similarly, Special
Funds and Endowment Funds will be shown on the liabilities side of the Balance
Sheet.
(viii) Recording of Entrance fees, Legacies and Life Membership Fees : When it is
decided to capitalise these receipts, these are transferred to the liabilities side
of the Balane Sheet.
(ix) Outstanding expenses and incomes received in advance at the end of the
accounting period are shown on the liability side of the closing Balance Sheet.
Similalry, prepaid expenses and accrued incomes at the end of the accounting
period, are shown on the assets side of the Balance Sheet.
FORMAT OF BALANCE SHEET
BALANCE SHEET AS ON ......
Capital Fund : Land and Building XXX
Opening Balance XXX Less Depreciation XXX XXX
Add : Surplus XXX Ground and Pavillion XXX
Entrance Fees XXX Sports Equipment XXX
(Capitalised portion) Mowing Machine XXX
Life membership fee XXX Furniture and Fixtures XXX
(Capitalised portion) Billiards Table XXX
Amount Transferred Liabrary Books XXX
from Speecial Fund XXX Motor Vehicles XXX
XXX Crockery and Cutlery XXX
Less : Deficit XXX XXX Investments :
Special Fund : Share XXX
Prize Fund XXX Debentures XXX
Add: Income from Prize Fund XXX National Savings Certificates XXX
147
XXX Prize Fund Investment XXX
Less : Prize Awarded XXX XXX Building Fund Investment XXX XXX
Building Fund XXX Endowment Fund Investment XXX
Tournament Fund XXX Scholarship Fund Investment XXX
Scholarship Fund XXX Fixed Deposits XXX
Endowment Fund XXX Current Assets :
Loans XXX Sports Materials XXX
Life Membership Fees XXX Stock of Refreshments XXX
Entrance Fees XXX Bar Stock XXX
(if capitalsed) Stock of medicines XXX
Legacy XXX Prepaid Expenses XXX
Government Grants : Accrued Incomes XXX
For Development XXX Cash in Hand XXX
For Books XXX Cash at Bank XXX
For Computers XXX
For Pavillion XXX
Bank overdraft XXX
Creditors XXX
Outstanding Expenses XXX
Subscriptions received in advance XXX
XXX XXX
Illustration 5
From the following Receipts and Payments Account of Sambulpur Club for
the year ending 31.12.2016, prepare Income and Expenditure Account for the year
and the Balance Sheet as on that date :
Receipts and Payments Account
for the year ending 31.12.2016.
Dr. Cr.
To Balance b/d : (A)
Cash in Hand 4,800 By Salaries 15,000
Cash at Bank 5,000 9,800 By Printing and Stationeries 3,000
To Subscriptions : By Office Expenses 8,500
Accountancy
148
(A) By Books 10,000
For 2015 12,500 By Newpapers 6,000
For 2016 34,500 By Rent 4,500
For 2017 5,400 52,400 By Balance c/d :
To Rent of Hall 12,000 Cash in Hand : 18,000
To Entrance Fees 5,000 Cash at Bank 15,200 33,200
To Sale of Old News Papers 1,000
1,000
80,200 80,200
Additional Information:
(i) On 01.01.2016, the club owned Building valued A2,00,000 and Furniture
A50,000.
Solution :
Income and Expenditure Account of
Sambalpur Club for the year ending 31.12.2016
Dr. Cr.
Expenditures (A) Incomes (A)
To Salaries 15,000 By Subscriptions 34,500
To Printing and Stationeries 3,000 By Rent of Hall 12,000
To Office Expenses 8,500 By Entrance Fees 5,000
To Newspapers 6,000 By Sale of old Newspapers 1,000
To Rent 4,500
To Exces of Income over Expenditure
(surplus transferred to
Capital Fund) 15,500
52,500 52,500
Balance Sheet of Sambalpur Clus

as on 31st December, 2016
Subscriptions received in advance 5,400 Cash in hand 18,000
Capital Fund : Cash at bank 15,200
Opening balance 2,72,300 Building 2,00,000
Add surplus 15,500 2,87,800 Furniture 50,000
Library books 10,000
2,93,200 2,93,200
149
Working Note :
Capital Fund 2,72,300 Cash in Hand 4,800
(Balancing figure) Cash at Bank 5,000
Subscription outstanding 12,500
Furniture 50,000
Building 2,00,000
2,72,300 2,72,300
Illustration 6
From the following Receipts and Payments Account and additional information,
prepare the Income and Expenditure Account and Balance Sheet of DAV Educational
Society :
Dr. Cr.
To Balance b/d 20,550 By General Expenses 4,200
To Subscriptions By Newspapers 2,850
For 2015 2,200 By Salaries 4,600
For 2016 27,500 By Electricity 3,000
For 2017 2,500 32,200 By Investments 30,000
To Lockers Rent 3,000 (@10% per annum)
To Sale of old Newspapers 250 By Rent 5,500
To Sale of Old Furniture 4,200 By Printing and Stationery 3,300
(Book Value A6,000) By Furniture 20,000
To Interest on Investment 450 By Balance c/d 7,200
To Grants from Government 20,000
80,650 80,650
Accountancy
150
(i) Subscription outstanding on 31.12.2016 A2,000
(ii) Salary outstanding on 31.12.2016 A1,400
(iii) Rent A700 has been paid in advance.
(iv) On 01.01.2016, the society had furniture worth A15,000.
Solution :
DAV Educational Society
Dr. Cr.
Expenditures (A) Incomes (A)
To General Expenses 4,200 By Subscriptions 27,500
To Newspaper 2,850 Add : Accrued 2,000 29,500
To Salaries 4,600 By Lockers Rent 3,000
Add : Outstanding 1,400 6,000 By Sale of Old Newspapers 250
To Electricity 3,000 By Interest on Investment 450
To Rent 5,500 Add : Accrued Interest 2,550 3,000
10
Less : Prepaid 700 4,800 {(30,000× ) – 450}
100
To Printing and Stationery 3,300 By Grants from Government 20,000
To Loss on sale of
old furniture 1,800
To Surplus (Excess of Income
over Expenditure) 29,800
55,750 55,750
Outstanding Salaries 1,400 Furniture 29,000
Subscription Received in Advance 2,500 10% Investment 30,000
Capital Fund 37,750 Accrued Interest on Investment 2,550
Add Surplus 29,800 67,550 Subrscription outstanding 2,000
Prepaid rent 700
Cash 7,200
71,450 71,450
151
Working Notes :
1. Balance Sheet as on 01.01.2016 (Opening)
Capital Fund 37,750 Cash 20,500
(Balancing figure) Subscription due 2,200
Furniture 15,000
37,750 37,750
2.
Furniture A/c
Dr. Cr.
To Balance b/d 15,000 By Bank (Sale of Furniture) 4,200
To Bank (Purchases) 20,000 By Loss on Sale of Furniture 1,800
35,500 35,000
Illustration 7
From the information of Sunshine Club Joyepre ascertain the amount of sports
materials consumed during the year ending 31.12.2016 and show it in their final
accounts.
Dr. Cr.
Receipts (A) Payment (A)
By Sports Materials 3,500

Creditor of on sports materials 150 Sports Materials 200
Accountancy
152
Illustration 6
From the following information of Sunshine Club, Jeypore, ascertain the amount
of sports materials consumed during the year ending 31.12.2016 and show it in their
final accounts :
By Sports Materials 3,500

Creditors for Sports Materials 150 Sports Materials 200
Additional information :
(a) Sports materials on hand as on 31.12.2016 was valued at A550.
Solution :
To Consumption of sports materials :
Opening stock 200
Purchased in 2016 3,500
Less 3,700
Creditors paid
for previous year 150
Less
Closing Stock
(as on 31.12.2016) 550 3,000
Dr. Balance Sheet as on 31.12.2016 Cr.
Sports Materials 550
Illustration 7
A Club has 50 members each contributing an annual subscription of A250. For the year
2016, the extract of the Receipts and Payments Account of the club was as follows :
153
Subscriptions: For 2015 A850
For 2016 A10,000
For 2017 A900
Calculate the amount of subscriptions to be credited to the Income and Expenditure Account.
Solution :
Dr. Income and Expenditure Account Cr.
By Subscriptions :
Received for 2016 A10,000
Add Outstanding A2,500 A12,500
{(250×50) –
actually received 10,000}
Illustration 8
The Receipts and Payments Account of a ‘Not for Profit’ organisation shows
A44,000 as subscriptions received during the year 2016. Taking into consideration
the following additional information, calculate the income from subscriptions for
2016:
(A)
(i) Subscriptions outstanding as on 31.12.2015 1,350
(ii) Subscriptions outstanding as on 31.12.2016 3,200
(iii) Subscriptions received in advance as on 31.12.2015 950
(iv) Subscriptions received in advance as on 31.12.2016 1,250
Solution :
Dr. for the year ending on 31.12.2016 Cr.
By Subscriptions : (A )
Received in 2016 44,000
Add : Outstanding in 2016 3,200
Received in advance for 2015 950
48,150
Less :
Outstanding for 2015 1,350
Received in advance 46,800
for 2017 1,250
45,550
Accountancy
154
Illustration 9
From the following extract of Receipts and Payments Account and additional
information given below, calculate the amount of subscription and show how they
would appear in the Income and Expenditure Account for the year ending 31.12.2016
and in the Balance Sheet as on that date :
To Subscriptions
(A)
For 2015 750
For 2016 25,000
For 2017 1,000 26,850
(i) Subscriptions outstanding as on 31.12.2015 A1,200.
(ii) Subscriptions outstanding as on 31.12.2016 A4,000.
(iii) Subscriptions received in advance as on 31.12.2015 A1,000.
Solution :
By Subscriptions : (A)
Received in 2016 25,000
Add :
Outstanding for 2016 3,550
Received in Advance
in 2015 for 2016 1,000
29,550
Dr. Cr.
Subscriptions Received in Advance 1,100 Subscriptions outstanding :
For 2015 (A1,200-received A750) 550
For 2016 (Total outstanding 3,550
A4,000 – outstanding for 2015 A450)
155
Illustration 10
Srikrishna Dance Society has 120 members. The annual subscription for each
member is A300. During the year ending 31.12.2016, 85 members have paid their
subscriptions. Of these, 25 members have paid their annual subscriptions for 2017
in advance. You are required to show the Income from subscriptions as it would appear
in the Income and Expenditure Account. Also, show the required information in the
Balance Sheet of the society.
Solution :
Income and Expenditure Account of Srikrishna Dance society
Received (85×A300) 25,500
Add : Outstanding
{(120×A300) –A25,500} 10,500
36,000
Dr. Cr.
Subscriptions Received in Advance 7,500 Subscriptions outstanding 10,500
(25×A300)
Illustration 11
Kishore Club, Bhubaneswar had the following assets and liabilities on
01.03.2017.
(A)
Cash in Hand 350
Outstanding Subscriptions 800
Books 3,000
Furniture 4,000
Bat and Balls 2,500
Prepaid rent 600
Salary Outstanding 950
Creditors for stationery 750
Calculate Capital Fund on 01.03.2017.
Accountancy
156
Solution :
Balance Sheet of Kishore Club
as on 01.03.2017
Salary Outstanding 950 Cash in Hand 350
Creditors for stationery 750 Outstanding Subscriptions 800
Capital Fund (Balancing Figure) 9,550 Prepaid Rent 600
Books 3,000
Bat and Ball 2,500
Furniture 4,000
11,250 11,250
Illustration 12
Receipts and Payments Account of Lions Club, Cuttack showed that A80,000
were received by way of subscriptions for the year ending 31.03.2017. The additional
information were as follows :
(A)
(i) Subscriptions outstanding as on 31.03.2016 4,200
(ii) Subscriptions outstanding as on 31.03.2017 3,800
(iii) Subscriptions received in advance as on 31.03.2016 3,500
(iv) Subscriptions received in advance as on 31.03.2017 2,700
Show the above information in the Income and Expenditure Account and Balance
Sheet of the Club for the year ending on 31.03.2017.
Solution :
Income and Expenditure Account of Lions Club, Cuttack
Received during the
year ending 31.03.17 80,000
Add :
Outstanding as on 31.3.17 3,800
Received in advance
as on 31.03.2016: 3,500
Less : 87,300
Outstanding
as on 31.3.16 4,200
Received in advance 83,100
as on 31.03.2017 2,700 80,400
157
Balance Sheet of Lions Club, Cuttack
Dr. as on 31.03.2017 Cr.
Subscriptions Received in Advance 2,700 Subscriptions Outstanding 3,800
Illustration 13
Receipts and Payments Account shows payment of salary A5,600 for the year
ending 31.12.2016. The additional information are :
Salary paid include A550 for 2015 and A600 for 2017. Salary due but not paid
on 31.12.2016 amounts to A750. Salary paid in advance as on 31.12.2015 was A700.
Show the information in the Final Accounts for the year ending 31.12.2016.
Solution :
Dr. Cr.
(A)
To Salary 5,600
Add :
Outstanding on 31.12.2016 750
Prepaid on 31.12.2015 700
7,050
Less :
Outstanding on 31.12.2015 550
6,500
Prepaid as on 31.12.2016 600
5,900

Salary Outstanding 750 Salary Prepaid 600
Accountancy
158
Illustration 14
Following is the extract of a Receipts and Payments Accounts of Vijay Club for
the year ending 31.12.2016 :
By Salary Paid
For 2015 800
For 2016 6,500
For 2017 300 7,600
Calculate the expenses on salary for 2016 and show it in the Income and
Expenditure Account and Balance Sheet after taking into consideration the following
additional information :
(a) Salary outstanding as on 31.12.2015 A1,000
(b) Salary outstanding as on 31.12.2016 A500
(c) Salary paid in advance as on 31.12.2015 A400
(d) Salary paid in advance as on 31.12.2016 A300
Solution :
To Salary
Paid for 2016 6,500
Add : Outstanding for 2016 300
Prepaid in 2015 for 2016 400 7,200
159
Salary outstanding : Salary prepaid (for 2017) 300
For 2015 200
(A1,000 – A800)
For 2016 300 500
(Total outstanding A500
less outstanding for 2015 A200)
Illustration 15
From the following extracts of Receipts and Payments Account and additional
information for the year ending 31.12.2016, show the treatment of subscriptions in
the final accounts :
To Subscriptions (A)
For 2015 5,600
For 2016 38,700
For 2017 8,500 52,800
(i) Subscriptions outstanding on 31.12.2016 A4,400
(ii) Subscriptions outstanding on 31.12.2015 A6,900
(iii) Subscriptions received in advance on 31.12.2015 A2,400
Solution :
Received in 2016 : 38,700
Add : Outstanding for 2016
{4,400-(6,900-5,600)} 3,100
Received in advance
in 2015 for 2016 2,400
44,200
Accountancy
160
Subscriptions Received in Advance Subscriptions outstanding
(In 2016 for 2017) 8,500 For 2015 (6,900-5,600) 1,300
For 2016 (4,400-1,300) 3,100
4,400
Illustration 16
From the following Receipts and Payments Account, prepare Income and
Expenditure Account :
To Balance b/d By Salaries 4,600
Cash in Hand 800 By Rent 1,800
Cash at Bank 1,000 By Postage and Telephones 700
To Subscriptions 9,000 By Printing and Stationery 1,200
To Sale of old newspapers 350 By Fixed Deposit 3,000
To Sale of old furniture 800 By Balance c/d
(Book value A1,000) Cash in Hand 500
To Donations 300 Cash at Bank 450
12,250 12,250
Solution :
Income and Expenditure Accounts
Dr. Cr.
To Rent 1,800 By Sale of old Newspapers 350
To Postage and Telephones 700
To Printing and Stationery 1,200
To Loss on sale of Furniture 200
To Excess of Income
over Expenditure (Surplus) 850
9,350 9,350
Note : Donations assumed to have been capitalised.
161
Illustration 17
From the following information, calculate the amount of subscriptions to be
credited to the Income and Expenditure Account of Current Year :
Subscriptions received during the current year A 9,500
Subscriptions outstanding at the end of the previous year A 1,000
Subscriptions outstanding at the end of the current year A 750
Subscriptions received in advance at the end of the previous year A 800
Subscriptions received in advance at the end of the current year A 650
Solution :
Dr. Cr.
By Subscriptions (A)
Received during the year 9,500
Add : Outstanding at the
end of the current year 750
Received in Advance at the
end of the previous year 800
11,050
Less :
Outstanding at the end
of the previous year 1000
10,050
Received in Advance at
the end of the current year 650 9,400
Illustration 18
The Receipts and Payments Account shows the payment of salary A14,500 for
the year ending 31.12.2016. The additional information below the Receipts and
Payments Account are :
Salary paid includes A4,500 for 2015 and A7,000 for 2017. Salary outstanding
on 31.12.2016 amounts to A6,000 and salary paid in advance as on 31.12.2015 was
A5,000.
Show the salary account in the Income and Expenditure Account of 2016.
Accountancy
162
Solution :
(A)
To Salary 14,500
Add : Outstanding
as on 31.12.2016 6,000
Prepaid on 31.12.15 5,000
25,500
Less : Outstanding
as on 31.12.15 4,500
21,000
Prepaid on 31.12.16 7,000
14,000
Illustration 19
From the following Receipts and Payments Account of Adishakti Club for the
year ending 31.12.2015, prepare Income and Expenditure Account :
Dr. Cr.
To Balance b/d By Charity 3,000
Cash in Hand 21,070 By Rates and Taxes 750
Cash at Bank 12,650 33,720 By Match Expenses 3,000
To Donations 18,000 By Salaries 11,000
To Subscriptions 14,500 By General Expenses 1,800
To Interest on Securities 3,400 By Investment 30,000
To Sale of old Newspaper 300 By Furniture 6,000
To Entrance Fees 2,450 By Insurance Premium 1,800
To Locker Rent 2,900 By Newspapers 650
To Receipts from cricket match 7,800 By Books Purchased 12,000
By Balance c/d
Cash in Hand 6,700
Cash at Bank 6,370 13,070
83,070 83,070
163
(i) Salary unpaid for 2015 A1,000 (2) Half of the donation is to be capitalised (3)
Insurance premium paid in advance A300.
Solution :
To Charity 3,000 By Donations 18,000
To Rates and Taxes 750 Less Capitalised 9,000 9,000
Add Unpaid 1,000 12,000 By Interest on securities 3,400
To General Expenses 1,800 By Sale of old Newspapers 300
To Insurance Premium 1,800 By Entrance Fees 2,450
Less Prepaid 300 1,500 By Locker Rent 2,900
To Newspapers 650 By Profit from cricket match :
To Excess of Income over Receipts 7,800
Expenditure (surplus) 17,650 Less Expenses 3,000
4,800
37,350 37,350
Illustration 20
From the Receipts and Payments Account of Ganjam Club, Berhampur, prepare
the Income and Expenditure Account for the year ending 31st December 2014 and
the Balance Sheet as on that date :
To Balance b/d By Salaries
Cash in Hand 3,600 For 2013 500
Cash at Bank 17,000 For 2014 6,000 6,500
To Subscriptions 26,900 By Miscellaneous Expenses 1,500
To Entrance Fees 2,400 By Books 10,000
To Restaurants taking 3,800 By Restaurant Expenses 2,650
To Rent of Ground 800 By 9% Fixed Deposit 15,000
To Sale of old Newspapers 200 (on 01.01.2014)
Accountancy
164
To Interest on Fixed Deposits 600 By Honorarium to Coach 2,500
By Periodicals and
Newspapers 1,100
By Balance c/d
Cash in Hand 4,050
Cash at Bank 12,000
55,300 55,300
(1) The club has 50 members and each paying an annual subscription of A600 per
annum. Subscriptions received include A900 for 2013 and A1,200 for 2015.
(2) Salaries outstanding on 31.12.2014 A1,000.
(3) On 01.01.2014, the club owned Land and Building worth A1,00,000, Furniture
worth A10,000 and Machinery worth A20,000.
(4) Provide a depreciation of 5% on all fixed assets except on books.
Solution :
Income and Expenditure Account of Ganjam Club
(A) By Subscriptions : (A)
To Salaries 6,000 Received during 2014 26,900
Add : Outstanding Less : Received for 2013 900
for 2014 1,000 7,000 26,000
To Miscellaneous Expenses 1,500 Received for 2015 1,200
To Honorarium to coach 2,500 24,800
To Periodicals and Newspapers 1,100 Add
To Depreciation : (A) outstanding for 2014 5,200
On Land and Buildings 5,000 {(50×600) – 24,800} 30,000
On Furniture 500 By Entrance Fees 2,400
By Profit from Restaurants
On Machinery 1,000 Takings 3,800
To Excess of Income over 6,500 Less Expenses 2,650 1,150
Expenditure (surplus) 17,300 By Rent of Ground 800
By Sale of old Newspapers 200
By Interest on Fixed Deposit
Received 600
Add Accrued 750 1,350
9
{(A15,000× 100 ) –A600)
35,900 35,900
165
Salaries outstanding 1,000 Cash in Hand 4,050
Subscriptions received in Advance 1,200 Cash at Bank 12,000
Capital Fund : Subscription outstanding 5,200
Opening Balance 1,51,000 Interest on FD Accrued 750
Add Surplus 17,300 9% Fixed Deposit 15,000
1,68,300 Books 10,000
Land and Buildings 1,00,000
Less Depreciation 5,000 95,000
Machinery 20,000
Furniture 10,000
Less Depreciation 500 9,500
1,70,500 1,70,500
Working Note :
Salaries outstanding 500 Land and Buildings 1,00,000
Capital Fund 1,51,000 Machinery 20,000
(Balancing figure) Furniture 10,000
Subscriptions Outstanding 900
Cash in Hand 3,600
Cash at Bank 17,000
1,51,500 1,51,500
Illustration 21
The following is the Receipts and Payments Account of Lions Club, Bhubaneswar
for the year ending 31.12.2016 :
Cash 1970 By Charity 1,500
Bank 13,620 By Municipal Expenses 700
15,590 By Sundry Expenses 800
Accountancy
166
To Donations 10,000 By Investment in
To Subscriptions 22,500 Government security 20,000
To Interest on securities 3,400 By Furniture 8,000
To Sale of sports materials 250 By Insurance 1,000
To Entrance Fees 1,450 By Bar Expenses 6,000
To Locker Rent 950 By Sports Equipment 8,000
To Bar Takings 7,500 By Balance c/d
Cash in Hand 2,000
Cash at Bank 10,000 12,000
61,640 61,640
(1) Salaries not paid for 2016 A1,360.
(2) Insurance premium paid in advance A200.
(3) Subscriptions received during 2016 include subscriptions of A1,500 for 2017.
Prepare Income and Expenditure Account and Balance Sheet.
Solution :
Income and Expenditure Account of Ganjam Club
(A) To Donations 10,000
Add Unpaid 1,360 5,000 Less Received in Advance 1,500
To Charity 1,500 (for 2017) 21,000
To Municipal Expenses 700 By Interest on securities 3,400
To Sundry Expenses 800 By Sale of sports materials 250
To Insurance 1,000 By Entrance Fees 1,450
Less Prepaid 200 800 By Locker Rent 950
To Excess of Income By Profit from Bar :
over expenditure (surplus) 29,750 Takings 7,500
Less Expenses 6,000 1,500
38,550 38,550
167
Salaries Unpaid 1,360 Cash in Hand 2,000
Subscriptions Received in Advance 1,500 Cash at Bank 10,000
Capital Fund : Prepaid Insurance 200
Opening Balance 15,590 Investment in Government
Add Surplus 29,750 45,340 Securities 20,000
Sports Equipment 8,000
Furniture 8,000
48,200 48,200
Working Note :
(1) Balance Sheet as on 31.12.2015
Capital Fund 15,590 Cash 1,970
(Balancing Figure) Bank 13,620
15,590 15,590
Illustration 22
From the following Receipts and Payments Account and additional information,
prepare Income and Expenditure Account for the year ending 31.12.2016 and the
Balance sheet as on that date :
Dr. Receipts and Payments Account for the year ending 31.12.2016 Cr.
To Balance b/d 11,500 By Charities 7,500
To Subscriptions 20,000 By Salaries 3,500
To Donations 2,700 By Printing 500
To Legacies 15,000 By Postages 300
To Interest on Investment 2,600 By Telephones 700
To Dividend on shares 800 By Rate and Taxes 1,300
To Sale of old Newspapers 200 By Furniture 10,000
By Insurance 1,000
By Investment 20,000
52,800 52,800
Accountancy
168
(1) Donations are treated as revenue receipts.
(2) Legacies 60% is treated as capital and 40% as revenue receipt.
(3) Insurance prepaid during 2016 A100.
Solution :
Income (A) Expenditure (A)
To Charities 7,500 By Subscriptions 20,000
To Salaries 3,500 By Donations 2,700
40
To Printing 500 By Legacies ( 100 ×15,000) 6,000
To Postages 300 By Interest on Investment 2,600
To Telephones 700 By Dividend on Shares 800
To Rate and Taxes 1,300 By Sale of old Newspapers 200
To Insurance 1,000
Less Prepaid 100 900
To Excess of Income
over Expenditure (surplus) 17,600
32,300 32,300
Balance Sheet
as on 31.12.2016
Legacies 15,000 Cash and Bank 8,000
Less (40% of A15,000) 6,000 9,000 Prepaid Insurance 100
Capital Fund : Investment 20,000
Opening Balance 11,500 Furniture 10,000
Add Surplus 17,600 29,100
38,100 38,100
169
Working Note :
Balance Sheet
as on 31.12.2015
Capital Fund 11,500 Cash and Bank 11,500
(Balancing Figure)
11,500 11,500
Illustration 23
The following is the Receipts and Payments Account of Sambalpur Dance society
for the year ending 31.03.2017. Prepare the Final Accounts of the Society for the
year ending 31.03.2017.
Dr. Cr.
To Balance b/d By Equipment and Machinery 17,000
Cash in Hand 4,700 By Stationery 3,500
Cash at Bank 5,300 By Insurance 4,500
To Subscriptions 40,000 By Repairs 2,000
To Sale of Old Furniture 800 By Salaries 23,000
(Book value A1,200) By Help to poor students 10,000
To Donations 10,000 By Audit fee 1,500
To Interest on Investments 2,800 By Advertisement 1,000
Cash in Hand 600
Cash at Bank 500
63,600 63,600
(1) Subscriptions for March 2017 is outstanding A7,000 and for March 2016, it
was due A9,000.
(2) Investments as on 31.03.2016 were A25,000 (Rate of Interest 12% p.a.)
(3) Insurance prepaid was A500.
(4) Depreciate Equipment and Machinery @10% p.a.
Accountancy
170
Solution :
Income and Expenditure Account of Sambalpur Dance Society
To Stationery 3,500 (A)
(A) By Subscriptions 40,000
To Insurance 4,500 Add : Outstanding
Less Prepaid 500 4,000 for March 2017 7,000
47,000
To Repairs 2,000 Less Outstanding
for March 2016 9,000 38,000
To Salaries 23,000 By Donations 10,000
To Help to poor students 10,000 By Interest on Investments 2,800
To Audit fee 1,500 Add Accrued Interest 200 3,000
12
To Advertisement 1,000 {(A25,000× 100 ) – A2,800}
To Depreciation on Equipment and
Machinery (A17,000×10%) 1,700
To Loss on sale of old Furniture 400
To Excess of Income over
Expenditure (surplus) 3,900
51,000 51,000
Balance Sheet of Sambalpur Dance Society

as on 31.03.2017
Capital Fund : Cash in Hand 600
Opening Balance : 45,200 Cash at Bank 1,500
Add Surplus 3,900 49,100 Subscriptions Accrued 7,000
Interest on Investment Accrued 200
Prepaid Insurance 500
12% Investments 25,000
Equipment and Machinery 15,300
(A17,000 – A1,700)
49,100 49,100
171
Working Note :
Balance Sheet
as on 31.03.2016
Capital Fund 45,200 Cash in Hand 4,700
(Balancing Figure) Cash at Bank 5,300
Subscriptions Accrued 9,000
Furniture 1,200
Investments 25,000
45,500 45,200
Illustration 24
The following is the Receipts and Payments Account of Star Club for the year
ending 31.03.2016 :
Dr. Receipts and Payments Account Cr.

To Balance b/d 7,000 By Salaries 12,450
To Subscriptions 13,380 By Stationery 3,600
To Receipts from Canteen 14,000 By Rent and Taxes 2,400
To Sundry Incomes 450 By Telephone Charges 600
To Rent of Hall 1,120 By Investments 7,500
To Interest on Investment 4,850 By Advertisements 1,250
By Postage 800
By General Expenses 3,500
By Canteen Expenses 5,000
40,800 40,800
1. There are 50 members each paying A300 as annual subscription.
2. Stock of Stationery on 01.04.2015 was A700 and on 31.03.2016 A900.
3. Land and Building A80,000, to be depreciated @7 21 %.
Accountancy
172
You are required to prepare an Income and Expenditure Account for the year
ending 31.03.2016 and the Balance Sheet as on that date.
Income and Expenditure Account of Star Club
Solution :
To Salaries 12,450 By Subscriptions A13,380
To Stationeries consumed : Add : Due for Current
(A) year (31.03.16) A1,620
Opening Stock 700 15,000
Add Purchases 3,600 By Profit from Canteen 9,000
4,300 By Sundry Incomes 450
Less Closing stock 900 3,400 By Rent of Hall 1,120
To Rent and Taxes 2,400 By Intereston Investments 4,850
To Telephone Charges 600
To Advertisements 1,250
To Postage 800
To General Expenses 3,500
To Depreciation on Land and Building 6,000
15
(A80,400× 200 )
Expenditure (surplus) 20
30,420 30,420
Balance Sheet of Star Club
as on 31.03.2016
(A) Cash in Hand 3,700
Capital Fund : Subscriptions Accrued 1,620
Opening Balance A87,700 Stock of Stationery 900
Add Surplus A20 87,720 Investments 7,500
Land and Building :
Opening Balance A80,000
Less Depreciation A 6,000 74,000
87,720 87,720
173
Working Note :
as on 31.03.2015
Capital Fund 87,700 Cash in Hand 7,000
(Balancing Figure) Stock of Stationery 700
Land and Building 80,000
87,700 87,700
Illustration 25
From the following Receipts and Payments Account of Jogamaya Club and
additional information supplied, prepare an Income and Expenditure Account for the
year ending 31.12.2016 and a Balance Sheet on that date :
Dr. for the year ended of 31st December, 2016 Cr.
To Balance b/d By Books 30,000
Cash in Hand 4,200 By Salaries 12,800
Cash in Bank 46,000 By General Expenses 3,500
To Subscriptions : By Newspapers 850
2015 A800 By 6% Fixed Deposit (on 1.7.16) 12,000
2016 A7,500 By Hanorarium 3,000
2017 A400 8,700 By Balance c/d
To Donations 3,275 Cash in Hand 845
To Lockers Rent 420 Cash at Bank 1,300
To Profit from entertainment 1,380
To Sale of grass 80
To Interest on Fixed Deposit 240
64,295 64,295
(a) The club has 100 members each paying an annual subscriptions of A120.
Subscriptions outstanding on 31.12.2015 were A1,200.
(b) Salaries paid include A800 for 2017 and salaries outstanding on 31.12.2016
A3,000.
(c) On 01.01.2016, the club owned building A50,000 and furniture A8,000.
Accountancy
174
(d) Provide depreciation on building and furniture @10% p.a.
Solution :
Income and Expenditure Account of Jogamaya Club
Dr. Cr.
To Salaries A12,800 By Subscriptions A7,500
Less Prepaid A800 Add Outstanding
A12,000 (100×A1200-A7,500) A4,500 12,000
Add Unpaid A3,000 15,000 By Donations 3,275
To General Expenses 3,500 By Lockers Rent 420
To Newspapers 850 By Profit from entertainment 1,380
To Honorarium 3,000 By Sale of grass 80
To Depreciation : By Interest on Fixed DepositA240
Building A5,000 Add Accrued A120
6
Furniture A800 5,800 (A12,000× 100 × 21 -A240)
By Excess of Expenditure
over Income (Deficit) 10,635
28,150 28,150
Balance Sheet of Jogamaya Club as on 31.12.2016
Subscriptions Received in Advance 400 Subscriptions outstanding (A)
For 2015 (A1,200–A800) 400
Salary unpaid 3,000 For 2016 4,500 4,900
Capital Fund : Prepaid Salary 800
Opening Balance A1,09,400 Cash in Hand 845
Less Deficit A10,635 98,765 Cash at Bank 1,300
Accrued Interest on Fixed Deposit 120
6% Fixed Deposit 12,000
Books 30,000
Building 50,000
Furniture 8,000
Less Depreciation 800 7,200
1,02,165 1,02,165
175
Working Note :
Opening Balance Sheet as on 31.12.2015
Capital Fund 1,09,400 Subscriptions Outstanding 1,200
(Balancing Figure) Cash in Hand 4,200
Cash at Bank 46,000
Furniture 8,000
Building 50,000
1,09,400 1,09,400
Illustration 26
Following is the Receipts and Payments
Account of Nandighosh Club, Bolgarh
To Subscriptions : By Books 2,000
2015 A1,250 By Newspapers 800
2016 A15,800 By Postages 250
2017 A1,600 18,650 By Furniture 2,000
To Sale of old furniture By Office Expenses 1,050
(Book value A200) 120 By Balance c/d 16,590
To Rent of Hall 850
To Sale of old Newspapers 120
27,490 27,490
(a) The club has 100 members. Annual subscription per member is A180. A300 are
still outstanding for 2015.
(b) Salaries outstanding for as on 31.12.2016 were A1,250 and salaries paid include
A500 paid for 2015.
(c) On 31.12.2015, the club owned the following assets : Building A80,000 and
Furniture A18,000. You you are required to prepare Income and Expenditure
Account for the year ending 31.12.2016, and a Balance Sheet as on that date.
Accountancy
176
Solution :
Income and Expenditure Account of Nandighosh Club, Bolgarh
Less Paid for 2015 A500 Add
A4,300 Outstanding A2,200
Add Outstanding A1,250 (A180×100 –A15,800) 18,000
5,550 By Rent of Hall 850
To Newspapers 800 By Sale of old Newspaper 120
To Loss on sale
of furniture (A200 – A120) 80
To Postages 250
To Office Expenses 1,050
Expenditure (surplus) 11,240
18,970 18,970
Balance Sheet of Nandi Ghosh Club, Bolgarh
as on 31.12.2016
Subscriptions Received Cash in Hand 16,590
in Advance 1,600
Salaries Outstanding 1,250 Subscriptions Outstanding :
Capital Fund : For 2015 A300
Opening Balance A1,06,800 For 2016 A2,200 2,500
Add Surplus A11,240 1,18,040 Books 2,000
Furniture A18,000
Less Sold A200
A17,800
Add Purchased A2,000 19,800
Building 80,000
1,20,890 1,20,890
177
Working Note :
Opening Balance Sheet of Nandighosh Club, Bolgarh as on 31.12.2015
Liabilities (A) Assets (A )
Salaries Outstanding 500 Subscriptions outstanding
Capital Fund Received in 2016 A1,250
(Balancing Figure) 1,06,800 Still outstanding A300
1,550
Cash in Hand 7,750
Furniture 18,000
Building 80,000
1,07,300 1,07,300
Illustration 27
From the following information relating to Star Club, prepare Income and
Expenditure Account for the year ending on 31.12.2016 and a Balance Sheet as on
that date :
Receipts and Payments Account of Star Club
To Subscriptions 40,500 By Rent 3,200
To Entrance Fees 2,400 By Electricity Charges 1,280
To Donations 2,540 By Books 3,600
To Life Membership Fees 3,600 By 12% Fixed Deposits
To Interest on Fixed Deposits 1,500 (on 01.01.2016) 15,000
By Office Expenses 2,400
55,720 55,720
Balance Sheet of Star Club as 31.12.2015
Salaries Outstanding 2,400 Cash in hand 5,180
Capital Fund 22,580 Books 12,000
(balancing figure) Furniture 5,000
Subscriptions outstanding 2,800
24,980 24,980
Accountancy
178
(a) Subscriptions outstanding as on 31.12.2016 A3,500.
(b) Half of donations are to be taken as income.
(c) Salaries outstanding A1,800.
Solution :
Star Club for the year ending 31.12.2016
Dr. Cr.
Add Outstanding A1,800 Less Received for 2015 A2,800
A14,300 A37,700
Less paid for 2015 A2,400 11,900 Add Outstanding
To Rent 3,200 for 2016 A3,500 41,200
To Electricity charges 1,280 By Donation A2,540
To Office Expenses 2,400 Less Capitalised
To Excess of Income over (50% of A2,540) A1,270 1,270
Expenditure (Surplus) 27,890 By Entrance Fees 2,400
By Interest on fixed Deposit A1,500
Add Accrued A300 1,800
12
{(A15,000× 100 –A1,500)}
46,670 46,670

as on 31.12.2016
Salaries Outstanding 1,800 Subscriptions outstanding 3,500
Life membership Fees 3,600 Interest on Fixed Deposit Accrued 300
Capital Fund : Cash in hand 17,740
Opening Balance A22,580 12% Fixed Deposit 15,000
Add Donation Books A12,000
Capitalised A1,270 Add Purchased A3,600 15,600
Add surplus A27,890 51,740 Furniture 5,000
57,140 57,140
179
Illustration 28
From the following Receipts and Payments Account of Sahara Club, Jaipur and
additional information, prepare the Income and Expenditure Account for the year
ending 31.12.2016 and a Balance Sheet as on that date :
Receipts and Payments Account of Sahara Club, Jaipur
Dr. Cr.
To Balance b/d By Purchase of Equipment 3,200
(on 01.07.2016)
Cash A350 By Repairs 850
Bank A8,400 By Match Expenses 1,260
8% Fixed Deposit A5,000 13,750 By Salaries 5,340
To Subscriptions 15,860 By Honorarium 2,950
(including A950 for 2015) By Upkeep of Lawn 560
To Donations 3,000 By Postage Stamp 250
To Entrance Fees 1,800 By Sundry Expenses 1,350
To Interest on Fixed Deposit 200 By Investment 4,000
To Sale of old Newspapers 140 By Tournament Expenses 1,240
To Sale of Equipment 350 By Balance c/d
(Book Value A500) Cash A800
To Tournament Fund 2,000 Bank A10,240
8% Fixed Deposit A5,000 16,100
37,100 37,100
(a) Provide depreciation on equipment @10%.
(b) Stock of postage stamp on 31.12.2016 A80.
(c) Subscriptions outstanding for 2016 A2,840.
(d) Salaries outstanding for 2016 A1,350.
(e) Donations are to be capitalised.
Accountancy
180
Solution :
Dr. Sahara Club for the year ending 31.12.2016 Cr.
Expenditure (A) Income (A )
To Repairs 850 By Subscriptions A15,860
To Match Expenses 1,260 Loss Paid for 2015: A950
To Salaries A5,340 A14,910
Add Outstanding A1,350 6,690 Add Outstanding in 2016 A2,840 17,750
To Honorarium 2,950 By Entrance Fees 1,800
To Upkeep of Lawn 560 By Interest on Fixed Deposit A200
To Postage 250 Add Accured Interest
Less Stock on 31.12.16 80 170 {(A5,000× 8 ) –A200} A200 400
100
To Sundry Expenses 1,350 By Sale of old Newspapers 140
To Depreciation on Equipment 160
10
(A3,200× 100 × 126 )
To Loss sale of Equipment 150
(A500 – A350)
Expenditure (Surplus) 5,950
20,090 20,090
Balance Sheet of Sahara Club

as on 31.12.2016
Salaries Outstanding 1,350 Subscriptions Outstanding 2,840
Tournament Fund : Stock of Postage 80
Opening Balance A2,000 Interest on Fixed Deposit Accrued 200
Less Expenses A1,240 760 Cash 860
Capital Fund : Bank 10,240
Opening Balance A15,200 8% Fixed Deposit 5,000
Add Surplus A5,950 Investments 4,000
Add Donations A3,000 24,150 Equipment A3,200
Less Depreciation A160 3,040
26,260 26,260
181
Working Note :
Opening Balance Sheet of Sahara Club
as on 31.12.2015
Capital Fund 15,200 Subscriptions Outstanding 950
(Balancing Figure) Equipment 500
Cash 350
Bank 8,400
8% Fixed Deposit 5,000
15,200 15,200
Illustration 29
The Master Club, Bolangir submits you its Receipts and Payments Account for
the year ending 31.12.2016. You are required to prepare the Income and Expenditure
Account and the Balance Sheet relating to the year.
Receipts and Payments Account of Master Club, Bolangir
To Opening Balance : By Rent (includes A400 for 2017) 6,000
Cash 250 By Postage and Telephone 540
Bank 20,550 By Upkeep of ground 250
To Subscriptions By Printing and Stationery 600
(including A750 for 2017) 21,250 By Travelling Expenses 150
To Lockers Rent 1,250 By Meeting Expenses 500
To Interest on 6% Bonds 1,000 By Salaries 5,400
To Donations 10,000 By Books 3,000
To Sale of Grass 50 By Donations 5,000
By Closing Balance :
Cash 310
Bank 32,600
54,350 54,350
The Club gives also the following information :
(a) The club holds 6% Government Bonds of A40,000 on 01.01.2016.
(b) The Books Account stood at A20,000 on 01.01.2016.
(c) Half of the donations received is to be capitalised.
(d) Salaries A300 is still unpaid.
Accountancy
182
Solution :
Income and Expenditure Account of Master Club, Bolangir
Dr. Cr.
Expenditure (A) Income (A )
To Rent A6,000 By Subscriptions A21,250
Less For 2017 A750 20,500
Less Paid for 2017 A400 5,600 By Lockers Rent 1,250
To Postage and Telephone 540 By Interest on Bonds A1,000
To Upkeep of ground 250 Add Accrued
6
To Donations 5,000 (A40,000× 100 -A1,000) A1,400 2,400
To Printing and Stationery 600 By Donations A10,000
To Travelling Expenses 150 Less Capitalised A5,000 5,000
To Meeting Expenses 500 By Sale of grass 50
To Salaries A5,400
Add Unpaid A300 5,700
Expenditure (surplus) 10,860 1
29,200 2 29,200
Balance Sheet of Master Club, Bolangir

as on 31.12.2016
Subscriptions Received in Advance 750 Cash 310
Salary Unpaid 300 Bank 32,600
Capital Fund : 6% Government Bond A40,000
Opening Balance A80,800 Add Accrued Interest A1,400 41,400
Add Surplus A10,860 Books A20,000
Add 21 of Donations Capitalised A5,000 96,660 Add Purchased
during 2016 A3,000 23,000
Prepaid Rent 400
97,710 97,710
183
Working Note :
Opening Balance Sheet
as on 01.01.2016
Capital Fund 80,800 Cash 250
(Balancing Figure) Bank 20,550
6% Government Bond 40,000
Books 20,000
80,800 80,800
2.9 QUESTIONS
1. From the Following alternatives given under each bit, write the correct answer along with
its serial number, against each bit;
(a) One of the following which is a ‘not for profit’ organisation, is.
(i) Tata Iron and Steel Company Limited.
(ii) Birla Tyres Ltd.
(iii) Ramakrishna Charitable Trust.
(iv) Bharat Sanchar Nigam Limited.
(b) Receipts and Payments Account is a :
(i) Personal Account (iii) Cash Account
(ii) Real Account (iv) Nominal Account
(c) Receipts and Payments Account shows :
(i) Capital Fund (iii) Receipts and Payments in cash
(ii) Surplus/Deficit (iv) Balance of assets
(d) The Receipts and Payments Account reveals :
(i) Net profit/loss (iii) Balances of Assets
(ii) Surplus/Deficit (iv) Balance of Cash
(e) Income and Expenditure Account is prepared by
(i) Manufacturing concerns (iii) ‘Not for profit’ concerns
(iv) Trading concerns (v) Manufacturing and trading concerns
(f) Income and Expenditure Account is a :
(i) Nominal Account (iii) Real Account
(ii) Personal Account (iv) Representative Personal Account
Accountancy
184
(g) Income and Expenditure Account shows :
(i) Cash in Hand and at Bank (iii) Capital Fund
(ii) Net Profit/Loss (iv) Surplus/deficit
(h) Subscription received in advance during an accounting year is :
(i) An asset (iii) An income
(ii) A liability (iv) An expense
(i) Subscription outstanding at the end of an accounting year is :
(i) An asset (iii) A liability
(ii) An income (iv) An expense
(j) Donation received for a specific purpose is a :
(i) Capital Receipt (iii) Capital expenditure
(ii) Revenue Receipt (iv) Revenue expenditure
(k) Life membership fee is a/an :
(i) Capital receipt (iii) Capital expenditure
(ii) Revenue receipt (iv) Revenue expenditure
(l) Legacy may be treated as :
(i) Capital receipt (iii) Capital or revenue receipt
(ii) Revenue receipt (iv) Revenue Income
(m) Sale of old newspaper is a/an
(i) Capital receipt (iii) Capital expenditure
(ii) Revenue receipt (iv) Revenue expenditure
(n) Receipts and Payments Account is prepared in lieu of :
(i) Balance sheet (iii) Income and Expenditure Account
(ii) Profit and Loss Account (iv) Cash Book
(o) Income and Expenditure Account is the equivalent name of :
(i) Trading Account (iii) Revaluation Account
(ii) Profit and Loss Appropriation A/c (iv) Profit and Loss Account
(p) The day to day cash transactions are recorded in
(i) Receipts and Payments Account (iii) Income and Expenditure Account
(ii) Cash Book (iv) Trial Balance
(q) When sports fund is created, sports expenses are transfered to :
(i) Receipt and Payments Account (iii) Sports Fund Investment Account
(ii) Income and Expenditure Account (iv) Sports Fund Account
(r) Special Fund usually appears in :
(i) Income and Expenditure Account (iii) Balance Sheet
(ii) Receipts and Payments Account (iv) Trial Balance
185
(s) The difference of assets and liabilities of opening Balance Sheet is :
(i) Surplus (iii) Reserve Fund
(ii) Capital Fund (iv) Deficit
(t) Income and Expenditure Account records only :
(i) Revenue items (iii) Both Revenue and Capital items
(ii) Capital items (iv) Only revenue receipts
(u) Receipts and Payments Account records :
(i) Revenue items (iii) Both revenue and capital items
(ii) Capital items (iv) Only revenue receipts
[Ans.: (a) iii, (b) ii, (c) iii, (d) iv, (e) iii, (f) i, (g) iv, (h) ii, (i) i, (j) i, (k) i, (l) iii, (m) ii, (n) iv,
(o) iv, (p) ii, (q) iv, (r) iii, (s) ii, (t) i, (u) iii.]
(a) Name the organisation rendering service to its members and the society without any profit
motive.
(b) What type of organisations are the schools, colleges, universities, libraries, sports clubs,
charitable hospitals, religious societies, etc. ?
(c) What does a ‘not for profit’ organisation provide ?
(d) What is the principal source of income of a ‘not for profit’ organisation ?
(e) To which Account is the surplus/deficit transferred ?
(f) Name the fee paid by the members at the time of their admission to a club for membership.
(g) What is the term used for the lump sum amount paid by the members/well-wishers of a
‘not for profit’ organisation ?
(h) What is the term used for the amount received by a ‘not for profit’ organisation as per the
will of a deceased person ?
(i) Name a register which contains the names and addresses of all members.
(j) Name the book which contains the proceedings of all meetings of the Board and Committees.
(k) On which side of the Balance Sheet is the ‘outstanding subscription’ shown ?
(l) What is the term used for the remuneration paid to artists/dancers/doctors, etc for their
performance and service ?
(m) On which side of the Balance Sheet is the subscription received in advance shown ?
(n) What is that fund which is not to be spent but provides a permanent source of income to
the ‘not for profit’ organisation ?
[Ans. (a) ‘Not for profit’, (b) ‘Not for profit’, (c) Service, (d) Membership fee/Subscription,
(e) Capital Fund, (f) Entrance fee, (g) Donation, (h) Legacy, (i) Members register, (j)
Minutes Book, (k) Asset, (l) Honorarium, (m) Liability, (n) Endowment.]
Accountancy
186
3. Correct the underlined portions of the following sentences :
(a) Receipts and Payments Account is a Personal account.
(b) Income and Expenditure Account is a Real account.
(c) Legacy is a revenue receipt.
(d) Life membership fee is a revenue receipt.
(e) Life membership fees is a recurring receipt.
(f) Capitalised donations are recurring items.
(g) Any amount paid to invitees like dancers, artists, singers, doctors, etc for their per-
formance and service is called salary.
(h) Honoraium is a capital expenditure.
[Ans.: (a) Real (b) Nominal (c) Capital, (d) Capital, (e) non-recurring (f) non-recurring (g)
Honorarium (h) revenue]
4. Fill up the blanks of the following sentences :
(a) The opening balance of Receipts and Payments Accounts is _______.
(b) Receipts and Payments accont records revenue and _______ items.
(c) The difference between two sides of Income and Expenditure Account is ______.
(d) The excess of assets over liabilities of a ‘not for profit’ organisation is _______.
(e) Endowment fund yields _______ income.
(f) Life membership fee is shown on the _______ side of Balance Sheet.
(g) Payment of honorarium is treated as _______ expenditure.
(h) Endoment Fund is shown on the _______ side of the Balance Sheet.
(i) Subscriptions due but not received are shown on ______ side of Balance sheet.
(j) Subscriptions received in advance is shown on the ______ side of Balance Sheet.
(k) Income and Expenditure Account does not show any ______ balance.
(l) Income and Expenditure Account is prepared on ______ basis.
(m) Receipts and Payments Account is prepared on ______ basis.
(n) Receipt of legacy is treated as a ______ receipt.
(o) Building Fund Investment is shown on the ______ side of Balance Sheet.
(p) Non-recurring entrance fee is treated as a ______ receipt.
(q) Entrance fee collected from members every year is treated as _______ receipt.
(r) Purchase and sale of fixed assets is ascertained from ______ Account.
(s) Lump sum amount received from well-wishers is _______.
(t) Amount received under the will of a person after his death is known as _______.
[Ans.: (a) Cash in hand/at Bank, (b) Capital, (c) Surplus/deficit, (d) Capital Fund, (e) Regular, (f)
Liabilities, (g) revenue, (h) Liability, (i) Assets, (j) Liabilities, (k) opening, (l) accrual, (m)
cash, (vi) Capital, (o) Assets, (p) Capital, (q) revenue, (r) Receipts and Payments, (s)
donations, (f) legacy]
187
(a) State the objective of a ‘not for profit’ organisation.
(b) Which account gives information about cash in a ‘not for profit’ organisation ?
(c) Which items are shown in Receipts and Payments Account ?
(d) Which items are shown in Income and Expenditure Account ?
(e) What are the sources of income of a ‘not for profit’ organisation ?
(f) What is the basis of accounting in preparing Receipts and Payments Account ?
(g) What is the basis of accounting in preparing Income and Expenditure Account ?
(h) How is capital fund of a ‘not for profit’ organisation calculated ?
(i) How will you treat specifice Fund expenditure ?
(j) How will you treat general donation ?
(k) How will you calculate Capital Fund if nothing is mentioned in question ?
(l) How would you treat suscriptions due at the beginning of the year ?
(m) How would you treat subscriptions received in advance in the current year ?
6. Answer the following questions within thirty words each :
(a) What do you mean by ‘not for profit’ organisation ?
(b) State the treatment of specific donation.
(c) State the treatment of legacy in the final accounts of a ‘not for profit’ organisation.
(d) What is an Endowment Fund ?
(e) Give the accounting treatment of life membership fee.
(f) Give any two important features of Receipts and Payments Account.
(g) Give any two important features of Income and Expenditure Account.
(h) What is Honorarium ?
(i) What do constitute the financial statements of a ‘not for profit’ organisation ?
(j) Give any two important features of a ‘not for profit’ organisation.
(k) Give the treatment of sale of fixed assets at the time of preparing Income and
(l) State the treatment of subscription outstanding at the time of preparing Income and
Accountancy
188
(m) State the treatment of subscription received in advance at the time of preparing Income
and Expenditure Account.
(n) How does donation differ from subscription ?
7. Answer the following questions within fifty words each :
(a) Define Receipts and Payments Account.
(b) Define Income and Expenditure Account.
(c) State the features of a ‘not for profit’ organisation.
(d) What is ‘legacy’ ?
(e) How do you treat ‘specific donations’ ?
(f) Give the steps in preparing Income and Expenditure Account.
(g) How will you treat entrance fees in the final accounts of a ‘not for profit’ organisation ?
(h) Why is Receipts and Payments Account prepared ?
(i) Distinguish between Cash Book and Receipts and Payments Account.
(j) Distinguish between Receipts and Payments Account and Income and Expenditure
Account.
(k) Distinguish between Income and Expenditure Account and Profit and Loss Account.
(l) Give any five items of Capital Receipt.
(m) Give any five items of Revenue Receipt.
(n) How does donation differ from subscription ?
8. Define ‘not for profit’ organisation with suitable examples. Distinguish between Receipts
and Payments Account and Income and Expenditure Account.
9. Define Receipts and Payments Account. State the procedure of preparing Income and
10. What is ‘not for profit’ organisation ? Distinguish Receipts and Payments Account from
Cash Book.
11. What is Receipts and Payments Account ? How does it differ from Income and Expenditure
Account ?
12. Explain the treatment of the following items in preparing final accounts of ‘not for profit’
organisations :
(a) Entrance Fees (c) Subscription (e) Life membership fee
(b) Capital Fund (d) Legacy (f) Donations
189
13. The following is the Receipts and Payments Account of Koshal Club, Bhawanipatna for
the year ending 31st March 2017 :
Dr. Cr.
Cash in Hand A1,700 By Postages and Telephones 700
Cash at Bank A1,400 3,100 By Investments 12,000
To Sale of old Newspapers 500 By Rent 2,000
To Subscriptions 25,000 By Printing and Stationery 800
By Furniture 6,000
By Balance c/d
Cash in Hand A1300
Cash at Bank A1600 2,900
28,600 28,600
1. Salaries Outstanding A300
2. Rent prepaid A500
3. Subscription due A1,000
4. Depreciate furniture by 10%.
Prepare Income and Expenditure Account and Balance Sheet.
(Answer : Surplus A18,400, Opening Capital Fund A3,100, Balance Sheet Total A21,800.)
14. From the following particulars of Kandhamal Legal Services Club, prepare the final accounts
for the year ending 31.12.2016 :
Receipts and Payments Account of Kandhamal
Dr. Legal Service Club for the year ending 31.12.2016 Cr.
To Subscriptions 25,000 By Legal Fees 2,000
To Sale of Grass 1,000 By Equipment 20,000
To Rent of Hall 1,700 By Travelling Expenses 1,400
To Donation for prizes 10,000 By Office Expenses 1,300
48,700 48,700
Accountancy
190
1. Books as on 01.01.2016 were A17,000.
2. Buildings as on 01.01.2016 stood at A63,000.
3. Travelling expenses unpaid A600.
4. Depreciate equipment by 71/2%.
5. Subscription due at the end of the year A600.
6. Subscription received in advance during the year A700.
Hint - Capitalise donation as it is for a specific purpose.
[Answers : Surplus A16,800, Opening Capital Fund A91,000
Balance Sheet Total A1,19,100.]
15. The following is the Receipts and Payments Account of Mayurbhanja Cultural Society for
the year ending 31.03.2017 :
Receipts and Payments Account of Mayurbhanja
Dr. Cultural Society for the year ending 31.03.2017 Cr.
To Balance b/d 18,000 By Salaries and wages 32,200
To Subscriptions 30,000 By Office Expenses 3,100
To Govt. Grants 12,000 By Library Books 12,300
To Rent of Hall 1,000 By Telephone Charges 3,600
To Entrance fees 7,000 By Repairs 900
ByAddition to Building 5,000
68,000 68,000
You are required to prepare an Income and Expenditure Account and Balance Sheet after
considering the following additional information :
1. Assets on 31.3.2016 were :
Furniture 17,000, Building A50,000, Library Books A10,700.
2. Subscriptions outstanding on 31.03.2017 were A1,000.
3. Provide depreciation on all fixed assets @10%.
[Ans. Surplus 1,700, Opening capital fund A95,700, Balance Sheet total A97,400.]
191
16. From the following particulars, prepare Income and Expenditure Account and Balance
Sheet of Utkal Sangeet Parishad, Puri :
Receipts and Payments Account of Utkal Sangeet Parishad, Puri
To Balance b/d 9,000 By Repairs 2,000
To Subscriptions 40,000 By Stationery 4,500
To Sale of old furniture 600 By Rent 3,500
(Book value A1,000) By Salaries 23,000
To Donations 10,000 By Help to Poor 10,000
To Interest on Investments 1,800 By Equipment 17,000
To Locker Rent 1,200 By Advertisement 1,500
62,600 62,600
1. Subscription on 31st March 2017 was due A7,000 and on 31st March 2016 was due A9,000.
2. Investments were A25,000 as on 31.03.2016.
3. Rent Prepaid A500.
4. Depreciate Equipment @20% p.a.
[Answer : Deficit A6,800, opening capital Fund A44,000, Balance Sheet Total A47,200.]
Hints - (1) Donation is Capitalised, (2) Furniture A1,000 and Investments A25,000 will
appear on the Balance Sheet as on 31.03.2016.
17. From the following information of Neelachal Club, prepare Income and Expenditure Account
and Balance Sheet for the year ending 31.12.2016 :
Receipts and Payments Account of Neelachal Club
To Subscriptions 23,375 (Including A440 for 2015)
(including A825 for 2017) By Rent 5,940
To Lockers Rent 1,375 By Establishment 1,100
To Interest on Securities 1,150 By Telephone Charges 275
To Donations 11,000 By Stationeries 825
By Library Books 3,300
By Donations 5,500
59,700 59,700
Accountancy
192
1. On 1.1.2016, Library books was A40,000 and 8% Government Bonds A20,000.
2. 1/4 the of donations received is to be capitalised.
3. Rent outstanding on 31.12.2017 A60.
[Answer: Surplus A13,965, Opening Capital Fund A82,360. Balance Sheet Total A99,960.]
18. From the following Receipts and Payments Account of Berhampur Music Club and other
information given below, prepare Income and Expenditure Account for the year ending
31.12.2016 and the Balance Sheet as on that date :
for the yer ending 31.12.2016
To Entrance fees 2,000 By Postage and Telephone 2,500
To Subscriptions : By Rent 4,000
2015 A7,000 By Printing and Stationery 3,500
2016 A48,000 By Furniture (1.7.16) 20,000
2017 A2,000 57,000 By 12% Debentures (1.4.16) 30,000
To Interest on Debentures 2,000 By Miscellaneous Expenses 5,000
To Profit on Restaurants 12,000 By Balance c/d 13,000
96,000 96,000
1. Depreciate furniture @10% p.a.
2. Rent unpaid A800.
3. Subscriptions outstanding A3.000.
4. The club had instruments worth A20,000 on 01.01.2016 on which depreciation to be
charged @5% p.a.
[Answer : Surplus A31,900. Opening Capital fund A50,000 Balance Sheet Total A84,700.]
19. From the following information, calculate the amount of subscription to be credited to
Income and Expenditure Account for the year ending 31.03.2017 :
193
Dr. Cr.
Subscriptions :
For the year ending on 31.03.2016 15,000
1. Subscriptions outstanding on 31.03.2017 A18,000
2. Subscriptions outstanding on 31.03.2016 A15,000
3. Subscriptions received in advance on 31.03.2016 A5,000
[Answer : A1,18,000.] Hint : (A95,000 + A18,000 + A5,000)
20. From the following information, calculate the amount to be charged to Income and
Expenditure Account for the year ending 31.03.2017 :
(A)
Salaries paid during the year 40,000
Salaries outstanding as on 31.03.2017 8,000
Salaries outstanding as on 31.03.2016 6,000
[Answer : A42,000 (A40,000+A8,000 – A6,000)]
21. During the year 31.03.2016, rent actually paid was A9,000. Find out the actual expenses
on rent chargable to Income and Expenditure Account for the year ending 31.03.2016
from the information given below :
(A)
Prepaid Rent on 01.04.2015 1,200
Prepaid Rent on 31.03.2016 800
Outstanding Rent on 01.04.2015 700
Outstanding Rent on 31.03.2016 1,400
[Answer : A10,100. (A9,000+A1,200+A1,400 – A800 – A700)]
22. Show the consumption of stationery to be charged to Income and Expenditure Account
from the following data for the year ending 31.03.2017 :
Stock of Stationery : On 31.03.2016 A7,000 and on 31.03.2017 A8,000.
Stationery purchased during the year ending on 31.03.2017 A22,000.
[Answer : A21,000 (A22,000+A7,000 – A8,000)]
Accountancy
194
23. Calculate the amount of stationery consumed during the year ending 31.03.2017 and to be
charged to Income and Expenditure Account for the year from the information given below:
(A)
Amount paid for stationery during the year 3,700
Creditors for stationery on 01.04.2016 500
Creditors for stationery on 31.03.2017 650
Stock of stationery as on 01.04.2016 750
Stock of stationery as on 31.03.2017 800
[Ans.: (1) Purchase of Stationery during the year : (A3,850. (A3,700+A650–A500)
(2) Amount to be charged to Income and Expenditure Account A3,800.
(A3,850+A750–A800).]
24. From the following Receipts and Paymetns Account of Santosh Club, Prepare the Income
and Expenditure Account for the year ending 31.12.2016 and the Balance Sheet as on
that date :
Receipts and Payments Account of Santosh Club
Dr. Cr.
To Balance b/d By Rent 2,400
Cash in Hand 600 By Salary 1,600
Cash at bank 2,500 By Printing 1,200
To Entrance fee 490 By Postage and Telephone 2,400
To Subscriptions 18,000 By Electricity 2,100
To Donations 1,650 By Library Books 4,000
To Life Member Fees 2,500 By 8% National Savings
To Interest on Deposits 240 Certificates (01.07.2016) 12,000
To Proceeds from Entertainment 2,320 By Balance c/d
Cash in Hand 500
Cash in Bank 2,100
28,300 28,300
195
(a) On 31.12.2015, the club had books worth A20,000 and furniture worth A8,000.
Provide depreciation on these assets @10% p.a.
(b) Subscriptions outstanding at the beginning A500 and at the end A700.
[Answer : Surplus A10,240. Opening Capital fund A31,600 Balance Sheet Total A44,340.]
24. Following is the Receipts and Payments Account of Peacock Club for the year ending
31.12.2016 :
Dr. Cr.

