Accountancy & Financial Management III-munotes

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11
FINAL ACCOUNTS OF PARTNERSHIP
FIRMS I
Unit Structure:
1.0 Objective
1.1 Introduction
1.2 Partnership Deed
1.3 Partnership Final Account
1.4 Profit and Loss Appropriation Accounts
1.5 Guarantee of Profits to / Or by a Partner
1.6 Joint Life Policy
1.7 Check Progress
1.0OBJECTIVE OF THE UNIT
After studying the unit the student will be able to :
Define the meaning of Partnership Deed.
Transfer the Trial Balance.
Describe the Accounting Procedure and the treatment to various
adjustments in Final Accou nts.
Calculate the Interest on Capital and Interest on Drawings.
Solve the practical problems.
1.1INTRODUCTION
A Partnership is defined by section 4 of the Indian Partnership Act
1932, as “The relation between person swho have agree dto share profit s
of business carried on by all or by any of them acting for all: Person swho
have entered into Partnership are individually called asPartners and
collectively called asaf i r m .
1.1.1There are three important characteristic sof Partnership
1) There sh ould be AGREEMENT between two or more persons.
2) This agreement must be to SHARE the profits of the business.
3) The business must be carried on by all the partners or by any
one of the partner acting for all of them.munotes.in

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21.2PARTNERSHIP DEED
We h ave seen above that Partnership is created by an
AGREEMENT. Itis not necessary to have a written agreement. However
written agreement is d esirable because it can avoid dispute in future. The
Deed of Partnership is a document in writing which contains th e important
terms that the partners have agreed among themselves. The partnership
deed should be properly drafted and stamped as required by Stamp Act.
1.2.1Partnership deed specific: -
In case of specific Provision in the Partnership deed (which
may be oral or written), the appropriation (or distribution) of Profit is done
accordingly.
1.2.2 Partnership deed issilent (or absence of Partnership deed): -
In this case, following provision sof section 13 of the Indian
Partnership Act, 1932 would be app licable: -
1) Interest on capital -Not Allowed.
2) Interest on capital -Such interest is payable only i fallowed by
the partnership deed. Out of profits.
3) Interest on drawings -NotAllowed.
4) Salary to Partners -NotAllowed.
5) Commissio nt oPartners -NotAllowed.
6) Interest on Partners loan -6% p.a .allowed .
7) Profit/ or L ossSharingRratio -Equal for all Partners (Even if Partner’s
capital may be un equal ).
1.3PARTNERSHIP FINAL ACCOUNTS
Each partner should know the financial p erformance of the
business for the year. Each partner has unlimited liability and therefore,
he should also know the state of affairs (i.e. Assets and Liabilit ies) on a
particular date. The accounts of a partnership business are prepared on the
basis of double entry as well as accrual basis. The accounts consider
outstanding expenses, prepaid expenses, outstanding Income, etc. to
determine profit (or loss) during the accounting year.
The final accounts of partnership firm includes: -
1)Trading Account to disclose the Gross Profit (or Gross Loss) during
the accounting year.
2)Profit and Loss Account to disclose NetProfit (or NetLoss) during the
accounting year.
3)Profit and Loss Appropriation Account to disclose the distribution of
NetProfit (or Net Loss) among partners after considering interest on
partner scapital, interest on drawing, salary to partners etc. If there ismunotes.in

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3no appropriation , then the net profit from the Profit and Loss Account
istransferred to C apital .
4) Balance Sheet to disclos e the Assets and L iabilities at theend of the
accounting year.
5)Manufacturing Account may be prepared (in addition to Trading
Account) to disclose Cost of Goods produced and other elements of
cost taking figure in Manufacturing A ccount shows cost of pr oduction,
which should be transferred to Trading Account.
6) Partners Capital Account sare prepared separately and then the closing
balance is transferred to the Balance S heet.WhenPartners Capital A/c ,
IfPartner’s Capital A/c are fixed, it is transferr ed to Current A ccount.
1.4PROFIT AND LOSS APPROPRIATION A/C
This is a special Ac count prepared in case of only PARTNERSHIP
firm. It shows how the Net profit/Net Loss has been distributed
(Appropriated) amongst Partners.
Note: In case of Partnership firm any remuneration paid or
payable to partners in the form of salary, rent. Interest on capital,
commission etc. is treated as distribution of profit and not as business
expense. Therefore the above expenses if paid or payable to partners shall
not b e debited to Profit and Loss Account but shall be debited to Profit and
Loss Appropriation A/c.
Thus this A/c will be debited by:
1) Net Loss (transferred from credit side of Profit & Loss Account)
2) Salaries ,Rent,Interest on Capital, Commission etc .t oPartners
This A/c will be credited by
1) Net Profit (transferred from the Debit side of Profit & Loss A/c)
2) Interest on Drawing cha rged to Partners.
The difference in this account will show the Final Net Profit/Loss
which can distributed amon gst the partners in their profit sharing ratio.
If the Credit side is heavier -profit to be distributed
If the Debit side is heavier –Loss transferred to Partners Account
1.4.1INTEREST ON CAPITAL OR SALARY ETC
Interest or Salary is payable only out of the Profit (i.e. on appropriation of
Profit). Therefore,
1) In case of loss, no interest or Salary is allowed.
2) In case i f Profit isless than Interest, etc then such interest etc. is
limited to the extent of profit.munotes.in

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4However, the partner may dec ide to waive such intimation (by
specific provision in the partnership deed) that interest, etc. is allowed
even (if there is a loss) then the amount of loss is increased and such
increased (entire) loss is shared by the partner in the profit (and loss)
sharing ratio.
1.4.2INTEREST ON DRAWINGS
The partner may be cha rgedInterest on the Drawing. So as to
make distribution of profit more equitable, Interest on Drawing is cha rged
on the different amounts withdrawn on the different date sduring the
accou nting year. The interest on drawings is calculated by the Product
Method or the Average DueDateMethod. Usually, when a partner draws
a fixed amount monthly, then the interest on drawings is calculated as
follows :-
Withdrawals Interest on total Drawing s
a) Beginning of each m onth
(e.g. 1stJanuary ,1stFebruary
…1stDecember
b)Middle of each m onth (not
given) (e .g. 15thJanuary, 14th
February, ….15thDecember)
c) End of each m onth (e.g. 31st
January, 28thFebruary, 31st
December)For 6.5 m onth
For 6 m onth
For 5.5 m onth
1.5GUARANTEE OF PROFITS TO /OR BY A PARTNER
According to the partnership deed, one or few partners are
guaranteed a minimum amount of profit, therefore, such partner would
receive guaranteed (minimum) profit or profit as per profit sharing ratio
which ever is higher.
The different types of guarantee arrangements are as follows: -
1) A Partner is given an undertaking that his share in profits (including
salary, interest on capital etc) wil l not be below a certain amount. Such
guarantee may be given by one partner or by all other remaining partners.
Usually, in such a case in future, when the concerned Partner’s share of
profit exceeds the minimum limits then the excess profit (above minim um
limit) is refunded (to the extent profits overdrawn in the past)
2) A partner guarantees that the profit of the firm would above ac e r t a i n
figure in such case the profit is lower ,then the guarantor partner’s account
is debited and profit and loss App ropriation A/c is credited.munotes.in

