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IEC Group of Institutions
IEC Group of Institutions

These slides are made to ease the preparation of 12th class (Commerce) students. Slides represent chapters of Accountancy of 12th Class

EducaciónEconomía y finanzasEmpresariales
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Chapter 1 Not For Profit Organisations ACCOUNTANCY Class XII
Index Chapter 1 – Not for Profit Organisation Chapter 2 – Partnership Fundamentals Goodwill Chapter 3 – Comparative and Common Size Statements Chapter 4 – Change In Profit Sharing Ratio Admission of a Partner Retirement of a Partner Retirement & Death – Capital Adjustment Ratio Analysis Chapter 5 - Cash Flow Statements Chapter 6 – Company Accounts – Accounting for Share Capital Company Accounts – Issues of Debenture Chapter 7 - Company Accounts – Redemption of Debenture
Not For Profit Organisations Organisations which are formed not for earning profits but for a charitable or social purpose are called as not for profit organisations. FEATURES:1) Separate legal entity 2) Service motive 3) Form 4) Profit- not a motivator 5) Funding 6) Accounts
Separate legal entity  According to the principle of separate legal entity, a not for profit organisation is an separate entity independent of its members.  These are the separate entity promoted by individuals or companies, but these are not owned by the promoters or managers.
Service Motive These organisations are formed  For welfare of the society.  For providing services to its members.  Main motive is to provide services.
Form  Charitable hospitals  Schools  Trusts  Colleges  Clubs  Hospitals  Societies
Profit – not a motivator  NPOs do not operate with the objective of earning profits.  Their aim is to promote art, science, commerce, religion, culture, education, charity, sports etc.  Some NPOs may involve in trading activities  Main objective is not to earn the profit but to benefit the members and society.  Any excess of income over expenditure is termed as SURPLUS while any excess of expenditure over income is termed as DEFICIT.
Funding The main sources of income of such organisations are:  Subscriptions from members,  Donations,  Legacies,  Grant-in-aid,  Income from investments, etc.
Accounts  The Not-for-Profit Organisations are also required to prepare financial statements at the end of the each accounting period.  They have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation.  The final accounts of a ‗not-for-profit organisation‘ consist of the following:  Receipt and Payment Account  Income and Expenditure Account, and  Balance Sheet.
Receipt and Payment A/c Features  Summary of the cash book.  Receipts are recorded on the debit side  Payments are entered on the credit side.  Records all cash transactions irrespective of the     period. Includes all receipts and payments whether they are of capital nature or of revenue nature. No distinction is made in receipts/payments made in cash or through bank. No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this account. It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with the year end balance of cash in hand/ cash at bank or bank overdraft.
Steps: Receipt & Payment A/c Steps in preparation of Receipt & Payment A/c  Take the opening balances of cash in hand and cash at bank & enter them on the debit side. In case there is a bank overdraft in beginning of the year, it will be recorded on credit side.  Show the total amounts of all receipts on its debit side irrespective of their nature (whether capital or revenue) & whether they belong to past, present or future.  Show the total amounts of all payments on its credit side irrespective of their nature & time period.  None of the receivable income or payable expense is to be entered in this account.  Find out the total of debit side & credit side of the account & enter the same on the credit side of cash/bank. If a balance comes out to be on debit side, take it as closing balance of bank overdraft.
Format Dr. Receipt & Payment A/c for the year ended _________ Receipts To Bal b/d Cash xxx Bank xxx To Revenue Receipts To Capital Receipts To Bal c/d (Bank O/D) Amount Payments Xxx Xxx Xxx xxx By Bal b/d (Bank O/D) By Revenue Payments By Capital Payments By Bal Bank xxx Cash xxx A detailed & comprehensive Receipt & Payment A/c may appear as: Cr. Amount Xxx Xxx Xxx xxx
Format Receipts To Bal b/d Cash ×××× Bank ×××× To Revenue Receipts Subscription General Donations Sale of newspaper Sale of periodicals Sale of old sports material Locker rent Sale of scraps Proceeds of show Miscellaneous Receipts Entrance fee Grant in aid To Capital Receipts Legacies Life Membership fees Specific Donation Sale of Investment Sale of fixed assets Endowment Fund To Bal c/d (Bank O/D) Amount Payments ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× By Bal b/d (Bank O/D) By Revenue Payments Wages & Salaries Rent, Rates & Taxes Insurance Printing & Stationary Postage Advertising Sundry Expenses Telephone charges Audit fees Honorarium Conveyance Newspapers Repairs By Capital Payments Purchase of fixed Assets Purchase of investments Fixed deposits By Bal Bank ××× Cash ××× Amount ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××××
Format A club has kept its accounts on cash basis and the figures for 2005 are given below. You are required to prepare receipts & payments A/c for the year 2005. Subscription Received 5,90,600 Entrance fee 80,000 Admission fee 32,000 Secretary‘s salary 60,000 Investment bought during the years 2,22,000 Expenses paid 1,54,500 Cash in hand (1.1.05) Solution:- 94,700 Locker rent received 16,250 General Donation 1,50,000 Receipts & payments A/c Receipts To balance b/d To subscription To Entrance fee To Admission fee To Locker‘s Rent To General Donation Rs. 94,700 5,90,600 80,000 32,000 16,250 1,50,000 Payments By Secretary Salary By Investment By Expenses By bal. c/d (balancing figure) Rs. 60,000 2,22,000 1,54,500 5,27,050
Class Practice Question Q. On 1/1/06, the opening balance was Rs. 18,000 of J. M. Trust, Delhi. The following transactions were held for the year ended 31/3/08. From these particulars, prepare a Receipts & payments account. Subscription received for current year 8,50,000 Subscription received for next year 30,000 Life Membership fees 80,000 Investments Furniture purchased 2,50,000 30,000
Solution Dr Receipts To balance b/d To subscription Current Year 8,50,000 Next Year 30,000 To Life Membership fee Receipt & Payment A/c Rs. Cr Payments Rs. 18,000 By Investment By Furniture By Sports Materials 8,80,000 By General Expenses 33,800 80,000 Less Unpaid Expenses 3,800 By bal. c/d (balancing figure) 2,50,000 30,000 1,50,000 9,78,000 9,78,000 30,000 5,18,000
Income & Expenditure A/c       It is a nominal account. ―Debit all expenses & credit all incomes‖ will be followed while preparing it. Opening & closing balance of cash at bank are not shown in it. It does not take into consideration both capital receipts & capital payments. Closing balance, if comes on debit side is known as surplus & on credit side, deficit. All non-cash adjustments like depreciation, outstanding or prepaid expenses & accrued or advance income, provision, etc. need to be adjusted through this account. It must be accompanied by Balance sheet in which personal & real accounts are recorded.
Steps Steps in preparation of Income & Expenditure A/c  Pursue the Receipts & Payments Account thoroughly.  Exclude opening & closing balance of cash & bank as they are not the income.  Exclude the capital receipts & capital payments.  Consider only revenue receipts to be shown on income side (credit side) of this account for the current year whether received or not.  Take all revenue expenses of current year on debit side of this account whether paid or not.  Non-Cash item like Deprecation, provisions profit / Loss on sale of assets etc. should be taken into consideration.  Balance if any in debit side resembles surplus but on credit side it shows deficit.
Format Income & Expenditure A/c For the year ended Expenditures To all revenue payments (current year whether paid or not) To Depreciation To Bad debts To Loss on sale of fixed assets To Consumed part of medicine, stationery, spot equipments etc. To Surplus (Excess of income over Expenditure) Amount Incomes By all revenue receipts (current year whether received or not) By profit on sale of fixed assets By Deficit (Excess of expenditure over Income). Amount
Example Prepare an income & expenditure Account for the year ended 31st March, 2006 from Receipts & payments Account. Receipts Cash in hand Subscription Miscellaneous Income Sale of old furniture (Book value 390) Sale of old Newspaper Amount 9,600 2,48,000 14,800 6,300 500 Payments Rent Honorarium to Clark Postage & stationary Printing charges Donation Cash in hand Amount 42,400 61,200 5,300 61,200 11,000 98,100
Solution Income and Expenditure account Expenditure To Rent Add- O/s Rent Amount Income 42,400 3,600 46,000 To Honorarium 61,200 Add Outstanding 9,800 71,000 To postage & stationery 5,300 To printing charges 61,200 To Donation 11,000 To loss on sale of furniture To Surplus (excess of income over expenditure) By Subscription 2,48,000 Less O/s subscription (04-05) 28,000 Add O/s Subscription (05-06) 20,000 By Income from Advertisement By Sale of old Newspaper Amount 2,40,000 14,800 500 700 60,100 2,55,300 2,55,300
DIFFERENCE Basis Receipt & Payment A/c Income & Expenditure A/c 1. Nature It is the summary of cash Book It is like profit & loss A/c 2. Nature of Items It records receipts & payments of revenue as well as capital nature It records incomes & expenditures of revenue nature only. 3. Period It includes receipts & Its items relate to current Payments for preceding & year only. succeeding years 4. Debit side Receipts are recorded Expenditure are recorded
Balance Sheet  The preparation of their Balance Sheet is on the same pattern as that of the business entities.  It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side. However, there will be a Capital Fund or General Fund in place of the Capital.  The surplus or deficit as per Income and Expenditure Account shall be added to/deducted to this fund.  It is also a common practice to add some of the capitalised items like legacies, entrance fees and life membership fees directly in the capital fund.
Balance Sheet Following procedure is adopted to prepare the Balance sheet.  Take the capital fund as per opening balance sheet & add surplus or deduct deficit as per income & expenditure account. Further, add legacy, life membership fees, endowment fund received during the year.  Take all fixed assets (not sold or destroyed) add additions made during the year les depreciation for assets used during the year.  Compare items on receipt side of receipt & payment A/c with items on income side of income & expenditure A/c to determine advances & dues.  Similarly, compare items of payments side of receipt & payment A/c with items of expenditure side of income & expenditure account to determine prepaid or outstanding expenses.  Balance sheet resembles the position statement of the organization & is a true indicator of growth potential.
Opening Balance Sheet Balance sheet as on Liabilities Current liabilities Outstanding expenses Incomes in Advances Capital fund (Balancing Figure) Amount Assets Cash Bank Fixed assets Current assets Accrued Incomes Prepaid Expenses Amount
Balance Sheet: At End Closing balance sheet is prepared at the end of the year after preparing Income & expenditure account. It maybe shown as:- Liabilities Capital fund Add Surplus Less Deficit Add life Membership Fees, Legacy, Endowment Fund Income in advance Specific Donations Outstanding Expenses Incomes in Advance Specific Funds Amount Assets Closing Balance Cash Bank Net Fixed Assets Current Assets (closing Balances) Investments Prepaid Expenses Accrued Incomes. Amount
PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 1 Opening balance of Cash and Bank is transferred to Opening Balance Sheet and Closing balances of Cash and Bank are transferred to Closing Balance Sheet.
PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 2 Items on the receipt side of Receipt & Payment A/c give the Components for Income Side for Income & Expenditure A/c.
PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 3 Items on the payment side of Receipt & Payment A/c give the components for Expenditure side for Income & Expenditure A/c.
PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 4 Items of revenue nature (recurring too) are carried from Receipt & Payment A/c and after analysing adjustments if any, total amount for the Current year is transferred to Income & Expenditure A/c.
PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 5 Items of Capital nature are adjusted through Balance Sheet.
PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 6 Adjustments on Capital Nature Items are not to be considered while preparing Income & Expenditure A/c.
PROCEDURE Result The balance on Debit Side of Income & Expenditure A/c will show SURPLUS while that on Credit Side will show DEFICIT. This will be transferred to Closing Balance Sheet and Added/Subtracted as the case may be.
PRACTICE QUESTION Following is Receipt & payment of Stanford trust, prepare Income & Expenditure and balance sheet for the year ended 31/12/06. Receipts Cash in hand Cash at bank Subscription 2005 : 5,000 2006 : 83,000 2007 : 3,000 Sale of Investment Interest on Investment Sale of furniture (book value 3,400) Amount Payments 14,000 Rent 60,000 Salary Postage Electricity charges Purchase of Furniture 91,000 Books 90,000 Defence bonds 2,000 Charity Cash in Hand 3,200 Cash at bank Amount 6,000 12,000 300 6,000 20,000 3,000 1,50,000 22,000 10,900 30,000 Adjustments: 1) Subscription for 2006 still owing were 7,000. 2) Interest due on defence bonds was Rs. 7,000. 3) Rent still owing was Rs. 1,000. 4) Investment sold valued Rs. 80,000, Rs. 30,000 of Investment were still in hand. 5) Salary paid for the year 2007 is Rs. 2,000.
Solution Income and Expenditure account Expenditure Rent Amount 6,000 Add O/s Rent 1,000 Salary 12,000 Less paid for 2007: 2,000 Postage Electricity charges Charity Loss on sale of furniture Surplus 7,000 Income Subscription 2006 : 83,000 Add O/s Subscription: 7,000 10,000 300 6,000 22,000 200 Amount 90,000 Interest on Investment 2,000 Interest on defence bonds 7,000 Profit on sale of investment 10,000 63,500 1,09,000 1,09,000
Solution WORKING NOTES: Balance Sheet Liabilities Capital fund Amount 1,92,400 Assets Amount Cash in Hand 14,000 Cash at bank 60,000 Subscription 5,000 Furniture 3,400 Investment 1,92,400 1,10,000 1,92,400
Solution Balance Sheet Liabilities Amount 63,500 Outstanding rent Subscription for 2007 Amount Cash in Hand Capital fund 1,92,400 Add Surplus Assets 2,55,900 1,000 3,000 10,900 Cash at bank 30,000 Subscription 7,000 Furniture Books Defence bonds Investment 20,000 3,000 1,50,000 30,000 Accrued interest Prepaid salary 2,59,900 7,000 2,000 2,59,900
EXAMPLE Prepare Income and Expenditure Account and Balance Sheet for the year ended March 31, 2007 from the following information Dr. Particulars Balance b/d Subscriptions: 2005-06 42,000 2006-07 4,47,000 2007-08 52,000 Entrance fees Locker rent Revenue from refreshment Income from investments Receipts and payment A/c Amount Particulars 81,000 Salaries and Wages 2005-06 14,800 2006-07 93,200 Sundry expenses 5,41,000 Freehold land 96,000 Stationery 73,000 Rates Refreshment expenses 84,000 Telephone charges Investments 3,65,000 Audit fee Balance c/d 12,40,000 Cr. Amount 1,08,000 43,000 5,00,000 6,000 22,000 63,000 9,000 3,50,000 9,000 1,30,000 12,40,000
EXAMPLE The following additional information is provided to you: 1. There are 2500 members each paying an annual subscription of Rs. 200, Rs. 18,000 were in arrears for 200506 as on April 1, 2006. 2. There was an outstanding telephone bill for Rs. 1,400 on March 31, 2007. 3. Outstanding sundry expenses as on March 31, 2006 totaled Rs. 12,800. 4. Stock of stationery as on March 31, 2006 was Rs. 2000; on March 31, 2007, it was Rs. 3,600. 5. On March 31, 2006 Building stood at Rs. 4,00,000 and it was subject to depreciation @ 2.5% p. a. 6. Investment on March 31, 2006 stood at Rs. 8,00,000. 7. On March 31, 2007, income accrued on investments purchased during the year amounted to Rs. 17,500.
EXAMPLE Dr. Income and Expenditure Account Particulars Salaries and Wages Sundry Expenses 43,000 Less: O/s on 31.03.06 12,800 Stationery: (consumed) Opening stock 2,000 Add: Purchases 6,000 Less: Closing stock 3,600 Rates Telephone charges 9,000 Add: Outstanding 1,400 Audit fee Depreciation on building Surplus (excess of Income over expenditure) Amount Particulars 93,200 Subscriptions Entrance fees Locker rent 30,200 Income from refreshment Revenue from refreshment 84,000 Less: Refreshment 4,400 expenses 63,000 22,000 Income from investments 3,65,000 10,400 Add: Accrued income on 9,000 current year investment 18,000 17,500 Cr. Amount 5,00,000 96,000 73,000 21,000 3,82,500 8,85,300 5,02,000 10,72,500
EXAMPLE Balance Sheet as on March 31, 2007 Liabilities Outstanding Telephone Expenses Subscription received in Advance General Fund 15,03,400 Add: Surplus 8,85,300 Amount Assets Cash and Bank 1,400 Subscription in Arrears Stock of Stationery 52,000 Accrued Interest on investment 23,88,700 Investments 8,00,000 Additions 3,50,000 Building 6,00,000 Less: Dep. 18,000 Land 24,42,100 Amount 1,30,000 59,000 3,600 17,500 11,50,000 5,82,000 5,00,000 24,42,100
EXAMPLE Working Notes: Balance Sheet as on March 31, 2007 Liabilities Outstanding Sundry Expenses Outstanding Salary and Wages General Fund (Balancing figure) Amount Assets Subscription in arrears 12,800 Stock of stationery Cash and Bank balance 14,800 Investments Building 15,03,400 15,31,000 Amount 48,000 2,000 81,000 8,00,000 6,00,000 15,31,000 Subscription A/c Liabilities Balance b/d (Arrears for 2005-06) Income and Expenditure Balance c/d (Advance for 2007-08) Amount Assets Receipt and Payment 48,000 Balance c/d (arrears) 5,00,000 Amount 5,41,000 59,000 52,000 6,00,000 6,00,000
When Trial Balance is given From the following trial balance, prepare income & expenditure account and balance sheet using additional information. Particulars (Debit) Amount Particulars (Credit) Building Furniture Books Fixed deposit Salaries Stationery Sundry expenses Electricity Cash at bank Cash in hand 2,50,000 40,000 60,000 2,00,000 2,00,000 16,000 7,200 6,000 20,000 800 Entrance Fees Subscriptions Creditors Rent of hall Miscellaneous Receipts Grants General fund Donation for tournament Sale of old Furniture 8,00,000 Additional information 1.Subscription outstanding Rs. 10,000 2.Salaries outstanding Rs. 12,000 3.Furniture sold was for Rs. 10,000 4.Depreciate building 5%, furniture 10% & books 15%. Amount 5,000 2,00,000 6,000 4,000 12,000 1,40,000 4,00,000 25,000 8,000 8,00,000
EXAMPLE Income & expenditure A/c For the year ended 31/3/2006 Expenditure Amount Incomes Loss on sale of furniture Entrance Fees (10,000 – 8,000) 2,000 Subscription 2,00,000 Salaries 2,00,000 Add outstanding 10,000 Add: outstanding 12,000 2,12,000 Rent for Hall Stationery 16,000 Miscellaneous Receipts Sundry Expenses 7,200 Grants Electricity 6,000 Depreciation Furniture 3,000 Building 12,500 Books 9,000 24,500 Surplus 1,03,300 3,71,000 Amount 5,000 2,10,000 4,000 12,000 1,40,000 3,71,000
EXAMPLE Balance sheet As on 31/3/2006 Liabilities Amount Creditors Outstanding salaries Donation for tournament General fund 4,00,000 Add surplus 1,03,300 6,000 Building 2,50,000 12,000 Less Deprecation 12,500 25,000 Furniture 40,000 Less sold 10,000 5,03,300 Less Deprecation 3,000 Books 60,000 Less Depreciation 9,000 Fixed Deposit Cash at bank Cash in hand Subscription Outstanding 5,46,300 Assets Amounts 2,37,500 27,000 51,000 2,00,000 20,000 800 10,000 5,46,300
Incidental Trading Activities Sometimes, trading activities such as chemist shop, hospital, canteen, bar etc. also take place in such organizations to provide certain facilities to members or public in general. In such a situation a trading account is prepared to calculate profit or loss from that trading aspect. Procedure: It is very important to take into consideration following two points: Profit or loss calculated by preparing trading A/c must be transferred to Income & expenditure A/c. Incomes & expenses related to that incidental activity, which is not recorded in trading A/c, are also to be considered while preparing. Income & expenditure A/c.
EXAMPLE The assets and liabilities on the Millennium Cricket Club on April 1, 2007 were: Club house and ground Rs. 10, 00,000; Creditors for bar supplies Rs. 3,41,000; Equipment Rs. 3,45,000; Bank Rs. 1,34,500; Bar stocks Rs. 92,240. Receipts Amount Payments Amount Balance b/d Bar Takings Subscriptions 1,34,500 8,85,000 9,15,000 Equipment Ground maintenance Creditors for Bar supplies Sundry Expenses Balance c/d 3,12,000 1,25,000 2,35,500 3,18,000 9,44,000 19,34,500 19,34,500 At the end of March 2008, the following further information was available: (a)Subscriptions Rs. 35,000 received this year related to the next year. (b)Creditors for bar supplies Rs. 3,50,000. (c)Bar stocks Rs. 84,380. (d)Depreciate equipment by Rs. 65,000 Prepare for the Millennium Cricket Club: (i) the bar Trading Account for the year ended March 31, 2007; (ii) the Income and Expenditure Account for the year ended march 31, 2007; and (iii) the Balance Sheet as on March 31, 2007.