To Subscriptions 10,000 By Rent 1,100
By Printing 500
By Furniture (purchased on 1.7.2016) 6,000
By Balance c/d
Cash in Hand 100
Cash at Bank 1,000
11,000 11,000
(i) Salary outstanding A200
(ii) Rent Prepaid A100
(iii) Subscriptions outstanding A400.
(iv) Depreciation on Furniture 10% p.a.
(v) On 31.12.2015, the Building stood at A20,000 and Investments were A40,000.
Prepare Income and Expenditure Account for the year ending 31.12.2016 and Balance
Sheet as on that date.
[Answer : Surplus A6,100, Opening Capital Fund A61,000, Balance Sheet total A67,300)]
CHAPTER-3
DEPRECIATION
STRUCTURE
3.1 Meaning
3.2 Causes of depreciation
3.3 Objectives / Needs for providing depreciation
3.4 Characteristics
3.5 Factors for determination of depreciation
3.6 Methods of charging depreciation
3.6.1 Simple depreciation method
3.6.2 Provision for Deprecation method
3.7 Methods of calculating depreciation
3.7.1 Straight line method
3.7.2 Written Down Value method
3.8 Questions
Depreciation
197
After going through this chapter, you will be able to know meaning, need, causes,
objectives and characteristics of depreciation. You will also be able to know different
methods of charging depreciation.
It is derived from latin word depretium which means decline in price. The word
depreciation is related to the concept of business income. The long term assets are
used in the business to generate revenue. In the process of use, the long term assets
consume their economic potential. After certain period of time the assets become
useless and discarded. The assets are replaced for new long term assets. The economic
potential so consumed is the expired cost of the assets. Such expired cost must be
recovered from the revenue of the business. Such recovery of the expired cost
determines the actual profit earned by business.
3.1 MEANING
The concept of depreciation refers to allocation of the cost of fixed assets over
their expected period of useful life. The main purpose of depreciation is to charge it
as an expense in order to find out the cost of production. As a result, true profit/loss
earned/suffered by the business can be ascertained.
The following definitions will give a clear understanding of the term
depreciation :
“The measure of the exhaustion of the effective life of an asset from any cause
during a period.” Spicer and peggler
“A measure of the wearing out, consumption or other loss of the value of
depreciable asset arising from use, effluxion of time or obsolescence through
technology and market changes. Depreciation is allocated so as to charge a fair
proportion of the depreciable amount in each accounting period during the expected
useful life of the asset. Depreciation includes amortisation of assets whose useful
life is predetermined.” The Institute of Chartered Accountants of India.
“Depreciation is the allocation of the depreciable amount of an asset over the
estimated useful life. Depreciation for the accounting period is charged to the income
either directly or indirectly” International Accounting Standard Committee.
“Depreciation accounting is a system of accounting which aims to distribute
the cost of tangible capital assets, less salvage value, if any over the estimated useful
Accountancy
198
life of the assets in a systematic and rational manner. It is the process of allocation,
not of valuation. Depreciation for the year is a portion of the total charge under such
a system that is allocated to the year.”
Analysis of the above definitions reveals :
(i) Depreciation is a gradual decrease in the value of the assets.
(ii) Depreciation accounting is concerned with allocation of amount to be
depreciated (cost less scrap value) over the estimated useful life period of the asset.
(iii) Such depreciation amount is charged to profit and loss account.
(iv) Depreciation is a process of allocation, not valuation of fixed assets.
Depreciable asset means :
(i) Life period of the asset is more than one accounting period.
(ii) Life of the asset is limited.
(iii) Asset is used in the business.
3.2 CAUSES OF DEPRECIATION
The following are the causes of depreciation
(i) Wear and tear : Assets get worn out because of constant use, passage of
time. Such thing happens with fixed assets like plant and machinery, furniture and
fixtures, building, etc.
(ii) Passage of time : The value of the most of the fixed assets fall because of
the passage of time, irrespective of the use. Some assets have fixed legal life like
lease, patent, copyright, etc.
(iii) Exhaustion : Some assets get exhausted in the process of use. Examples
are : mines, oil wells, stone quarries, etc. These assets are known as wasting assets.
The value reduces with extraction or exploitation.
(iv) Obsolescence : Obsolescence is a process of becoming obsolete or out of
date. Some assets are discarded though they are in existence and working condition.
Depreciation
199
For example, a new asset has hit the market with more efficiency, low running and
maintenance cost, etc. Use of the old asset becomes uneconomic. Running and
maintend cost will be increased. So the old asset is discarded and it is replaced by a
new asset.
(v) Accident : Sometimes the value of an asset reduces to zero or very negligible
amount after it meets an accident.
3.3 OBJECTIVES / NEEDS FOR PROVIDING DEPRECIATION
The following are the objectives of or need for providing depreciation.
(i) To ascertain true profit :
When we are purchasing an asset, we are paying in advance for the future
expenses. For example we have purchased plant & machinery for A5,00,000 for
business use. As a result we are saving the hiring charge or the rent of the plant &
machinery until it exists and used in the business. But this will be useless after some
period of time. So the cost of the plant is nothing but the advance rent or hiring
charges for the entire period for which the plant is useful. This rent or hiring charges
would have been charged to profit and loss account. So the cost of the plant is to be
charged to the profit and loss account over the useful life period of the plant and
machinery. So we are charging the depreciation as an expense to know the true profit
or loss. This is an invisible expense for the subsequent years of purchase of the asset
during which period no cash is paid, as it has been paid in lump sum when it was
purchased.
(ii) True financial position
The balance sheet must reveal true and fair view of the financial position of the
business. The asset loses its value because of depreciation for various reasons. Value
of the assets will be overstated, if shown in the balance sheet without charging
depreciation. So depreciation must be deducted from the asset to show true financial
position of the business.
(iii) For replacement of asset :
All fixed assets become commercially unviable after a fixed period of time.
Accountancy
200
But as per going concern concept, the business continues for a long period of time.
So the old discarded assets are to be replaced by new ones in order to keep the business
going. The depreciation so charged is accumulated over its useful life. This amount
can be used to purchase a new asset.
(iv) Computation of tax liability
Depreciation is to be charged at a specific rate prescribled by the Income Tax
authorities depending upon the nature and type of assets. Profit or loss can be
calculated only after changing depreciation, so that the tax can be appropriataly levied.
(v) Determination of cost of production
Depreciation is an important componet of the cost of products though it is not
paid in cash every year. So calculation of depreciation is important to find out the real
cost of production.
3.4 CHARACTERISTICS
(i) Depreciation is a non-cash or non-monetary expense. The businessman need
not pay anything in cash for depreciation.
(ii) The term depreciation is applicable to only fixed assets.
(iii) Depreciation is a charge against profit. This implies that true profit or loss of a
business cannot be accurately ascertained without charging depreciation.
(iv) Depreciation is charged on the asset whether it is used for full year or part of
the year.
(v) The total amount of depreciation cannot exceed the depreciable value of the
fixed asset (i.e. cost price–scrap value)
(vi) Depreciation is a process of allocation of cost.
(vii) Calculation of exact depreciation is almost impossible. It is always calculated
on estimated basis.
(viii) Depreciation is continuous fall in the value of the asset till the entire cost is
exhausted.
Depreciation
201
(ix) Depreciation has no link with market price of the asset. It is always charged as a
percentage of the cost price of the fixed asset.
(x) Depreciation is different from maintenance. Maintenance expenses are incurred
to keep the asset in usable condition.
3.5 FACTORS FOR DETERMINATION OF DEPRECIATION
Calculation of depreciation usually depends upon the three factors, such as
acquisition or historical cost, expected residual value or salvage or scrap value
and estimated useful life of the asset. Each one of these factors is discussed
below :
1. Historical cost of the asset implies cost incurred on acquisition of the asset
and other cost incurred to put the asset in useful condition. The other cost includes
all expenses incurred till the asset is installed or put to use. These expenses
include transportation charges, transit insurance charge, installation expenses,
registration charges, commission paid on purchase of asset and any other
expenses. Depreciation is calculated on cost of acquisition including all the
above expenses. For example, a machinery is purchased at a cost of A2,00,000,
transportation cost incurred is A10,000 and installation cost is A20,000. For
the purpose of depreciation, the cost of the asset is A2,30,000.
2. Estimated useful life of the depreciable asset implies either the number of
years over which the asset is expected to be used or number of units expected to
be produced or number of working hours of the asset during its life period or
total kilometer to run during its useful life; depending upon the nature of the
asset.
3. Number of years : Usually the life of an asset is expressed in terms of number
of calender years for which the asset can be used effectively. Methods of
depreciation under this category are :
- Fixed instalment method
- Diministing balance method
- Annuity method
Accountancy
202
- Depreciation fund method
- Insurance policy method
- Revaluation method
4. Number of units : Total number of units to be produced during the life time of
the asset is taken as its life. Depreciation is calculated basing upon number of
units produced during an accountng year. The method used is production unit
method or depletion method.
For example, the cost of the machine is five lakh rupees. Total number of units
to be produced during its life time is estimated at 10,000 units. In a particular
year, 500 units are produced. Depreciation will be calculated as follows :
Cost of the asset

___________________ Number of units
x
No. of units to be produced produced during
during life time the year.
5,00,000
  500  25,000 rupees
10,000
5. No. of working hours : Total number of hours for which asset is available for
use during its life period is treated as its life. Depreciation is calculated basing
upon number of hours for which asset is put to use during the year. Proceduer to
calculate such depreciation is machine hour rate method or working hour method.
For example, the cost of the machinery is A5,00,000, total number of working
hour during its life is estimated to be 1,00,000 hours. During a year the machine
is used for 10,000 hours. The amount of deprection during the year is :
5,00,000
A 1,00,000  10,000  A50,000.
6. Expected residual value or salvage of depreciable asset implies estimated
realisable value of the asset at the end of its useful life. It is also called scrap
Depreciation
203
value or salvage. Difference between cost of the asset and its estimated scrap
value is termed as depreciable cost of the asset. Such depreciable cost is allocated
and recovered during the life period of the asset. Total depreciation charged
during its life time must be equal to depreciable cost.
3.6 METHODS OF CHARGING DEPRECIATION
There are two methods of charging depreciation. Those are :
(i) Simple Depreciation Method or by charging depreciation to Asset Account,
(ii) Provision for Depreciation Method or by creating provision or accumulated
depreciation account.
These methods are discussed below :
3.6.1 Simple Depreciation Method or Recording of Depreciation by charging
to Asset Account
Under this method, the amount of depreciation is debited to Depreciation
Account and credited to Asset Account every year. The Asset Account appears
in the Balance sheet at written down value (i.e. original cost less depreciation
till date). The Depreciation Account is closed by transferring to Profit and Loss
Account like any other items of expenses.
The various journal entries which are passed under this method are summarised
below:
1. To record purchase of asset Asset A/c Dr.
To Bank A/c
(Being the asset purchased)
2. To provide depreciation Depreciation A/c Dr.
To Asset A/c
(Being the depreciation provided for)
3. To transfer depreciation Profit and Loss Account Dr.
to Profit and Loss Account To Depreciation A/c
(Being transfer of depreciation account
to P.L. A/c)
Accountancy
204
4. When additional asset is purchased Asset A/c Dr.
To Bank A/c
(Being the asset purchased)
5. To record sale of asset Bank A/c Dr.
Loss on sale of asset A/c Dr.
To Asset A/c
(Being loss on sale of asset)
or
Bank A/c Dr.
To Asset A/c
To Profit on sale of asset A/c.
(Being profit on sale of asset)
6.(a) To transfer profit on sale of asset Profit on sale of asset A/c Dr.
(Being transfer of profit on sale of asset).
(b) To transfer loss on sale of asset Profit and loss A/c Dr.
To Loss on sale of asset A/c
(Being transfer of loss on sale of
asset to P/L A/c).
Tutorial Notes
1. Book value on the date of sale = Original cost of asset – Total depreciation
provided till the date of sale.
2. Profit = Sale price of asset - Book value on the date of sale.
3. Loss = Book value of asset on the date of sale – selling price of the asset.
4. In case of exchange of asset, the amount at which the vendor agrees to acquire
the asset is the sales price.
5. In case of destruction or damage of an asset which is insured, claim admitted by
insurance company is treated as sale price.
Depreciation
205
3.6.2 Provision for Depreciation Method or Recording depreciation when a
provision for Depreciation Account is maintained
Under this method, the amount of depreciation to be charged in a particular year
is debited to Profit and Loss Account and credited to Provision for Depreciation
Account. The asset account appears on the asset side of the Balance Sheet at its
original cost throughout its life; and the Provision for Depreciation Account
appears on the liabilities side of the Balance Sheet. In case of sale of asset the
provison for depreciation Account (relating to the asset sold) is transferred to
Asset Account. Any amount realised on sale of asset is also transferred to Asset
Account. The balance, if any, in the Asset Account (either profit or loss) is
transfered to Profit and Loss Account.
The following journal entries are passed under this method :
1. For providing deprecration : Depreciation A/c Dr.
To Provision for Deprecation A/c
2. For transferring depreciation Profit and Loss A/c Dr.
A/c to Profit and Loss A/c To Depreciation A/c
3. For transferring Provision for Depreciation A/c Dr.
accumulated depreciation To Asset A/c
on asset sold.
4. In case of profit on sale of asset Bank A/c Dr/
To Asset A/c
5. In case of loss on sale of Asset Bank A/c Dr.
To Asset A/c
Distinction between Depreciation Account and
Provision for Depreciation Account
Depreciation is a gradual reduction in the value of a fixed asset. Depreciation
account is opened to record such reduction in the value of the fixed assets.
Accountancy
206
Depreciation account is a direct charge against the asset. It means every year the
depreciation account is debited and concerned asset account is credited. At the end
of the year the depreciation account is closed by transferring to Profit and Loss
account. However, when the provision for depreciation account is opened, depreciation
is not a direct charge against the asset. The provision for depreciation account is not
closed each year and it is closed by transferring to asset account at the time of sale of
the asset. Throughout the life time of the asset, the asset is shown on the asset side of
the balance sheet at its original cost and provision for depreciation is shown on the
liabilities side of the balance sheet.
Depreciation Account Provision for Depreciation Account

This account is a Nominal account. This account is a provision account,
always showing a credit
balance till the disposal of the asset.
At the time of charging At the time of charging depreciation,
depreciation, depreciation account depreciation account is debited and
is debited and asset account is provision for depreciation account is
credited. credited.
At the end of the accounting year, Provision for depreciation account has
depreciation account is closed by no place in profit and loss account. It
transferring to profit and loss is shown on the liabilities side of the
account. balance sheet and is closed by
transferring to the particular asset
account, when the asset is sold.
This account shows debit balance. This account shows credit balance.
Asset is shown at written down Asset is shown at original cost in the
value in the balance sheet. balance sheet.
Depreciation account does not Provision for depreciation account is
appear in the balance sheet. shown on the liabilities side of the
balance sheet.
Depreciation
207
3.7 METHODS OF CALCULATING DEPRECIATION
There are several methods of allocating depreciation over the useful life of the
asset. There are various methods to recover the depreciable cost of the asset over its
useful life. However, we will discuss only Straight Line method and Written Down
value method.
3.7.1 Straight line method
Under this method, a fixed percentage of the original cost of the asset is written
off during each accounting period over the useful life of the asset.
The rate of depreciation is calculated as under :
Cost of the asset  Residual Value
Depreciation =
Estimated life
For example, the cost of an asset is A1,10,000. Its residual value after its 10
years estimated life is A10,000. Amount of depreciation is :
A1,10,000  A10,000
 A10,000 per annum.
10
A10,000 is charged as depreciation per annum for a period of 10 years. At the
end of 10 years, the cost of the asset reduces to its residual value or scrap value. It is
called straight line method as the amount of depreciation remains fixed or same in
each year. Under this method, depreciation is generally calculated as a fixed percentage
on the original cost of the asset.
Advantages : The main advantages of straight line method of depreciation are as
follows :
(i) This method is very simple to calculate and easy to apply.
(ii) The same depreciation amount is charged every year. So comparison of income
of different years is easy.
(iii) The value of the asset will be reduced to zero or scrap value at the end of its life
time.
(iv) This method is very suitable, particularly for those assets, which have a fixed
life like leasehold property, patent right, etc.
Accountancy
208
Disadvantages : If suffers from the following disadvantages :
(i) It is based on the assumption that the asset has the same utility in different
accounting periods. But the efficiency of the asset reduces with the passage of
time.
(ii) The repair and maintance cost of the asset increases as the asset gets older.
Depreciation amount remains the same. So total charge (i.e., depreciation plus
repair and maintenance cost) to profit and loss account increases year after
year as the asset grows older and older.
(iii) It does not consider loss of interest on the amount invested in the business.
(iv) If does not provide liquid fund for replacement of asset on expiry of its useful
life.
(v) It is difficult to calculate depreciation on subsequent addition of the asset.
(vi) This method is not recognised by the income tax department.
3.7.2 Written down value method
This is otherwise known as diminising balance method or reducing instalment
method.
Under this method, depreciation is calculated at a fixed percentage on written
down value of the asset.This method assumes that the efficiency of the asset
goes on reducing as the asset grows older. So the amont of depreciation to be
charged in different accounting periods also decreases with the passage of time.
For example, the cost of an asset is A1,00,000 and the rate of depreciation is
10% per annum. Under written down value method, the depreciation is calculated
as under :
A
Cost of the asset 1,00,000
less : Depreciation for 1st Year (10% of A1,00,000) 10,000
Written down value in the beginning of 2nd year 90,000
less : Depreciation for 2nd year (10% of A90,000) 9,000
Written down value in the beginning of 3rd year 81,000
less : Depreciation for 3rd year (10% of A81,000) 8,100
Written down value in the beginning of 4th year 72,900
Depreciation
209
As the amount of depreciation is calculated on written down value of the asset,
it is known as written down value method.
Formula for calculating depreciation is as follows :
L
M Residual Value O
P
Rate of Depreciation = 1  n Cost of asset  100
N Q
Where n = number of year
For example cost of the asset is A10,00,000, residual value is A64,000 and life
period is 3 years.
L
M 64,000 O
P
The rate of Depreciation = 1  3 10,00,000  100
N Q
= 60%
Advantages
This method has the following advantages :
(i) The total charge (i.e., depreciation plus repair and maintenance) remains almost
the same year after year. The reason is amount of depreciation is more in the
initial period. It goes on reducing as the asset grows older. The repair and
maintenance is less in the initial period. It goes on increasing as the asset gets
older. So total charge to profit and loss remains almost uniform.
(ii) This method is logical as the asset grows older, deprciation goes on reducing.
(iii) This method is recognised by the Income Tax department.
(iv) Fresh calculation of dereciation is not required when addition is made.
(v) A major portion of the asset is recovered in its earlier life. Replacement of the
asset due to technological change will not create more problem.
Disadvantages
It suffers from the following disadvantages :
(i) As the depreciation is calculated at a fixed percentage on written down value of
the asset, the value of the asset cannot be zero.
Accountancy
210
(ii) It does not take into consideration the loss of interest due to investment in
asset.
(iii) It does not provide liquid fund for replacement of asset at the end of its useful
life.
(iv) It is very difficult to calculate the amount of depreciation.
(v) It takes a long time to write off the asset.
Distinction between straight line method and
written down value method
Straight line method Written down value method
The rate and amount of depreciation The rate of depreciation remains the
remain the same year after year same, but the amount of depreciation
throughout the life period. goes on reducing year after year.
Depreciation is calcualted as a Depreciation is calculated as a
percentage on the original cost of percentage on the written down value
the asset. or reducing balance or book value of
the asset.
The book value of the asset The value of the asset never comes
becomes zero at the end of the life down to zero.
of the asset.
As the asset grows older, the As the asset grows older, the amount
amount of repair increases. But the of repair increases. But the amount
amount of depreciation remains the of depreciation decreases. Hence,
same. Hence, the total amount of the total amount of depreciation and
repair and depreciation increases repair remains almost the same each
year after year. It reduces the annual year. It does not affect the profit of
profit gradually. the subsequent years substantially.
It is suitable for the assets whose It is suitable for assets which are
repair charges are less and affected by change in technology and
possibility of obsolescence is less. which require more repair with the
passage of time.
Depreciation
211
Illustration 1 (Calculation of Rate of Depreciation under straight line method.)
Calculate the cost of the asset, the amount of depreciation per annum and the
rate of depreciation in the following cases under straight line method :
Case Purchase Price Expenses to be Estimated Expected
A capitalised (A) Scrap value Life
1. 55,000 15,000 10,000 6 years
2. 45,000 27,000 12,000 5 years
3. 63,000 27,000 9,000 9 years
4. 2,00,000 30,000 20,000 15 years
Solution :
Calculation of total cost of the asset :
Total cost of an asset = purchase price + Expenses to be capitalised
Case-1 A55,000 + A15,000 = A70,000
Case-2 A45,000 + A27,000 = A72,000
Case-3 A63,000 + A27,000 = A90,000
Case-4 A2,00,000 + A30,000 = A2,30,000
Calculation of amount of depreciation per year :
Total cost of asset  Estimated scrap value
Amount of depreciation = Expected life in years
A70,000  A10, 000

Case-1  A10, 000
6
A72,000  A12, 000
Case-2  A12, 000
5
A90, 000  A9, 000
Case-3  A9, 000
9
A2,30, 000  A20, 000
Case-4  A14, 000
15
Calculation of rate of depreciation under straight line method :
Accountancy
212
Annual depreciation
Rate of depreciation under straight line method=  100
Total cost of asset
A10, 000
Case-1 A70, 000 100  14.29%
A12, 000
Case-2 A72, 000 100  16.67%
A9, 000
Case-3 A90, 000 100  10%
A14, 000
Case-4 A2, 30, 000 100  6.09%
Illustration 2
(Calculation of depreciation for the 1st year of purchase, when rate of
depreciation is not given.)
A machine costing A1,80,000 was purchased. Installation expense is A20,000.
Expected life period is 7 years. Expected residual value at the end of useful life is
A25,000.
Calculate the amount of depreciation for the year ending 31st March 2017, if
the machine is purchased on :
(i) 1st April, 2016
(ii) 1st July 2016
(iii) 30th September 2016
(iv) 1st January 2017
Solution :
Cost of the machinery =
Purchase price + Installation expense
= A1,80,000 + A20,000 = A2,00,000
Amount of depreciation per year :
Depreciation
213
Total cost of machine  Estimated scrap value
Expected useful life
A2,00,000  A25,000
=  A25,000 per annum.
7
Amount of depreciation for the first year of purchase :
Case-(i) Asset is purchased on 01.04.2016
Amount of depreciation for 12 months = A25,000
Case-(ii) Asset is purchased on 1st July, 2016
Amount of depreciation for 9 months
9
A25,000× =A18,750
12
Case-(iii) Asset is purchased on 30th September 2016
6
A25, 000   A12,500
12
Case-(iv) Asset is purchased on 1st January 2017
3
A25, 000   A6, 250
12
Illustration 3
(Calculation of depreciation for the first year of purchase when rate is given)
A machine costing A80,000 was purchased.
Installation expense is A20,000.
Rate of depreciation under straight line method is 10% p.a. Calculate
depreciation for the first year ending 31st March 2017, if the machine is purchased
on :
(i) 1st April 2016
(ii) 1st July 2016
(iii) 1st October 2016
(iv) 1st January 2017
Accountancy
214
Solution :
Total cost of the machine A80,000 + A20,000 = A1,00,000
Amount of Depreciation =
Period from date of

purchase to date of closing
Rate the accounts
Cost of the machine  
100 12
Case-(i) When date of purchase is 1st April 2016 :
10 12
 A1, 00, 000    A10, 000
100 12
Case-(ii)
When the date of purchase is 1st July 2016 :
10 9
Amount of depreciation for 9 months  A1, 00, 000    A7,500
100 12
Case-(iii)
When date of purchase is 1st October 2016 :
Amount of depreciation for 6 months  A1, 00, 000  10  6  A5, 000

100 12
Case-(iv)
When date of purchase is 1st January 2017 :
10 3
Amount of depreciation for 3 months  A1, 00, 000    A2,500
100 12
Illustration 4
(Calculation of profit or loss on sale of asset)
A vehicle is purchased for A4,00,000. Depreciation is provided @10% p.a. on
straight line method. The vehicle is sold for A3,00,000. Calculate the profit or loss
on sale of vehicle in the following cases for the year ending 31st March 2017 :
Depreciation
215
(i) The date of purchase is 1st April 2015and the date of sale is 30th June
2016.
(ii) The date of purchase is 1st July 2015 and the date of sale is 31st December
2016.
(iii) The date of purchase is 1st October 2015 and date of sale is 30th Sept
2016.
(iv) The date of purchase is 1st January 2014 and the date of sale is 31st
December 2016.
Solution :
Calculation of profit or loss on sale
Particulars Case-(i) Case-(ii) Case-(iii) Case-(iv)
A A A A
A.Total cost of Vehicle 4,00,000 4,00,000 4,00,000 4,00,000
B.Depreciation from the
date of purchase to
date of sale 50,000 60,000 40,000 1,20,000
(4,00,000× (4,00,000× (4,00,000× (4,00,000×
10 15 10 18 10 12 10 36
 )  )  )  )
100 12 100 12 100 12 100 12
C. Book value on the date
of sale (A-B) 3,50,000 3,40,000 3,60,000 2,80,000
D. Sale price 3,00,000 3,00,000 3,00,000 3,00,000
E. Profit on sale/loss
on sale (D - C) (50,000) (40,000) (60,000) 20,000
Journal Entries
(i) For providing depreciation :
Depreciation Account Dr. (with amount of depreciation provided)
To Asset Account
Accountancy
216
(ii) For Transfer of depreciation to Profit and Loss Account :
To Depreciation Account
(iii) For sale of the asset at a profit :
Bank Account Dr. (With the selling price)
To Asset A/c
To profit on sale of asset A/c (with the amounts of profit, i.e.,
excess realised over the book value
of the asset).
(iv) For transfer of profit on sale of asset :
Profit on sale of asset Account Dr.
(v) For sale of asset at a loss :
Bank A/c Dr. (With the sale price of the asset)
Loss on sale of asset A/c Dr. (With the difference between book
To Asset A/c value and sale price of the asset.)
(vi) For transfer of loss on sale of asset.
Profit and Loss A/c Dr. (With the amount of loss)
To Loss on sale of asset A/c
Illustration 5
A machine is purchased on 1st April 2015 for A5,00,000. Depreciation is
charged under straight line method @10% per annum. Pass Journal entries for
the year ending 31st March 2016 and 31st March 2017.
Solution :
Journal
(Dr.) (Cr.)
L.F.
Date Particulars ( A) (A)
1st April Machinery Account Dr. 5,00,000
2015 To Bank Account 5,00,000
(Being the machinery purchased)
Depreciation
217
31st March Depreciation Account Dr. 50,000
2016 To Machinery Account 50,000
(Being depreciation charged)
31st March Profit and Loss Account Dr. 50,000
2016 To Depreciation Account 50,000
(Being transfer of depreciation to
Profit and Loss Account)
31st March Depreciation Account Dr. 50,000
2017 To Machinery Account 50,000
(Being depreciation charged)
31st March Profit and Loss Account Dr. 50,000
2017 To Depreciation Account 50,000
(Being transfer of depreciation
to Profit and Loss Account)
Working Note :
10
Annual Depreciation = A5,00,000   A50,000
100
Illustration 6
A businessman bought a machinery on 1st October 2014 at a cost of
A2,80,000. Amount spent on installation is A20,000. The business man writes
off depreciation @10% per annum on original cost. The books are closed on
31st March every year. Prepare Machinery account and Depreciation account
for 3 years.
Accountancy
218
Solution :
In the Books of....
Machinery Account
Dr. Cr.
Date Particulars A Date Particulars A
2014 2015
Oct 1 To Bank A/c (Purchase price) 2,80,000 Mar 31 By Depreciation A/c (1) 15,000
To Bank A/c (Installation expense) 20,000 Mar 31 By Balance c/d 2,85,000
3,00,000 3,00,000
2015 2016
Apr 11 To Balance b/d 2,85,000 Mar 31 By Depreciation A/c (2) 30,000
Mar 31 By Balance c/d 2,55,000
3,00,000 2,85,000
2016 2017
Apr 1 To Balance b/d 2,55,000 Mar 31 By Depreciation A/c (2) 30,000
2,55,000 2,55,000
Depreciation Account
2015 2015
Mar 31 To Machinery A/c 15,000 Mar 31 By Profit and Loss A/c 5,000
(For half year) (Transferred)
2016 2016
(Transferred)
2017 2017
(Transferred)
Working Notes :
Calculation of Depreciation :
1. Depreciation for the year ending 31st March 2015 :
10 6
A3,00,000× × = A15,000
100 12
Depreciation
219
2. Depreciation for the year ending 31st March 2016 and 2017
10
A3,00,000× = A30,000
100
Illustration 7
Auto Trader purchased a machine on 1st April 2014 at a cost of A1,00,000. It
provides depreciation @20% per annum on 31st March every year on original cost of
the machine. The plant was sold for A60,000 on 31st December 2016.
Prepare Machinery Account from 2014-15 to 2016-17.
Solution :
In the books of Auto Traders
Dr. Machinery Account Cr.
2014 2015
Apr 1 To Bank A/c 1,00,000 Mar 31 By Depreciation A/c 20,000
Mar 31 (20% on A1,00,000)
1,00,000 1,00,000
2015 2016
Apr 1 To Balance b/d 80,000 Mar 31 By Depreciation A/c 20,000
(20% on A1,00,000)
Mar 31 By Balance c/d 60,000
80,000 80,000
2016 2016
Apr 1 To Balance b/d 60,000 Dec 31 By Depreciation A/c 15,000
(20% on A1,00,000
Dec-31 To Profit on sale of asset A/c 15,000 for 9 months)
(profit on sale) Dec-31 By Bank A/c 60,000
75,000 (sale of machine) 75,000
Working Note :
Calculation of profit on sale : A
Cost price on 1s April 2014 1,00,000
less depreciation from 01.04.14 - 31.03.15 20,000
F
G 20 I
J
H
1,00,000 
100 K
Book value on 01.04.15 80,000
Accountancy
220
less Depreciation from 01.4.15 to 31.3.16 20,000
F
G 20 I
J
H
1,00,000 
100 K
Book value on 01.04.16 60,000
less : Depreciation from 01.04.16 to 31.12.16 15,000
F
G 10 9I
 J
H
1,00,000 
100 12 K
Book value on 31.12.16 45,000
Sale proceeds 60,000
Profit on sale of machine 15,000
Illustration 8
M/s Mehta Bros purchased a machine for A4,00,000 on 1st April 2015. They
spent A20,000 on its installation. Depreciation is charged @10% on original cost.
The books are closed on 31st March every year. On 31st March 2017, one half of the
machine is sold for A1,50,000. Prepare Machinery Account for 2 years.
Solution :
Machinery A/c
2015 2016
April 1 To Bank A/c 4,00,000 Mar 31 By Depreciation A/c 42,000
(Purchase of machine) (10% on A4,20,000)
April 1 To Bank A/c 20,000 Mar 31 By Balance c/d 3,78,000
(Installation Charges)
4,20,000 4,20,000
2015 2017
April 1 To Balance b/d 3,78,000 Mar 31 By Depreciation A/c 42,000
(10% on A4,20,000)
Mar 31 By Bank A/c 1,50,000
(Sale of Machine)
Mar 31 By Profit and Loss A/c 18,000
(loss sale of machine)
3,78,000 3,78,000
2017
April 1 To Balance b/d 1,68,000
Depreciation
221
Working Note :
Calculation of loss on sale : A
Balance on 01.04.16 3,78,000
less : Depreciation for 2016-17 42,000
Book value on 31.03.17 3,36,000
Half of 3,36,000 1,68,000
Less : Selling price 1,50,000
loss on sale 18,000
Illustration 9
M/s Raman Singh purchased a machine on 1st April 2014 for A2,00,000. On 1st
July 2015, additions were made for A1,00,000. On 1st October 2016 further additions
were made for A50,000. On 31st December 2016, the machine purchased on 1st
April 2014 became obsolete and sold for A1,40,000/-. Depreciation is charged at
10% p.a. under fixed instalment method, and the accounts are closed on 31st March
every year.
Show Machinery Account for the year 2014-15 to 2016-17.
Solution :
In the Books of M/s Raman Singh
Machinery Account
Date Particulars Date Particulars A
2014 2015
April 1 To Bank A/c 2,00,000 Mar 31 By Depreciation A/c 20,000
(Purchase of machine) (10% on A2,00,000
for one year)
2,00,000 2,00,000
2015 2016
April 1 To Balance b/d 1,80,000 Mar 31 By Depreciation A/c
July 1 To Bank A/c 1,00,000 10% on A2,00,000 for
(purchase of new machinery) 1 year
10
A2,00,000   20,000
100
10% on A1,00,000 for
9 months.
10 9
1,00,000  
100 12
 7,500 27,500
2,80,000 2,80,000
Accountancy
222
2016 2016
April 1 To Balance b/d 2,52,500 Dec 31 By Bank A/c 1,40,000
(obsolete machinery sold)
Oct 1 To Bank A/c 50,000 Dec 31 By Depreciation A/c 15,000
(addition of new machinery) F
G 9I
H2,00,000  100  12 J
10
K
Dec 31 By Profit and Loss 5,000
Account
(loss on sale of obsolete
2017 machinery)
Mar 31 By Depreciation A/c
On A1,00,000, 10% p.a.
for one year
10
A1,00,000   A10,000
100
10% p.a. on 50,000 for
6 months.
10 6
A50,000  
100 12
 A2 ,500 12,500
2017 3,02,500 3,02,500
Mar 31 To Balance b/d 1,30,000
Working Note
Calculation of profit or loss on sale of machine : A
cost price on 1.4.2014 2,00,000
less Depreciation for 1.4.14-31.3.15 20,000
F
G 10 12 I
 J
H
2,00,000 
100 12 K
Book value on 1.4.15 1,80,000
less Depreciation for 1.4.15-31.3.16 20,000
F
G 10 IJ
H
2,00,000 
100 K
Book value on 1.4.16 1,60,000
Less Depreciation from 1.4.16 - 31.12.16 for 9 months 15,000
F
G 10 9I
 J
H
2,00,000 
100 12 K
Balance on 31.12.2016 1,45,000
less Selling price 1,40,000
Loss on sale of asset 5,000
Depreciation
223
Illustration 10
Somesh Dutta & Co. purchased a machinery an 1st April 2014 for A50,000.
Depreciation is to be provided @10% p.a. according to written down value
method. Prepare Journal, Machinery Account and Depreciation Account for 3
years assuming that accounts are closed on 31st March every year.
Solution :
Journal of Somesh Dutta & Co.
Date Particulars L.F. Amount Amount

A A
01.04.2014 Machinery A/c Dr. 50,000
To Bank A/c 50,000
(Being the purchase of machinery)
31.03.2015 Depreciation A/c Dr. 5,000
(Being the depreciation provided)
31.03.2015 Profit and Loss A/c Dr. 5,000
To Depreciation A/c 5,000
(Being the transfer depreciation A/c to P/L A/c.)
(Being depreciation provided)
(Being the transfer of depreciation A/c)
To P/l A/c)
(Being the depreciation provided)
(Being the transfer of depreciation to P/L A/c).
Accountancy
224
Date Particulars A Particulars A
31.3.15 To Machinery A/c 5,000 31.3.15 By Profit and Loss A/c 5,000
(Transferred)
5,000 5,000
31.3.16 To Machinery A.c 4,500 31.3.16 By Profit loss A/c 4,500
4,500 (Transferred) 4,500
31.3.17 To Machinery A.c 4,050 31.3.17 By Profit and Loss A/c 4,050
4,050 (Transferred) 4,050
1.4.14 To Bank A/c 50,000 31.3.15 By Depreciation A/c 5,000
(Purchase of machine) 31.3.15 By Balance c/d 45,000
50,000 50,000
1.4.15 To Balance b/d 45,000 31.3.16 By Depreciation A/c 4,500
31.3.16 By Balance c/d 40,500
45,000 45,000
31.3.17 By Balance c/d 36,450
40,500 40,500
1.4.17 To Balance b/d 36,450
Working Notes
10
Depreciation for 2014 – 15 = A50,000   A5,000
100
10
100
10
100
Illustration 11
A merchant purchased a second hand machinery for A80,000 on 1.4.14. He
spent A20,000 for repair and installation. Depreciation is provided @20% p.a.
according to written down value method. Pass journal entries, show Machinery
Account and Depreciation Account for first three years assuming accounts are closed
on 31st March each year.
Depreciation
225
Solution :
Journal of the Merchant
Amount Amount
Date Particulars L.F. Dr A Dr A
1.4.14 Machinery A/c Dr. 80,000
To Bank A/c 80,000
(Being the machinery purchased)
To Bank A/c 20,000
(Being the repair and installation charges paid)
(Being transfer of Depreciation to P/LA/c)
(Being transfer of depreciation to P/L A/c)
(Being transfer of Depreciation)

Amount Particulars Amount
Date Particulars L.F. (A ) Date (A )
1.4.14 To Bank A/c 80,000 31.3.15 By Depreciation A/c 20,000
1.4.14 To Bank A/c 20,000 31.3.15 By Balance c/d 80,000
(Installation and repair)
1,00,000 1,00,000
Accountancy
226
31.3.16 By Balance c/d 64,000
80,000 80,000
1.4.16 To Balance b/d 64,000 31.3.17 By Depreciation 12,800
31.3.17 By Balance c/d 51,200
64,000 64,000
1.4.17 To Balance b/d 51,200
(Transferred)
20,000 20,000
(Transferred)
16,000 16,000
(Transferred)
12,500 12,500
Working Notes
Depreciation for 2014-15 :
20
A1,00,000   A20,000
100
20
A80,000   A16,000
100
20
A64,000   A12,800
100
Depreciation
227
Note: In case of purchase of old/second hand machinery, all expenses incurred
including the installation expenses are to be capitalised.
Illustration 12
X Ltd. purchased a plant on 1st July 2014 for A1,20,000. The plant is subject
to depreciation of 10% p.a. on reducing balance method. The plant became
obsolete on 31st December 2016 and sold for A20,000. Write up the Plant
Account assuming that accounts are closed on 31st March every year.
Solution :
Dr. Plant Account Cr.
Date Particulars L.F. (A) Date ( A)
1.7.14 To Bank A/c 1,20,000 31.3.15 By Depreciation A/c 9,000
31.3.15By Balance c/d 1,11,000
1,20,000 1,20,000
1.4.15 To Balance b/d 1,11,000 31.3.16 By Depreciation A/c 11,100
31.3.16By Balance c/d 99,900
1,11,000 1,11,000
1.4.16 To Balance b/d 99,900 31.12.16By Bank A/c 20,000
(sale of absolete
machinery)
31.12.16 By Depreciation A/c 7,493
31.12.16 By Profit and Loss A/c 72,407
(loss on sale)
99,900 99,900
Working Notes
10 9
A1,20,000    A9,000
100 12
10
A111
, ,000   A11100
,
100
Accountancy
228
10 9
A99 ,900    A7 ,493
100 12
Calculation of profit/loss on sale :
A
Cost of the plant on 1.7.14 1,20,000
Less : Depreciation from 1.7.14-31.3.15 9,000
Cost on 1.4.15 1,11,000
Less : Depreciation from 1.4.15-31.3.16 11,100
Cost on 1.4.16 99,900
Less Depreciation from 1.4.16-31.12.16 7,493
Written down value on 31.12.16 92,407
Less : Sale Price 20,000
Loss on Sale 72,407
Illustration 13
(Provision for Depreciation Account)
Raman purchased a machinery for A2,00,000 on 1.4.14 and sold for A1,45,000
on 31.3.17. Depreciation is provided @10% p.a. on the original cost of the machinery.
Pass the necessary journal entries and prepare necessary ledger accounts assuming
that Provision for Depreciation Account is maintained.
Solution :
Journal
Amount Amount
Date Particulars L.F. Dr A Dr A
1.4.14 Machinery A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being the purchase of machinery)
To Provision for Depreciation A/c 20,000
(Being provision for depreciation created)
(Being transfer of depreciation to P/L A/c)
Depreciation
229
(Being the provision for made)
(Being transfer of
depreciation Account to P & L A/c)
(Being provision for depreciation made)
31.3.17 Profit and Loss Account A/c Dr. 20,000
(Being transfer of depreciation to P&L A/c)
31.3.17 Bank A/c Dr. 1,45,000
To Machinery A/c 1,45,000
(Being sale of machinery)
31.3.17 Provision for Depreciation A/c Dr. 60,000
(Being transfer of Provision for Depreciation
to Machinery account on sale)
(Being profit on sale of machinery)

01.4.14 To Bank A/c 2,00,000 31.3.15 By Balance c/d 2,00,000
01.4.15 To Balance b/d 2,00,000 31,.3.16 By Balance c/d 2,00,000
01.4.16 To Balance b/d 2,00,000 31,.3.17 By Bank A/c 1,45,000
31.3.17 To Profit and Loss A/c 5,000 31.3.17 By Provision for 60,000
(profit on sale of Depreciation A/c
machinery)
2,05,000 2,05,000
Accountancy
230
Dr. Depreciation Account Cr.