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53) A partner guarantees that, if particular partner’s share of profit exceeds
a certain amount, then he would suffer to the extent of difference (i .e.to
the extent of profit above certain amount the guarantor partner would
receive less profits).
1.6JOINT LIFE POLICY
The object of taking life policy on the lives of the partner is to
insure against the chances or disturbance in the business due to death of
any one of the partners. The amount payable to the legal representati ve of
the decease dpartner is paid out of the policy amount received from the
Insurance Company; otherwise , the assets may have to be sold, which may
result in the disturbance to or closure of the business. The firm can take
one Joint Policy on the life o f all partners, or otherwise, itmay take
separate policies on the life of each partner.
Accounting treatment may be one of the following three ways: -
1.6.1Premium paid istreated as expense of the firm and debited to
Profit and L ossA/c when amount is received it is credited to P artners
Capital in their profit sharing ratio
1.6.2When premium paid is treated as assets :-Inthis case premium
paid is debited to Joint Life P olicy A/c. Joint LifePolicy A/c is kept at
surrender value, on date of bala nce-sheet . The balance in Policy A/c in
excess of surrender value is treated as loss and transfer redto P & L A/c.
When amount received on surrender of policy or maturity of policy, is
credited to Joint LifePolicy A/c. Balance in Joint LifePolicy being profit
credited to Partners Capital A/c in their profit sharing ratio.
1.6.3When premium paid treated as asset and Joint life policy
reserve is maintained. In this case premium paid is debited to Joint Life
Policy A/c at the end of the year Joint LifePolicy R eserve is created to the
extent of premium paid by debiting to P rofit and L ossA/c and crediting to
Joint life policy reserve a/c. Both Joint LifePolicy and Joint LifePolicy
Reserve A/c are brought down to surrender value by debiting Joint Life
Policy Reserve A/c crediting Joint LifePolicy A/c. At the end of the year
Joint L ifePolicy is shown on Assets side of the Balance Sheet. Joint Life
Policy Reserve a/c is shown on the Liability side of the Balance Sheet.
On the maturity of the polic y or when policy issurrender edfollowing
entries are passed.
When Joint LifePolicy premium paid
a) Joint L ifePolicy A/c ……Dr.
To Bank A/c
b) For transferring toProfit &Loss A/c (equal to premium paid)
Profit & Loss A/c ……Dr.munotes.in

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6To Joint L ifePolicy Reserve A/c
c) For bring balance in Joint life policy to surrender value
Joint LifePolicy Reserve A/c ….. Dr.
To Joint LifePolicy A/c
Above entries are repeat edevery year ,ifjoint li fepolicy surrender edor
matured.
On maturity of policy/surrender following entries are passed.
a) Bank A/c …..Dr.
To Joint LifePolicy A/c
b) For excess amount received
Joint LifePolicy A/c…….Dr
To Joint LifePolicy Reserve A/c
c) For transferring Joint life policy Reserves to Partn ers C apital A/c
in their profit sharing ratio.
Joint L ifePolicy Reserve A/c…..Dr
To All Partners C apital A/c
1.7 CHECK YOUR PROGRESS:
Define
Partnership Deed
Profit and Loss Appropriation Account
Joint Life Policy
Fill in the Blanks
Any salary paid or payable to a Partner is treated as
____________________________________
If Any Commission ispaid or payable to a Partner shall be debited
to------------------------------------------------------------- .
When the Joint Life Policy Premium paid is treated as Expenses of
the firm it is to be debited to -------------------------
Variable expenses related to sales are to be divided in the -----------
------------------------ Ratio.
State whether True or False
In case of Partnership Firm any Interest paid on Capital of a
Partner is treated as Expenses of the firm.
In case of Loss ,no Interest or Salary is allowed.
No Interest is to be payable to a New Partner before Admission.
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72
PARTNERSHIP FINAL ACCOUNTS II
Unit Structure :
2.0 Objectives
2.1 Adjustment to Final Accounts
2.2 Revaluation Assets and Liabilities on Admission or Retirement of
Partner
2.3 Adjustment Relating to Reserves / Goodwill
2.4 Hidden Adjustments
2.6 Proforma of Final Accounts
2.7 Accounting Procedure
2.0OBJECTIVES
After studying the unit the students will be able to:
Understand the adjustments and journal entries and effets of the
adjustments to Final Accounts.
Revaluate assets and liabilities on adm ission and retirement of the
partner.
Understand the adjustments related to Goodwill and Reserves.
2.1ADJUSTMENT TO FINAL ACCOUNTS
Sr.
No.Adjustment Journal
EntriesEffect in
Trading or
P&L A/c or
P&LA d j .A / cEffect in
Balance Sheet
1. Outstanding or
Unpaid
expenses e.g.
Salary
Outstanding.Salary/s a/c -
Dr.
To
Outstanding
Salary A /cAdd to the
expenses,
e.g. salaryShow on the
Liability side
as Outstanding
Salary.
2. Outstanding
Income or
Income n ot
received or
Income
Receivable or
Income Earned
but notInterest
Receivable
A/c-Dr.
To Interest
A/cAdd to the
Income on
credit side, e.g.
from InterestShow on the
Assets Side as
Outstanding
Interest.munotes.in

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8received
e.g. I nterest due
but not
received.
3Prepaid
Expenses or
Expenditure
paid in advance
orUnexpired
Insurance
e.g. P repaid
Insurance.Prepaid
Insurance A/c
–Dr.
To Insurance
A/cDeduct from
that
expenditure on
debit side e.g.
from
Insurance.Show on the
Assets Side as
Prepaid
Insurance.
4Bad Debts
written off.Bad Debts A/c-Dr.
To Sundry
Debtors A/c.Show on the
debit si de as
addition to the
bad debts
given in tri al
balance.Deduct from
the Debtors on
Assets S ide.
5Income
Received in
Advance, e.g.
Interest for
three months
Received in
Advance.Interest
(Income) A/c
-Dr.
To Interest
Received in
Advance.Deduct from
the Income on
credit side e.g.
from Interest
Received.Show on the
Liability Side
as Interest
Received in
Advance.
6Depreciation on
Fixed Assets .
(e.g.
depreciation on
machinery.)Depreciation
A/c-Dr.
To Machinery
A/c.Show on the
debit side as
depreciation
on m achinery.Deduct from
that assets on
the assets side
e.g. from
machinery.
7Reserve for
Discount on
Creditors.Reserve for
Dis. On Cr.
A/c-Dr.
To Discount
Received A /c.Show on the
Credit Side.Deduct from
Creditors on
Liability Side.
8Provision for
Discount on
Debtors.
(Calculated at
given % on the
balance of
Debtors after
deducting Bad
Debts and
R.D.D. given in
the
adjustments.)Discount
Allowed A/c
-Dr.
ToProvision
for discount
on Debtors
A/cShow
separa tely on
the Debit side.Deduct from
the D ebtors.
9Bills Debtors A/c -Debit S ide of Deduct frommunotes.in

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9Receiva ble
Discounted is
Dishonou red.Dr.
To Bank A/c.P&LA / c the Bank A/c
and Add to the
Debtors on the
Assets Side
10 Writing off
deferred
Revenue
Expenditure
e.g.Write Off
Preliminary
Expenses.P&LA / c -
Dr.
To
Preliminary
Expenses A/cNO IMPACTDeduct from
that Account
on the Assets
Side e.g. from
Preliminary
Expenses A/c.
11 Bill Receivable
dishonored is
remained to be
adjusted.Debtors A/c -
Dr.
To Bills
Receivable
A/c.NO IMPACTDeduct from
B/R & Add to
Debtors on the
assets side.
12 Sundry Debtors
include a
Debtor for
Dishonor Bill
and half the
amount is
irrecoverable.Bad Debts A/c-Dr.
To Debtors
A/cShow on the
Debit S ide as
Bad Debts.Deduct from
the Debtors on
the Asset Side.
13 Goods
withdrawn by
the Partner.Drawings A/c
-Dr.
To Trading
A/cShow on the
credit side of
Trading A/c.Deduct from
the Capital A/c
of the Partner
on the Liability
Side.
14 Goods
Purchased
remained to be
recorded
though
included in
stock.Purchases A/c
-Dr.
To Creditors
A/cAdd to
Purchases on
Debit si de of
the Trading
A/c.Add to the
Creditors on
the Liability
Side.
15 Goods sold are
included in the
closing s tock as
it was not
delivered .NO ENTRYDeduct from
the Closing
Stock on the
credit side of
Trading A/cDeduct from
the Closing
Stock on the
Assets Side.
16 Sale includes
goods sent on
sale or return
basis.At Selling
Price:
Sales A/c –
Dr.
To Debtors
A/c
At Cost Price:(a) Deduct
from sale on
credit side of
Trading A/c at
selling price to
the extent it is
not approved
by customers.(a) Deduct
from Debtors
on Assets Si de
at sales price to
the extent it is
notapproved
by customers.munotes.in