EXAMPLE Income and Expenditure A/c Expenditure To Ground Maintenance To Sundry expenses To Depreciation To Surplus Amount Income 1,25,000 By Subscription 9,15,000 3,18,000 Less. For next year 35,000 65,000 By Surplus from bar Trading 8,04,640 12,82,640 Amount 8,80,000 4,32,640 12,82,640 Bar Trading A/c Particulars To Opening Stock To Purchases To Surplus on bar trading Amount Particulars Amount 92,240 By Bar Takings 4,44,500 By Closing Stock 4,32,640 8,85,000 84,380 9,69,380 9,69,380 Creditors for Bar A/c Particulars To Cash To Closing Stock Amount Particulars Amount 2,35,500 By Opening Stock 5,50,000 By Purchases (Bal. Fig.) 3,41,000 4,44,500 7,85,500 7,85,500
EXAMPLE Balance Sheet (Closing) Liability Subscription in Advance Creditors for bar supplies Capital Fund 12,30,740 Add Surplus 8,04,640 Amount Assets Amount 35,000 Bank 5,50,000 Sports equipments 3,45,000 Add Purchases 3,12,000 20,35,380 Less Depreciation 65,000 Bar stocks Club house and ground 9,44,000 5,92,000 84,380 10,00,000 26,20,380 26,20,380 Balance Sheet (opening) Liability Amount Assets Amount Creditors for bar supplies Capital Fund 3,41,000 Bank 12,30,740 Sports equipments Bar stocks Club house and ground 1,34,500 3,45,000 92,240 10,00,000 15,71,740 15,71,740
Class Practice Question Following balance have been extracted from the books of pleasure club for the year ended on March 31. 2007: Details Amount (Rs.) Restaurant receipts during the year Subscription received during the year Honorarium paid to secretary Purchases for restaurant Rent and rates Wages (restaurant 1,25,000) Repairs and Renewals Lighting Sundry expenses Particulars Capital fund Restaurant stock Furniture Billiard Table Cash in hand Bank balance 14,00,000 16,00,000 2,00,000 7,00,000 2,30,000 6,00,000 1,20,000 1,50,000 2,00,000 As on 31 march 2006 10,40,100 1,25,000 3,00,000 2,50,000 4,35,000 6,00,000 Provide 10% depreciation on furniture & billiard table As on 31st March 2007 ? 2,10,000 ? ? 3,19,600 8,45,500
SOLUTION Restaurant A/c Particulars To Opening Stock To Purchases To Wages for Restaurant To Surplus from Restaurant Amount Particulars 1,25,000 By Restaurant Receipts 7,00,000 By Closing Stock 1,25,000 6,60,000 16,10,000 Amount 14,00,000 2,10,000 16,10,000 Income and Expenditure A/c Expenditures To Honorarium To Rent and Rates To Wages To Repairs & Renewals To Lighting To Sundry Expenses To Depreciation Furniture 30,000 Billiard Table 25,000 To Surplus Amount Incomes 2,00,000 By Surplus from Restaurant 2,30,000 By Subscription 4,75,000 1,20,000 1,50,000 2,00,000 Amount 6,60,000 16,00,000 55,000 8,30,000 22,60,000 22,60,000
SOLUTION Balance Sheet Liability Amount Capital Fund 10,40,100 Add Surplus 8,30,000 18,70,000 18,70,000 Assets Bank Cash Stock Furniture 3,00,000 - depreciation 30,000 Billiard table 2,50,000 - depreciation 25,000 Amount 8,45,500 3,19,600 2,10,000 2,70,000 2,25,000 18,70,000
Class Practice Question Q. Abacus Trust provides their Receipts & Payment A/c & Income & Expenditure A/c For the year ended 31/3/07.Prepare opening and closing balance sheet. Receipts To bal b/d: Cash 23,000 Bank 57,000 To Subscription 2005-06 19,000 2006-07 3,40,000 2007-08 59,000 To Miscellaneous Receipts Amount Payments Amount By Salaries 80,000 By Rent By Advertising By Books By Furniture 4,18,000 By bal C/d Cash 1,86,000 2,92,000 Bank 1,62,000 98,000 72,000 62,000 80,000 1,30,000 7,90,000 7,90,000 3,48,000 The Trust had following balance in their books on 31/3/06. Books 48,000, Furniture 1, 07,000, Outstanding Salary Rs. 12,000 Expenditure Salaries Rent Advertising Depreciation: Books 8,000 Furniture 13,000 Audit fees Surplus Amount Income 80,000 Subscription 78,000 Miscellaneous receipts 62,000 Amount 3,60,000 2,92,000 21,000 38,000 3,73,000 6,52,000 6,52,000
SOLUTION Balance Sheet (Opening) Liabilities Outstanding Salary Capital/General Fund (Balancing figure) Amount 12,000 2,42,000 Assets Furniture Books Outstanding subscription Cash in hand Cash at bank 2,54,000 Amount 1,07,000 48,000 19,000 23,000 57,000 2,54,000 Balance Sheet (Closing) Liabilities Subscription in Advance Audit Fees (Outstanding) Rent (Outstanding) Capital/General Fund 2,42,000 Add:- Surplus 3,73,000 Amount 59,000 38,000 6,000 6,15,000 7,18,000 Assets 1,07,000 1,30,000 2,37,000 Less Depreciation 13,000 Books 48,000 Add Purchases 80,000 1,28,000 Less Depreciation 8,000 Outstanding subscription Prepaid Salary (98,000-12,000-80,000) Cash in hand Cash at bank Amount Furniture Add Purchases 2,24,000 1,20,000 20,000 6,000 1,86,000 1,62,000 7,18,000
Blue Star Education Trust provides the information in regard to Receipt & Payment Account and Income and Expenditure Account for the year ended March 31st 2008:Receipt and Payment Account For the year ending march 31, 2008 CLASS ROOM QUESTION Receipts Balance b/d Cash in hand Cash at bank Subscription: 2006 – 07 6,000 2007 – 08 23,000 2008 – 09 7,800 Entrance fees Tuition fees: 2007 – 08 40,000 2008 – 09 5,000 Interest on investment: 2006 – 07 2,000 2007 – 08 3,000 Miscellaneous receipts Amount 1,500 7,500 36,800 12,600 45,000 Payments Printing and Stationery Lighting & Water Rent Advertisement Miscellaneous Expenses Staff Salaries Furniture purchased Honorarium Books Balance c/ d Cash in hand Cash at bank Amount 3,000 1,300 10,500 1,410 2,200 42,500 14,000 7,500 2,500 4,590 22,500 5,000 3,600 1,12,000 1,12,000
CLASS ROOM QUESTION On March 31, 2007 the following balances appeared: Investments Rs. 80,000; Furniture Rs. 20,000; and Books Rs. 10,000 Expenditure Printing and Stationery Lighting & water Rent Staff salaries Advertisement Honorarium Misc. Expenses Depreciation on furniture Surplus (Excess of income over expenditure) Amoun t (Rs.) 3,600 1,300 12,000 42,000 1,600 7,500 2,200 2,000 2,800 Income Subscription Interest on investment Miscellaneous incomes Tuition fees 75,000 Prepare opening and closing balance sheet. Amoun t (Rs.) 23,000 3,400 3,600 45,000 75,000
SOLUTION LIABILITIES AMOUNT ASSETS AMOUNT Capital Fund 1,27,000 Cash in hand 1,500 Cash At Bank 7,500 Subscription Outstanding 6,000 Accrued Interest on 2,000 investments Investments Furniture 20,000 Books 1,27,000 80,000 10,000 1,27,000
SOLUTION LIABILITIES Advance Tuition fees Entrance Fees Subscription in advance Outstanding Printing and AMOUNT ASSETS AMOUNT 5,000 Cash in hand 4,590 12,6 00 Cash At Bank 22,500 7,800 600 Accrued Interest on investments Accrued Tuition fees 400 5,000 stationery Outstanding Rent Outstanding advertisement 1,500 190 Prepaid expenses Furniture 500 32,000 (20,000 + 14,000 – 2,000) Capital Fund (1,27,000+2,800) 1,29,800 12,500 Investments 1,57,490 Books (10,000 + 2,500) 80,000 1,57,490
Chapter 2 Partnership: Fundamentals ACCOUNTANCY Class XII
Individual Claims I’m running my business since 8 years I brought my present company at no.1 in sales and marketing Managing people is not a big deal for me I’m an MCA I’m an MBA I love Share trading and earning money of it I’ve been working as a production manager since last 10 years with different companies
Concept of partnership WHY NOT TO WORK TOGETHER AND LEAD THE WORLD
Partnership: Defined In India Partnership is governed by THE INDIAN PARTNERSHIP ACT, 1932 Partnership is defined as: “the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all.” Section 4 of THE INDIAN PARTNERSHIP ACT, 1932
Partnership: Features  Two or more persons  Agreement Written  Oral  Sharing of profits  Business  Mutual agency 
Partnership: Features We need minimum 2 and maximum 10 partners (in banking) or 20 partners (in other businesses) IF DISPUTE ARISES: WE WILL REFER TO DEED Deed is a written agreement containing the terms and conditions as agreed upon while entering into partnership.
Partnership: Features Sharing of profits  The Act says that the profits of the business should be divided in the agreed ratio else equally among the partners.  The Act has not made it mandatory to share losses also, but it is the duty of the partners to share in losses too.  For example there may be a partner in profit only, minor partners etc.
Partnership: Features BUSINESS There must be a business and that should be legal to have a partnership. Purchasing a building jointly do not form partnership. I have done my work/This is not my area or work : NO EXCUSE Partnership is the contract of mutual agency. Each partner is the agent as well as the principal. He binds everyone by his work.
Deed: Contents The Partnership Deed usually contains the following details:  Names & Addresses of the firm, its main business & of all partners;  Amount of capital to be contributed by each partner;  The accounting period of the firm;  The date of commencement of partnership;  Rules regarding operation of Bank Accounts;  Profit and loss sharing ratio;  Rate of interest on capital, loan, drawings, etc;  Mode of auditor’s appointment, if any;  Salaries, commission, etc, if payable to any partner;  The rights, duties and liabilities of each partner;  Treatment of loss arising out of insolvency of one or more partners;  Settlement of accounts on dissolution of the firm;  Method of settlement of disputes among the partners;  Rules to be followed in case of admission, retirement, death of a partner; and  Any other matter relating to the conduct of business.  Normally, the deed covers all matters affecting relationship of partners amongst themselves.
Deed: Rules IF DEED IS ORAL/ABSENT  Profits and Losses are shared EQUALLY  NO Interest on Capital  NO Interest on Drawings  NO Salary or any Commission to any partner  Interest on Loan given by partner must carry @ 6% p.a.
Some Problems Mohan and Shyam are partners in a firm, State whether the claim is valid if the partnership agreement is silent in the following matters: a) Mohan is an active partner. He wants a salary of Rs. 10,000 per year: b)Shyam had advanced a loan to the firm. He claims interest @ 10% per annum: c) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan wants equal share in profits. d)Shyam wants interest on capital to be credited @ 6% per annum.
Some Problems State whether the following statements are true or false: a)Valid partnership can be formulated even without a written agreement between the partners: b)Each partner carrying on the business is the principal as well as the agent for all the other partners; c)Maximum number of partners in a banking firm can be 20: d)Methods of settlement of dispute among the partners can’t be part of the partnership deed; e)If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the partner: f) Interest on partner’s loan is to be given @ 12% p.a. if the deed is silent about the rate.
Special aspects Accounting treatment for partnership firm is similar to that of a sole proprietorship business with the following exceptions: a)Distribution of profits & losses b)Maintenance of capital accounts of partners c)Adjustment of wrong Appropriation of profit in part. d)Reconstitution of Partnership firm. e)Dissolution of partnership firm.
ACCOUNTING Profit & Loss Appropriation A/c  Profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account of the firm.  It shows how the profits are appropriated or distributed among the partners.  All adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made through this account.  It starts with the net profit/net loss as per Profit and Loss Account .
JOURNAL ENTRIES JOURNAL Date Particulars Profit and Loss A/c Dr. To Profit and Loss Appropriation A/c (If profit is there) Profit and Loss Appropriation A/c Dr. To Profit and Loss A/c (If loss is there) Interest on Capital A/c Dr. To Partner‘s Capital/Current A/cs (For providing interest on capital to partners) Profit and Loss Appropriation A/c Dr. To Interest on Capital A/c (For transferring interest on capital to profit and loss appropriation A/c) L.F. Debit Credit
JOURNAL ENTRIES JOURNAL Date Particulars Partners Capital/Current A/c‘s (individually) Dr. To Interest on Drawings A/c (For charging interest on drawings to partners) Interest on Drawings A/c Dr. To Profit and Loss Appropriation A/c (For transferring interest on drawings to profit and loss appropriation A/c) Salary to Partner A/c Dr. To Partner‘s Capital/Current A/c‘s (For providing salary to partners) Profit and Loss Appropriation A/c Dr. To Salary to Partner‘s A/c (For transferring salary to profit and loss appropriation A/c) Commission to Partner A/c Dr. To Partner‘s Capital/Current A/c‘s (For providing commission to partners) L.F. Debit Credit
JOURNAL ENTRIES JOURNAL Date Particulars Profit and Loss Appropriation A/c Dr. To Commission to Partners Capital/Current A/c (For transferring commission to profit and loss appropriation A/c) If Profit: Profit and Loss Appropriation A/c Dr. To Partner‘s Capital/Current A/c‘s (For transferring profit to capital A/c) If Loss: Partner‘s Capital/Current A/c‘s (individually) Dr. To Profit and Loss Appropriation A/c (For transferring loss to capital A/c) L.F. Debit Credit
FORMAT Dr. Profit and Loss Appropriation Account For the year ended Cr. Particulars Profit and Loss (if there is loss) Interest on Capital Salary to Partner Commission to Partner Interest on Partner‘s Loan Partners‘ Capital A/c (distribution of profit) Amount XXX XXX XXX XXX Particulars Profit and Loss (if there is profit) Interest on Drawings Partners‘ Capital Accounts (distribution of loss) Amount XXX XXX XXX XXX XXX XXXX XXXX
Question A, B & C set up a partnership firm on April 1, 2006. They contributed Rs. 50,000 Rs. 40,000 & Rs. 30,000, respectively as their capitals & agreed to share profits & losses in the ratio of 3:2:1. A is to be paid a salary of Rs. 1,000 per month and B, a Commission of Rs. 5,000. It is also provided that interest to be allowed on capital at 6% per annum. The drawings for the year were A Rs. 6,000, B Rs. 4,000 & C Rs. 2,000. Interest on drawings of Rs. 270 was charged on A’s drawings, Rs. 180 on B’s drawings & Rs. 90, on C’s drawings. The net profit as per Profit and Loss Account for the year ending March 31, 2006 was Rs. 35, 660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.
Solution Dr. Profit and Loss Appropriation Account For the year ended Particulars Interest on Capital A – 3,000 B – 2,400 C – 1,800 Salary to A Commission to B Amount Particulars Cr. Amount Profit and Loss 35,660 Interest on Drawings 7,200 12,000 A – 270 B – 180 C – 90 540 5,000 Partners’ Capital A/c (distribution of profit) Rs. 12,000 to be divided in 3:2:1 A – 6,000 B – 4,000 12,000 C – 2,000 36,200 36,200
PRACTICE QUESTION Reena & Raman are partners with capitals of Rs. 3,00,000 & Rs. 1, 00,000 respectively. The profit (as per profit & loss A/c) for the year ended March 31, 2007 was Rs. 1, 20,000. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of Rs. 30,000 p.a. The drawings of partners were Rs. 30,000 and 20,000. The interest on drawings to be charged to Reena was Rs. 1,000 and to Raman Rs. 500 Assuming that Reena and Raman are equal partners, state their share of profit after necessary appropriations.
SOLUTION Dr. Profit and Loss Appropriation Account For the year ended Particulars To Interest on Capital Reena 18,000 Raman 6,000 To Salary to Raman To Profit transferred to: Reena Raman Amount Particulars By Profit for the Year By Interest on 24,000 drawings 1,000 30,000 Reena Raman 500 Cr. Amount 1,20,000 1,500 67,500 1,21,500 1,21,500
Capital Accounts  All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts.  This includes the amount of money brought in as capital, withdrawal of capital, share of profit, interest on capital, interest on drawings, partner’s salary, commission to partners, etc.  There are two methods by which the capital accounts of partners can be maintained. These are:  Fixed capital method, and  Fluctuating capital method.
Fixed Capital Method  Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners.  All items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in a separate accounts, called Partner’s Current Account.  The partners’ capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital.  The partners’ current account on the other hand, may show a debit or a credit balance. Thus under this method, two accounts are maintained for each partner viz., capital account and current account, While the partners’ capital accounts shall always appear on the liabilities side in the balance sheet, the partners’ current account’s balance shall be shown on the liabilities side, if they have credit balance and on the assets side, if they have debit balance.
Format Format of capital account FIXED CAPITAL METHOD Partners‘ Capital Account Particulars A B Particulars A B To drawings (permanent withdrawal) To balance c/d XXX XXX XXX XXX By balance b/d By Cash/Bank (additional capital) XXX XXX XXX XXX
Format Partners‘ Current Account Particulars A B Particulars A To balance b/d To drawings To Interest on drawings To profit & Loss Appropriation A/c (In case of Loss) To balance c/d XXX XXX XXX XXX By balance b/d By interest on capital By salary By commission By profit & Loss Appropriation A/c (In case of Profit) By balance c/d XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX B XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
Fluctuating Capital  Under the fluctuating capital method, only one account, i.e. capital account is maintained for each partner.  All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners.  This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called fluctuating capital method.  In the absence of any instruction, the capital account should be prepared by this method.
Format Partners‘ Capital Account Particulars A B Particulars A B To drawings To Interest on drawings To profit & Loss Appropriation A/c (In case of Loss) To balance c/d XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX By balance b/d By interest on capital By salary By commission By profit & Loss Appropriation A/c (In case of Profit) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
Salary to a partner If in the question profit is given after charging salary thenDo not show salary in profit and loss appropriation A/c Or Add salary to the profit given and then show salary on debit side of profit and loss appropriation A/c.
Question Show how the following items will appear in capital accounts of the partner S & M when:• Capitals are fluctuating. • Capitals are fixed. Particulars Capital on 1-1-2001 Additional capital introduced Drawings during the year Interest @ 6% on Capital Interest on Drawings at 5% Partner‘s Salary Partner‘s Commission Share of Profit for 2001 S M 80,000 − 16,000 4,800 400 7,200 − 8,400 70,000 5,000 14,000 4,200 350 − 5,000 6,600
Fluctuating Method Partners‘ Capital Account Particulars To Drawings To Interest on drawings To bal c/d A B Particulars 16,000 14,000 400 350 84,000 76,450 By balance b/d By Cash By interest on capital By salary A B 80,000 5,000 4,800 4,200 7,200 By commission 90,800 By balance b/d 8,400 5,000 6,600 1,00,400 By profit & Loss App. A/c 1,00,400 70,000 90,800 84,000 76,450
Fixed Capital Method Partners‘ Capital Account Particulars A To bal c/d B 80,000 Particulars 75,000 A B 80,000 70,000 5,000 80,000 By balance b/d 75,000 By Cash 80,000 75,000 Partners‘ Capital Account Particulars A To Drawings To Interest on drawings To bal c/d B 16,000 Particulars 14,000 400 350 84,000 76,450 1,00,400 By interest on capital By salary 90,800 A B 4,800 7,200 5,000 By commission By profit & Loss App. A/c By balance b/d 4,200 8,400 6,600 1,00,400 90,800 84,000 76,450
PRACTICE QUESTION Prepare capital accounts of the partners A & B when:(i) Capitals are fluctuating. (ii) Capitals are fixed. Capital on 1-1-2006 Additional capital introduced Drawings during the year 2006 Interest on Capital Interest on Drawings Partner‘s Salary Share of Profit for 2006 A 8, 00,000 − 2,16,000 64,000 5,400 1,47,000 8,400 B 6, 70,000 1, 50,000 1,14,000 45,200 3,300 1,32,000 6,600
Fluctuating Method Partners‘ Capital Account Particulars To drawings To interest on drawings To bal c/d A B 2,16,000 5,400 7,98,000 Particulars 1,14,000 By bal b/d By bank 3,300 By interest on capital 8,86,500 By salary By profit 10,19,400 10,03,800 A B 8,00,000 - 6,70,000 1,50,000 64,000 1,47,000 8,400 45,200 1,32,000 6,600 10,19,400 10,03,800
Fixed Capital Method Partners‘ Capital Account Particulars A B Particulars To bal c/d 8,00,000 8,20,000 By bal b/d By bank 8,00,000 8,20,000 A B 8,00,000 - 6,70,000 1,50,000 8,00,000 8,20,000 Partners‘ Capital Account Particulars A To drawings To interest on drawings 2,16,000 To bal c/d B 5,400 2,21,400 Particulars A B 1,14,000 By interest on capital 3,300 By salary By profit 66,500 By bal c/d 64,000 1,47,000 8,400 2,000 45,200 1,32,000 6,600 - 1,83,800 2,21,400 1,83,800
EXERCISE TIME
Interest on Capital  No interest is allowed on partners’ capitals unless it is expressly agreed among the partners.  When the Deed specifically provides for it, interest on capital is credited to the partners at the agreed rate with reference to the time period for which the capital remained in business during a financial year.  Interest on capital is calculated with due allowance for any addition or withdrawal of capital during the accounting period.
Calculation A & B entered into partnership in the ratio of 3:2 and have contributed Rs. 5,00,000 and Rs. 3,00,000 respectively on 1st January 2007. on 1st April A withdrew Rs. 1,00,000 and on 1st October he introduced 3,00,000 as additional capital. B introduced Rs. 2,00,000 on 30th April and withdrew 1,50,000 on 31st August. Calculate interest on capital if it calculated on 12% p.a.
Solution Interest on A’s Capital: Date Transaction Account Balance 1st Jan. (Introduced Rs. 5,00,000) 5,00,000 1st April (withdrew Rs. 1,00,000) 4,00,000 1st Oct. (Introduced Rs. 3,00,000) 7,00,000 12 3 5,00,000 X X =15,000 100 12 12 6 4,00,000 X X =24,000 100 12 12 3 7,00,000 X X =21,000 100 12 Total interest on A’s Capital 15,000 + 24,000 + 21,000 = 60,000
Solution Interest on B’s Capital: Date Transaction Account Balance 1st Jan. (Introduced Rs. 3,00,000) 3,00,000 30th April (Introduced Rs. 2,00,000) 5,00,000 31st Aug. (withdrew Rs. 1,50,000) 3,50,000 12 4 3,00,000 X X =12,000 100 12 12 4 5,00,000 X X =20,000 100 12 12 4 3,50,000 X X =14,000 100 12 Total interest on B’s Capital 12,000 + 20,000 + 14,000 = 46,000
Some Problems Q. A and B are partners sharing profits and losses in the ratio of 3 : 2. Their capital accounts showed balances of Rs. 1,50,000 and Rs. 2,00,000 respectively on Jan 01, 2006. Show the treatment of interest on capital for the year ending December 31, 2006 in each of the following alternatives: 1) If the partnership deed is silent as to the payment of interest on capital and the profit for the year is Rs. 50,000; Sol. In the absence of a specific provision in the Deed, no interest will be paid on the capital to the partners. The whole amount of profit will however be distributed among the partners in their profit sharing ratio. 2) If partnership deed provides for interest on capital @ 8% p.a. and the firm incurred a loss of Rs. 10,000 during the year; Sol. As the firm has incurred losses during the accounting year, no interest on capital will be allowed to any partner. The firm’s loss will however be shared by the partners in their profit sharing ratio.
Some Problems (c) If partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 50,000 during the year; Sol. Interest to A @ 8% on Rs. 2,00,000 = 16,000 Interest to B @ 8% on Rs. 1,50,000 = 12,000 = 28,000 As the profit is sufficient to pay interest at agreed rate, the whole amount of interest on capital shall be allowed and the remaining profit amounting to Rs. 22,000 (Rs. 50,000 – Rs. 28,000) shall be shared by the partners in their profit sharing ratio. (d) If the partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 14,000 during the year Sol. As the profit for the year is Rs. 14,000, which is less than the amount of interest on capital due to partners, i.e. Rs. 28,000 (Rs. 12,000 for A and Rs. 16,000 for B), interest will be paid to the extent of available profit i.e., Rs. 14,000. A and B will be credited with Rs. 6,000 and Rs. 8,000, respectively. Effectively this amounts to sharing the firm’s profit in the ratio of interest on capital.