31.3.15 To Provision for
DepreciationA/c 20,000 31.3.15 By Profit and Loss A/c 20,000
Depreciation A/c 20,000 31,.3.16 By Profit and Loss A/c 20,000
Depreciation A/c 20,000 31.3.17 By Profit and Loss A/c 20,000
Provision for Depreciation Account

31.3.15 To Balance c/d 20,000 31.3.15 By Depreciation A/c 20,000
31.3.16 To Balance c/d 40,000 01.4.15 By Balance b/d 20,000
40,000 40,000
31.3.17 To Machinery A/c 60,000 01.4.16 By Balance b/d 40,000
60,000 60,000
Working Notes :
Calculation of profit or loss on sale of machinery A
Cost price of Machinery on 1.4.2014 2,00,000
less : Depreciation for 3 years @ A20,000 p.a. 60,000
Written down value on 31.03.17 1,40,000
Sale price 1,45,000
Profit on sale 5,000
-0-
Depreciation
231
3.8 QUESTIONS
1. From the alternatives given under each bit, write the correct answer along with
its serial number against each bit :
(a) Depreciation is calculated on the basis of :
(i) Market Price.
(ii) Cost Price.
(iii) Market Price or cost price whenever is less.
(iv) On average of cost price and market price.
(b) Under straight line method of depreciation, the amount of annual depreciation :
(i) Increases every year.
(ii) decreases every year.
(iii) Increases in some years and decreases in some other years.
(iv) remains constant.
(c) Under diminishing balance method, the amount of depreciation :
(i) increases every year.
(ii) decreases every year.
(iii) remains constant.
(iv) both Increases and decreases.
(d) Depreciation is :
(i) an income.
(ii) a loss.
(iii) an asset.
(iv) a liability.
(e) Depreciation is calculated on :
(i) fixed assets.
(ii) current assets.
(iii) liquid assets.
(iv) fictitious asset.
(f) Deprecation is charged to :
(i) Trading Account.
Accountancy
232
(ii) Profit and Loss Account.
(iii) Profit and Loss Adjustment account.
(iv) Profit and Loss Appropriation account.
(g) Depreciation arises due to :
(i) fall in market price of the asset.
(ii) physical wear and tear of the asset.
(iii) fall in the value of money.
(iv) pilferage.
(h) Profit on sale of machinery should be credited to :
(i) Profit and Loss Account.
(ii) Trading Account.
(iii) Profit and Loss Appropriation Account.
(iv) Provision for Depreciation Account.
(i) The cost of the plant is A5,000. Depreciation is provided @10% p.a. on written
down value method. The depreciation for 3rd year will be.
(i) A500.
(ii) A450.
(iii) A400.
(iv) A405.
(j) If the cost of the asset is A31,000 and scrap value is A1,000, then the amount
of depreciation @10% p.a. on straight line method is :
(i) A3,100 p.a.
(ii) A3,000 p.a.
(iii) A2,900 p.a.
(iv) A3,110 p.a.
(k) One of the following assets which is assumed not to be depreciated is :
(i) plant.
(ii) machinery.
(iii) land.
(iv) mine.
Depreciation
233
(l) Depreciation is a process of :
(i) valuation of asset.
(ii) allocation of cost of asset.
(iii) amortisation of the asset.
(iv) duplication of asset.
[Ans. (a) - (ii) - Cost price
(b) - (iv) - Remain constant
(c) - (ii) - decreases every year
(d) - (ii) - a loss
(e) - (i) fixed assets
(f) - (ii) - profit and loss account
(g) - (ii) - physical wear and tear of the asset
(h) - (i) - profit and loss account
(i) - (iv) - A405
(j) - (ii) - A3,000 p.a
(k) - (iii) - land
(l) - (ii) - allocation of cost of asset]
2. Answer the following questions in one word/term each :
(a) Name the type of asset on which depreciation is calculated.
(b) Name the type of fixed asset on which depreciation is not calculated.
(c) Name the account to be debited for the amount of depreciation charged
against an asset.
(d) Under which method of charging depreciation, the amount of depreciation
for each year remains constant ?
(e) Name the asset against which the term ‘depletion’ is used.
(f) Name the term used for the amount likely to be realised on sale of fixed
asset after its useful life.
(g) In which method of depreciation the value of the fixed asset becomes zero
at the end of its useful life.
Accountancy
234
(h) Name the account to be debited for loss on sale of fixed asset.
(i) Name the method of depreciation in which amount depreciation reduces
year after year of use.
(j) What is the amount of depreciation on the deminishing balance method on a
machinery of A10,000 at the rate at 10% p.a. in the 3rd year of its use ?
[Ans.: (a) fixed asset (b) Land (c) Depreciation Account (d) Straight line
method (e) wasting asset (f) scrap value or salvage value (g) straight line
method (h) profit and loss account (i) reducing balance method (j) A810.]
(i) What do you mean by depreciation ?
(ii) Write any one cause of depreciation.
(iii)On which type of asset, depreciation is chargeed ?
(iv) State any one characteristic of depreciation.
(v) Give any one difference between depreciation account and provision for
depreciation account.
(vi) Give the journal entry for writing off depreciation.
(vii) Give any one difference between straight line method and written down
value method of depreciation.
(viii) Which method of depreciation is approved for income tax purpose ?
(ix) What do you mean by residual value of the asset ?
(x) Explain the meaning of the term “wear and tear” in depreciation.
(a) The word depreciation is derived from the latin word ______.
(b) Permanent decrease in the value of the asset is known as ______ .
(c) The estimated value realised at the time of discard of fixed assets is known
as ______ .
(d) Obsolescence is the technical term used as the reason of discarding ______
asset.
(e) Total cost of the fixed asset is equal to purchase price – installation expenses.
Depreciation
235
(f) Depreciation refers to ______ in the value of fixed assets.
(g) Depreciation is a ______ expense.
(h) When depreciation is charged, asset account is ______.
(i) ______ is the only asset which is usually not depreciated.
(j) Depreciation is charged on ______ assets.
[Ans. : (a) Depretium (b) depreciation (c) scrap (d) fixed (e) + (f) decrease/
reduction (g) Non cash (h) credited (i) Land (j) fixed]
5. Correct the underlined partions of the following sentences :
(a) In written down value method of depreciation, the written down value of
the asset becomes zero at the end of its useful life.
(b) In straight line method of depreciation the value of the asset is never zero.
(c) Provision for depreciation account always shows Debit balance.
(d) Fixed assets are shown in the balance sheet at market price.
(e) In case of loss suffered during a financial year, depreciation cannot be
provided.
(f) Profit and Loss Account is credited with the amount of depreciation.
[Ans.: (a) straight line (b) written down value (c) credit (d) cost (e) can
(f) debited]
6. Answer the following questions within 30 words each :
(a) Define the term ‘depreciation’.
(b) What do you mean by salvage value of the fixed asset ?
(c) What is ‘written down value’ of asset ?
(d) Write any two differences between straight line method of depreciation
and written down value method of depreciation.
(e) Why is asset shown in the balance sheet at its original cost under provision
for depreciation method ?
(f) What are the causes of depreciation ?
(g) What is the need for charging depreciation ?
Accountancy
236
(h) What do you mean by reducing balance method of depreciation ? Explain
with an example.
(i) Write the formula for calculation of depreciation under straight line method.
Explain with an example.
(a) Explain the merits and demerits of straight line method of depreciation.
(b) State the merit and demerits of written down value method of depreciation.
(c) Show the calculation of depreciation under reducing balance method of
depreciation for 3 years with an imaginary example.
(d) State the objectives of providing depreciation.
(e) Explain the characteristics of depreciation.
(f) Which factors affect the depreciations ?
(g) Show the calculation of profit on sale of depreciable asset with an imaginary
example.
(h) Distinguish between straight line method and written down value method
of depreciation.
(i) Differentiate between sample depreciation method and provision for
depreciation method.
8. What is depreciation ? Discuss the causes and objectives of providing
depreciation.
9. Define depreciation. Discuss its characteristics.
10. Explain straight line method and written down value method of providing
depreciation.
11. Give the Journal entries for charging depreciation under simple method with
imaginary example. Show the treatment in the balance sheet also.
12. Write journal entries required for charging depreciation under provision for
depreciation method with imaginary example. Show the treatment also in the
Balance Sheet.
13. M purchased a machinery for A40,000. The useful life of the machinery is 10
years. The estimated scrap value is A4,000/- M wants to provide depreciation
under straight line method. Calculate the rate of depreciation. (Ans. 9%)
Depreciation
237
14. Raman purchased a machinery on 1st April 2014 for A1,00,000. The estimated
life of the machine is 15 years. Its scrap value after 15 years will be A10,000.
Pass journal entries for the first three years, under straight line method assuming
that the accounts are closed on 31st March, every year.
(Annual depreciationA6,000)
15. Madan Purchased a machine on 1.4.14 for A1,20,000. Assuming the life of the
machine at 10 years and estimated scrap value at A20,000, prepare the Machinery
Account for the first three years under straight line method. Accounts are closed
on 31st March each year.
(Balance in Machinery Account A90,000)
16. Mr. Kumar purchased a plant on 1.4.13 costing A2,00,000. The life of the plant
is estimated at 15 years. The estimated scrap value after the useful life is
A20,000. Prepare necessary ledger accounts from 2013-14 to 2016-17 under
straight line method of depreciation.
(Ans. Balance of Plant Account A1,52,000)
17. Sanjay purchased a fixed asset on 01.01.2014 for A80,000. Depreciation is
provided under straight line method @ 10% p.a. Accounts are closed on 31st
March every year. Pass Journal entries and prepare necessary ledger accounts
till 31st March 2017.
(Ans. Balance of Plant Account A54,000)
18. A manufacturer acquires a machine on 1.4.2014 for A80,000. He spent A2,000
on transportation and A18,000 on installation. The manufacturer charges
depreciation @10% on original cost every year. Show the Machinery Account
and Depreciation Account for 3 years. The books are closed on 31st March
every year.
(Ans. Balance in Machinery Account A70,000)
19. Mr. Nandan purchased a second-hand machine for A40,000 on 1st April 2014.
He spent A10,000 on its overhauling and installation. Depreciation is written
off @10% p.a. on original cost. Prepare Machinery Account and Depreciation
Account and show the balance sheet entries for first three years assuming that
accounts are closed on 31st March every year.
(Balance in Machinery Account of A35,000)
Accountancy
238
20. Mrs. Smruti Purchased a machinery for A50,000 on 1st April 2013. She
purchased another machinery on 31st December 2015 for A60,000. Rate of
depreciation under straight line method is 10%. Write up Machinery Account
and Depreciation Account from 2013-14 to 2016-17 assuming that accounts
are closed on 31st March every year.
(Balance in Machinery Account A82,500)
21. On 1st January 2014, an asset was purchased for A64,000. If was decided to
write off 10% depreciation on original cost each year. On 31st March 2017, it
was sold for A40,200. Prepare asset account till 31st March 2017 assuming
that books are closed on 31st March every year.
(loss A3,000)
22. Mr. Ram lal purchased a machine at a cost of A75,000 on 1st January 2014. He
spent A5,500 on installation of the machine. He purchased another machine on
1st April 2015 for A60,000. Another machine was purchased on 1st April 2016
for A50,000. Show Machinery Account and Depreciation Account from 1st
January 2014 to 31st March 2017 assuming that accounts are closed on 31st
March every year. Depreciation is calculated @10% p.a. on original cost of the
machine.
(Ans. Balance in Machinery account A1,55,000)
23. Mr. Jambaban purchased a second hand machine for A70,000 on 1st April 2014.
He spent A20,000 on repair and installation. He purchased another machine on
1st April 2015 for A58,000. He spent A2,000 on installation of the machine.
Depreciation is provided @10% p.a. on straight line method. Pass necessary
journal entries, prepare necessery ledger accounts for the period 2014-15 to
2016-17 assuming that accounts are closed on 31st March every year.
[Ans. Balance in Machinery Account A1,11,000)
24. The cost of furniture on 1.4.2013 was A30,000. Depreciation is to be provided
at 10% p.a. on diminishing balance method. Show the necessary ledger accounts
for the first four years assuming that accounts are closed on 31st March every
year.
[Ans. Depreciationon A3,000, A2,700, A2,430, A2,187]
Depreciation
239
25. Mr. Som Prasad purchased a machine for A3,00,000 an on 1st January 2014. It
was decided that depreciation would be charged at 10% p.a. on reducing balance
method. Show the Machinery Account and Depreciation Account in the books
of Som Prasad from 1st January 2014 to 31st March 2017 assuming that accounts
are closed on 31st March every year.
[Ans. Balance of Machinery account A2,13,232]
26. The original cost of a plant an 1st April 2013 amounted to A4,00,000. It was
decided to charge depreciation at 5% p.a. on written down value method. Show
the necessary ledger accounts as these will appear from 2013-14 to 2016-17,
assuming that accounts are closed on 31st March every year.
[Ans. A3,25,803]
27. On 1st April 2014 a machine was bought at a cost at A2,82,000. Installation
charges were A18,000. It was decided to charge depreciation @15% p.a. on
dimmishing balance. Show Machinery Account and Depreciation Account for
the year 2014-15 to 2016-17 assuming that accounts are closed on 31st March
every year.
[Ans. Balance in machinery account A1,84,237]
28. A plant was purchased for A5,00,000 on 1st April 2012. It was depreciated
@5% p.a. on reducing balance method. It became obsolete on 31st March 2017
due to new method of production and was scrapped. The scrap realised
A1,00,000. Show Plant Account from 2012-13 to 2016-17 assuming that
[Ans. Depreciation A25,000, A23,750, A22,563, A21,434, A20,363, loss on
sale A2,86,890)
29. On 1st April 2012 a firm purchased a machine worth A6,00,000. Show, how it
will be depreciated under fixed instalment method and written down value
method. Annual depreciation is 10%. Show Machinery Account, Depreciation
Account and entries in the Balance Sheet for a period of 5 years, assuming that
[Ans. Depreciation under written down value method : A60,000, A54,000,
A48,600, A43,740, A39,366, Balance A3,54,294. Under straight line method :
Depreciation each year A60,000, Balance A3,00,000]
Accountancy
240
30. On 01.4.2016 balance of Machinery Account was A2,00,000. On 30.09.2016
part of the machinery was sold for A40,000 (original cost being A50,000 on
01.04.2015). Machinery was depreciated @10% p.a. under diminishing balance
method.
Show the Machinery Account for the year 2016-17 assuming accounts are closed
on 31st March every year.
[Ans. Balance in Machinery Account A1,39,500, loss on sale A2,750]
Hints, Balance of machinery sold on 01.04.16 A45,000, Depreciation from
01.4.16-30.9.16 A2,250. Balance of other machine A1,55,000 on 1.4.16]
31. Amar purchased 3 Trucks @ A5,00,000 for each truck on 01.4.2014. On
30.09.2015 one truck was completely damaged in accident. The insurance
company admit a claim of A2,00,000. Prepare Truck Account for 3 years ending
31st March 2017 assuming that depreciation is provided @20% p.a. on W.D.V.
method.
[Ans. Truck Account blance A6,40,000 (loss on accident A1,60,000)
(Hints : original cost of Truck damaged on 01.04.14 A5,00,000 Depreciation
from 01.04.2014 to 31.03.2015 @ 20% on A5,00,000 is A1,00,000, on
A4,00,000 @20% p.a. for six months from 1.4.2015-30.9.15 A40,000)
32. A manufacturer purchased a machinery on 01.4.14 for A2,00,000. Additional
machinery was purchased on 01.04.2015 for A1,00,000. On 30.9.15, the
machinery purchased on 1.4.15 was sold for A72,000. Another machinery for
A50,000 was purchased on the same day. Give Machinery Account for the year
ending 31st March 2017 assuming that depreciation is provided @10% p.a. on
reducing balance method.
(Ans. Balance A1,90,800, loss on sale A13,500)
[Hint. Machinery purchased on 1.4.15 A1,00,000. Depreciation for 1 year
A10,000. depreciation from 1.4.16-30.09.16 for 6 months @10% p.a. 4,500.]
33. On 01.4.14, Raman purchased a machinery for A10,00,000. On 1st April 2016,
a part of the machinery purchased on 1.4.14 costing A1,00,000 was sold for
A75,000. The business had adopted the method of providing depreciation at
Depreciation
241
10% p.a. on the original cost of the machine. Accounts are closed on 31st
March every year.
Show necessary ledger accounts from 2014-15 to 2016-17 assuming that :
(a) Provision for depreciation account is not maintained.
(b) Provision for depreciation account is maintained.
[Ans.: Whe provision for depreciation account is not maintained : Balance of
Machinery Account A6,30,000.
When provision for depreciation account is maintained-Balance in machinery
Account - A8,00,000.
Balance in Provision for Depreciation Account A2,70,000.]
34. X purchased a machinery on 1st April 2014 for A12,00,000. On 1st April 2015
a part of the machine purchased on 1.4.14 for A2,00,000 was sold for A1,70,000.
Another machine was purchased on 1st April 2016 for A1,00,000. X has adopted
method of providing 10% depreciation p.a on the diminishing balance of the
machinery. Show necessary ledger accounts from 2014-15 to 2016-17
assuming that :
(a) Provision for depreciation account is not maintained.
(b) Provision for depreciation account is maintained.
[Ans. : - When provision for Depreciation account is not maintained :
balance in Machinery account A8,19,000
loss on sale of machine A10,000
When provision for depreciation account is maintained :
Balance in Machinery Account A11,00,000
Balance in Provison for Depreciation Account A2,71,000.]
-o-
CHAPTER - 4
ACCOUNTING FROM INCOMPLETE RECORDS

(Single Entry System)
STRUCTURE
4.1 Meaning
4.2 Characteristics
4.3 Limitations
4.4 Difference between Single Entry and Double Entry System
4.5 Difference between Balance Sheet and Statement of Affairs
4.6 Ascertainment of profit and loss by Statement of Affairs Method
4.7 Questions
Accounting from Incomplete Records
243
After going through this chapter, you will be able to understand the meaning,
characteristics and limitations of single entry system of book keepaing. You will also
understand the difference between :
(i) Single entry and Double entry system
(ii) Balance Sheet and Statement of Affairs.
You will also understand the method of calculation of profit and loss under
statement of affairs method.
4.1 MEANING
The team “single entry system’’ can be defined as a system which is not exactly
double entry system. In other words, incomplete accounting records are those
accounting records which are not completed according do double entry principles.
Many authors describe it as the single entry system. But majority of accountants
describe it as incomplete records. In fact, single entry is not at all a separate system
of accounting. Under this system, the principles of Double entry system are followed
but in a half-hazard or incomplete manner. Therefore, it is more appropriately described
as a incomplete record of keeping accounts.
For example, under this system, incomplete record may consist of :
(i) in certain cases, both the aspects of some transactions are recorded, e.g., in
case of cash received from the debtor and cash paid to the creditors.
(ii) in certain other cases, only one aspect of the transaction is recorded. As for
example, in case of cash purchase, cash sales, payment for expenses, purchase of
fixed assets for cash, etc., only one aspect is recorded and finally, yet in some other
cases,
(iii) no aspect of a transaction is recorded. For example, writting off depreciation
on fixed assets is not at all recorded in the books of accounts.
Accountancy
244
Thus, a business is said to be following incomplete records or single entry

system, if it is not following the complete system of double entry system of Book-
keeping. The accountant Kohler has defined Single Entry System as, “A system of
Book-Keeping in which as a rule only records of cash and personal accounts are
maintained, it is always incomplete double entry varying with the circumstances.”
4.2 CHARACTERISTICS
The following are the characterstics of the single entry system of book-keeping:
(i) Recording of personal accounts
Under this system, only personal accounts are maintained. Real accounts and
Nominal accounts are ignored. For this reason, some accountants define it as a system
of personal accounts only.
(ii) Maintaining of the cash-book
A cash book is maintained by the business adopting single entry system. However,
the businessman mixes the personal transactions with the business transactions.
(iii) No uniformity
This system of maintaning records may vary from business to business as per
their requirements, and hence, no uniform system is maintained by all the concerns
following this system.
(iv) Suitability
This system is suitable only to small business units. Small sole traders and
partnership firms only adopt this system. The companies and other big business houses
cannot adopt the system because of legal requirements.
(v) Dependant on original vouchers
As the business records only cash transactions and personal accounts, complete
information is not available. So one has to depend on original vouchers for necessary
245
information. For example, to find out the total amount of credit purchase or credit
sales, one has to depend on original invoices.
4.3 LIMITATIONS
Maintenance of incomplete records or single entry system suffers from the
following limitations :
(i) Arithmetic accuracy of accounts cannot be checked : Under Double entry
system of book-keeping both the debit and credit aspects of the transactions are
recorded. Trial Balance is prepared to check the arithmetic accuracy of the accounts.
But under single entry system, trial balance cannot be prepared. Full information is
not recorded under single entry system. So chances of fraud and misappropriation is
increased.
(ii) True profit of the business cannot be ascertained : True and correct
profit can be ascertained from the information like purchases, sales and other expenses.
But complete information regarding these items are not available under such system.
Hence, Trading and Profit and Loss account cannot be prepared to ascertain the true
profit earned or loss suffered by the business.
(iii) True financial position of the business cannot be ascertained : Balance
Sheet records the position of assets and liabilities on a specific date. The liabilities
include true profits of the business. But true profit cannot be ascertained. Correct
figures of other assets and liabilities are not available. So Balance Sheet cannot be
prepared to know the correct financial position of the business.
(iv) No internal check : Internal check is not possible under single entry system.
So chances of fraud and misappropriation increase in comparison to Double entry
system.
(v) Not recognised by law : The legal authorities like Income Tax and other
Tax authorities, courts, etc., does not recognise the records under this system.
(vi) It is difficult to conduct the audit work.
(vii) Planning and decision-making of the business is difficult.
(viii) It is difficult to ascertain the worth of the business. So goodwill
cannot be valued.
Accountancy
246
(ix) It is difficult to exercise control over the assets.

As it suffers from so many limitations, the system is not popular.
4.4 DIFFERENCE BETWEEN SINGLE ENTRY SYSTEM AND DOUBLE
ENTRY SYSTEM
Basis of Distinction Single entry system Double entry system

Principles and It is not based upon any It is based upon certain
Assumptions specific and scientific principles and assumptions.
principles and assumptions.
Aspect of It does not record both the It records both the aspects of
transaction aspects of transactions the transactions scrupulously.
normally.
Accounts It usually records cash It records all types of
maintained account and personal accounts-Personal, Real and
accounts. Nominal accounts.
Trial Balance Trial Balance cannot be Trial Balance can be prepared
prepared. Hence arithmetical as complete records of all
accuracy of the accounts transactions are maintained.
cannot be checked. Artihmetic accuracy of the
accounts can be checked.
Calculation of true Trading and Profit and Loss True profit and loss can be
profit and loss Account cannot be prepared. determined by preparing
Hence, only estimated profit Trading and Profit and Loss
and loss can be calculated. Account.
Financial position Balance Sheet cannot be True financial position of the
prepared as complete business can be ascertained
records of Real and Nominal by preparing Balance Sheet
accounts are not available. as complete records of all
Only estimated financial accounts are available.
position can be known by
preparing statement of
affairs.
247
Adjustments Accounts are prepared Final Accounts are prepared

without considering the considering all type of
adjustments. adjustments in accounts.
Recognition It is not recognised by The accounts are recognised
Income Tax authorities, by all the government
Companies Act and other agencies.
government agencies.
Businessman Usually small business This system is adopted by all

enterprises adopt this types of business houses.
system.
Manipulation of There is scope for There is no scope for
Accounts manipulation of accounts and manipulation of accounts and
possibility of frauds. frauds.
Free from doubts The results draw from this The results drawn from this
system are not free from system are completely free
doubts. from doubts.
4.5 DIFFERENCE BETWEEN BALANCE SHEET AND STATEMENT OF
AFFAIRS
Both the Balance Sheet (prepared under Double-entry system) and statement of
affairs (prepared under single-entry system) show the financial position of the business
on a particular date. However, they differ from each other in the following ways :
Basis of Distinction Balance Sheet Statement of Affairs
System It is prepared on double entry It is prepared under single
system entry system
Basis of It is prepared under the basis It is prepared on the basis of
Preparation of Trial balance prepared, some ledger accounts and
from ledger accounts. estimates.
Time of It is always prepared at the It is prepared either at the end
preparation end of the year. of the year or beginning of
the year.
Accountancy
248
Balance of capital Capital balance can be known Balance of capital account is

account from the Capital Account found out by balancing the
found in the ledger. Statement of Affairs.
Assets and The assets and liabilities The assets and liabilities
Liabilities shown in the Balance Sheet shown in Statement of Affairs
are taken from the ledger are taken by physical
accounts. inspection.
Financial position It shows the true and fair It shows only estimated
view of the financial position financial position of the
of the business. business.
Omission of assets Omission of assets and omission of assets and
and liabilities liabilities can be traced. liabilities cannot be traced.
Trial Balance Trial Balance is prepared Trial balance is not prepared
before preparation of at all.
Balance Sheet.
4.6 ASCERTAINMENT OF PROFIT OR LOSS BY STATEMENT OF
AFFAIRS METHOD
The profit or loss of the business maintaining accounts under single entry system
can be ascertained by :
(i) Statement of Affairs method or Net worth method or pure Single Entry System.
(ii) Conversion method or Quasi Single Entry System or Final Accounts System.
However, we will discuss only Statement of Affairs Method.
Statement of Affairs Method
Meaning : A Statement of Affairs is nothing but a balance sheet prepared under
single entry system on a particular date. In other words, it is a balance sheet which
shows the assets and liabilities of a business concern on a particular date. It lists
assets on the right hand side and liabilities on the left hand side. Excess of assets over
liabilities is assumed to be capital. It is to be noted that complete information is not
available about assets and liabilities from accounting records. Some assets and
liabilities are estimated. The proforma of Statement of Affairs is given below :
249
Statement of Affairs as on .......

Liabilities Amount (A) Liabilities Amount (A)
Sundry Creditors ? Cash in Hand ?
Bills Payable ? Cash at Bank ?
Outstanding expenses ? Sundry Debtors ?
Bank Overdraft ? Bills Receivable ?
Income received in advance ? Stock ?
Loans ? Prepaid expenses ?
Capital (Balancing figure) ? Accrued Income ?
Fixed Assets ?
Ascertainment of profit or loss

According to this method, profit or loss made by the business can be ascertained
by comparing net worth (capital) of the business on two different dates. For example,
the capital of a business on 01.04.2016 is A2,00,000 and on 31.3.2017 is A3,00,000.
We can tell that the business has earned a profit of is A1,00,000 (A3,00,000 –
A2,00,000) during the period.
The following steps are involved in the ascertainment of profit or loss under
statement of affairs method.
Step-1 Prepare statement of affairs at the end of the accounting period and find out
closing capital.
Step-2 Deduct additional capital introduced from the closing capital.
Step-3 Add amount of drawings whether cash or in kind. The figure is adjusted
closing capital.
Step-4 Prepare statement of affairs in the beginning of the accounting period and
find out opening capital.
Step-5 Deduct opening capital from the adjusted closing capital (As per step 3).
Step-6 Make adjustment for interest on capital, interest on drawings, proprietor/
partner’s salary, depreciation on fixed assets, provision for doubtful debts,
etc.
Accountancy
250
It is to be noted that when adjustments are given in the question, prepare

statement of affairs to calculate capital, record assets and liabilities before
adjustments.
Format for showing profit (loss) for the period ending.......
A
Capital at the end of the accounting period XXXX
Add Drawings (whether in cash or in kind) XXXX
Less Additional capital introducted during the year XXXX
Adjusted capital of the end of the accounting period XXXX
Less Capital of the beginning of the accounting period XXXX
Profit (or loss) for the accounting period XXXX
Illustration 1
A keeps the accounts under single entry system. Prepare statement of affairs
from the following information :
Particulars 1.4.2016 31.3.17
A A
Cash in hand 5,000 6,500
Cash at Bank 13,200 18,600
Stock 15,300 12,700
Sundry Debtors 18,100 19,300
Bills Receivable 7,500 8,600
Machinery 27,500 27,500
Bills Payable 12,300 8,200
Creditors 17,300 18,600
Investments 6,000 8,000
251
Solution :
Statement of Affairs as on 1.4.2016
Liabilities Amount (A) Assets Amount (A)
Bills Payable 12,300 Cash in hand 5,000
Capital (Balancing figure) 63,000 Stock 15,300
Investments 6,000
Machinery 27,500
92,600 92,600

Bills Payable 8,200 Cash in hand 6,500
Capital (Balancing figure) 74,400 Stock 12,700
Investments 8,000
Machinery 27,500
1,01,200 1,01,200
Illustration 2
Following incomplete information is available from the record
maintained by Mr. X :
Particulars 1.4.2016 31.3.17
A A
Cash 12,200 14,300
Bank 18,500 21,300
Debtors 22,300 17,500
Accountancy
252
Creditors 25,200 27,000

Investment 14,000 16,000
Stock 15,600 12,700
Bank Loan 18,000 20,000
During the year, Mr. X introduced further capital A10,000. His drawings were
A2,000 p.m.
From the above information, prepare a statement showing the profit or loss
made by him for the year ending 31st March 2017.
Solution :
Statement of Affairs on 01.04.16
Bank Loan 18,000 Bank 18,500
Capital (Balancing figure) 51,800 Debitors 22,300
Stock 15,600
Investments 14,000
95,000 95,000
Bank Loan 20,000 Bank 21,300
Capital (Balancing figure) 49,100 Debitors 17,500
Stock 12,700
Investments 16,000
96,100 96,100
253
Statement of profit of Mr. X for the year ending 31.3.2017

Particulars Amount
A
Capital as on 31.03.2017 49,100
Add Drawings during the year 24,000
(@A2,000 p.m. for one year)
73,100
Less Capital introduced during the year 10,000
63,100
Less Capital as on 01.4.16 51,800
Profit earned during the year 11,300
Illustration 3
Following information is available from Jagadamba’s record who is maintaining
books under single entry system :
Particulars 31.3.2016 31.3.17
A A
Debtors 25,200 27,300
Creditors 16,800 15,400
Bills Payable 21,400 25,200
Stock 22,400 28,600
Cash 24,300 31,200
Bank overdraft 24,400 28,300
Building 52,000 52,000
Furniture 21,000 21,000
During the year Jagadamba has withdrawn A15,000 for personal expenses. He
introduced further capital of A10,000 in the business.
Calculate profit after making the following adjustments :
a) Depreciate Furniture by 10%
b) Depreciate Building by 2%
c) Bad debts A300
Accountancy
254
Solution :
Statement of Affairs of Jagadamba as on 31.3.2016 and 31.3.2017.
31.3.16 31.3.17 31.3.16 31.3.17
Liabilities Assets
A A A A
Creditors 16,800 15,400 Cash 24,300 31,200
Bills Payable 21,400 25,200 Debtors 25,200 27,300
Bank Overdraft 24,400 28,300 Bills Receivable 23,300 24,500
Capital (Balancing Stock 22,400 28,600
figure) 1,05,600 1,15,700 Furniture 21,000 21,000
Building 52,000 52,000
1,68,200 1,84,600 1,68,200 1,84,600
Statement of profit or loss for the year ending 31.3.2017

Particulars Amount
(A )
Capital as on 31.3.2017 1,15,700
1,30,700
Less Further Capital introduced 10,000
Adjusted Capital at the end 1,20,700
Less Capital as an 01.4.2016 1,05,600
Profit subject to adjustments 15,100
Less Adjustments :
Depreciation on Furniture 2,100
(10% on A21,000)
Depreciation on Building 2,400
(2% on A52,000)
Bad debts 300 4,800
Net Profit 10,300
255
Illustration 4
A trader does not keep proper books of accounts. However, he provides you the
following information :
31.3.2016 31.3.17
A A
Cash in hand 42,000 45,000
Stock-in-trade 68,000 77,000
Debtors 26,800 31,400
Equipment 50,000 50,000
Creditors 30,000 20,000
Furniture 40,000 40,000
The trader had introduced further capital of A30,000. He withdrew 40,000 for
his personal use. Depreciation to be provided on equipment and furniture of 5% per
annum. Allow interest on capital A2,000. Charge interest on drawings A500. Rent
prepaid A500. Salary outstanding A1,000.
Prepare a statement showing profit or loss for the year ending 31st March 2017.
Solution :
Statement of affairs of the trader as of 31.3.2016 and 31.3.2017.
31.3.16 31.3.17 31.3.16 31.3.17
Liabilities Assets
A A A A
Bank overdraft 33,000 37,000 Cash in hand 42,000 45,000
Creditors 30,000 20,000 Stock-in-trade 68,000 77,000
Capital (Balancing Debtors 26,800 31,400
figure) 1,63,800 1,86,400 Equipment 50,000 50,000
Furniture 40,000 40,000
2,26,800 2,43,400 2,26,800 2,43,400
Accountancy
256
Statement showing profit or loss for the year ended 31st March 2017
Particulars A A
Closing capital (capital on 31.3.2017) 1,86,400
2,26,400
Less Additional capital introduced during the year 30,000
Adjusted closing capital 1,96,400
Less Opening capital (capital on 31.3.2016) 1,63,800
Gross Profit 32,600
Less Depreciation on equipements (5% on A50,000) 2,500
Depreciation on Furniture (5% on A40,000) 2,000
Interest on capital 2,000
Outstanding salary 1,000 7,500
25,100
Add Interest on drawings 500
Prepaid Rent 500 1,000
Net Profit 26,100
Illustration 5
Prem commenced business on 1st April 2016 with a capital of A1,00,000. He
Immediately purchased furniture and fixtures for A20,000. On 30th September 2016,
he borrowed A50,000 from his wife @9% p.a. (Interest not yet paid) and introduced
a further capital of A11,500. Prem withdrew @A3,000 p.m. at the end of each month
for his household expenses. on 31st March 2017, his position was as follows :
Cash-in-hand A28,000; Sunday debtors A48,000; Stock A68,000; Bills
Receivable A16,000; Creditors A5,000; Owing for rent A1,500.
Furniture and fixtures are to be depreciated by 10%. Ascertain the profit or loss
made by Prem during the year ended 31st March 2017.
257
Solution :
Statement of Affairs of Prem as on 31.3.2017
Creditors 5,000 Cash in hand 28,000
Loan from Mrs. Prem 50,000 Sundry Debtors 48,000
Capital (Balancing figure) 1,25,000 Stock 68,000
Furniture and Fixtures 20,000
1,80,000 1,80,000
Statement of Profit or loss

for the year ended 31st March 2017
Particulars A A
Capital as on 31.3.2017 1,25,000
Add Drawings during the year
@A3,000 p.m for 12 months 36,000
1,61,000
Less Capital Introduced during the year 11,500
Adjusted closing capital 1,49,500
Less Capital as on 01.4.2016 1,00,000
Gross profit 49,500
Less Depreciation on furniture and fixtures 2,000
(10% on A20,000)
Outstanding Rent 1,500
Interest on Mrs. Prem’s Loan 2,250
(@9% p.a. on A50,000 for 6 months, i.e., from 30.9.16 to 31.3.17) 5,750
Net Profit 43,750
Accountancy
258
Illustration 6
A trader does not keep proper books of accounts. However, he provides the
following information to you :
Particulars 31.3.2016 31.03.17
A A
Cash at bank 4,500 4,000
Cash in hand 300 3,000
Debtors 12,000 20,000
Equipment 5,000 5,000
Creditors 30,000 20,000
Furniture 4,000 4,000
During the year ended 31st March 2017, the trader introduced A6,000, as
additional capital and withdrew A4,000 for his personal use. Depreciation is to be
provided on furniture at 10% p.a. and on equipment at 5% per annum. Prepare statement
showing profit or loss made by him for the year ended 31st March 2017.
Solution :
Statement of Affairs of prem as on 31st March 2016

Creditors 30,000 Cash in hand 300
Capital (Balancing figure) 35,800 Cash at Bank 4,500
Stock-in-trade 40,000
Debtors 12,000
Equipment 5,000
Furniture 4,000
65,800 65,800
259
Statement of Affairs
as on 31st March 2017
Capital (Balancing figure) 61,000 Cash at Bank 4,000
Debtors 20,000
Equipment 5,000
Furniture 4,000
81,000 81,000
Statement of profit or loss

Particulars A A
Capital as on 31st March 2017 61,000
Add Drawings made during the year 4,000
65,000
Less Further capital introduced during the year 6,000
Adjusted Capital 59,000
Less Capital on 31st March 2016 35,800
Gross Profit 23,200
Less Depreciation on Furniture 400
(10% on A4,000 p.a.)
Depreciation on Equipment 250 650
(5% on A5,000 p.a.)
Net Profit 22,550
Illustration 7
Ramesh, who keeps the books under single entry, gives you the following
information :
Particulars 1.4.2016 31.3.17
A A
Debtors 24,000 28,000
Creditors 18,000 3,000
Accountancy
260

Bills receivable 12,000 15,000
Bills payable 4,000 3,000
Furniture 16,000 16,000
(i) A provison for doubtful debt on debtors amounting A2,100 is to be created.
(ii) Furniture is to be depreciated @5% per annum.
(iii) Insurance prepaid A500.
(iv) Expenses outstanding A1,200.
(v) Drawing during the year A5,700
Calculate the profit of the year.
Solution :
Statement of Affairs as on 31st March 2016
Creditors 18,000 Debtors 24,000
Bill Payable 4,000 Stock-in-trade 36,000
Bank overdraft 8,600 Bills Receivable 12,000
Capital (Balancing figure) 57,400 Furniture 16,000
88,000 88,000
Statement of Affairs as on 31st March 2017

Creditors 3,000 Debtors 28,000
Bill Payable 3,000 Stock-in-trade 46,000
Bank overdraft 6,500 Bills Receivable 15,000
Capital (Balancing figure) 92,500 Furniture 16,000
1,05,000 1,05,000
261
Statement showing the profit or loss

Particulars Amount Amount
A A
Closing capital (Capital on 31.3.17) 92,500
Adjusted Capital 98,200
Less Opening Capital (on 01.4.16) 57,400
Gross Profit 40,800
Add Incomes and gains (prepaid insurance) 500
41,300
Less Expenses and lossess :
Provison for doubtful debts 2,100
Depreciation on furniture 800
(5% on A16,000 p.a.)
Outstanding expenses 1,200 4,100
Net Profit 37,200
Illustration 8
Mr Joseph keeps his books under single entry system. From the following
information, prepare a statement showing profit or loss for the year ended 31st March
2017 :
Particulars 1.4.2016 31.3.17
A A
Cash 32,000 35,500
Stock 47,200 52,400
Debtors 31,400 32,000
Bank 12,000 16,000
(overdraft)
Sundry creditors 18,000 11,000
Investments 22,000 ---
Furniture (30.9.2016) -- 18,000
Accountancy
262

Bills payable 17,500 --
During the year he withdrew A20,000 for personal use. He introduced further
capital of A21,000.
Adjustments :
(i) Debtors include A1,000 from a customer who is insolvent. The amount is
irrecoverable.
(ii) Depreciate furniture by 10% p.a.
(iii) Depreciate plant and machinery by 5% p.a.
Solution :
Statement of affairs as on 01.4.2016
Sundry Careditors 18,000 Cash 32,000
Bills Payable 17,500 Bank 12,000
Capital (Balancing figure) 1,56,100 Stock 47,200
Debtors 31,400
Bills receivable 7,000
Investments 22,000
Plant and machinery 40,000
1,91,600 1,91,600
Statement of affairs as on 31st March 2017
Bank overdraft 16,000 Cash 35,500
Sundry Creditors 11,000 Stock 52,400
Capital (Balancing figure) 1,58,900 Debtors 32,000
Furniture 18,000
1,85,900 1,85,900
263
Statement showing profit or loss for the year ended 31st March 2017
Particulars A A
1,78,900
Less Additional Capital introduced 21,000
Adjusted Capital 1,57,900
Less Opening Capital (As on 01.4.2016) 1,56,100
Gross Profit 1,800
Less Loss and expenses :
Bad debts 1,000
Depreciation on Furniture 900
(10% on A18,000 for six months
10 6
A18,000× × )
100 12
Depreciation on plant and machinery 2,000
(5% on A40,000 p.a.) 3,900
Net loss 2,100
Revised Statement of Affairs (or Balance Sheet) is prepared taking the closing assets,
liabilities and adjustments. Revised statement of affairs is similar to Balance Sheet.
Illustration 9
Mr. Ratan supplies you the following information, who keeps his books on single
entry system :
31.3.2016 31.3.17
A A
Creditors 36,700 39,000
Debtors 32,200 28,400
Stock 37,300 41,300
Cash-in-hand 38,300 42,200
Bank Balance 8,200 7,300
(overdraft)
Bank Loan -- 25,000
Furniture 22,000 22,000
Motor car 52,000 52,000
Accountancy
264
9% Investment (on 1.10.16) -- 20,000

During the year he withdrew A17,500 for personal use.
Adjustments :
(i) Depreciate furniture by 10% and motor car by 15%.
(ii) Bad debt is A1,500.
(iii) Prepaid insurance A800.
(iv) Outstanding salary A2,000.
Prepare a statement showing profit or loss for the year ending 31.3.17 and the
revised statement of affairs on that date.
Solution :
Bank overdraft 8,200 Bills receivable 27,000
Capital (Balancing figure) 1,63,900 Debtors 32,200
Stock 37,300
Motor Car 52,000
Furniture 22,000
2,08,800 2,08,800
Bank Loan 25,000 Bank Balance 7,300
Capital (Balancing figure) 1,71,700 Bills receivable 22,500
Stock 41,300
Debtors 28,400
Motor Car 52,000
Furniture 22,000
2,35,700 2,35,700
265
Statement showing profit or loss

for the year ended 31st March 2017
Particulars A A
Add Drawings 17,500
Less Opening Capital (As on 31.3.2016) 1,63,900
Gross Profit 25,300
F
G9 6 IJ
H
Add Income and gains : Interest accrued 100  20,000  12 K 900
Prepaid Insurance 800 1,700
Less Expenses and lossess : 27,000
Depreciation on Furniture 2,200
(10% p.a. on A22,000)
Depreciation on Motor Car 7,800
(15% p.a. on A52,000)
Bad debts 1,500
Net Profit 13,500
Revised Statement of Affairs / Balance Sheet
as on 31st March 2017
(A ) (A )
Bank Loan 25,000 Bank Balance 7,300
Salary outstanding 2,000 Bills Receivable 22,500
Capital : Debtors 28,400
Opening Balance 1,63,900 Less Bad debts 1,500 26,900
Add Net Profit 13,500 Stock 41,300
1,77,400 9% Investments 20,000
Less Drawings 17,500 1,59,900 Add Interest Accrued 900 20,900
Accountancy
266
Liabilities Amount Liabilities Amount

(A ) (A )
Prepaid Insurance 800
Motor car A52,000
Less Depreciation (15%) A7,800 44,200
Furniture A22,000
Less Depreciation (10%) A2,200 19,800
2,25,900 2,25,900
Illustration 10
Mr. Despande, a small trader who maintains his books of accounts on single
entry, supplies the following information :
Particular 01.4.2016 31.3.17
A A
Furniture 20,000 20,000
8% Investment 25,000 25,000
Motor car (purchased on 1.10.2016) -- 50,000
Cash-in-hand 22,000 23,200
Cash at Bank 17,500 6,500 (overdraft)
Building 1,20,000 1,20,000
During the year, he withdrew A25,000 for personal use. On 1.11.16, he introduced
a further capital of A20,000.
Adjustments :
(i) Depreciate Furniture, Plant and Machinery and Motor Car by 10%.
(ii) Appreciate Building by 10%.
(iii) Make a provision of 5% for doubtful debts on sundry debtors.
(iv) Interest on capital A3,200.
267
(v) Prepaid rent A1,500.

(vi) Outstanding salary A1,800.
(vii) No interest on investment is received.
Prepare a statement showing profit or loss for the year ending 31st March 2017
and the revised statement of affairs as on that date.
Solution :
(A ) (A )
Sundry Creditors 42,000 Cash-in-hand 22,000
Capital (Balancing Figure) 2,85,500 Cash at Bank 17,500
Furniture 20,000
Building 1,20,000
3,27,500 3,27,500

(A ) (A )
Bank overdraft 6,500 Sundry Debtors 45,000
Capital (Balancing figure) 3,29,700 Stock-in-trade 45,000
Motor car 50,000
Furniture 20,000
Building 1,20,000
3,73,200 3,73,200
Accountancy
268
Statement of profit or loss for the year ending 31st March 2017
Particular A A
Closing capital (As on 31.3.2017) 3,29,700
Add Drawings 25,000
3,54,700
Less Further capital introduced 20,000
Less Opening capital (As on 01.4.2016) 2,85,500
Gross Profit 49,200
Add Income and Gains :
Appreciation in Building 12,000
(10% on A1,20,000)
Prepaid Rent 1,500
Interest on investment (8% on A25,000 p.a) 2,000 15,500
64,700
Less Expenses and Losses :
Depreciation on furniture 2,000
(10% on A20,000 p.a)
Depreciation on plant and machinery 4,500
(10% A45,000 p.a.)
Depreciation on Motor Car 2,500
(10% on A50,000 for six months)
Provision for doubtful debts 2,250
(5% on A45,000)
Interest on Capital 3,200
Net profit 48,450
269
Revised Statement of Affairs / Balance Sheet

As on 31st March 2017
(A ) (A )
Bank overdraft 6,500 Prepaid Rent 1,500
Outstanding salary 1,800 Sundry Debtors 45,000
Capital : Less : Provision for
Opening Balance A2,85,500 Bad debts 2,250 42,750
Add Net profit A48,450 Stock-in-trade 45,000
Add Further Capital Building 1,20,000
introduced A20,000 Add Appreciation 12,000 1,32,000
Add Interest on Capital A3,200 8% Investments 25,000
A3,57,150 Add Interest Accured 2,000 27,000
Less Drawings 25,000 3,32,150 Motor car 50,000
Furniture 20,000
3,77,450 3,77,450
4.7 QUESTIONS
(a) When adjusted closing capital is greater than opening capital, it denotes :
(i) Profit.
(ii) Loss.
(iii) No profit no loss.
(iv) Sometimes profit and sometimes loss.
(b) When adjusted closing capital is less than opening capital, it denotes :
(i) Profit.
(ii) Loss.
Accountancy
270
(iii) No profit no loss.

(iv) Either profit or loss.
(c) Incomplete records are generally maintained by :
(i) Company.
(ii) Government.
(iii) Sole trader.
(iv) Banks.
(d) The other name of single entry is :
(i) Incomplete records.
(ii) Complete records.
(iii) Single record.
(iv) Full records in one book
(e) Incase of networth method of single entry, profit of the business can be
ascertained by :
(i) Preparing trading and profit and loss account.
(ii) Preparing statement of affairs in the beginning and end of the accounting
period.
(iii) Preparing Balance Sheet in the beginning and end of the period.
(iv) adopting any convenient method.
(f) The opening capital (capital in the beginning of the accounting period) can be
ascertained by preparing :
(i) Capital Account.
(ii) Opening Balance Sheet.
(iii) Opening statement of affairs.
(iv) Cash account.
(g) The capital at the end of the accounting period can be ascertained by preparing :
(i) Capital Account.
(ii) Closing Balance Sheet.
(iii) Closing Statement of Affairs.
(iv) Cash Account
(h) Adjusted closing capital is :
(i) Opening Capital – Drawings – Additional Capital.
(ii) Opening Capital – Drawings + Additional Capital.
(iii) Opening Capital + Drawings + Additional Capital.
(iv) Opening Capital + Drawings – Additional Capital.
271
[Answer : a (i) Profit

b (ii) Loss
c (iii) Sole trader
d (i) Incomplete records
e (ii) Preparing statement of affairs in the beginning and end of the period
f (iii) Opening statement of affairs
g (iii) Closing statement of affairs
h (iv) Opening capital + Drawings – Additional capital ]
(i) Name the capital under single entry system which is arrived by taking capital
at the end+Drawings –fresh capital introduced.
(ii) Name the term which represents the increase in closing capital under single
entry system.
(iii) Name the term which represents the decrease in closing capital under single
entry system.
(iv) Name the system of accounting followed by the business which is not
following complete system of double entry system of Book-keeping.
(v) Under which system of Book-keeping arithmetic accuracy of the accounts
cannot be checked ?
(vi) State wheather single entry system of Book-keeping is recognised by law ?
(vii) State wheather internal check is possible under single entry system ?
(viii) Is it possible to find but the true financial position of the business under
single entry system ?
[Answer : (i) Adjusted closing capital
(ii) Profit
(iii) Loss
(iv) Single entry system
(v) Single entry system
(vi) No
(vii) No
(viii) No ]
(i) What do you mean by adjusted closing capital ?
(ii) What do you mean by single entry system of Book-Keeping ?
Accountancy
272
(iii) State one difference between single entry and double entry system of
Book-Keeping.
(iv) Write any one characteristic of single entry.
(v) State any one limitation of single entry system of book-keeping.
(vi) Explain one difference between Balance Sheet and Statement of Affairs.
(vii) Write the name of the methods used to ascertain the profit or loss of the
business under single entry system of Book-keeping.
(viii) What do you mean by opening capital under single entry system of Book-
Keeping ?
(ix) How to calculate closing capital under single entry system ?
(x) State any one reason of maintaining books of accounts under single entry
system.
(i) In case of single entry, a ______ picture of all transactions will be available.
(ii) Under single entry system, closing capital is adjusted by adding ______
to find out the profit.
(iii) Under single entry system, closing capital is adjusted by subtracting
______ capital to find out the profit.
(iv) If Closing capital is A5,000, Drawings A500, Profit A1,000, then Opening
capital is _______ .
(v) Closing capital is A15,000, Drawings A2,000, Opening capital A10,000,
then profit is _______ .
(vi) Increase in adjusted closing capital represents _______.
(vii) Decrease in adjusted closing capital represents _______ .
(viii) Opening capital is A18,000, Drawings A5,000, Profit A12,000, then
Closing capital would be _______ .
[Answer : (i) Partial
(ii) Drawings
(iii) Additional
(iv) A4,500
(v) A7,000
(vi) Profit
(vii) Loss
(viii) A25,000.]
273

(i) Single entry system is used in large business enterprises.
(ii) Single entry system and double entry system are same.
(iii) Closing capital A17,000, Drawings A5,000, Opening Capital A12,000.
Profit is A15,000.
(iv) Opening Capital A18,000. Profit A12,000, Drawings A6,000. Closing
capital is A14,000.
(v) Opening capital A27,000. Profit A11,000. Closing capital A30,000.
Drawings is A18,000.
[Answer : (i) small
(ii) different
(iii) A10,000
(iv) A24,000
(v) A8,000. ]
6. Answer the following questions within 30 words each;
(i) Define single entry system.
(ii) What do you mean by “Statement of Affairs” ?
(iii) What do you mean by ‘Incomplete accounting records’ ?
(iv) “Arithmetic accuracy of the accounts maintained under single entry cannot
be checked”. explain.
(v) Why cannot the true profit of a business be ascertained under the single
entry system of keeping accounts ?
(vi) Name the different laws of the country which have not recognised single
entry system ?
(vii) Why cannot goodwill be valued under single entry system ?
(viii) Why is internal check not possible under single entry system ?
(ix) Why is the single entry system not popular ?
(i) How can you ascertain the profit under single entry system ?
(ii) Explain the advantages of single entry system.
(iii) State the meaning of single entry system.
Accountancy
274
(iv) Explain the characteristics of single entry system.

(v) Explain the disadvantages of single entry system.
(vi) Explain the reasons for maintaining the single entry system.
(vii) How can opening capital be ascertained under single entry system ? Explain
with example.
(viii) How can you calculate the profit under single entry system ? Explain with
example.
(ix) Prepare a statement of affairs with imaginary figures and ascertain the
profit.
(x) Prepare the statement of affairs with imaginary figures and ascertain the
capital.
8. What do you mean by single entry system ? What are its advantages ?
9. Discuss the characteristics and limitations of single entry system.
10. Discuss, in brief with suitable example, the ascertainment of profit under net
worth method.
11. Distinguish between Single entry and Double entry system.
12. Differentiate between Balance Sheet and Statement of Affairs.
13. Ascertain the opening and closing capital from the following balances :
Particulars 01.4.2016 31.3.17
A A
Cash 12,200 15,600
Bank 4,000 (over 6,300
draft)
Debtors 7,500 6,300
Creditors 16,400 12,500
Furniture 20,000 20,000
Machinery 40,000 40,000
[Ans : Opening capital A75,900
Closing capital A91,900]
275
14. Prepare the statement of affairs and ascertain the profit from the following
information :
Particulars 01.4.2016 31.3.17
A A
Stock 22,200 25,700
Debtors 18,300 20,200
Creditors 17,400 12,600
Cash-in-hand 22,500 28,600
Bank balance 8,200 7,300
Furniture 25,000 25,000
Prepaid expenses -- 500
[Ans. Opening capital - A93,000
Closing capital - A1,10,600
Gross profit - A17,600
Net profit - A17,100]
15. Jivan keeps his books under single entry system. His position on 31st March
2016 was as follows :
Cash in hand A15,200, Cash at Bank A6,300, Sundry Debtors A7,600, Sundry
Creditors A8,400, Bills receivable A4,200, Fixture and fittings A18,000.
He introduced A15,000 as further capital during the year. His drawings were
A1,000 p.m.
His position on 31st March 2017 was as follows :
Cash in hand A16,400, Cash at Bank A7,200, Sundry Debtors A8,200, Sundry
Creditors A7,200, Bills receivable A5,400, Fixture and fittings A18,000.
Prepare statement of affairs and statement of profit or loss for the year ending
31st March 2017.
[Ans. Opening capital A42,900
Closing capital A48,000
Profit - A2,100]
Accountancy
276
16. Jaydeep commenced business on 1st April 2016 with a capital of A50,000. He
bought furniture worth A10,000. On 1st Octorber, 2016 he borrowed A20,000
from his wife at 12% p.a. (Interest not paid yet). He introduced further capital
of A10,000. He withdrew @ A1,500 p.m. for household expenses. On 31st
March, 2017 his position was as follows :
Cash in hand A12,000, Bank A16,700, Debtors 16,800, Creditors A12,500,
Stock A32,200.
Furniture is to be depreciated by 10%. Prepare a statement showing Jaydeep’s
profit or loss in the business for the year ending 31st March 2017.
[Ans.: Closing capital A55,200
Profit - A11,000]
17. Mr. Raghubir who maintains his accounts under single entry system, supplies
you the following information :
31.3.2016 31.3.2017
A A
Cash in hand 30,000 35,000
Cash at Bank 12,000 16,200
Stock 45,000 55,200
Furniture 30,000 30,000
Loan from Mrs. Raghubir 30,000 30,000
He withdrew A5,000 every month from the business to meet his private
expenses. He had sold a private investment for A30,000 and invested the amount
in the business.
Adjustments :
Interest on Mrs. Raghubir’s loan @ 12% p.a. is not paid.
Depreciate furniture by 10% p.a.
[Ans. Opening capital A77,000
Closing capital A1,04,200
Profit - A50,600]
277
18. Mr. Rama keeps the books under single entry system. He supplies you the
Particulars 01.4.2016 31.3.2017
A A
Furniture 20,000 20,000
Land and Building 70,000 70,000
Investments -- 10,000
Stock 45,000 50,000
Motor Car (01.10.2016) -- 20,000
Cash 10,000 20,000
During the year, he withdrew A10,000 for personal use. On 01.10.2016
he introduced further capital of A20,000 by selling his private investment.
Adjustment :
(a) Appreciate land and Building by 20%.
(b) Debtors include A1,000 from a customer who is insolvent and nothing can be
recovered from him.
(c) Maintain reserve for bad debts at 5% on debtors.
(d) Depreciate plant and machinery at 10%, furniture at 5% and motor car at 10%.
Prepare a statement showing profit and loss for the year ending 31st March
2017 and a revised statement of affairs on that date.
[Ans. Opening capital A1,65,000, Closing capital A1,98,000,
Profit A38,550, Revised statement of affairs
Total A2,65,550.]
19. Chandraswami keeps his books under single entry system. Ascertan the profit
of Chandraswami for the year ending 31st March 2017 and prepare revised
statement affairs as on that date.
Accountancy
278
Particulars 31.3.2016 31.3.2017

A A
Cash in hand 12,000 16,000
Cash at Bank 6,500 17,600
Debtors 18,000 32,000
Creditors 21,300 17,400
Stock 45,000 55,300
Furniture 32,000 32,000
Machinery 48,000 48,000
During the year, he introduced a fresh capital of A26,000. He withdrew
@A3,000 p.m. for domestic expenses.
Adjustments :
(i) Depreciate Furniture by 10% and Machinery by 5%.
(ii) Bad debts amounting to A2,000 to be written off.
(iii) Outstanding salaries A2,000.
(iv) Prepaid rent A3,000.
[Ans. Opening capital A1,45,100, Closing A1,84,700, Profit A43,000, Revised
statement of affairs total A2,15,900.]
20. Amarendra, who keeps his books on single entry system, provides the following
information :
Particulars 01.4.2016 31.3.2017
A A
Cash in hand 22,000 27,800
Cash at Bank 13,200 24,300
Building 1,20,000 1,20,000
279
Furniture 40,000 40,000

Additional capital introduced during the year A20,000. He was drawing
@A2,500 p.m. for his domestic expenses.
Adjustments :
1. Depreciate furniture at 10% p.a.
2. Appreciate building by 5%.
3. Write off a bad debt of A2,500
4. Outstanding rent A2,000.
5. Prepaid salary A3,000.
Prepare a statement of profit for the year ending 31.3.17 and a revised statement
of affairs as on that date.
[Ans.- Opening Capital A2,46,700, Closing Capital A2,91,900, Profit A55,700,
Revised Statement of Affairs total A3,30,400]
21. Mr Javedkar, who maintains his accounts on single entry system, supplies the
Particulars 01.4.2016 31.3.2017
A A
Debtors 18,700 25,300
Creditors 17,200 12,300
Cash in hand 14,400 18,600
Cash at Bank 17,600 14,400
Motor car 50,000 50,000
Furniture 30,000 30,000
Stock 42,600 70,300
He introduced a further capital of A30,000. He drew @A5,000 p.m. for his
personal expenses.
Accountancy
280
Adjustments :
(i) Depreciate motor car by 10% and furniture by 71/2%.
(ii) Allow Interest on capital A2,500.
(iii) Interest on drawings is A1,600.
(iv) Outstanding Rent A3,200
(v) Prepaid salary A2,300
(vi) Create a provison for Bad debts @2% on debtors.
Prepare statement of affairs for the year ending 31.3.2016 and 31.3.2017. Show
the statement of profit and loss for the year ending 31st March 2017 and revised
statement of affairs as on that date.
[Ans. Opening capital A1,53,700, closing capital A1,97,300, profit A64,044,
Revised statement of affairs total A2,11,744.]
22. Mr. Swapan, who keeps his books on single entry system, supplies the following
information :
Particulars 01.4.2016 31.3.2017
A A
Building 2,50,000 2,50,000
Motor car 60,000 60,000
Furniture 30,000 30,000
Cash in hand 22,000 25,000
Cash at Bank 17,000 19,300
Debtors 18,000 32,000
Creditors 22,000 17,000
Furniture 35,000 35,000
He withdrew @A3,000 p.m. for his domestic expenses.
281
Adjustments :
(i) Depreciate furniture @10% p.a., Motor car @ 20%, Building @2% p.a.
(ii) A customer became insolvent. A1,000 due from him was irrecoverable.
(iii) Outstanding salary A3,000.
(iv) Prepaid expenses A2,500.
(v) Interest on capital amounts to A3,200.
Prepare statement of profit or loss for the year ending 31st March 2017.
[Ans.:Opening capital A4,24,000, closing capital A4,56,300, profit - A93,500]
-o-
CHAPTER - 5
ACCOUNTING FOR PARTNERSHIP FIRM
STRUCTURE
5.1 Meaning, Definition and Features of Partnership

5.2 Right of Partners
5.3 Partnership Deed
5.3.1 Provisions of Partnership Act, 1932 in the absence of
Partnership Deed
5.3.2 Some other important provisions of the Partnership Act, 1932.
5.4 Partners' Capital Accounts (Fixed vs. Fluctuating)
5.5 Profit and loss Appropriation Account
5.6 Questions.
Accounting for Partnership Firm
283
5.1 MEANING, DEFINITION AND FEATURES OF PARTNERSHIP