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10Stock wi th
Customers
A/c-Dr.
To Trading
A/c(b) Add to the
Closing Stock
at cost on
credit side of
Trading A/c.(b) Add to the
Closing Stock
at cost on
Assets Side.
17 Goods
distributed as
free samples.Advertisement
A/c–Dr.
To Trading
A/c(a) Show on
the credit side
of Trading
A/c.
(b) And on th e
debit side of
P&LA / c .a s
Advertisement.NO IMPACT
18 Wages paid for
installation of
Machinery
debited to
Wages A/c.Machinery
A/c Dr.
To Wages A/c
(Rectification
Entry)Deduct from
the W ages on
the debit side
of Trading a/c.Add to the
Machinery on
theAssets
Side.
19 Loss of goods
by fire and
Insurance
Company
Admitted
Claim.Insurance
Claim A/c –
Dr.
Loss by Fire
A/c–Dr.
To Trading
A/c.(a) Show on
credit side of
Trading A/c
the total loss.
(b) Show on
debit side of
P&L A/c the
actual loss i.e.
Amt. of goods
lost by fire
LessA m t .O f
claim
Admitted by
theInsurance
Co.Show on the
Assets S ide the
amount of
claim
Admitted by
the Insurance
Company .
20 Legal charges
paid for
Acquisition of
property
debited to
LegalExpenses
A/cProperty A/c –
Dr.
ToLegal
Charges A/cDeduct from
the le gal
expenses on
debit side of
P&L A/cAdd to the
Property
acquired on
Assets S ide.
21 Interest on
Partner’s
capital.Interest on
Capital A/c –
Dr.
To Partners
Capital A/cShow on the
debit side of
P&L
Appropriation
A/c.Add to
Capital /Current
A/con the
Liability Side.munotes.in

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1122 Salary to
Partner.P&L
Appropriation
A/c–Dr.
To Partners
Capital A/cShow on the
debit side of
P&L
Appropriation
A/c.Add to the
Capital /Current
A/c of the
Partner.
23 Interest on
Partner’s
DrawingPartners Cap.
A/c–Dr.
To P & L
Appropriation
A/cShow on the
credit side of
P&L
Appropriation
A/cDeduct from
the Capital.
24 Closing Stock. (a) Stock of
Raw Material
A/c–Dr.
Work In
Progress A/c –
Dr.
To
Manufacturing
A/c
(b) Stock of
Finished
Goods A/c–
Dr.
To Trading
A/c(a)Stock of
Raw Material
on the credit
side of
Manufacturing
A/c
(b)Stock of
Work In
Progress as
above.
(c) Stock of
Finished
Goods on
credit side of
the Trading
A/c.(a)On Assets
Side.
(b)On Assets
Side.
(c)On Asse ts
Side.
25 Commission to
Manager as %
Net Profit.Managers
Commission
A/c–Dr.
To
Outstanding
Comm. A/cShow on the
debit side of
P&L A/c.Show on the
Liability Side
as Outstanding
Commission
26 Goods received
as free sample,
and included in
Closing Stock.Trading A/c –
Dr.
To P & L A/c(a) Show on
thedebit side
of Trading
A/c.
(b) Show on
the credit side
of P & L A/c.NO IMPACTmunotes.in

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122.2REVALUATION ASSETS AND LIABILITIES ON
ADMISSION OR RETIREMENT OF PARTNER
Increase in value of Assets.
Fixed Assets A/c Dr.
To Revaluation A/c
Decrease in value of fixed Assets
Revaluation A/c Dr.
To Fixed Assets A/c
Increase in liabilities ( unrecorded)
Revaluation A/c Dr .
To Sundry Liabilities A/c
Decrease in Liabilities
Sundry Liabilities A/c Dr.
To Revaluation A/c
Transferring Revaluation Profit to Old Partners in old ratio .
Revaluation A/c Dr.
ToOld Partners Capital A/c
Transferring Loss on Revaluation to Old Partners Capital A/c
in old ratio
OldPartners ’Capital A/c Dr.
To Revaluation A/c
Note:
i) Revaluation A/c is also known as profit & Loss Adjustment A/c.
ii) Revaluation of Assets etc. may not be included in syllabus.
However not specially excluded also.
2.3 ADJUSTMENT RELATI NG TO RESERVES /
GOODWILL :
2.3.1 Reserves appearing in Balance Sheet. These reserve belongs to old
partner therefore should be transferred to Old Partners Capital A/c.
General Reserve A/c Dr.
To Old Partners Capital A/cmunotes.in

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13Adjustment relating Goodwill.
Full value of Goodwill is raised and Appears in Balance Sheet.
Goodwill A/c Dr.
To old Partners Capital A/c [in Old Ratio]
2.3.2Goodwill was raised and written off
(not appearing in Balance Sheet)
Incoming Partners Capital A/c Dr.
To Old Partn ers Capital A/c
(Credited in Sacrificing Ratio)
(Sacrificing Ratio = Old Ratio –New Ratio)
2.3.3After admission of New Partner
Goodwill written off
All Partners Capital A/c ….. Dr. [In new P.S.R.]
To Goodwill A/c
2.3.4Incoming partner bring his share of Goodwill in cash.
a) Cash A/c –Dr.
To Goodwill A/c
b) Goodwill A/c –Dr.
To Old Partners Capital A/c
[in sacrificing ratio]
2.3.5Goodwill amount paid in Cash by new partner privately
No entry in book of Accounts.
2.4HIDDEN ADJUSTMENTS :
Sometimes, details given in Trial Balance indicate amount of
expenses or income are to be adjusted.
Sr.
No.Trial Balance on 31.12.13 Adjustment
Particulars Debit Credit a) Bank int. for 6 months
(a) 10% Bank Loan
[1stJuly 2012]
Bank Interest 5,0002,00,000 10% on 2,00,000
= 2,00,000 x10% x 6/12
=₹ 10,000
Outstanding Interestmunotes.in

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14=₹ 5,000
(b) Salaries
(11 months)22,000 b) Per Month’s Salary
= 22,000/11 = ₹ 2,000
Provide Outstanding
₹2,000
(c) 12% Govt.
Securities
[Face Value –
₹1,00,000]
Interest on
Govt. Sec.97,000
6,000c) Amount of interest
= 1,00,000 X 12%
=₹ 12,000
Accrued Interest
= 12,000 –6,000
=₹ 6,000 to be accounted.
Interest on Investme nt is
always calculated or Face
Value.
(d) Furniture
(Opening
Balance)
Sale of
Furniture
(WDV -₹
25,000)60,000
18,000Furniture sold at loss of.
₹7,000 (25,000 –18,000)
i) Deduct ₹ 25,000 from
Furniture
ii) Loss on sale of Furniture
₹7000 Debit to P&L A/c
2.6PROFORMA OF FINAL ACCOUNTS:
2.6.1
Dr. Trading A/c for the year ended…. Cr.
Particulars Rs. Particulars Rs.
X
X
X
X
X
XX
X
XTo Opening tock
To Purchases X
Less Purchase Return X
To Carriage
To Wag es
To Direct Expenses
To Gross Profit C/d
XXBy Sales: Cash X
Credit X
Less: Sales Return (X)
By Goods Lost by
Fire etc : (at cost)
By Closing Stock
XXmunotes.in

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152.6.2
Dr. Profit & Loss A/c for the ended ……. Cr.
Particulars Basis Before
AdmissionAfter
AdmissionParticulars Basis Before
AdmissionAfter
Admission
To salaries
To Insurance
To
Administrative
Exp.
To Depreciation
To Commission
To Bad Debts
To Discount
To
Advertisement
To Travelling
Exp.
ToN . P .C / d .T
T
T
T
S
S
S
S
SX
X
X
X
X
X
X
X
X
XX
X
X
X
X
X
X
X
X
XBy Gross
Profit
By Interest
By Rent
By Discount
By Net Loss
C/dS
T
T
SX
X
X
X
XX
X
X
X
X
2.6.3
Dr. Profit & Loss Appropriation A/c the ended ……. Cr.
Particular s Before
AdmissionAfter
AdmissionParticulars Before
AdmissionAfter
Admission
To Partner Salaries
Old Partner T
New Partner --
To Interest on
Capital Old T
New --
ToN e tP r o f i t
Before Admi. Old Ratio x
After Admi. New Ratio xX
--
X
--
XX
X
X
X
XBy G.P.B/fd
By Interest on
Drawings
New Partner -
Old Partner TX
--
--
XX
--
X
X
XX XX XX XX munotes.in