PRODUCT METHOD EXAMPLE: A, B and C are partners sharing profits equally they have started business with capital of Rs. 3,00,000, Rs. 2,00,000 & Rs. 10,000 respectively on 1 Jan 2002. During the year they have made given additions & withdrawal of capital:- Date A Addition B Withdraw al Addition C Withdraw al 1 Feb. 50,000 - - - 1 May. - 40,000 60,000 - 1 Aug. 30,000 - - 70,000 1 Sep. - 20,000 10,000 - Calculate interest on capital @ 10% p.a. No Addition No Withdrawal
SOLUTION A I II I  II Date Capital Month Product 1 Jan. 3,00,000 1 3,00,000 1 Feb. 3,50,000 3 10,50,000 1 May. 3,10,000 3 9,30,000 1 Aug. 3,40,000 1 3,40,000 1 Sept. 3,20,000 4 12,80,000 39,00,000 Interest on capital = 39,00,000× 10 1 × =Rs.32,500 100 12
SOLUTION B I II I  II Date Capital Month Product 1 Jan. 2,00,000 4 8,00,000 1 May 2,60,000 3 7,80,000 1 Aug. 1,90,000 1 1,90,000 1 Sept. 2,00,000 4 8,00,000 25,70,000 Interest on capital = 25,70,000× 10 1 × =Rs.21,416.67 100 12
Interest on Drawings  The partnership agreement may also provide for charging of interest on money withdrawn out of the firm by the partners for their personal use.  No interest is charged on the drawings if there is no express agreement among the partners about it.  However if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period money remained outstanding from the partners during an accounting year.  Charging interest on drawings discourages excessive amounts of drawings by the partners.
Interest on Drawings Interest on drawings is calculated as:- Rate Drawings × ×TimeElement 100 Time Element can be calculated in different situations in different ways which are as follows:
Interest on Drawings Time Element is calculated by using the following formula: TimeLeft After 1st Drawing+TimeLeft After Last Drawing 2 Case 1 If partner withdrew equal amount at beginning of every month, interest will be calculated for: 13 months +1month 2 = 6 ½ months Case 2 If partner withdrew equal amount at end of every month, interest will be calculated for: 11months +0 month 2 = 5 ½ months Case 3 If partner withdrew equal amount in middle of every month, interest will be calculated for: 111/2 months + 2 1/2 month = 6 months
Interest on Drawings Case 4 If partner withdrew equal amount in beginning of every quarter, interest will be calculated for: 12 months + 3month 2 = 7 ½ months Case 5 If partner withdrew equal amount at end of every quarter, interest will be calculated for: 9 months +0 month 2 = 4 ½ months Case 6 If partner withdrew equal amount in middle of every quarter, interest will be calculated for: 101 / 2 months +11 / 2 month 2 = 6 months
Interest on Drawings Case 7 If partner withdrew equal amount in Beginning of every month for 6 months, interest will be calculated for: 6 months +1 month 2 = 3½ months Case 8 If partner withdrew equal amount at end of every month for 6 months, interest will be calculated for: 5 months +0 month 2 = 2½ months Case 9 If partner withdrew equal amount in middle of every month for 6 months, interest will be calculated for: 51 / 2 months + 1 / 2 month 2 = 3 months
Interest on Drawings Case 10 If nothing is mentioned about dates, interest will be calculated for 6 months Case 11 If per annum is not mentioned with the rate of interest on drawings in the question, interest will be calculated for complete year. Case 12 If unequal amounts are withdrawn on uneven dates, interest on drawings will be calculated using product method. PRODUCT METHOD In this method for each amount withdrawn by the partner, time is calculated for which that money is used during the year.
EXAMPLE        Mr. X & Mr. Y started business on 1st Jan. 2003 with capitals of Rs 5, 00,000 & Rs 3, 00,000 respectively. Calculate the Interest on Drawings of Mr. X @ 10% p.a. in each of the following alternative cases: Case (a) If his drawings during the period were Rs 18,000 Case (b) If he withdrew Rs 2,000 p.m. in the beginning of every month Case (c) If he withdrew Rs 2,000 p.m. at the end of every month. Case (d) If he withdrew Rs 2,000 p.m. Case (e) If he withdrew Rs 6,000 in the beginning of every quarter. Case (f) If he withdrew Rs 6,000 at the end of every quarter. Case (g) If he withdrew Rs 6,000 per quarter.
SOLUTION CASE (a) Interest on drawings: Since nothing is mentioned for the period, therefore the time period is taken on average basis i.e. 6 months. = 18,000 x 10 6 = Rs 900 100  12
SOLUTION CASE (b) Interest on drawings: Since the drawings have been evenly made in the beginning of the every month, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 12 Rs 1,300 1  6.5 2 10 6.5    100 12
SOLUTION CASE (c) Interest on drawings: Since the drawings have been evenly made in the end of the every month, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months 0 = 11 24,000  5.5 2 = Rs 1,100 10 5.5  100  12 
SOLUTION CASE (d) Interest on drawings: Since drawings have been made evenly every month, therefore the time period is taken on average basis i.e. 6 months. = 2,000 x 12 x 10 6 = Rs 1,200  100 12
SOLUTION CASE (e) Interest on drawings: Since the drawings have been evenly made in the beginning of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 = Rs 12  3  7.5 1,500 2  10 7.5   100 12
SOLUTION  CASE (f) Interest on drawings: Since the drawings have been evenly made in the end of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 = Rs 900 0 9 2  4.5 10 4.5    100 12
SOLUTION CASE (g)  Interest on drawings: Since the drawings have been evenly made in the middle of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 10.5  1.5 = Rs 1,200  6 2  10 6   100 12
Interest on Drawings Product Method Calculate interest on A’s drawings @ 6% p.a. from following information A withdrew as follows: 1st March, 2007 Rs. 20,000 31st May 2007 Rs. 50,000 1st September 2007 Rs. 40,000 1st December 2007 Rs. 40,000 Date Amount Time for which amount is used Product 1st March 20,000 10 months 2,00,000 31st May 50,000 7 months 3,50,000 1st September 40,000 4 months 1,60,000 1st December 40,000 1 month 40,000 7,50,000 Interest on drawings will be: 7, 50, 000  1 6  12 100 =3,750
Commission to a partner If commission is to be charged on divisible profits before charging such commission then following formula is applied: Profit  R 100 If commission is to be charged on divisible profits before charging such commission then following formula is applied: Profit  R 100  R
Example X and Y are partners in a firm sharing profits and losses in the ratio of 3:2, with the capital of Rs. 10,00,000 and Rs. 8,00,000 respectively. Their deed provided as follows: a) Interest on capital is to be charged @ 6%. b) A will get a salary of Rs. 18,000 per month while B will get Rs. 40,000 as quarterly salary. c) A will get a commission of 3% on turnover. d) B will get a commission @ 5% after charging all above and such commission. Prepare profit and loss appropriation A/c for A and B. Net profit earned during the year was Rs. 9,00,000. the turnover amounted to Rs. 20,00,000.
Solution Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount To Interest on Capital X: 60,000 Y: 48,000 ToX: 10,00,000 X 6% Salary Y: X: 8,00,000 X 6% 2,16,000 Y: 1,60,000 To commission X: 60,000 3 Y: 00, 000 16,000 20,  100 To Profit 5 Particulars By Net Profit Cr. Amount 9,00,000 1,28,000 3,76,000 76,000 3, 36,000  X: Y: 105 1,92,000 1,28,000 3,20,000 9,00,000 9,00,000
Capital Ratio  Sometimes, the partners may decide to share in capital ratio.  If capitals are fixed, the ratio is fixed  If capitals are fluctuating, ratio will be calculated on average amount of capital  Calculation of Average amount of capital can be explained with the help of this example.
Example X and Y started their partnership on 1st January 2007 with Rs. 50,00,000 and Rs. 45,00,000 respectively as capital. They agreed to share profits in capital ratio. They made following transaction during the year Capital Introduced Dates 1st April 1st June 30th September 1st December X 8,00,000 6,00,000 - Y 9,00,000 8,00,000 Capital Withdrawn X 7,00,000 9,00,000 Y 5,00,000 7,00,000 At the end of the year, they made a profit of 24,00,000. You are required to calculate amount of profits to be transferred to capital assuming that the fir closes its books on 31st December every year.
Solution Total Capital employed by X Date 1.1.07 1.4.07 1.6.07 30.9.07 1.12.07 Capital (Rs.) Months for Product which money is used 50,00,000 58,00,000 (50,00,000+8,00,000) 51,00,000 (58,00,000-7,00,000) 57,00,000 (51,00,000+6,00,000) 48,00,000 (57,00,000-9,00,000) 3 2 4 2 1 1,50,00,000 1,16,00,000 2,04,00,000 1,14,00,000 48,00,000 6,32,00,000
Solution Total Capital employed by Y Date 1.1.07 1.4.07 1.6.07 30.9.07 1.12.07 Capital (Rs.) Months for which money is used 45,00,000 40,00,000 (45,00,000-5,00,000) 49,00,000 (40,00,000+9,00,000) 42,00,000 (49,00,000-7,00,000) 50,00,000 (42,00,000+8,00,000) 3 2 4 2 1 Product 1,35,00,000 80,00,000 1,96,00,000 84,00,000 50,00,000 5,45,00,000 Capital Ratio = 6,32,00,000:5,45,00,000 = 632:545
CLASS ROOM QUESTION A, B, and C are partners in a firm. According to the partnership deed, the partners are entitled to draw Rs. 7,000 per month. On the 1st day of every month A, B and C drew Rs. 7,000, Rs. 6,000 and Rs. 5,000 respectively. Interest on capitals and interest on drawings is fixed at 8 per cent and 10 per cent respectively. Profit during the year ended March 31, 2006 was Rs. 7, 55, 000 out of which Rs. 2, 00,000 are to be transferred to General Reserve. B and C are entitled to receive a salary of Rs. 30,000 and Rs. 45,000 per annum respectively and A is entitled to receive commission @10 per cent net distributable profit is after charging such commission. On 1st April, 2005 the balances of their Capital Accounts were Rs. 5, 00,000, Rs. 4,00,000 and Rs. 3, 50,000 respectively. You are required to show the Profit and Loss Appropriation Account for the year ended March 31, 2006 and the Capital Accounts of partners in the books of the firm.
SOLUTION Ans PROFIT AND LOSS APPROPRIATION ACCOUNT AMOUNT PARTICULARS AMOUNT 2,00,000 By P& L A/c 7,55,000 PARTICULARS To General Reserve To Salary A/c: B’s Capital A/c C’s capital A/c 30,000 45,000 To Interest on capital A/c A’s capital A/c 40,000 B’s capital A/c 32,000 C’s capital A/c 28,000 75,000 By Interest on drawings: A’s Capital A/c 4,550 B’s Capital A/c 3,900 C’s capital A/c 3,250 11,700 1,00,000 To A’s Capital A/c (Commission) (3,91,700 × 10 100 + 10 ) To Profit transferred to capital A/c A’s capital A/c 1,18,696 B’s capital A/c 1,18,697 C’s capital A/c 1,18,697 35,610 3,56,090 7,66,700 7,66,700
SOLUTION PARTNERS’ CAPTIAL ACCOUNTS Dr. Particulars To interest on drawings A/c To Balance c/d A Rs. B Rs. 4,550 6,89,756 6,94,306 C Rs. 3,900 5,76,797 5,80,697 Particulars By Balance 3,250 b/d By Salary A/c By Commission 5,38,447 A/c By interest on capital A/c By P& L App A/c 5,41,697 A Rs. 5,00,000 Cr B C Rs. Rs. 4,00,000 3,50,000 30,000 45,000 40,000 32,000 28,000 1,18,696 1,18,697 1,18,697 35,610 6,94,306 5,80,697 5,41,697
PAST ADJUSTMENTS PAST ADJUSTMENTS Four types of errors Omitted Over Charged Under Charged Wrongly distributed
PAST ADJUSTMENTS Omitted If partners have omitted any item which was agreed upon as per deed, then a single adjustment entry is passed to rectify the omission error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital @ 10% p.a. has been omitted. Pass a single adjustment entry to record the error.
PAST ADJUSTMENTS Particulars A Dr. Interest on capital Loss (1:1) 27,500 Difference Cr. B Dr. Cr. 30,000 2,500 30,000 25,000 FIRM Dr. Cr. 55,000 55,000 27,500 2,500 30,000 27,500 27,500 55,000 55,000 Journal Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 2,500 2,500
PAST ADJUSTMENTS Over-Charged If partners have charged any item at more than agreed rate as per deed, then also a single adjustment entry is passed to rectify the error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital is charged @ 10% p.a. instead of 8%. Pass a single adjustment entry to rectify the error.
PAST ADJUSTMENTS Particulars A Dr. Interest on capital charged (debited) Interest on capital to be charged Profit (1:1) Difference Cr. 30,000 B Dr. Cr. FIRM Dr. Cr. 25,000 55,000 28,000 20,000 48,000 3,500 3,500 1,500 7,000 25,000 55,000 1,500 31,500 31,500 25,000 55,000 Journal Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 1,500 1,500
PAST ADJUSTMENTS Under-Charged If partners have charged any item at less than agreed rate as per deed, then also a single adjustment entry is passed to rectify the error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital is charged @ 8% p.a. instead of 10%. Pass a single adjustment entry to rectify the error.
PAST ADJUSTMENTS Particulars A Dr. Interest on capital charged debited Interest on capital to be charged Loss (1:1) Difference Cr. 28,000 B Dr. Cr. 20,000 30,000 3,500 48,000 25,000 1,500 31,500 FIRM Dr. Cr. 3,500 1,500 31,500 25,000 55,000 7,000 25,000 55,000 55,000 Journal Date Particulars A‘s Capital A/c Dr. To B‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 1,500 1,500
PAST ADJUSTMENTS Wrongly Distributed If partners have distributed profits either without charging or allowing any items as per deed, then also a single adjustment entry is passed to rectify such errors. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After distributing the profits of 5,00,000 equally, it was noted that • interest on capital is not charged @10%. •Salary @ 7,000 to A & Rs. 5,000 to B was not charged. •Profits were to be divided in ratio of 3: 2. Pass a single adjustment entry to rectify the error.
PAST ADJUSTMENTS Particulars A Dr. Profit wrongly given debited Interest on capital Salary Profit (1:1) Difference B Cr. 2,50,000 Dr. FIRM Cr. Dr. 2,50,000 30,000 84,000 1,80,600 44,600 Cr. 5,00,000 25,000 55,000 60,000 1,44,000 1,20,400 3,01,000 44,600 2,94,600 2,94,600 2,50,000 2,50,000 5,00,000 5,00,000 Journal Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 44,600 44,600
Guarantee to a partner Guaranteed amount of money may be agreed to be given to any of the partner due to any of the reason by :  The firm,  By any specific partner, or  By all partners in some some specific ratio.
Guarantee to a partner Guarantee given by the firm Whenever the guarantee is given by the firm, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in their profit sharing ratio.
Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee that his share will not be less than Rs. 3,00,000 in any year. The company earned a profit of Rs. 10,00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account.
Guarantee to a partner Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount Cr. Amount By Net Profit To Partner’s Capital A/c Particulars 10,00,000 A: 5,00,000 - Given to C 62,500 4,37,500 B 3,00,000 - Given to C 37,500 2,62,500 C 2,00,000 + From A: to be divided in 5:3 Rs. 1,00,000 62,500 + From B: 37,500 3,00,000 10,00,000 10,00,000
Guarantee to a partner Guarantee given by specific partner Whenever the guarantee is given by a specific partner, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be borne by that specific partner only.
Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee by A that his share will not be less than Rs. 3,00,000 in any year. The company earned a profit of Rs. 10,00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account.
Guarantee to a partner Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount Particulars Amount By Net Profit To Partner’s Capital A/c A: 5,00,000 - Given to C 1,00,000 B 3,00,000 Cr. 10,00,000 4,00,000 3,00,000 C 2,00,000 + 1,00,000 1,00,000 Rs. From A:to be borne by A only 3,00,000 10,00,000 10,00,000
Guarantee to a partner Guarantee given in specific ratio Whenever the guarantee is given by the remaining partners in a specific ratio, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in that specified ratio.
CLASS ASSIGNMENT A, B and C were partners in the ratio of 3:2:5. However B was given a guarantee by C that his share will not be less than Rs. 1, 00,000 in any year. The company earned a profit of Rs. 4, 00,000 during the year 200708. Prepare profit & Loss Appropriation Account.
SOLUTION Particulars Amount To Partners capital A/c Particulars By P & L A/c Amount 4,00,000 A‘s Capital A/c1,20,000 B‘s Capital A/c (+) Guarantee 80,000 20,000 C‘s capital A/c 2,00,000 (-) Guarantee 20,000 4,00,000 4,00,000 4,00,000
GUARANTEE GIVEN IN SPECIFIC RATIO Whenever the guarantee is given by the remaining partners in a specific ratio, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in that specified ratio.
Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee that his share will not be less than Rs. 3,00,000 in any year. Deficiency if any will be borne by A & B equally. The company earned a profit of Rs. 10,00,000 during the year. Prepare profit & Loss Appropriation Account.
Guarantee to a partner Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount Cr. Amount By Net Profit To Partner’s Capital A/c Particulars 10,00,000 A: 5,00,000 - Given to C 50,000 4,50,000 B 3,00,000 - Given to C 50,000 2,50,000 C 2,00,000 + From to divided Rs. 1,00,000A: be 50,000 in 1:1 (equally) + From B: 50,000 3,00,000 10,00,000 10,00,000
CLASS ASSIGNMENT A, B and C were partners in the ratio of 2:2:1. However C was given a guarantee by C that his share will not be less than Rs. 3, 00,000 in any year. . Deficiency if any will be borne by A & B in 5:3.The Company earned a profit of Rs. 10, 00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account.
SOLUTION Particulars To Partner‘s Capital A/c A: 4,00,000 - Given to C 62,500 B 4,00,000 - Given to C 37,500 C 2,00,000 + From A: 62,500 + From B: 37,500 Amount Particulars Amount By P& L A/c 10,00,000 3,37,500 3,62,500 3,00,000 10,00,000 10,00,000
Partnership: Goodwill ACCOUNTANCY Class XII
GOODWILL
GOODWILL: Defined “Goodwill is nothing more than the probability that the old customers will resort to old place.” By Lord Eldon
Characteristics  An Intangible asset not a fictitious asset.  Cannot have a separate existence from that of the enterprise.  Helps to earn higher profits.  Attractive force that binds old  customer to old place.  Its value is determined by  subjective judgment of the valuer.  Fluctuates with the fortunes of the enterprise.  Affected by various factors.
Factors Affecting Value  Efficient management  Location  Favourable contracts  Patent advantage  Access to supplies  Quality  Others like after sales services, good customer relations, good labour relations etc…
When to Valuate There is a need to valuate goodwill in following circumstances: Change in profit sharing ratio  Admission of a partner  Retirement of a partner  Death of a partner  Amalgamation of two firms  Conversion of firm into company.
Classification GOODWILL Purchased Self-generated
Purchased Goodwill  When goodwill is acquired by making a payment, it will be termed as purchased goodwill like when a business purchases any brand which already has a market standing will be purchased goodwill. • When a business is purchased, the excess of purchased consideration of its net assets (i.e. assets liabilities) is the purchased goodwill.
Self-Generated Goodwill  This is the market standing which a business makes by working over a number of years.  It is not recorded in the books of accounts if AS 10 is followed.  Its valuation depends on the subjective judgment of the valuer.
Methods of Valuation. Methods of Goodwill Average Profit Method Super Profit Method Capital-isation Method
Average Profit Method This method is based on the assumption that a new business will not be able to earn any profits during the first few years of its operations. Hence, the person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years. The goodwill, therefore, should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.
Average Profit Method STEPS 1. Calculate normal past business profits for each year by deducting abnormal gains and non-business incomes and adding abnormal losses and non-business expenses. 2. Add the profits calculated above and divide their sum by number of years to get average profit. 3. Calculate goodwill as follows: Goodwill = Average Profits x Number of years Purchased
Average Profit Method Example  The profit for the last five years of a firm were as follows – Year 2003 Rs. 1,00,000; Year 2004 Rs. 1,98,000; Year 2005 Rs. 3,42,000; Year 2006 Rs. 4,60,000 and Year 2007 Rs. 6,00,000.  Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Average Profit Method Calculate Average Profit as: 1,00,000 +1,98,000 + 3,42,000 + 4,60,000 + 6,00,000 5 17,00,000 = =3,40,000 5 To calculate Goodwill, Average Profit is multiplied by number of years’ Purchased as: =3,40,000 × 4 =13,60,000
Super Profit Method  Capital employed in a business earns returns known as profits. Normally the average rate of the industry is considered as normal rate of return from that business.  But if a business from same industry able to earn higher profits, then these excess profits are termed as super or abnormal profit. Goodwill is calculated by multiplying these super profits with number of agreed years purchased.
Super Profit Method STEPS Calculate average capital employed: opening capital employed + closing capital employed 2 capital employed = capital + free reserves - fictitious assets 2. Calculate actual expected profit i.e. average profits. 3. Calculate normal profits as: normal rate of return Average capital employed x 100 4. Calculate super profit i.e. 1. Average/actual profits – normal profits 5. Calculate goodwill asGoodwill = Super Profits x Number of years Purchased
Super Profit Method Example  The average profit for the last five years of a firm were Rs. 13,00,000. the normal rate of return on capital employed is 20%.  The firm has assets worth of Rs. 65,00,000 and liabilities for Rs. 15,00,000 in the business.  Calculate goodwill of the firm on the basis of 4 years purchase of super profits.
Super Profit Method Solution  Actual/average profit = 13,00,000  Capital employed = assets – liabilities  = 65,00,000 – 15,00,000  = 50,00,000  Normal profit = 20% of 50,00,000  = 10,00,000  Super profit = average profit – normal profit  =13,00,000 – 10,00,000 = 3,00,000  Goodwill = super profit x number of years purchased  = 3,00,000 x 4 = Rs. 12,00,000
Capitalisation Method  Under Capitalisation method, goodwill is calculated in two ways:Capitalisation of Average Profits, Capitalisation of Super Profits.
Capitalisation Method STEPS 1. Calculate average normal profits earned. 2. Calculate capitalised value of the firm as:- AverageProfit ×100 Rate of NormalProfits 3. Determine the value of net tangible assets, i.e. assets other than fictitious assets 4. Calculate goodwill by deducting net tangible assets from the capitalised value, i.e., 5. Goodwill = Capitalised Value – Net Tangible Assets.