Partnership is an association of two or more persons to carry on, as co-owners,
a business and to share its profits or losses. When two or more persons agree to carry
on business for their mutual benefits, they are said to form a partnership. Partnership
firm in India is governed by the Indian Partnership Act, 1932., According to sec-4 of
the Indian Partnership Act, 1932 the term 'Partnership' is ‘‘the relation between two
or more persons who have agreed to share the profits of a business carried on by all
or any of them acting for all.’’
ESSENTIAL CHARACTERISTICS OF PARTNERSHIP
The essential characteristics of partnership are :
1. Two or More Persons : There nust be at least two persons to form a partnership
and all such persons must be competent to contract. According to Indian contract
Act, 1872, every person except the following is competent to contract :
(i) Minor
(ii) Persons of unsound mind (Lunatics, idiots, etc.)
(iii) Persons disqualified by any law to which they are subjected (insolvent,
alien enemy etc.)
2. Agreement - Partnership comes into existence by an agreement. The agreement
may be written or oral. The relation of partnership arises out of contract and not
from status.
A written agreement or deed is preferred to oral one, because it helps in resolving
the disputes, if any, arising in future among partners.
3. Lawful Business : There must exist a lawful business. The business may be of
the nature of any trade, occupation or profession.
4. Profit-sharing : The agreement between/among the partners must be to share
profits or losses of the business. It is not essential that all the partners must
Accountancy (Part-II)
284
share losses also. There may be a provision in the Partnership Deed that a
particular partner or partners shall not bear the losses. In the absence of a specific
mention regarding profit-sharing in the Partnership Deed the partners must share
the proft/loss equally as provided in the partnership Act.
5. Good faith : The partnership lies on the mutual trust and good faith of all the
partners. Each and every partner should act honestly and fairly in the conduct of
business.
6. Implied Agency : Each and every partner is regarded as an agent of the business.
All the partners are entitled to take active part in the day to day management of
the business. Every partner can bind the firm for acts undertaken by him in good
faith and on behalf of the firm.
7. No Separate Legal Entity:- A partnership firm has no separate legal entity of
its own. It is represented collectively by its partners. Persons who have entered
into a partnership with one another are called partners individually, and
collectively, a firm, and the name under which their business in carried on is
called the firm name.
8. Unlimited Liability : Each and every partner is liable, jointly and severally for
the amount of all the debts owed by the firm. As a rule, the liability of the partners
is unlimited. If assets of the business are not sufficient to meet the obligations
of the business at the time of dissolution of the firm, the private property of
partners can be used to meet them.
5.2 RIGHT OF PARTNERS
1. All the partners have the right to participate in the management of the
business.
2. All the partners have the right to be consulted about the affairs of the
business.
3. All the partners have the right to inspect the books of accounts and have a
copy of it.
285
4. All the partners have the right to share profits or losses with others in the
agreed ratio.
5. If a partner has advanced loan, he has the right to receive interest on it at an
agreed rate of interest. If rate of interest is not agreed upon, interest is
paid @6% p.a.
6. In case of an emergency, a partner has the right to act according to his best
judgement and be indemnified for the expenses incurred by him.
7. A partner has the right not to allow the admission of a new partner.
8. After giving proper notice, a partner has the right to retire from the firm.
9. If a partner incurs expenses on the business or he pays some money on
behalf of the firm, that partner may get indemnified against these payments
from the firm.
5.3 PARTNERSHIP DEED
Meaning - Partnership arises out of contractual relationship among partners.
This contract or agreement may either be oral or written. But it is always advisable to
have it in black and white. 'Partnership Deed' or 'Partnership Agreement' is a document
which contains the terms of partnership as agreed among the partners. The deed is
required to be duly stamped as per Indian Stamp Act, 1889 and duly signed by all the
partners. To solve all future disputes, that may creep into the partnership, all firms
should have their own partnership deed.
CONTENTS OF PARTNERSHIP DEED :
The contents of the deed may vary from firm to firm. But certain clauses are
usually incorporated to ensure smooth working of the business, which are outlined
below :
1. The name of the firm;
2. Name and address of all the partners;
3. The nature of business to be carried on;
4. The place of business;
286
5. Duration of partnership - It may be dissolved at will, if no limit has been

fixed for its duration so that it can be disolved at any moment; or it may be
for a fixed term, if the time of dissolution has been previously fixed by the
original agreement;
6. The amount of capital investment to be made by each partner;
7. Ratio in which profits and losses are to be shared
8. The drawings, i.e., the sums the partners can withdraw during a particular
period;
9. The interest to be allowed on capital and charged on drawings;
10. Interest on loan by a partner to the firm;
11. Remuneration by way of salary, commission etc.; if any, payable to the
partners;
12. Method of computation and treatment of goodwill;
13. Mode of settlement of accounts in case of retirement or death of a partner;
14. Mode of settlement of accounts in case of dissolution of firm.
15. Maintenance of proper books of accounts;
16. Operating bank accounts.
17. Arbitration clause, laying down the procedure to be followed in the event
of disputes.
However, the partnership deed must not contain any term which is in
contravention with the provisions of the Indian Partnership Act.
5.3.1 PROVISIONS OF PARTNERSHIP ACT, 1932 IN THE ABSENCE
OF PARTNERSHIP DEED
We know that drafting a deed is not compulsory, though it is advisable to have it
to resolve all future disputes among partners. In the absence of a written deed, the
following provisions of the Indian partnership Act shall be applicable for making
accounting treatments :
1. No remuneration by way of salary or commission is payable to any partner
for taking part in the conduct of business (Sec. 13(a)]
287
2. Profit and losses are to be shared equally [sec-13(b)]

3. No interest is allowed on capital [sec-13(c)]. If the deed provides for the
payment of interest on capital, it is payable only out of available profits.
4. Interest @6% p.a. is allowed on loan or advance given to the firm by a
partner. [sec 13(d)]
5. No interest is to be charged on drawings made by a partner.
5.3.2 SOME OTHER IMPORTANT PROVISIONS OF THE
PARTNERSHIP ACT, 1932
(i) With the consent of all the partners, a minor may be admitted for the benefit
of partnership. [sec-30]
(ii) A person may be admitted as a partner either with the consent of all the
existing partners or in accordance with an express agreement among the
partners. [sec-31]
(iii) A partner may retire from the firm either with the consent of all the other
partners or in accoriance with an express agreement among the partners.
[sec.32]
(iv) Registration of the firm is optional and not compulsory. [sec-69]
(v) Unless otherwise agreed by the partners, a firm is dissolved on the death
of a partner. [sec-35]
Note: It should be noted that the above provisions of the Act are applicable when
partnership deed does not have a clause to this effect.
Illustration 1
A, B and C are partners in a firm. They do not have a Partnership Deed.
(i) A, who has contributed more capital than other partners, demands interest
on capital at 10% p.a. and share of profit in the capital ratio. But B and C
donot agree with him.
(ii) B has devoted full time to run the business and demands a salary of
A5,000p.m. But A & B donot agree with him.
288
(iii) C demands interest on the loan of A50,000 advanced by him, at the market
rate of interest which is 12% p.a.
(iv) Net profit before taking into account any of the above claims amounted to
A50,000 at the end of the first year of the business.
How will the disputes be settled ?
Solution :
The partners do not have a Partnership Deed. Therefore, provisions of the Indian
Partnership Act, 1932 will apply to settle the disputes :
(i) Interest on capital is not payable to any partner. Therefore, A is not entitled
to interest on capital.
(ii) Remuneration is not payable to any partner. Therefore, B is not entitled to
any salary.
(iii) Interest on loan is payable @6% p.a., which comes to A3,000 and the balance
of A47,000 to be distributed equally. Profit cannot be shared in capital
ratio, as claimed by A.
5.4 PARTNERS' CAPITAL ACCOUNTS : (Fixed vs Fluctuating)
A separate Capital Account is maintained for each partner. For example, if A, B
and C are three partners in a firm, there shall be three Capital Accounts, one each for
A, B and C. The partners' Capital Accounts may be maintained by following any of the
two methods :
(i) Fixed Capital Accounts Method
(ii) Fluctuating Capital Accounts Method
Fixed Capital Accounts Method
When capital contribution of partners are fixed, it is called fixed capital. When
fixed Capital Accounts method is followed, a separate Current Account is opened for
each partner in addition to the Capital Account.
Capital Account : Fixed capital means that the capital remains unaltered, i.e.,
fixed unless additional capital is introduced or withdrawal is made from the existing
289
capital. Thus, if fresh capital is not introduced or capital is not withdrawn, Capital
Account of a partner will continue to show the same balance year after year.
Current Account : Current Account is maintained to record transactions other
than introduction and withdrawals of capital such as interest on capital, interest on
drawings, salary or commission to a partner, share of profits/losses. As a result, the
balance of Current Account fluctuates with every transaction with the partner.
Current Account of each partner is debited with :
(i) Drawings made by him;
(ii) Interest on drawings;
(iii) Share of loss;
(iv) Transfer of any amount to Capital Account permanently, in case of deficiency
in capital balance as per new agreement, if any.
Similarly, Current Account of each partner is credited with :
(i) Interest on capital;
(ii) Salary or commission;
(iii) Share of profit; and
(iv) Transfer of any amount from Capital Account permanently, in case of excess
capital balance as per new agreement, is any.
Normally, partner's Current Account has a credit balance but, if a partner has
drawn more than his or her share of profits or there are losses in the business year
after year, it will have a debit balance.
The balance of the partners' Capital Accounts are shown on the liabilities side
of the Balance Sheet, as that much amount is due to them.
Credit balance in Current Account is shown on the liabilities side and debit
balance on the asset side of the Balance Sheet.
The outline of the two accounts. maintained under the Fixed Capital Method
are:-
290
PARTNER'S CAPITAL ACCOUNTS

Dr. Cr.
Particulars A(A) B(A) C(A) Particulars A (A) B(A) C(A)
To Cash/Bank A/c --- --- --- By balance b/d --- --- ---
(withdrawal of capital)
To Balance c/d --- --- --- By cash/Bank A/c --- --- ---
(Additional capital)
PARTNER'S CURRENT ACCOUNTS

Dr. Cr.
Particulars A(A) B(A) C(A) Particulars A(A) B(A) C(A)
To Balance b/d --- --- --- By balance b/d --- --- ---
(in case of debit (in case of credit
opening balance) --- --- --- opening balance)
To Drawings A/c By Interest on Capital
To Interest on Drawings A/c --- --- --- By Commission A/c --- --- ---
To Profit and Loss A/c --- --- --- By Salary A/c --- --- ---
(loss) By Profit and loss --- --- ---
To Balance c/d* Appropriation A/c
(profit)
* The balance may be on the opposite (credit) side also

FLUCTUATING CAPITAL ACCOUNTS METHOD
Under this method, only one account namely ‘capital’ is maintained for each
partner.
All transactions of a partner (e.g., salary or commission, interest allowed on
291
capital, drawings, interest charged on drawings, share of profit or share of loss, etc.)
are recorded in the Capital Account.
As a result, balance in the Capital Account fluctuates with every transaction.
Capital Accounts having credit balances are shown on the liabilities side while
Capital Accounts having debit balances are shown on the assets side of the Balance
Sheet.
Fluctuating Capital Method is normally followed for maintaining Capital
Accounts and therefore, in the absence of any instruction, this method should be
followed for maintaining the partners’ Capital Accounts.
The outline of Capital Accounts under the Fluctuating Capital Method is as
follows :
PARTNERS’ CAPITAL ACCOUNTS
Dr. Cr.
Particulars A B C Particulars A B C
(A) (A) (A) (A) (A) (A)
To Balance b/d (in case --- --- --- By Balance b/d --- --- ---
of debit balance) (in case of credit balance)
To Drawings A/c --- --- --- By Cash/Bank A/c --- --- ---
To Interest on (Additional Capital)
By Interest on Capital A/c --- --- ---
Drawings A/c --- --- ---
To Profit and Loss A/c --- --- --- By Commission A/c --- --- ---
(loss) By Salary A/c --- --- ---
To Balance c/d* --- --- --- By Profit and Loss A/c
(Profit) --- --- ---
* The balance may be on the opposite (credit) side also.

292
Difference between Capital Account and Current Account

Basis Capital Account Current Account
1.- Need Capital Account is Current Account is
maintained in all the cases, maintained only when fixed
i.e., under fixed capital capital account method is
account and fluctuating followed.
capital account.
2.- Balance of When fixed capital method Current Account may have a
Account is followed, Capital credit or debit balance.
Account will show a credit
balance.
3.- Nature In case of fixed Capital, Current Account balance
Capital Account balance fluctuates with every
generally remains transaction.
unchanged from year to
year. It will change only
when further capital is
introduced or capital is
withdrawn from business.
4.- Transactions Capital Account records the Current Account records the
amount invested by a partner transactions such as
in the firm. drawings, interest on capital,
interest on drawings, salary,
profit, ctc.
Difference between Fixed Capital Account and Fluctuating Capital Account.

Basis Fixed Account Fluctuating Account
1.- No. of Acconts Two accounts are Only one account (viz,
Maintained maintained for each Capital Account) is
partners, i.e., Capital maintained for each partner.
Account and Current
Account.
293
2. Frequency of Balance in fixed capital The balance changes

change Account does not change frequently from period to
except under specific period.
circumstances.
3. Adjustment for All adjustments for All entries for drawings,
drawings, etc. drawings, interest on interest on drawings, interest
drawings, interest on on capital, salary, share of
capital, salary, share of profits and losses are made in
profit / loss are made in Capital Account.
Current Account.
4. Balance It always shows credit Capital Account can also
balance in Capital Account. show debit balance
The important question, in this connection, is whether the firm should adopt
Fluctuating Capital System or Fixed Capital System. The answer is that if Partnership
Deed prescribes any definite system, it should be followed. In the absence of a clear
mention, partners' decision should be treated as final, However, in most of the cases,
fluctuating capital system is followed.
Interest on Drawings
The amount drawn by a partner from the partnership firm to meet his personal
needs is termed as drawings. As per the partnership agreement, the firm may impose
restrictions on the maximum amount of withdrawals by a partner. Similarly the
partnership deed may provide for charging interest on drawings at an agreed rate. In
the absence of such an agreement no interest can be charged on drawings.
Interest on drawings is an income for the firm and an expense for the partner.
The partner usually does not pay this interest amount to the firm in cash. This may be
charged to his drawings account which may reduce his capital in case of fluctuating
capital. It the capital is treated as fixed, the drawings may be charged to the partner's
Current Account. Drawings may be made in cash or in the form of goods.
294
(i) When drawings made by cash :
Partner's Drawings Account Dr.
To Cash A/c
(ii) When drawings made in the form of goods :
Partner's Drawings Account Dr.
To Purchases A/c
(iii) For charging interest on drawings :
Partner's Drawings / current A/c Dr.
To Interest on Drawings A/c
(iv) For transferring the interest on drawings to Profit and Loss Appropriction A/c :
Interest on Drawing A/c
To Profit and Loss Appropriation A/c
Sometimes, the (iii) and (iv) entries above are combined and only one entry is
passed which is as under :
Partner's Drawings / Current A/c Dr.
To Profit and Loss Appropriation A/c
Calculation of Interest on Drawings :
Interest on Drawings is calculated with reference to the time period for which
the money is withdrawn by the partner. Depending upon the different situations of
drawings, interest may be calculated under various ways, which are discussed below :
(i) When date of drawings is not given :
If the date of drawings by a partner is not given and the total drawings during the
period are given, the interest on drawings is calculated at the agreed rate for a period
of six months on the assumption that, the drawings have been made by the partner
uniformly throughout the year.
295
Illustration 2
During the period total drawings made by a partner is A9,000 and interest on
drawings is to be charged at 5% p.a. Calculate the interest on drawings.
Solution :
Since no date of drawings is given, it may be assumed that the total drawings of
A9,000 has been uniformly made throughout the total period. That is, the partner has
drawn every month a sum of A750
5 1
Interest on Drawings - A9,000    A225
100 2
(ii) When dates of drawings are given :
If the dates of drawings and the amounts of drawings on these dates are
specifically given, the interest on drawings may be calculated by the product method,
which is explained in the following illustration :
Illustration 3
Calculate the interest on drawings of Y, a partner, for the year ending 31st
December 2016, from the following data by product method, by charging interest at
6% p.a.
Date of drawings Amount of drawings (A)
1st April, 2016 5,000
1st July, 2016 4,000
1st Oct, 2016 3,000
1st Dec, 2016 6,000
296
Solution :
Amount of Period of drawings Product
Date of drawings
drawings (A) (in months) (A )
1st April, 2016 5,000 9 45,000
1st July, 2016 4,000 6 24,000
1st Oct, 2016 3,000 3 9,000
1st Dec, 2016 6,000 1 6,000
Sum of the products = 84,000
6 1
Interest on Drawings = A84,000    A420
100 12
Note: Interest on sum of the products is calculated for 1 month at the given rate.
The interest calculated under the product method for 1 month may also be
calculated individually for the amount and period of drawings.
Taking the above illustration, the interest on drawings may be calculated
individually as follows :
Amount of Period of
Date of
drawings drawings Product
drawings
(in A) (in months)
9 6
1st April, 2016 5,000 9 5,000    225
12 100
6 6
1st July, 2016 4,000 6 4,000    120
12 100
3 6
1st Oct, 2016 3,000 3 3,000    45
12 100
1 6
1st Dec, 2016 6,000 1 6,000    30
12 100
Total Interest 420
297
(iii) When a fixed amount is withdrawn on the first day of each month for a period of
12 months.
In this situation, interest on the total amounts withdrawn during the period is
1
calculated at the given rate for a period of 6 months.
2
(iv) When a fixed amount is withdrawn on the last day of each month for a period of
12 months.
In this case, interest on the total amounts withdrawn during the period is
1
calculated at the given rate for a period of 5 months.
2
Interest on Capital
If the partnership deed provides for allowing interest on capital, then only this
is allowed to all the partners on their capital contributions. In the absence of such a
provision, no interest on capital is allowed to any partner. This is calculated before
distributing the profits to the partners. The rationale behind allowing interest on capital
is to compensate the partner who subseribes capital in excess of what is required as
per the profit sharing ratio.
Accounting Treatment :
The interest on capital allowed to a partner is normally not given in cash. It is
credited to his capital or current account as in case of fluctuating or fixed capital
method respectively.
(i) For allowing interest on capital :
Interest on capital A/c Dr.
To Partner's Capital / Current A/c
(ii) For transferring the interest on capital to profits and loss appropriation account.
Profit and Loss Appropriation A/c Dr.
To Interest on capital A/c.
298
Sometimes only one entry is passed instead of the above, which is :

Profit and loss Appropriation A/c Dr.
To Partner's Capital/Current A/c.
The interest on capital allowed to the partners is a charge against the profits of
the firm and is income for the partners. If the same is not withdrawn in cash, this
increases their capital. However, instead of treating the interest on capital as a charge
against profit, it may be regarded as an appropriation of profit. In this case, interest
on capital is shown on the debit side of profit and loss appropriation A/c before
distributing the profits among the partners. It will be more appropriate to treat this as
an appropriation of profit. It is important to note that interest on capital is allowed
onlywhen the firm has earned some profits. In case of loss, no interest on capital is
allowed to the partners.
Calculation of Interest on Capital
While calculating the interest on capital, the drawings and introduction of
additional capital, if any, should be taken into account. Interest is calculated at the
given rate with reference to the time period for which the capital has been used. If
there is no withdrawal or no introduction on of additional capital during a year, the
interest on capital is calculated for the whole year on the opening balance of capital.
On the otherhand, if there are drawings or introduction of additional capital, the
effective use of capital for the time period will be calculated separately upto and
after the date of drawing or introduction of additional capital.
Illustration 4
Amiya and Binoy are partners in a firm providing capitals of A60,000 and
A50,000, respectively. They are allowed interest on capital @8% p.a. Calculate the
interest on capital to be allowed to them for the year ending 31st march, 2016.
299
Solution :
8
Interest on Capital to Amiya  A60,000 
100
 A4,800 .
8
Interest on capital to Binoy  A50,000   A4,000
100
Illustration 5
In continuation of the above illustration, if the drawings and introduction of
additional capital by the partners are given as below, calculate the interest on capital
allowed to them.
Amiya withdrew A10,000 on 1st July,2015 and Binoy introducted additional
capital of A5,000 on 1st October, 2015.
Solution :
Amiya's capital of A60,000 has been used for 3 months, i.e., from 1st April,
2015 to 1st July, 2015. After drawings of A10,000, his capital of 50,000 has been
used for next 9 months i.e., from 1st July 2015 to 31st March, 2016.
3 8
Interest on Capital to Amiya  A60,000    A1,200
12 100
9 8
 A50,000    A3,000
12 100
Total interest = A1,200 + A3,000 = A4,200
Binoy's Capital of A50,000 has been used for 6 months i.e., from 1st April,
2015 to 1st october, 2015. After introducing additional capital of A5,000 on 1st
October, his capital of A55,000 has been used for next 6 months i.e., from 1st October,
2015 to 31st March, 2016.
300
6 8
 Interest on Capital to Binoy  A50,000    A2,000
12 100
6 8
 A55,000    A2,200
12 100
So total interest = A2,000 + A2,200 = A4,200.
Interest on Loan given by a Partner :
If a partner provides loan to the firm at the time of its need for additional funds,
he is entitled to interest on loan amount. If there is an agreement to this effect, interest
on loan is paid at the agreed rate. If there is no agreement as to the rate of interest,
interest at the rate of 6% p.a. is payable to the partner as per the provisions of the
partnership Act.
The partner provides the loan to the firm over and above his capital contribution.
So this amount of loan is credited to the partner's loan Account which represents
liability for the firm, hence, shown on the liability side of the Balance Sheet. Interest
on loan may be paid in cash. Since interest on loan is an expense of the firm, it is
debited to the profit and loss account of the firm for determining the profit/loss.
Accounting treatment
(i) When loan is taken :
Cash A/c Dr.
To Partners Loan A/c
(ii) When interest on Loan becomes due :
To Partner's Loan A/c
or
(iii) When interest on Loan is paid in cash :
To Cash A/c
(iv) When interest on Loan is transferred to Profit and Loss A/c.
To Interest on Loan A/c.
301
Illustration 6
X and Y are partners sharing profits and losses in the ratio of 2:1. On 1st April,
2015, X gave a loan of A60,000 and on 1st July, 2015, Y gave a loan of A50,000 to
the firm. Show, how profit of the firm will be distributed for the year ending 31st
March, 2016, in the following cases :
(i) If the profit before interest is A28,350
(ii) If the profit before interest is A4,350
(iii) If the loss before interest is A7,050
Solution :
(i) Profit and Loss Appropriation Account
Dr. Cr.
Particulars A Particulars A
To interest on Loan By Profit before interest 28,500
X 3,600
Y 2,250 5,850
To Profit
transferred to
Capital A/c
X - 15,000
Y - 7,500 22,500
28,350 28,350
(ii)
Dr. Profit and Loss Appropriation Account Cr.
To interest on Loan By Profit before interest 4,350
X- 3,600 By loss transferred
Y- 2,250 5,850 to Capital A/c
X - 1,000
Y - 500 1,500
5,850 5,850
302
(iii)
Profit and Loss Appropriation Account
Dr. Cr.
To Loss before interest 7050 By Loss transferred
To Interest on Loan to Capital A/c
X- 3,600 X - 8,600
Y- 2,250 5,850 Y - 4,300 12,900
12,900 12,900
N.B.: Since no interest rate is given, it is charged at 6% p.a. as per the provision of
Partnership Act.
It should be noted that the loan given by a partner has to be kept quite distinct
from his capital and in the Balance Sheet also, it should be separately shown. Therefore,
interest due on loan should be credited to loan account and not to Partner’s Capital
Account. The justification for this is that in the case of dissolution of partnership
firm, partners loans have priority in repayment over partner's capitals.
Salary, commission payable to partners :
Normally no salary or commission is payable to a partner for the work done by
him, because it is his duty to work for the firm sincerely and honestly However, if he
is given any extra work, may be remunerated for the same by way of salary, commission,
fees, etc. For this purpose, there must be an agreement between all the partners as to
who is to be entitled to salary, commission, etc. and by what amount. In the absence
of this agreement, no salary or commission is payable to any partner
Salary or commission payable to a partner is regarded as an appropriation of
profit and not an expense or a charge against profits. So this is debited to the profit
and loss appropriation account and not to the profit and loss account. However, salary
303
or commission payable to the manager or any other employee of the firm is regarded
as an expense and hence, debited to the profit and loss account.
Calculation of Commission based on profit :
Sometimes, commission may be allowed to partners or manager of the firm, as
a percentage of the profits earned by the firm. The objective behind this way of
remunerating them is to make them more involved in the activities of the firm and to
put their best for earning more profits so that their income can be enhanced.
Commission may be calculated as a certain percentage of net profits before charging
such commission or after charging such commission.
Commission on Net profit before charging commission
Rate of commission
Commission = Net profit before commission ×
100
Commission on Net Profit after Charging Commission
Rate of Commission
Commission = Net profit before commission ×
100  Rate of Commission
(i) For Salaries, Commission, etc. due to a partner :
Partner's Salaries / Commission A/c Dr.
To Partner's Capital / Current A/c.
(ii) For Transfer of Salaries / Commission to Profit and Loss Appropriation A/c
Profit and Loss Appropriation A/c Dr.
To Partner's Salaries / Commission A/c.
Illustration 7
Anita and Binita share the profits of a firm in the ratio of 3:2. Anita, being an
active partner, is entitled to a salary of A2,000 p.m. Binita is entitled to a commission
304
of 10% on net profit before charging her commission. Profit for the year ending 31st
March, 2016, before charging salary and commission is A55,000.
Show, how you will divide the profit between Anita and Binita.
Profit and Loss Appropriation Account
Dr. Cr.
To Salary to Anita 24,000 By Profit b/d 55,000
from profit and loss A/c
To Commission to Binita 3,100
to capital A/c
Anita - A16,740
Binita - A11,160 27,900
55,000 55,000
5.5 PROFIT AND LOSS APPROPRIATION ACCOUNT

Meaning :
Profit and loss Account is prepared to ascertain the net profit/loss. The profit
earned by the firm is to be distributed among the partners in their profit sharing ratio.
Before distribution of profits, certain adjustments like interest on drawings, salary
or commission due to partners, etc. are to be accounted for. This is done by means of
a 'Profit and Loss Appropriation A/c, This is merely an extension of the Profit and
Loss Account. This account shows, how the profits earned by the firm have been
utilised and distributed among the partners.
Accounting treatment :
(i) This account is credited with the net profits as calculated in Profit and Loss
Account and interest on drawings.
(ii) It is debited with interest on capital, salary, commission payable to the partners.
305
(iii) It is debited with the amount transferred to General Reserve/Reserve fund,

Specific Reserve, etc.
Format of Profit and Loss Appropriation Account
(i) Profit and Loss Appropriation Account
Dr. Cr.
To Interest on Capital By Profit and Loss A/c
X - ............. (Net Profit b/d)
Y - ............. By Interest on Drawings
To Salary to Partners
X- ............. X- .............
Y- ............. Y- .............
To Commission
to Partners
X- .............
Y- .............
To General/Specific
Reserve
To Profit transferred
to capital A/cs
X- .............
Y- .............
Illustration 8
What entries are passed to record the following transactions in the books of the
firm of A and B before distributing the profits earned ?
(i) Commission of A5,000 payable to B.
(ii) Interest on Capital A - A8,000; B - A5,000.
(iii) Salary payable to A - A20,000 p.a.
(iv) Transfer to the General Reserve - A25,000.
306
Solution :
Date Particulars L.F Dr. (A) Cr. (A)
(i) Profit and Loss Appropriation A/c Dr. 5,000
5,000
To B's Capital A/c
(Being the amount of commission payable to B)
(ii) Profit and Loss Appropriation A/c Dr. 13,000
To A's Capital A/c 8,000
To B's Capital A/c 5,000
(Being interest on capital payable to A and B)
(iii) Profit and Loss Appropriation A/c Dr. 20,000
To A's Capital A/c 20,000
(Being salary payable to A)
(iv) Profit and Loss Appropriation A/c Dr. 25,000
25,000
To General Reserve A/c
(Being the amount transferred to general reserve.
Note : Capital Accounts are assumed to be fluctuating.
Miscellaneous Illustrations on Division of Profits :
Illustration 9
X and Y started a partnership on 1st January 2016 by contributing capital of
A70,000 and A60,000 respectively.The agreement between the partners was as follows:
(i) X and Y to get a monthly salary of A1,500 and A2,000 respectively and
share the profits in the ratio of 3:2.
(ii) Interest on Capital to be allowed at 10% p.a.
(iii) Interest on Drawings to be charged at 8% p.a.
(iv) X is entitled to a commission of A5,000.
(v) 15% of the profits to be transferred to General Reserve.
The profit for the year ending 31st December 2015 before above mentioned
adjustments was A1,44,000. X and Y have drawn A35,000 and A30,000 respectively
during the year.
You are required to pass journal entries relating to the above appropriations.
Prepare Profit and Loss Appropriation Account and Partner's Capital Accounts.
307
Solution :
Journal of X and Y
Date Particulars L.F Dr. Cr.
Amt (A) Amt. (A)
2015 Salary A/c Dr. 42,000
To X's Capital A/c 18,000
Dec 31
To Y's Capital A/c 24,000
(Being the salary due to X & Y)
Profit and Loss Appropriation A/c Dr. 42,000
’’ 42,000
To Salary A/c
(Being transfer of salary of X & Y to P & L App. A/c)
Interest on Capital A/c Dr. 13,000
’’ To X's Capital A/c 7,000
(Being interest on capital allowed to X & Y)
’’ 13,000
To Interest on Capital A/c
(Being transfer of interest on capital to P & LApp. A/c.)
X's Capital A/c 1,400
’’ Y's Capital A/c 1,200
To Interest on Drawings A/c 2,600
(Being interest on drawings charged)
Interest on Drawings A/c 2,600
’’ To Profit and Loss Appropriation A/c 2,600
(Being transfer of interest on drawings to P & L App. A/c.)
Commission to X’s A/c 5,000
5,000
’’ To X's Capital A/c
(Being commission due to X)
’’ To Commission to X’s A/c 5,000
(Being transfer of commission to X’s A/c to P&L Appr. A/c)
’’ To General Reserve A/c 21,600
(Being 15% of the profits transferred to General Reserve)
’’ 26,000
To Y's Capital A/c
(Being transfer of Net Profits to X and Y)
308
Profit and Loss Appropriation A/c for the year

Dr. ended 31st December 2016 Cr.
To Salary By Net Profit transferred
X - 18,000 from P & L A/c 1,44,000
Y - 24,000 42,000 By Interest on Drawings
To Interest on Capital X - 1,400
X - 7,000 Y - 1,200 2,600
Y - 6,000 13,000
To Commission to X 5,000
To General Reserve 21,600
To Net Profit transferred to
Capital A/cs.
X - 39,000 (3/5)
Y - 26,000 (2/5) 65,000
1,46,000 1,46,000
Partner's Capital Accounts

Dr. Cr.
Particulars X Y Particulars X Y
(A) (A) (A) (A)
To Drawings 35,000 30,000 By Cash A/c 70,000 60,000
To Interest on Drawings 1,400 1,200 By Salary 18,000 24,000
By Interest on
Capital 7,000 6,000
By Commission 5,000
By Profit & Loss
App. A/c 39,000 26,000
To balance c/d 1,02,600 84,800
1,39,000 1,16,000 1,39,000 1,16,000

309
Illustration 10
X and Y are partners in a firm. X is to get a commission of 10% of net profit
before charging any commission. Y is to get a commission of 10% of net profit after
charging all commissions. Net profit for the year ended 31st March, 2016 before
charging any commission was A5,50,000.
Find the commission of X and Y, Also, show the distribution of profits.
Solution :
PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ended 31st March, 2016
Dr. Cr.
To X's Commission A/c 55,000 By Profit (before any
5,50,000
F
G
5,50,000 
10 I
J
commission)
H 100 K
To Y's Commission A/c (Note)
L
a
M f 10 O
100 P
5,50,000  55,000  45,000
N Q
To Net profit transferred to capital
A/cs.
1
X  2  2,25,000
 
1
Y  2  2,25,000 4,50,000
 
5,50,000 5,50,000
310
Note - The above stated amount of Y's commission can be verified. After charging all
commissions, net profit comes to 4,50,000 [i.e. 5,50,000-(55,000+45,000)]. Now,
Calculate 10% of 4,50,000. It works out to 45,000 which means the amount of
commission calculated by the given formula i.e., Net profit before commission ×
F
G Rate of commission I
H100  Rate of commission JKis correct.
Illustration 11
X and Y are partners sharing profits and losses in the ratio of 3:1. On 1st April,
2015, their capitals were : X-A50,000 and Y-A30,000. During the year ended 31st
March, 2016, they earned net profit of A74,000. The terms of partnership are :
(i) Interest on capital is to be allowed @6% p.a.
(ii) X will get commission @3% on turnover.
(iii) Y will get a salary of A500 per month.
(iv) Y will get commission of 5% on profits after deductions of interest, salary
and commission (including his own commission)
(v) X is entitled to a rent of A2,000 per month for the use of his premises by the
firm. It is paid to him by cheque at the end of every month.
Partner's drawings for the year were : X-A8,000 and Y-A6,000. Turnover for the
year was A3,00,000. After considering the above factors, you are required to prepare
Profit and Loss Appropriation Account and Capital Accounts of the Partners.
311
Solution :
In the Books of X and Y
Dr. Cr.
To Interest on Capital A/cs- By Profit and Loss A/c 50,000
F
G 6 I
H 100JK 3,000
X 50,000  - Net profit (A74,000-Rent
A24,000)
FA30,000  6 IJ 1,800

YG
H 100 K
4,800
To salary A/c (Y) A500×12 6,000

To Commission A/cs :
2
X- A3,00,000× = 6,000
100
Y- (WN-1) 1,581 7,581
To Partner's capital A/cs (Profit)
F
G3I
X- H4 JK 23,714
F1IJ
Y- G
H4 K 7,905 31,619
50,000 50,000
312

Dr. Cr.
Particulars X Y Particulars X Y
Date (A) Date
(A) (A) (A)
2016 To Drawings A/c 8,000 6,000 2015
By Balance b/d 50,000 30,000
March April
By Interest on
31 2016 Capital A/c 3,000 1,800
By Salary A/c .... 6,000
’’ To Balance c/d 74,714 41,286 March By Commission A/c 6,000 1,581
31 By Profit and loss
Appropriation A/c
(Profit) 23,714 7,905
82,714 47,286
82,714 47,286
Working Notes :
1. Y's Commission :
Net profit after charging interest, salary and X's commission but before charging
Y's commission.
= A(50,000-4,000-6,000-,6000)=A33,200
Profit after commission Commission Profit before commission
100 5 105
x 33,200
5
x= ×A33,200 = A1,581.
105
2. Rent payable to partner for the use of his premises is a charge against profit
not an oppropriation of profit Hence, it is deducted from Net profit, while preparing
profit & loss appropriation A/c.
Illustration 12
A, B and C are partner in a firm. According to the partnership Deed, the partners
are entitled to draw a maximum amount of A7,000; per month. On the 1st day of
every month A, B and C draw A7,000; A6,000 and A5,000 respectively. Interest on
capitals and interest on Drawings are fixed at 8% and 10% respectively. Profit for the
313
year ended 31st March, 2016 was A7,55,000 out of which A2,00,000 are to be
transferred to General Reserve. B and C are entitled to receive salary of A30,000 and
A45,000 p.a. respectively and A is entitled to receive commission @10% on net
distributable profits after charging such commission. On 1st April, 2015, the balances
of their Capital Accounts were A5,00,000, A4,00,000 and A3,50,000 respectively.
You are required to show profit and loss Appropriation Account for the year ended
31st March, 2016 and capital Accounts of Partners in the books of the firm.
Dr. Cr.
To Interest on capital : By Profit as per Profit and
A's Capital A/c loss A/c 7,55,000
8 By Interest on Drawing
(A5,00,000× ) 40,000
100 (WN-1):
B's Capital A/c A's Capital A/c
8 10
(A4,00,000× ) 32,000 (A84,000× ) 8,400
100 100
C’s Capital B's Capital A/c
8 10
(A3,50,000× ) 28,000 1,00,000 (A72,000× ) 7,200
100 100
To Partners' Salaries :
C's Capital A/c
B's Capital 30,000
C's Capital 45,000 75,000 10
(A60,000× ) 6,000
To General Reserve 2,00,000 100
To Commission A/c (A's Capital A/c) 36,510
(Working Note-3)
To profits transferred to :
A's Capital A/c 1,21,697
B's Capital A/c 1,21,697
C's Capital A/c 1,21,696 3,65,090
7,76,600 7,76,600
314

Dr. Cr.
A B C A B C
Particulars Particulars
(A) (A) (A) (A) (A) (A)
To Drawings A/c 84,000 72,000 60,000 By Balance b/d 5,00,000 4,00,000 3,50,000
To Interest on By Interest on Capital A/c 40,000 32,000 28,000
Drawings A/c 8,400 7,200 6,000 By Partners' salaries A/c ...... 30,000 45,000
To Balance c/d 6,05,807 5,04,497 4,78,696 By Commission A/c 36,510 ...... .......
By Profit and Loss
Appropriation A/c 1,21,697 1,21,697 1,21,696
6,98,207 5,83,697 5,44,696 6,98,207 5,83,697 5,44,696
Working Notes :
1. Interest on capital and interest on drawings are @8% and 10% (and not 8% p.a.
and @10% p.a.) respectively. Therefore, the time factor is ignored.
2. Unless otherwise stated in the deed, all partners are equal partners. Thus, profits
of the year is divided among partners equally.
3. Commission payable to A is calculated as :
10
×(A7,55,000+A21,600-A1,10,000-A75,000-A2,00,000=A36,510
100
Illustration 13
X, Y and Z were partners, sharing profits and losses in the ratio of 5:3:2, after
providing for interest at 5% per annum on their capitals, which were : X-A50,000;
YA30,000 and ZA20,000 and allowing Y and Z salary of A5,000 each per annum.
During the year 2016 X has drawn A10,000; YA7,500 and ZA1,000 in addition to
their salaries. The profit during the year before charging interest on capital and partner's
salaries, amounted to A45,000. On 1st January 2016, the balances in the Current
315
Accounts of the partners were - X A4,500 (Cr), Y A1,000 (Dr) and ZA2,500 (Cr).
Show the Profit and Loss Appropriation A/c, Partners' Capital and Current Accounts
as on 31st December 2016.
Solution :
Profit and Loss Appropriation A/c
Dr. Cr.
To Current A/c By Net Profit
(Interest on capital) transferred from P&LA/c 45,000
X - 2,500
Y - 1,500
Z - 1,000 5,000
To Current A/c (Salary)
X - 5,000
Y - 5,000 10,000
To Current A/c (Profit)
X - 15,000
Y - 9,000
Z - 6,000 30,000
45,000 45,000

Dr. Cr.
A B C A B C
(A) (A) (A) (A) (A) (A)
By Balance b/d 50,000 30,000 20,000
To Balance c/d 50,000 30,000 20,000
50,000 30,000 20,000 50,000 30,000 20,000

By balance b/d 50,000 30,000 20,000
316
Illustration 14
Ajaya, Bijoy and Chita are in partnership with respective fixed capitals of
A40,000, A30,000 and A20,000. Bijoy and Chita are entitled to annual salaries of
A2,000 and A1,500 respectively payable before division of profits. Interest on capital
is allowed at 5% p.a., but no interest is charged on drawings. Of the profits earned
during a year, the first A12,000 is divided between Ajaya, Bijoy and Chita as to 50%,
30% and 20% and profit in excess of this, is shared equally. The profit for the year
ended 31st Decemeber, 2016 was A20,100 after debiting partner's salaries but before
charging interest on Capital. The drawings during the year were, Ajaya A8,000, Bijoy
A7,500 and Chita A4,000. The balances on partners' Current Accounts on 1st January,
2016 were- Ajaya A3,000 (Cr.), Bijoy A500 (Cr.) and Chita A1,000 (Dr.).
Prepare Profit and Loss Appropriation Account and the partner's Current
Accounts for the year 2016.
Solution :
Profit and Loss Appropriation A/c
for the year ending 31st December, 2016
Dr. Cr.
To Current A/c By Net Profit
(Interest on capital) before salaries
Ajaya - 2,000 23,600
A(20,100+2,000+1,500)
Bijoy - 1,500
Chita - 1,000 4,500
To Current A/c (Salary)
Ajaya - 2,000
Bijoy - 1,500 3,500
To Current A/c (Profit)
Ajaya - 7,200
Bijoy - 4,800
Chita - 3,600 15,600
23,600 23,600
317
Current Accounts
Dr. Cr.
Ajaya Bijay Chita Ajaya Bijay Chita
(A) (A) (A) (A) (A) (A)
To Balance b/d ..... ..... 1,000 By Balance b/d 3,000 500 ---
To Cash By P/L App. A/c
(Drawings) 8,000 7,500 4,000 Interest on capital 2,000 1,500 1,000
To Balance c/d 4,200 1,300 1,100 Salary --- 2,000 1,500
Profit 7,200 4,800 3,600
12,200 8,800 6,100 12,200 8,800 6,100

By Balance b/d 4,200 1,300 1,100
Working Note : Calculation of Share of Profit

Profits after interest on capital = A20,100-4,500 = A15,600, First A12,000

distributed as to 50%, 30% and 20% among Ajaya, Bijoy and Chita respectively.
 Ajaya's share = A6,000, Bijoy = A3,600 and Chita = A2,400
Remaining profit = A15,600 - A12,000 = A3,600, which is to be shared equally
(i.e., each parter gets A1,200)
Now total share of Ajaya= A6,000 + A1,200 = A7,200, that of Bijay
A3,600+A1,200=A4,800 and of Chita is = A2,400+A1200=A3,600.
-o-
318
5.6 QUESTIONS
1. From the given alternatives, under each bit choose and write the correct answer
along with its serial number against each bit:
(i) Indian Partnership Act was enacted in the year :
(a) 1956.
(b) 1961.
(c) 1932.
(d) 1912.
(ii) Current Account of a partner :
(a) will always have a credit balance.
(b) can never have a debit balance.
(c) will always have a debit balance.
(d) may have a debit balance or credit balance.
(iii) In the absence of an agreement profits and losses are divided by the partners in
the ratio of :
(a) Capital.
(b) Drawing.
(c) Time devoted by each partner.
(d) Equality.
(iv) In the absence of an agreement to contrary, the partners :
(a) are entitled to 6% interest on loans to the firm, only when there are profits.
(b) are entitled to 6% interest on loans to the firm, whether there are profits or
not.
(c) are not entitled to any interest on loans to the firm.
(d) are entitled to 9% interest on loans to the firm, when there are profits.
319
(v) Interest payable on the capitals of the partners is charged to

(a) Profit and Loss Account.
(b) Profit and Loss Adjustment Account.
(c) Realisation Account.
(d) Profit and Loss Appropriation Account.
(vi) Interest on partners drawings under Fluctuating Capital Accounts is debited to :
(a) Partner's Capital Account.
(b) Profit and Loss Account.
(c) Drawings Account.
(vii) Partners Current Accounts are opened :
(a) When capital is fixed.
(b) When capital is fluctuating.
(c) always.
(d) as and when desired by partners.
(viii) Minimum number of persons required to start a partnership is
(a) Three.
(b) Two.
(c) Seven.
(d) Eleven.
(ix) Interest on partner's capital is calculated on the :
(a) capital at the beginning of the period.
(b) capital af the end of the period.
(c) capital at the end less drawings.
(d) average capital employed.
(x) Profit and Loss Appropriation Account is prepared after the preparation of :
(a) Trading Account
320
(b) Manufacturing Account

(c) Profit and Loss Account
(d) Balance Sheet
[Ans.: (i) c, (ii) d , (iii) d, (iv) b, (v) d, (vi) a, (vii) a, (viii) b, (ix) d, (x) c.]
(i) What is the maximum number of partners for a banking business ?
(ii) In which year the Indian Partnership Act was enacted ?
(iii) Which account is opened to record the transactions of a partner with the firm
when capital is fixed ?
(iv) What is the minimum number of persons required to start a partnership business ?
(v) Under which capital method, the Current Accounts of partners are maintained ?
(vi) If the partnership Deed doesnot specify the rate of interest payable on loan by a
partner, at what rate will the interest be paid ?
(vii) If the partnership Deed doesnot specify the profit sharing ratio, in what ratio is
the profit or loss shared by the partners ?
(viii) If the partner's Capital Accounts are fixed, where will you record the fresh capital
introduced by a partner ?
Ans: (i) 10, (ii) 1932, (iii) Current Account, (iv) two, (v) Fixed Capital, (vi) 6%,
(vii) Equally, (viii) Capital Account
3. Correct the underlined portions of the following sentences.
(i) In case of fixed capital method, the additional capital introduced by a partner is
recorded in his current account.
(ii) The written agreement among the partners is known as partnership will.
(iii) In the absence of agreement, profit is divided among the partners in their capital
ratio.
(iv) Registration of partnership is compulsory.
(v) At the time of admission of a partner, the firm is dissolved.
321
(vi) In the absence of partnership deed, the partners are allowed to get 5% interest
on loan given to the firm.
(vii) The liability of partners is limited in case of partnership business.
(viii) Interest on capital is a charge against profit.
[Ans. (i) Capital, (ii) partnership deed, (iii) Equal, (iv) voluntary,
(v) partnership, (vi) 6%, (vii) Unlimited, (viii) appropriation.]
(i) Define Partnership.
(ii) Where will the drawings made by a partner be recorded if the partners'
Capital Accounts are fixed ?
(iii) What is the purpose of preparing Profit and Loss Appropriation account ?
(iv) What share of profits would a "sleeping partner", who has contributed 75%
of the total capital, get in the absence of a deed ?
(v) How is interest on drawings calculated, if the drawings are made on the
15th day of each month ?
(vi) Why is a Partners Current Account prepared ?
(vii) What is partnership deed ?
(i) In the absence of any mention in the partnership Deed, the partners share
profits in ______ ratio.
(ii) The document containing the terms of an agreement of a partnership is
known as partnership ______ .
(iii) Under the ______ capital method, capital at the beginning and capital at
the end will be different.
(iv) In absence of agreement, ______ is not paid on capitals.
(v) Partnership Deed is a ______ agreement among partners.
(vi) When date of drawings is not given, interest for ______ months is
calculated on total drawings during a period.
322
(vii) When drawings by partner is made in the form of goods, ______ account
is credited by the firm.
(viii) Salary to a partner is a/an ______ of profit.
[Ans.- (i) equal, (ii) Deed, (iii) fluctuating, (iv) interest, (v) written, (vi) six,
(vii) purchase, (viii) appropriation]
(i) What is fixed capital ?
(ii) How do you calculate interest on drawings, if no date of drawing is given ?
Explain with illustration.
(iii) What is the maximum number of partners under different situations ?
(iv) Is it essential that each partner should contribute capital ? Explain.
(v) Is it always necessary to have a written agreement ?
(vi) At what rate of interest on capital and interest on drawings is calculated in
the absence of any specific agrement.
(vii) What is oral agreement ?
(viii) Can minor be admitted as a partner ?
(ix) What do you mean by a partnership firm ?
(i) What is the objective of preparing Profit and Loss Appropriation Account ?
(ii) Give four important contents of a "Partnership Deed".
(iii) Discus the provisions of Indian Partnership Act applicable for a firm in the
absence of Partnership Deed.
(iv) Mention the items that may appear on the credit side of the Capital Account
of a partner when the capitals are fluctuating.
(v) List any four items appearing on the Profit and Loss Appropriation Account.
(vi) How will you compute the commission payable to a partner based on net
profit ?
323
8. What is Partnership Deed ? Discuss its important clauses.

9. Discuss and distinguish between fixed and fluctuating capital.
10. X and Y, two partners, drew for private use A1,20,000 and A80,000 respectively.
Interest is chargeable @6% p.a. on drawings. What is the total interest changeable
to X and Y ?
[Ans. X-A3,600 and Y-A2,400.]
11. B and C are partners in a firm. They withdraw A48,000 and A36,000 respectively
during the year evenly at the middle of every month. According to the partnership
agreement, interest on drawings is to be charged @10% p.a.
Calculate interest on drawings of the partners using the appropriate formula.
[Ans. B-A4,400 and C-A1,800.]
12. A and B are partners sharing profits and losses equally. A drew regularly A4,000
in the beginning of every month for six months ended 30th September, 2016.
Calculate interest on drawings @5% p.a.
[Ans. Interest on drawings A350]
13. Amit and Binit are partners sharing profits and losses equally. Amit drew regularly
A4,000 at the end of every month for six months ended 30th September, 2016.
Calculate interest on drawings @5% p.a.
[Ans. Int. on drawings A250]
14. For the year ending 31st March 2016, A has withdrawn an amount of A13,000
on 1st December 2015. As per the deed, interest on drawings is charged at 6%
p.a. upto maximum drawings of A10,000. Beyond this limit, interest on drawings
is charged at 10% p.a. Calculate the interest on drawings payable by A.
[Ans. Int. on drawings A300]
15. A and B are partners sharing profit, and loss in the ratio of 3:2 having Capital
Account balances of A50,000 and A40,000 respectively on 1st April 2015. On
1st July 2015, A introduced A10,000 as his additional capital whereas B
introduced only A1,000. If the interest on capital is allowed to partners @10%
324
p.a., calculate interest on capital assuming that the financial year closes on 31st
March.
[Ans. Total int. payable A-A5,750 and B-A4,075]
16. Ram and Rahim are partners in a business. Their capitals at the end of the year
were A24,000 and A18,000 respectively. During the year 2015-16, Ram's
drawings and Rahim's drawings were A4,000 and A6,000 respectively. Profit
(before changing interest on capital) during the year was A16,000. Calculate
interest on capital @5% p.a. for the year ended 31st March, 2016.
17. The capital of A and B at the end of the year was A1,00,000 and A1,50,000
respectively. Their drawings were A20,000 and A40,000 during the year. They
had shared profits of A60,000 in the ratio of 3:2 for the year. Interest on capital
@10% has been omitted. Find out the interest on capital to be allowed to them.
18. From the following Balance Sheet of X and Y, Calculate interest on Capital
@6% p.a. payable to Y for the year ended 31st March, 2016 :
Liabilities A Assets A
X's Capital A/c 50,000 Sundry Assets 1,10,000
Y's Capital A/c 40,000
Profit & Loss
Appropriation A/c 2015-16 20,000
1,10,000 1,10,000
During the year Y's drawings were A15,000 and profit during 2015-16 was
A30,000. [Ans. Interest on Y's capital A3,000]
19. M and N are partners sharing profit and loss in the ratio of 2:3 having capital
account balances of A50,000 and A60,000 on 1st April, 2015. On 1st July, 2015,
A introduced A10,000 as his additional capital whereas B introduced only
325
A5,000. If the interest on capital is allowed to partners @10% p.a., calculate

interest on capital assuming that the financial year closes on 31st March.
20. A and B are partners in a firm having profit sharing ratio of 3:2 respectevely.
They had advanced to the firm a sum of A30,000 as a loan in their profit sharing
ratio on 1st october, 2015. The partnership deed is silent on the question of
interest on loans from partners. Compute interest on loan payable by the firm to
the partners, if the firm closes its books of accounts on 31st March. [Ans: A-
A540, B-A360]
21. X and Y are partners sharing profit and losses in the ratio of 2:3 with capital of
A2,00,000 and A3,00,000 respectively. On 1st october, 2015. X and Y advanced
loans of A80,000 and A40,000 respectively to the firm. Show the distribution
of profits/losses for the year ended 31st March, 2016 in each of the following
alternative cases :
Case 1. If the profits before any interest for the year amounted to A21,000.
[Ans : Int. to X's lean A2,400, Int. to Y's lean A1,200
Case -1. Profit X A6,960; YA10, 440
Case-2. Loss X A240; YA360
Case-3. Profit XA560; YA540]
22. Y has advanced a loan of A80,000 to the firm on 01.07.2015, without any
agreement as to the rate of interest with his co-partner X. Calculate the amount
of interest on loan allowable to him for the year ending 31st March,2016.
[Ans : A3,600]
23. A and B are partners in a firm. A has advanced a loan to the firm at the rate of
12% p.a. amounting to A60,000 on 1st August 2015. Calculate the amount of
326
interest payable to him for the year ending 31st March, 2016.
[Ans : Int on loan to A A4,800]
24. Arjun and Bhima are partners in a firm sharing profits and losses in the ratio of
3:2. A gets a salary of A2,000p.m. and B is entitled to a commission of 5% on
net profits before charging his commission. Distribute a profit of A70,000 earned
during a year before allowing salary and commission.
[Ans : A's share of profit A24,840, B's share A16,560]
[Total share of A = A48,840, Total share of B = A21,160]
25. X. Y and Z are partners sharing profits and losses equally. As per Partnership
Deed, Z is entitled to a commission of 10% on the net profits after charging
such commission. The net profit before charging commission is A2,20,000.
Findout the commission payable to Z.
[Ans : commission payable to Z = A11,000]
26. A and B are partners in a firm. A is entitled to a salaryof A10,000 per month
together with a commission of 10% of the net profit after partner's salaries but
before charging any commission. B is entitled to a salary of A25,000 p.a. together
with a commission of 10% of the net profit after charging all commission and
partners' salaries. The net profit before providing for partners' salaries and
commission for the year ended 31st March, 2016 was A4,20,000.
Show distribution of profit.
[Ans: A's commission A27,500 B's commission A22,500 Net profit - A2,25,000
A and B share A1,12,500 each]
27. X and Y are partners in a firm sharing the profits and losses equally. They
contributed capital of A10,000 and A12,000 respectively on which they are
entitled to interest at 5% p.a. A gets A500 p.m. as salary. If the total profits for
the year before the above adjustments are A26,100, distribute the profit by
327
preparing a Profit and Loss Appropriation Account.