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162.6.4
BALANCE SHEET AS ON
Liabilities Rs. Rs. Assets Rs. Rs.
X
X
X
X
X
X
XX
X
X
(X)
X
(x)X
X
X
X
X
X
x
XPartners Capital A/c
X
Y
Z
Partners Current
Accounts X
Z
Bank Loans
Sundry Creditors
Bills Payable
Outstanding Expenses
Income Received in AdvanceX
X
X
X
X
XXFixed Assets
Goodwill
Other Fixed Assets
-Depreciation
Investment
Stock
S. Debtors
-New Bad debts
-New R.D.D.
Bills Receivable
Cash & Bank Balance
Y’s Current A/c
XX
2.7ACCOUNTING PROCED URE
When New Partner is admitted on 1stday of the year or on Last day of
the year, usual final A/c should be prepared i.e. division in Profit &
Loss A/c, Profit & Loss Appropriation A/c is not required.
Similarly in case of Retirement/Death of a partner on 1stday or last
day of the year, there is no need of preparing Profit & Loss A/c and
Profit& Loss Appropriation A/c in columnar form before retirement
and after retirement of partner.
In both of above cases, it is usual Partnership Final A/c.
In case o f Admission on Retirement or Death of Partner in between the
year -Either prepare Final Accounts on that date to find out Profit or
Loss upto change in partnership i.e. Close the books of Accounts on
that date.
However it may not be possible to close bo oks of accounts on the date
of Admission or Retirement or Death of the Partner. Partners continue
same books of accounts up to the end of the year. In such case Profit
& Loss A/c as well as Profit and Loss Appropriation A/c are prepared
in columnar form i .e. Before Change in Partnership and After Change
in Partnership then following accounting procedure is followed.
1)Prepare Trading A/c to ascertain Gross Profit.
2)Ascertain Time Ratio i.e. number of months before admission and
after admission of partner.
3)Similarly ascertain Sales Ratio.munotes.in

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17These ratios are required to divide various Income and Expenses as
follow:
iIncome/Discount Earned/Gros s Profit credit to P & L A/c in Sales
Ratio.
iiInterest Earned divide in Time Ratio.
iiiVarious Fixed Expenses divide in Time Ra tio e.g. Salaries,
Insurance, Rent, Interest paid, Depreciation etc.
ivVarious Variable Expenses related with Sales divide in Sales Ratio
e.g. Carriage Outwards, Bad Debts written off, Advertisement,
Commission, and Depreciation on Delivery Van etc.
4)If details about expenses/income are given for dividing
expenses/income should be considered on e.g. Plant was purchased
after admission, then Depreciation on New Plant should be debited to
II column only (i.e. After Admission] and deducted from Plant in
Balance Sheet.
5)Ascertain Net Profit/Loss separately, (say B efore Change and After
Change) and transfer it to Profit and Loss Appropriation A/c.
6)Interests on Capital if any ascertain before Admission/After Admission
of Partner. Debit it to appropriate co lumn and credit to Partners
Capital A/c [ no interest is payable to new partner before
admission ] same way any Salaries to Partner, etc. account in
respective column.
7)Net Profit before admission transfer to Old Partner in old ratio, a Net
Profit after admis sion of partner transfer to All partner in New Ratio.
8)Transferee balance in Partner Capital Accounts to Balance Sheet.
9)However in case of Retirement of partner same procedure should be
followed for division of expenses or income. Then Net Profit before
retirement should be ascertained and transferred to Old Partners
Capital Accounts. If Balance in Retiring Partners Capital A/c
transferred to Loan A/c, Retiring Partners Loan A/c may carry interest.
Calculate the Interest and debit it to P & L A/c in II colum n (i.e. After
Retirement). Net Profit after retirement should be transferred to
Continuing Partners Capital A/c in new profit sharing ratio. Same
procedure should be followed in case of death of partner. However
balance in Capital A/c of Diseased Partne r should be transferred to
Executors Loan A/c and shown in the Balance Sheet on Liability Side.
2.8CHECK YOUR PROGRESS:
A.Fill in the Blanks
1.Wages paid for installation of Machinery must be debited to ____.
2.Reserves appearing in the Balance Sheet belongs to the _______.munotes.in

Page 18

183.If the Incoming Partner is bringing his share of Goodwill in Cash the
Journal Entries will be _________.
4.Variable expenses related to sales are to be divided in the _____ r atio.
5.Net Profit/Loss before admission should transferred to the _______
partners in their Old Profit Sharing Ratio.
B.State whether True or False
1.Outstanding Insurance is to be shown on the Assets Side of the
Balance Sheet.
2.When New Partner is admitted on the 1stday of year, division in Profit
and Loss A/c, Profit and Loss Appropriation A/c is required.
3.No Interest is payable to a New Partner before Admission.
4.Net Profit after admission of partner is transferred to all partner sin
Old Profit Sharing Ratio.
5.If any Interest is allowed on Retiring Partners Loan A/c such amou nt
of Interest is to be debited it to P & L A/c in After Retirement column.
C.Show both the effects of following adjustments and give the Journal
Entry.
1.In the Trial Balance Legal Expenses ar e Rs. 10,000.Legal Charges Rs.
5,000 paid are included in the Legal Expenses.
2.In the Trial Balance there are Purchases of Rs. 2,00,000 which
included purchase of Furniture of Rs. 20,000.
3.Goods costing Rs. 10,000 are lost by fire and Insurance Company
admit ted a claim of Rs. 8,000.
4.Trade Expenses accrued but not entered in the books amounted Rs.
2,500.
5.Bills Receivabl e includes a dishonored bill.
munotes.in

Page 19

193
PARTNERSHIP FINAL ACCOUNTS III
Unit Structure :
3.0 Objectives
3.1 Illustrations
3.0 OBJECTIVES
After studying the unit students will be able to solve the practical
problems related to Partnership Final Accounts.
3.1ILLUSTRATIONS
Illustration no .1[Admission of Partner]
Trial balance as on 31stDecember, 2013
Particulars Rs.Dr. Rs. Cr.
24,000
60,000
1,25,000
1,75,000
36,000
18,000
96,000
4,00,0003,00,000
75,000
35,000
12,000
12,000
1,00,000
2,00,000
2,00,000Gross Profit
Creditors
Bills Payable
Outstanding Expenses
Interest Received
A’s Capital
B’s Capital
C’s Capital (admitted 1stMay, 2013
Salaries
Advertisemen t
Stock
Debtors
Rent
Bad Debts
Cash & Bank Bal.
Fixed Assets
934000 9,34,000
A & B sharing ratio of 2: 1 Admitted C on 1stMay, 2013 and
agreed to share P & L in a ratio of 2:1:1. Sales before C admission were
1,00,000 out of total for the year Rs. 5 ,00,000.munotes.in

Page 20

20Depreciate Fixed Assets @ 10% p.a.
Provide interest on capital 6% p.a. You are required to prepare Final A/c
of the firm.
Solution:
Profit and Loss A/c
Dr. For the year ended 31stDecember, 2013 Cr.
Particulars 4 mths.
Rs.8 mths.
Rs.Particulars 4 mths.
Rs.8mths.
Rs.
8,000
12,000
12,000
3,600
13,333
15,06716,000
48,000
14,400
26,667
1,18,93360,000
4,0002,40,000
8,000To Salaries
To Advertisement
To Rent
To Bad Debts
To Dep. On Fixed
Asset s
To Net Profit (Bal.
C/d)
64,000 2,48,000By Gross Profit
By Interest
Received
64,000 2,48,000
Profit and Loss Appropriation A/c.
For the yea r ended 31stDecember, 2013
Dr. Cr.
Particulars 4 mths. 8 mths. Particulars 4 mths. 8 mths.
2,000
4,000
--
9,0674,000
8,000
8,000
98,93315,067 1,18,933 To Interest on Capital
A
B
C
To Net Profit
transferred A & B
In 2:1 ratio.
To New profit
transferred to A,B
& C in 2:1:1 ratio.
15,067 1,18,933By Net profit b/d
15,067 1,18,933munotes.in