Capitalisation Method Example  A firm earns Rs. 6,00,000 as its annual profits, the rate of normal profit being 10%.  The assets of the firm amount to Rs. 65,00,000 and liabilities for Rs. 35,00,000.  Calculate goodwill of the firm by Capitalisation method.
Capitalisation Method Solution Average profit = 6,00,000 AverageProfit ×100 Total Capitalised value = Rate of NormalProfits 6,00,000×100 = = 60,00,000 10 Net assets of the firm=Total Assets – Liabilities = 65,00,000-35,00,000 = 30,00,000 Goodwill = Total Capitalised Value-Net Assets = 60,00,000 – 30,00,000 = Rs. 30,00,000.
Capitalisation Method STEPS:  Calculate capital employed of the firm as: Total Tangible Assets – Outside Liabilities.  Calculate normal profit on capital employed as:Profit = Capital Employed × Requred rate of return 100  Calculate Average Profits of past years  Calculate Super Profits, i.e. Actual Average Profits-Normal Profits.  Calculate Goodwill as Goodwill= Super Profit × 100 Normal rate of return
Capitalisation Method Example  A firm earns Rs. 6,00,000 as its annual profits, the rate of normal profit being 10%.  The tangible assets of the firm amount to Rs. 75,00,000 and liabilities for Rs. 25,00,000.  Calculate goodwill of the firm by Capitalisation method.
Capitalisation Method Solution:  Capital Employed = tangible assets – liabilities  = 75,00,000 – 25,00,000 = 50,00,000  Normal Profit = 10% of capital i.e. 50,00,000  = 5,00,000  Super Profit = average profit – normal profit   Goodwill= = 6,00,000 – 5,00,000 = 1,00,000 Super Profit × 100 Normal rate of return  = Rs. 10,00,000 1,00,000 ×100 = 10
Chapter 3 Comparative & Common Size Statements ACCOUNTANCY Class XII
MEANING Comparative of financial statements involves the comparative study of the components of financial statements i.e. Profit and Loss A/c and Balance Sheet over a period of two or more years When the comparison is made for the data for the period of more than two years of the same firm then it is called Intra firm Comparison When the comparison is made for the data of the another firm then it is called Inter firm Comparison The change is depicted both in absolute and percentage terms
OBJECTIVES AND TOOLS OBJECTIVES  It gives information about the nature of changes affecting the financial position of the firm  It points out the weaknesses about the liquidity, solvency and profitability of the firm  It helps in forecasting and planning TOOLS  Comparative Balance Sheets  Comparative Income statements
COMPARATIVE BALANCE SHEET PARTICULARS A. Fixed Assets B. Investments C. Current Assets TOTAL A. Equity Share Capital B. Preference Share capital C. Reserves & Surplus D. Secured Loans E. Unsecured Loans F. Current Liabilities G. Provisions TOTAL 2007 2008 Absolute Percentage change change
EXAMPLE 1 LIABILITIES 2007 2008 Share Capital 60,000 Preference Share Capital 2007 2008 60,000 Fixed Assets 90,000 108000 15,000 15,000 Investments 15,000 15,000 Reserves & Surplus 15,000 18,000 Current assets 40,000 30,000 Secured Loans 30,000 27,000 Misc Expenditure 5,000 1,500 Unsecured Loans 15,000 18,000 Current Liabilities 12,000 13,200 Provisions 3,000 3,300 1,50,000 1,54,500 ASSETS 1,50,000 1,54,500
18,000  100 1,08,000 -90,000 90,000 SOLUTION PARTICULARS A. Fixed Assets B. Investments C. Current assets Total A. Equity Share Capital B. Preference Share capital C. Reserves & Surplus D. Secured Loans E. Unsecured Loans F. Current Liabilities G. Provisions Total 2007 2008 Absolute change Percentage change 90,000 15,000 40,000 1,08,000 15,000 30,000 18,000 ---(10,000) 20% ---(25%) 1,45,000 1,53,000 8,000 5.5% 60,000 15,000 10,000 30,000 15,000 12,000 3,000 60,000 15,000 16,500 27,000 18,000 13,200 3,300 ------(6,500) (3,000) 3,000 1,200 300 ------(65%) (10%) 20% 10% 10% 1,45,000 1,53,000 8,000 5.5%
CLASS ASSIGNMENT Prepare the comparative Balance Sheet of Apex Ltd from the following information for two years ended 31.03.07 and 31.03.08 PARTICULARS 31.03.07 31.03.08 Fixed Assets 30,00,000 32,00,000 Investments 6,00,000 8,00,000 Stock – in – Trade 3,50,000 5,00,000 Sundry Debtors 80,000 50,000 Cash in Bank 80,000 80,000 Miscellaneous Expenditure 40,000 30,000 25,00,000 25,00,000 Reserves and Surplus 8,00,000 12,00,000 Secured Loans 4,00,000 3,00,000 Unsecured Loans 3,00,000 1,00,000 Creditors 1,50,000 5,60,000 Equity Share Capital
SOLUTION PARTICULARS A. Fixed Assets B. Investments C. Current assets 2007 2008 Absolute change Percentage change 30,00,000 6,00,000 5,10,000 32,00,000 8,00,000 6,30,000 2,00,000 2,00,000 1,20,000 6.67% 33.3% 23.5% Total 41,10,000 46,30,000 5,20,000 12.6% A. Equity Share Capital B. Reserves & Surplus C. Secured Loans D. Unsecured Loans E. Current Liabilities 25,00,000 7,60,000 4,00,000 3,00,000 1,50,000 25,00,000 --11,70,000 4,00,000 3,00,000 (1,00,000) 1,00,000 (2,00,000) 5,60,000 (1,30,000) --50% (25%) (66.6%) (86.6%) Total 41,10,000 46,30,000 5,20,000 12.6%
COMPARATIVE INCOME STATEMENT PARTICULARS Sales Less: Cost of goods sold Gross Profit Less: Operating Expenses: Net Operating Profit + Other Income Profit before Interest and Tax Less: Interest paid Profit before Tax Income Tax Payable Profit after Tax 2007 2008 Absolute change Percentage change
EXAMPLE 2 PARTICULARS Sales Cost Of Goods Sold 2007 (Rs) 2008(Rs) 1,00,000 2,00,000 60% of Sales 70% of Sales Indirect Expenses 10% of Gross Profit Rate of Income Tax 50% of Net Profit before Tax
1,00,000  100 2,00,000 2,00,000 -1,00,000 SOLUTION 2 PARTICULARS Sales Less: Cost of Goods sold Gross Profit Less: Indirect Expenses Net Profit before tax Less: Income Tax Net Profit after tax 2007 2008 Absolute Percentage change change 1,00,000 2,00,000 1,00,000 100% 60,000 1,40,000 40,000 60,000 80,000 20,000 133.3% 50% 4,000 36,000 6,000 54,000 2,000 18,000 50% 50% 18,000 27,000 9,000 50% 18,000 27,000 9,000 50%
CLASS ASSIGNMENT From the following data prepare a Comparative Income Statement PARTICULARS 2007 (Rs) 2008 (Rs) Sales 14,00,000 16,00,000 Cost of goods sold 10,00,000 11,80,000 Office and Administration Expenses 90,000 1,30,000 Interest on Loan 80,000 80,000 Income Tax 40,000 36,000
SOLUTION PARTICULAR 2007 2008 Absolute change Percentage change Sales Less: COGS 14,00,000 10,00,000 16,00,000 11,80,000 2,00,000 1,80,000 14.2% 18% Gross Profit (-) I. Exp 4,00,000 90,000 5,80,000 1,30,000 20,000 40,000 5% 44.4% Operating Profit (-) Int. on loan 3,10,000 4,50,000 1,40,000 45.1% 80,000 80,000 --- --- Net Profit before tax (-) tax 2,30,000 3,70,000 1,40,000 60.8% 40,000 36,000 (4,000) (10%) Profit after Tax 1,90,000 3,34,000 1,36,000 71.5%
COMMON SIZE STATEMENTS MEANING Common size Statements are those statements in which the amounts of two years of Balance sheet or Income Statement are converted into percentages to some common base. •When the comparison is made for the data for the period of more than two years of the same firm then it is called Intra firm Comparison •When the comparison is made for the data of the another firm then it is called Inter firm Comparison •In Balance sheet the Total Assets is assumed to be 100 & in Income Statements the Sales are assumed to be 100.
COMMON SIZE STATEMENTS OBJECTIVES  To analyze change in individual item of Income Statement and Balance Sheet  To study the trend of items in Balance sheet and Income statement  It helps in forecasting and planning TOOLS  Common Size Balance Sheet  Common Size Income statement
COMMON SIZE BALANCE SHEET PARTICULARS AMOUNT 2007 (Rs) ASSETS Fixed Assets Investments Current Assets TOTAL LIABILITIES Equity Share Capital Preference Share Capital Reserves and Surplus (after Misc. expenditure) Secured Loans Unsecured Loans Current Liabilities Provisions TOTAL 2008 (Rs) PERCENTAGE 2007 (Rs) 2008 (Rs)
EXAMPLE 3 LIABILITIES 2007 2008 ASSETS 2007 2008 Current Liabilities 2,00,000 4,00,000 Current Assets 6,00,000 10,00,000 Reserves 3,50,000 3,00,000 Fixed Assets 10,00,000 16,00,000 12% Loan 5,50,000 9,00,000 Share Capital 5,00,000 10,00,000 16,00,000 26,00,000 16,00,000 26,00,000
6,00,000 10,00,000  100 100 16,000,000 26,00,000 SOLUTION 3 PARTICULARS AMOUNT 2007 (Rs) PERCENTAGE 2008 (Rs) 2007 (Rs) 2008 (Rs) ASSETS Current Assets 6,00,000 10,00,000 37.5% 38.4% Fixed Assets 10,00,000 16,00,000 62.5% 61.5% TOTAL 16,00,000 26,00,000 100% 100% Current Liabilities 2,00,000 4,00,000 12.5.% 15.38% Reserves 3,50,000 3,00,000 21.8% 11.53% 12% Loans 5,50,000 9,00,000 34.3% 34.6% Share capital 5,00,000 10,00,000 19.2% 62.5% 16,00,000 26,00,000 100% 100% LIABILITIES TOTAL
CLASS ASSIGNMENT LIABILITIES 2007 2008 ASSETS Equity Share Capital 7,50,000 9,00,000 Fixed Assets General Reserve 1,50,000 2,25,000 Current Assets 12% Debentures 2,70,000 1,80,000 Preliminary Expenses Unsecured Loans 1,80,000 3,75,000 4,20,000 Profit & Loss A/c 1,80,000 2008 1,20,000 Current Liabilities 2007 1,35,000 19,05,000 19,80,000 12,45,000 11,55,000 6,15,000 7,95,000 45,000 30,000 19,05,000 19,80,000
SOLUTION PARTICULARS AMOUNT PERCENTAGE 2007 (Rs) 2008 (Rs) 2007 (Rs) 2008 (Rs) ASSETS Fixed Assets Current Assets 12,45,000 6,15,000 11,55,000 7,95,000 66.9% 33% 59.2% 40.7% TOTAL 18,60,000 19,50,000 100% 100% 7,50,000 2,85,000 9,00,000 3,30,000 40.3% 15.3% 46.1% 16.9% 2,70,000 1,80,000 3,75,000 1,80,000 1,20,000 4,20,000 14.5% 9.6% 20.1% 9.2% 6.1% 21.5% 18,60,000 19,50,000 100% 100% LIABILITIES Equity Share Capital Reserves and Surplus (after Miscellaneous expenditure) Secured Loans Unsecured Loans Current Liabilities TOTAL
COMMON SIZE INCOME STATEMENT PARTICULARS AMOUNT 2007 (Rs) Net Sales Less: Cost of goods sold Gross Profit Less: Operating Expenses Net Profit before tax Less: Tax Net Profit after tax 2008 (Rs) PERCENTAGE 2007 (Rs) 2008 (Rs)
EXAMPLE 4 PARTICULARS Sales Gross Profit Indirect Expenses Income Tax 2007 2008 20,00,000 30,00,000 40% 30% 50% of G.P 40% of G.P. 50% 50%
30,00,000 20,00,000  100  100 20,00,000 30,00,000 SOLUTION 4 PARTICULARS AMOUNT 2007 (Rs) Net Sales Less: Cost of goods sold 2008 (Rs) PERCENTAGE 2007 (Rs) 2008 (Rs) 20,00,000 12,00,000 30,00,000 21,00,000 100% 60% 100% 70% Gross Profit Less: Operating Expenses 8,00,000 4,00,000 9,00,000 3,60,000 40% 20% 30% 12% Net Profit before tax Less: Tax 4,00,000 2,00,000 4,50,000 2,25,000 20% 10% 15% 7.5% Net Profit after tax 2,00,000 2,25,000 10% 7.5%
CLASS ASSIGNMENT PARTICULARS Sales Cost Of Goods Sold 2007 (Rs) 1,00,000 2008(Rs) 2,00,000 60% of Sales 70% of Sales Indirect Expenses 10% of Gross Profit Rate of Income Tax 50% of Net Profit before Tax
SOLUTION PARTICULARS AMOUNT 2007 Net Sales Less: COGS PERCENTAGE 2008 2007 2008 1,00,000 60,000 2,00,000 1,40,000 100% 60% 100% 70% Gross Profit Less: Operating Expenses 40,000 60,000 40% 30% 4,000 6,000 4% 3% Net Profit before tax Less: Tax 36,000 18,000 54,000 27,000 36% 18% 27% 13.5% Net Profit after tax 18,000 27,000 18% 13.5%
Chapter 4 Change in Profit Sharing Ratio ACCOUNTANCY Class XII
Concept Old ratio 1:1 A Profit is like a cake A will loose ¼ of the cake while B will gain ¼ of cake A New ratio 1:3 B B
Numerical Presentation Old ratio of A and B 1:1 New ratio of A and B 1:3 Difference = old share – new share A’s Share B’s Share 1 1 2-1 1 = = A’s sacrifice 2 4 4 4 1 3 2 - 3  1 = =   B’s gain 2 4 4 4
CLASS ASSIGNMENT Q1 A, B and C were partners in the firm in the ratio of 3:2:1. Now they decided to share profits in the ratio of 5:3:2. Calculate gaining/sacrificing ratio of each partner. Q2 A, B and C were partners in the firm in the ratio of 4:3:2. Now they decided to share profits in the ratio of 2:2:1. Calculate gaining/sacrificing ratio of each partner. Q3 A, B and C were partners in the firm in the ratio of 6:4:5. Now they decided to share profits equally. Calculate gaining/sacrificing ratio of each partner.
SOLUTION Q1 Sacrifice/ Gain = Old Share - New Share A= 3 5  NIL 6 10  B= 2 3 2   (Sacrifice) 6 10 60 C= 1 2 2   (Gain) 6 10 60
SOLUTION Q2 Sacrifice/ Gain = Old Share - New Share A= 4 2 2   (sacrifice) 9 5 45 B = 3 2 3  9 5 C=  45 (Gain) 2 1 1   (Sacrifice) 9 5 45
SOLUTION Q3 Sacrifice/ Gain = Old Share - New Share A= B= C= 6 1 1   (sacrifice) 15 3 15 4 1 1   (Gain) 15 3 15 5 1   NIL 15 3
Effects on Goodwill  When partners agree to change their profit sharing ratio, their share in goodwill also changes.  To take into account such change, an adjustment entry among the partners is passed, debiting the gaining partner and crediting the sacrificing partner.  It can be represented as: JOURNAL Date Particulars Gaining Partner A/c Dr. To Sacrificing Partner A/c L.F. Debit Credit
Example A & B are partners in the ratio of 3:2. now they decided to share in the ratio of 5:3. for this purpose goodwill is valued at Rs. Rs. 4,00,000. Partners decided to pass a adjustment entry to give this effect. Journalise.
Solution Calculation of sacrificing and gaining ratio Old ratio of A and B 3:2 New ratio of A and B 5:3 Difference = old share – new share 3 5 24 - 25  1  A's Share = - = =  Gain 5 8 40  40  2 3 16 - 15 1 B's Share = - = = Sacrifice 5 8 40 40
Journal Entry Amount to be adjusted 1 40 × 4,00,000 =10,000 JOURNAL Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being adjustment entry Passed) L.F. Debit Credit 10,000 10,000
Previous Goodwill If Goodwill Already Appears in books  If goodwill already appears in the books of accounts, it has to be written off among the partners in the old ratio.  The journal entry would be:JOURNAL Date Particulars All Partners (old ratio) A/c Dr. To Goodwill A/c L.F. Debit Credit
Reserves/Past Profits  When partners agree to change their profit sharing ratio, their share in reserves, accumulated profits, provisions, funds etc. also changes.  To take into account such change, an adjustment entry among the partners is passed, debiting the gaining partner and crediting the sacrificing partner.  It can be represented as: JOURNAL Date Particulars Gaining Partner A/c Dr. To Sacrificing Partner A/c L.F. Debit Credit
Example A & B are partners in the ratio of 3:2. now they decided to share in the ratio of 5:3. The reserves stood at Rs. Rs. 2,00,000. Partners decided to pass a adjustment entry to give this effect. Journalise.
Solution Calculation of sacrificing and gaining ratio Old ratio of A and B 3:2 New ratio of A and B 5:3 Difference = old share – new share 3 5 24 - 25  1  A's Share = - = =  Gain 5 8 40  40  2 3 16 - 15 1 B's Share = - = = Sacrifice 5 8 40 40
Journal Entry Amount to be adjusted 1 40 × 2,00,000 =5,000 JOURNAL Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being adjustment entry Passed) L.F. Debit Credit 5,000 5,000
Example X, Y and Z are partners sharing profits and losses in the ratio of 7: 5: 4. Their balance Sheet as on 31st March 2003 was: Liabilities Capital Accounts: X 4,00,000 Y 2,70,000 Z 1,80,000 General Reserve Profit & Loss A/c Creditors Rs. Assets Rs. Sundry Assets 10,26,000 8,50,000 80,000 32,000 64,000 10,26,000 10,26,000 Partners decided that with effect from 1st April 2003, they will share profits and losses in the ratio of 3: 2: 1. For this purpose goodwill of the firm was valued at Rs. 3, 20,000. The partners do not want to record the goodwill and also do not want to distribute the general reserve and profits. Pass a single journal entry to record the change and prepare a revised balance sheet.
Solution 7 3 21- 24  3  X's Share = - = =  Gain 16 6 48  48  5 2 15 - 16  1  Y's Share = - = =  Gain 16 6 48  48  4 1 12 - 8 4 Z's Share = - = = Sacrifice 16 6 48 48 Amount to be adjusted: Goodwill 3,20,000 3 X'sGain= × 4,32,000 =27,000 Reserves 80,000 48 Profit 32,000 1 Total 4,32,000 Y'sGain= × 4,32,000=9,000 48 4 Z's Sacrifice = × 4,32,000 =36,000 48
Solution JOURNAL Date Particulars L.F. Debit X‘s Capital A/c Dr. Y‘s Capital A/c Dr. To Z‘s Capital A/c (Being adjustment entry Passed) Credit 27,000 9,000 36,000 (27,000 + 9,000) Partner‘s Capital A/c Particulars To Z To bal c/d X Y Z X Y Z By bal b/d By X 3,73,000 2,61,000 2,16,000 By Y 4,00,000 2,70,000 1,80,000 27,000 9,000 4,00,000 2,70,000 2,16,000 4,00,000 2,70,000 2,16,000 27,000 9,000 Particulars
Solution Liabilities Capital Accounts: X 3,73,000 Y 2,61,000 Z 2,16,000 General Reserve Profit & Loss A/c Creditors Balance Sheet Rs. Assets Sundry Assets Rs. 10,26,000 8,50,000 80,000 32,000 64,000 10,26,000 10,26,000
Revaluation/Reassessment  The value of assets may be different from the one stated in the books because with the passage of time the value of some assets fall while of some other rise In the case of liabilities, it is possible that the amount payable is different from the value stated in the books.  It is also possible that some assets or liabilities are not recorded in the books. The value of assets and the amounts payable need to be brought to their correct values.  It may be done through revaluation A/c when such changes are agreed to be shown in the books of accounts whereas if partners decide not to reveal and record the changed figures in books of accounts, in that case to give effect of such changes a statement for calculation of profit/loss from revaluation of assets and reassessment of liabilities is prepared and its effect is passed through the same gaining-sacrificing entry.
Journal Entries i) for a increase in the value of assets Assets A/c (Individually) To Revaluation A/c Dr. ii) for a decrease in the value of assets Revaluation A/c To Assets A/c (Individually) Dr. iii) For an increase in the amount of liabilities Revaluation A/c To Liability A/c (Individually) Dr. iv) For a decrease in the amount of liabilities Liability A/c (individually) To Revaluation A/c Dr. v) For accounting unrecorded assets Assets A/c (Individually) To Revaluation A/c Dr. (vi) For Accounting unrecorded liabilities Revaluation A/c To Liability A/c (Individually) Dr.
Profit/Loss on Revaluation  If the credit side exceeds the debit side, i.e., there is a gain. The entry is: Revaluation A/c Dr. To Old Partners' Capital A/c’s (old Ratio)  In case debit side exceeds the credit side, i.e., there is a loss. The entry is: Old Partners' Capital A/c’s (old Ratio) Dr. To Revaluation A/c
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Accountancy exam made easy

  • 1.
  • 2. Chapter 1 Not For Profit Organisations ACCOUNTANCY Class XII
  • 3. Index Chapter 1 – Not for Profit Organisation Chapter 2 – Partnership Fundamentals Goodwill Chapter 3 – Comparative and Common Size Statements Chapter 4 – Change In Profit Sharing Ratio Admission of a Partner Retirement of a Partner Retirement & Death – Capital Adjustment Ratio Analysis Chapter 5 - Cash Flow Statements Chapter 6 – Company Accounts – Accounting for Share Capital Company Accounts – Issues of Debenture Chapter 7 - Company Accounts – Redemption of Debenture
  • 4. Not For Profit Organisations Organisations which are formed not for earning profits but for a charitable or social purpose are called as not for profit organisations. FEATURES:1) Separate legal entity 2) Service motive 3) Form 4) Profit- not a motivator 5) Funding 6) Accounts
  • 5. Separate legal entity  According to the principle of separate legal entity, a not for profit organisation is an separate entity independent of its members.  These are the separate entity promoted by individuals or companies, but these are not owned by the promoters or managers.
  • 6. Service Motive These organisations are formed  For welfare of the society.  For providing services to its members.  Main motive is to provide services.