[Ans. X's profit A9,500, Y's A9,500]
28. A, B and C entered into a partnership providing capital of A50,000, A50,000
and A20,000 respectively and agreed to share the profits and losses in the ratio
of 4:3:3 after allowing interest on capital @9% p.a. and charging interest on
drawings @10% p.a. During the year 2015, drawings of A,B and C were A10,000;
A6,000 and A8,000 respectively. C, being a working partner is entitled to a
salary of A6,000 p.a. The firm earned a profit of A30,000 before charging or
allowing interest and salary payable to partners. Prepare Profit and Loss
Appropriation Account and Capital Accounts of the partners for the year.
[Ans. Share of profits A = A5,760; B= A4,320; C=A4,320
Capital Accounts A = A49,760; B= A52,520; C= A3,350]
29. A and B started business with capitals of A1,00,000 and A60,000 respectively
on 1st January 2016. B is allowed a salary of A800p.m. Interest on capital and
drawings are at 6% p.a. Profits are distributed equally after making the above
noted adjustments. Drawings of A and B during the year amounted to A16,000
and A20,000 respectively. Profits as per profit and loss account for the year
amounted to A60,000.
Assuming the capitals to be fixed, prepare Profit and Loss Appropriation Account
and accounts relating to partners.
[Ans : Profit A = A20,940, B=A20,940. Current Account Balance, A = A10,460,
B= A13,540]
30. X, Y and Z are partners in a firm with capital contribution of A50,000, A60,000
and A80,000 respectively. They agreed to share the profits in the ratio of 2:3:5.
Partnership deed provides for allowing interest on capital @6% p.a. and charging
interest an drawings @8% p.a. A is allowed a salary of A1,200 p.m. B is entitled
328
to a commission of 10% on net profits after charging his commission. Drawing

during the year by X, Y and Z amounted to A5,000, A10,000 and A20,000
respectively. Profit during the year before the above adjustments amounted to
A1,12,840. Prepare Profit and Loss Appropriation Account and Capital Accounts
of partners.
[Ans.: Profit×=A16,080, Y=A24,120 and Z=A10,200]
31. A and B are partners sharing profits and losses in the ratio of 3:2. They have
contributed capitals of A60,000 and A40,000 respectively. Drawings during the
year were A10,000 and A5,000 respectively by A and B. The partnership deed
provides for the following adjustments :
(i) Interest on capital is allowed at 5% p.a.
(ii) Interest on drawings is charged at 6% p.a.
(iii) A is allowed a salary of A1,500 p.m. for managing the business.
(iv) A has assured B of earning a minimum profit of A60,000 for the firm. Any
short fall is to be borne by him.
(v) A3,000 is to be credited to a Reserve Fund. Profits before the above
adjustment were A55,000. Distribute the profit and prepare capital accounts.
[Ans.: Profit A=A20,000, B= A13,780
Capital A/cs A = A86,370, B = A50,630]
-o-
Accounting for Partnership Firm (Goodwill)
329
CHAPTER-6
ACCOUNTING FOR PARTNERSHIP FIRM

(GOODWILL)
STRUCTURE
6.1 Meaning, Nature and Factors affectig Goodwill
6.2 Methods of valuation of Goodwill :
6.2.1 Average profit method
6.2.2 Super profit method
6.2.3 Capitalisation of super profit method
6.3 Questions
330
6.1 MEANING, NATURE AND FACTORS AFFECTING GOODWILL
Meaning : Goodwill is an intangible asset. It is the reputation of a firm which is
acquired in course of time. It is neither visible nor can be dealt with like any other
tangible asset. It is the value of reputation of a firm in respect of profits expected in
future over and above the normal profits earned by similar firms belonging to the
same industry. This excess profit over the normal profit earned by a firm is called
super profit. Thus, goodwill exists only when the firm earns super profits. In this
connection, it would be pertinent to go through the views expressed by certain
authorities on goodwill. Lord Eldon says "Goodwill is nothing more than the probability
that the old customers will resort to the old place" Similarly, Dicksee remarks :
"When a man pays for goodwill, he pays for something which places him in the
position of being able to earn more than he would be able to do by his own unaided
efforts."
However, if time value of money is considered, Goodwill may be defined as the
present value of firm's anticipated excess earnings.
Nature of Goodwill
1. Goodwill is an intangible asset which cannot be seen, nor touched but it has a
value.
2. No value is attached to goodwill of a firm which is incurring losses.
3. A price for the goodwill may be realised if the business is sold as a going concern.
4. It helps to earn higher profit. It is the capitalised value of super profits.
5. It is an attractive force which brings in customers to old place of business.
6. It is an extra value attached to a prosperous business beyond the intrinsic worth
of the net assets.
7. It is usually calculated at the time of admission, retirement or death of a partner.
8. No such concrete method is laid down for its valuation.
Factors affecting Goodwill
The goodwill of a firm arises due to the following factors :
1. Nature of Business : A firm which deals with quality products having a stable
demand in the market is in an advantageous position to earn more profit and
therefore, is in a position to earn more and more goodwill.
2. Suitable Location : If the business is situated in a busy shopping complex or is
centrally located, it acquires more goodwill.
3. Greater managerial Talent : If a firm is well managed because of expert
331
knowledge of the managers in their respective fields, economy arises in every

field which leads to cost efficiency and ultimately results in the acquisition of
more goodwill.
4. Degree of competition : If a firm enjoys monopoly over the products dealt in by
it or the products are in short supply in the market, it stands to earn more profits
which leads to higher value of goodwill.
5. Commitment towards customers : If a firm fulfills all its commitments towards
customers like prompt supply of goods, provision of timely after-sales service,
it attracts more goodwill.
6. Degree of Risk : If the risk involved in the business is less, it creates more
goodwill and vice-versa.
7. Advantages of Patents : Normally, patents are necessary for the manufacture or
production of certain types of articles. A firm which possesses the necessary
patents will have an edge over its competitors having no such patents and hence,
in a position to earn more goodwill.
8. Profit Trend : If the business is showing an upward trend in profits for years
together, it has the scope for earning more goodwill.
9. Market situation : If a firm is in a business wherein, demand for the products
dealt in is higher than the supply, it will lead to more turnover as well as more
profit, which will increase the value of goodwill.
10. Nature of Business : If the business of a firm is of the nature where the products
dealt in are in high demand, the profit will be higher. It will, thus, increase the
value of goodwill.
11. Other factors : General economic conditions, political stability, Government
policies, money market conditions, trade cycles, etc. are the other factors
influencing the value of goodwill.
6.2 METHODS OF VALUATION OF GOODWILL
In actual practice, it is very difficult to value goodwill of a firm on any particular
date. We know that the value of goodwill depends upon the earning capacity of a
firm, yet no simple procedure or rule can be laid down for its valuation. However,
taking the profit as the basis, goodwill may be valued by any of the three following
methods :
(i) Average profit method;
(ii) Super profit method;
332
(iii) Capitalisation method.

(i) Average Profit method :
Under this method, usually goodwill is valued at a few years' purchase of adjusted
average of past profits.
Goodwill under this method is calculated as follows :
(a) Calculate normal past business profits for each year by deducting abnormal
gains and non-business incomes and adding abnormal losses and non-business
expenses.
(b) Add the profits calculated as per (a) above.
(c) Calculate Average Profits as follows :
Total Profits (as per (b) above)
Average Profit =
Number of years for which profit and loss are given
Note - Above average profit is known as Actual Average profit or average
maintainable profit in future.
In actual practice, this method is used very rarely by the business firms as it is
not a scientific method. The only advantage of this method is that it is a very simple
method which can be easily understood and applied by everybody.
(d) Calculate Goodwill applying the formula :
Goodwill = Average Profit (as per c) above × Number of years purchase
For example, goodwill of a firm is to be valued at three years purchase of four
years average profit. The firm earned in the previous four years profits of A17,000;
A11,500, A19,000 and A16,500. Goodwill will be valued as follows :
A17,000 + A11,500 + A19,000 + 16,500
Average Profit =  A16,000
4
Goodwill = A16,000 × 3 = A48,000.
Illustration 1
Calculate the value of goodwill of a firm on the basis of three years purchase of
the average profits of the last five years. The profits for the last five years are -
Year Profit (A)
2012 40,000
2013 47,000
2014 60,000
333
2015 68,000
2016 75,000
Solution :
Total profits of the given 5 years = A(40,000+47,000+60,000+68,000+75,000)
=A2,90,000
Total Profits A2,90,000
Average Profits =   A58,000
No. of years 5
Goodwill = Average Profits × No. of years purchase
= A58,000×3 = A1,74,000
(ii) Super Profit Method :
Captial employed in a business yields a profit. Some of the enterprises earn
more profit, while others in the same line of business earn less profit on the capital
employed. When a similar type of business earns profit as a certain percentage of the
capital employed, it is called normal return. But an investor's advantage lies in the
excess of normal return on capital employed. It is only such enterprises which enjoy
goodwill. The excess of actual profit over the normal profit is called super profit.
For calculating goodwill under this method, the steps are :
(a) Calculate Average Capital Employed as :
Opening Capital Employed + Closing Capital Employed
2
Capital Employed = Capital + Free Reserves - Fictitious Assets (if any)
OR
All Assets (other than goodwill, fictitious assets and non-trade investments) –
outsiders' liabilities.
(b) Calculate actual expected profit, i.e., actual average profit.
(c) Calculate normal profit on average capital employed by applying the following
formula :
Normal Rate of Return
Average Capital Employed ×
100
334
Note - Normal Rate of Return refers to the rate of return normally earned by
other firms in the same industry.
(d) Calculate super profit, i.e., Actual Average Profit - Normal Profit.
(e) Calculate value of goodwill as follows :
Goodwill = Super Profit × Number of years purchase
Illustration 2 (Super Profit Method)
A firm earned net profits during the last three years as follows :
Year Profit (A)
2014 18,500
2015 20,300
2016 22,100
The capital investment of the firm is A60,000. A fair return on the capital having
regard to the risk involved is 10%. Calculate the value of goodwill on the basis of
three years purchase of the average super profit for the last three years.
Solution :
A18,500 + A20,300 + A22,100
a) Average Profit = =A20,300
3
10
(b) Normal Profit = A60,000× = A6,000
100
(c) Super Profit = Average profit - Normal profit
= A20,300 – A6,000=A14,300
(d) Goodwill = Super profit × No. of years' purchase
= A14,300 × 3 = A42,900.
Illustration 3 (Super Profit Method)
Average net profit of ABC Ltd. expected in the future is A54,000 per year. The
average capital employed in the business is A3,00,000. Normal profit expected from
capital investment in this class of business is 10%. The remuneration of the partners
is estimated to be A9,000 p.a.
335
Find out the value of goodwill on the basis of two year's purchase of super
profit.
Solution :
A A
Average annual profit - 54,000
Less : Partners remuneration 9,000
Normal profit on capital employed 30,000 39,000
Annual super profit 15,000
Goodwill, being two year's purchase of super profit
= A15,000×2=A30,000
Difference between average Profit and Super Profit :
Basis Average Profit Super Profit
1. Meaning It is average of the profits It is excess of average profit
of past few years. over normal profit.
2. Normal Normal rate of return is not Normal rate of return is
Rate of return relevant in the calculation considered while calculating
of average profit. super profit.
3. Average Average Capital Employed is Average capital employed is
Capital not taken into account in the taken into account while
Employed calculation of average profit. calculating the super profit.
4. Relevance Average profit is relevant for Super profit is relevant for super
of valuing Average profit method, Super profit method and capitalisation
Goodwill. profit method and Capitalisation of super profit method of
method of valuing Goodwill. valuation of Goodwill.
(iii) Capitalisation Method :

Under this method, goodwill can be valued in two ways :
336
(a) Capitalisation of Average Profits; or

(b) Capitalisation of Super Profit.
(a) Capitalisation of Average Profit :
Under this method, goodwill is calculated by deducting capital employed (i.e.,
Net Assets as on the date of valuation) in the business from the capitalised value of
average profit on the basis of Normal Rate of Return. Capitalised value of the business
is ascertained by capitalising profits earned at the normal rate of profit. It is calculated
as follows:
Average Profit
 100
Net Assets = All Assets (other than goodwill, fictitious assets and non-trade
investments) at their current values minus outsiders' liabilities.
If a firm earns a profit of A24,000 annually and firms in the same time of
business normally earn 10%, the total capitalised value of the firm will be A2,40,000,
100
i.e., 24,000× .
10
For calculating goodwill under this method, the steps are :
 Calculate average normal profit earned.
 Calculate capitalised value of the firm by using the above formula.
 Determine the value of Net Assets, on the date of valuation of goodwill.
Net Assets = All Assets (other than goodwill, fictitious assets and non-trade
investments) at their current values minus outsiders' liabilities.
 Goodwill = Capitalised Value- Net Assets.
This method is suitable when the actual profits are less than the normal profit.
Illustration 4 (Capitalisation Method)
A firm earns A65,000 as its annual profit, the normal rate of profit being 10%.
Assets of the firm are A7,20,000 (excluding goodwill) and liabilities are A2,40,000.
Find the value of goodwill by Capitalisation Method.
337
Solution :
Average Profit
Total Capitalised Value of the Firm =  100
R65,000
=  100  R6,50,000
10
Net Assets of the Firm = Total Assets - Liabilities
= A7,20,000 - A2,40,000 = A4,80,000
Goodwill = Total Capitalised Value of Business - Net Assets
= A6,50,000 - A4,80,000 = A1,70,000.
(b) Capitalisation of Super Profit :
Under this method, goodwill is calculated by capitalisation of super profit. In
other words, goodwill is ascertained by capitalising the super profit on the basis of
Normal Rate of Return. For example, where average profit is A60,000 and normal
profit is A48,000, the super profit will be A12,000 (i.e., A60,000-A48,000). Assuming
that the Normal Rate of Return is 10%, the goodwill will be A1,20,000 (i.e.,
100
A12,000× ).
10
For calculating the goodwill under this method. the steps are :
(a) Calculate Capital Employed (i.e., Net Assets of the firm as on the date of
valuation.
(b) Calculate Normal Profit on Capital Employed by using the following formula:
Normal Profit = Capital Employed × Normal Rate of Return/100
(c) Calculate Average Profit of past years, i.e., three to five years.
(d) Calculate Super Profit, i.e., Actual Average Profit-Normal Profit.
100
(e) Goodwill = Super Profit × .
338
Illustration 5
Average profit of the firm is A1,50,000. Total Tangible assets in the firm are
A15,00,000 and outside liabilities A4,00,000. In the same type of business,
the normal rate of return is 10% of the capital employed.
Calculate the value of goodwill by capitalisation of Super Profit Method.
Solution :
Capital Employed = Total Tangible Assets - outside liabilities
= A15,00,000 - A4,00,000 = A11,00,000
Normal Profit = Capital Employed × Normal Rate of Return
10
= A11,00,000 × = A1,10,000
100
Super Profit = Average Profit - Normal Profit
= A1,50,000 – A1,10,000 = A40,000
Super Profit
 Goodwill =  100
A40,000
  100  A4,00,000 .
10
Illustrations 6
Average net profit expected in future by U.C. Lal & Co is A30,000 per
year. Average capital employed in the business by the firm is A2,00,000. Normal
rate of return on capital employed in a similar business is 10%. Calculate
goodwill of the firm by :
(i) Super Profit Method on the basis of two years' purchase, and
(ii) Capitalisation of Super Profit Method.
Solution :
(i) Super Profit Method :
Average Profit = A30,000
Normal Rate of Return - 10%
339
Capital Employed = A2,00,000

Normal profit = 10% of A2,00,000 = A20,000
Super profit = Average Profit - Normal Profit
= A30,000 - A20,000 = A10,000
Goodwill = Super Profit × Number of years purchase
= A10,000 × 2 = A20,000
(ii) Capitalisation of Super Profit Method :
100
Goodwill = Super Profit ×
100
= A10,000 × = A1,00,000
10
6.3 Questions
1. From the given alternatives under each bit, choose and write the correct answer
along with its serial number against each bit:
(i) The excess of actual profit over normal profit is called :
(a) Gross profit.
(b) Net profit.
(c) Super profit.
(d) Average profit.
(ii) Goodwill is a/an :
(a) tangible asset.
(b) fictitious asset.
(c) intangible asset.
(d) wasting asset.
(iii) Profit of last three years were A13,000, A10,000 and A7,000. Value of goodwill
at 3 years purchase will be :
(a) A27,000.
340
(b) A28,000.
(c) A29,000.
(d) A30,000.
(iv) Under capitalisation of super profit method, goodwill is calculated by :
(a) Average profit × years of purchase
(b) Super profit × years of purchase
(c) Super profit divided by expected rate of return.
(d) Total of the discounted value of expected future profit.
(v) When the incoming partner pays for goodwill in cash, the amount should be
debited to:
(a) goodwill account
(b) Capital account of the incoming partner.
(c) Cash.
(d) Capital account of the existing partners.
(vi) Super profit is equal to :
Total profit
(a) No. of years
Average profit
(b)
Normal rate of return
Weighted profits
(c) No. of weights
(d) Average profits - Normal profits.

[Ans.: (i) c, (ii) c, (iii) d, (iv) c, (v) c, (vi) d]
(i) What is the term used for expressing the reputation of a firm in monetary
term ?
341
(ii) Name the asset which is intangible but not fictitious.

(iii) Name the term used for writting off of Goodwill.
(iv) Name the method of calculating goodwill, when average maintainable profit
and normal profit of a firm are given.
[Ans.: (i) Goodwill, (ii) Goodwill, (iii) Amortisation (iv) Super profit method.]
3. Answer the following in one sentence each :
(i) Define Goodwill.
(ii) What is meant by number of years' purchase ?
(iii) What do you mean by super profit ?
(iv) Write two factors which affect the value of Goodwill.
(v) What is normal profit ?
(vi) What is meant by average maintainable profit ?
(i) Super profit is the shortage of average profit over normal profit.
(ii) Three years purchase of super profit means, super profit divided by 3.
(iii) In case of partnership business goodwill is valued, when partnership firm
is dissolved.
(iv) Capitalised value of average profit method for valuing goodwill is used
frequently.
(v) For writing off the decrease in the value of goodwill, the term depreciation
is used.
[Ans.: (i) excess, (ii) multiplied, (iii) sold/reconstituted, (iv) rarely, (v)
amortisation]
5. Fill in the blanks with appropriate words :
(i) Excess of actual adjusted profit over normal profit is called ______ profit.
(ii) Negative super profit indicates that there is no _______ of business concern.
342
(iii) When a business is taken over by another business, the excess of purchase
price over its net asset value is referred to as _______.
(iv) Goodwill is a/an _______ asset.
(v) The number of methods of valuation of goodwill is _______.
[Ans.: (i) Super, (ii) goodwill, (iii) goodwill, (iv) intangible, (v) three.]
(a) What do you mean by Goodwill ?
(b) State any four factors which influence the valuation of Goodwill of a
partnership firm.
(c) Distinguish between Average Profit and Super Profit Methods of valuation
of Goodwill.
(d) Briefly explain the Average Profit method of valuation of goodwill.
(e) Briefly explain the super profit method of valuation of goodwill.
(a) What are the circumstances under which valuation of goodwill is necessary
in case of partnership ?
(b) How do you calculate goodwill in Average Profit method ? Give one
example.
(c) Name the methods of valuation of goodwill.
(d) Explain the method of calculation of goodwill under capitalisation of super
profit with an example.
8. What is goodwill ? How is it valued ?
9. "Goodwill is intangible but not fictitious" Justify the statement giving examples.
10. Define goodwill. On what occasions does the need for valuation of goodwill
arise ?
11. What do you mean by goodwill ? Describe the factors affecting goodwill.
343
12. Goodwill is to be valued at three years purchase of four years average profit.
Profits of a partnership firm for last four years were :
2013- A1,20,000; 2014-A1,80,000; 2015-A1,60,000; 2016-A1,40,000
[Ans. Goodwill-A4,50,000]
13. The profits of a firm for the last five years were as follows :
Year 2012 2013 2014 2015 2016
Profit (A) 24,000 36,000 48,000 60,000 66,000
Calculate the value of goodwill on the basis of three years purchase of average
profits. [Ans.: A1,40,400]
14. X and Y were partners in a firm. In order to admit Z into their firm, the need for
valuation of goodwill arises. Goodwill for this purpose is to be calculated at
two years purchase of the average normal profit of past three years. Profits of
the last three years were:
2014- Profit A5,00,000 (including profits on sale of assets A50,000)
2015- Loss A2,00,000 (including loss by fire A3,00,000)
2016- Profit A7,00,000 (including insurance claim received A1,80,000 and
interest on investments A80,000) [Ans. A6,60,000]
15. A and B are partners in a firm sharing profits and losses in the ratio of 2:1. They
decide to take C into partnership for 1/4th share on 1st April, 2016. For this
purpose, goodwill is to be valued at four times the average annual profit of the
previous four or five years whichever is higher. The profits for the goodwill
purpose of the past five years are :
Year 2012 2013 2014 2015 2016
Profit (A) 24,000 25,500 20,000 26,000 25,000
Find the value of goodwill. [Ans.: A96,500]
16. Bini and Gini had a firm in which they had invested A5,00,000. On an average,
the profits were A1,60,000. The usual rate of earning in the industry is 15%.
344
Goodwill is to be valued at four years' purchase of profits in excess of profits

@15% on the money invested. Value the goodwill. [Ans. A3,40,000]
17. The average net profits expected in the future by ABC firm are A36,000 per
year. The average capital employed in the business by the firm is A2,00,000.
The rate of interest expected from capital invested in this class of business is
10%. The remuneration of partners is estimated to be A6,000 p.a. Find out the
value of goodwill on the basis of two years purchase of super profit.
[Ans. A20,000]
18. A and B are partners in a firm investing capitals of A6,00,000 and A4,00,000
respectively. The normal rate of return for the same business is 15%. If the firm
makes an average profit of A2,50,000, compute goodwill by taking it to be five
years' purchase of super profits. [Ans. A5,00,000]
19. From the following information, calculate the value of goodwill on the basis of
3 years' purchase of the super profits :
(i) Average Capital employed in the business is A15,00,000.
(ii) Rate of interest expected from capital is 10%.
(iii) Net trading profits for the firm for last four years were : A2,70,800;
A3,20,000; A2,70,500 and A3,05,100.
(iv) Fair remuneration to the partners for their services for the firm is
A36,000p.a. [Ans. A2,56,800]
20. The following particulars are available in respect of a firm carried on by X and Y :
(i) Profit earned, 2014 A50,000; 2015 A60,000 and 2016 A55,000
(ii) Normal rate of profit 10%
(iii) Capital Employed A3,00,000.
(iv) The profit included non-recurring profits on an average basis of A3,000p.a.
You are required to calculate goodwill as per capitalisation of super profit
method.
[Ans. A2,20,000]
345
21. A firm earns profit of A5,00,000. Normal Rate of return in a similar type of
business is 10%. The value of total assets (excluding goodwill) and total outsiders
liabilities as on the date are A55,00,000 and A14,00,000 respectively Calculate
value of goodwill according to capitalisation of Super Profit Method as well as
capitalisation of Average Profit Method.
[Ans. Value of Goodwill- A9,00,000 in both cases]
22. From the following information, calculate value of goodwill of the firm by
applying Capitalisation Method :
Total Capital of the firm A16,00,000.
Reasonable rate of return 10%.
Profit for the year A2,00,000. [Ans. A4,00,000]
23. From the following particulars, calculate value of goodwill of a firm, by applying
capitalisation of Average Profit Method :
(i) Profit of last five consecutive years ending 31st March are 2012-A59,000;
2013-A67,000; 2014-A39,000; 2015-A42,000 and 2016-A54,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm A2,00,000. [Ans. A61,000]
24. A business has earned average profit of A4,00,000 during the last few years and
the normal rate of return in similar business is 10%. Find the value of goodwill
by :
(i) Capitalisation of super profit method, and
(ii) Super profit method, if the goodwill is valued at 3 years purchase of super
profits.
Assets of the business were A40,00,000 and its external liabilities A7,20,000.
[Ans. (i) A7,20,000, (ii) A2,16,000]

CHAPTER - 7
RECONSTITUTION OF PARTNERSHIP FIRM
STRUCTURE
7.1 Meaning
7.2 Circumstances leading to Reconstitution
7.3 Change in Profit Sharing Ratio
7.4 Accounting for Revaluation of Assets and Liabilities
7.5 Distribution of Reserve and Accumulated Profits and Losses
7.6 Questions
Reconstitution of Partnership Firm
347
7.1 MEANING
Partnership is created by an agreement among the partners. The agreement may
be changed if all the partners so like. Any change in the existing agreement of
partnership, amounts to reconstitution of a firm. As a result, the old agreement comes
to an end and a new one comes into existence. In other words, reconstitution of
partnership means change in relationship among the partners.
7.2 CIRCUMSTANCES LEADING TO RECONSTITUTION
The various circumstances which lead to reconstitution of partnership, are
discussed below :
(i) Change in the existing profit-sharing ratio :
When partners decide to change the existing profit-sharing ratio, reconstitution
is said to take place. A change in such ratio usually occurs when a partner starts
putting in more effort into the business, brings in additional capital, shoulder
additional responsibilities, etc.
(ii) Admission of a new partner :
When a new partner is admitted into the partnership, reconstitution is said to
take place. A new partner must have a share in the further profits of the business.
It is bound to change the profit-sharing ratio of the existing old partners.
(iii) Retirement of a partner :
When a partner retires, he ceases to be a partner in the firm. In such a case,
reconstitution is said to take place and the share of profit which was earlier
taken by the retiring partner would be shared by the continuing partners in their
old profit sharing ratio unless it is otherwise agreed upon by them.
(iv) Death of a partner :
When a partner dies, reconstitution is said to take place. For example, X, Y and
Z are partners in a firm sharing profits and losses equally, i.e, 1/3rd each. Z dies
on September 20, 2016 leaving behind X and Y who would now to share profits
348
and losses in the ratio of 1:1, i.e., having equal profit sharing ratio unless it is
otherwise agreed upon.
(v) Insolvency of a partner :
When a partner turns insolvent, that is, his assets are insufficient to meet his
liabilities, reconstitution is said to take place. For example, X, Y and Z are in
partnership sharing profit in the ratio of 1:2:3. X declares himself to be insolvent
and can only repay 20 paise in a rupee. As a result of this, he now cases to be a
partner which leads to reconstitution of the partnership firm.
(vi) Amalgamation of two Partnership Firms :
When two or more partnership firms amalgamate, reconstitution is said to take
place. For example, a partnership firm consisting of X, Y and Z sharing profits
and losses equally get merged with another partnership firm consisting of A and
B sharing profits and losses in the ratio of 2:1.
Amalgamation is usually preferred for better availability of capital, increased
marketing opportunities, decreased costs through economies of scale,
streamlined administration, spreading of risks, more effective allocation of
resources, lesser competition, etc.
In all of the above cases reconstitution takes place because respective shares of
the partners get re-distributed and there occurs a change in profit sharing ratio.
7.3 CHANGE IN PROFIT-SHARING RATIO
Change in the profit sharing ratio among the existing partners means
reconstitution of the firm without admission of a new partner or retirement or death
of a partner. A change in the profit-sharing ratio in a partnership firm means, one (or
more) partner(s) acquires share of profit in the business from another partner(s).
Therefore, the aggregate amount of gain by one (or more) partner(s) is equal to the
349
aggregate amount of sacrifice made by the other partner (s). In other words if share
of profit of one or more partners increases, the share of profit of other partner(s)
decreases.
A change in profit sharing ratio usually takes place due to change in capital
contribution, more active participation of a partner(s) in management, looking after
greater responsibilities by one or more partners and similar other reasons. Goodwill
is the means of compensation by which the gaining partners provide to the sacrificing
partners, with a proportionate amount in scenarios where reconstitution takes place
through a change in profit-sharing ratio.
Various other adjustments also take place at the time of reconstitution of a firm
through a change in profit sharing ratio which are as follows :
(i) Determination of sacrifice ratio and gaining ratio.
(ii) Accounting treatment of goodwill
(iii) Accounting treatment of reserve and accumulated profits or losses, and
(iv) Revaluation of assets and reassessment of liabilities.
Sacrificing ratio
Wherever there is a change in the profit-sharing ratio, one or more of the existing
partners have to surrender some of their old share in favour of one or more other
partners. The ratio of surrender of the share of profit is called sacrificing ratio. It is
calculated as : Sacrificing Ratio = Old Share – New Share.
The sacrificing ratio determines the compensation that has to be paid through a
proportionate amount of goodwill by the gaining partners to the sacrificing partners.
The gaining partners are those that acquire a greater share in profits when the
reconstitution occurs. Similarly, the sacrificing partners are those that lose a
proportionate share of profits during reconstitution.
350
Gaining ratio
The ratio in which a gain in profit-sharing ratio is made is called the gaining
ratio. In other words, gaining ratio is the proportion in which a partner receives an
increased share of profits than his earlier share.
As a result of change in the ‘profit sharing ratio’, one or more of the existing
partners gains/gain some portion of other partner’s share of profit. The ratio of gain
of profit-sharing ratio is called gaining ratio. It is calculated as :
Gaining Ratio = New share – Old share.
The objective of calculating gaining ratio is exactly the same as above mentioned
for sacrificing ratio, that is, through this ratio it may be determined what proportion
of amount has to be paid by the gaining partner/partners to the sacrificing partner/
partners under circumstances of change in profit-sharing ratio.
Illustration 1
A, B, and C were in partnership sharing profits and losses in the ratio 4:3:1. The
partners agreed to share future profits in the ratio 5:4:3. Calculate each partner’s gain
or sacrifice due to change in ratio.
Solution :
Old ratio of A, B and C = 4:3:1 and New ratio of A, B and C = 5:4:3.
Sacrificing = Old share – New share.
4 5 12  10 2
For A  
8 12 24

24
(Sacrifice )
3 4 98 1
B    (Sacrifice )
8 12 24 24
1 3 36 3
C    (Gain)
8 12 24 24
351
2 1 3 2 1
A has sacrificed , B has sacrificed and C has gained   .
24 24 24  4 4 
It is important to note that sacrifices of A and B is equal to the gain of C.
Illustration 2
X, Y, and Z were partners in a firm sharing profits and losses in the ratio of
3:2:1. The partners decide to share future profits and losses in the ratio of 2:2:1.
Indicate each partner’s gain or sacrifice due to change in ratio.
Solution :
Old ratio of X, Y and Z = 3:2:1
New ratio of X, Y and Z = 2:2:1
Sacrifice/ Gain = Old share – New share
 For X  3  2  15  12  3 (Sacrifice )
6 5 30 30
2 2 10  12 2
Y    (Gain)
6 5 30 30
1 1 56 1
Z    (Gain)
6 5 30 30
3 2 1
X has sacrificed ; Y has gained and Z has gained .
30 30 30
( negative sacrifice=gain)
Illustration 3
A, B, C and D are partners in a firm sharing the profits and losses in the ratio of
5:4:3:1. They agreed to share the future profits of the firm in the ratio of 4:3:4:2
352
respectively. Find the sacrificing and gaining ratio of the partners. Also verify that
sum of sacrifice is equal to sum of gain.
Solution :
Old Ratio A:B:C:D = 5:4:3:1
i.e., A’s share B’s share C’s share D’Share
5/13 4/13 3/13 1/13
Share in
New Ratio 4/13 3/13 4/13 2/13
5 4 1 4 3 1
 A’s Sacrifice = 13  13  13 , B’s Sacrifice = 13  13  13
4 3 1
C’s Gain =   ,
13 13 13
2 1 1
D’s Gain =   ( Gain = New Ratio - Old Ratio)
13 13 13
Verification :
1 1 2
Total sacrificing ratio of A and B =  
13 13 13
1 1 2
and total gaining ratio of C and D =  
13 13 13
Hence, Sum of sacrifice = Sum of gain.
7.4 ACCOUNTING FOR REVALUATION OF ASSETS AND LIABILITIES
Assets are revalued and the liabilities are reassessed at the time of change in
profit-sharing ratio and the profit of loss arising from it, is credited or debited to the
Partner’s Capital Accounts in their old profit-sharing ratio. The reason for revaluation
of assets and reassessment of liabilities is that any increase or decrease in the value
353
of assets and liabilities up to the date of change in profit-sharing ratio should be

shared by the partners in their old profit-sharing ratio. For revaluation of assets and
reassessment of liabilities, an account entitled ‘Revaluation Account’ or ‘Profit and
Loss Adjustment Account’ is opened. Increase in value of assets and decrease in
liabilities is credited to this account while decrease in the value of assets and increase
in liabilities is debited. Unrecorded assets, if any, are credited and unrecorded
liabilities are debited. The balance in the account is gain (profit), if total of credit
side is larger than the total of debit side and loss, if total of debit side is larger than
the total of credit side. Gain (profit) or loss on revaluation and reassessment is
credited or debited to Partner’s Capital Accounts in their old profit-sharing ratio.
Specimen of Revaluation Account is given below :
Revaluation Account
Dr. Cr.
To Assets (Individually) By Assets (Individually)
(Decrease in value on revaluation) (Increase in value)
To Liabilities (Individually) (Increase on By Liabilities - (Individually)
reassessment) (Decrease in reassessment)
By Partner’s Capital A/cs.

To Partner’s Capital A/cs (Individually) (Individually)–(Loss on revaluation)
(profit on revaluation)
Important note : When Revaluation Account is prepared, assets and liabilities appear
in the Balance Sheet of the reconstituted firm at their revised values.
354
Accounting Entries to Record the Revaluation of

Assets and Reassessment of Liabilities
1. For increase in the value of an asset Asset A/c(Individually) Dr.
To Revaluation A/c
2. For decrease in the value of an asset Revaluation A/c Dr.
To Asset A/c (Individually)
3. For increase in the amount of a liability Revaluation A/c Dr.
To LiabilityA/c (Individually)
4. For decrease in the amount of a liability LiabilityA/c (Individually) Dr.
To Revaluation A/c
5. For recording an unrecorded asset Unrecorded Asset A/c. Dr.
To Revaluation A/c
6. For recording an unrecorded liability Revaluation A/c. Dr.
To Unrecorded Liability
7. For transfer of Balance in Revaluation (a) Revaluation A/c Dr.
Account To Partner’s Capital A/cs
(Individually in old profit-sharing ratio)
(a) If credit side exceeds debit side (b) Partner’s Capital A/cs. (Individually in old
(Net Gain) profit sharing ratio)
(b) If debit side exceeds credit side To Revaluation A/c
(Net Loss)
Illustration 4
Pass Journal entries to record the following cases relating to revaluations :
(a) Machinery of A70,000 brought down by 15%.
(b) Value of Stock A50,000 appreciated by 10%.
(c) Furniture of A10,000 is brought down to A7,000.
(d) Stock of A35,000 is written down to A30,000.
(e) Building of A1,00,000 is written up to A1,30,000.
(f) Provision for doubtful debt @5% is created on Sundry Debtors of A40,000.
(g) Creditors were over-estimated by A6,000.
(h) Interest accrued on investment A2,000 is to be brought into account.
(i) A claim of A750 for damages should be created against the firm.
(j) An old typewriter having a book value of A2,500 is to be written off fully.
355
Solution :
Date Particulars LF Dr. (A) Cr. (A)
(a) Revaluation A/c Dr. 10,500
(Being machinery brought down by 15%)
(b) Stock A/c Dr. 5,000
To Revaluation A/c 5,000
(Being value of stock increased by A5,000)
(c) Revaluation A/c Dr. 3,000
To Furniture A/c 3,000
(Being value of furniture decreased by A3,000)
(d) Revaluation A/c Dr. 5,000
To Stock A/c 5,000
(Being value of stock decreased by A5,000)
(e) BuildingA/c Dr. 30,000
(Being value of Building increased)
(f) Revaluation A/c Dr. 2,000
To Provision for doubtful debt A/c 2,000
(Being provision for doubtful debts created)
(g) Creditors A/c Dr. 6,000
(Being creditors written down)
(h) Accrued Interest A/c Dr. 2,000
(Being interest accrued on investment
brought into account)
(i) Revaluation A/c Dr. 750
To Claim for damages A/c 750
(Being a claim for damages provided for)
(j) Revaluation A/c Dr. 2,500
To Typewriter A/c 2,500
(Being old typewriter written off)
356
Illustration 5
X, Y and Z are partners in a firm sharing profits and losses in the ratio of 3:3:2.
Their Balance Sheet as at 31st March, 2016 was :
Sundry Creditors 24,000 Cash at Bank 27,000
General Reserve 36,000 Sundry Debtors 50,000
Capital A/cs : Stock 1,20,000
X 2,00,000 Machinery 1,59,000
Y 2,00,000 Building 2,00,000
Z 1,00,000 5,00,000 Advertisement Expenditure
(Deferred Revenue) 4,000
5,60,000 5,60,000
Partners decided that with effect from 1st April, 2016 they would share profits
and losses in the ratio of 4:3:2. It was agreed that :
(i) Stock to be valued at A1,10,000.
(ii) Machinery is to be depreciated by 10%.
(iii) A provision for doubtful debts is to be made on Sundry Debtors @5%.
(iv) Building to be appreciated by 20%.
(v) A liability for A3,000 included in Sundry creditors is not likely to arise.
Partners agreed that revised values of assets and liabilities are to be recorded in
the books. They decided to retain the General Reserve in the books. Give necessary
accounting entries.
357
Solution :
Journal
Revaluation A/c Dr. 28,400
2016 To Stock A/c 10,000
April 1 To Machinery A/c 15,900
To Provision for doubtful debts A/c 2,500
(Being decrease in the value of assets and
provision for doubtful debts)
April 1 BuildingA/c Dr. 40,000
Sundry Creditors A/c. Dr. 3,000
To Revaluation A/c. 43,000
(Being increase in the value of building and
decrease in creditors)
April 1 Revaluation A/c Dr. 14,600
To X’s Capital A/c 5,475
To Y’s Capital A/c 5,475
To Z’s Capital A/c 3,650
(Being the transfer of profit on revaluation to the Capital
Accounts of partners in old profit sharing ratio(WN-1)
 5 
R36,000  
April 1 X’s Capital A/c  72 
Dr. 2,500
 3 
To Y’s Capital A/c  R 36,000 
72 
Dr.
 1,500
 2 
To Z’s Capital A/c  R 36,000 
72 
Dr. 1,000

(Being the adjustment of general reserve on change in
profit-sharing ratio) (W.N.-2)
X’s Capital A/c Dr 1,500
April 1
Y’s Capital A/c Dr 1,500
Z’s Capital A/c Dr 1,500
To Advertisement expendture A/c 4,000
(Being transfer of advertisement expenditure
to all partners in old profit-sharing ratio.)
358
Working Notes :
1. Revaluation A/c
To Stock A/c 10,000 By Building A/c 40,000
To Machinery A/c 15,900 By Sundry Creditors A/c 3,000
To Provision for Doubtful Debt A/c 2,500
To Z’s Capital A/c 3,650 14,600
(Profit on revaluation)
43,000 43,000
2. Calculation of Sacrifies /Gain in share of Partners :
X Y Z
Old Ratios 3/8 3/8 2/8
New Ratios 4/9 3/9 2/9
Difference (Gain or Sacrifies) –5/72 3/72 2/72

Gaining Sacrificing Sacrificing
Partner Partner Partner
359
Illustration 6
X, Y and Z are partners in a firm sharing profits and losses in the ratio of 8:5:3.
Their Balance Sheet as at 31st December, 2016 was as follows :
Sundry Creditors 30,000 Cash 12,000
General Reserve 16,000 Bills Receivable 10,000
Partners’ Loan A/cs Sundry Debtors 8,000
X 8,000 Stock 24,000
Y 6,000 14,000 Fixed Assets 56,000
Partners’ capital A/cs:
X 20,000
Y 16,000
Y 14,000 50,000
1,10,000 1,10,000
From 1st January, 2017, they agreed to alter their profit-sharing ratio as 5:6:5.
It is also decided that :
(a) The fixed assets should be valued at A66,200.
1
(b) A provision of 7 % on sundry debtors be made for doubtful debts.
2
(c) The stock be reduced to A22,400.
They have decided to make revaluation of assets and liabilities before bringing
into force the new ratio.
Pass necessary journal entries, prepare Revaluation Account and calculate gain
or sacrifice of partners.
Solution :
Journal
2017 Fixed Assets A/c Dr. 10,200
Jan 1. To Revaluation A/c 10,200
(Being value of fixed assets increased)
360

To Provision for doubtful debt A/c 600
To Stock A/c 1,600
(Being value of liability increased and asset decreased)
To Z's Capital A/c 1,500
(Being profit on revalutation transferred to partner's
capital accounts in old profit sharing ratio.)
Revaluation Account
Dr. Cr.
To Provision for doutful debts A/c 600 By Fixed Assets 10,200
To Stock A/c 1,600
To Z's Capital A/c 1,500 8,000
(Profit on revaluation)
10,200 10,200
Working Notes :
(i) Calculation of Gain or Sacrifice of partners :
X Y Z
Old Share 8/16 5/16 3/16
New Share 5/16 6/16 5/16
Difference 3/16 -1/16 -2/16
Effect (sacrifice) (gain) (gain)
361
When assets and liabilities are to appear in the books at the old values
(Memorandum Revaluation Account)
The partners may decide that the value of assets and liabilities will continue
to appear in the books at the existing value. In such a case, an increase or decrease
in the amount of assets and liabilities is recorded in the Memorandum
Revaluation Account. This account is divided into two parts. First part is similar
to the Revaluation Account and in the second part, entries are reversed. The
balance of the first part (i.e., profit or loss on revaluation) is transferred to the
Capital Accounts of the old partners in thier old profit sharing ratio. The balance
of the second part is transferred to all the partners, including the incoming
partners, in the new profit-sharing ratio. The journal entries for the same are as
follows:
(i) For increase in the value of assets and decrease in the value of liabilities :
Assets A/c (individually) Dr.
Liabilitis A/c (individually) Dr.
To Memorandum Revaluatin A/c
(ii) For decrease in the value of assets and increase in the account of liabilities:
Manorandum Revaluation A/c Dr.
To Assets A/c (individually)
To Liabilities A/c (individually)
(iii) For transferring the balance of the first part of Memorandum Revaluation
Account :
(If credit side exceeds debit side, i.e., in case of profit):
Memorandum Revaluation A/c Dr.
To Old partners capital A/cs
(This entry is reversed if debit side exceeds
credit side, i.e., in case of loss on revaluation)
(iv) For reversing the first entry, entry (i) :
Memorandum Revaluation A/c Dr.
To Assets (individually) A/c
To Liabilities (individually) A/c
362
(v) For reversing the second entry, i.e., entry (ii) :

Assets (individually) A/c Dr.
Liabilities (individually) A/c Dr.
To Memorandum Revaluation A/c
(vi) For transferring the balance of the second part of the Memorandum Revaluation
Account (if debit side exceeds credit side)
All Partners' Capital A/c Dr.
To Memorandam Revaluation A/c
(This entry is reversed if credit side exceeds the debit side)
It should be kept in mind that if the first part of the Memorandum
Revoluation Account results in profit, the second part will result in loss and
vice versa.
It may be noted that value of assets and liabilities except the cash and
capital accounts, will not change and they will continue to appear at old values
in the Balance Sheet of the firm after the reconstitution.
Difference between the Revaluation Account and the Memorandum
Revaluation Account :
Basic Revaluation Account Memorandum Revoluation Account

1.Pur- It is prepared to record the effect It is prepared to record the effect of
pose of revaluation of assets and liabilities revaluation of assets and liabilities which are
when the assets and liabilities are to to appear at their old figures.
appear at their revised figures.
2.Parts It is not divided into two parts. It is divided into two parts, viz, the first part
to record the changes in the value of assets
and liabilities and the second part to nullify
the changes recorded in the first part.
363
3.Transfer The balance of the Revaluation The balance of first part (profit or loss) of this
of Account is transferred to the old account is transferred to the capital A/cs of
Balance partners' capital accounts in the old the old partners in their old profit sharing ratio.
profit-sharing ratio. The balance (Profit or loss) of the second part
is transferred to the capital A/cs. of all the
partners including the new partner in the new
profit sharing ratio in case of the admission of
a partner and continuing partner in the case of
retirement of a partner.
7.5 DISTRIBUTION OF RESERVE AND ACCUMULATED PROFITS /

LOSSES
If at the time of admission of a partner, a balance in reserve and accumulated
profits/losses exists in the Balance Sheet, those are transferred to old partners' Capital
Accounts (or Current Accounts in case of fixed capital) in their old profit-sharing
ratio. Those are transferred to the old partners' Capital Accounts because those had
been set aside out of profits in the earlier periods, i.e., before the new partner was
admitted. As a rule, the new partner should not be put to advantage or disadvantage on
this account. Thus, the journal entry will be :
Profit and loss A/c Dr.
General Reserve A/c Dr.
Workmen's Compensation Reserve A/c Dr. (excess of reserve over
liability)
Investments Fluctuation Reserve A/c Dr. (excess of reserve over the
difference between book value
and market value) (in old ratio)
to old partners' capital (or
current) A/cs.
(Being the reserve and profits transferred
to old partners in their old ratio)
The effect of this entry is that in the new Balance Sheet, balance of the General
Reserve or the Profit and Loss Account (credit) will not appear. Similarly if Profit
364
and Loss Account (debit balance) appears on the asset side of the Balance Sheet, it is
transferred to the old partners' Capital Accounts in their old profit-sharing ratio by
passing the following entry :
Old partners' capital (or current) A/cs Dr.
To Deferred Revenue Expenditure A/c *
(like Advertisement Expenditure)
(Being the accumulated losses transferred to old partners capital A/cs. in their
old ratio).
* It is an accumulated loss which should be borne by the old partners only.
The loss will not appear in the new Balance Sheet.
Important Note
When the partners decide to record the net effect of accumulated profits, losses
or reserves without affecting their old figures single adjustment entry through Capital
Accounts or Current Accounts of gaining partners and sacrificing partners should be
passed. In that situation, the Accumulated profits, Losses or Reserves shall appear in
the Balance Sheet of new firm at their old figures.
For example, X and Y sharing profits in the ratio of 2:1 decide to share future
profits in equal proportion. Suppose, reserves appearing in the Balance Sheet amount
to A60,000 and partners do not want to distribute that. In such a case, in the old
arrangement, X is entitled to A40,000 and Y to A20,000 of such reserve. But in future,
after the change in the profit-sharing ratio, each partner would be entitled to A30,000
of such reserves. Hence, Y must compensate X to the extent of A10,000. This amount
is proportionate to the 1/6th share gained by him. The following jounral entry will be
passed :
Y's Capital A/c Dr 10,000
(Being proportionate share of reserves adjusted between existing partners)
365
When partners decide not to close the reserves and undistributed Profit
and Loss Account:
(i) For accumulated profits
Gaining Partner's Capital A/c Dr. [with his respective share]
To Sacrificing Partner's Capital A/c
(ii) For accumulated losses :
Sacrificing Partner's Capital A/c Dr. [with his respective share]
To Gaining Partner's Capital A/c
Illustration 7
Amit and Sumit are two partners sharing profits and losses in the ratio of 3:2.
On 31.03.2016 they had A80,000 in general reserve and A40,000 in profit and loss
account.
They have decided to change the profit sharing ratio to 1:1 with effect from
1.4.2016. Pass adjusting entry if :
(i) They decide not to show the accumulated profits in the Balance Sheet.
(ii) They decide to show the accumulated profits in the Balance Sheet.
Solution :
(i) The accumulated profits are to be distributed among themselves in the old ratio
if they do not want to show in the Balance Sheet. The journal entry will be;
General Reserve A/c Dr. 80,000
Profit and loss A/c Dr. 40,000
To Amit's Capital A/c 72,000
To Sumit's Capital A/c 48,000
(ii) If they want to show the accumulated profits in the Balance Sheet, the following
adjustment entry will be passed :
Sumit's Capital A/c Dr. 12,000
To Amit's Capital A/c 12,000
(Being gaining partner's capital A/c debited and sacrificing partner’s capital A/c
credited)
366
Working Note
Amit Sumit
3 2
Old share
5 5
1 1
New share
2 2
1 1
Difference 
10 10
Effect (sacrifice) (gain)
1
Adjusted amount 1, 20, 000  12, 000
10
Students are advised to transfer the accumulated profits/reserves or
accumulated losses to old partners’ capital account in old profit sharing ratio,
even if the question is silent on this point.
Illustration 8
A, B and C are three partners sharing profit in the ratio of 5:3:2. They decided to
change the ratio to 2:2:6. On that date, they had a debit balance of A18,000 in Profit
and Loss Account and A6,000 in Deferred Revenue Expenditure Account.
(a) They decide not to show the accumulated losses in the books of accounts.
(b) They decide to show the same in the books of accounts.
Solution :
(a) The accumulated losses are to be divided among themselves in their old
ratio. If they do not want to show that in the books of accounts, the journal entry will
be:
A's Capital A/c Dr. 12,000
B's Capital A/c Dr. 7,200
C's Capital A/c Dr. 4,800
To Referred Revenue Expenditure A/c 6,000
(Being accumulated losses shared by old partners in their old profit securing
ratio)
367
(b) If they want to show the accumulated losses, necessary adjustment shall be
made through capital accounts. In such a case, journal entry will be :
A's Capital A/c Dr. 7,200
B's Capital A/c Dr. 2,400
To C's Capital A/c 9,600
Working Note
A B C
Old Share 5/10 3/10 2/10
New Share 2/10 2/10 6/10
Difference 3/10 1/10 - 4/10
Effect (sacrifice) (Sacrifice) (gain)
 3   1 
Adjusted amount  10  24000   7200 ,  10  24, 000   2, 400 ,
   
 4 
 10  24, 000   9, 600 .
 
When both Accumulated Profits and Losses Exist
When the partners decide to record the net effect of accumulated profits, losses
or reserves, without disturbing the old figures, the reserves/accumulated profits or
losses continue to appear at the same amount in the Balance Sheet of the reconstituted
firm. In such a situation, a single adjusting entry is passed involving the capital accounts
of the gaining and sacrificing partners.
Illustration 9
P, Q and R were sharing profits and losses in the ratio of 5:3:2. They decided to
share future profits and losses in the ratio of 2:3:5 with effect from 1.4.2016. They
also decided to record the effect of the following, without affecting their book values:
368
(i) General Reserve A24,000 (ii) Profit and Loss Account (losses) A12,000.
Pass necessary adjusting journal entry.
Solution:
Step-I : Calculation of Amount to be adjusted.
General Reserve A24,000
Less : Profit and Loss (losses) A12,000
A12,000
3
Amount to be adjusted 12,000× =3,600
10
Step-II : Calculation of sacrifice or gaining ratio :
Particulars P Q R
Partners' Old Share 5/10 3/10 2/10
Partners' New Share 2/10 3/10 5/10
Difference 3/10 NIL -3/10
Effect Sacrifice No effect Gain
Step-III : Journal

2016 R's Capital A/c Dr. 3,600
Apri-1 3,600
To P's Capital A/c
(Being adjustment of profit on change
in profit sharing ratio.)
369
7.6 QUESTIONS
(i) The profit on revaluation of assets and liabilities are shared by :
(a) Old partners in sacrificing ratio.
(b) Old partners in old profit sharing ratio.
(c) all partners including new partner in new ratio.
(d) Old partners equally.
(ii) When assets are revalued, any increase in the value of assets is debited to :
(a) Revaluation Account.
(b) Asset Account.
(c) Profit and loss Account.
(d) Profit and loss Appropriation Account.
1
(iii) X and Y sharing profits in the ratio of 3:2 admit Z as a partner with th share.
6
The new profit and loss sharing ratio is :
(a) 2:2:2
(b) 4:3:2
(c) 5:3:2
(d) 3:2:1
(iv) A and B sharing profits in the ratio of 5:3 admit C and new profit sharing ratio of
A,B and C is fixed at 4:2:2. The ratio of sacrifice of A and B is:
(a) 5:3
(b) 1:2
(c) 1:1
(d) 2:1
370
(v) Increase in liability amounts to :

(a) Gain to old partners.
(b) Loss to old partners.
(c) Neither gain nor loss,
(d) More gain and less loss.
(vi) An old Partner's Capital Account is debited, when there is :
(a) Credit balance in Profit and Loss A/c.
(b) Debit balance in Profit and Loss A/c.
(c) General Reserve.
(d) Workmen's compersation Fund.
1
(vii) When new partner acquires th share from X, then X's sacrifice is:
5
2
(a)
5
1
(b)
5
2
(c)
3
9
(d)
10
(viii) When all the partners including the incoming partner decide not to change the
value of assets and liabilities, then the account which is prepared is called :
(a) Revaluation Account
(b) Profit and Loss Adjustment Account
(c) Memorandum Revaluation Account
(d) Suspense Account.
(ix) Revaluation Account is a :
(a) Real Account
371
(b) Nominal Account.