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21Balance sheet
as on 31stDecember, 2013
LiabilitiesRs. Rs. Assets Rs. Rs.
6,34,000
75,000
35,000
12,0001,25,000
1,75,000
3,60,000
96,000Capital A
B
C
Creditors
Bills Payable
Outstanding Expenses1,61,511
2,39,756
2,32,733
7,56,000Closing Stoc k
Debtors
Fixed Assets
Less Dep.
Cash and Bank
Bal.4,00,000
40,000
7,56,000
Working Note:
Partners Capital A/c
Dr. Cr.
Particulars A B C Particulars A B C
1,61,511 2,39,756 2,32,7331,00,000
6,000
6,044
49,4672,00,000
12,000
3,023
24,7332,00,000
8,000
--
24,733To Bal.C/d
1,61,511 2,39,756 2,32,733By Bal. B/d
By Interest on
Capital
By Net Profit
(4 moths)
By Net Profit
(8moths)
1,61,511 2,39,756 2,32,733
Illustration -2 [Admission of Partner in between the year]
Trial Balance as on 31stDecember, 2013
Particulars Dr.
Rs.Cr.
Rs.
Gross Profit
Salaries
Rent
Printing and Stationery
Bad Debts
Discount
Sales Commission
Sundry Debtors
Sundry Creditors
Bills Receivable and Bills Payable
Land and Building
Plant and Machinery36,000
12,000
9,000
18,000
30,000
2,10,000
1,20,000
2,00,000
1,50,0003,60,000
24,000
40,000
35,000munotes.in

Page 22

2224,000
1,00,0001,00,000
1,50,000
2,00,000A’s Capital
B’s Capital
C’s Capital [ 1stJuly, 2013]
Advertisement
Bank Fixed Deposits
9,09,000 9,09,000
Adjustments: -
1)A and B sha ring profit & losses in the ratio of 2:1 admitted C on 1st
July, 2013 and agreed to share in the ratio of 2:1:2.
2)As per partnership deed (old and New) partners were entitled to
interest on capital @ 6% p.a. A’s remuneration Rs. 12 ,000 p.a. and C
Rs. 20 ,000 p.a. w.e.f. 1stJuly 2013
3)Depreciate land and bldg by 5%. Plant and machinery by 20% p.a.
4)Plant includes, plant worth Rs. 50 ,000 purchased on 1stJuly, 2013
5)Fixed Deposits carry interest at 12% p.a. from 1stOct 2013
6)Sales up 30thJune, 2013 amounted to Rs. 2 ,00,000 out of total sales for
the year 5 ,00,000.
You are required to prepare P and L A/c, P and L Appropriation
A/c for the year ended 31stDecember, 2013 and Balance Sheet as on 31st
December, 2013.
Solution:
Profit and Loss A/c
Dr. For the year ended 31stDecember, 2013 Cr.
Particulars 1J a nt o
30 June1J u l yt o
31 Dec.Particulars 1J a nt o
30 June1J u l y
31 Dec.
18,000
6,000
4,500
7,200
12,000
9,600
5,000
10,000
81,30018,000
6,000
4,500
10,800
18,000
14,400
5,000
15,000
1,41,7001,44,000
9,600
__2,16,000
14,400
3,000To Salaries
To Rent
To Printing &
Stationery
To Bad Debts
To Sales Commission
To Advertisement
To Depreciat ion On:
Land & Bldg
Plant & Machinery
To Net Profit c/d
1,53,600 2,33,400By Gross Profit
(2:3 ratio)
ByDiscount
By Interest on
F.D.
(from 1stOct
2001)
1,53,600 2,33,400munotes.in

Page 23

23Profit & Loss Appropriation A/c
Dr. For the year ended 31stDecember, 2013 Cr.
Particulars 1 Jan to
30 June1 July to
31 Dec.Particulars 1J a n
to
30
June1 July
31 Dec.
3,000
4,500
--
6,000
--
67,800
--3,000
4,500
6,000
6,000
10,000
--
1,12,20081,300 1,41,700To Interest on Capital
A
B
C
To Partners Salary
A
C
Tonet profit transferred to Cap.
Upto 30thJune A & B in 2:1
From 1stJuly A, B, C, in 2:1:2
81,300 1,41,700By Net
Profit b/d
81300 1,41,700
Balan ce Sheet
As on 31stDecember, 2013
Liabilities Rs. Rs. Assets Rs. Rs.
2,00,000
10,000 2,08,080
2,04,040
2,60,880 1,50,000
25,000
1,00,000
3,0006,73,000
40,000
35,0001,90,000
1,25,000
2,10,000
1,20,000
1,03,000Partners Capital A/c
A
B
C
Sundry Creditors
Bills Payable
7,48,000Land & Building
Less: Depreciation
Plant and Machinery
Less: Depreciation
Sundry Debtors
Bills Receivable
Bank Fixed Deposits
Add: Interest Accrued
7,48,000
Partners Capital A/ c.
Dr. For the year ended 31stDecember, 2013 Cr.
A B C Particulars A B C
To Bal. carried to
Balance Sheet
2,08,080 2,04,040 2,60,880By Bal. B/d
By Cash & bank
By Interest on
Capital
By Salaries
By Net Profit
upto 30thJune
2008
from 1stJuly1,00,000
--
6,000
12,000
45,200
44,8801,50,000
--
9,000
--
22,600
22,4402,00,000
6,000
10,000
44,080
2,08,080 2,04,040 2,60,880 2,08,080 2,04,040 2,60,880munotes.in

Page 24

24Illustration 3 [Admission of Partner]
Rana and Balu were partners sharing profits and Losses in the ratio
of 3:2 with effect from 1 -10-2013 kaka joins as a third partner. The new
profit sharing ratio was 2:2:1
The following is their trial balance as on 31 -3-2014
Particulars Debit
Rs.Credit
Rs.
15,000
10,000
5,000
30,000
9,00,000
1,40,000
2,00,000
60,000
14,000
6,26,000
3,50,000
--3,00,000
2,00,000
1,50,000
--
14,00,000
--
--
--
--
2,50,000
--
50,000Drawing & Capital -Rana
-Balu
-Kaka
Opening Stock (1 -4-2013)
Purchases & Sales
Wages
Furniture
General Exp.
Selling Exp.
Debtors & Creditors
Cash & Bank Balance
Amount brought by kaka (for his share of Goodwill)
23,50,000 23,50,000
Other Information:
(a) Stock on 31 -3-2014 was ₹1,80,000
(b) Purchases from 1 -4-2013 to 30 -9-2013 we re₹ 4,00,000.
(c) Sales from 1 -4-2013 to 30 -9-2013 were ₹ 6,00,000
(d) Wages from 1 -4-2013 to 30.09.2013 were ₹60,000.
(e) Stock on 30 -9-2013 was ₹80,000.
(f) Furniture worth ₹1,00,000 was Purchased on 1 -1-2014.
Write off depreciation on F urniture at 20% p.a.
(g) Interest on Partner’s Capital is to be provided at 12% p.a.
(h) No interest is to be charged on Partner’s Drawings.
You are required to prepare: -
(i) P & L A/c and P & L Appropriation A/c with columns for
(01-4-2013 to 30 -9-2013) and (01.10.2013 to 31.03.2014).
(ii) Balance sheet as on 31 -03-2014
[M.U. Apr., 03] andmunotes.in