  • 7. Form  Charitable hospitals  Schools  Trusts  Colleges  Clubs  Hospitals  Societies
  • 8. Profit – not a motivator  NPOs do not operate with the objective of earning profits.  Their aim is to promote art, science, commerce, religion, culture, education, charity, sports etc.  Some NPOs may involve in trading activities  Main objective is not to earn the profit but to benefit the members and society.  Any excess of income over expenditure is termed as SURPLUS while any excess of expenditure over income is termed as DEFICIT.
  • 9. Funding The main sources of income of such organisations are:  Subscriptions from members,  Donations,  Legacies,  Grant-in-aid,  Income from investments, etc.
  • 10. Accounts  The Not-for-Profit Organisations are also required to prepare financial statements at the end of the each accounting period.  They have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation.  The final accounts of a ‗not-for-profit organisation‘ consist of the following:  Receipt and Payment Account  Income and Expenditure Account, and  Balance Sheet.
  • 11. Receipt and Payment A/c Features  Summary of the cash book.  Receipts are recorded on the debit side  Payments are entered on the credit side.  Records all cash transactions irrespective of the     period. Includes all receipts and payments whether they are of capital nature or of revenue nature. No distinction is made in receipts/payments made in cash or through bank. No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this account. It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with the year end balance of cash in hand/ cash at bank or bank overdraft.
  • 12. Steps: Receipt & Payment A/c Steps in preparation of Receipt & Payment A/c  Take the opening balances of cash in hand and cash at bank & enter them on the debit side. In case there is a bank overdraft in beginning of the year, it will be recorded on credit side.  Show the total amounts of all receipts on its debit side irrespective of their nature (whether capital or revenue) & whether they belong to past, present or future.  Show the total amounts of all payments on its credit side irrespective of their nature & time period.  None of the receivable income or payable expense is to be entered in this account.  Find out the total of debit side & credit side of the account & enter the same on the credit side of cash/bank. If a balance comes out to be on debit side, take it as closing balance of bank overdraft.
  • 13. Format Dr. Receipt & Payment A/c for the year ended _________ Receipts To Bal b/d Cash xxx Bank xxx To Revenue Receipts To Capital Receipts To Bal c/d (Bank O/D) Amount Payments Xxx Xxx Xxx xxx By Bal b/d (Bank O/D) By Revenue Payments By Capital Payments By Bal Bank xxx Cash xxx A detailed & comprehensive Receipt & Payment A/c may appear as: Cr. Amount Xxx Xxx Xxx xxx
  • 14. Format Receipts To Bal b/d Cash ×××× Bank ×××× To Revenue Receipts Subscription General Donations Sale of newspaper Sale of periodicals Sale of old sports material Locker rent Sale of scraps Proceeds of show Miscellaneous Receipts Entrance fee Grant in aid To Capital Receipts Legacies Life Membership fees Specific Donation Sale of Investment Sale of fixed assets Endowment Fund To Bal c/d (Bank O/D) Amount Payments ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× By Bal b/d (Bank O/D) By Revenue Payments Wages & Salaries Rent, Rates & Taxes Insurance Printing & Stationary Postage Advertising Sundry Expenses Telephone charges Audit fees Honorarium Conveyance Newspapers Repairs By Capital Payments Purchase of fixed Assets Purchase of investments Fixed deposits By Bal Bank ××× Cash ××× Amount ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××× ××××
  • 15. Format A club has kept its accounts on cash basis and the figures for 2005 are given below. You are required to prepare receipts & payments A/c for the year 2005. Subscription Received 5,90,600 Entrance fee 80,000 Admission fee 32,000 Secretary‘s salary 60,000 Investment bought during the years 2,22,000 Expenses paid 1,54,500 Cash in hand (1.1.05) Solution:- 94,700 Locker rent received 16,250 General Donation 1,50,000 Receipts & payments A/c Receipts To balance b/d To subscription To Entrance fee To Admission fee To Locker‘s Rent To General Donation Rs. 94,700 5,90,600 80,000 32,000 16,250 1,50,000 Payments By Secretary Salary By Investment By Expenses By bal. c/d (balancing figure) Rs. 60,000 2,22,000 1,54,500 5,27,050
  • 16. Class Practice Question Q. On 1/1/06, the opening balance was Rs. 18,000 of J. M. Trust, Delhi. The following transactions were held for the year ended 31/3/08. From these particulars, prepare a Receipts & payments account. Subscription received for current year 8,50,000 Subscription received for next year 30,000 Life Membership fees 80,000 Investments Furniture purchased 2,50,000 30,000
  • 17. Solution Dr Receipts To balance b/d To subscription Current Year 8,50,000 Next Year 30,000 To Life Membership fee Receipt & Payment A/c Rs. Cr Payments Rs. 18,000 By Investment By Furniture By Sports Materials 8,80,000 By General Expenses 33,800 80,000 Less Unpaid Expenses 3,800 By bal. c/d (balancing figure) 2,50,000 30,000 1,50,000 9,78,000 9,78,000 30,000 5,18,000
  • 18. Income & Expenditure A/c       It is a nominal account. ―Debit all expenses & credit all incomes‖ will be followed while preparing it. Opening & closing balance of cash at bank are not shown in it. It does not take into consideration both capital receipts & capital payments. Closing balance, if comes on debit side is known as surplus & on credit side, deficit. All non-cash adjustments like depreciation, outstanding or prepaid expenses & accrued or advance income, provision, etc. need to be adjusted through this account. It must be accompanied by Balance sheet in which personal & real accounts are recorded.
  • 19. Steps Steps in preparation of Income & Expenditure A/c  Pursue the Receipts & Payments Account thoroughly.  Exclude opening & closing balance of cash & bank as they are not the income.  Exclude the capital receipts & capital payments.  Consider only revenue receipts to be shown on income side (credit side) of this account for the current year whether received or not.  Take all revenue expenses of current year on debit side of this account whether paid or not.  Non-Cash item like Deprecation, provisions profit / Loss on sale of assets etc. should be taken into consideration.  Balance if any in debit side resembles surplus but on credit side it shows deficit.
  • 20. Format Income & Expenditure A/c For the year ended Expenditures To all revenue payments (current year whether paid or not) To Depreciation To Bad debts To Loss on sale of fixed assets To Consumed part of medicine, stationery, spot equipments etc. To Surplus (Excess of income over Expenditure) Amount Incomes By all revenue receipts (current year whether received or not) By profit on sale of fixed assets By Deficit (Excess of expenditure over Income). Amount
  • 21. Example Prepare an income & expenditure Account for the year ended 31st March, 2006 from Receipts & payments Account. Receipts Cash in hand Subscription Miscellaneous Income Sale of old furniture (Book value 390) Sale of old Newspaper Amount 9,600 2,48,000 14,800 6,300 500 Payments Rent Honorarium to Clark Postage & stationary Printing charges Donation Cash in hand Amount 42,400 61,200 5,300 61,200 11,000 98,100
  • 22. Solution Income and Expenditure account Expenditure To Rent Add- O/s Rent Amount Income 42,400 3,600 46,000 To Honorarium 61,200 Add Outstanding 9,800 71,000 To postage & stationery 5,300 To printing charges 61,200 To Donation 11,000 To loss on sale of furniture To Surplus (excess of income over expenditure) By Subscription 2,48,000 Less O/s subscription (04-05) 28,000 Add O/s Subscription (05-06) 20,000 By Income from Advertisement By Sale of old Newspaper Amount 2,40,000 14,800 500 700 60,100 2,55,300 2,55,300
  • 23. DIFFERENCE Basis Receipt & Payment A/c Income & Expenditure A/c 1. Nature It is the summary of cash Book It is like profit & loss A/c 2. Nature of Items It records receipts & payments of revenue as well as capital nature It records incomes & expenditures of revenue nature only. 3. Period It includes receipts & Its items relate to current Payments for preceding & year only. succeeding years 4. Debit side Receipts are recorded Expenditure are recorded
  • 24. Balance Sheet  The preparation of their Balance Sheet is on the same pattern as that of the business entities.  It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side. However, there will be a Capital Fund or General Fund in place of the Capital.  The surplus or deficit as per Income and Expenditure Account shall be added to/deducted to this fund.  It is also a common practice to add some of the capitalised items like legacies, entrance fees and life membership fees directly in the capital fund.
  • 25. Balance Sheet Following procedure is adopted to prepare the Balance sheet.  Take the capital fund as per opening balance sheet & add surplus or deduct deficit as per income & expenditure account. Further, add legacy, life membership fees, endowment fund received during the year.  Take all fixed assets (not sold or destroyed) add additions made during the year les depreciation for assets used during the year.  Compare items on receipt side of receipt & payment A/c with items on income side of income & expenditure A/c to determine advances & dues.  Similarly, compare items of payments side of receipt & payment A/c with items of expenditure side of income & expenditure account to determine prepaid or outstanding expenses.  Balance sheet resembles the position statement of the organization & is a true indicator of growth potential.
  • 26. Opening Balance Sheet Balance sheet as on Liabilities Current liabilities Outstanding expenses Incomes in Advances Capital fund (Balancing Figure) Amount Assets Cash Bank Fixed assets Current assets Accrued Incomes Prepaid Expenses Amount
  • 27. Balance Sheet: At End Closing balance sheet is prepared at the end of the year after preparing Income & expenditure account. It maybe shown as:- Liabilities Capital fund Add Surplus Less Deficit Add life Membership Fees, Legacy, Endowment Fund Income in advance Specific Donations Outstanding Expenses Incomes in Advance Specific Funds Amount Assets Closing Balance Cash Bank Net Fixed Assets Current Assets (closing Balances) Investments Prepaid Expenses Accrued Incomes. Amount
  • 28. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 1 Opening balance of Cash and Bank is transferred to Opening Balance Sheet and Closing balances of Cash and Bank are transferred to Closing Balance Sheet.
  • 29. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 2 Items on the receipt side of Receipt & Payment A/c give the Components for Income Side for Income & Expenditure A/c.
  • 30. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 3 Items on the payment side of Receipt & Payment A/c give the components for Expenditure side for Income & Expenditure A/c.
  • 31. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 4 Items of revenue nature (recurring too) are carried from Receipt & Payment A/c and after analysing adjustments if any, total amount for the Current year is transferred to Income & Expenditure A/c.
  • 32. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 5 Items of Capital nature are adjusted through Balance Sheet.
  • 33. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. STEP 6 Adjustments on Capital Nature Items are not to be considered while preparing Income & Expenditure A/c.
  • 34. PROCEDURE Result The balance on Debit Side of Income & Expenditure A/c will show SURPLUS while that on Credit Side will show DEFICIT. This will be transferred to Closing Balance Sheet and Added/Subtracted as the case may be.
  • 35. PRACTICE QUESTION Following is Receipt & payment of Stanford trust, prepare Income & Expenditure and balance sheet for the year ended 31/12/06. Receipts Cash in hand Cash at bank Subscription 2005 : 5,000 2006 : 83,000 2007 : 3,000 Sale of Investment Interest on Investment Sale of furniture (book value 3,400) Amount Payments 14,000 Rent 60,000 Salary Postage Electricity charges Purchase of Furniture 91,000 Books 90,000 Defence bonds 2,000 Charity Cash in Hand 3,200 Cash at bank Amount 6,000 12,000 300 6,000 20,000 3,000 1,50,000 22,000 10,900 30,000 Adjustments: 1) Subscription for 2006 still owing were 7,000. 2) Interest due on defence bonds was Rs. 7,000. 3) Rent still owing was Rs. 1,000. 4) Investment sold valued Rs. 80,000, Rs. 30,000 of Investment were still in hand. 5) Salary paid for the year 2007 is Rs. 2,000.
  • 36. Solution Income and Expenditure account Expenditure Rent Amount 6,000 Add O/s Rent 1,000 Salary 12,000 Less paid for 2007: 2,000 Postage Electricity charges Charity Loss on sale of furniture Surplus 7,000 Income Subscription 2006 : 83,000 Add O/s Subscription: 7,000 10,000 300 6,000 22,000 200 Amount 90,000 Interest on Investment 2,000 Interest on defence bonds 7,000 Profit on sale of investment 10,000 63,500 1,09,000 1,09,000
  • 37. Solution WORKING NOTES: Balance Sheet Liabilities Capital fund Amount 1,92,400 Assets Amount Cash in Hand 14,000 Cash at bank 60,000 Subscription 5,000 Furniture 3,400 Investment 1,92,400 1,10,000 1,92,400
  • 38. Solution Balance Sheet Liabilities Amount 63,500 Outstanding rent Subscription for 2007 Amount Cash in Hand Capital fund 1,92,400 Add Surplus Assets 2,55,900 1,000 3,000 10,900 Cash at bank 30,000 Subscription 7,000 Furniture Books Defence bonds Investment 20,000 3,000 1,50,000 30,000 Accrued interest Prepaid salary 2,59,900 7,000 2,000 2,59,900
  • 39. EXAMPLE Prepare Income and Expenditure Account and Balance Sheet for the year ended March 31, 2007 from the following information Dr. Particulars Balance b/d Subscriptions: 2005-06 42,000 2006-07 4,47,000 2007-08 52,000 Entrance fees Locker rent Revenue from refreshment Income from investments Receipts and payment A/c Amount Particulars 81,000 Salaries and Wages 2005-06 14,800 2006-07 93,200 Sundry expenses 5,41,000 Freehold land 96,000 Stationery 73,000 Rates Refreshment expenses 84,000 Telephone charges Investments 3,65,000 Audit fee Balance c/d 12,40,000 Cr. Amount 1,08,000 43,000 5,00,000 6,000 22,000 63,000 9,000 3,50,000 9,000 1,30,000 12,40,000
  • 40. EXAMPLE The following additional information is provided to you: 1. There are 2500 members each paying an annual subscription of Rs. 200, Rs. 18,000 were in arrears for 200506 as on April 1, 2006. 2. There was an outstanding telephone bill for Rs. 1,400 on March 31, 2007. 3. Outstanding sundry expenses as on March 31, 2006 totaled Rs. 12,800. 4. Stock of stationery as on March 31, 2006 was Rs. 2000; on March 31, 2007, it was Rs. 3,600. 5. On March 31, 2006 Building stood at Rs. 4,00,000 and it was subject to depreciation @ 2.5% p. a. 6. Investment on March 31, 2006 stood at Rs. 8,00,000. 7. On March 31, 2007, income accrued on investments purchased during the year amounted to Rs. 17,500.
  • 41. EXAMPLE Dr. Income and Expenditure Account Particulars Salaries and Wages Sundry Expenses 43,000 Less: O/s on 31.03.06 12,800 Stationery: (consumed) Opening stock 2,000 Add: Purchases 6,000 Less: Closing stock 3,600 Rates Telephone charges 9,000 Add: Outstanding 1,400 Audit fee Depreciation on building Surplus (excess of Income over expenditure) Amount Particulars 93,200 Subscriptions Entrance fees Locker rent 30,200 Income from refreshment Revenue from refreshment 84,000 Less: Refreshment 4,400 expenses 63,000 22,000 Income from investments 3,65,000 10,400 Add: Accrued income on 9,000 current year investment 18,000 17,500 Cr. Amount 5,00,000 96,000 73,000 21,000 3,82,500 8,85,300 5,02,000 10,72,500
  • 42. EXAMPLE Balance Sheet as on March 31, 2007 Liabilities Outstanding Telephone Expenses Subscription received in Advance General Fund 15,03,400 Add: Surplus 8,85,300 Amount Assets Cash and Bank 1,400 Subscription in Arrears Stock of Stationery 52,000 Accrued Interest on investment 23,88,700 Investments 8,00,000 Additions 3,50,000 Building 6,00,000 Less: Dep. 18,000 Land 24,42,100 Amount 1,30,000 59,000 3,600 17,500 11,50,000 5,82,000 5,00,000 24,42,100
  • 43. EXAMPLE Working Notes: Balance Sheet as on March 31, 2007 Liabilities Outstanding Sundry Expenses Outstanding Salary and Wages General Fund (Balancing figure) Amount Assets Subscription in arrears 12,800 Stock of stationery Cash and Bank balance 14,800 Investments Building 15,03,400 15,31,000 Amount 48,000 2,000 81,000 8,00,000 6,00,000 15,31,000 Subscription A/c Liabilities Balance b/d (Arrears for 2005-06) Income and Expenditure Balance c/d (Advance for 2007-08) Amount Assets Receipt and Payment 48,000 Balance c/d (arrears) 5,00,000 Amount 5,41,000 59,000 52,000 6,00,000 6,00,000
  • 44. When Trial Balance is given From the following trial balance, prepare income & expenditure account and balance sheet using additional information. Particulars (Debit) Amount Particulars (Credit) Building Furniture Books Fixed deposit Salaries Stationery Sundry expenses Electricity Cash at bank Cash in hand 2,50,000 40,000 60,000 2,00,000 2,00,000 16,000 7,200 6,000 20,000 800 Entrance Fees Subscriptions Creditors Rent of hall Miscellaneous Receipts Grants General fund Donation for tournament Sale of old Furniture 8,00,000 Additional information 1.Subscription outstanding Rs. 10,000 2.Salaries outstanding Rs. 12,000 3.Furniture sold was for Rs. 10,000 4.Depreciate building 5%, furniture 10% & books 15%. Amount 5,000 2,00,000 6,000 4,000 12,000 1,40,000 4,00,000 25,000 8,000 8,00,000
  • 45. EXAMPLE Income & expenditure A/c For the year ended 31/3/2006 Expenditure Amount Incomes Loss on sale of furniture Entrance Fees (10,000 – 8,000) 2,000 Subscription 2,00,000 Salaries 2,00,000 Add outstanding 10,000 Add: outstanding 12,000 2,12,000 Rent for Hall Stationery 16,000 Miscellaneous Receipts Sundry Expenses 7,200 Grants Electricity 6,000 Depreciation Furniture 3,000 Building 12,500 Books 9,000 24,500 Surplus 1,03,300 3,71,000 Amount 5,000 2,10,000 4,000 12,000 1,40,000 3,71,000
  • 46. EXAMPLE Balance sheet As on 31/3/2006 Liabilities Amount Creditors Outstanding salaries Donation for tournament General fund 4,00,000 Add surplus 1,03,300 6,000 Building 2,50,000 12,000 Less Deprecation 12,500 25,000 Furniture 40,000 Less sold 10,000 5,03,300 Less Deprecation 3,000 Books 60,000 Less Depreciation 9,000 Fixed Deposit Cash at bank Cash in hand Subscription Outstanding 5,46,300 Assets Amounts 2,37,500 27,000 51,000 2,00,000 20,000 800 10,000 5,46,300
  • 47. Incidental Trading Activities Sometimes, trading activities such as chemist shop, hospital, canteen, bar etc. also take place in such organizations to provide certain facilities to members or public in general. In such a situation a trading account is prepared to calculate profit or loss from that trading aspect. Procedure: It is very important to take into consideration following two points: Profit or loss calculated by preparing trading A/c must be transferred to Income & expenditure A/c. Incomes & expenses related to that incidental activity, which is not recorded in trading A/c, are also to be considered while preparing. Income & expenditure A/c.
  • 48. EXAMPLE The assets and liabilities on the Millennium Cricket Club on April 1, 2007 were: Club house and ground Rs. 10, 00,000; Creditors for bar supplies Rs. 3,41,000; Equipment Rs. 3,45,000; Bank Rs. 1,34,500; Bar stocks Rs. 92,240. Receipts Amount Payments Amount Balance b/d Bar Takings Subscriptions 1,34,500 8,85,000 9,15,000 Equipment Ground maintenance Creditors for Bar supplies Sundry Expenses Balance c/d 3,12,000 1,25,000 2,35,500 3,18,000 9,44,000 19,34,500 19,34,500 At the end of March 2008, the following further information was available: (a)Subscriptions Rs. 35,000 received this year related to the next year. (b)Creditors for bar supplies Rs. 3,50,000. (c)Bar stocks Rs. 84,380. (d)Depreciate equipment by Rs. 65,000 Prepare for the Millennium Cricket Club: (i) the bar Trading Account for the year ended March 31, 2007; (ii) the Income and Expenditure Account for the year ended march 31, 2007; and (iii) the Balance Sheet as on March 31, 2007.