(c) Personal Account.
(d) Statement.
(x) The purpose of Profit and Loss Adjustment account is :
(a) to find out gross profit.
(b) to find out net profit.
(c) to know the financial position.
(d) to find out results of revaluation of assets and liabilities.
[Ans.: (i) b (ii) b (iii) d (iv) c (v) b (vi) b (vii) b (viii) c (ix) b (x) d]
(i) To which partner's capital Account, profit or loss on revaluation is not
transferred ?
(ii) What would be the result by deducting new ratio from old ratio ?
(iii) On which side of Revaluation Account, unrecorded assets are recorded ?
(iv) On which side of Revaluation Account, unrecorded liabilities are recorded ?
(v) Name at least one item which is debited to partner’s capital account, even
if the question is silent about that item at the time of reconstitution of the
firm.
[Ans.(i) New partner (ii) sacrificing ratio (iii) credit side (iv) Debit side
(v) Debit balance of profit and loss A/c.]
3. Fill up the blanks:
(i) Profit on revaluation of assets and liabilities is credited to capital accounts of
old partners in ______ ratio.
(ii) Appreciation in the value of investment is ______ to the Revaluation Account.
(iii) A partner whose share is increased due to change in profit sharing ratio, is called
______ partner.
(iv) Revaluation of assets becomes necessary because present value of assets may
be ______ from their book value.
372
(v) If all the partners decide that the assets and liabilities in the new balance sheet
should be shown at the old figure after reconstitution of the firm, then ______
revaluation account should be prepared.
[Ans. (i) Old (ii) credited (iii) gaining (iv) different (v) Memorandum]
(i) Unrecorded assets are shown in the Revaluation Account as decrease in assets.
(ii) Loss on revaluation is credited to old partners' capital accounts in old ratio.
(iii) The excess of new ratio over old ratio is called sacrificing ratio.
(iv) If provision for bad and doubtful debt is created for a reconstituted firm, the
revaluation account will be credited.
(v) In case of change in profit sharing ratio, the gaining partner’s capital account is
credited and losing partner's capital account debited.
[Ans.: (i) increase (ii) debited (iii) gaining (iv) debited (v) debited and credited]
5. Answer each of the following questions in one sentence :
(i) What is reconstitution of firm ?
(ii) What is meant by revaluation of assets ?
(iii) State the ratio in which old partners share the accumulated profits or losses or
reserves.
(iv) Why is 'Memorandum Revaluation Account' prepared ?
(v) What is the nature of Revaluation Account ?
(vi) On which side of Revaluation Account, unrecorded assets are recorded ?
(vii) State whether Revaluation Account is debited or credited to record the increase
in the value of Building.
(viii) State whether revaluation Account is debited or credited to record the amount
recovered that was earlier written off as bad debt.
(ix) State whether the partner's Capital Account is debited or credited to record the
profit of revaluation account.
(x) When the General Reserve is distributed, is the partner's Capital Account debited
or credited ?
373
6. Answer the following questions within 30 words each;

(i) What is reconstitution of partnership ?
(ii) Define Revaluation Account.
(iii) Define sacrificing ratio.
(iv) What should be the profit-sharing ratio of partners if there is no mention about
it in the agreement ?
(v) What is gaining ratio and who is gaining partner ?
(vi) List any three features of Revaluation Account.
(vii) What is the necessity of revaluation of assets and reassessment of liabilities at
the time of change in profit sharing ratio among the existing partners.
(viii) Give a specimen of Revaluation Account.
7. Answer the following questions within 50 words each:
(i) Distinguish between 'Revaluation Account' and Memorandum Revaluation
Account.
(ii) Distinguish between gaining partner and sacrificing partner.
(iii) What is Revaluation Account ? Draw Revaluation Account with imaginary
items.
(iv) What is meant by revaluation of assets and reassessment of liabilities on
the reconstitution of a firm ? What purpose does it serve at the time of
reconstitution of partnership ?
8. What is a ‘Revaluation Account’ ? How does it differ from a ‘Memorandum
Revaluation Account’ ?
9. Explain the need for and calculation of different ratios to be calculated at the
time of reconstitution of a partnership firm.
10. List the various issues that need to be taken care of when there is a change in
profit sharing ratio among the existing partners. Explain any one issue with
example.
11. Pass necessary journal entries relating to revaluation of assets and liabilities on
the reconstitution of a firm.
374
12. X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1. Now they
decide to change the ratio to 3:2:1. Calculate gaining or sacrificing ratio of
each partner.
[Ans.: A’s gain 3/30, B’s sacrifice 2/30 and C’s sacrifice 1/30]
13. Amit, Sumit and Ranjeet are partners sharing profits in the ratio of 5:3:2. They
decided to share future profits and losses in the ratio of 2:3:5 rerpctively. You
are required to calculate the sacrifice and gaining ratio of each partner.
3 3
[Ans.: Amit sacrifices and Sumit gains ]
10 10
1
14. X, Y and Z are partners sharing profits in the ratio of 3:2:1. X gave away to Y
5
1
and Y gave away to Z. Find the new ratio, gaining and sacrificing ratio.
10
6 3 3
[Ans.: New Ratio : 9:13:8, Xs sacrifice , Y's gain , Z's gain ]
30 30 30
15. A, B and C share the profits of a firm in the ratio of 5:3:2. Now decided to share
the profits equally. Find the sacrifice and gain of each partner.
5 1 4
[Ans.: A's sacrifice , B's gain , C's is gain ]
30 30 30
16. A and B are sharing profits and losses equally. With effect from 1st April, 2016,
they agree to share profits in the ratio of 4:3. Calculate individual partner's gain
or sacrifice due to the change in ratio.
1
[Ans. A gains and B sacrifices th share]
14
17. X, Y and Z are sharing profits and losses in the ratio of 5:3:2. With effect from
1st April 2016, they decide to share future profits and losses in the ratio of
5:2:3. Calculate each partner's gain or sacrifice due to change in ratio.
1 1
[Ans.: Z's gain th share and Y's sacrifice th share.]
10 10
375
18. Anita and Binita are partners in a firm. They have A60,000 in Profit and Loss A/c
and A80,000 in general reserve on 1st April 2016. On this day, they decided to
change their profit sharing ratio from 3:2 to 1:1. They also decided to distribute
profits and reserves before bringing the new profit sharing ratio into force. Pass
the necessary adjustment entry.
[Ans.: Anita's Capital A/c Cr. A84,000 and Binita's Capital A/c Cr. A56,000]
19. A and B are Partners in a firm sharing profits in the ratio of 3:2. They decided to
share future profits equally. On the date of change in the profit sharing ratio,
Profit and Loss Account showed a debit balance of A60,000. Pass Journal entry
for distribution of balance in Profit and loss Account immediately before change
in the profit sharing ratio.
[Ans.: Debit A's capital A/c A36,000 and B's capital A/c A24,000 and credit
profit and loss A/c 60,000]
20. X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. With
effect from 1st April, 2016, they decided to share future profits equally. On the
date of change in the profit sharing ratio, the Profits and loss Account showed a
credit balance of A1,50,000. Record the necessary journal entry for the
distribution of the balance in the Profit and Loss Account immediately before
the change in the profit sharing ratio.
[Ans.: Dr. Profit and Loss A/c by- A1,50,000; Cr. X's Capital A/c by A90,000
and Y's Capital A/c by A60,000]
21. A, B and C are sharing profits and losses in the ratio of 5:3:2. They decide to
share future profits and losses in the ratio of 2:3:5 with effect from 1.4.2016.
They also decide to record the effect of the following accumulated profits,
losses and reserves without affecting their book figures by passing a single entry:
Book Figure (A)
General Reserve 6,000
Profit and loss A/c (credit) 24,000
Advertisement Suspense A/c 12,000
[Ans.: Debit C and credit A by A5,400]
376
22. X and Y are partners sharing profits and losses in the ratio of 2:1. On 31st March,
2016, their Balance Sheet showed General Reserve of A60,000. It was decided
that in future they will share profits and losses in the ratio of 3:2. Pass necessary
journal entry in each of the following alternative cases:
(i) If they do not want to show General Reserve in the new Balance Sheet.
(ii) If they want to show General Reserve in the new Balance sheet.
[Ans.: (i) Dr. General Reserve A/c by A60,000; credit X's capital A/c by A40,000
and Y's capital A/c by A20,000.
1 1
(ii) X's sacrifice= ; Y's gain , Debit Y's Capital A/c by A4,000 and
15 15
credit X's Capital A/c by A4000)
23. X, Y and Z who presently sharing profits and losses in the ratio of 5:3:2 decide
to share future profits and losses in the ratio of 2:3:5. Give the journal entry to
distribute workmen’s compensation reserve of A1,20,000 at the time of change
in profit sharing ratio, when there is no claim against it.
[Ans: Debit Workmen’s is Compensation Reserve A/c A1,20,000; Credit
X's Capital A/c A60,000; Y's Capital A/c A36,000 and Z's Capital A/c-
A24,000]
24. A, B and C are partners sharing profits and losses in the ratio of 2:1:1. They
1
decided that with effect from 1st April, 2016, A shall receive th share in the
4
profits.
On March 31, 2016, their Balance Sheet stood as follows :
Capital A/cs : Debtors 35,000
A 50,000 Stock 15,000
B 25,000 Land 60,000
C 25,000
1,00,000
1,20,000 1,20,000
377
On this date, land was valued at A75,000; stock at A30,000 and a provision
of A2,000 on debtors is to be created.
Pass necessary journal entries in the books of the firm regarding the
revaluation of assets and prepare Revaluation Account.
[Ans.: Profit on Revaluation A28,000]
25. A, B and C are sharing profits and losses in the ratio of 5:3:2. They decided to
share future profit and losses in the ratio of 2:3:5 with effect from 1st April,
2016. They also decide to record the effect of the following revaluation without
changing the book value of the assets and liabilities :
Particulars A A
Land and Building 10,00,000 11,00,000
Plant and Machinery 5,00,000 4,80,000
Trade Creditors 1,20,000 1,10,000
Outstanding expenses 1,20,000 1,50,000
Show the accounting treatment to give effect to the new arrangement.

[Ans.: Debit C's Capital A/c by A18,000 and credit A's Capital A/c by A18,000.]
26. P, Q and R are partners sharing profits and losses in the ratio of 7:5:4. Their
Balance Sheet as at 31st March, 2016 stood as :
Capital A/cs : Sundry Assets 7,00,000
P 2,10,000
Q 1,50,000
R 1,20,000 4,80,000
Profit and loss A/c 25,000
Creditors 1,30,000
7,00,000 7,00,000
Partners decided that with effect from 1st April, 2016, they will share profit
and losses in the ratio of 3:2:1. For this purpose, goodwill of the firm was valued at
378
A1,50,000. The partners neither want to record the goodwill nor want to distribute
the General Reserve or profits.
Pass a journal entry to record the change and prepare revised Balance Sheet.
[Ans.: Debit P's Capital A/c by A15,000; Q's Capital A.c by A5,000; credit Z's
capital A/c by A20,000 and Total Balance Sheet - A7,00,000]
27. X,Y and Z are partners in a firm sharing profits and losses in the ratio of 5:4:3
respectively. Their Balance Sheet as at 31st March, 2016 was :
Sundry Creditors 40,000 Cash at Bank 40,000
outstanding Expenses 15,000 SundryDebtors 2,10,000
General Reserve 75,000 Stock 3,00,000
Capital A/cs : 1,30,000 Furniture 60,000
X 4,00,000 Plant and Machinery 4,20,000
Y 3,00,000
9,00,000
Z 2,00,000
10,30,000 1,030,000
From 1st April, 2016, they agree to alter their profit sharing ratio as 4:3:2. It is
also decided that :
(a) Furniture be taken at 80% of its value.
(b) Stock be appreciated by 20%.
(c) Plant and Machinery be valued at A4,00,000.
(d) Outstanding expenses be increased by A13,000.
Partners agreed that altered values are not to be recorded in the books and
they also donot want to distribute General Reserve.
You are required to pass a single journal entry to give effect to the above.
Also, prepare revised Balance Sheet.
[Ans.: Profit on Revaluation-A15,000, Adjustment for Revaluation and General
Reserve: Debit X's Capital A/c and credit Z' Capital A/c by A2,500 and Balance
Sheet Total-A10,50,000]
-0-
CHAPTER-8
ADMISSION OF A PARTNER
STRUCTURE
8.1 Meaning of Admission of a Partner
8.2 Rights of a new Partner
8.3 Effects of Admission of a Partner
8.4 Adjustments required on the Admission of a Partner
8.4.1 New profit sharing ratio
8.4.2 Accounting treatment of Goodwill
8.5 Questions
380
8.1 MEANING OF ADMISSION OF A PARTNER
Admission of a partner is one of the modes of reconstituting the firm under
which old partnership comes to an end and a new one (among all partners including
incoming partner) comes into existence. Capital contribution by the new partner, his
share of profits and other conditions are agreed upon. The new partner, on joining,
becomes liable for the liabilities of the firm and is entitled to assets and profits of
the firm. According to section 31 of the Indian Partnership Act, 1932, a person can be
admitted as a new partner only with the consent of all the existing partners, unless
otherwise agreed upon.
8.2 RIGHTS OF A NEW PARTNER
After admission, the new partner gets the following two main rights :
(i) Rights to share future profits of the firm and
(ii) Right to share in the assets of the firm
At the same time, he becomes liable for any liability of the business incurred
after admission and any loss incurred by the firm.
The new or incoming partner receives share in future profits that is equal to the
sacrifice of profit by an existing partner or partners of the firm. The new partner
compensates the partner or partners who sacrifice their share in profits in his or her
favour. The amount he pays for their sacrifice is called Goodwill or Premium for
Goodwill.
Besides the goodwill or premium for goodwill, new partner may bring in capital
to get right in the assets of the firm.
8.3 EFFECTS OF ADMISSION OF A PARTNER
The effects of admission of a new partner are :
(i) Old partnership comes to an end and new partnership comes into existence but
the firm continues.
Admission of a Partner
381
(ii) New partner becomes entitled to share future profits of the firm and the combined
share of the old partners get reduced.
(iii) New partner contributes an agreed amount of capital.
(iv) New partner acquires right on the assets and also becomes liable for the liabilities
of the firm.
(v) Adjustment is made in regard to accumulated profits or losses which are credited
or debited to the old partners capital accounts respectively.
(vi) Assets are revalued and liabilities are reassessed. The net change is adjusted in
old partners’ capital accounts in their old profit sharing ratio, by opening one
Profit and Loss Adjustment Account or Revaluation Account.
(vii) Goodwill of the firm is valued to be paid to sacrificing partners for their sacrified
share, by the new partner.
8.4 ADJUSTMENTS REQUIRED ON THE ADMISSION OF A PARTNER
The adjustments required on admission of a partner are :
(i) Determining new profit-sharing ratio.
(ii) Valuation and adjustment of Goodwill
(iii) Adjustment of profit/loss arising from revaluation of assets and reassessment
of liabilities.
(iv) Adjustment of accumulated profits, reserves and losses.
(v) Adjustment of capital (if agreed).
8.4.1 New Profit-Sharing Ratio
New partner is entitled to share future profits of the firm. In effect, there is a
change in the old profit-sharing ratio. Since, new partner acquires his share from old
partners, it is necessary to determine new profit-sharing ratio and also sacrificing
ratio.
382
New profit sharing ratio is the ratio in which all partners, including new partner,
share future profits and losses of the firm.
New partner may acquire his share from old partners through any of the following
alternatives :
(1) In their old profit-sharing ratio; or
(2) In a particular ratio or surrendered ratio; or
(3) In a particular fraction from some or all of the partners.
Let us now discuss each of the above cases in detail.
Case 1 : When new partner acquires his share from old partners in their
old profit-sharing ratio
In such a situation, share of the new partner is given and it is assumed that the
new partner has acquired his share from old partners in their old profit sharing ratio.
Old partners, therefore, continue to share balance profits or losses in their old
profit-sharing ratio. In other wards, unless otherwise agreed, profit-sharing ratio among
the existing partners remains unchanged. New profit-sharing ratio among all the
partners is ascertained by deducting new partner’s share from 1 and then dividing the
balance in old profit-sharing ratio of the old partners.
Illustration 1 (new partner’s share is given)
X and Y are partners sharing profits in the ratio of 5:3. Z is admitted for 1/4th
share in the profits.
Calculate new profit-sharing ratio of the partners.
Solution :
Calculation of new profit sharing ratio :
5 3
Old ratio of X and Y=5:3 or and
8 8
1
Let the total share be 1; Z’s share =
4
383
1 3
 Remaining share of X and Y = 1- =
4 4
3 5 15
X’s new share = × = ,
4 8 32
3 3 9 1 8
Y’s new share = × = and Z’s share or .
4 8 32 4 32
Hence, new profit-sharing ratio of X, Y and Z
15 9 8
= : : or 15:9:8.
32 32 32
Since only share of Z is given, it is assumed that Z has acquired his share from
X and Y in their old profit-sharing ratio.
Illustration 2
P, Q and R were partners in a firm sharing profits and losses in 3:2:1 ratio. They
admitted S for 10% profits. Calculate new profit-sharing ratio.
Solution :
10 1 1 9
S’s share = 10% or or , remaining share = 1- = .
100 10 10 10
9 3 27
P’s new share = × =
10 6 60
9 2 18
Q’s new share = × =
10 6 60
9 1 9
R’s new share = × =
10 6 60
 New profit sharing ratio of P,Q,R and S
27 18 9 1 6
= : : : or  27:18:9:6 or 9:6:3:2.
60 60 60 10 60
Case 2 :
When share of new partner and new ratio of old partners are given
In this situation, new partner’s share is deducted from I and balance is divided
among old partners in their new ratio. This gives new profit-sharing ratio of all the
partners of the new firm.
384
Illustration 3
1
X and Y are partners. They admit Z for th share. In future, profit sharing ratio
4
between X and Y would be 2:1. Calculate new profit-sharing ratio.
Solution :
1
Let the total share be = 1. Share of new partner Z is .
4
1 3
Remaining share = 1- = .
4 4
Existing partners’ share being calculated by dividing remaining share in their
future profit-sharing ratio (i.e., 2:1) as under :
2 3 6
X’s new share =  
3 4 12
1 3 3
Y’s new share =  
3 4 12
6 3 1 3
 New profit-sharing ratio of X, Y and Z = 12 : 12 : 4 or 12 =6:3:3 or 2:1:1.
Case 3 When new partner acquires his share from old partners in a
particular ratio
New partner may acquire a part of share of profits from one partner and part of
share of profits from another partner. In such a case, existing partners’ profit-sharing
ratio will change to the extent of share sacrificed on admission of the new partner.
Existing partners’ share of profits in the reconstituted firm is determined by deducting
the sacrifice made from the existing share of profits.
Illustration 4
X and Y are in partnership sharing profits and losses in the ratio of 5:3. Z is
1 1 1
admitted as a partner for th share for which he takes th from X and th from Y.
5 10 10
385
Calculate the new profit-sharing ratio of the partners.
Solution :
Calculation of future profit sharing ratio :
Old profit-sharing ratio of X and Y = 5:3
1 1
Z acquires his share th from X and th from Y.
10 10
5 1 25  4 21
X’s share after sacrifice =   
8 10 40 40
3 1 15  4 11
Y’s share after sacrifice =   
8 10 40 40
21 11 1 8
 The new profit-sharing ratio of X, Y and Z = 40 : 40 : 5 or 40  21118
: :
Illustration 5
1
M and N are partners sharing profits in the ratio of 5:4. They admit O for th
10
share of profits which he acquires, in equal proportions from both. Find out the new
profit-sharing ratio.
Solution :
1
O’s share of profit in the firm is , which he acquires from M and N in equal
10
proportions.
1 1 1
It means, M has surrendered of =
2 10 20
1 1 1
N has surrendered of =
2 10 20
 M’s share of profit in the new firm
5 1 100  9 91
   
9 20 180 180
N’s share of profit in the new firm
386
4 1 80  9 71
   
9 20 180 180
1 18
O’s share of profit in the new firm = or
10 180
Hence, new profit-sharing ratio of M, N and O
91 71 18
 : :  917118
: : .
180 180 180
Case-4 When new partner acquires his share by surrender of a particular
fraction of their share by the old or existing partners
In this case, shares surrendered by the old partners in favour of new partner
are added up in order to arrive at the share of new partner. The share surrendered by
old partners is deducted from their respective shares to determine old partners share
in the reconstituted firm.
Illustration 6
P and Q were partners in a firm sharing profits and losses in the ratio of 3:2. P
1 2
surrendered th of his share, and Q surrendered th of his share in favour of R, the
5 5
new partner. Calculate the new profit-sharing ratio.
Solution :
3 3 1 3
P’s share = , P surrendered in favour of R =  
5 5 5 25
3 3 15  3 12
So P’s new share    
5 25 25 25
2 2 2 4
Q’s share  , Q surendered in favour of R   
5 5 5 25
2 4 10  4 6
So Q’s new share    
5 25 25 25
387
3 4 7
R’s share is the sum total of shares surrendered by P and Q   
25 25 25
12 6 7
Now the new profit-sharing ratio of P,Q and R  : : or 12:6:7
25 25 25
Illustration 7
A and B share profits in the ratio of 5:4. They admit C as a partner. A surrenders
1 1
th of his share and B, rd of his share in favour of C. Calculate new profit-sharing
6 3
ratio.
Solution :
5 1 5 1 5
A’s share was . th of A’s share   
9 6 9 6 54
5 5 30  5 25
 A’s new share was    
9 54 54 54
4 1 4 1 4
B’s old share was . rd of B’s share =  
9 3 9 3 27
4 4 12  4 8
 B’s new share = 9  27  27  27
5 4 5  8 13
Hence, C’s share will be (sum of)   
54 27 54 54
Therefore, New ratio of A, B and C will be :
25 8 16 13
: or : or 25:16:13
54 27 54 54
Case 5
When new partner’s share contributed solely by only one existing partner
Illustration 8
X and Y are partners sharing profits and losses in the ratio of 3:2. They admit Z
1
as a new partner who gets th of profit, entirely from X. Calculate new profit-sharing
5
ratio.
388
Solution :
3
X’s original share =
5
1
X’s sacrifice in favour Z =
5
 X’s new share = old share - share sacrificed
3 1 2
=  
5 5 5
2 2 1
Hence, new profit sharing ratio of X, Y and Z will be : : or 2:2:1 .
5 5 5
Illustration 9
Ajay and Bijay are partners sharing profits in the ratio of 5:3. Chita is admitted
3
for th share, half of which was gifted by Ajay and the remaining share was taken by
10
Chita equally from Ajay and Bijay. Calculate new profit-sharing ratio.
Solution :
Ajay Bijay
5 3
(i) Their old share
8 8
3 1 3
(ii) Share gifted by Ajay   --
10 2 20
3 1 3 3 1 3
(iii) Share acquired by Chita    
20 2 40 20 2 40
New share of Ajay = old share - share gifted – share acquired by Chita
5 3 3 25  6  3 16
    
8 20 40 40 40
3 3 15  3 12
New share of Bijay    
8 40 40 40
389
16 12 3 12
New profit-sharing ratio of Ajay, Bijay and Chita  : : or
40 40 10 40
16 12 12
or  : :  4:3:3
40 40 40
8.4.2 Accounting treatment of Goodwill
Accounting Standard-26 (AS-26) on ‘Intangible Assets’ prescribes that goodwill
should be recorded in the books only when consideration in money or money’s worth
has been paid for it, i.e., goodwill is purchased. Thus, in case of admission or
retirement/death of a partner or in case of change in the profit sharing ratio among
partners, goodwill should not be raised in the books of the firm because no
consideration in money or money’s worth is paid for it. If any partner brings any
premium over and above his capital contribution at the time of his admission, such
premium should be distributed among the existing partners in their sacrificing ratio.
If goodwill is evaluated at the time of change in the constitution of the firm (by
way of admission/retirement/death/change in profit-sharing ratio), goodwill should
not be brought into books as it is inherent goodwill. The value of goodwill should be
adjusted through partners’ capital accounts.
As you know, Goodwill is an intangible asset which enables a firm to earn profit
over and above the normal profit (i.e., super profit) earned by other firms in the industry.
It arises due to efforts made by the old partners in the past. Therefore, at the time of
admission, new partner who acquires the share in future profits from the old or existing
partners, should compensate sacrificing partners by paying them an amount, termed
as goodwill or premium for goodwill.
So, goodwill is a way for compensating the old partners for the sacrifice they
make in favour of new partner. From the accounting point of view, there may be
different situations related to treatment of goodwill and these are :
(i) Goodwill paid privately : When goodwill or premium for goodwill is paid
privately (i.e., outside the business) by the new partner to the old partners, it is not
recorded in the books of account of the firm and hence, no entry is passed.
390
(ii) Goodwill/Premium for Goodwill brought in cash by the new partner
and retained in the business :
Under this situation, cash brought in by the new partner for his share of goodwill
is credited to goodwill account and then the same amount is credited to old partners’
capital accounts in their sacrificing ratio, debiting the goodwill account. The process
is illustrated by means of the following journal entries :
1) When new partner brings his share of capital and goodwill in cash.
Cash A/c Dr. (with share of capital brought in)
To New Partner’s Captial A/c
To Goodwill A/c
2) The amount of goodwill is credited to the old partners’ capital accouts in
sacrificing ratio.
Goodwill A/c Dr.
To old partners’ capital A/c
(individually)
Illustration 10
1
P and Q share profits in the ratio of 5:3. They admit R with th of share in the
5
future profits. R is required to pay A50,000 as capital and his share of goodwill
in cash. The Goodwill of the firm is valued at A80,000. Record the above
transactions in the books of the firm.
Solution :
5 3
Profit sharing ratio of Pand Q = 5:3 = :
8 8
1
R’s share in the profit =
5
1 4
 Remaining share = 1- 5 = 5
391
4 5 20
P’s share = × =
5 8 40
4 3 12
Q’s share = × =
5 8 40
Hence, profit-sharing ratio of P,Q and R
20 12 1 20 12 8 5 3 2
= : :  : : or : :
40 40 5 40 40 40 10 10 10
Therefore, their new profit sharing ratio
= 20:12:8 or 5:3:2
Sacrificing ratio = old ratio - new ratio
5 5 25  20 5
 P’s Sacrifice  8  10  40

40
3 3 15  12 3
Q’s sacrifice    
8 10 40 40
So, sacrificing ratio of P and Q = 5:3
Total goodwill of the firm = A80,000
1 1
R’s share of goodwill, for th of profit = A80,000 × = A16,000
5 5
Journal
Date Particulars L.F. Dr. Cr.
A A
Cash A/c Dr. 66,000
To R’s Capital A/c 50,000
To Goodwill A/c 16,000
(Being the amount brought in by R
towards his Capital and Goodwill)
Goodwill A/c Dr. 16,000
To P’s Capital A/c 10,000
To Q’s Capital A/c 6,000
(Being the amount of goodwill credited
to the old partners’ Capital Accounts in
their sacrificing ratio)
392
(iii) When the new partner brings his share of goodwill in cash which is
withdrawn by the old partners either partly or fully :
In this situation, the cash paid by the new partner towards goodwill, is credited
to the goodwill account and subsequently the amount in credited to the old partners’
capital accounts in their sacrificing ratio debiting goodwill account. At the time of
withdrawal of the same amount by the old partners, their capital accounts are debited
with their individual share of withdrawal and the cash/bank account is credited.
The following journal entries need to be passed :
1. For cash paid by the new partner towards his share of goodwill.
Cash A/c Dr.
To Goodwill A/c
(Being cash received from new partner towards goodwill)
2. Old partner’s capital accounts are credited in their sacrificing ratio debiting
goodwill A/c.
Goodwill A/c Dr.
To Old Partner’s Capital A/cs
(individually)
(Being the goodwill credited to the old partners capital accounts in their
sacrificing ratio)
3. Amount is withdrawn from the business by the old partners.
Old Partners’ Capital A/cs Dr.
(Individually)
To Cash
(Being the amount withdrawn from business)
Illustration 11
1
A and B share profits of a firm in the ratio of 2:1. They admit C with th share
4
in the profit with the understanding that C will pay A68,000 in cash towards his share
of capital and goodwill. The total goodwill of the firm is valued at A72,000. Pass
journal enties in the books of the firm if :
393
(a) A and B withdraw their share of goodwill from the business fully.
(b) A and B withdraw 25% of the amount of goodwill brought in by the new partner.
Solution :
1
Profit-sharing ratio of A and B = 2:1. C is admitted for th share in the profits,
4
1 3
hence, remaining share = 1- = . This is to be shared by A and B in their profit
4 4
sharing ratio.
3 2 2
 A’s new share = 4 × 3 = 4
3 1 1
B’s new share   
4 3 4
1
C’s share 
4
2 1 1
Hence, new profit-sharing ratio of all partners  : : or 2:1:1
4 4 4
Again sacrificing ratio of A and B = 2:1 (same as old ratio)
Total value of goodwill = A72,000
1 1
C’s share for th profit = A72,000× =A18,000.
4 4
C pays A68,000 for capital and goodwill. Therefore, his capital contribution
would be A68,000 - A18,000 = A50,000.
JOURNAL
A A
? Cash A/c Dr. 68,000
To C’s Capital A/c 50,000
To Goodwill A/c 18,000
(Being the amount brought in by C
towards his Capital and Goodwill)
394
Goodwill A/c Dr. 18,000
To A’s Capital A/c 12,000
To B’s Capital A/c 6,000
(Being the amount of goodwill credited
to the old partners’ Capital Accounts in
their sacrificing ratio)
(a) A’s Capital A/c Dr. 12,000
B’s Capital A/c 6,000
To Cash A/c 18,000
(Being the amount of goodwill
withdrawn by A and B fully)
(b) A’s Capital A/c Dr. 3,000
B’s Capital A/c Dr. 1,500
To Cash 4,500
(Being 25% of the amount of goodwill
withdrawn from business by A and B)
(iv) When the new partner is unable to bring his share of goodwill in cash :
When a new partner is admitted, he contributes his share of capital as agreed
upon but may express his inability to pay his share of goodwill in cash. Under this
situation, goodwill is treated by debiting the new partner’s capital account with his
share of goodwill and crediting the old partners’ capital accounts with their sacrificing
ratio. The following journal entries are passed :
1. Cash A/c Dr.
To New Partner’s Capital A/c
(Being cash brought in by new partner towards his capital)
2. New Partner’s Capital A/c Dr. (with his share of goodwill)
To Old Partners’ Capital A/c (in sacrificing ratio)
(Being the new partners’ share of
goodwill debited to his capital account
and credited to old partners’ capital
accounts in sacrificing ratio)
When the value of goodwill of the firm is not specifically given, the value
of goodwill has to be inferred on the basis of the net worth of the firm (hidden goodwill)
which is arrived at as follows :
395
A. Net worth (including goodwill) on the basis of capital brought in by incoming
partner. (Incoming partner’s capital X reciprocal of share of the incoming partner)
B. Networth (excluding goodwill) of the reconstituted firm (i.e., after taking into
consideration the capital brought in by the incoming partner)
C. Value of Goodwill (A-B)
Illustration 12
A and B were partners sharing profits and losses equally having capital of A10,000
1
each. C is admitted for th share in the profits of the firm and contributes A12,000
4
as his share of capital. Record the above transactions showing the treatment of
goodwill.
Solution :
Working Note :
1
C’s Capital for th share = A12,000
4
3
So, A and B’s share for th profit = 12,000×3=A36,000
4
But the combined capital of A and B = A20,000
Hence, Goodwill of the firm may be inferred at A36,000 – A20,000=A16,000
1
 C’s share in the goodwill = A16,000× 4 =A4,000.
JOURNAL
Date Particulars L.F. Dr. (A) Cr.(A)
? Cash A/c Dr. 12,000
To C’s Capital A/c 12,000
(Being capital brought in by C)
C’s Capital A/c Dr. 4,000
To A’s Capital A/c 2,000
To B’s Capital A/c 2,000
(Being the share of C’s goodwill in
the firm credited to old partners’
capital accounts in sacrificing ratio)
396
Illustration 13
Pass journal entries to record the following adjustments relating to revaluation
of assets and liabilities :
(a) Machinery of A80,000 brought down by 15%.
(b) Value of stock A30,000 appreciated by 10%.
(c) Furniture of A12,000 is brought down to A9,000.
(d) Stock of A35,000 is written down to A28,000.
(e) Building of A1,00,000 is written up to A1,20,000.
(f) Provision for doubtful debts @5% on Sundry Debtors of A50,000.
(g) Creditors were over estimated by A5,000.
(h) Interest accrued on investments A2,000 is to be brought into account.
(i) A claim of A750 for damages should be created against the firm.
(j) An old typewriter having a book value of A1,500 is to be written off fully.
Solution :
(a) Revaluation A/c Dr. 12,000
(Being machinery brought down by 15%)
(b) Stock A/c Dr. 3,000
(Being value of stock increased by A3,000)
(c) Revaluation A/c Dr. 3,000
To Furniture A/c 3,000
(Being value of furniture
decreased by A3,000)
(d) Revaluation A/c Dr. 7,000
To stock 7,000
(Being value of stock decreased by A7,000)
(e) Building A/c Dr. 20,000
(Being value of building increased)
(f) Revaluation A/c Dr. 2,500
To Provision for doubtful debts A/c 2,500
(Being provision for doubtful debts created)
397
(g) Creditors A/c Dr. 5,000
(Being creditor written down)
(h) Accrued Interest A/c Dr. 2,000
(Being interest accrued on investment
brought into account)
(i) Revaluation A/c Dr. 750
To Claim for damages A/c 750
(Being claim for damages created)
(J) Revaluation A/c Dr. 1,500
To Typewriter A/c 1,500
(Being old typewriter written off)
Illustration 14
The following was the Balance sheet of X and Y on 1st April 2016 :
(A) (A)
Sundry creditors 3,000 Cash in hand 4,000
Capital Accounts : Stock 14,000
X - 40,000 Machinery 10,000
Y - 30,000 70,000 Buildings 30,000
Furniture 5,000
75,000 75,000
X and Y share profits and losses in the ratio of 2:1. They decided to admit Z as
1
a new partner with th share in the profits of the firm. Z paid in A35,000 on his share
4
of capital. It was agreed to revalue the assets and liabilities as follows :
a) Stock to be appreciated by 10%
b) Machinery to be depreciated by 5%
c) Buildings to be written up to A38,000
d) Furniture is valued at A4,300
398
1
e) A provision for doubtful debts is to be created at 2 % on Sundry Debtors.
2
f) Creditors waive out their claim by A500.
You are required to pass necessary journal entries and open necessary ledger
accounts and show the Balance Sheet after Z’s admission.
Solution :
Journal
? Stock A/c Dr. 1,400
Buildings A/c Dr. 8,000
Creditors A/c Dr. 500
(Being revaluation of assets
and liabilities made)
? Revaluation A/c Dr 1,500
To Machinery A/c 500
To Furniture A/c 700
To Provision for doubtful debts A/c 300
(Being assets revalued)
Revaluation A/c Dr 8,400
(Being profit on revaluation transferred to X’s
and Y’s capital A/cs in old profit-sharing ratio)
Cash A/c Dr. 35,000
(Being capital brought in by Z)
Revaluation A/c
Particulars Amount (A) Particulars Amount (A)
To Machinery A/c 500 By Stock A/c 1,400
To Furniture A/c 700 By Buildings A/c 8,000
To Provision for doubtful debts A/c 300 By Creditors A/c 500
To X’s capital A/c (profit) 5,600
To Y’s capital A/c (profit) 2,800
9,900 9,900
399
Partners Capital Accounts
Dr. Cr.
X Y Z X Y Z
(A) (A) (A) (A) (A) (A)
By Balance b/d 40,000 30,000 --
By Revaluation A/c
(Profit) 5,600 2,800
By Cash -- -- 35,000
To Balance c/d 45,600 32,800 35,000
45,600 32,800 35,000 45,600 32,800 35,000
By Balance b/d 45,600 32,800 35,000
Cash Account
Dr Cr.
(A) (A)

39,000 39,000
Balance Sheet of X, Y and Z as on 1st April 2016
(A) (A)
Sundry Creditors 2,500 Cash in hand 39,000
Capital A/cs. Less provision for
X- 45,600 doubtful debtrs 300 11,700
Y- 32,800 Stock 15,400
Z- 35,000 1,13,400 Furniture 4,300
Machinery 9,500
Buildings 38,000
1,17,900 1,17,900
400
Illustration 15
The following is the Balance Sheet of A, B and C who were equal partners :
Balance Sheet of A, B and C as on 1st April 2016
(A) (A)
Capital Accounts : Buildings 19,500
A - 16,800 Furniture 2,400
B - 12,600 Stock 11,400
C - 6,000 35,400 Debtors 10,800
Trade creditors 6,000 Cash 900
Bills payable 3,600
45,000 45,000
They agreed to take D into partnership and give him 1/4th share in the profits,
on the following terms :
(a) D should bring a capital of A20,000.
(b) Stock and Furniture be depreciated by 10%.
(c) A provision for doubtful debts be created at 5% on sundry debtors.
(d) A liability of A1,080 be created against bills discounted.
(e) The value of building be increased to A27,000.
(f) The assets and liabilities to appear in the new Balance Sheet at the old figures.
Prepare Memorandum Revaluation Account and the Balance Sheet after D’s
admission into the firm.
Solution :
Memorandum Revaluation Account
Dr. Cr.
(A) (A)
To Stock A/c 1,140 By Buildings A/c 7,500
To Furniture A/c 240
To Provision for doubtful debt A/c 540
To Reserve for bills discounted 1,080
401
To Capital Accounts :
A - 1,500
B - 1,500
C- 1,500 4,500
7,500 7,500
To Building A/c 7,500 By Stock A/c 1,140
By Furniture A/c 240
By Provision for doubtful debts 540
By Reserve for bills discounted 1,080
By Capital Accounts :
A - 1,125
B - 1,125
C - 1,125
D - 1,125 4,500
7,500 7,500
Balance Sheet of A, B, C and D as on 1st April 2016

(A) (A)
Capital Accounts : Buildings 19,500
A 17,175 Furniture 2,400
B 12,975 Stock 11,400
C 6,375 Debtors 10,800
D 18,875 55,400 Cash 20,900
Trade creditors 6,000
Bills Payable 3,600
65,000 65,000
Working Note :
Balance of Capital Accounts :
A’s Capital = A16,800+A1,500 – A1,125 = A17,175
B’s Capital = A12,600+A1,500 – A1,125 = A12,975
C’s Capital = A6,000+A1,500 – A1,125 = A6,375
D’s Capital = A20,000 – A1,125 = A18,875
402
Illustration 16
P and Q are partners sharing profits in the ratio of 3:2. R is admitted and the new
profit-sharing ratio is 2:2:1. R brings in A20,000 as his capital and could not pay any
thing towards his share of goodwill which is valued at A3,000. The balance sheet of P
and Q as on 31.03.2016 was as follows :
Capital Accounts : Cash in hand 15,000
P - 15,000 Sundry assets 45,000
Q - 15,000 30,000
Profit and Loss A/c 10,000
60,000 60,000
It was further agreed by all partners that the value of sundry assets be written
down to A42,000 and sundry creditors be valued at A10,000, Pass journal entries to
give effect to the above adjustments and prepare necessary ledger accounts and show
the opening balance sheet of the firm after R’s admission.
Solution :
Working Note :
P:Q = 3:2
P:Q:R = 2:2:1
2
Q’s profit – sharing ratio remains intact, i.e.,
5
3 2
P’s old profit sharing ratio was and new share is , which means P alone has
5 5
1
sacrificed in favour of R. Hence, he is entitled to the compensation (goodwill)
5
from the new partner R.
Journal
Amt.(A) Amt.(A)
? Cash A/c Dr. 20,000
To R’s Capital A/c 20,000
(Being capital brought in by R)
403
R’s Capital A/c Dr. 3,000
(Being R’s share of goodwill debited to
R’s capital and credited to P’s capital A/c)
To Sundry Assets A/c 3,000
(Being decrease in the value of assets)
Sundry Creditors A/c Dr. 2,000
(Being decrease in the value
of sundry creditor)
P’s Capital A/c Dr. 600
Q’s Capital A/c Dr. 400
To Revaluation A/c 1000
(Being loss on revaluation transferred
to Capital Accounts of old partners in
old profit-sharing ratio)
(Being the undistributed profits
transferred to old partners’
capital accounts in their old profit–sharing ratio)
General Reserve A/c Dr. 8,000
(Being general reserve transferred to old
partners’ Capital Accounts in old
profit-sharing ratio.)
404
Ledger
Dr. Revaluation A/c Cr.
(A) (A)
To Sundry Assets 3,000 By Sundry Creditors 2,000
By Loss on Revaluation
transferred to
P’s Capital 600
Q’s Capital 400
3,000 3,000
Dr. General Reserve A/c Cr.

(A) (A)
To P’s Capital A/c 4,800 By Balance b/d 8,000
8,000 8,000
Profit and Loss A/c

Dr. Cr.
(A) (A)
To P’s Capital 6,000 By Balance b/d 10,000
To Q’s Capital 4,000
10,000 10,000
405
Partners’ Capital Accounts

Dr. Cr.
P Q R P Q R
(A) (A) (A) (A) (A) (A)
To P’s Capital -- -- 3,000 By Balance b/d 15,000 15,000 --
To Revaluation A/c 600 400 -- By Cash -- -- 20,000
To Balance c/d 28,200 21,800 17,000 By R’s Capital A/c 3,000 -- --
By P and L A/c 6,000 4,000 --
` By General Reserve A/c 4,800 3,200 --
28,800 22,200 20,000 28,800 22,200 20,000
By Balance b/d 28,200 21,800 17,000
Dr Cash Account Cr.

(A) (A)
To R’s Capital A/c 20,000 By Balance c/d 35,000
35,000 35,000
Balance Sheet of P, Q,R
as on 1st April 2016
(A) (A)
Capital Accounts Cash in hand 35,000
P- 28,200 Sundry Assets 42,000
Q- 21,800
R- 17,000 67,000
77,000 77,000
406
8.5 QUESTIONS
1. From the alternatives given under each bit write the correct answer along
with its serial number against each bit :
(i) When the share of goodwill of a new partner is brought in cash, it is shared by :
(a) old partners in old profit – sharing ratio.
(b) old partners in sacrificing ratio.
(c) old partners in gaining ratio.
(d) all the partners in new profit – sharing ratio.
(ii) A new partner may be admitted to the partnership :
(a) without the consent of all partners.
(b) with the consent of all partners.
(c) with the consent of majority of partners.
(d) with the consent of any one partner.
(iii) At the time of admission of new partner, goodwill appearing in the books is
shared among old partners in :
(a) New profit sharing ratio.
(b) Old profit sharing ratio.
(c) Sacrificing ratio.
(d) Equally.
(iv) When assets are revalued, any increase in the value of assets is debited to :
(a) Revaluation Account.
(b) Asset Account.
(c) Profit and Loss Account.
(v) The profit on revaluation of assets and liabilities are shared by :
(a) old partners in sacrificing ratio.
407
(b) old partners equally.
(c) old partners in old profit – sharing ratio.
(d) all partners including new partner in new ratio.
(vi) A, B and C are partners in a firm. If D is to be admitted as a new partner :
(a) old parnership has to be dissolved
(b) old firm has to be dissolved.
(c) Both old partnership and firm have to be dissolved.
(d) Neither firm nor partnership need to be dissolved.
(vii) The balance of Memorandum Revaluation Account (second part) is transferred
to the capital accounts of the partners in :
(a) Capital ratio
(b) Old profit sharing ratio
(c) New profit sharing ratio
(d) Equally among all partners
(viii) A and B who are partners sharing profits in the ratio of 3:1 and admit C for one
–fourth share in the future profits, the profit sharing ratio will be :
(a) A 9/16; B 3/16; C 4/16
(b) A 10/16; B 2/16; C 4/16
(c) A 8/16; B 4/16; C 4/16
(d) A 6/16; B 6/16; C 4/16
1
(ix) A and B sharing profits in the ratio of 2:1 admit C for th share in future profits.
5
The new profit and loss sharing ratio is :
(a) 4:2:1
(b) 5:3:7
(c) 8:4:3
(d) 5:7:3
408
(x) A and B sharing profits in the ratio of 5:3 admit C and new profit sharing ratio of
A, B and C is fixed at 4:2:2. The ratio of sacrifice of A and B is :
(a) 5:3
(b) 1:2
(c) 1:1
(d) 2:1
(xi) X and Y who shared profits in the ratio of 3:1 respectively admit Z to one –
fourth share in the future profits. Z acquired his share equally from X and Y. The
new profit sharing ratio would be :
(a) 9:3:4
(b) 2:1:1
(c) 3:2:3
(d) 5:1:2
(xii) A and B are partners in a business sharing profits in the ratio of 5:3. They admit
1 3 1
C as a partner with th share in the profits which he acquires from A and th
4 4 4
from B. He pays A8,000 for his share of goodwill. A and B will be credited by:
(a) A5,000 and A3000 respectively
(b) A6,000 and A2000 respectively
(c) A3,000 and A5,000 respectively
(d) A4,000 each.
[Ans. i (b), ii(b), iii(b), iv(b), v(c), vi(a), vii(c), viii(a), ix(c), x(c), xi(d), xii(b)]
2. Answer the following questions in one ward or term each :
(i) By what name is the compensation, paid by a new partner to the old partners,
known ?
(ii) By what name is the undistributed profit of a firm known ?
(iii) What is the name given to the excess of desired total capital of a firm over
the actual combined capital of all the partner ?
409
(iv) On which side of Revaluation Account, unrecorded liabilities are recorded ?
(v) On which side of Revaluation Account, appreciation in building is
recorded ?
(vi) In which ratio, goodwill brought in by new partner, is distributed among
old partners ?
[Ans.: (i) Goodwill, (ii) General Reserve/ Profit and Loss Account credit balance,
(iii) Hidden goodwill, (iv) Debit side, (v) Credit side, (vi) Sacrificing ratio]
3. Fill in the blanks with appropriate words :
(i) Share of goodwill brought in cash by the new partner in also called ____.
(ii) Reduction in provision for bad debts will be ______ to Revaluation A/c.
(iii) Profit and loss arising from revaluation of assets and liabilities is shared
by _______ partners.
(iv) Old ratio is also the _______ ratio unless otherwise mentioned.
(v) _______ assets are debited to old partners’ Capital Accounts at the time
of admission of partners.
[Ans : (i) Premium; (ii) credited, (iii) old, (iv) sacrificing, (v) Fictitious]
4. Correct the underlined partions of the following sentences :
(i) Profits and loss adjustment account is otherwise known as profit and loss
appropriation account.
(ii) The Employees’ Provident Fund represents profits.
(iii) At the time of retirement of a partner, sacrificing ratio is calculated.
(iv) As per AS-20 only purchased goodwill be recorded in the books of account.
(v) The sum of closing capital and opening capital divided by two is known as
total capital employed.
(vi) Profit on revaluation of assets and liabilities is transferred to the capital
of old partners in the sacrificing ratio.
[Ans.: (i) Revaluation, (ii) liability, (iii) admission, (iv) AS-26, (v) average,
(vi) old.]
410
(i) What do you understand by admission of a partner ?
(ii) State any one purpose of admitting a new partner into a firm.
(iii) State any one right acquired by a newly admitted partner.
(iv) What is sacrificing ratio ?
(v) State the ratio in which the old partners share all the accumulated profits,
reserves and losses.
(vi) State whether Revaluation Account is debited or credited to record the
increase in the value of an asset.
(vii) List any two items that need adjustments in the books of accounts of a
firm at the time of admission of a partner.
(viii) State whether partner’s Capital Account is debited or credited to record
the profit on Revaluation Account.
(ix) Under what circumstance will the premium for goodwill paid by the
incoming partner, not be recorded, in the books of accounts ?
(x) State whether at the time of admission of a partner, partnership is dissolved
or partnership firm is dissolved.
(i) What is hidden goodwill ? How is it treated when a new partner is admitted ?
(ii) What is the effect of Memorandum Revaluation Account on partners’
capital accounts ?
(iii) Explain the AS-26 with regard to the treatment of goodwill.
(iv) Pass the journal entries when a new partner is unable to bring his share of
goodwill in cash.
(v) On admission of a partner, what journal entries will be passed for :
(a) Increase in assets
(b) Increase in liabilities
(i) What do you mean by Memorandum Revaluation Account ?
411
(ii) State any two circumstances when Revaluation Account will be debited
and any two situation when Revaluation Account will be Credited.
(iii) Why is it necessary to revalue the assets and reassess the liabilities in
case of the admission of a partner ?
(iv) Draw a Revaluation Account with imaginary amounts.
(v) What entry will be passed when new partner brings in goodwill in cash ? In
what ratio the old partners will divide it ?
8. A and B share the profits of a firm in the ratio of 3:2. They admit C as a partner
and the new profit-sharing ratio becomes 3:2:1. The goodwill of the firm is
valued at 2 years purchase of the average of three years profits. The profits of
the firm for the last 3 years were A58,000; A68,000 and A54,000. C brings his
share of goodwill in cash. Journalise the above transactions.
[Ans.: Goodwill of the firm A1,20,000]
9. P and Q are partners sharing profits and losses in the ratio of 3:2. They admit R
1 1
into partnership with th share in the profits which he acquires th from P and
4 6
1
th from Q. The goodwill of the firm is valued at A72,000. R pays A1,00,000
12
as capital and pays his share of goodwill in cash. Half of the amount of goodwill
is withdrawn by the old partners. Give necessary journal entries.
[Ans : P’s withdrawal A6,000 and Q’s withdrawal A3,000]
10. A, B and C are partners sharing profits in the ratio of 5:3:2. D is admitted with
1
th share. Goodwill of the firm is valued at A60,000. D brings in A80,000 as
10
his share of capital but could not pay anything for goodwill in cash. New ratio is
fixed at 4:4:1:1. Pass journal entries.
[Ans : B’s capital and D’s capital wil be debited by A6,000 each and A’s capital
C’s capital will be credited by A6,000 each]
412
11. X and Y are partners sharing profits in the ratio of 3:2. Z is admitted and the new
profit sharing ratio is 2:2:1. Z brings in cash A20,000 as capital and A3,000 as
goodwill. The balance sheet of X and Y is as follows :
(A) (A)
Capital Accounts : X 40,000 Sundry Assets 80,000
Y 30,000
Reserve Fund 10,000
80,000
Give journal entries and prepare the balance sheet of new firm.
12. A and B are equal partners. They decided to admit C as a partner and readjust
the Balance Sheet values for this purpose. The Balance Sheet of A and B as on
31st. December, 2016 was as follows :
(A) (A)
Creditors 1,000 Cash 600
Bills Payable 1,000 Debtors 1,500
Reserve Fund 400 Stock 1,400
A’s Capital 1,500 Furniture 400
B’s Capital 1,000 2,500 Machinery 1,000
4,900 4,900
The following adjustments are to be made before C’s admission :
(a) A300 were to be provided for doubtful debts.
(b) Furniture was valued at A250.
(c) Investments worth A400 not shown in the Balance Sheet were to be taken into
account.
(d) C brings A1,000 as capital and A1,000 for goodwill which amount was withdrawn
by A and B fully.
Give journal entries, Revaluation Account and Balance Sheet of the new firm.
[Ans.: Loss on Revaluation A50]
413
13. X, Y and Z are partners in a firm sharing profits and losses in the ratio of
2:2:1. Their Balance Sheet as on 31st March, 2017 was as follows :
(A) (A)
Sundry Creditors 12,850 Land and Building 25,000
Outstanding liabilities 1,500 Furniture 6,500
General Reserve 6,500 Closing Stock 11,750
Capital Accounts : Sundry Debtors 5,500
X 12,000 Cash in hand 140
Y 12,000 Cash at Bank 960
Z 5,000 29,000
49,850 49,850
P is admitted as a partner with effect from 1st April 2017 on the following
terms :
a) P shall bring A5,000 towards his capital.
b) The value of stock be intereased by A2,500.
c) Provision for bad and doubtful debts should be provided at 10% of the debtors.
d) The furniture to be depreciated by 10%.
e) The value of land and building be appreciated by 20%.
f) The outstanding liabilities of A1,000 has been paid by X, for which no entry
has been made in books.
g) General reserve will be transferred to the capital accounts of partners.
h) The new profit sharing ratio shall be 5:5:3:2 among X, Y, Z and P respectively.
Prepare Revaluation Account, Capital Accounts of partners and their new
Balance Sheet.
[Ans.: Profit on revaluation A6,300]
414
14. A, B and C are partners in a firm sharing profits and losses in the ratio of 2:3:1.
1
They decided to admit D as a partner with th share in the future profits. Their
4
Balance Sheet as on 31st March 2017 was as follows :
(A) (A)
B’s Capital 35,000 Furniture 10,000
C’s Capital 22,000 Motor Car 20,000
Cash at Bank 18,000
A’s Capital 9,000
57,000 57,000
The following adjustments are to be made :
a) The motor car is taken over by B at a value of A25,000.
b) The furniture is revalued at A18,000.
c) D is to bring A20,000 as his capital and his share of goodwill in cash. The
goodwill of the firm is valued of A48,000.
d) Unrecorded debtors of A11,000 be brought into account.
e) Expenses incurred, but not paid A3,000 are to be provided for. Pass journal
entries and prepare Revaluation Account, Capital Accounts of Partners and the
new Balance Sheet after D’s admission.
15. The following is the Balance Sheet of P, Q and R as on 31.03.2017.
(A) (A)
Bills Payable 6,000 Debtors 26,500
Capital Accounts : Stock 30,000
P 40,000 Furniture 7,500
Q 33,500 Land and Building 50,000
R 25,000 98,500
1,15,500 1,15,500
415
They share profits in the ratio of 6:5:3. On 1st April 2017, they agreed to
1
admit S as a partner giving him th share in future profits. The following
10
arrangements were made :
a) S should bring A14,840 as his capital.
b) Stock be depreciated by 10% and furniture by A900.
c) A reserve of A1,300 be made for outstanding repair bill.
d) The value of land and buildings be brought upto A65,000.
e) S does not contribute anything for goodwill which was valued at 8,400 for the
firm.
Pass necessary journal entries to record the above and prepare the new Balance
Sheet.
16. The Balance Sheet of A, B and C sharing profits in the ratio of 3:2:1, is given
below :
(A) (A)
Trade creditors 1,60,000 Cash at Bank 40,000
Employee’s Provident Fund 20,000 Debtors 2,00,000
Contingency Reserve 1,26,000 Less provision 3,000 1,97,000
Stock 2,03,000
A’s Capital 4,00,000 Furniture 30,000
B’s Capital 4,00,000 Machinery 5,30,000
C’s Capital 2,00,000 Buildings 3,00,000
Advertisement
Suspense A/c 6,000
13,06,000 13,06,000
They decided to admit D into partnership on the following terms and conditions:
a) New profit – sharing ratio will be 3:3:2:2.
416
b) Goodwill of the firm is valued at A3,00,000 and D brings his share of goodwill
in cash.
c) D should bring a capital of A1,50,000.
d) Contingeney Reserve is no more required.
e) Provision for doubtful debts to be raised to 5% on debtors.
f) Machinery is found overvalued by A30,000 and Building is found undervalued
by A67,000.
Prepare Revaluation Account, Capital Accounts of partners and the new
Balance Sheet.
[Ans.: Revaluation profit A1,56,000]
17. The Balance Sheet of A and B who share profits and losses in the ratio of 3:2 as
on 31st March 2017 was as follows :
(A) (A)
A’s Capital 1,00,000 Goodwill 20,000
B’s Capital 75,000 Plant 45,000
Creditors 70,000 Furniture and Fittings 37,500
Provident Fund 20,000 Stock 57,500
Debtors 55,000
Cash 40,000
2,65,000 2,65,000
On 1st April, 2017, C was admitted into partnership on the following terms :
a) New profit – sharing ratio will be 2:2:1.
b) C is to bring his capital of A50,000 in cash and to pay his share of goodwill in
cash. Goodwill for this purpose, is to be valued at 2 years purchase of average
of the previous 4 years profits. The profits for the past four years were A25,000;
A22,500; A25,000 and A27,500.
417
c) Other assets are valued as under :
Plant A52,000; Furniture and Fittings A32,000; Stock A63,000; Debtors
A50,000.
d) The value of assets except cash shall remain unchanged.
Give necessary journal entries and the opening Balance Sheet of the
reconstituted firm.
[Ans : value of goodwill A50,000. Revaluaiton profit A2,500]
18. A and B are partners sharing profits in the ratio of 2:1. Their Balance Sheet as
on 31st March 2017 is as follows :
(A) (A)
Sundry Creditors 44,000 Cash 17,000
Capital Accounts : Sundry Debtors 15,000
A 30,000 Bills Receivable 4,000
B 20,000 50,000 Stock 25,000
Furniture and Fixtures 3,000
Land & Buildings 30,000
94,000 94,000
C is admitted to partnership with effect from 1st April 2017 on the following
terms :
1
a) That he brings in A15,000 as his capital for th share and pays A6,000 for
4
goodwill, half of which is to be withdrawn by A and B.
b) Provision to the extent of A1,500 is to be made since there is likely to be
claim against the firm for damages.
c) A liability on account of unpaid electricity bill of A500 is to be provided for.
d) That the stock is to be reduced to A23,000 and furniture and fittings by A1,000.
418
e) That a 5% reserve for bad debt is to be created.
f) That value of land and buildings be appreciated by 20%.
g) An item of A1,200 included in creditors has to be written off.
h) That the value of assets and liabilities will not change except cash.
Prepare the necessary accounts and opening Balance Sheet the firm.
[Ans : Profit on Revaluation (1st part A1,450)]
-o-
548
9.10 QUESTIONS
1. From the alternatives given below, choose and write the correct answer along
with its serial number against each :
(i) Minimum number of shareholders in a private limited campany other than one
person company is :
(a) 7 (b) 50 (c) 2 (d) 10
(ii) Minimum number of shareholders in a public limited company is :
(a) 2 (b) 7 (c) 50 (d) 20
(iii) Maximum number of shareholders in a private company is :
(a) 200 (b) 50 (c) 7 (d) No limit as to maximum number
(iv) Maximum number of shareholders in a public limited company is :
(a) No limit as to maximum number (b) 50 (c) 7 (d) 100
(v) As per the Comapnies Act, 2013, minimum amount of paid up share capital in
a private limited company is :
(a) A5 lakh (b) A1 lakh (c) A2 lakh (d) A10 lakh
(vi) As per the Comapnies Act, 2013, minimum amount of paid up share capital in
a public limited company is :
(a) A2 lakh (b) A5 lakh (c) A1 lakh (d) No such minimum amount
(vii) The equity shareholders of a company are :
(a) creditors (b) debtors (c) owners (d) customers of the company
(viii) The preference shareholders of a company have preferential right :
(a) to receive dividednd
(b) to return of capital when the company goes into liquidation
(c) both (a) and (b) above
(d) to participate in management
Accounting for Companies : Accounting for Share Capital
549
(ix) Preference shareholders who do not have any right to share the surplus left
over after paying equity shareholders are called :
(a) Non-participating preference shareholders
(b) Non-convertible preference shareholders
(c) Non-cumulative preference shareholders
(d) Irredeemable preference shareholders
(x) Nominal share capital is :
(a) the amount of share capital issued by a company
(b) the amount of share capital subscribed by the public
(c) the amount of share capital which is actually paid by the shareholders
(d) the maximum amount of capital which a company is authorised to raise
(xi) The part of share capital which can be called up only in the event of winding up
of a company is known as :
(a) authorised capital (b) called up capital
(c) reserve capital (d) uncalled capital
(xii) The minimum share application money as per Companies Act is :
(a) 5% of the nominal value of shares
(b) 10% of the nominal value of shares
(c) 25% of the nominal value of shares
(d) 5% of the issue price of shares
(xiii) As per the guidelines of Securities and Exchange Board of India, the minimum
share application money is :
(c) 5% of the issue price of shares
550
(xiv) When excess application money is to be adjusted towards allotment, the

accoutn to be credited is :
(a) share applicatiion account (b) share allotment account
(c) share capital account (d) calls-in-advance account
(xv) According to Table F ot the Companies Act, 2013, the maximum amount of
one call should not exceed :
(c) 10% of the nominal value of shares
(xvi) When shares are allotted, one of the following accounts to be credited is :
(a) share allotment account (b) share capital account
(c) share application account (d) bank account
(xvii) Securities premium cannot be utilised for :
(a) issuing fully paid bonus shares to the members
(b) writing off the preliminary expenses of the company
(c) writing off discount on issue of debentures of the company
(d) declaration of dividend to the shareholders
(xviii) If the Articles of Association are silent, interest on calls-in-arrear in charged
at a maximum rate of :
(a) 5% p.a. (b) 10% p.a. (c) 12% p.a. (d) 6% p.a.
(xix) As per the provisions of Table F of the Companies Act, 2013, interest on
calls-in-advance is payable by the company at :
(a) 5% p.a. (b) 10% p.a. (c) 12% p.a. (d) 6% p.a.
551
(xx) Amount of calls-in-advance is :