Page 25

25Solution:
(In the book of Rana, Balu & Kaka)
Trading and P & L Appropriation A/c.
For the year ended 31 -3-2014
Dr. Cr.
Particulars1-4-13
to
30-9-131-10-13
to
31-3-14Particulars1-4-13
to
30-9-131-10-13
to
31-3-14
30,000
4,00,000
60,000
1,90,00080,000
5,00,000
80,000
3,20,0006,00,000
80,0008,00,000
1,80,000To Opening Stock
To Purchases
To Wages
To Gross profit
6,80,000 9,80,000By Sales
By Closing stock
6,80,000 9,80,000
30,000
6,000
10,000
1,44,00030,000
8,000
15,000
2,67,0001,90,000 3,20,000To General Exp. (2)
To Selling Exp. (2)
To Depre. Furniture (3)
To Net Profit c/d
1,90,000 3,20,000By Gross Profit b/d
1,90,000 3,20,000
18,000
12,000
--
68,400
45,600
--18,000
12,000
9,000
91,200
91,200
45,6001,44,000 2,67,000 To Interest on Cap.12%
Rana
Balu
Kaka
To Partners Capital A/cs
Rana (3/5) (2/5) =1,59,600
Balu (2/5) (2/5) = 1,36,800
Kaka ( -)( 1 /5) = 45,600
1,44,000 2,67,000By Net Profit b/d
1,44,000 2,67,000
Dr. Partners Capital A/c Cr.
Particulars Rana
Rs.Balu
Rs.Kaka
Rs.Particulars Rana Balu Kaka
15,000
5,30,60010,000
3,50,8005,000
1,99,6003,00,000
--
36,000
50,000
1,59,6002,00,000
--
24,000
--
1,36,800--
1,50,000
9,000
--
45,600To Drawings
To Balance
C/d (Bal. fig)
5,45,600 3,60,800 2,04,600By Balance b/d
By Bank (1)
By Interest (1)
(d)
By Goodwill
By P & L Appr.
5,45,600 3,60,800 2,04,600
Balance Sheet as on 31 -3-2014
Liabilities Rs. Assets Rs.
10,81,000
2,50,0001,75,000
6,26,000
1,80,000
3,50,000Partners CapitalRana 5,30,600Balu 3,50,800
Kaka 1,99,600
Creditors
13,31,000Furniture 2,00,000Less: Dep. 25,000
Debtors
Stock
Cash & Bank
13,31,000munotes.in

Page 26

26Note : -(1) Sacrifice Ratio (Old Partners)
Profit -Share R atio Rana Balu Kaka
(a) Old 3: 2
i.e.3525(b) New 2 : 2 : 1
i.e.252515(c) Sacrifice = (a) –(b)1515(d) Therefore, Kaka has to pay Rana on account of Go odwill no entry is
Passed, since Interest on Capital is calculated on Rs. 1, 50,000 kaka
for 6 months
(2)Allocation of Expenses Basis
(a) General Expenses TIME
(b) Selling Expenses SALES
(3) Depreciation on Furniture
Depreciation @ 2 0% p.a.
Furniture A/c Rs Upto 1 -10-13 After 1 -10-13 Total
Opening Bal. (1 -04-13) (Bal. fig) 1,00,000 10,000* 10,000* 20,000*
Addition 1 -1-09 1,00,000 -- 5,000** 5,000**
Closing Bal. (31 -3-14) 2,00,000 10,000* 15,000 25,000 munotes.in

Page 27

27Illustration : 4
[Admission of Partner]
The following is the Trial Balance of a firm as on 31stDecember, 2013.
Debit Rs. Credit Rs.
1,56,000
2,400
24,000
12,000
12,000
12,000
27,000
16,500
2,100
4,500
6,750
1,00,000
3,250
8,000
2,500
25,000
50,000
36,00030,000
30,000
30,000
2,94,000
2,000
8,800
20,000
76,500
8,700
5,00,000 5,00,000Purchases
Return Inward
Stock
Drawings:
Sonu
Kalu
Motu
Salary
Off. Exp.
Bad Debts
Carriage Inwards
Carriage Outwards
Debtors
Bills Receivables
Bank Balance
Cash Balance
Investment
Premises
machineryCapital A/c:
Sonu
Kalu
Motu
Sales
Return Outward
R.D.D.
Bank Loan
Creditors
Bills payable
On 1stJuly 201 3 Sonu retired and the following adjustments were agreed
upon:
a)Goodwill of Rs. 90,000/ -was brought into the books of accounts.
b)Furniture worth Rs. 20,000/ -was purchased on 31 -3-2013 but the
invoice was not recorded in the books.
c)Balance in sonu account a fter making all adjustments was to be
transferred to his Loan account carrying interest @ 16%.
d)Closing stock was valued at Rs. 42,000/ -.
e)Depreciate Machinery by 10%, Premises by 5% and Furniture by 5%
p.a.
f)Provide interest on capital at 10% p.a. Prepare T rading and Profit and
Loss Account for the year ended 31 -12-2013 and a Balance sheet as on
that date.
[Modified M.U. Apr.,05]munotes.in

Page 28

28Solution : (In the Books of Sonu, Kalu, & Motu)
Trading, P & L and P & L Appropriation. A/c
Dr. for the year ended 31stDec. 2013 Cr.
Particulars Rs. Particulars Rs.
24,000
1,54,000
4,500
1,51,10 0
3,33,600
27,000
16,500
2,100
6,750
6,850
91,9002,91,600
42,000
3,33,600
1,51,100
1,51,100 1,51,100To Opening Stock
To Purchases 1,56,000
Less: Returns (2,000)
To Carriage Inward
To GP c/d
To Salary
To Office Expenses
To Bad Debts
To Carriage Outward
To Deprecation
Machinery 3,600
Premises 2,500
Furniture 750
To Net ProfitBy Sales 2,94,000
Less: Returns (2,400)
By Closing Stock
By Gross Profit
HY1
Rs.HY2
Rs.HY1
Rs.HY2
Rs.
1,500
1,500
1,500
13,818
13,816
13,816--
1,500
1,500
5066
18,942
18,942By Net Profit
(91,900 X ½) 45,950 45,950To Interest on Capital
Sonu 1,500=
Kalu 3,000=
Motu 3,000=
To Interest A’s Loan -
(63,317 x 16% x 6 mths)
To Net Profit
Transfer to Capital A/cs.
A1 3 , 8 1 7 =
B3 2 , 7 5 8 =
C3 2 , 7 5 8 =
45,950 45,950 45,950 45,950
i) Half year, HY1 = 1stJan. 2013 to 30 June 2013.
HY2 = 1st July 13 to 31stDecember, 2013.
ii) It is assumed that monthly sales were uniform throughout the year.
Balance Sheet As on 31stDec., 2013munotes.in

Page 29

29Liabilities Rs. Rs. Assets Rs. Rs.
20,000
96,500
8,700
68,384
1,67,516Cash
Bank
Debtors
Less: R.D.D
B/R
Closing stock
Investment
Premises
Less:
Depreciation
Machinery
Less:
Depreciation
Furniture
Less:
Depreciation
Goodw ill2,500
8,000
91,200
3,250
42,000
25,000
47,500
32,400
19,250
90,000Bank Loan
Creditors
Add: Purchase of
Furniture
Bill payable
Sonu’s Loan A/c
Add: O/s Interest
Capitals:
Kalu
Motu76,500
20,000
63,318
5,066
83,758
83,758
3,61,1001,00,000
8,800
50,000
(2,500)
36,000
(3,600)
20,000
(750)
3,61,100
Capitals A/c
Dr. Cr.
Particulars Sonu Balu Kaka Particulars Sonu Balu Kaka
12,000
63,31812,000
83,75812,000
83,758By Balance b/d
By Goodwill
By Int. on
capital
By P/L A/c30,000
30,000
1,500
13,81830,000
30,000
3,000
32,75830,000
30,000
3,000
32,758To Drawing
To Loan A/c
75,318 95,758 95,758 75,318 95,758 95,758
Illustration –5 [Admission of a partner]
A and B were partners in business sharing profit and losses, A two -
third and B one -third. Interest on Fixed Capi tal was credited @ 5% p.a.
No. interest was charged on drawings. Accounts were made upto 31st
March of each year.
On January 1, 2014 C was admitted as partner and from that date
all P and L were to be shared, A six -tenth B three -tenth, C one -tenth.
Before ascertaining the partners shares of P and L C was to be credited
with a salary at the rate of Rs. 6000 p.a. Provisions regarding interest on
capital and drawings remained unaltered.
It was agreed that C’s total share of profits including his salary an d
interest on capital, should be guaranteed by A at minimum rate of Rs.
15000 p.a. Any apportionment of profit for a particular period should be
made as to gross profit on the basis of sales and as to expenses, with the
expectation of general expenses on the basis of time.
The Trial Balance extracted from the books on 31stMarch 14 was
as follows -munotes.in