  • 49. EXAMPLE Income and Expenditure A/c Expenditure To Ground Maintenance To Sundry expenses To Depreciation To Surplus Amount Income 1,25,000 By Subscription 9,15,000 3,18,000 Less. For next year 35,000 65,000 By Surplus from bar Trading 8,04,640 12,82,640 Amount 8,80,000 4,32,640 12,82,640 Bar Trading A/c Particulars To Opening Stock To Purchases To Surplus on bar trading Amount Particulars Amount 92,240 By Bar Takings 4,44,500 By Closing Stock 4,32,640 8,85,000 84,380 9,69,380 9,69,380 Creditors for Bar A/c Particulars To Cash To Closing Stock Amount Particulars Amount 2,35,500 By Opening Stock 5,50,000 By Purchases (Bal. Fig.) 3,41,000 4,44,500 7,85,500 7,85,500
  • 50. EXAMPLE Balance Sheet (Closing) Liability Subscription in Advance Creditors for bar supplies Capital Fund 12,30,740 Add Surplus 8,04,640 Amount Assets Amount 35,000 Bank 5,50,000 Sports equipments 3,45,000 Add Purchases 3,12,000 20,35,380 Less Depreciation 65,000 Bar stocks Club house and ground 9,44,000 5,92,000 84,380 10,00,000 26,20,380 26,20,380 Balance Sheet (opening) Liability Amount Assets Amount Creditors for bar supplies Capital Fund 3,41,000 Bank 12,30,740 Sports equipments Bar stocks Club house and ground 1,34,500 3,45,000 92,240 10,00,000 15,71,740 15,71,740
  • 51. Class Practice Question Following balance have been extracted from the books of pleasure club for the year ended on March 31. 2007: Details Amount (Rs.) Restaurant receipts during the year Subscription received during the year Honorarium paid to secretary Purchases for restaurant Rent and rates Wages (restaurant 1,25,000) Repairs and Renewals Lighting Sundry expenses Particulars Capital fund Restaurant stock Furniture Billiard Table Cash in hand Bank balance 14,00,000 16,00,000 2,00,000 7,00,000 2,30,000 6,00,000 1,20,000 1,50,000 2,00,000 As on 31 march 2006 10,40,100 1,25,000 3,00,000 2,50,000 4,35,000 6,00,000 Provide 10% depreciation on furniture & billiard table As on 31st March 2007 ? 2,10,000 ? ? 3,19,600 8,45,500
  • 52. SOLUTION Restaurant A/c Particulars To Opening Stock To Purchases To Wages for Restaurant To Surplus from Restaurant Amount Particulars 1,25,000 By Restaurant Receipts 7,00,000 By Closing Stock 1,25,000 6,60,000 16,10,000 Amount 14,00,000 2,10,000 16,10,000 Income and Expenditure A/c Expenditures To Honorarium To Rent and Rates To Wages To Repairs & Renewals To Lighting To Sundry Expenses To Depreciation Furniture 30,000 Billiard Table 25,000 To Surplus Amount Incomes 2,00,000 By Surplus from Restaurant 2,30,000 By Subscription 4,75,000 1,20,000 1,50,000 2,00,000 Amount 6,60,000 16,00,000 55,000 8,30,000 22,60,000 22,60,000
  • 53. SOLUTION Balance Sheet Liability Amount Capital Fund 10,40,100 Add Surplus 8,30,000 18,70,000 18,70,000 Assets Bank Cash Stock Furniture 3,00,000 - depreciation 30,000 Billiard table 2,50,000 - depreciation 25,000 Amount 8,45,500 3,19,600 2,10,000 2,70,000 2,25,000 18,70,000
  • 54. Class Practice Question Q. Abacus Trust provides their Receipts & Payment A/c & Income & Expenditure A/c For the year ended 31/3/07.Prepare opening and closing balance sheet. Receipts To bal b/d: Cash 23,000 Bank 57,000 To Subscription 2005-06 19,000 2006-07 3,40,000 2007-08 59,000 To Miscellaneous Receipts Amount Payments Amount By Salaries 80,000 By Rent By Advertising By Books By Furniture 4,18,000 By bal C/d Cash 1,86,000 2,92,000 Bank 1,62,000 98,000 72,000 62,000 80,000 1,30,000 7,90,000 7,90,000 3,48,000 The Trust had following balance in their books on 31/3/06. Books 48,000, Furniture 1, 07,000, Outstanding Salary Rs. 12,000 Expenditure Salaries Rent Advertising Depreciation: Books 8,000 Furniture 13,000 Audit fees Surplus Amount Income 80,000 Subscription 78,000 Miscellaneous receipts 62,000 Amount 3,60,000 2,92,000 21,000 38,000 3,73,000 6,52,000 6,52,000
  • 55. SOLUTION Balance Sheet (Opening) Liabilities Outstanding Salary Capital/General Fund (Balancing figure) Amount 12,000 2,42,000 Assets Furniture Books Outstanding subscription Cash in hand Cash at bank 2,54,000 Amount 1,07,000 48,000 19,000 23,000 57,000 2,54,000 Balance Sheet (Closing) Liabilities Subscription in Advance Audit Fees (Outstanding) Rent (Outstanding) Capital/General Fund 2,42,000 Add:- Surplus 3,73,000 Amount 59,000 38,000 6,000 6,15,000 7,18,000 Assets 1,07,000 1,30,000 2,37,000 Less Depreciation 13,000 Books 48,000 Add Purchases 80,000 1,28,000 Less Depreciation 8,000 Outstanding subscription Prepaid Salary (98,000-12,000-80,000) Cash in hand Cash at bank Amount Furniture Add Purchases 2,24,000 1,20,000 20,000 6,000 1,86,000 1,62,000 7,18,000
  • 56. Blue Star Education Trust provides the information in regard to Receipt & Payment Account and Income and Expenditure Account for the year ended March 31st 2008:Receipt and Payment Account For the year ending march 31, 2008 CLASS ROOM QUESTION Receipts Balance b/d Cash in hand Cash at bank Subscription: 2006 – 07 6,000 2007 – 08 23,000 2008 – 09 7,800 Entrance fees Tuition fees: 2007 – 08 40,000 2008 – 09 5,000 Interest on investment: 2006 – 07 2,000 2007 – 08 3,000 Miscellaneous receipts Amount 1,500 7,500 36,800 12,600 45,000 Payments Printing and Stationery Lighting & Water Rent Advertisement Miscellaneous Expenses Staff Salaries Furniture purchased Honorarium Books Balance c/ d Cash in hand Cash at bank Amount 3,000 1,300 10,500 1,410 2,200 42,500 14,000 7,500 2,500 4,590 22,500 5,000 3,600 1,12,000 1,12,000
  • 57. CLASS ROOM QUESTION On March 31, 2007 the following balances appeared: Investments Rs. 80,000; Furniture Rs. 20,000; and Books Rs. 10,000 Expenditure Printing and Stationery Lighting & water Rent Staff salaries Advertisement Honorarium Misc. Expenses Depreciation on furniture Surplus (Excess of income over expenditure) Amoun t (Rs.) 3,600 1,300 12,000 42,000 1,600 7,500 2,200 2,000 2,800 Income Subscription Interest on investment Miscellaneous incomes Tuition fees 75,000 Prepare opening and closing balance sheet. Amoun t (Rs.) 23,000 3,400 3,600 45,000 75,000
  • 58. SOLUTION LIABILITIES AMOUNT ASSETS AMOUNT Capital Fund 1,27,000 Cash in hand 1,500 Cash At Bank 7,500 Subscription Outstanding 6,000 Accrued Interest on 2,000 investments Investments Furniture 20,000 Books 1,27,000 80,000 10,000 1,27,000
  • 59. SOLUTION LIABILITIES Advance Tuition fees Entrance Fees Subscription in advance Outstanding Printing and AMOUNT ASSETS AMOUNT 5,000 Cash in hand 4,590 12,6 00 Cash At Bank 22,500 7,800 600 Accrued Interest on investments Accrued Tuition fees 400 5,000 stationery Outstanding Rent Outstanding advertisement 1,500 190 Prepaid expenses Furniture 500 32,000 (20,000 + 14,000 – 2,000) Capital Fund (1,27,000+2,800) 1,29,800 12,500 Investments 1,57,490 Books (10,000 + 2,500) 80,000 1,57,490
  • 61. Individual Claims I’m running my business since 8 years I brought my present company at no.1 in sales and marketing Managing people is not a big deal for me I’m an MCA I’m an MBA I love Share trading and earning money of it I’ve been working as a production manager since last 10 years with different companies
  • 62. Concept of partnership WHY NOT TO WORK TOGETHER AND LEAD THE WORLD
  • 63. Partnership: Defined In India Partnership is governed by THE INDIAN PARTNERSHIP ACT, 1932 Partnership is defined as: “the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all.” Section 4 of THE INDIAN PARTNERSHIP ACT, 1932
  • 64. Partnership: Features  Two or more persons  Agreement Written  Oral  Sharing of profits  Business  Mutual agency 
  • 65. Partnership: Features We need minimum 2 and maximum 10 partners (in banking) or 20 partners (in other businesses) IF DISPUTE ARISES: WE WILL REFER TO DEED Deed is a written agreement containing the terms and conditions as agreed upon while entering into partnership.
  • 66. Partnership: Features Sharing of profits  The Act says that the profits of the business should be divided in the agreed ratio else equally among the partners.  The Act has not made it mandatory to share losses also, but it is the duty of the partners to share in losses too.  For example there may be a partner in profit only, minor partners etc.
  • 67. Partnership: Features BUSINESS There must be a business and that should be legal to have a partnership. Purchasing a building jointly do not form partnership. I have done my work/This is not my area or work : NO EXCUSE Partnership is the contract of mutual agency. Each partner is the agent as well as the principal. He binds everyone by his work.
  • 68. Deed: Contents The Partnership Deed usually contains the following details:  Names & Addresses of the firm, its main business & of all partners;  Amount of capital to be contributed by each partner;  The accounting period of the firm;  The date of commencement of partnership;  Rules regarding operation of Bank Accounts;  Profit and loss sharing ratio;  Rate of interest on capital, loan, drawings, etc;  Mode of auditor’s appointment, if any;  Salaries, commission, etc, if payable to any partner;  The rights, duties and liabilities of each partner;  Treatment of loss arising out of insolvency of one or more partners;  Settlement of accounts on dissolution of the firm;  Method of settlement of disputes among the partners;  Rules to be followed in case of admission, retirement, death of a partner; and  Any other matter relating to the conduct of business.  Normally, the deed covers all matters affecting relationship of partners amongst themselves.
  • 69. Deed: Rules IF DEED IS ORAL/ABSENT  Profits and Losses are shared EQUALLY  NO Interest on Capital  NO Interest on Drawings  NO Salary or any Commission to any partner  Interest on Loan given by partner must carry @ 6% p.a.
  • 70. Some Problems Mohan and Shyam are partners in a firm, State whether the claim is valid if the partnership agreement is silent in the following matters: a) Mohan is an active partner. He wants a salary of Rs. 10,000 per year: b)Shyam had advanced a loan to the firm. He claims interest @ 10% per annum: c) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan wants equal share in profits. d)Shyam wants interest on capital to be credited @ 6% per annum.
  • 71. Some Problems State whether the following statements are true or false: a)Valid partnership can be formulated even without a written agreement between the partners: b)Each partner carrying on the business is the principal as well as the agent for all the other partners; c)Maximum number of partners in a banking firm can be 20: d)Methods of settlement of dispute among the partners can’t be part of the partnership deed; e)If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the partner: f) Interest on partner’s loan is to be given @ 12% p.a. if the deed is silent about the rate.
  • 72. Special aspects Accounting treatment for partnership firm is similar to that of a sole proprietorship business with the following exceptions: a)Distribution of profits & losses b)Maintenance of capital accounts of partners c)Adjustment of wrong Appropriation of profit in part. d)Reconstitution of Partnership firm. e)Dissolution of partnership firm.
  • 73. ACCOUNTING Profit & Loss Appropriation A/c  Profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account of the firm.  It shows how the profits are appropriated or distributed among the partners.  All adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made through this account.  It starts with the net profit/net loss as per Profit and Loss Account .
  • 74. JOURNAL ENTRIES JOURNAL Date Particulars Profit and Loss A/c Dr. To Profit and Loss Appropriation A/c (If profit is there) Profit and Loss Appropriation A/c Dr. To Profit and Loss A/c (If loss is there) Interest on Capital A/c Dr. To Partner‘s Capital/Current A/cs (For providing interest on capital to partners) Profit and Loss Appropriation A/c Dr. To Interest on Capital A/c (For transferring interest on capital to profit and loss appropriation A/c) L.F. Debit Credit
  • 75. JOURNAL ENTRIES JOURNAL Date Particulars Partners Capital/Current A/c‘s (individually) Dr. To Interest on Drawings A/c (For charging interest on drawings to partners) Interest on Drawings A/c Dr. To Profit and Loss Appropriation A/c (For transferring interest on drawings to profit and loss appropriation A/c) Salary to Partner A/c Dr. To Partner‘s Capital/Current A/c‘s (For providing salary to partners) Profit and Loss Appropriation A/c Dr. To Salary to Partner‘s A/c (For transferring salary to profit and loss appropriation A/c) Commission to Partner A/c Dr. To Partner‘s Capital/Current A/c‘s (For providing commission to partners) L.F. Debit Credit
  • 76. JOURNAL ENTRIES JOURNAL Date Particulars Profit and Loss Appropriation A/c Dr. To Commission to Partners Capital/Current A/c (For transferring commission to profit and loss appropriation A/c) If Profit: Profit and Loss Appropriation A/c Dr. To Partner‘s Capital/Current A/c‘s (For transferring profit to capital A/c) If Loss: Partner‘s Capital/Current A/c‘s (individually) Dr. To Profit and Loss Appropriation A/c (For transferring loss to capital A/c) L.F. Debit Credit
  • 77. FORMAT Dr. Profit and Loss Appropriation Account For the year ended Cr. Particulars Profit and Loss (if there is loss) Interest on Capital Salary to Partner Commission to Partner Interest on Partner‘s Loan Partners‘ Capital A/c (distribution of profit) Amount XXX XXX XXX XXX Particulars Profit and Loss (if there is profit) Interest on Drawings Partners‘ Capital Accounts (distribution of loss) Amount XXX XXX XXX XXX XXX XXXX XXXX
  • 78. Question A, B & C set up a partnership firm on April 1, 2006. They contributed Rs. 50,000 Rs. 40,000 & Rs. 30,000, respectively as their capitals & agreed to share profits & losses in the ratio of 3:2:1. A is to be paid a salary of Rs. 1,000 per month and B, a Commission of Rs. 5,000. It is also provided that interest to be allowed on capital at 6% per annum. The drawings for the year were A Rs. 6,000, B Rs. 4,000 & C Rs. 2,000. Interest on drawings of Rs. 270 was charged on A’s drawings, Rs. 180 on B’s drawings & Rs. 90, on C’s drawings. The net profit as per Profit and Loss Account for the year ending March 31, 2006 was Rs. 35, 660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.
  • 79. Solution Dr. Profit and Loss Appropriation Account For the year ended Particulars Interest on Capital A – 3,000 B – 2,400 C – 1,800 Salary to A Commission to B Amount Particulars Cr. Amount Profit and Loss 35,660 Interest on Drawings 7,200 12,000 A – 270 B – 180 C – 90 540 5,000 Partners’ Capital A/c (distribution of profit) Rs. 12,000 to be divided in 3:2:1 A – 6,000 B – 4,000 12,000 C – 2,000 36,200 36,200
  • 80. PRACTICE QUESTION Reena & Raman are partners with capitals of Rs. 3,00,000 & Rs. 1, 00,000 respectively. The profit (as per profit & loss A/c) for the year ended March 31, 2007 was Rs. 1, 20,000. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of Rs. 30,000 p.a. The drawings of partners were Rs. 30,000 and 20,000. The interest on drawings to be charged to Reena was Rs. 1,000 and to Raman Rs. 500 Assuming that Reena and Raman are equal partners, state their share of profit after necessary appropriations.
  • 81. SOLUTION Dr. Profit and Loss Appropriation Account For the year ended Particulars To Interest on Capital Reena 18,000 Raman 6,000 To Salary to Raman To Profit transferred to: Reena Raman Amount Particulars By Profit for the Year By Interest on 24,000 drawings 1,000 30,000 Reena Raman 500 Cr. Amount 1,20,000 1,500 67,500 1,21,500 1,21,500
  • 82. Capital Accounts  All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts.  This includes the amount of money brought in as capital, withdrawal of capital, share of profit, interest on capital, interest on drawings, partner’s salary, commission to partners, etc.  There are two methods by which the capital accounts of partners can be maintained. These are:  Fixed capital method, and  Fluctuating capital method.
  • 83. Fixed Capital Method  Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners.  All items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in a separate accounts, called Partner’s Current Account.  The partners’ capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital.  The partners’ current account on the other hand, may show a debit or a credit balance. Thus under this method, two accounts are maintained for each partner viz., capital account and current account, While the partners’ capital accounts shall always appear on the liabilities side in the balance sheet, the partners’ current account’s balance shall be shown on the liabilities side, if they have credit balance and on the assets side, if they have debit balance.
  • 84. Format Format of capital account FIXED CAPITAL METHOD Partners‘ Capital Account Particulars A B Particulars A B To drawings (permanent withdrawal) To balance c/d XXX XXX XXX XXX By balance b/d By Cash/Bank (additional capital) XXX XXX XXX XXX
  • 85. Format Partners‘ Current Account Particulars A B Particulars A To balance b/d To drawings To Interest on drawings To profit & Loss Appropriation A/c (In case of Loss) To balance c/d XXX XXX XXX XXX By balance b/d By interest on capital By salary By commission By profit & Loss Appropriation A/c (In case of Profit) By balance c/d XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX B XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
  • 86. Fluctuating Capital  Under the fluctuating capital method, only one account, i.e. capital account is maintained for each partner.  All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners.  This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called fluctuating capital method.  In the absence of any instruction, the capital account should be prepared by this method.
  • 87. Format Partners‘ Capital Account Particulars A B Particulars A B To drawings To Interest on drawings To profit & Loss Appropriation A/c (In case of Loss) To balance c/d XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX By balance b/d By interest on capital By salary By commission By profit & Loss Appropriation A/c (In case of Profit) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
  • 88. Salary to a partner If in the question profit is given after charging salary thenDo not show salary in profit and loss appropriation A/c Or Add salary to the profit given and then show salary on debit side of profit and loss appropriation A/c.
  • 89. Question Show how the following items will appear in capital accounts of the partner S & M when:• Capitals are fluctuating. • Capitals are fixed. Particulars Capital on 1-1-2001 Additional capital introduced Drawings during the year Interest @ 6% on Capital Interest on Drawings at 5% Partner‘s Salary Partner‘s Commission Share of Profit for 2001 S M 80,000 − 16,000 4,800 400 7,200 − 8,400 70,000 5,000 14,000 4,200 350 − 5,000 6,600
  • 90. Fluctuating Method Partners‘ Capital Account Particulars To Drawings To Interest on drawings To bal c/d A B Particulars 16,000 14,000 400 350 84,000 76,450 By balance b/d By Cash By interest on capital By salary A B 80,000 5,000 4,800 4,200 7,200 By commission 90,800 By balance b/d 8,400 5,000 6,600 1,00,400 By profit & Loss App. A/c 1,00,400 70,000 90,800 84,000 76,450
  • 91. Fixed Capital Method Partners‘ Capital Account Particulars A To bal c/d B 80,000 Particulars 75,000 A B 80,000 70,000 5,000 80,000 By balance b/d 75,000 By Cash 80,000 75,000 Partners‘ Capital Account Particulars A To Drawings To Interest on drawings To bal c/d B 16,000 Particulars 14,000 400 350 84,000 76,450 1,00,400 By interest on capital By salary 90,800 A B 4,800 7,200 5,000 By commission By profit & Loss App. A/c By balance b/d 4,200 8,400 6,600 1,00,400 90,800 84,000 76,450
  • 92. PRACTICE QUESTION Prepare capital accounts of the partners A & B when:(i) Capitals are fluctuating. (ii) Capitals are fixed. Capital on 1-1-2006 Additional capital introduced Drawings during the year 2006 Interest on Capital Interest on Drawings Partner‘s Salary Share of Profit for 2006 A 8, 00,000 − 2,16,000 64,000 5,400 1,47,000 8,400 B 6, 70,000 1, 50,000 1,14,000 45,200 3,300 1,32,000 6,600
  • 93. Fluctuating Method Partners‘ Capital Account Particulars To drawings To interest on drawings To bal c/d A B 2,16,000 5,400 7,98,000 Particulars 1,14,000 By bal b/d By bank 3,300 By interest on capital 8,86,500 By salary By profit 10,19,400 10,03,800 A B 8,00,000 - 6,70,000 1,50,000 64,000 1,47,000 8,400 45,200 1,32,000 6,600 10,19,400 10,03,800
  • 94. Fixed Capital Method Partners‘ Capital Account Particulars A B Particulars To bal c/d 8,00,000 8,20,000 By bal b/d By bank 8,00,000 8,20,000 A B 8,00,000 - 6,70,000 1,50,000 8,00,000 8,20,000 Partners‘ Capital Account Particulars A To drawings To interest on drawings 2,16,000 To bal c/d B 5,400 2,21,400 Particulars A B 1,14,000 By interest on capital 3,300 By salary By profit 66,500 By bal c/d 64,000 1,47,000 8,400 2,000 45,200 1,32,000 6,600 - 1,83,800 2,21,400 1,83,800
  • 96. Interest on Capital  No interest is allowed on partners’ capitals unless it is expressly agreed among the partners.  When the Deed specifically provides for it, interest on capital is credited to the partners at the agreed rate with reference to the time period for which the capital remained in business during a financial year.  Interest on capital is calculated with due allowance for any addition or withdrawal of capital during the accounting period.
  • 97. Calculation A & B entered into partnership in the ratio of 3:2 and have contributed Rs. 5,00,000 and Rs. 3,00,000 respectively on 1st January 2007. on 1st April A withdrew Rs. 1,00,000 and on 1st October he introduced 3,00,000 as additional capital. B introduced Rs. 2,00,000 on 30th April and withdrew 1,50,000 on 31st August. Calculate interest on capital if it calculated on 12% p.a.
  • 98. Solution Interest on A’s Capital: Date Transaction Account Balance 1st Jan. (Introduced Rs. 5,00,000) 5,00,000 1st April (withdrew Rs. 1,00,000) 4,00,000 1st Oct. (Introduced Rs. 3,00,000) 7,00,000 12 3 5,00,000 X X =15,000 100 12 12 6 4,00,000 X X =24,000 100 12 12 3 7,00,000 X X =21,000 100 12 Total interest on A’s Capital 15,000 + 24,000 + 21,000 = 60,000
  • 99. Solution Interest on B’s Capital: Date Transaction Account Balance 1st Jan. (Introduced Rs. 3,00,000) 3,00,000 30th April (Introduced Rs. 2,00,000) 5,00,000 31st Aug. (withdrew Rs. 1,50,000) 3,50,000 12 4 3,00,000 X X =12,000 100 12 12 4 5,00,000 X X =20,000 100 12 12 4 3,50,000 X X =14,000 100 12 Total interest on B’s Capital 12,000 + 20,000 + 14,000 = 46,000
  • 100. Some Problems Q. A and B are partners sharing profits and losses in the ratio of 3 : 2. Their capital accounts showed balances of Rs. 1,50,000 and Rs. 2,00,000 respectively on Jan 01, 2006. Show the treatment of interest on capital for the year ending December 31, 2006 in each of the following alternatives: 1) If the partnership deed is silent as to the payment of interest on capital and the profit for the year is Rs. 50,000; Sol. In the absence of a specific provision in the Deed, no interest will be paid on the capital to the partners. The whole amount of profit will however be distributed among the partners in their profit sharing ratio. 2) If partnership deed provides for interest on capital @ 8% p.a. and the firm incurred a loss of Rs. 10,000 during the year; Sol. As the firm has incurred losses during the accounting year, no interest on capital will be allowed to any partner. The firm’s loss will however be shared by the partners in their profit sharing ratio.
  • 101. Some Problems (c) If partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 50,000 during the year; Sol. Interest to A @ 8% on Rs. 2,00,000 = 16,000 Interest to B @ 8% on Rs. 1,50,000 = 12,000 = 28,000 As the profit is sufficient to pay interest at agreed rate, the whole amount of interest on capital shall be allowed and the remaining profit amounting to Rs. 22,000 (Rs. 50,000 – Rs. 28,000) shall be shared by the partners in their profit sharing ratio. (d) If the partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 14,000 during the year Sol. As the profit for the year is Rs. 14,000, which is less than the amount of interest on capital due to partners, i.e. Rs. 28,000 (Rs. 12,000 for A and Rs. 16,000 for B), interest will be paid to the extent of available profit i.e., Rs. 14,000. A and B will be credited with Rs. 6,000 and Rs. 8,000, respectively. Effectively this amounts to sharing the firm’s profit in the ratio of interest on capital.