(a) added to share capital in the Balance Sheet
(b) deducted from share capital in the Balance Sheet
(c) shown on the assets side of the Balance Sheet
(d) shown on the Equity and Liabilities side of the Balance Sheet
(xxi) A company offered 10,000 shares of A10 for public subscription. 8,000 shares
were subscribed on which A8 per share was called up. Amount due on 7,000
shares was received at A8 per share and A6 per share on 1,000 shares. The
paid up capital of the company is :
(a) A64,000 (b) A8,000 (c) A62,000 (d) A56,000
(xxii) On forfeiture of shares, the account to be debited is :
(a) Share forfeiture A/c (b) Capital reserve A/c
(c) Shareholders' A/c (d) Share capital A/c
(xxiii) Shares can be forfeited :
(a) for failure to pay the allotment or call money
(b) for failure to attend the shareholders' meeting
(c) for failure to repay the loan to the bank for which the shares are pledged as
security
(d) for not buying the products of the company
(xxiv) On forfeiture, share capital account is debited with :
(a) the amount received on such forfeited shares
(b) the nominal value of shares forfeited
(c) the called up amount on the forfeited shares
(d) the amount not received on the shares forfeited
552
(xxv) The profit on reissue of forfeited shares is transferred to :

(a) General Reserve A/c (b) Capital reserve A/c
(c) Capital Redemption Reserve A/c (d) Securities Premium Reserve A/c
(xxvi) On forfeiture of shares, the share forfeiture account is credited with :
(a) the amount not received on shares forfeited
(b) the amount received on such forfeited shares
(c) the nominal value shares forfeited
(d) the called up amount on the shares forfeited
(xxvii) If a share of A100 issued at par is forfeited on which A80 has been called up
and A60 paid, the share capital account is debited with :
(a) A60 (b) A80 (c) A20 (d) A40
(xxviii) The balance of share forfeiture account is shown in the Balance Sheet under
the head :
(a) Reserves and Surplus (b) Share Capital
(c) Current Liabilities (d) Non-current Liabilities
(xxix) If a share of A100 issued at a premium of A20, is forfeited in respect of which
the full amount has been called up and A80 (including premium) is paid, the
share capital account is debited with :
(a) A120 (b) A100 (c) A80 (d) A20
(xxx) X Ltd. forfeited 100 shares of A10 each issued at par and fully called up, on
whih A4 per share was paid. The minimum price which the company must
charge, if all the forfeited shares are reissued as fully paid up is :
(a) A600 (b) A1,000 (c) A400 (d) A800
[Ans : (i) c, (ii) b, (iii) a, (iv) a, (v) b, (vi) b, (vii) c, (viii) c, (ix) a, (x) d, (xi) c,
553
(xii) a, (xiii) d, (xiv) b, (xv) d, (xvi) b, (xvii) d, (xviii) b, (xix) c, (xx) d, (xxi) c,
(xxii) d, (xxiii) a , (xxiv) c, (xxv) b, (xxvi) b, (xxvii) b, (xxviii) b, (xxix) b, (xxx)
a.]
(i) Name the company which has only one person as its member.
(ii) Name the company which limits the number of its members to 200.
(iii) Which type of comapny has a minimum paid up capital of rupees five lakh or
such higher paid up capital as may be prescribed ?
(iv) Which type of shares have voting rights ?
(v) Which type of shares carry preferential rights as regards payment of dividend
and repayment of capital ?
(vi) What is the other name of authorised capital ?
(vii) Under which head of the Balance Sheet 'securities premium reserve accoun'
is shown ?
(viii) Which balance does calls-in-arrear account show ?
(ix) What is the maximum rate of interest charged on 'calls-in-arrear' as per Table
F of schedule I of the Companies Act, 2013 ?
(x) What is the maximum rate of interest paid on 'calls-in'advance' as per the Table
F of schedule I of the Companies Act, 2013 ?
(xi) Under which head of the Balance Sheet, Share Forfeiture A/c' is shown ?
[Ans : (i) one person company, (ii) Private Limited company, (iii) Public
Limited company, (iv) Equity shares (v) Preference shares (vi) Nominal or
Registered capital (vii) Reserves and surplus, (viii) Debit, (ix) 10%, (x) 12%,
(xi) current liabilities, (xii) Share Capital.]
554
3. Answer the following questions in one sentence each:

(i) State any one essential feature of a joint stock company.
(ii) Write any one feature of a private limited company.
(iii) Write any one essential feature of a public limited comapny.
(iv) What is a share ?
(v) What do you mean by redeemable preference shares ?
(vi) What is authorised capital of a company ?
(vii) What is subscribed capital ?
(viii) How does 'Securities premium Reserve' appear in the Balance Sheet ?
(ix) What do you mean by Over-subseription ?
(x) What is under-subscription ?
(xi) What are calls-in arrear ?
(xii) What are calls-in-advance ?
(xiii) How are calls-in-advance shown in the Balance Sheet ?
(xiv) How are calls-in-arrear shown in the Balance Sheet ?
(xv) What is the name given to the part of capital of a company which is called up
only on winding up ?
(xvi) State the meaning of 'subscribed and fully paid up capital ?
(xvii) What is the maximum amount of discount which may be allowed on reissue of
forfeited shares ?
(xviii) What is meant by 'Issue of shares at par' ?
(xix) Where would you transfer the balance left in the 'Share Forfeiture Account'
after the reissue of such shares ?
(xx) How does 'Capital Reserve' appear in the Balance Sheet ?
555
4. Correct the underlined portion of the following sentences:

(i) Liability of a shareholder is limited to paid up value of the shares allotted to
him.
(ii) Calls-in-advance is shown separately in the Balance Sheet under the main head
'Current Assets'.
(iii) The maximum rate of interest on calls-in-advance payable by a company is
6% p.a. as per Table F of schedule I of the Companies Act, 2013.
(iv) As per Table F of schedule I of the Companies Act, 2013, a company can
charge interest @5% p.a. on calls-in-arrear.
(v) Subscribed capital refers to the maximum amount which a company is
authorised to issue shares.
(vi) Shares are said to have been issued at par when an applicant has to pay a sum
more than the face value of the share.
(vii) Shares are said to be under-subscribed when the number of shares applied for
is more than the number of shares offered to the public for subscription.
(viii) Redeemable preference shareholders have a right to get their preference shares
converted into equity shares at their option according to the terms of issue.
(ix) Authorised capital is that part of issued capital which is subscribed for by the
public.
(x) Paid up capital is that part of subscribed capital. which has been called up for
payment by the directors, from shareholders.
[Ans.: (i) face, (ii) Liabilities, (iii) 12%, (iv) 10%, (v) Authorised, (vi) premium,
(vii) over-subscribed, (viii) convertible, (ix) subscribed, (x) called.]
5. Fill up the blanks:
(i) Maximum number of shareholders in a private limited company is _______.
556
(ii) Minimum number of shareholders in a public limited company is _______.

(iii) The equity shareholders are the _______of a company.
(iv) The part of share capital which can be called up only is the event of winding
up of a company is known as _______capital.
(v) The minimum share application money is _______% of the issue price of
shares as per the guidelines of Securities and Exchange Board of India.
(vi) When shares are allotted, share _______account is credited.
(vii) The balance of calls-in-arrear account is shown on the Equity and Liabilities
side of the Balance Sheet by way of _______from called up capital under the
head 'subscribed but not fully paid capital ?
(viii) The amount of calls-in-advance is a _______of the company.
(ix) Calls-in-advance is shown on the Equity and Liabilities side of the Balance
Sheet under the main head 'Current Liabilities' and sub-head 'Other
_______Liabilities.
(x) As per Table _______of schedule I of the Companies Act, 2013, a company
may pay maximum 12% p.a. interest on calls-in-advance.
(xi) When shares are forfeited, share _______account is debited for the amount
already called up on shares forfeited.
(xii) After the reissue of all the forfeited shares, the credit balance of share
forfeiture acount is tranferred to capital reserve account and is shown under
the head 'Shareholders' Funds' and sub-head 'Reserve and _______.
(xiii) The company cannot proceed with the allotment of shares, unless it receives
_______subscription.
(xiv) If any shareholder fails to pay the allotment money or any call money within
the specified period, the company may _______his shares.
557
(xv) According to the guidlines of SEBI, minimum subscription has been fixed at
_______% of the issued amount.
[Ans.: (i) 200, (ii) 7, (iii) owners, (iv) reserve, (v) 25, (vi) capital, (vii)
deduction, (viii) debt, (ix) other, (x) F, (xi) capital, (xii) surplus, (xiii) minimum,
(xiv) forfeit, (xv) 90.)
6. Answer the following questions within 30 words each:
(i) Write any two features of a joint stock company.
(ii) State any two features of a private limited company.
(iii) Write any two essential features of a publci limited company.
(iv) What are the types of shares which a company can issue ?
(v) What are preference shares ?
(vi) What are equity shares ?
(vii) What is cumulative preference share ?
(viii) What do you mean by redeemable preference share ?
(ix) What is participating preference share ?
(x) What do you mean by convertible preference shares ?
(xi) What is authorised capital ?
(xii) What is subscribed capital ?
(xiii) What do you mean by 'Issued capital' ?
(xiv) What is meant by 'Reserve Capital' ?
(xv) What do you mean by 'sweat equity shares' ?
(xvi) What is meant by 'Issue of shares at a premium' ?
(xvii) Write any two purposes for which securities premium can be utilised by
a company.
(xviii) What is meant by 'over-subscription' ?
(xix) What is pro rata allotment of shares ?
558
(xx) What is calls-in arrear ?

(xxi) What is calls-in-advance ?
(xxii) What is meant by 'Issue of shares for consideration other than cash' ?
(xxiii) What is forfeiture of shares ?
(xxiv) How are forfeited shares reissued ?
(xxv) State the steps a company can take in case of over-subscription of shares
other than rejecting applications.
(i) State any three points of distinction between private limited company and
public limited company.
(ii) Write any three points of distinction between an equity share and a
preference share.
(iii) Write any three points of distinction between calls-in-arrear and calls-in-
advance.
(iv) What do you mean by 'private placement of shares' ?
(v) What is pro rata allotment of shares ?
(vi) What is 'Minimum subscription' ?
(vii) What is meant by 'Issue of shares for consideration other than cash' ?
(viii) State the purposes for which securities premium can be utilised.
(ix) State any six essential features of a joint stock company.
(x) Mention the alternatives while allotting shares in case of over-subscription
by public.
8. Define a joint stock company. Discuss the essential features of a joint stock
company.
9. What is a public limited company ? State the differences between a private
limited and a public limited company.
559
10. What do you mean by 'share' ? Describe the different classes of shares which
a company can issue.
11. What is a preference share ? Distinguish between preference share and equity
share.
12. What is share capital ? Explain different classes of share capital. How are
they shown in the Balance Sheet ?
13. Discuss brifely the different kinds of companies.
14. Can the shares be issued at a premium ? State the purposes for which securities
premium reserve can be utilised.
15. What is over-subscription of shares ? How does a company allot shares in
case of over-subscription ? Illustrate your answer.
16. What is 'calls-in-arrear' ? Explain the accounting treatment of calls-in-arrear
with suitable examples.
17. What is calls-in-advance ? Discuss the accounting treatment of calls-in-advance
with imaginary figures.
18. What is forfeiture of shares ? Can forfeited shares be reissued at discount ? If
so, th what extent ? Where would you transfer the balance of share forfeiture
account after reissue of the forfeited shares ? Explain with examples.
19. A Ltd. was incorported with an authorised capital of A50,00,000, divided into
5,00,000 Equity shares of A10 each. The company offered 1,00,000 Equity
shares for public subscription. The public applied for 80,000 Equity shares
and the amount due on these shares was duly received. How will you show the
'Share Capital' in the Balance Sheet of the company as per Schedule III of the
Companies Act, 2013 ? Also prepare 'Notes to Accounts' for the same.
[Ans.: Subscribed and fully paid up capital A8,00,000.]
20. B. Ltd. was registered with an authorised capital of A50,00,000 in Equity
shares of A10 each. If offered 1,00,000 Equity shares for public subscription.
560
The public applied for 80,000 Equity shares and the shares were fully allotted.
The Directors called up A8 per shares on these shares. The entire called up
amount on shares was received except A2 per share on 1,000 shares. Prepare
an extract of the Balance Sheet of B. Ltd. showing 'share capital' as per the
schedule III, of Companies Act, 2013 and also prepare 'Notes to Accounts'.
[Ans: Subscribed but not fully paid up capital A6,38,000.]
21. AB Ltd. was formed on 1.1.2016 with an authorised capital of A50,00,000
divided into 5,00,000 Equity shares of A10 each. It offered 20% of the shares
to the public for subscription. Public applied for 80,000 shares and the shares
were duly allotted. All calls were made and the amount duly received except
A2 per share on 500 shares. Show the 'share capital' is the Balance Sheet of
the company as per schedule III of the Companies Act, 2013 at the end of
financial year. Also prepare 'Notes to Accounts' for the same.
[Ans.: Subscribed and fully paid up capital A7,95,000 and Subscribed but not
fully paid up capital A4,000.]
22. X Ltd. was incorporated on 1.6.2015 with an authorised capital of A50,00,000,
divided into 5,00,000 Equity shares of A10 each. Out of these, 20,000 Equity
shares were issued to the vendors as fully paid up as purchase consideration
for a machine purchased and issued 80,000 Equity shares to the public for
subscription, the entire issue being subscribed and duly allotted. The amounts
due on these shares were received in full except A2 per share on 6,000 shares.
You are required to :
(a) show the 'share capital' in the Balance Sheet of X Ltd. as per schedule III of
the Companies Act, 2013 as at 31st March, 2016, and (b) prepare 'Notes to
Accounts' relating to share capital.
[Ans : Subscibed and fully paid up capital A9,40,000, and subscribed but not
fully paid up capital A48,000.]
561
23. Y Ltd. was formed on 1.10.2015 with an authorised capital of A50,00,000,

divided into 4,00,000 Equity shares of A10 each and 1,00,000 6% Preference
shares of A10 each. The company issued 80,000 Equity shares and 20,000
6% preference shares for public subscription. Applications for 75,000 Equity
shares and 15,000 6% preference shares were received and duly allotted by
the directors. The amounts due on these shares were received in full except
A2 per share on 500 Equity shares and A3 per share on 1,000 6% preference
shares. Prepare an extract of the Balance Sheet of Y Ltd. as at 31st March,
2016 showing 'share capital' as per the Schedule III of the Companies Act,
2013 and also prepare 'Note to Accounts'.
[Ans. Subscribed and fully paid up capital: Equity share capital A7,45,000, 6%
Preference share capital A1,40,000 Subscribed but not fully paid up capital :
Equity share capital A4,000, 6% Preference share capital A7,000.]
24. Moon Ltd. issued 20,000 Equity shares of A10 each, payable on application
A3, on allotment A3, A2 on each two subsequent calls. All shares were
subscribed in full and were duly allotted. All the calls were made and money
realised. Show the journal entries to record the above transactions in the books
of Moon Ltd.
25. Star Ltd. issued 50,000 Equity shares of A10 each, payable A3 on application,
A2 on allotment, A2.50 on first call and A2.50 on final call. The public applied
for all the shares which were subsequently allotted. All the calls were duly
made and amounts were fully realised.
Pass the journal entries, prepare the cash book and necessary ledger accounts
in the books of Star Ltd.
[Ans. Cash at Bank A5,00,000]
562
26. Skyview Ltd. offered for public subscription 30,000 Equity shares of A10
each and 50,000 10% preference shares of A10 each, payable as follows:
For Equity Shares For Preference shares
On application A3.50 A3.00
On allotment A4.50 A5.00
On first and final call A2.00 A2.00
Public applied for 40,000 Equity shares and 60,000 10% preference shares.
The company rejected the application for 10,000 Equity shares and 10,000
preference shares and remaining applications were accepted in full. All the
calls were duly made and money was realised.
Prepare the cash book and pass journal entries in the books of Skyview Ltd.
[Ans. Cash at Bank A8,00,000]
27. Sunshine Ltd. offered 80,000 Equity shares of A10 each for public subscription
on 1.5.2016, payable as follows :
On application A3 per share
On allotment (1.7.2016) A5 per share
On first and final call A2 per share
(one month after allotment)
Public applied for 75,000 shares and the application money was duly received
by 1.6.2016. All amounts due on allotment were received by 25.7.2016 and
amounts due on call were received by 25.8.2016. Journalise the transactions.
The company maintains the joint account for application and allotment.
28. Sun Ltd. issued 1,00,000 Equity shares of A10 each at a premium of A2 per
share payable as follows:
On application A3.00
563
On allotment A6.00
On first and final call A3.00
The issue was fully subscribed and duly allotted. The call was also made. All
sums were received.
Pass journal entries if,
a) Securities premium is included with application money,
b) Securities premium is included with allotment money, and
c) Securities premium is included with call money.
29. Mind fire Ltd. was incorporated with an authorised capital of A50,00,000 in
Equity shares of A100 each. The company issued 30,000 Equity shares of
A100 each at A120 per share, payable on application A50, on allotment A50
(including premium of A10), and on call A20 (including premium of A10).
All the shares were applied for and allotted. All the amounts including call
money were duly received. Share issue expenses amounted to A5,000, which
were fully written off against securities premium.
Prepare the Bank Account, pass necessary journal entries in the looks of the
company and show the Balance Sheet after the issue of shares.
[Ans.: Subscribed and fully paid up capital A30,00,000, Reserves and Surplus
A5,95,000 cash, Cash at Bank A35,95,000]
30. AB Ltd. had an authorised capital of A30,00,000 in Equity shares of A100
each. The company issued 20,000 Equity shares of A100 each at A120 per
share, payable as follows :
On application A40
On allotment A60 (including premium)
and on first and final call A20.
564
All the shares were subscribed by the public and the directors made the
allotment in full to all the applicants. All the amounts due on allotment and
first and final call were received except the first and final call money on 5,000
Equity shares. Prepare the Cash Book and Journal of the company. Also prepare
the Balance Sheet showing the items in respect of the above issue of shares,
(a) without opening Calls - in - Arrear A/c and
(b) by opening Calls-in-Arrear A/c.
[Ans.: Subscribed and fully paid up capital A15,00,000
Subscribed but not fully paid up capital A4,00,000
Reserves and Surplus A4,00,000
Cash at Bank A23,00,000.]
31. BK Ltd. was incorporated with a capital of 5,00,000 Equity shares of A10
each. The company issued 2,00,000 Equity shares of A10 each at A12 per
share, payable as follows :
On application A5
and on call A2
(three months after allotment)
All the shares were subscribed. The allotment was made and all the amounts
received except the allotment money on 2,000 shares, which was received
with the call money (the amount due on call received in full) together with
interest as per the provisions of Table F. Pass entries in the Cash Book and
Journal.
[Ans.: Cash at Bank A24,00, 250.]
Note : Interest on calls-in-arrear is calculated at the maximum rate of 10%
565
p.a. as per Table F.

32. ABC Ltd. with authorised capital of A1,00,00,000 in Equity shares of A100
each, issued 60,000 of such shares payable as follows :
On application A30
On first call A20
On final call A20.
All the shares were subscribed by the public. The allotment was duly made
and money was received. On first call being made, Rakesh to whom 3,000
shares were allotted, paid the entire amount due on his shares. Final call is yet
to be made.
Pass journal entries to record the above transactions and prepare the Balance
Sheet.
[Ans.: Subscribed but not fully paid up capital A48,00,000
Other Current Liabilities A60,000
33. New India Ltd. issued 50,000 Equity shares of A10 each at a premium of A2
per share, payable as follows :
On application A3
and the balance by two equal calls.
The due dates of the instalments were :
application on 1.10.2015
566
allotment on 1.11.2015
first call on 1.1.2016
final call on 1.3.2016
Interest was to be paid @12% p.a. on calls-in-advance as per the Articles of
Association of the company. All the shares were fully subscribed and duly
allotted, The amounts were received on the due dates. Ram, holding 5,000
shares, paid the entire amount due on his holdings with the allotment money.
You are required to prepare the Cash Book and the Journal in the books of the
company.
[Ans.: Cash at Bank A5,99,400.]
34. AB Ltd. was registered with a capital of A60,00,000 in Equity shares of A100
each. 30,000 of such Equity shares were issued for public subscription at a
premium of A20 per share and payable as follows :
On application A25 per share
On allotment A45 per share including premium
On first call A20 per share and
the balance as and when required.
All the amounts were received except Mr. A, holding 3,000 shares, failed to
pay the amount due on first call and Mr. B, holding 6,000 shares, paid the
entire amount due on final call (not yet made) along with the first call money.
Record these transactions in the Journal of the company and prepare the
Balance Sheet.
[Ans .: Subscribed but not fully paid up capital A20,40,000
Other Current Liabilities A1,80,000
567
35. Star Ltd. invited applications for issue of 60,000 Equity shares of A10 each,
payable as follows :
On application A3
On allotment A5
On call A2.
Applications were received for 50,000 shares and allotment was made in full.
Akash to whom 1,000 shares were allotted, failed to pay the amount due on
allotment and call. Surya, who had applied for 500 shares, failed to pay the
amount due on call.
Pass the necessary journal entries to record the above transactions.
[Ans.: Total calls-in-arrear A8,000.]
36. XYZ Ltd. invited applications for 30,000 Equity shares of A100 each, payable
as follows :
On application A40
On allotment A40
On call A20
Applications were received for 40,000 shares. The Board of Directors
accepted applications for 30,000 shares and rejected the remaining
applications. Excess application money was refunded. Allotment money was
received in full and call money was received on 28,000 shares.
Pass journal entries.
[Ans.: Excess application money refunded A4,00,000
Calls-in-Arrear A40,000.]
37. Jay Prakash Ltd. invited applications for issue of 30,000 Equity shares of
A100 each, payable A60 on application, A20 on allotment and A20 on first
568
and final call. Applications were received for 45,000 shares. It was decided by
the Board of Directors to allot 30,000 shares on pro-rata basis and utilise the
excess application money towards the amount due on allotment and the balance,
if any, to be refunded.
Prepare the Cash Book and Journal in the books of the company assuming the
amounts due were duly received.
[Ans. Excess application money refunded A3,00,000. Cash at Bank

A30,00,000.]
38. Himalaya Ltd. invited applications for issue of 20,000 Equity shares of A100
each, payable A60 on application, A20 on allotment and A20 on first and final
call. Applications were received for 30,000 shares. Directors decided to allot
20,000 shares on pro-rata basis and utilise the excess application money
towards the amounts due on allotment and call. Pass journal entries in the
books of Himalaya Ltd. assuming the amounts due were duly received.
[Ans.: Excess application money adjusted on allotment A4,00,000 and on call

A2,00,000]
39. XY Ltd. issued 50,000 Equity shares of A10 each for public subscription,
payable as A5 on application, A3 on allotment and A2 on first and final call.
Applications for 80,000 shares were received. The directors allotted the shares
as follows :
I. To the applicants for 20,000 shares- 20,000 shares
II. To the applicants for 50,000 shares-30,000 shares
III. To the applicants for 10,000 shares - NIL
Call was made and the amounts due were received. Pass the jounal entries for
569
the above transactions, assuming that the excess application money on partial allotment
category was adjusted towards allotment and call.
[Ans.: Excess application money adjusted towards allotment A90,000 and call
A10,000. Excess application money refunded A50,000.]
40. Sunshine Ltd. issued 5,000 Equity shares of A100 each for public subscription,
payable on application A50, on allotment A30 and first and final call A20. Applications
were received for 12,500 shares. It was decided :
(i) to refuse allotment to the applicants for 2,500 shares,
(ii) to allot at 50% to Mr. X who had applied for 4,000 shares,
(iii) to allot in full to Mr. Y who had applied for 2,000 shares,
(iv) to allot balance of available shares on pro-rata basis among remaining

applicants,
(v) to utilise excess application money towards allotment and call.
Pass necessary journal entries assuming that the entire amount due on
allotment and call was received.
[Ans.: Excess application money adjusted towards allotment A90,000 and call A60,000.
Allotment money received A60,000 and call money received A40,000.
Excess application money refunded A2,25,000.]
41. Sunrise Ltd. issued 6,000 Equity shares of A100 each at A120 per share for
public subscription, payable on application A50, on allotment (including premium)
A50 and balance on call at the end of 3 months from the date of allotment. Application
for 8,500 shares were received by 5.4.2016 and shares were allotted on 24.4.2016
570
at the rate of 3 shares for every 4 shares applied for and an amount of 25,000 was
refunded on the same date. All the amounts due on allotment and call were received
on due dates. Pass Journal entries in the books of the company.
[Ans.: Excess application money adjusted towards allotment A1,00,000, Allotment
money received A2,00,000]
[Hints. : Applications for 500 shares, i.e, A25,000 / 50 rejected and 6,000 shares
were allotted among applicants for 8,000 shares]
42. X Ltd. issued for public subscription 5,000 Equity shares of A100 each at par,
the entire amount being payable with application. Applications received for all
the shares and shares were duly allotted.
Pass necessary journal entries in the books of the Company.
43. A Ltd. Purchased a Building for A12,00,000 from Biswakarma Builders. It issued
Equity shares of A100 each as fully paid up is full satisfaction of their claim.
Pass Journal entries in the books of A Ltd. in case such issue is (a) at par and (b)
at a premium of 20%.
[Hints. : (a) 12,000 Equity shares were issued.
(b) 10,000 Equity shares were issued]
44. S Ltd. Purchased a machine from Utkal Machinary for A2,50,000. An amount
of A10,000 was paid by way of cheque and for the balance fully paid up Equity
shares of A10 each at a premium of 20% were issued.
Journalise the transactions in the books of the Company.
[Hint - 20,000 Equity share were issued.]
45. AB Ltd. purchased a business with the following Assets and Liabilities from XY
Ltd. and issued 10,000 fully paid up Equity shares of A100 each in full satisfaction
of their claims :
A
571
Cash at Bank 2,00,000
Sundry Creditors 1,80,000
Journalise the above tranasactions in the books of AB Ltd.
[Hint - Goodwill A5000.]
46. RK Ltd. purchased a running business, which had the following Assets and
Liabilities, from BK Ltd. for A20,00,000, payable as A15,00,000 is fully paid
up Equity shares of A100 each and balance in Account Payee cheque :
Buildings 12,00,000
Plant 8,00,000
Pass journal entries in the books of the company
[Hint - Capital Reserve A1,50,000.]
47. Bharat Ltd. issued 10,000 Equites shares of A100 each credited as fully paid to
the promoters for their services. The company also issued 1,000 Equity shares
of A100 each credited as fully paid to the underwriters for their commission.
Pass necessary journal entries.
48. AB Ltd. issued 10,000 Equity shares of A100 each at par, payable on application
A30, on allotment A30, on first call A20 and on second and final call A20. Mr.
X was allotted 100 Equity shares. Show the journal entries in respect of forfeiture
of shares in each of the following cases :
572
a) Mr. X failed to pay the allotment money and his shares were forfeitcd.
b) Mr. X failed to pay the allotment money and on his subsequent failure to pay the
first call money, his shares were forfeited.
c) Mr. X failed to pay the first call money and on his failure to pay the second and
final call money, his shares were forfeited.
49. Sunflower Ltd. issued 1,00,000 Equity shares of A10 each, payable on
application A4, on allotment A2, on first call A2 and on final call A2 per share.
All the shares were applied for by the public and were duly allotted. All the
amounts due were received except from a shareholder holding 1,000 shares on
which only application and allotment money were received. Pass journal entries
in respect of forfeiture of shares if,
a) Shares were forfeited after first call,
b) Shares were forfeited after final call.
50. A Ltd. with an authorised capital of 5,00,000 Equity share of A10 each, invited
applications for 50,000 shares of A10 each for public subscription, payable on
application A3, on alllotment A3, on first call A2 and on final call A2 per share.
The issue was fully subscribed and shares were duly allotted. All the amounts
due on shares were received except the following : Mohan, to whom 100 shares
were allotted, failed to pay the amount due on allotment and calls.
Rohan, who holds 200 shares, failed to pay the money due on first and final call.
Sohan, who holds 300 shares, failed to pay the final call money.
The shares allotted to Mohan, Rohan and Sohan were forfeited by the company
after the final call. Pass journal entries to record the above issue and forfeiture
of shares. Also show how share capital will appear in the Balance Sheet after the
forfeiture of shares. Prepare the Notes to Accounts for the same.
[Ans : Subscribed and fully paid up capital A4,90,100, Share Forfeiture Account
A3,900]
51. A Ltd. invited applications for issue of 40,000 Equity shares of A10 each at par.
The amount payable on each share was as follows :
573
On application A4
On allotment A4
On first and final call A2
Applications were received for 67,000 shares. Allotment was made as follows :
a) To applicants for 20,000 shares - full
b) To applicants for 40,000 shares - 50%
c) To applicants for 7,000 shares - NIL
A76,000 was realised on account of allotment (excluding the amount carried
from application money) and A78,000 was realised towards first and final call.
The directors decided to forfeit the shares of those applicants to whome full
allotment was made and on which allotment money and call money were over
due.
Pass necessary journal entries in the books of the company to record the above
transactions.
[Hint - Number of shares forfeited 1,000]
52. XY Ltd. was registered with an authorised capital of A50,00,000 in A100 Equity
shares. Of these shares, 2,000 Equity shares were issued as fully paid to a vendor
for the purchase a machine and 12,000 Equity shares were subscribed for by the
public and were duly allotted. The company had so far called up A60 per share,
payable as A30 on application, A10 on allotment, A10 on first call and A10 on
second call. The amounts received in respect of these shares were as follows :
on 8,000 shares - full amount called up
on 2,400 shares - A50 per share
on 1,000 shares - A40 per share
on 600 shares - A30 per share
The directors forfeited 1,600 shares on which less than A50 per share had been
received.
574
Pass the journal entries in the books of the company and show the ‘share capital’
as it would appear in the Balance Sheet of the company with Notes to Accounts.
[Ans. : Subscribed and fully paid up capital A2,00,000, Subscribed but not fully
paid up capital A6,00,000, Share Forfeiture A/c A58,000.]
53. DLC Ltd. invited applications for 80,000 Equity shares of A100 each at A120
per share, payable A50 on application (including premium), A50 on allotment
and the balance on first and final call. Applications for 1,00,000 Equity shares
were received. Of the amounts received on applications, A2,50,000 was refunded
and A7,50,000 was applied for the amount due on allotment. All the shareholders
paid the amounts due on their shares allotted with the exception of one
shareholder, holding 1,000 shares, failed to pay the call amount. These shares
were forfeited.
Journalise the transactions in the books of the company.
[Ans. : Share Forfeiture A/c A80,000]
54. A limited company issued 50,000 Equity shares of A10 each at A12 per share,
payable on application A3, on allotment (including premium) A7 and on first
and final call A2. All the shares were subscribed by the public and duly allotted
by the directors. All the amounts due on the shares were received except on
1,000 shares for non-payment of allotment and call money. These shares were
forfeited subsequently. Pass necessary journal entries in the books of the
company.
[Ans. : Share Forfeiture A/c A3,000.]
55. MK Ltd. invited applications for 10,000 Equity shares of A100 each at a premium
of A50 per share. The amount was payable as follows:
on application A50 per share (including premium of A20)
on allotment A70 per share (including premium of A20)
on first and final call A30 per share (including premium) of A10)
Applications for 8,000 shares were received. All the applications were accepted
and shares were duly allotted. Mr. A to whom 100 shares were allotted, failed to
575
pay the allotment money. His shares were forfeited immediatly after allotment.
Afterwards, the first and final call was made.
Mr. B, the holder of 50 shares, failed to pay the call money. His shares were
also forfeited.
Pass the journal entries in the books of the company.
[Ans : Share Forfeiture Account A7,000]
56. XYZ Ltd. issued 50,000 Equity shares of A10 each for public subscription at a
premium of A2 per share, payable A5 on application, A5 (including premium)
on allotment and A2 on first and final call. Applications were received for 60,000
shares. The directors rejected applications for 10,000 shares and remaining
applications were accepted. The allotment money was received in full. But the
holders of 1,000 shares failed to pay the first and final call money. These shares
were forfeited and subsequently reissued at A8 per share as fully paid up. Pass
the journal entries.
[ Ans. : Capital Reserve A6,000.]
57. FM Ltd. issued for public subscription 10,000 Equity shares of A10 each at par
on application A3
on allotment A5
on first and final call A2.
All the shares were subscribed and duly allotted. All the amounts due were
received except on 2,000 shares held by Mr. Z who failed to pay the call money.
These shares were forfeited and subsequently 1,500 of these shares were
reissued at A8 per share as fully paid up.
Journalise the transactions in the books of the company.
[ Ans.: Capital Reserve A9,000, Balance of Forfeiture A/c A4,000.]
58. A limited company issued 2,000 Equity shares of A10 each to A, 4,000 Equity
shares of A10 to B and 6,000 Equity shares of A10 each to C. The details of the
576
amount received from them were :

A paid the application money @ A2.50 per share.
B paid the application Money of A2.50 and allotment money of A3 per share.
C paid the application money of A2.50, allotment money of A3 and first call
money of A2.50 per share.
They could not pay their arrears of different calls made and also the amount due
on final call @A2 per share. Directors forfeited the shares held by them. These
shares were subsequently reissued for cash at 10% discount.
Pass journal entries relating to forfeiture and reissue in the books of the company.
[Ans : Capital Reserve A 63,000]
59. XY Ltd. issued 50,000 Equity shares of A 10 each at a premium of A 6 per
share. The amount was payable as follows:
On application A 8 per share (including A 3 premium)
On allotment balance amount.
The issue was fully subscribed. One shareholder holding 500 shares paid the
full amount due on his holdings with application. Another shareholder holding
300 shares could not pay the allotment money and his shares were forfeited.
Subsequently these shares were reissued for A 4,800 as fully paid up. Pass
journal entries.
[Ans : Allotment money received A 3,93,600, Capital Reserve A 1,500]
60. AB Ltd. issued 5,00,000 Equity Shares of A 10 each for public subscription,
payable A 3 on application, A 5 on allotment and the balance on first and final
call. Applications were received for 15,00,000 shares and the shares were allotted
on pro-rata basis. The excess application money was to be adjusted towards
allotment only. A shareholder who had applied for 12,000 shares, could not pay
the call money and his shares were forfeited. Subsequently, these shares were
reissued at A 9 per share as fully paid up. Pass journal entries for the above
transactions.
577
[Ans. Capital Reserve A 28,000]

61. BC Ltd., issued for public subscription 20,000 Equity shares of A 10 each at a
premium of 20%, payable as,
A 5 on application,
A 5 on on allotment (including Premium), and
A 2 on first and final call.
Applications for 30,000 shares were received. Applications for 6,000 shares
were rejected and allotment was made on pro-rata basis among the remaining
applicants. Sandeep was allotted 400 shares and he failed to pay the allotment
money and call money. The directors forfeited his shares and subsequently those
shares were reissued at A 9 per share.
Prepare the Cash Book and pass the journal entries in the books of the company.
[Ans. : Capital Reserve A 2,000]
62. Utkal Ltd. invited applications for 50,000 Equity shares of A 100 each at a
premium of A 20 per share, payable as follows :
on application A 30,
on allotment A 50 (including premium),
on first call A 20, and
on final call A 20.
Applications were received for 1,00,000 shares and allotment was made on pro-
rata basis. Excess money paid on application was utilised in respect of amounts
due on allotment.
X, to whom 1,000 shares were allotted , failed to pay the allotment money and
on subsequent failure to pay the first call money, his share were forfeited.
Y, to whom 2,000 shares were allotted, failed to pay the two calls and his shares
were forfeited after the final call. Out of these forfeited shares, 2,000 shares
(whole of X' s shares included) were reissued to Z @ A 80 per share.
578
Prepare the Cash Book and pass the journal entries. Show how will the Share
Capital be shown in the company's Balance Sheet. Also prepare the Notes to
Accounts.
[Ans.: Capital Reserve A 80,000, Balance in Share Forfeited A/c A 60,000.]
63. A Ltd. invited applications for 10,000 Equity shares of A 100 each, payable as
follows :
on application A 40 per share,
on allotment A 40 per share, and
on first and final call A 20 per share.
Applications were received for 15,000 shares and allotment was made on pro
rata basis as follows :
Applicants for 8,000 shares were allotted 6,000 shares on pro-rata basis and
applicants for 7,000 shares were allotted 4,000 shares on pro-rata basis.
A (an applicant of the first category), who was allotted 240 shares, failed to pay
the allotment money and his shares were forfeited after allotment.
B (an applicant of the second category), who had applied for 140 shares, could
not pay the first and final call money and his shares were also forfeited.
Out of the forfeited shares, 200 shares (including all forfeited shares of B)
were reissued @ A 80 per share fully paid up.
Journalise the above transactions in the books of the company.
[Ans :. Balance is Share Forfeited A/c A 6,400, Capital Reserve A 8,800.]

Accounting for Companies : Accounting for Debentures
579
CHAPTER-10
ACCOUNTING FOR COMPANIES :

ACCOUNTING FOR DEBENTURES
STRUCTURE
10.1 Introduction
10.2 Meaning, Definition and Features of Debentures
10.3 Types of Debentures
10.4 Distinction between Share and Debenture
10.5 Issue of Debentures
10.5.1 Issue of Debentures for Cash
10.5.2 Issue of Debentures for Consideration Other than Cash
10.5.3 Issue of Debentures as Collateral Security
10.6 Issue of Debentures Considering the Terms and Conditions of

Redemption
10.7 Questions
Accountancy
580
10.1 INTRODUCTION :
Debentures play a significant role while preparing financial planning for a
company. A company requires long-term funds for its initial needs and for expansion
of its activities. For this purpose, a company may borrow money by issue of debentures
in addition to raising funds by issue of shares. Thus, debentures are one of the important
sources of raising long-term finance for a company.
10.2 MEANING, DEFINITION AND FEATURES OF DEBENTURES
The word 'debenture' has been derived from a Latin word 'debere' which means
to borrow. Debenture is a written acknowledgement of a debt by a company under its
common seal. A debenture issued by a company is usually in the form of a certificate
under the seal of the company. A Debenture Certificate contains terms of payment of
interest at a fixed rate and the terms of repayment of the principal sum on a specified
date. Debentrues normally create a charge on the assets of the company. It is usual to
prefix 'Debentures' with the rate of interest. Thus, if the rate of interest is 10%, the
name given will be '10% Debentures'. Debentureholders are the creditors of the
company. Debentures are shown under the head 'Non-current Liabilities' and sub-
head 'Long-term Borrowings' on the Equity and Liabilities side of the Balance Sheet.
According to section 2(30) of the Companies Act, 2013, "Debenture includes
debenture stock, bonds and any other securities of a company, whether constituting a
charge on the assets of the company or not."
Features or Characteristics of Debentures
The features or characteristics of a debenture are as follows :
(i) A debenture is a certificate of acknowledgement of indebtedness and as such,
the inner significance of a debenture is indebtedness.
(ii) A debenture is issued under the seal of the company.
(iii) Debenture certificate contains a contract for the repayment of principal sum
at a specified date. Usually, the debentures are repaid after a long period, such
as ten years or twelve years. Debentureholders have priority over shareholders
as to repayment in case of winding up of a company.
(iv) As per the Companies Act, 2013 no company is allowed to issue debentures
having a maturity period of more than 10 years from the date of issue. But a
581
company, engaged in infrastructure projects, can issue debentures for more

than 10 years, but not exceeding 30 years.
(v) Debentures are issued with a specified rate of interest. A debentureholder
receives the interest on his debentures at the specified rate mentioned in the
debenture certificate. Payment of interest is made, usually after every six
months, whether the company makes a profit or not.
(vi) Usually a debenture creates a floating charge on the assets of the company.
This signifies that if the company is unable to repay to the debentureholders
as per the terms of the issue, the debentureholders can take legal action to
realise their money out of the sale proceeds of the assets of the company.
(vii) Sometimes a debenture creates a fixed charge on particular assets of the
company instead of floating charge.
(viii) A debentureholder, being a creditor, has no right to vote in the meetings of the
company.
10.3 TYPES OF DEBENTURES
The following types of debentures can be issued by a company :
(a) From Security point of view :
(i) Unsecured or Naked Debentures
Unsecured or Naked debentures are those debentures which are issued without
any security in respect of interest or the repayment of the principal. Solvency of the
company is the only security. Such debentureholders are treated as unsecured creditors
at the time of liquidation of the company. Such debentures are not common these
days.
(ii) Secured or Mortgage Debentures
Secured or Mortgage debentures are those debentures which are secured by a
charge on the assets of the company. When such debentures are secured on specific
assets of the company, these are known as 'Secured Debentures having fixed charge'.
If the company is unable to repay the debenturholders on the due date, such type of
debentureholders can realise their money from the assets mortgaged with them. On
the other hand, when the debentures are secured on all assets of the company, these
are known as 'Secured Debentures having floating charge'. Such type of
Accountancy
582
debentureholders can claim their dues for repayment on priority basis before anything
is paid to the unsecured creditors in the event of liquidation of the company.
(b) From Permanence point of View :
(i) Redeemable Debentures
Redeemable debentures are those debentures which are repaid by the company
either in lump sum at the end of a specific period or by instalments during the life
time of the company. Most of the debentures are of this type.
(ii) Irredeemable or Perpetual Debentures
Irredeemable or Perpetual debentures are those debentures which are not
repayable by the company during its life time. Such debentures are to be paid only in
the event of liquidation of the company, as in case of shares. As per the Companies
Act, 2013, no company is allowed to issue such type of debentures.
(C) From Convertibility point of view :
(i) Convertible Debentures
Convertible debentures are those debentures which are convertible into equity
shares or other securities at a stated rate of exchange either at the option of the
debentureholders or at the option of the company after a specified period. When full
amount of debenture is convertible into shares, such debentures are called 'Fully
Convertible Debentures.' But when only a part of the amount of debenture is convertible
into shares, such debentures are called 'Partly Convertible Debentures'. As per SEBI
guidelines where the conversion is to be made at or after 18 months from the date of
allotment but before 36 months, any conversion in part or whole shall be optional on
the part of the debentureholders. Convertible debentures are very popular these days
as they provide liquidity, safety, capital appreciation and assured return to the investors.
(ii) Non-Convertible Debentures
Non-convertible debentures are those debentures which cannot be converted
into equity shares or other securities.
(d) From Records point of view :
(i) Bearer Debentures
Bearer debentures are those debentures which are transferable by mere
583
delivery and the company does not keep any record of names and addresses of the
debantureholders. Interest is paid at the end of the stipulated period to the bearers of
such debentures. In other words, interest is paid to the holders irrespective of identity.
Coupons are attached with these debutures and interest is paid to such persons who
produce the coupons in the specified bank.
(ii) Registered Debentures
Registered debentures are those debentures which are registered in the name
of a holder in the books of the company. Names and addresses of the holders of
registered debentures are recorded in a register of the company. Such debentures are
not freely transferable. The transfer of such debentures needs the execution of a
proper transfer deed. Principal amount and interest on such debentures are paid to the
person whose name appears is the register of the company.
(e) From Priority point of view :
(i) First Debentures
First debentures are those debentures which are repayable prior to other
debentures.
(ii) Second Debentures
Second debentures are those debentures which are payable only after the
redemption of the first debentures.
10.4 DISTINCTION BETWEEN SHARE AND DEBENTURE
Share and Debenture can be distinguished as follows:
Basis Share Debenture
1.Nature Share is a unit of owned capital. Debenture is a part of loan capital.
2. Owner A person holding a share, is a joint A person holding a debenture, is a
ship owner of the company. creditor of the company.
3. Dividend is the reward for the Interest is the reward for the
Reward shareholders. debentureholders.
Accountancy
584
4. Rate of The rate of dividend on equity The rate of interest on debentures is

Dividend shares may change from year to fixed and interest must be paid
and year depending upon the profits irrespective of the fact that the company
Interest
and decision of the directors. makes a profit or incurs a loss.
5. Priority Payment of dividend gets no Payment of interest gets priority over
of payment priority over payment of interest. payment of dividend.
of reward
6. Priority In case of winding up, the payment In case of winding up, the repayment
of
repayment of share capital is made after the of debentures is made before the
of principal repayment of debentures. payment of share capital.
in case of
winding up
7. Secured Shares are not secured by any Debentures are generally secured and
by charge charge. Hence, shareholders bear carry a charge on the assets of the
more risk. company. Hence, debentureholders
bear little risk.
8. Voting Shareholders generally enjoy Debentureholders do not enjoy any
right voting right. voting right.
9. It is at the option of the company The amount of debentures must be
Voluntary
or to return the amount of share returned as per the terms of the issue.
compulsory capital by buying back its own
redemption shares.
10. Under section 53 of the Companies There is no restriction on the issue of
Restriction Act, 2013, shares cannot be issued debentures at a discount.
on issue
at at a discount except sweat equity
discount shares.
11. There can be no mortgage shares. There can be mortgage debentures.
Mortgage Assets of the company cannot be Assets of the company can be
mortgaged in favour of mortgaged in favour of
shareholders. debentureholders.
12. Con- Equity shares are not convertible. Debentures may be converted into
vertibility However, preference shares may be shares.
converted into equity shares.
585
10.5 ISSUE OF DEBENTURES

Issue of debentures means issue of a certificate by the company under its
seal, which is an acknowledgement of debt taken by the company. The procedure of
issue of debentures is similar to that of the issue of shares. A prospectus is issued,
applications are invited, applications are received with application money and letters
of allotment are issued. On rejection of applications, application money in respect of
rejected applications is refunded. In case of partial allotment, excess application money
may be adjusted towards allotment and subsequent calls. The company may also ask
for the entire amount due on debentures to be paid in one instalment on application.
As per section 39 of the Companies Act, 2013, condition of minimum subscription
applies on every type of securities including debentures.
Issue of debentures takes various forms which are as follows :
 Issue of Debentures for cash
 Issue of Debentures for consideration other than cash
 Issue of Debentures as collateral security
10.5.1 Issue of Debentures for Cash
Debentures are normally issued by a company for cash. The amount due on
debentures may be called by the company in lump sum with application or it may also
be called in instalments as in the case of shares, such as on application, on allotment
and on one or more calls. Accounting entries on issue of debentures are also the
same as in the case of issue of shares. The only difference is that 'Debenture A/c' will
be opened instead of 'Share Capital A/c'. As mentioned earlier, it is usual to prefix the
rate of interest to the debentures. Like shares, debentures may be issued either at par
or at a premium or at a discount. It is to be mentioned here that there is no restriction
to issue debntures at a discount.
Journal Entries: (assuming that the debentures carry 10% interest)
A. When the amount is payable in lump sum on application :
Accountancy
586
When the full amount on debentures issued, is received in one instalment, the
amount should be credited to 'Debenture Application and Allotment A/c' instead of
'Debenture Application A/c'.
1. When the debentures are issued at par :
(i) Bank A/c Dr. (With the amount
To 10% Debenture Application and Allotment A/c received)
(Being the application money received)
(ii) 10% Debenture Application

and Allotment A/c Dr. (With the face value
To 10% Debentures A/c of Debentures)
(Being transfer of application memory
to Debentures A/c.)
2. When the debentures are issued at a premium :

and Allotment A/c Dr. (With the amount received)
To 10% Debentures A/c (with the nominal value of debentures)
To Securities Premium Reserve A/c (With premium amount)
(Being application money transferred to
Debentures A/c and Security Premium
Reserve A/c.)
3. When the debentures are issued at a discount :
587

and Allotment A/c Dr. (With the amount received)
Discount on issue of Debentures A/c Dr. (With the discount on issue)
To 10% Debentures A/c (With the face or nominal
value of Debentures.)
10% Debentures and Discount on issue
of Debentures A/c being debited.)
Illustration 1
X Ltd. invited applications for issue of 10,000, 10% Debentures of 100 each
at par. The full amount was payable on applicaton. All the debentures were fully
subscribed and duly allotted. Pass necessary journal entries is the books of X Ltd.
Solution :
Books of X Ltd.
Journal
Bank A/c Dr. 10,00,000
To 10% Debenture Application and Allotment A/c 10,00,000
(Being receipt of application money on 10,000
debentures @A100 each.)
10% Debenture Application and Allootment A/c Dr. 10,00,000
10,00,000
To 10% Debentures A/c
(Being transfer of application money to 10%
Debentures A/c.)
Illustration 2
Y Ltd. invited applications for 10,000, 10% Debentures of A100 each at a
premium of A20 per debenture. The full amount due on debentures was payable on
application. Applications were received for 12,000 debentures. Applications for 2,000
debentures were rejected and money was refunded. The remaing applications were
accepted in full and duly allotted. Pass journal entries in the books of Y Ltd.
Accountancy
588
Solution :
Books of Y Ltd.
Journal
Bank A/c Dr. 14,40,000
(Being application money received for 12,000
10% Debenture Application and Allotment A/c Dr. 14,40,000
To 10% Debentures A/c 10,00,000
To Securities Premium Reserve A/c 2,00,000
Debentures A/c @A100 and to Securities Premium
Reserve A/c @A20 each, the money on rejected
applications being refunded.)
Illustration 3
Z Ltd. invited applications for 10,000, 10% Debentures of A100 each at a
discount of A10 per debenture. The full amount due on debentures was payable on
application. Applications were received for 9,000 debentures. Directors accepted all
the applications and debentures were duly allotted.
Pass the journal entries in the books of Z Ltd.
Solution :
Books of Z Ltd.
Journal
Date Particulars LF Dr. A Cr.A
Bank A/c Dr. 8,10,000
(Being application money received on 9,000
debentures @A90 per debenture)
589

Discount on issue of Debentures A/c Dr. 90,000
(Being transfer of Debenture Application money
to 10% Debentures A/c and Discount on issue of
Debenture A/c being debited @A10 per debenture)
B. When the amount is payable in instalments :

1. When Debentures are issued at par :
When debentures are issued at face value or nominal value of debentures, it is
said to be issued at par. When debentures are issued at par, the following entries are
recorded in the books of the company assuming that the debentures carry 10% interest :
(i) On receipt of application money -
Bank A/c Dr. (with the amount of application
To 10% Debenture Application A/c. money received)
(ii) On transfer of application money to Debentures A/c -
10% Debenture Application A/c Dr. (with the amount of application
To 10% Debentures A/c money on debentures allotted)
(iii) On refund of application money on rejected applications -
10% Debenture Application A/c Dr. (With the amount refunded)
To Bank A/c
(iv) On transfer of excess application money on partially accepted applications-
10% Debenture Application A/c Dr. (with excess application
To 10% Debenture Allotment A/c money adjusted for allotment)
(v) On allotment money becoming due-
10% Debenture Allotment A/c Dr. (with the allotment money due)
Accountancy
590
(vi) On receipt of allotment money-