Page 30

30Particulars Dr. Cr.
30,000
15,000
3,000
10,000
24,000
2,22,000
48,000
10,400
24,000
2,200
9,600
20,000
19,80048,000
24,000
8,000
4,000
3,000
3,36,000
15,000Capital Account: A
B
C (cash paid in Jan 1st,2 0 1 4 )
Current Account: A
B
C
Delivery Van at cost
Pro. For Dep. thereon at 31stMarch, 2014
Furniture and Fittings at cost
Pro. For Dep. thereon at 31stMarch, 2014
Sales (Nine months, to Dec 31st)R s .2 , 4 0 , 0 0 0 / -
Purchases
Stock Mar ch 31st2013
General Exp. (9 months To Dec. 2013 Rs. 4,550)
Salaries
Heating and Lighting
Rent and Rates
Creditors
Debtors
Balance at Bank
4,38,000 4,38,000
On 31stMarch, 2014 the stock was valued at Rs. 47000, rates paid
in advance amounted to Rs. 600; Rs. 800 is to be provided for electricity
consumed to that date.
Included in the sundry de btors was an amount of Rs. 6000 for
goods invoiced on sale or return on 1stFebruary 2014 which were still
unsold on 31stMarch 2014. The cost of these goods which were not
included in the stock was Rs. 3000.
Depreciation is to be provided @ 20% p.a., o n the cost of the
delivery van at 2 ½ % p.a., on the cost of furniture and fittings.
You are required to prepare: -
(a) Trading and P and L A/c for the year ended 31stMarch 2014 and
(b) Balance Sheet as on that date: Ignore Taxation.munotes.in

Page 31

31Solution: -
M/s A, B and C
Trading and P and L Account for the year ended
31stMarch 2014
Dr. Cr.
Particulars Rs.
Amt.Particulars Rs.
Amt.Rs.
Amt.
48,000
2,22,000
1,10,00047,000
3,0003,30,000
50,000To Opening Stock
To Pur chases
To Gross Profit c/d
3,80,000By Sales
By Stock in hand:
With Customer
3,80,000
Upto Dec.
31st2013
Rs.1stJan 14
31stMar.
14
Rs.Upto Dec.
31st2013
Rs.1stJan.
14
31st
Mar. 14
Rs.
18,000
4,550
2,250
6,750
1,500
450
46,5006,000
5,850
750
2,250
500
150
14,50080,000 30,000 To Salaries
To General Exps.
To Heating and Lighting
To Rent and Rates
To Depreciation on: -
Delivery Van
Furniture & fixtures
To Net Profit c/d
80,000 30,000By Gross
Profit
(240:90)
80,000 30,000
1,800
900
29,200
14,600600
300
100
1,500
7,200
3,600
1,20046,500 14,500 To Interest on Capital: -
A
B
C
To Salary to artners C
To Profit: -
A2/36/10
B1/33/10
C-1/10
46,500 14,500By Net
profit b/d
46,500 14,500
Note : Rs. 6000 goods with customer on approval basis have been
deducted both sales and debtors.munotes.in

Page 32

32Balance Sheet as at 31stMarch, 2014
Liabilities Rs. Assets Rs.
80,000
13,000
15,000
8004,000
20,400
50,000
14,000
19,800
600Capital Account: -
A
B
C
Current Account: -
A
B
C
Creditors
Expenses UnpaidRs.
48,000
24,000
8,000
7,850
4,400
750
108800Fixed Assets:
Delivery Van cost
Less: Depreciation
Furniture and
Fixtures cost
Less: Depreciation
Current Assets:
Stock in hand with
customer
Debtor
Cash at Bank
Prepaid RatesRs.
10,000
6,000
24,000
3,600
108800
Partners Current Account
Dr. Cr.
Particulars A B CParticulars A B C
30,000
950
7,85015,000
4,4003,000
7502,400
29,200
7,2001,200
14,600
3,600100
1,500
--
1,200
950To Drawings
To Partner c
(to Make up
Rs. 3750 for
Mths)
To Balance
C/d
38,800 19,400 3,750By Interest
By Salary
By Net Profit
Upto 31 -12-
2014
By Net Profit
After Jan 1st
By C/A’s A/c
38,800 19,400 3,750
Illustration –6 [final A/c of professional firm]
Dr. Gandhi and Dr Gujar were partners (sharing P and L in 3:2
ratio). On 1 -10-2013 they admitted Dr. Jani as a partner. Dr. Jani brings
Rs. 40000 as Goodwill for his 1/5thshare.
The trial balance on 31 -12-2013 was as follows: -munotes.in

Page 33

33Particulars Dr. Cr.
15,000
10,000
1,80,000
72,000
21,000
40,000
1,02,000
60,00060,000
40,000
40,000
10,000
3,00,000
50,000Drawings and Capital
Dr. Gandhi
Dr. Gujar
Jani (Goodwill brought on 1 -10-2013)
Client’s deposits received
Equipments and furniture
Office and administration expenses
Rent
Salaries
Cash and Bank
Fees earned
Provisions against out stand ings fees) 1 -1-
2013)
Outstanding Fees (on 31 -12-2013)
5,00,000 5,00,000
Adjustments: -
1)Provide 10% depreciation on Equipment an d Furniture.
2)The business has handled 50% more work in each of the months of
the last quarter compared with the previous months.
3)Outstanding Fees 31 -12-2013 includes Rs. 45000 for fees to be
collected for the period in the last quarter of 2013. All outsta nding
fees should be provided.
4)Rent has been increased by Rs. 500 p.m. from 1 -7-2013
5)A clerk was appointed at Rs. 1000 p.m. from 1 -9-2013
Prepare Final accounts for the year ended 31stDecember 2013
Solution: -
In the books of Dr. Gandhi, Dr. Gujar and Dr. Jani
Profit and Loss A/c.
For the year ended 31stDecember 2013
Dr. Cr.
Particulars Upto
30-9After
1-10Particulars Upto
30-9After
1-10
To Office and
Administration
To Rent (Note 1)
To salaries (Note 2)
To Depreciation on
equipments
And furniture54,000
15,000
28,000
13,50018,000
6,000
12,000
4,500
45,000By Fees earned (notes
3)
By Provision for
outstanding fees
(1.1.2013 Rs. 500000
Less : (31 -12-2012
Rs. 15000
(15000=60000 -
45000)2,000 00
35,0001,00,000munotes.in

Page 34

34To Provision for
outstanding fees
To Partners Capital
A/c (profit) (bal.
Fig.)
Dr. Gandhi (3/5 &
12/25)
Dr. Gujar (2/5 &
8/25)
Dr. Jani 5/2574,700
49,8006,960
4,640
2,900
2,35,000 1,00,000 2,35,000 1,00,000
Balance Sheet as at 31stDecember, 2013
Liabilities Rs. Rs. Assets Rs. Rs.
1,80,000
(18,000)1,50,660
1,00,440
2,900 2,54,000
10,000 60,000
(60,000)1,62,000
1,02,000
--Capital
Account: -
Dr. Gandhi
Dr. Gujar
Dr. Jani
Client Deposit
Received
2,64,000Equipment &
Furniture
Less:
Depreciation
Cash & Bank
Outstanding Fees
Less: Provision
2,64,000
Working Note:
Partners Capital A/c
Dr. Cr.
Particulars Gandhi Gujar Jani Particulars Gandhi Gujar Jani
15000
15066010000
10040040000
290060000
24000
8160040000
16000
5444040000
2990To Drawings
To Goodwill
To Balance c/d
(bal. Fig.)
165660 110440 42900By Bal. B/d
By Goodwill
By Profit
165660 110440 42990
(1) Rent 21,000
Less: Increased (500 x 6 mths 3,000
----------
Rent (without increase 18,000
======munotes.in