  • 102. PRODUCT METHOD EXAMPLE: A, B and C are partners sharing profits equally they have started business with capital of Rs. 3,00,000, Rs. 2,00,000 & Rs. 10,000 respectively on 1 Jan 2002. During the year they have made given additions & withdrawal of capital:- Date A Addition B Withdraw al Addition C Withdraw al 1 Feb. 50,000 - - - 1 May. - 40,000 60,000 - 1 Aug. 30,000 - - 70,000 1 Sep. - 20,000 10,000 - Calculate interest on capital @ 10% p.a. No Addition No Withdrawal
  • 103. SOLUTION A I II I  II Date Capital Month Product 1 Jan. 3,00,000 1 3,00,000 1 Feb. 3,50,000 3 10,50,000 1 May. 3,10,000 3 9,30,000 1 Aug. 3,40,000 1 3,40,000 1 Sept. 3,20,000 4 12,80,000 39,00,000 Interest on capital = 39,00,000× 10 1 × =Rs.32,500 100 12
  • 104. SOLUTION B I II I  II Date Capital Month Product 1 Jan. 2,00,000 4 8,00,000 1 May 2,60,000 3 7,80,000 1 Aug. 1,90,000 1 1,90,000 1 Sept. 2,00,000 4 8,00,000 25,70,000 Interest on capital = 25,70,000× 10 1 × =Rs.21,416.67 100 12
  • 105. Interest on Drawings  The partnership agreement may also provide for charging of interest on money withdrawn out of the firm by the partners for their personal use.  No interest is charged on the drawings if there is no express agreement among the partners about it.  However if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period money remained outstanding from the partners during an accounting year.  Charging interest on drawings discourages excessive amounts of drawings by the partners.
  • 106. Interest on Drawings Interest on drawings is calculated as:- Rate Drawings × ×TimeElement 100 Time Element can be calculated in different situations in different ways which are as follows:
  • 107. Interest on Drawings Time Element is calculated by using the following formula: TimeLeft After 1st Drawing+TimeLeft After Last Drawing 2 Case 1 If partner withdrew equal amount at beginning of every month, interest will be calculated for: 13 months +1month 2 = 6 ½ months Case 2 If partner withdrew equal amount at end of every month, interest will be calculated for: 11months +0 month 2 = 5 ½ months Case 3 If partner withdrew equal amount in middle of every month, interest will be calculated for: 111/2 months + 2 1/2 month = 6 months
  • 108. Interest on Drawings Case 4 If partner withdrew equal amount in beginning of every quarter, interest will be calculated for: 12 months + 3month 2 = 7 ½ months Case 5 If partner withdrew equal amount at end of every quarter, interest will be calculated for: 9 months +0 month 2 = 4 ½ months Case 6 If partner withdrew equal amount in middle of every quarter, interest will be calculated for: 101 / 2 months +11 / 2 month 2 = 6 months
  • 109. Interest on Drawings Case 7 If partner withdrew equal amount in Beginning of every month for 6 months, interest will be calculated for: 6 months +1 month 2 = 3½ months Case 8 If partner withdrew equal amount at end of every month for 6 months, interest will be calculated for: 5 months +0 month 2 = 2½ months Case 9 If partner withdrew equal amount in middle of every month for 6 months, interest will be calculated for: 51 / 2 months + 1 / 2 month 2 = 3 months
  • 110. Interest on Drawings Case 10 If nothing is mentioned about dates, interest will be calculated for 6 months Case 11 If per annum is not mentioned with the rate of interest on drawings in the question, interest will be calculated for complete year. Case 12 If unequal amounts are withdrawn on uneven dates, interest on drawings will be calculated using product method. PRODUCT METHOD In this method for each amount withdrawn by the partner, time is calculated for which that money is used during the year.
  • 111. EXAMPLE        Mr. X & Mr. Y started business on 1st Jan. 2003 with capitals of Rs 5, 00,000 & Rs 3, 00,000 respectively. Calculate the Interest on Drawings of Mr. X @ 10% p.a. in each of the following alternative cases: Case (a) If his drawings during the period were Rs 18,000 Case (b) If he withdrew Rs 2,000 p.m. in the beginning of every month Case (c) If he withdrew Rs 2,000 p.m. at the end of every month. Case (d) If he withdrew Rs 2,000 p.m. Case (e) If he withdrew Rs 6,000 in the beginning of every quarter. Case (f) If he withdrew Rs 6,000 at the end of every quarter. Case (g) If he withdrew Rs 6,000 per quarter.
  • 112. SOLUTION CASE (a) Interest on drawings: Since nothing is mentioned for the period, therefore the time period is taken on average basis i.e. 6 months. = 18,000 x 10 6 = Rs 900 100  12
  • 113. SOLUTION CASE (b) Interest on drawings: Since the drawings have been evenly made in the beginning of the every month, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 12 Rs 1,300 1  6.5 2 10 6.5    100 12
  • 114. SOLUTION CASE (c) Interest on drawings: Since the drawings have been evenly made in the end of the every month, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months 0 = 11 24,000  5.5 2 = Rs 1,100 10 5.5  100  12 
  • 115. SOLUTION CASE (d) Interest on drawings: Since drawings have been made evenly every month, therefore the time period is taken on average basis i.e. 6 months. = 2,000 x 12 x 10 6 = Rs 1,200  100 12
  • 116. SOLUTION CASE (e) Interest on drawings: Since the drawings have been evenly made in the beginning of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 = Rs 12  3  7.5 1,500 2  10 7.5   100 12
  • 117. SOLUTION  CASE (f) Interest on drawings: Since the drawings have been evenly made in the end of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 = Rs 900 0 9 2  4.5 10 4.5    100 12
  • 118. SOLUTION CASE (g)  Interest on drawings: Since the drawings have been evenly made in the middle of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 10.5  1.5 = Rs 1,200  6 2  10 6   100 12
  • 119. Interest on Drawings Product Method Calculate interest on A’s drawings @ 6% p.a. from following information A withdrew as follows: 1st March, 2007 Rs. 20,000 31st May 2007 Rs. 50,000 1st September 2007 Rs. 40,000 1st December 2007 Rs. 40,000 Date Amount Time for which amount is used Product 1st March 20,000 10 months 2,00,000 31st May 50,000 7 months 3,50,000 1st September 40,000 4 months 1,60,000 1st December 40,000 1 month 40,000 7,50,000 Interest on drawings will be: 7, 50, 000  1 6  12 100 =3,750
  • 120. Commission to a partner If commission is to be charged on divisible profits before charging such commission then following formula is applied: Profit  R 100 If commission is to be charged on divisible profits before charging such commission then following formula is applied: Profit  R 100  R
  • 121. Example X and Y are partners in a firm sharing profits and losses in the ratio of 3:2, with the capital of Rs. 10,00,000 and Rs. 8,00,000 respectively. Their deed provided as follows: a) Interest on capital is to be charged @ 6%. b) A will get a salary of Rs. 18,000 per month while B will get Rs. 40,000 as quarterly salary. c) A will get a commission of 3% on turnover. d) B will get a commission @ 5% after charging all above and such commission. Prepare profit and loss appropriation A/c for A and B. Net profit earned during the year was Rs. 9,00,000. the turnover amounted to Rs. 20,00,000.
  • 122. Solution Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount To Interest on Capital X: 60,000 Y: 48,000 ToX: 10,00,000 X 6% Salary Y: X: 8,00,000 X 6% 2,16,000 Y: 1,60,000 To commission X: 60,000 3 Y: 00, 000 16,000 20,  100 To Profit 5 Particulars By Net Profit Cr. Amount 9,00,000 1,28,000 3,76,000 76,000 3, 36,000  X: Y: 105 1,92,000 1,28,000 3,20,000 9,00,000 9,00,000
  • 123. Capital Ratio  Sometimes, the partners may decide to share in capital ratio.  If capitals are fixed, the ratio is fixed  If capitals are fluctuating, ratio will be calculated on average amount of capital  Calculation of Average amount of capital can be explained with the help of this example.
  • 124. Example X and Y started their partnership on 1st January 2007 with Rs. 50,00,000 and Rs. 45,00,000 respectively as capital. They agreed to share profits in capital ratio. They made following transaction during the year Capital Introduced Dates 1st April 1st June 30th September 1st December X 8,00,000 6,00,000 - Y 9,00,000 8,00,000 Capital Withdrawn X 7,00,000 9,00,000 Y 5,00,000 7,00,000 At the end of the year, they made a profit of 24,00,000. You are required to calculate amount of profits to be transferred to capital assuming that the fir closes its books on 31st December every year.
  • 125. Solution Total Capital employed by X Date 1.1.07 1.4.07 1.6.07 30.9.07 1.12.07 Capital (Rs.) Months for Product which money is used 50,00,000 58,00,000 (50,00,000+8,00,000) 51,00,000 (58,00,000-7,00,000) 57,00,000 (51,00,000+6,00,000) 48,00,000 (57,00,000-9,00,000) 3 2 4 2 1 1,50,00,000 1,16,00,000 2,04,00,000 1,14,00,000 48,00,000 6,32,00,000
  • 126. Solution Total Capital employed by Y Date 1.1.07 1.4.07 1.6.07 30.9.07 1.12.07 Capital (Rs.) Months for which money is used 45,00,000 40,00,000 (45,00,000-5,00,000) 49,00,000 (40,00,000+9,00,000) 42,00,000 (49,00,000-7,00,000) 50,00,000 (42,00,000+8,00,000) 3 2 4 2 1 Product 1,35,00,000 80,00,000 1,96,00,000 84,00,000 50,00,000 5,45,00,000 Capital Ratio = 6,32,00,000:5,45,00,000 = 632:545
  • 127. CLASS ROOM QUESTION A, B, and C are partners in a firm. According to the partnership deed, the partners are entitled to draw Rs. 7,000 per month. On the 1st day of every month A, B and C drew Rs. 7,000, Rs. 6,000 and Rs. 5,000 respectively. Interest on capitals and interest on drawings is fixed at 8 per cent and 10 per cent respectively. Profit during the year ended March 31, 2006 was Rs. 7, 55, 000 out of which Rs. 2, 00,000 are to be transferred to General Reserve. B and C are entitled to receive a salary of Rs. 30,000 and Rs. 45,000 per annum respectively and A is entitled to receive commission @10 per cent net distributable profit is after charging such commission. On 1st April, 2005 the balances of their Capital Accounts were Rs. 5, 00,000, Rs. 4,00,000 and Rs. 3, 50,000 respectively. You are required to show the Profit and Loss Appropriation Account for the year ended March 31, 2006 and the Capital Accounts of partners in the books of the firm.
  • 128. SOLUTION Ans PROFIT AND LOSS APPROPRIATION ACCOUNT AMOUNT PARTICULARS AMOUNT 2,00,000 By P& L A/c 7,55,000 PARTICULARS To General Reserve To Salary A/c: B’s Capital A/c C’s capital A/c 30,000 45,000 To Interest on capital A/c A’s capital A/c 40,000 B’s capital A/c 32,000 C’s capital A/c 28,000 75,000 By Interest on drawings: A’s Capital A/c 4,550 B’s Capital A/c 3,900 C’s capital A/c 3,250 11,700 1,00,000 To A’s Capital A/c (Commission) (3,91,700 × 10 100 + 10 ) To Profit transferred to capital A/c A’s capital A/c 1,18,696 B’s capital A/c 1,18,697 C’s capital A/c 1,18,697 35,610 3,56,090 7,66,700 7,66,700
  • 129. SOLUTION PARTNERS’ CAPTIAL ACCOUNTS Dr. Particulars To interest on drawings A/c To Balance c/d A Rs. B Rs. 4,550 6,89,756 6,94,306 C Rs. 3,900 5,76,797 5,80,697 Particulars By Balance 3,250 b/d By Salary A/c By Commission 5,38,447 A/c By interest on capital A/c By P& L App A/c 5,41,697 A Rs. 5,00,000 Cr B C Rs. Rs. 4,00,000 3,50,000 30,000 45,000 40,000 32,000 28,000 1,18,696 1,18,697 1,18,697 35,610 6,94,306 5,80,697 5,41,697
  • 130. PAST ADJUSTMENTS PAST ADJUSTMENTS Four types of errors Omitted Over Charged Under Charged Wrongly distributed
  • 131. PAST ADJUSTMENTS Omitted If partners have omitted any item which was agreed upon as per deed, then a single adjustment entry is passed to rectify the omission error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital @ 10% p.a. has been omitted. Pass a single adjustment entry to record the error.
  • 132. PAST ADJUSTMENTS Particulars A Dr. Interest on capital Loss (1:1) 27,500 Difference Cr. B Dr. Cr. 30,000 2,500 30,000 25,000 FIRM Dr. Cr. 55,000 55,000 27,500 2,500 30,000 27,500 27,500 55,000 55,000 Journal Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 2,500 2,500
  • 133. PAST ADJUSTMENTS Over-Charged If partners have charged any item at more than agreed rate as per deed, then also a single adjustment entry is passed to rectify the error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital is charged @ 10% p.a. instead of 8%. Pass a single adjustment entry to rectify the error.
  • 134. PAST ADJUSTMENTS Particulars A Dr. Interest on capital charged (debited) Interest on capital to be charged Profit (1:1) Difference Cr. 30,000 B Dr. Cr. FIRM Dr. Cr. 25,000 55,000 28,000 20,000 48,000 3,500 3,500 1,500 7,000 25,000 55,000 1,500 31,500 31,500 25,000 55,000 Journal Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 1,500 1,500
  • 135. PAST ADJUSTMENTS Under-Charged If partners have charged any item at less than agreed rate as per deed, then also a single adjustment entry is passed to rectify the error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital is charged @ 8% p.a. instead of 10%. Pass a single adjustment entry to rectify the error.
  • 136. PAST ADJUSTMENTS Particulars A Dr. Interest on capital charged debited Interest on capital to be charged Loss (1:1) Difference Cr. 28,000 B Dr. Cr. 20,000 30,000 3,500 48,000 25,000 1,500 31,500 FIRM Dr. Cr. 3,500 1,500 31,500 25,000 55,000 7,000 25,000 55,000 55,000 Journal Date Particulars A‘s Capital A/c Dr. To B‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 1,500 1,500
  • 137. PAST ADJUSTMENTS Wrongly Distributed If partners have distributed profits either without charging or allowing any items as per deed, then also a single adjustment entry is passed to rectify such errors. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After distributing the profits of 5,00,000 equally, it was noted that • interest on capital is not charged @10%. •Salary @ 7,000 to A & Rs. 5,000 to B was not charged. •Profits were to be divided in ratio of 3: 2. Pass a single adjustment entry to rectify the error.
  • 138. PAST ADJUSTMENTS Particulars A Dr. Profit wrongly given debited Interest on capital Salary Profit (1:1) Difference B Cr. 2,50,000 Dr. FIRM Cr. Dr. 2,50,000 30,000 84,000 1,80,600 44,600 Cr. 5,00,000 25,000 55,000 60,000 1,44,000 1,20,400 3,01,000 44,600 2,94,600 2,94,600 2,50,000 2,50,000 5,00,000 5,00,000 Journal Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being Adjustment entry passed) L.F. Debit Credit 44,600 44,600
  • 139. Guarantee to a partner Guaranteed amount of money may be agreed to be given to any of the partner due to any of the reason by :  The firm,  By any specific partner, or  By all partners in some some specific ratio.
  • 140. Guarantee to a partner Guarantee given by the firm Whenever the guarantee is given by the firm, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in their profit sharing ratio.
  • 141. Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee that his share will not be less than Rs. 3,00,000 in any year. The company earned a profit of Rs. 10,00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account.
  • 142. Guarantee to a partner Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount Cr. Amount By Net Profit To Partner’s Capital A/c Particulars 10,00,000 A: 5,00,000 - Given to C 62,500 4,37,500 B 3,00,000 - Given to C 37,500 2,62,500 C 2,00,000 + From A: to be divided in 5:3 Rs. 1,00,000 62,500 + From B: 37,500 3,00,000 10,00,000 10,00,000
  • 143. Guarantee to a partner Guarantee given by specific partner Whenever the guarantee is given by a specific partner, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be borne by that specific partner only.
  • 144. Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee by A that his share will not be less than Rs. 3,00,000 in any year. The company earned a profit of Rs. 10,00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account.
  • 145. Guarantee to a partner Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount Particulars Amount By Net Profit To Partner’s Capital A/c A: 5,00,000 - Given to C 1,00,000 B 3,00,000 Cr. 10,00,000 4,00,000 3,00,000 C 2,00,000 + 1,00,000 1,00,000 Rs. From A:to be borne by A only 3,00,000 10,00,000 10,00,000
  • 146. Guarantee to a partner Guarantee given in specific ratio Whenever the guarantee is given by the remaining partners in a specific ratio, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in that specified ratio.
  • 147. CLASS ASSIGNMENT A, B and C were partners in the ratio of 3:2:5. However B was given a guarantee by C that his share will not be less than Rs. 1, 00,000 in any year. The company earned a profit of Rs. 4, 00,000 during the year 200708. Prepare profit & Loss Appropriation Account.
  • 148. SOLUTION Particulars Amount To Partners capital A/c Particulars By P & L A/c Amount 4,00,000 A‘s Capital A/c1,20,000 B‘s Capital A/c (+) Guarantee 80,000 20,000 C‘s capital A/c 2,00,000 (-) Guarantee 20,000 4,00,000 4,00,000 4,00,000
  • 149. GUARANTEE GIVEN IN SPECIFIC RATIO Whenever the guarantee is given by the remaining partners in a specific ratio, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in that specified ratio.
  • 150. Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee that his share will not be less than Rs. 3,00,000 in any year. Deficiency if any will be borne by A & B equally. The company earned a profit of Rs. 10,00,000 during the year. Prepare profit & Loss Appropriation Account.
  • 151. Guarantee to a partner Profit and Loss Appropriation A/c Dr. For the year ended 31st March 2008 Particulars Amount Cr. Amount By Net Profit To Partner’s Capital A/c Particulars 10,00,000 A: 5,00,000 - Given to C 50,000 4,50,000 B 3,00,000 - Given to C 50,000 2,50,000 C 2,00,000 + From to divided Rs. 1,00,000A: be 50,000 in 1:1 (equally) + From B: 50,000 3,00,000 10,00,000 10,00,000
  • 152. CLASS ASSIGNMENT A, B and C were partners in the ratio of 2:2:1. However C was given a guarantee by C that his share will not be less than Rs. 3, 00,000 in any year. . Deficiency if any will be borne by A & B in 5:3.The Company earned a profit of Rs. 10, 00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account.
  • 153. SOLUTION Particulars To Partner‘s Capital A/c A: 4,00,000 - Given to C 62,500 B 4,00,000 - Given to C 37,500 C 2,00,000 + From A: 62,500 + From B: 37,500 Amount Particulars Amount By P& L A/c 10,00,000 3,37,500 3,62,500 3,00,000 10,00,000 10,00,000
  • 156. GOODWILL: Defined “Goodwill is nothing more than the probability that the old customers will resort to old place.” By Lord Eldon
  • 157. Characteristics  An Intangible asset not a fictitious asset.  Cannot have a separate existence from that of the enterprise.  Helps to earn higher profits.  Attractive force that binds old  customer to old place.  Its value is determined by  subjective judgment of the valuer.  Fluctuates with the fortunes of the enterprise.  Affected by various factors.
  • 158. Factors Affecting Value  Efficient management  Location  Favourable contracts  Patent advantage  Access to supplies  Quality  Others like after sales services, good customer relations, good labour relations etc…
  • 159. When to Valuate There is a need to valuate goodwill in following circumstances: Change in profit sharing ratio  Admission of a partner  Retirement of a partner  Death of a partner  Amalgamation of two firms  Conversion of firm into company.
  • 161. Purchased Goodwill  When goodwill is acquired by making a payment, it will be termed as purchased goodwill like when a business purchases any brand which already has a market standing will be purchased goodwill. • When a business is purchased, the excess of purchased consideration of its net assets (i.e. assets liabilities) is the purchased goodwill.
  • 162. Self-Generated Goodwill  This is the market standing which a business makes by working over a number of years.  It is not recorded in the books of accounts if AS 10 is followed.  Its valuation depends on the subjective judgment of the valuer.
  • 164. Average Profit Method This method is based on the assumption that a new business will not be able to earn any profits during the first few years of its operations. Hence, the person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years. The goodwill, therefore, should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.
  • 165. Average Profit Method STEPS 1. Calculate normal past business profits for each year by deducting abnormal gains and non-business incomes and adding abnormal losses and non-business expenses. 2. Add the profits calculated above and divide their sum by number of years to get average profit. 3. Calculate goodwill as follows: Goodwill = Average Profits x Number of years Purchased
  • 166. Average Profit Method Example  The profit for the last five years of a firm were as follows – Year 2003 Rs. 1,00,000; Year 2004 Rs. 1,98,000; Year 2005 Rs. 3,42,000; Year 2006 Rs. 4,60,000 and Year 2007 Rs. 6,00,000.  Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
  • 167. Average Profit Method Calculate Average Profit as: 1,00,000 +1,98,000 + 3,42,000 + 4,60,000 + 6,00,000 5 17,00,000 = =3,40,000 5 To calculate Goodwill, Average Profit is multiplied by number of years’ Purchased as: =3,40,000 × 4 =13,60,000
  • 168. Super Profit Method  Capital employed in a business earns returns known as profits. Normally the average rate of the industry is considered as normal rate of return from that business.  But if a business from same industry able to earn higher profits, then these excess profits are termed as super or abnormal profit. Goodwill is calculated by multiplying these super profits with number of agreed years purchased.
  • 169. Super Profit Method STEPS Calculate average capital employed: opening capital employed + closing capital employed 2 capital employed = capital + free reserves - fictitious assets 2. Calculate actual expected profit i.e. average profits. 3. Calculate normal profits as: normal rate of return Average capital employed x 100 4. Calculate super profit i.e. 1. Average/actual profits – normal profits 5. Calculate goodwill asGoodwill = Super Profits x Number of years Purchased
  • 170. Super Profit Method Example  The average profit for the last five years of a firm were Rs. 13,00,000. the normal rate of return on capital employed is 20%.  The firm has assets worth of Rs. 65,00,000 and liabilities for Rs. 15,00,000 in the business.  Calculate goodwill of the firm on the basis of 4 years purchase of super profits.
  • 171. Super Profit Method Solution  Actual/average profit = 13,00,000  Capital employed = assets – liabilities  = 65,00,000 – 15,00,000  = 50,00,000  Normal profit = 20% of 50,00,000  = 10,00,000  Super profit = average profit – normal profit  =13,00,000 – 10,00,000 = 3,00,000  Goodwill = super profit x number of years purchased  = 3,00,000 x 4 = Rs. 12,00,000
  • 172. Capitalisation Method  Under Capitalisation method, goodwill is calculated in two ways:Capitalisation of Average Profits, Capitalisation of Super Profits.