Bank A/c Dr. (with allotment money received)
To 10% Debenture Allotment A/c
(vii) On first call money becoming due-
10% Debenture First Call A/c Dr. (with the amount due on first call)
10% Debentures A/c
(viii) On receipt of first call money-
Bank A/c Dr. (With first Call money received)
To 10% Debenture First Call A/c
(ix) On final call money becoming due-
10% Debenture Final Call A/c Dr. (With the amount due on final
To 10% Debentures A/c call)
(x) On receipt of final call money-
Bank A/c Dr. (with the final call money
To 10% Debenture Final Call A/c received)
Illustration 4
Rose Ltd. issued 10,000, 15% Debentures of A100 each at par, payable as
follows:
On application A30, on allotment A30,
On first call A20 and on final call A20.
Public applied for 12,000 debentures. Applications for 9,000 debentures were
accepted in full. Application for 1,600 debentures were allotted 1,000 debentures
and applications for 1,400 debentures were rejected. Excess money on applications
was utilised towards allotment. All amounts due were duly received. Pass journal
entries in the books of the company.
591
Solution:
Books of Rose Ltd.
Journal
Bank A/c Dr. 3,60,000
To 15% Debenture Application A/c 3,60,000
(Being application money for 12,000
debentures received @A30 each.)
15% Debenture Application A/c Dr. 3,60,000
To 15% Debenture Allotment A/c 18,000
To Bank A/c 42,000
(Being application money transferred to 15%
Debentures A/c, 15% Debentures Allotment A/c
and Money refunded to rejected applicants
for 1,400 debentures.)
15% Debenture Allotment A/c Dr. 3,00,000
(Being Allotment money due on 10,000
Bank A/c Dr. 2,82,000
To 15% Debenture Allotment A/c 2,82,000
(Being balance of allotment money received
i.e. A3,00,000-A18,000)
15% Debenture First Call A/c 2,00,000
2,00,000
(Being first call money due @20 each.)
Bank A/c Dr. 2,00,000
To 15% Debenture First Call A/c 2,00,000
(Being first call money received.)
15% Debenture Final Call A/c Dr. 2,00,000
(Being final call money due @A20 each)
Bank A/c Dr. 2,00,000
To 15% Debenture Final Call A/c 2,00,000
(Being final call money received)
Accountancy
592
Illustration 5
Sunflower Ltd. invited applications for 5,000, 12% Debenture of A100 each
at par and payable as follows:
A30 on application, A40 on allotment,
A20 on first call and A10 on final call.
Public applied for all the debentures and allotment was duly made. All sums
on allotment and calls were received. However, Bijay who holds 100 debentures,
failed to pay the allotment money and Bimal who holds 200 debentures, paid the
money due on calls in advance with allotment money. Bijay paid the arrear amount
with the first call money. Journalise the above in the books of the company.
Solution:
Books of Sunflower Ltd.
Journal
Date Particulars LF Dr.(A) Cr.(A)
Bank A/c Dr. 1,50,000
(Being application money received
on 5,000 debentures @A30 each)
(Being transfer of Debenture Application
money to 12% Debentures A/c on allotment)
(Being allotment money due on 5,000
debentures @A40each.)
Bank A/c Dr. 2,02,000
To Calls-in-Advance A/c 6,000
(Being allotment money received on 4,900
debentures @A40 each and calls-in-advance
received on 200 debentures @A30 each.)
593
12% Debenture First Call A/c Dr. 1,00,000

1,00,000
(Being first call due on 5,000 debentures
@A20 per debenture.)
Bank A/c Dr. 1,00,000
Calls-in-Advance A/c Dr. 4,000
1,00,000
To 12% Debenture First Call A/c 4,000
To 12% Debenture Allotment A/c
(Being first call money received after adjusting
the advance of first call @A20 on 200
debentures and arrear on allotment received
on 100 debentures @A40 each)
12% Debenture Final Call A/c Dr. 50,000
50,000
(Being final call due on 5,000 debentures
@A10 each.)
Bank A/c Dr. 48,000
Calls-in-Advance A/c Dr. 2,000
50,000
To 12% Debenture Final Call A/c
(Being final call money received after adjusting the
advance of final call @A10 each on 200 debentures.)
2. When Debentures are issued at Premium :

When debentures are issued at a price more than the face value or nominal
value of debentures, it is said to be issued at a premium. If the face value or nominal
value of debentures of a company is A100 and such debentures are issued at A120
each, the debentures are said to have been issued at a premium, the premium amount
being A20 per debenture. The amount of premium should be credited to a separate
account called 'Securities Premium Reserve A/c' since the debentures are also
securities like shares. It is a capital profit for the company and is shown separately on
the Equity and Liabilities side of the Balance Sheet under the sub-head 'Reserves and
Surplus' and head 'Shareholders' Funds'.
Accountancy
594
Journal Entries :
(a) When premium is collected with application money :
(i) On receipt of application money -
Bank A/c Dr. (With application money
To Debenture Application A/c including premium)
(ii) On transfer of Debenture Application A/c to Debenture A/c -

Debenture Application A/c Dr. (with application money
including premium)
To Debentures A/c (with application money
excluding premium)
To Securities Premium Reserve A/c (with the amount of premium)
(b) When premium is collected with allotment money :
(i) On allotment money due -
Debenture Allotment A/c Dr. (\with allotment money
including premium)
To Debentures A/c (with allotment money
excluding premium)
To Securities Premium Reserve A/c (with premium amount)
(ii) On receipt of allotment money -
Bank A/c Dr. (with allotment money
To Debenture Allotment A/c received)
Illustration 6
X Ltd. invited applications for 20,000, 10% Debentures of A100 each at a
premium of 20%, payable as A50 on application (including premium), A50 on
allotment and A20 on first and final call. Applications were received for 30,000
debentures and allotment was made on pro-rata basis. All the money due was duly
received. Pass journal entries in the books of X Ltd.
595
Solution :
Books of X Ltd.
Journal
Bank A/c Dr. 15,00,000
(Being application money received for
30,000 debentures @A50 each.)
Debentures A/c @A30 each and Securities
Premium Reserve A/c @A20 each, and
Excess money transferred to Allotment A/c)
(Being allotment money due on 20,000
debentures @A50each.)
Bank A/c Dr. 5,00,000
(Being allotment money received after adjusting
the excess application money.)
10% Debenture First and Final Call A/c Dr. 4,00,000
(Being first and final call money due on 20,000
Bank A/c Dr. 4,00,000
To 10% Debenture First and Final Call A/c 4,00,000
(Being first and final call money received.)
Illustration 7
A Ltd. issued 10,000, 14% Debentures of A100 each at 10% premium, payable
as A50 on application, A40 on allotment (including premium) and balance on call.
Accountancy
596
Debentures were fully subscribed and duly allotted. All the amounts due were realised.
Journalise the above transactions.
Solution :
Books of A Ltd.
Journal
Bank A/c Dr. 5,00,000
(Being application money received on
10,000 debentures @A50 each per debentures)
Debentures A/c.)
3,00,000
1,00,000
To Securities Premium Reserve A/c
(Being allotment money due @A30 towards
14% debentures and A10 towards premium)
Bank A/c Dr. 4,00,000
(Being allotment money received)
14% Debenture Call A/c Dr. 2,00,000
(Being amount due on call @A20 each
on 10,000 debentures.)
Bank A/c Dr. 2,00,000
To 14% Debenture Call A/c 2,00,000
(Being call money received.)
3. When Debentures are issued at discount :
When the issue price of debentures is less than the face value or nominal
value, it is said that debentures are issued at discount, e.g., an issue of debentures of
A100 each at A90 per debenture. There is no restriction regarding the maximum
limit for discount on debentures in the Companies Act, 2013.
597
As per Accounting standard 26, borrowing costs and discount on issue of

debentures could be amortised over loan period. Unamortised portion of such discount
on issue or expenses on issue of debentures is shown on the aseets side of the Balance
Sheet under the head, 'Current or Non-current Assets' depending on whether the amount
will be amortised in the next 12 months or thereafter. For example, if the discount or
expense on issue of debentures amounts to A1,00,000 and it is to be written off in 10
years, then :
A10,000 shall be debited to Statement of Profit and Loss of the current year;
A10,000 shall be shown under 'Other Current Assets' and, A80,000 shall be
shown under 'Other Non-Current Assets' in the Balance Sheet.
Discount or Expense on issue of debentures is a capital loss. It should be
written off within the life time of the debentures as early as possible. It can be written
off against Securities Premium Reserve Account or Statement of Profit and Loss.
Discount on issue of debentures is recorded usually at the time of allotment
by debiting 'Discount on issue of Debentures A/c.'
Journal Entries :
1. On allotment of debentures -
Debenture Allotment A/c Dr. (With allotment money)
Discount on issue of Debentures A/c Dr. (With discount amount)
To Debentures A/c (With the total amount)
2. On receipt of allotment money -
Bank A/c Dr. (With allotment money
To Debenture Allotment A/c received)
Illustration 8
B Ltd. issued 10,000, 15% Debentures of A100 each at a discount of 10%,
payable as A30 on application, A40 on allotment and A20 on first and final call. Public
Accountancy
598
applied for 12,000 debentures. Allotment was made for 10,000 debentures and the
remaining applications were rejected. All the amounts due were duly received. Pass
journal entries in the books of the company.
Solution:
Books of B Ltd.
Journal
Bank A/c Dr. 3,60,000
(Being application money received for
12,000 debentures @A30 per debenture.)
To Bank A/c 60,000
Debentures A/c and excess money refunded.)
Discount on issue of Debentures A/c Dr. 1,00,000
(Being the amount due on allotment, discount on
issue being A1,00,000 @A10 per debenture.)
Bank A/c Dr. 4,00,000
(Being allotment money received.)
15% Debenture First and Final Call A/c Dr. 2,00,000
To 15% Debentures 2,00,000
(Being the amount due on first and final call.)
Bank A/c Dr. 2,00,000
To 15% Debenture First and Final Call A/c 2,00,000
599
Illustration 9
Moonlight Ltd. issued 5,000, 10% Debentures of A100 each at a discount of
10%, payable as follows :
A30 on application,
A40 on allotment, and
the balance on first and final call.
Applications were received for 4,000 Debentures and allotment was duly
made. All sums were duly received. Expenses on issue of debentures amounted to
A5,000. It was decided by Directors to write off 1/5th of expenses on issue of
debentures and discount on issue of debentures from Statement of Profit and Loss
each year. Pass journal entries for the year in which debentures are issued.
Solution :
Books of Moonlight Ltd.
Journal
Bank A/c Dr. 1,20,000
(Being application money received on
4,000 debentures @A30 each.)
Debentures A/c.)
(Being the amount money due @A40 per
debenture on 4,000 debentures and discount
on issue of debentures being @A10 each.)
Accountancy
600

Bank A/c Dr. 1,60,000
(Being allotment money received.)
10% Debenture First and Final Call A/c Dr. 80,000
To 10% Debentures A/c 80,000
(Being first and final call money due on 4,000
debentures @A20 per debenture.)
Bank A/c Dr. 80,000
To 10% Debenture First and Final Call A/c 80,000
Expenses on issue of Debentures A/c Dr.
5,000
To Bank A/c 5,000
(Being expenses paid on issue of debentures)
Statement of Profit and Loss A/c Dr. 9,000

To Discount on issue of Debentures A/c 8,000
To Expenses on issue of Debentures A/c 1,000
(Being 1/5th of discount on issue of
debentures and 1/5th of expenses on issue
of debentures written off.)
10.5.2 Issue of Debentures for Consideration Other than Cash
Sometimes a company purchases assets from vendors or acquires a running
business and instead of paying cash, the company decides to issue debentures in
discharge of purchase consideration. Such an issue of debentures to vendors is known
as issue of debentures for consideration other than cash. Such debentures may be
issued at par or at a premium or at a discount.
Journal Entries :
(i) For Purchase of Assets -
Assets A/c (individually) Dr. (With the agreed value
of assets)
To Vendor's A/c (With purchase Price)
601
(ii) For Purchase of Business -

Assets A/c (individually) Dr. (with agreed value of assets)
To Liabilities (individually) (with agreed value
of liabilities)
To Vendor's A/c (Price payable to vendor)
Notes : 1. If price payable to the vendor is more than the net assets (Assets-Liabilities)
purchased, the difference is to be debited to Goodwill A/c.
2. If price payable to the vendor is less than net assets purchased, the
difference is to be credited to Capital Reserve A/c.
(iii) For Issue of Debentures as consideration -
Vendor's A/c Dr. (with the purchase price)
Discount on issue of Debentures A/c Dr. (with discount on issue, if any)
To Debentures A/c (with nominal value of
debentures issued)
To Securities Premium Reserve A/c (with premium on issue of
debenture, if any.)
Illustration 10
B Ltd. purchased a Building from Mr. X at an agreed value of A19,20,000. It
was agreed to pay the purchase price by issuing 10% Debentures of A100 each. Pass
journal entries in the books of the company if,
(a) Debentures are issued at par,
(b) Debentures are issued at a premium of 20%, and
(c) Debentures are issued at discount of 20%.
Accountancy
602
Solution :
Books of B. Ltd.
Journal
Buildings A/c Dr. 19,20,000
19,20,000
To X's A/c
(Being Buildings purchased from X).
(a) X's A/c Dr. 19,20,000
(Being issue of 10% Debentures at par to X)
(b) X's A/c Dr. 19,20,000
(Being issue of 16,000, 10% Debentures
of A100 each at a premium of 20%, calculated
A19,20,000
as follows :  16,000 Debentures.)
A120
(c) X's A/c Dr. 19,20,000
Discount on issue of Debentures A/c Dr. 4,80,000
(Being issue of 24,000, 10% Debentures of A100
each at 20% discount, calculated as follows :
A19,20,000
 24,000 Debentures.)
A80
Illustration 11
D Ltd. acquired assets of A5,45,000 and creditors of A50,000 from A Ltd.
and issued 12% Debentures of A100 each at a premium of 10% as purchase
consideration. Pass journal entries in the books of D Ltd.
Solution :
Working Note :
Purchase consideration = Assets - Creditors
= A5,45,000-A50,000=A4,95,000
603
A4,95,000
No. of Debentures issued =  4,500
A110
Books of D Ltd.
Journal
Assets A/c Dr. 5,45,000
50,000
To Creditors A/c
4,95,000
To A Ltd.
(Being acquisition of assets and creditors from A Ltd.)
A Ltd. Dr. 4,95,000
45,000
To Securities Premium Reserve A/c
(Being issue of 4,500, 12% Debentures
of A100 each at 10% premium)
Illustration 12
P Ltd. purchased a running business having the following assets and liabilities
from X and issued 50,000, 10% Debentures of A100 each at par in full satisfaction
of his claim :
A
Stock-in-trade 10,00,000
Sundry Creditors 8,00,000
Journalise the above transactions in the books of P Ltd.
Accountancy
604
Solution :
Books of P Ltd.
Journal
Land and Buildings A/c Dr. 25,00,000
Plant and Machinery A/c Dr. 15,00,000
Stock-in-trade A/c Dr. 10,00,000
Sundry Debtors A/c Dr. 5,00,000
Goodwill A/c (Balancing figure) Dr. 3,00,000
To Sundry Creditors 8,00,000
To X's A/c 50,00,000
(Being purchase of assetes and liabilities from X,
the excess of consideration over net assets being
debited to Goodwill A/c.)
X's A/c Dr. 50,00,000
each to X for purchase consideration.)
Illustration 13
S Ltd. purchased a running business consisting of the following assets and
liabilities from B Ltd. for A10,00,000, payable as A8,00,000 by issuing 12%
Debentures of A100 each and balance in A/c Payee cheque :
A
Furniture and Fixture 2,00,000
Cash at Bank 5,000
Pass necessary journal entries in the books of S Ltd.
605
Solution :
Books of S Ltd.
Journal
Furniture and Fixture A/c Dr. 2,00,000
Sundry Debtors A/c Dr. 20,000
Cash at Bank A/c Dr. 5,000
80,000
To Sundry Creditors A/c
20,000
To Bills Payable A/c
25,000
To Capital Reserve A/c (Balancing figure) 10,00,000
To B Ltd.
(Being purchase of assets and liabilities from B Ltd.,
the excess of net assets over the consideration being
credited to Capital Reserve A/c.)
B Ltd. Dr. 10,00,000
each and balance of A2,00,000 paid in A/c Payee
cheque to B Ltd. for purchase consideration.)
Illustration 14
R Ltd. purchased a plant worth A4,80,000 from M Ltd. An amount of A1,00,000
was paid immediately and the balance of purchase price was discharged by issue of
4,000, 15% Debentures of A100 each. Pass journal entries to record the above
transactions in the books of R Ltd.
Solution :
Books of R Ltd.
Journal
Plant A/c Dr. 4,80,000
To M Ltd. 4,80,000
(Being purchase of plant from M Ltd.)
Accountancy
606
M Ltd. Dr. 1,00,000

1,00,000
To Bank A/c
(Being an amount of A1,00,000 paid in part
payment of consideration.)
M Ltd. Dr. 3,80,000
(Being balance amount of A3,80,000 settled
by issue of 4,000, 15% Debentures
of A100 each at a discount)
Illustration 15
H Ltd. purchased a plant worth A2,70,000 from M Ltd. An amount of A50,000
was paid immediately and the balance of purchase price was discharged by issue of
10% debentures of A2,00,000 at a premium of A10%. Pass journal entries in the
books of H Ltd.
Solution :
Books of H. Ltd.
Journal
Plant A/c Dr. 2,70,000
2,70,000
To M Ltd.
(Being purchase of plant from M Ltd.)
M Ltd. Dr. 50,000
50,000
To Bank A/c
(Being A50,000 paid in part payment of
purchase price.)
M Ltd. Dr. 2,20,000
To Securities Premium Reserve A/c 20,000
(Being the balance amount of A2,20,000 settled
by issue of 10% Debentures of A2,00,000
at 10% premium.)
607
Illustration 16
A Ltd. purchased the following assets of X Ltd. for a purchase consideration
of A48,00,000 :
Land and Buildings of A40,00,000 at A35,00,000, and
Plant and Machinery of A20,00,000 at A15,00,000.
An amount of A12,00,000 was paid by drawing a Promissory Note in favour
of X Ltd. and the balance of consideration was discharged by issue of 10% Debentures
of A100 each at a premium of 20%.
Record the necessary journal entries in the books of A Ltd.
Solution :
Books of A Ltd.
Journal
To Capital Reserve A/c (Balancing figure) 2,00,000
To X Ltd. 48,00,000
(Being purchase of assetes from X Ltd., the excess
of agreed value over the consideration
being credited to Capital Reserve A/c.)
X Ltd. Dr. 12,00,000
To Bills Payable A/c 12,00,000
(Being promissory note of A12,00,000 issued
for part payment of consideration to X Ltd.)
X Ltd. 36,00,000
(Being issue of 30,000, 10% Debentures of A100 each
at 20% premium.
A36,00,000
No. of Debentures issued =  30,000 .)
A120
Accountancy
608
10.5.3 Issue of Debentures as Collateral Security

A Company may take a loan from a bank or any other financial institution or
any other person and may have to issue debentures as an additional or secondary
security besides other principal security like property or asset of the company. Such
an issue of debentures as additional security is termed as 'Issue of Debentures as
collateral security'. Collateral securrity means secondary security in addition to
principal security. The lenders to whom such debentures are issued as collateral
security, will not be entitled to any interest on these debentures. They are only entitled
to get interest on the loan advanced by them. If a default is made either in the payment
of interest or in the repayment of loan, the lender will realise the amount of debt
from the principal security. If the debt is not fully realised from the principal security,
the lender may claim all the rights of a debentureholder. But if the company pays the
loan amount with interest in full, the lender will return back the debentures to the
company for cancellation.
There are two methods to deal with such type of issue of debentures in the
books of the company :
1. First Method :
Under this method, no entry is passed in the books of the company at the time
of issue of debentures as collateral security. But entry is passed only for taking loan.
If a loan is taken from a bank, the entry will be:
Bank A/c Dr. (with the amount of loan)
To Bank Loan A/c
On the equity and liabilities side of the Balance Sheet, a note is given below
the loan that the loan is secured by the issue of debentures as collateral security
under the sub-head "Long-term Borrowings" and head "Non-current Liabilities."
2. Second Method :
Under this method, entry is passed in the books of the company for issue of
debentures as collecteral security with the entry for taking loan.
a. On taking a loan from bank -
Bank A/c Dr. (with the amount of loan)
To Bank Loan A/c
609
b. On issue of Debentures as collateral security -

Debenture Suspense A/c Dr. (with the nominal value
To Debentures A/c of Debentures issued as
collateral security)
Debenture Suspense A/c will be shown as a deduction from Debentures A/c

on the equity and liabilities side of the Balance Sheet and also a note is given below
the Loan that the loan is secured by issue of debentures as collateral securities under
the sub-head "Long-term Borrowings" and head "Non-Current Liabilities".
Illustration 17
A Ltd. had A20,00,000, 10% Debentures outstanding on 1st April, 2015.
During the year 2015-16, the company took a loan of A5,00,000 from bank for which
the company issued A6,00,000, 10% Debentures as collateral security.
Pass journal entries, if any. Show how the Debentures and Bank Loan will
appear in the Balance Sheet of A Ltd. as at 31st March, 2016.
Solution :
(a) First Method :
Books of A Ltd.
(i) No entry for issue of Debentures as collecteral security.
(ii) On taking the Bank Loan-
Journal
Bank A/c Dr. 5,00,000
To Bank Loan A/c 5,00,000
(Being loan of A5,00,000 taken from bank and
A6,00,000, 10% Debentures issued as collateral security.)

Accountancy
610
Extract of Balance Sheet as at 31st March, 2016

Note 31st March, 31st March,
Particulars
No. 2016 (A) 2015 (A)
I. EQUITY AND LIABILITIES :
Non-Current Liabilities :
Long-term Borrowings 1 25,00,000 20,00,000
Notes to Accounts :
I. Long-term Borrowings : A
10% Debentures (In addition, Debentures of A6,00,000 20,00,000
have been issued as collateral security)
Bank Loan (on collateral security of 10% Debentures of A6,00,000) 5,00,000
25,00,000
(b) Second Method :
Books of A Ltd.
Journal
Bank A/c Dr. 5,00,000
(Being Loan of A5,00,000 taken from
bank and A6,00,000,10% Debentures issued
as collateral security.)
10% Debenture Suspense A/c Dr. 6,00,000
(Being issue of 10% Debentures of A6,00,000
as collateral security to secure a loan
of A5,00,000 from bank.)
Extract of Balance Sheet
as at 31st March, 2016
Particulars Note 31st March, 31st March,
No. 2016 (A) 2015 (A)
Non-Current Liabilities :
Long-term Borrowings 1 25,00,000 20,00,000
611
Notes to Accounts :
Particulars A
I. Long-term Borrowings :
10% Debentures A26,00,000
Less 10% Debenture Suspense A/c A6,00,000 20,00,000
Bank Loan (on collateral security 5,00,000
of 10% Debentures of A6,00,000)
25,00,000
Illustration 18
Bright Ltd. issued 5,000,12% Debentues of A100 each at a premium of 10%
on 1.10.2015. On the same date, the company purchased fixed assets of the value of
A5,00,000 and took over current liabilities of A60,000 and issued 12% Debentures
at a premium of 10% to the vendor. It also took a loan from bank for A2,00,000 and
issued 12% Debentures as collateral security on the same date.
Journalise the transactions in the books of Bright Ltd. and prepare the extract
of the Balance Sheet as at 31st March, 2016. Ignore interest.
Solution :
Books of Bright Ltd.
Journal
Date Particulars LF Dr. (A) Cr.(A)
2015 Bank A/c Dr. 5,50,000
Oct. 1 To 12% Debentures A/c 5,00,000
(Being 5,000, 12% Debentures of A100 each
issued at a premium of 10%)
Oct. 1 Fixed Assets A/c Dr. 5,00,000
60,000
To Current Liabilities A/c 4,40,000
To Vendor's A/c
(Being purchase of fixed assets
and take over of current liabilities)
Accountancy
612
Oct. 1 Vendor's A/c Dr. 4,40,000

To Securities Premium A/c 40,000
(Being issue of 4,000 debentures
of A100 each at 10% premium,
A4,40,000
No. of debentures issued   4,000.)
A110
Oct. 1 Bank A/c Dr. 2,00,000
(Being loan taken from bank by issuing
12% Debentures as collateral security.)
Oct. 1 12% Debentures Suspense A/c Dr. 2,00,000
(Being issue of 12% Debentures
as collateral security)
Extract of Balance Sheet

as at 31st March, 2016
Note 31st March, 31st March,
Particulars
No. 2016 (A) 2015 (A)
Shareholders' Funds :
Reserve and surplus 1 90,000
Non-current Liabilities :
Long-term Borrowings 2 11,00,000
Current Liabilities 60,000
II. Assets :
Non-current Assets :
Fixed Assets 2,50,000
Current Assets :
Cash and Cash Equivalents 3 7,50,000
613
Notes to Accounts :
Particulars A
1. Reserves and Surplus :
Securities Premium Reserve A/c 90,000
2. Long term Borrowings :
12% Debentures A 11,00,000
Less 12% Debenture Suspense A/c A 2,00,000
A 9,00,000
Bank Loan A 2,00,000 11,00,000
(on collateral security of 12%
Debenture of A2,00,000)
3. Cash and Cash Equivalents :
10.6 ISSUE OF DEBENTURES CONSIDERING THE TERMS AND

CONDITIONS OF REDEMPTION
A company may issue debentures on different terms. These terms may not
only relate to issue but also to redemption, i.e., repayment of the amount of debentures
to the debentureholders. As discussed earlier, there are three possible terms of issue,
i.e., at par, at premium and at discount.Debentures may be redeemed either at par or at
premium according to the terms determined at the time of issue. Debentures generally
are not redeemed at discount although a company may redeem its debentures by
purchasing them at a discount in the open market. Thus, considering the terms and
conditions of redemption of debentures, the following situations are commonly found
in practice:
a. Debentures issued at par and redeemable (repayable) at par,
b. Debentures issued at discount but redeemable at par,
c. Debentures issued at premium but redeemable at par,
d. Debentures issued at par but redeemable at premium,
Accountancy
614
e. Debenutres issued at discount but redeemable at premium,

f. Debentures isued at premium and redeemable at premium.
The journal entries passed at the time of issue and redemption of debentures
in all the above cases are as follows :
a. Debentures issued at par and redeemable at par :
(i) On issue of Debentures -
Bank A/c Dr. (With money received on
application)
To Debenture Application and Allotment A/c
on issue of debentures)
Debenture Application and Allotment A/c Dr. (With nominal value of

debentures issued)
To Debentures A/c
(Being transfer of application money
to Debentures A/c)
(ii) On redemption of Debentures -
Debentures A/c Dr. (with nominal value of
debentures redeemed)
To Debentureholders A/c
(Being amount due to debentureholders
on redemption)
Debentureholders A/c Dr. (with nominal value of
To Bank A/c
(Being amount paid to debentureholders.)
615
b. Debentures issued at discount but redeemable at par :
Bank A/c Dr. (with money received on
To DebentureApplicaton andAllotment A/c application)
Debenture Application and Allotment A/c Dr. (with amount received
on application)
Discount on issue of Debentures A/c Dr. (with the discount amount
on issue)
debentures issued)
(Being transfer of application money
to Debentures A/c, discount issue of
debentures debited for discount)
debentures redeemed.)
(Being amount due to debentureholders
on redemption.)
To Bank A/c
(Being amount paid to debentureholders)
'Discount on issue of Debentures' is a capital loss and will be written off
during the life time of the debentures by debiting 'Securities Premium Reserve A/c'
or 'Statement of Profit and Loss.' The amount not written off or unamortised portion
of discount on issue of debentures will be shown on assets side of the Balance Sheet,
under the head 'Current/Non-current Assets' depending on the fact that whether the
amount will be amortised is the next 12 months or thereafter, and sub-head 'other
current/Non-current Assets'
Accountancy
616
C. Debentures issued at premium but redeemable at par :

Bank A/c Dr. (with amount received on
issue of debentures)
(Being money received on application)
Debenture Application and Allotment A/c Dr. (with application money
received)
debenuture issued)
To Securities Premium Reserve A/c (with the premium amount
on issue)
(Being transfer of application money to
Debentures A/c and Securities
Premium Reserve A/c.)
(Being the amount due to
debentureholders on redemption)

To Bank A/c
(Being amount paid to debentureholders)
'Securities Premium Reserve' is a capital profit and to be shown on the equity

and liabilities side of the Balance Sheet under the head 'Shareholders' Funds
and sub-head 'Reserves and Surplus'.
617
d. Debentures issued at par but redeemable at premium :

When debentures are redeemable at a premium, it is a capital loss for the
company. Though such premium amount will be paid at the time of redemption, the
company records such premium at the time of issue of debentures by debiting 'Loss
on issue of Debenture A/c' considering the convention of conservatism. Such loss is
written off from Securities Premium Reserve or from Statement of Profit and Loss
gradually every year during the life time of the debentures. The balance of 'Loss on
issue of Debentures A/c' is shown on the assets side of the Balance Sheet under the
head 'Current/Non-current Assets' and sub-head 'Other current/Non-current Assets'.
'Premium on redemption of Debentures' is a personal account and shows a credit
balance. It is a liablity of the company and shown under the head 'Non-current
Liabilities' and sub-head 'Other Long-term Liabilities' on the equity and liabilities
side of the Balance Sheet till the debentures are redeemed. At the time of redemption,
this account is debited and closed.
(i) On issue of Debentures-
Bank A/c Dr. (with amount received on
application)
Debenture Application and Allotment A/c Dr. (with the amount of
application money received)
Loss on issue of Debentures A/c Dr. (with the premium payable
on redemption)
debentures issued)
To Premium on Redemeption of (with the premium payable
Debentures A/c on redemption)
Debentures A/c, loss on issue of debentures
debited for premium on redemptin of debentures)
Accountancy
618
(ii) On Redemption of Debentures -

Debentures A/c Dr. (with the nominal value
of debentures redeemed)
Premium on Redemption of Debentures A/c Dr. (with premium payable on
on redemption)
To Debentureholders A/c (with total amount payable
on redemption)
(Being the amount due to debentureholders
on redemption at premium.)
Debentureholders A/c Dr. (with the amount payable to

To Bank A/c to debentureholders)
(Being the amount paid to

debentureholders)
e. Debentures issued at discount but redeemable at Premium :

In such case, both the amount of discount allowed on issue and premium
payable on redemption of debentures are capital loss and the total amount is to be
debited to 'Loss on issue of Debentures A/c'. Such Loss on issue of Debentures A/c is
shown on the assets side of the Balance Sheet under the head 'Current/Non-current
Assets' and sub-head 'Other current/Non-Current Assets' till it is written off.
Bank A/c Dr. (with amount received
on application)
To Debenture Application and
Allotment A/c
619
Debenture Application and Allotment A/c Dr. (with application money

received)
Loss on issue of Debentures A/c Dr. (with the total amount of
discount allowed on issue
and premium payable
on redemption)
To Debentures A/c (with the nominal value
of debentures issued)
To Premium on Redemption of (with premium payable on
Debentures A/c redemption)
Debentures A/c and debiting loss on issue
of debentures A/c for both discount on
issue and premium payable on redemption)
Debentures A/c Dr. (with the nominal value
of debentures redeemed)
Premium on Redemption of Debentures A/c Dr. (with premium payable on
redemption)
To Debentureholders A/c (with the amount payable on
redemption)
(Being amount due to debentureholders,
debiting Debentures A/c and Premium
on Redemption of Debentures A/c.)
Debentureholders A/c Dr. (with the amount payable to
on redemption)
To Bank A/c
(Being the amount paid to
debentureholders)
f. Debentures issued at premium and redeemable at Premium :
Bank A/c Dr. (with the amount received
on application)
To Debenture Application
and Allotment A/c
Accountancy
620
Debenture Application and Allotment A/c Dr. (with application money received)
Loss on issue of Debentures A/c Dr. (with premium payable on redemption)
To Debentures A/c (with the nominal value
of debentures issued)
To Securities Premium Reserve A/c (with premium on issue)
To Premium on Redemption of Debentures A/c (with premium payable on
redemption)
Debentures A/c, Loss on issue of Debentures
A/c debited for premium payable)

Debentures A/c Dr. (with the nominal value of
Premium on Redemption of Debentures A/c Dr. (with premium payable on redemption)
To Debentureholders A/c (with total amount payable on redemption
of debentures)
(Being amount due to debentureholders on
redemption of debentures.)
Debentureholders A/c Dr. (With the amount

due to debentureholders)
To Bank A/c
(Being the amount paid to debentureholders
on redemption of debentures.)
621
Securities Premium Reserve A/c will appear on the equity and liabilities side of
the Balance Sheet under the head 'Shareholders' Funds' and sub-head 'Reserves and
Surplus' and Premium on Redemption of Debentures A/c will be shown under the
head 'Non-current Liabilities' and sub-head 'Other Long-term Liabilities'. Loss on
issue of Debentures A/c will appear on the assets side of the Balance Sheet under the
head 'Current/Non-current Assets' and sub-head 'Other Current/Non-current Assets'
till it is written off by debiting Securities Premium Reserve A/c or Statement of
Profit and Loss.
Illustration 19
Pass journal entries for the issue of debentures in the following situations:
(a) Issued 5,000, 10% Debentures of A100 each at par and also redeemable at par.
(b) Issued 5,000, 10% Debentures of A100 each at a discount of 5% but redeemabale
at par.
(c) Issued 5,000, 10% Debentures of A100 each at a premium of 10% but redeemable
at par.
(d) Issued 5,000, 10% Debentures of A100 each at par but redeembale at 10%
premium.
(e) Issued 5,000, 10% Debentures of A100 each at a discount of 5% but redeemable
at a premium of 10%.
(f) Issued 5,000, 10% Debentures of A100 each at a premium of 10% and
redeemable at a premium of 20%.
Accountancy
622
Solution :
(a) Journal
Bank A/c Dr. 5,00,000
To 10% Debentures Application and Allotment A/c 5,00,000
(Being application money received on issue
of 10% Debentures)
(Being Transfer of application money to
10% Debentures A/c, debentures issued at par)
(b) Journal
Bank A/c Dr. 4,75,000
(Being application money received)
10% Debentures A/c, issued at a discount of 10%)
(c) Journal
Date Particulars LF Dr. A Cr.A
Bank A/c Dr. 5,50,000
(Being application money received on issue of 5,000,
10% Debentures @A110 each.)
Debenture A/c, issued at a premium of 10%)
623
(d) Journal
Bank A/c Dr. 5,00,000
5,00,000
To 10% Debenture Application and Allotment A/c
(Being application money received on issue
of 10% Debentures A100 each)
Loss on issue of Debentures A/c Dr. 50,000
To Premium on Redemption of Debentures A/c 50,000
(Being transfer of application money to 10% Debentures
A/c, issued at par but redeemable at a premium of 10%)
(e) Journal
Bank A/c Dr. 4,75,000
To 10% Debentures Application and Allotment A/c 4,75,000
on 5,000 10% Debentures @A95 each))
Loss on issue of Debentures A/c 75,000
To Premium on Redemption of Debentures A/c 50,000
10% Debentures A/c, issued at a discount of 5%
but redeemable at premium of 10%)
Note : Loss on issue of Debentures A/c has been debited by A75,000, i.e., total of
discount on issue A25,000 and premium on redemption A50,000.
(f) Date Particulars LF Dr. (A) Cr. (A)
Bank A/c Dr. 5,50,000
(Being application money received on 5,000,
10% Debentures @A110 each.)
Accountancy
624

Loss on issue of Debentures A/c Dr. 1,00,000
To Premium on Redemption of Debenture A/c 1,00,000
Debentures A/c, issued at premium of 10%
but redeemable at a premium of 20%)
Illustration 20
Laxmi Ltd. issued 10,000, 14% Debentures of A100 each at a discount of 5%
but redeemable at a premium of 10%. The amount was payable as follows :
On application 60 per debenture and the balance on allotment.
Public applied for all the debentures. Debentures were duly allotted and the
amounts due were realised. Pass necessary journal entries for issue of debentures.
Solution :
Books of Laxmi Ltd.
Journal
Bank A/c Dr. 6,00,000
(Being application money received on 10,000 14%
Debentures @A60 per debenture)
14% Debentures A/c)
Loss on issue of Debentures A/c Dr. 1,50,000
To Premium on Redemption of Debentures A/c 1,00,000
(Being allotment money due @A35 each on
10,000 debentures issued at 5% discount and
redeemable at 10% premium, loss on issue of
debentures account debited for total of discount on
issue A50,000 and premium on redemption A1,00,000.)
Bank A/c Dr. 3,50,000
(Being allotment money received)
625
10.7 QUESTIONS
1. From the given alternatives, choose and write the correct answer along with its
serial number against each bit :
(i) Debentureholders are :
(a) Debtors of the company
(b) Creditors of the company
(c) Customers of the company
(d) Owners of the company
(ii) Debentureholders are entitled to :
(a) Dividend at a fixed rate
(b) Voting rights in the meetings of the company
(c) Share in the profits of the company
(d) Interest at a fixed rate
(iii) Unamortised portion of 'Discount on issue of Debentures' appears:
(a) On the Assets side of the Balance Sheet
(b) On the Equity and Liabilities side of the Balance Sheet
(c) In the Statement of Profit and Loss as expense.
(d) In the Statement of Profit and Loss as income.
(iv) Total amount of 'Discount on issue of Debentures' is written off :
(a) In the year of redemption of debentures
(b) During the life time of the debentures
(c) Within 3 years of the issue of debentures
(d) In the year of issue of debentures
(v) On the issue of debentures for consideration other than cash, the account credited is :
(a) Vendor's A/c (b) Debtors A/c
(c) Debentures A/c (d) Creditors A/c
(vi) On issue of debentures as collateral security, the account debited is :
(a) Debentures A/c (b) Bank Loan A/c
(c) Debentures Suspense A/c (d) Debentureholders A/c
(vii) Premium on redemption of Debentures A/c is :
(a) Personal Account (b) Real Account
(c) Nominal Account (d) Intangible Real Account
Accountancy
626
(viii) On issue of debentures to vendors, the account debited is :

(a) Vendor's A/c (b) Debtors A/c
(c) Creditors A/c (d) Debentures A/c
(ix) Securities Premium Reserve A/c is shown on the Equity and Liabilities side of Balance
Sheet under :
(a) Share Capital (b) Reserves and Surplus
(c) Non-current Liabilities (d) Current Liabilities
(x) Discount on issue of debentures is written off against :
(a) General Reserve (b) Capital Reserve
(c) Securities Premium Reserve (d) Share Capital
[Ans.: (i) b, (ii) d, (iii) a, (iv) b, (v) c, (vi) c, (vii) a, (viii) a, (ix) b, (x) c]
(i) Is the amount raised by a company by issue of debentures a loan or capital ?
(ii) Name the debentures which are issued without any security.
(iii) Name the debentures which are repayable only at the time of liquidation of the company.
(iv) Which type of debentures are secured on assets of the company ?
(v) If a company issues 10% Debentures, State the rate of interest at which the company pays
interest to the debentureholders.
(vi) When debentures are issued for consideration other than cash, state the account to be
credited.
(vii) Which account is debited on issue of debentures for purchase of an asset ?
(viii) Besides Securities Premium Reserve Account, State the account to be credited on issue of
debentures at a premium.
(ix) On which side of the Balance Sheet, the unamortised portion of the 'Discount on issue of
Debentures' is shown ?
(x) On which side of the Balance Sheet, 'Securities Premium Reserve A/c' appears ?
[Ans: (i) Loan, (ii) Unsecured or Naked Debenture, (iii) Irredeemable Debenture, (iv)
Secured or Mortgage Debenture, (v) 10%, (vi) Debentures A/c, (vii) Vendor's A/c, (viii)
Debentures A/c, (ix) Assets side, (x) Equity and Liabilities side.]
(i) What is a debenture ?
(ii) What is meant by 'Secured or Mortgage Debenture' ?
(iii) What is unsecured debenture ?
(iv) What is 'Bearer Debenture' ?
627
(v) What is 'Redeemable Debenture' ?
(vi) What do you mean by 'Irredeemable Debenture' ?
(vii) What is meant by 'Convertible Debenture' ?
(viii)What do you mean by 'Issue of Debenture for consideration other than cash' ?
(ix) State any one point of distinction between shareholders and debentureholders.
(x) Are debentures less risky than shares ?
(xi) Is there any restriction regarding issue of debentures at a discount ?
(xii) What do you mean by 'Issue of Debentures at par' ?
(i) Debentureholders are the owners of the company.
(ii) A debentureholder is entitled to dividend at a fixed rate.
(iii) Unsecured debentures are transferable by mere delivery.
(iv) Discount on issue of debentures is shown on the Equity and Liabilities side of the Balance
Sheet.
(v) Convertible debentures are those debentures which can be normally converted into cash.
(vi) Debentures are shown under the head 'Current Liabilities' on the Equity and Liabilities side
of the Balance Sheet.
(vii) Mortgage debentures are those which are not given any security and holders of such
debentures are treated as unsecured creditors at the time of liquidation of the company.
(viii) On issue of debentures at a price less than their nominal value, the debentures are said to
have been issued at a premium.
(ix) Securities Premium Reserve A/c is shown on the Assets side of the Balance Sheet.
(x) On issue of debentures as a collateral security, Debenture suspense A/c is credited.
[Ans. (i) creditors, (ii) interest, (iii) Bearer, (iv) Assets, (v) Shares, (vi) Non-current, (vii)
Unsecured or Naked, (viii) discount, (ix) Equity and Liabilities (x) Debentures.]
5. Fill up the blanks :
(i) A debentureholder is entitled to interest at a _______ rate.
(ii) Debentureholders are the _______ of the company.
(iii) Debenture is an acknowledgement of a _______ by a company under its common seal.
(iv) Debentures are shown under the head _______ liabilities on the Equity and Liabilities side
of the Balance Sheet.
(v) No company is allowed to issue debentures having a maturity period of more than _______
years other than a company engaged in infrastructure projects.
(vi) _______ debentures are secured by a charge on the assets of the company.
Accountancy
628
(vii) When the issue price of debenture is equal to its nominal value, debentures are said to be
issued at _______.
(viii) When the issue price of debentures is more than the nominal value, debentures are said to
be issued at a _______.
(ix) Unamortised portion of discount on issue of debentures is shown on the _______ side of
the Balance Sheet.
(x) When debentures are issued at par to vendors, _______ A/c is credited.
(xi) If the price payable to the vendors is less than the net assets purchased, the difference is to
be credited to _______ reserve A/c.
(xii) If the price payable to the vendors is more than the net assets purchased, the difference is to
be debited to _______ A/c.
(xiii) Securities Premium Reserve A/c is a _______ profit.
(xiv) On issue of debentures as a collateral security, _______ account is credited.
(xv) On issue of debentures as a collateral security, Debenture _______ A/c is debited.
[Ans.: (i) fixed, (ii) creditors, (iii) debt, (iv) Non-current, (v) ten, (vi) Secured or Mortgage,
(vii) par, (viii) premium, (ix) Assets, (x) Debentures, (xi) Capital, (xii) Goodwill, (xiii) Capital,
(xiv) Debentures, (xv) Suspense.]
(i) State any two characteristics of debenture.
(ii) What do you mean by 'Secured Debenture' ?
(iii) What is 'Bearer Deabenture' ?
(iv) What is meant by 'Redeemable Debenture' ?
(v) What is meant by 'Issue of Debentures for consideration other than cash' ?
(vi) What do you mean by 'Issue of Debentures as collateral security' ?
(vii) Give any two points of distinction between a share and a debenture.
(viii) What is meant by issue of debentures at a premium ?
(ix) Why would an investor prefer to invest in the debentures of a company rather than in its
shares ?
(x) What do you mean by 'Debentures issued at par but redeemable at premium' ?
(i) What is a Debenture ?
(ii) State any three characteristics of Debenture.
(iii) Write a short note on 'Convertible Debentures'.
(iv) What do you mean by 'Issue of Debentures for consideration other than cash' ?
629
(v) What is meant by 'Issue of Debentures as collateral security' ?

(vi) State any three points of distinction between a share and a debenture.
(vii) Write the differences between 'Premium on issue of Debentures' and 'Premium on
Redemption of Debentures'.
(viii) Explain brifly the meaning of 'Issue of Debentures at par, at discount and at premium
with imaginary examples.
8. What is debenture ? Describe briefly different types of debentures.
9. What do you mean by 'Issue of Debentures at par, at discount and at premium' ? Explain
with the help of accounting entries in each case with imaginary figures.
10. What is meant by 'Issue of Debentures for consideration other than cash' ? Discuss with the
help of journal entries with imaginary figures.
11. What do you mean by 'Issue of Debentures as collateral security' ? Explain with accounting
entries taking imaginary examples.
12. A Ltd. invited applications for issue of 5,000, 14% Debentures of A100 each at par. The
full amount due on debentures was payable on application. All the debenutres were fully
subscribed and duly allotted. Make journal entries in the books of A Ltd.
13. B Ltd. issued 5,000, 14% Debentures of A100 each at a premium of 10% for public
subscription. The full amount due on debentures was payable on application. Applications
were received for 7,000 Debentures. Applications for 2,000 Debentures were rejected
and money refunded. The remaining applications were accepted and Debentures were duly
allotted.
Pass necessary journal entries in the books of B Ltd.
14. C Ltd. invited applications for 5,000, 14% Debentures of A100 each at a discount of 5%.
The entire amount due on debentures was payable on application. Applications were received
for 4,500 Debentures. The company accepted all the applications and Debentures were
duly allotted. Show the journal entries in the books of C Ltd.
15. Apple Ltd. issued 20,000, 12% Debentures of A100 each for public subscription and
On application A40, on allotment A50 and
On first and final call A10
Applications for 25,000 Debentures were received. The Directors accepted the applications
for 16,000 Debentures in full. Applications for 8,000 Debenutres were allotted 4,000
Debentures and the remaining applications for 1,000 Debentures were rejected. Excess
money on application was utilised for allotment. Pass journal entries in the books of Apple
Accountancy
630
Ltd. assuming that all the amonts due on Debentures were duly received.
16. Sunshine Ltd. invited applications for 15,000, 10% Debentures of A100 each at par and
On application A30 , on allotment A30,
On first call A20 and on final call A20. Debentures were fully subscribed. All the
applications were accepted and Debentures were duly allotted. The amounts due on allotment
and calls were received except from Sonu who was allotted 200 Debentures and failed to
pay the allotment money. But Romi who was allotted 100 Debentures, paid the money due
on calls in advance with the allotment money. However, Sonu paid the arrear amount with
the first call money. Record the above transactions in the books of Sumshine Ltd.
17. A Ltd. invited applications for 50,000, 12% Debentures of A100 each at a premium of
10%, payable as A40 on application, A50 on allotment (including premium) and A20 on
first and final call. Applications were received for 60,000 Debentures and allotment was
made on pro-rata basis. All the amounts due were duly received.
Pass journal entries in the books of A Ltd.
18. RK Ltd. issued 20,000, 14% Debentures of A100 each at 10% discount for public
subscription, payable as A40 on application, A30 on allotment and A20 on first and final
call. Public applied for 25,000 Debentures. Allotment was made for 20,000 Debentures
rejecting the remaining applications for 5,000 Debentures. The amounts due on allotment
and call were duly received. Pass journal entries.
19. MK Ltd. issued 10,000, 12% Debentures of A200 each at a discount of 10% for public
subscription, payable as A80 on application, A60 on allotment, and the balance on first and
final call. Applications were received for 8,000 Debentures and allotment was made in full.
All the amounts due were duly received. Expenses on issue of debentures amounted to
A10,000. It was decided by the company to write off 1/10th of 'Expenses on issue of
Debentures A/c' and 'Discount on issue of Debentures A/c' from Statement of Profit and
Loss each year. Pass journal entries in the books of MK Ltd.
20. H Ltd. purchased a machine from Mr. B at an agreed value of A9,90,000. It was agreed to
pay the purchase consideration by issuing 12% Debentures of A100 each. Pass journal
entries in the books of H Ltd.,
if (a) Debentures were issued at par,
(b) Debentures were issued at a premium of 10% and
(c) Debentures were issued at a discount of 10%.
21. S Ltd. acquired the assets at an agreed value of A10,20,000 and creditors of A60,000
from B Ltd. and issued 10% Debentures of A100 each at a premium of 20% as purchase
631
price. Pass journal entries in the books of S Ltd.

22. Sky Ltd. purchased a running business with the following assets and liabilities from Moon
Ltd. and issued 20,000, 12% Debentures of A100 each in full satisfaction of its claim :
A
Journalise the above transactions in the books of Sky Ltd.
23. Sun Ltd. purchased a running business having the following assets and liabilities from Mr. X
for A15,40,000, payable as A15,00,000 by issuing 10% Debentures of A100 each and
balance in Account Payee Cheque :
A
Furniture and Fixture 55,000
Pass journal entries in the books of Sun Ltd.
24. A Ltd. purchased a Machine worth A5,00,000 from Mr. B. An amount of A1,40,000 was
paid immediately and the balance of purchase consideration was discharged by issue of
A4,00,000, 14% Debentures. Pass journal entries in the books of A Ltd.
25. B Ltd. purchased a machine valued A4,50,000 from Mr. X. An amount of A30,000 was
paid immediately by accepting a bill of exchange and the remaining amount was discharged
by issue of A4,00,000, 12% Debentures.
Journalise the transactions in the books of B Ltd.
26. PK Ltd. purchased the following assets of SK Ltd. for a purchase consideration of
A48,50,000 :
Land and Buildings of A35,00,000 at A38,00,000
Plant and Machinery of A15,00,000 at A10,00,000
and Furniture and Fixture of A2,50,000 at A2,00,000.
Accountancy
632
An amount of A4,50,000 was paid by drawing a promissory note in favour of SK Ltd. and
the balance of purchase consideration was discharged by issue of 15% Debentures of
A100 each at a premium of 10%.
27. Laxmi Ltd. had A50,00,000, 12% Debentures outstanding on 1st April, 2015. During the
year 2015-16, the company took a loan of A10,00,000 from bank for which the company
issued A12,00,000, 12% Debentures as collateral security.
Pass journal entries, if any. Show how the Debentures and Bank Loan will appear in the
Balance Sheet of Laxmi Ltd. as at 31st March, 2016.
28. White Ltd. issued 10,000, 10% Debentures of A100 each at a premium of 20% on 1.12.2015.
On the same date, the company purchased a machine valued A8,00,000 and took over
sundry creditor of A80,000 and issued 10% Debentures at a premium of 20% to the vendor.
It also took a loan from bank for A5,00,000 and issued 10% Debentures for the same
amount at par as collateral security in favour of the bank. Pass journal entries in the books
of White Ltd. and prepare the extract of the Balance Sheet of the company as at 31st
March, 2016. Ignore interest.
29. Pass journal entries for the issue of debentures in the following situations:
(a) Issued 10,000, 15% Debentures of A100 each at par and also redeemable at par.
(b) Issued 10,000, 15% Debentures of A100 each at a discount of 10% but redeemable at par.
(c) Issued 10,000, 15% Debentures of A100 each at a premium of 20% but redeemable at
par.
(d) Issued 10,000, 15% Debentures of A100 each at par but redeemable at a premium of
10%.
(e) Issued 10,000, 15% Debentures of A100 each at a discount of 10% but redeemable at a
premium of 10%.
(f) Issued 10,000, 15% Debentures of A100 each at a premium of 10% and redeemable at a
premium of 20%.
30. Saraswati Ltd. issued 1,000, 10% Debentures of A1,000 each at a discount of 10% but
redeemable at a premium of 10%. The amount was payable as follows :
On application A550 per debenture and the balance on allotment.
Public applied for all debentures. Debentures were duly allotted and the amounts due were
realised.
Pass necessary journal entries for the issue of debentures in the books of Saraswati Ltd.
-o-

2nd Year Accountancy Cm2 Accountancy

Uploaded by

Document Informationclick to expand document information

Document Informationclick to expand document information

Copyright:

Available Formats

2nd Year Accountancy Cm2 Accountancy

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2nd Year Accountancy Cm2 Accountancy

Uploaded by

Copyright:

Available Formats

Bureau’s

Dr. Ram Chandra Jena Dr. Prafulla Kumar Parida

First Edition : 2017/ 3000 copies

Printed at : M/s Jagannath Process Pvt. Ltd., Cuttack

Price : Rs. 160/– (Rupees One hundred sixty) only

The Odisha State Bureau of Textbook Preparation and Production, Bhubaneswar

The present book ‘‘Accountancy’’- Class-XII is meant for Higher Secondary

Sri Umakanta Tripathy

CHAPTER TITLE PAGE

2 FINANCIAL STATEMENTS OF ‘NOT FOR PROFIT’ ORGANISATIONS 123-195

4 ACCOUNTING FROM INCOMPLETE RECORDS 242-281

5 ACCOUNTING FOR PARTNERSHIP FIRM 282-328

6 ACCOUNTING FOR PARTNERSHIP FIRM (GOOD WILL) 329-345

7 RECONSTITUTION OF PARTNERSHIP FIRM 346-378

8 ADMISSION OF A PARTNER 379-418

9 ACCOUNTING FOR COMPANIES : ACCOUNTING FOR SHARE CAPITAL 419-578

10 ACCOUNTING FOR COMPANIES : ACCOUNTING FOR DEBENTURES 579-632

1.3.6 Capital Profits and Revenue Profits

Relevant Items in Trading Account

1.4.2 Preparation of Profit and Loss Account. (Without adjustment)

1.4.3 Preparation of Balance Sheet (Without adjustments)

Distinction between Trial Balance and Balance Sheet

Balance Sheet of Messrs Jaga Balia Garments

Particulars Dr. (`) Cr. (`)

Closing stock was valued at `30,000.

(b) Outstanding Expenses :

Balance Sheet as on 31st March 2017

(c) Prepaid Expenses :

Balance Sheet as on 31.12.2016

(e) Income received in Advance/Unearned Income :

Profits Loss Account for the year

Profit and Loss Account

Profit and Loss Account

Balance Sheet as on 31st March 2017

Profit and Loss Account

Balance Sheet of Mr. A as on 31.12.2017

Balance Sheet as on 30.06.2017

P & L A/c for the year ending 31.12.20.....

Balance Sheet as 31.12.20....

Profit and Loss A/c Dr.

Sundry Debtors A/c

Dr. Sundry Debtors A/c Cr.

Dr. Bad Debts A/c Cr.

Profit and Loss Account for the year ending 31.03.2016

Balance Sheet as on 31.03.2016

Dr. Discount (Received) A/c Cr.

Dr. Reserve for Discount on Creditors A/c Cr.

31.12.2014 To Balance b/d 2,000 31.12.2014

Profit and Loss A/c of M/s T. Krishna Patro & Sons

(c) If goods were Partially (70%) Insured :

Profit & Loss Account of M/s T. Krishna Patro

Trading Account of M/s X & Co.

Profit and Loss Account of M/s X & Co.

Manager’s Commission  % of commission  Net profit before charging such commission

Trading Account for the year ending 31.12.2015

Balance Sheet as on 31.12.2015

Balance Sheet as on 31.03.2017

(ii) Profit and Loss Account