  • 173. Capitalisation Method STEPS 1. Calculate average normal profits earned. 2. Calculate capitalised value of the firm as:- AverageProfit ×100 Rate of NormalProfits 3. Determine the value of net tangible assets, i.e. assets other than fictitious assets 4. Calculate goodwill by deducting net tangible assets from the capitalised value, i.e., 5. Goodwill = Capitalised Value – Net Tangible Assets.
  • 174. Capitalisation Method Example  A firm earns Rs. 6,00,000 as its annual profits, the rate of normal profit being 10%.  The assets of the firm amount to Rs. 65,00,000 and liabilities for Rs. 35,00,000.  Calculate goodwill of the firm by Capitalisation method.
  • 175. Capitalisation Method Solution Average profit = 6,00,000 AverageProfit ×100 Total Capitalised value = Rate of NormalProfits 6,00,000×100 = = 60,00,000 10 Net assets of the firm=Total Assets – Liabilities = 65,00,000-35,00,000 = 30,00,000 Goodwill = Total Capitalised Value-Net Assets = 60,00,000 – 30,00,000 = Rs. 30,00,000.
  • 176. Capitalisation Method STEPS:  Calculate capital employed of the firm as: Total Tangible Assets – Outside Liabilities.  Calculate normal profit on capital employed as:Profit = Capital Employed × Requred rate of return 100  Calculate Average Profits of past years  Calculate Super Profits, i.e. Actual Average Profits-Normal Profits.  Calculate Goodwill as Goodwill= Super Profit × 100 Normal rate of return
  • 177. Capitalisation Method Example  A firm earns Rs. 6,00,000 as its annual profits, the rate of normal profit being 10%.  The tangible assets of the firm amount to Rs. 75,00,000 and liabilities for Rs. 25,00,000.  Calculate goodwill of the firm by Capitalisation method.
  • 178. Capitalisation Method Solution:  Capital Employed = tangible assets – liabilities  = 75,00,000 – 25,00,000 = 50,00,000  Normal Profit = 10% of capital i.e. 50,00,000  = 5,00,000  Super Profit = average profit – normal profit   Goodwill= = 6,00,000 – 5,00,000 = 1,00,000 Super Profit × 100 Normal rate of return  = Rs. 10,00,000 1,00,000 ×100 = 10
  • 179. Chapter 3 Comparative & Common Size Statements ACCOUNTANCY Class XII
  • 180. MEANING Comparative of financial statements involves the comparative study of the components of financial statements i.e. Profit and Loss A/c and Balance Sheet over a period of two or more years When the comparison is made for the data for the period of more than two years of the same firm then it is called Intra firm Comparison When the comparison is made for the data of the another firm then it is called Inter firm Comparison The change is depicted both in absolute and percentage terms
  • 181. OBJECTIVES AND TOOLS OBJECTIVES  It gives information about the nature of changes affecting the financial position of the firm  It points out the weaknesses about the liquidity, solvency and profitability of the firm  It helps in forecasting and planning TOOLS  Comparative Balance Sheets  Comparative Income statements
  • 182. COMPARATIVE BALANCE SHEET PARTICULARS A. Fixed Assets B. Investments C. Current Assets TOTAL A. Equity Share Capital B. Preference Share capital C. Reserves & Surplus D. Secured Loans E. Unsecured Loans F. Current Liabilities G. Provisions TOTAL 2007 2008 Absolute Percentage change change
  • 183. EXAMPLE 1 LIABILITIES 2007 2008 Share Capital 60,000 Preference Share Capital 2007 2008 60,000 Fixed Assets 90,000 108000 15,000 15,000 Investments 15,000 15,000 Reserves & Surplus 15,000 18,000 Current assets 40,000 30,000 Secured Loans 30,000 27,000 Misc Expenditure 5,000 1,500 Unsecured Loans 15,000 18,000 Current Liabilities 12,000 13,200 Provisions 3,000 3,300 1,50,000 1,54,500 ASSETS 1,50,000 1,54,500
  • 184. 18,000  100 1,08,000 -90,000 90,000 SOLUTION PARTICULARS A. Fixed Assets B. Investments C. Current assets Total A. Equity Share Capital B. Preference Share capital C. Reserves & Surplus D. Secured Loans E. Unsecured Loans F. Current Liabilities G. Provisions Total 2007 2008 Absolute change Percentage change 90,000 15,000 40,000 1,08,000 15,000 30,000 18,000 ---(10,000) 20% ---(25%) 1,45,000 1,53,000 8,000 5.5% 60,000 15,000 10,000 30,000 15,000 12,000 3,000 60,000 15,000 16,500 27,000 18,000 13,200 3,300 ------(6,500) (3,000) 3,000 1,200 300 ------(65%) (10%) 20% 10% 10% 1,45,000 1,53,000 8,000 5.5%
  • 185. CLASS ASSIGNMENT Prepare the comparative Balance Sheet of Apex Ltd from the following information for two years ended 31.03.07 and 31.03.08 PARTICULARS 31.03.07 31.03.08 Fixed Assets 30,00,000 32,00,000 Investments 6,00,000 8,00,000 Stock – in – Trade 3,50,000 5,00,000 Sundry Debtors 80,000 50,000 Cash in Bank 80,000 80,000 Miscellaneous Expenditure 40,000 30,000 25,00,000 25,00,000 Reserves and Surplus 8,00,000 12,00,000 Secured Loans 4,00,000 3,00,000 Unsecured Loans 3,00,000 1,00,000 Creditors 1,50,000 5,60,000 Equity Share Capital
  • 186. SOLUTION PARTICULARS A. Fixed Assets B. Investments C. Current assets 2007 2008 Absolute change Percentage change 30,00,000 6,00,000 5,10,000 32,00,000 8,00,000 6,30,000 2,00,000 2,00,000 1,20,000 6.67% 33.3% 23.5% Total 41,10,000 46,30,000 5,20,000 12.6% A. Equity Share Capital B. Reserves & Surplus C. Secured Loans D. Unsecured Loans E. Current Liabilities 25,00,000 7,60,000 4,00,000 3,00,000 1,50,000 25,00,000 --11,70,000 4,00,000 3,00,000 (1,00,000) 1,00,000 (2,00,000) 5,60,000 (1,30,000) --50% (25%) (66.6%) (86.6%) Total 41,10,000 46,30,000 5,20,000 12.6%
  • 187. COMPARATIVE INCOME STATEMENT PARTICULARS Sales Less: Cost of goods sold Gross Profit Less: Operating Expenses: Net Operating Profit + Other Income Profit before Interest and Tax Less: Interest paid Profit before Tax Income Tax Payable Profit after Tax 2007 2008 Absolute change Percentage change
  • 188. EXAMPLE 2 PARTICULARS Sales Cost Of Goods Sold 2007 (Rs) 2008(Rs) 1,00,000 2,00,000 60% of Sales 70% of Sales Indirect Expenses 10% of Gross Profit Rate of Income Tax 50% of Net Profit before Tax
  • 189. 1,00,000  100 2,00,000 2,00,000 -1,00,000 SOLUTION 2 PARTICULARS Sales Less: Cost of Goods sold Gross Profit Less: Indirect Expenses Net Profit before tax Less: Income Tax Net Profit after tax 2007 2008 Absolute Percentage change change 1,00,000 2,00,000 1,00,000 100% 60,000 1,40,000 40,000 60,000 80,000 20,000 133.3% 50% 4,000 36,000 6,000 54,000 2,000 18,000 50% 50% 18,000 27,000 9,000 50% 18,000 27,000 9,000 50%
  • 190. CLASS ASSIGNMENT From the following data prepare a Comparative Income Statement PARTICULARS 2007 (Rs) 2008 (Rs) Sales 14,00,000 16,00,000 Cost of goods sold 10,00,000 11,80,000 Office and Administration Expenses 90,000 1,30,000 Interest on Loan 80,000 80,000 Income Tax 40,000 36,000
  • 191. SOLUTION PARTICULAR 2007 2008 Absolute change Percentage change Sales Less: COGS 14,00,000 10,00,000 16,00,000 11,80,000 2,00,000 1,80,000 14.2% 18% Gross Profit (-) I. Exp 4,00,000 90,000 5,80,000 1,30,000 20,000 40,000 5% 44.4% Operating Profit (-) Int. on loan 3,10,000 4,50,000 1,40,000 45.1% 80,000 80,000 --- --- Net Profit before tax (-) tax 2,30,000 3,70,000 1,40,000 60.8% 40,000 36,000 (4,000) (10%) Profit after Tax 1,90,000 3,34,000 1,36,000 71.5%
  • 192. COMMON SIZE STATEMENTS MEANING Common size Statements are those statements in which the amounts of two years of Balance sheet or Income Statement are converted into percentages to some common base. •When the comparison is made for the data for the period of more than two years of the same firm then it is called Intra firm Comparison •When the comparison is made for the data of the another firm then it is called Inter firm Comparison •In Balance sheet the Total Assets is assumed to be 100 & in Income Statements the Sales are assumed to be 100.
  • 193. COMMON SIZE STATEMENTS OBJECTIVES  To analyze change in individual item of Income Statement and Balance Sheet  To study the trend of items in Balance sheet and Income statement  It helps in forecasting and planning TOOLS  Common Size Balance Sheet  Common Size Income statement
  • 194. COMMON SIZE BALANCE SHEET PARTICULARS AMOUNT 2007 (Rs) ASSETS Fixed Assets Investments Current Assets TOTAL LIABILITIES Equity Share Capital Preference Share Capital Reserves and Surplus (after Misc. expenditure) Secured Loans Unsecured Loans Current Liabilities Provisions TOTAL 2008 (Rs) PERCENTAGE 2007 (Rs) 2008 (Rs)
  • 195. EXAMPLE 3 LIABILITIES 2007 2008 ASSETS 2007 2008 Current Liabilities 2,00,000 4,00,000 Current Assets 6,00,000 10,00,000 Reserves 3,50,000 3,00,000 Fixed Assets 10,00,000 16,00,000 12% Loan 5,50,000 9,00,000 Share Capital 5,00,000 10,00,000 16,00,000 26,00,000 16,00,000 26,00,000
  • 196. 6,00,000 10,00,000  100 100 16,000,000 26,00,000 SOLUTION 3 PARTICULARS AMOUNT 2007 (Rs) PERCENTAGE 2008 (Rs) 2007 (Rs) 2008 (Rs) ASSETS Current Assets 6,00,000 10,00,000 37.5% 38.4% Fixed Assets 10,00,000 16,00,000 62.5% 61.5% TOTAL 16,00,000 26,00,000 100% 100% Current Liabilities 2,00,000 4,00,000 12.5.% 15.38% Reserves 3,50,000 3,00,000 21.8% 11.53% 12% Loans 5,50,000 9,00,000 34.3% 34.6% Share capital 5,00,000 10,00,000 19.2% 62.5% 16,00,000 26,00,000 100% 100% LIABILITIES TOTAL
  • 197. CLASS ASSIGNMENT LIABILITIES 2007 2008 ASSETS Equity Share Capital 7,50,000 9,00,000 Fixed Assets General Reserve 1,50,000 2,25,000 Current Assets 12% Debentures 2,70,000 1,80,000 Preliminary Expenses Unsecured Loans 1,80,000 3,75,000 4,20,000 Profit & Loss A/c 1,80,000 2008 1,20,000 Current Liabilities 2007 1,35,000 19,05,000 19,80,000 12,45,000 11,55,000 6,15,000 7,95,000 45,000 30,000 19,05,000 19,80,000
  • 198. SOLUTION PARTICULARS AMOUNT PERCENTAGE 2007 (Rs) 2008 (Rs) 2007 (Rs) 2008 (Rs) ASSETS Fixed Assets Current Assets 12,45,000 6,15,000 11,55,000 7,95,000 66.9% 33% 59.2% 40.7% TOTAL 18,60,000 19,50,000 100% 100% 7,50,000 2,85,000 9,00,000 3,30,000 40.3% 15.3% 46.1% 16.9% 2,70,000 1,80,000 3,75,000 1,80,000 1,20,000 4,20,000 14.5% 9.6% 20.1% 9.2% 6.1% 21.5% 18,60,000 19,50,000 100% 100% LIABILITIES Equity Share Capital Reserves and Surplus (after Miscellaneous expenditure) Secured Loans Unsecured Loans Current Liabilities TOTAL
  • 199. COMMON SIZE INCOME STATEMENT PARTICULARS AMOUNT 2007 (Rs) Net Sales Less: Cost of goods sold Gross Profit Less: Operating Expenses Net Profit before tax Less: Tax Net Profit after tax 2008 (Rs) PERCENTAGE 2007 (Rs) 2008 (Rs)
  • 200. EXAMPLE 4 PARTICULARS Sales Gross Profit Indirect Expenses Income Tax 2007 2008 20,00,000 30,00,000 40% 30% 50% of G.P 40% of G.P. 50% 50%
  • 201. 30,00,000 20,00,000  100  100 20,00,000 30,00,000 SOLUTION 4 PARTICULARS AMOUNT 2007 (Rs) Net Sales Less: Cost of goods sold 2008 (Rs) PERCENTAGE 2007 (Rs) 2008 (Rs) 20,00,000 12,00,000 30,00,000 21,00,000 100% 60% 100% 70% Gross Profit Less: Operating Expenses 8,00,000 4,00,000 9,00,000 3,60,000 40% 20% 30% 12% Net Profit before tax Less: Tax 4,00,000 2,00,000 4,50,000 2,25,000 20% 10% 15% 7.5% Net Profit after tax 2,00,000 2,25,000 10% 7.5%
  • 202. CLASS ASSIGNMENT PARTICULARS Sales Cost Of Goods Sold 2007 (Rs) 1,00,000 2008(Rs) 2,00,000 60% of Sales 70% of Sales Indirect Expenses 10% of Gross Profit Rate of Income Tax 50% of Net Profit before Tax
  • 203. SOLUTION PARTICULARS AMOUNT 2007 Net Sales Less: COGS PERCENTAGE 2008 2007 2008 1,00,000 60,000 2,00,000 1,40,000 100% 60% 100% 70% Gross Profit Less: Operating Expenses 40,000 60,000 40% 30% 4,000 6,000 4% 3% Net Profit before tax Less: Tax 36,000 18,000 54,000 27,000 36% 18% 27% 13.5% Net Profit after tax 18,000 27,000 18% 13.5%
  • 204. Chapter 4 Change in Profit Sharing Ratio ACCOUNTANCY Class XII
  • 205. Concept Old ratio 1:1 A Profit is like a cake A will loose ¼ of the cake while B will gain ¼ of cake A New ratio 1:3 B B
  • 206. Numerical Presentation Old ratio of A and B 1:1 New ratio of A and B 1:3 Difference = old share – new share A’s Share B’s Share 1 1 2-1 1 = = A’s sacrifice 2 4 4 4 1 3 2 - 3  1 = =   B’s gain 2 4 4 4
  • 207. CLASS ASSIGNMENT Q1 A, B and C were partners in the firm in the ratio of 3:2:1. Now they decided to share profits in the ratio of 5:3:2. Calculate gaining/sacrificing ratio of each partner. Q2 A, B and C were partners in the firm in the ratio of 4:3:2. Now they decided to share profits in the ratio of 2:2:1. Calculate gaining/sacrificing ratio of each partner. Q3 A, B and C were partners in the firm in the ratio of 6:4:5. Now they decided to share profits equally. Calculate gaining/sacrificing ratio of each partner.
  • 208. SOLUTION Q1 Sacrifice/ Gain = Old Share - New Share A= 3 5  NIL 6 10  B= 2 3 2   (Sacrifice) 6 10 60 C= 1 2 2   (Gain) 6 10 60
  • 209. SOLUTION Q2 Sacrifice/ Gain = Old Share - New Share A= 4 2 2   (sacrifice) 9 5 45 B = 3 2 3  9 5 C=  45 (Gain) 2 1 1   (Sacrifice) 9 5 45
  • 210. SOLUTION Q3 Sacrifice/ Gain = Old Share - New Share A= B= C= 6 1 1   (sacrifice) 15 3 15 4 1 1   (Gain) 15 3 15 5 1   NIL 15 3
  • 211. Effects on Goodwill  When partners agree to change their profit sharing ratio, their share in goodwill also changes.  To take into account such change, an adjustment entry among the partners is passed, debiting the gaining partner and crediting the sacrificing partner.  It can be represented as: JOURNAL Date Particulars Gaining Partner A/c Dr. To Sacrificing Partner A/c L.F. Debit Credit
  • 212. Example A & B are partners in the ratio of 3:2. now they decided to share in the ratio of 5:3. for this purpose goodwill is valued at Rs. Rs. 4,00,000. Partners decided to pass a adjustment entry to give this effect. Journalise.
  • 213. Solution Calculation of sacrificing and gaining ratio Old ratio of A and B 3:2 New ratio of A and B 5:3 Difference = old share – new share 3 5 24 - 25  1  A's Share = - = =  Gain 5 8 40  40  2 3 16 - 15 1 B's Share = - = = Sacrifice 5 8 40 40
  • 214. Journal Entry Amount to be adjusted 1 40 × 4,00,000 =10,000 JOURNAL Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being adjustment entry Passed) L.F. Debit Credit 10,000 10,000
  • 215. Previous Goodwill If Goodwill Already Appears in books  If goodwill already appears in the books of accounts, it has to be written off among the partners in the old ratio.  The journal entry would be:JOURNAL Date Particulars All Partners (old ratio) A/c Dr. To Goodwill A/c L.F. Debit Credit
  • 216. Reserves/Past Profits  When partners agree to change their profit sharing ratio, their share in reserves, accumulated profits, provisions, funds etc. also changes.  To take into account such change, an adjustment entry among the partners is passed, debiting the gaining partner and crediting the sacrificing partner.  It can be represented as: JOURNAL Date Particulars Gaining Partner A/c Dr. To Sacrificing Partner A/c L.F. Debit Credit
  • 217. Example A & B are partners in the ratio of 3:2. now they decided to share in the ratio of 5:3. The reserves stood at Rs. Rs. 2,00,000. Partners decided to pass a adjustment entry to give this effect. Journalise.
  • 218. Solution Calculation of sacrificing and gaining ratio Old ratio of A and B 3:2 New ratio of A and B 5:3 Difference = old share – new share 3 5 24 - 25  1  A's Share = - = =  Gain 5 8 40  40  2 3 16 - 15 1 B's Share = - = = Sacrifice 5 8 40 40
  • 219. Journal Entry Amount to be adjusted 1 40 × 2,00,000 =5,000 JOURNAL Date Particulars B‘s Capital A/c Dr. To A‘s Capital A/c (Being adjustment entry Passed) L.F. Debit Credit 5,000 5,000
  • 220. Example X, Y and Z are partners sharing profits and losses in the ratio of 7: 5: 4. Their balance Sheet as on 31st March 2003 was: Liabilities Capital Accounts: X 4,00,000 Y 2,70,000 Z 1,80,000 General Reserve Profit & Loss A/c Creditors Rs. Assets Rs. Sundry Assets 10,26,000 8,50,000 80,000 32,000 64,000 10,26,000 10,26,000 Partners decided that with effect from 1st April 2003, they will share profits and losses in the ratio of 3: 2: 1. For this purpose goodwill of the firm was valued at Rs. 3, 20,000. The partners do not want to record the goodwill and also do not want to distribute the general reserve and profits. Pass a single journal entry to record the change and prepare a revised balance sheet.
  • 221. Solution 7 3 21- 24  3  X's Share = - = =  Gain 16 6 48  48  5 2 15 - 16  1  Y's Share = - = =  Gain 16 6 48  48  4 1 12 - 8 4 Z's Share = - = = Sacrifice 16 6 48 48 Amount to be adjusted: Goodwill 3,20,000 3 X'sGain= × 4,32,000 =27,000 Reserves 80,000 48 Profit 32,000 1 Total 4,32,000 Y'sGain= × 4,32,000=9,000 48 4 Z's Sacrifice = × 4,32,000 =36,000 48
  • 222. Solution JOURNAL Date Particulars L.F. Debit X‘s Capital A/c Dr. Y‘s Capital A/c Dr. To Z‘s Capital A/c (Being adjustment entry Passed) Credit 27,000 9,000 36,000 (27,000 + 9,000) Partner‘s Capital A/c Particulars To Z To bal c/d X Y Z X Y Z By bal b/d By X 3,73,000 2,61,000 2,16,000 By Y 4,00,000 2,70,000 1,80,000 27,000 9,000 4,00,000 2,70,000 2,16,000 4,00,000 2,70,000 2,16,000 27,000 9,000 Particulars
  • 223. Solution Liabilities Capital Accounts: X 3,73,000 Y 2,61,000 Z 2,16,000 General Reserve Profit & Loss A/c Creditors Balance Sheet Rs. Assets Sundry Assets Rs. 10,26,000 8,50,000 80,000 32,000 64,000 10,26,000 10,26,000
  • 224. Revaluation/Reassessment  The value of assets may be different from the one stated in the books because with the passage of time the value of some assets fall while of some other rise In the case of liabilities, it is possible that the amount payable is different from the value stated in the books.  It is also possible that some assets or liabilities are not recorded in the books. The value of assets and the amounts payable need to be brought to their correct values.  It may be done through revaluation A/c when such changes are agreed to be shown in the books of accounts whereas if partners decide not to reveal and record the changed figures in books of accounts, in that case to give effect of such changes a statement for calculation of profit/loss from revaluation of assets and reassessment of liabilities is prepared and its effect is passed through the same gaining-sacrificing entry.
  • 225. Journal Entries i) for a increase in the value of assets Assets A/c (Individually) To Revaluation A/c Dr. ii) for a decrease in the value of assets Revaluation A/c To Assets A/c (Individually) Dr. iii) For an increase in the amount of liabilities Revaluation A/c To Liability A/c (Individually) Dr. iv) For a decrease in the amount of liabilities Liability A/c (individually) To Revaluation A/c Dr. v) For accounting unrecorded assets Assets A/c (Individually) To Revaluation A/c Dr. (vi) For Accounting unrecorded liabilities Revaluation A/c To Liability A/c (Individually) Dr.
  • 226. Profit/Loss on Revaluation  If the credit side exceeds the debit side, i.e., there is a gain. The entry is: Revaluation A/c Dr. To Old Partners' Capital A/c’s (old Ratio)  In case debit side exceeds the credit side, i.e., there is a loss. The entry is: Old Partners' Capital A/c’s (old Ratio) Dr. To Revaluation A/c