Page 35

35Therefore, Rent= 18000/12 Rs. 1500 per Mth.
(a) Rent (from 1 -1-2013 to 1 -9-2008)
1-1-2008 to 30 -6-2013 (1500 x 6 mths.) 9,000
1-7-2013 to 30 -9-2013 (2000 * 3 mths.) 6,000
-----------
Total 15,000
===== ==
(b) Rent (from 1 -10-2013 to 31 -12-2013
(2000* 3 mths.) 6,000
=======
(2) Salaries
Salaries 40,000
Less: Clerk appointed (1000 x 4 mths.) 4,000
Salaries (without appointment) 36,000
=====
Therefore, Salari es = Rs. 36000/12=Rs. 3000 per mth.
(a) Salaries (from 1 -1-2013 to 30 -9-2013)
1-1-2013 to 31 -8-2013 (3000 x 8 mths.) 24,000
1-9-2013 to 30 -9-2013 (4000 x 1 mths.) 4,000
-----------
Total 28,000
======
(b) Salaries (f rom 1 -10-2013 to 31 -12-2013) -----------
1-10-2013 to 31 -12-2013 (4000 x 3 mths.) 12,000
=======
(3) Fees Earned
Lets assume, average monthly work in first three quarters
be 2x per month. Therefore, average monthly work in last
Quarte r = 3x per months.
Work (01 -01-2013 to 30 -9-2013) = 2x for 9 mths. = 18x
Work (01 -10-2013 to 31 -12-2013) = 3x for 3 mths. = 9x
Therefore, Work upto 30 -9-2013 and after 01 -10-2013 is in
2:1.
(4) Goodwill Adjustment
As the new profit sharing ratio is not specified, the sacrifice
by old partners (Gandhi and Gujar) is in old profit sharing ratio
(i.e. 3:2). The entry passed is
Jani’s capital A/c……………Dr. 40,000
To Gandhi capital A/c 24,000
To Gujar Capital A/c 16,000
(5) New profit sharing ratio
(a) Partner Gandhi = 3/5 of (1 -1/5) = 12/25
(b) Partner Gujar = 2/5 of (1 -1/5) = 8/25
(c) Partner Jani = 1/5 = 5/25
Therefore, Gandhi : Gujar: Jani: 12:8:5munotes.in

Page 36

36Illustration –7 [Admission of A partner in between the year]
M/s Kunal & Co. having D eepak and Ram (sharing profits and
losses in 2:1) decided to admit Amit, as partner from 1 -1-2014. The new
profit -sharing of the partner was Deepak: six -tenth; Ram : three -tenth; and
Amit: One -tenth.
According to the partnership deed, interest @ 10% p.a ., is payable
on fixed capital: No interest was charged on drawings. The capital should
be prepared on 31stMarch each year Deepak and Ram admitted Amit on
following terms and conditions: -
(1) Amit should get salary of Rs. 9000 p.a.
(2) Amit’s share of p rofits (including salary and interest on capital
should be guaranteed by Deepak at a minimum of Rs. 16000 p.a.,
from the date of admission.
(3) Apportionment of expenses should be made on the basis average
sales, except from miscellaneous expenses and admi nistrative
expenses.
(4) Goodwill of the firm was valued at Rs. 100000 and it should be
raised in the books.
The Trial balance on 31stMarch, 2014 was as follows: -
Particulars Dr.
Rs.Cr.
Rs.
60000
30000
6000
20000
48000
400000
60000
90000
20000
44000
17000
11000
1000096000
48000
16000
8000
18000
610000
20000Current and Capital Accounts:
Deepak
Ram
Amit (Capital Brou ght on 14 -2-2014)
Cost and Provision for Depreciation
On Office furniture
On Delivery Vans
Purchases and Sales
Debtors and Creditors
Stock on 1 -4-2013
Miscellaneous expenses (upto 31stDecember Rs.
11900)
Rent, Rates and Taxes
Carriage outward
Cash & Bank
Goodwill
816000 816000
In addition following information is to be considered: -
1)Stock on 31 -3-2014 Rs. 34000.
2)Rent, Rates and Taxes outstanding on 31 -3-2014 Rs. 4000.
3)Carriage outward paid in advance on 31 -3-2014 Rs. 2000.munotes.in

Page 37

374)Sales and Debtors includes goods sent on “sales or return” basis on 01 -
03-14 of Rs. 25000 (Cost Rs. 15000) On 31 -3-14.
(i)50% of goods accepted by customers.
(ii)10% of goods no intimation from customer but period
of approval expired on 25thMarch 2014.
(iii)Balance goods, period of approval not expired.
5)Average monthly sales for the months of January, March, May to July,
Septembe r to December were half, compared to average monthly sales
of the remaining months.
6)On 31 -3-2014 partners decided that partners fixed capital should be in
8 (Deepak); 4 (Ram); 1 (Amit). For this purpose, Amit’s capital
should be considered as base. Th e shortfall in case on Ram, should be
adjusted through introduction of cash by Ram. However shortfall of
Deepak should be transferred to his current a/c. The necessary cash
was brought by Ram on 31 -3-2014 for which no entry was passed.
7) Provide 10% de preciation on Office furniture and on delivery vans.
Prepare Trading and Profit and Loss Account for the year ended
31stMarch, 2014 and the Balance Sheet on that date.
Solution :
In the books of Kumar and Co. Trading Account
for the year ended 31stMarch, 2014
Dr. Cr.
Particulars AMT. Particulars Amt.
610000
10000
34000
600090000
400000
150000600000
40000To Opening Stock
To Purchases
To Gross Profit (bal.
Fig.)
640000By Sales
Less: Sales or Return
By Closing Stock
Add: Sales or Return
at cost
640000 munotes.in

Page 38

38Profit and Loss A/c
Dr. For the year ended 31stMarch 2014 Cr.
Particulars Upto 31 -12Rs.After 1 -1
Rs.Particulars Upto 31 -12Rs.After 1 -1
Rs.
11,900
36,000
11,000
900
2,200
48,0008,100
12,000
4,000
300
800
14,8001,10,000 40,000
1,10,000 40,000 1,10,000 40,000
--
7,200
3,600
--
24,800
12,400
--2,250
2,400
1,200
200
4,575
2,625
1,55048,000 14,800To Misc. E xp
To Rent, Rates &
Taxes
(44000 + 4000)
To Carriage
Outward
(170000 -2000)
(sales)
To Dep. On
Furniture (time)
To Dep. On
Delivery Van
(sales)
To Net Profit (bal.
Fig.)
Total Rs.
To Salary
(9000*3/12)
To Interest on
Capital:
@1 0 %o n9 6 0 0 0
@1 0 %o n4 8 0 0 0
@1 0 %o n1 6 0 0 0
for 1.5 mths.
(from 14 -2-2014)
To Partners Capital
A/c (profit)
Deepak( 2/3 and
note 4)
Ram 1/3 and
3/10)
Amit ( -)a n d
note 4
Total Rs.
48,000 14,800By Gross Prof it b/d
(sales)
By Net Profit b/d
48,000 14,800munotes.in

Page 39

39Partners Current Accounts
Particulars Deepak Ram Amit Particulars Deepak Ram Amit
60000
32000
697530000
--
198256000
--60000
9600
2937530000
4800
150252250
200
1550
2000To Bal. B/d
To Deepak’s
Capital
Account (note
5).
To Bal. C/d
Total Rs.
98975 49825 6000By Goo dwill
(2:1) [note 6]
By Salary
By Interest on
Capital
By Profit
By Bal. C/d
Total Rs.
98975 49825 6000
Balance Sheet
As on 31stMarch 2014
Liabilities AMT. AMT. Assets AMT. AMT.
20000
9200
128000
64000
1600048000
21000
60000
10000
6975
19825 11000
16000
10000
90000
34000
6000Partners Capital
A/c
Deepak
Ram
Amit
Partners Current
A/c
Deepak
Ram
Creditors
Outstanding Rent,
Rates and Taxes208000
26800
20000
4000Office Furniture
Less: Pro. For Dep.
(note 3)
Delivery Vans
Less: Pro. For De p.
(note 3)
Debtors
Less: Sales of Return
Cash and Bank
Add: Brought by
Ram
Goodwill
Add: Raised
Stock
Add: sales or Return
Carriage -outward
paid in adv.
Partners Current A/c
Amit10800
27000
50000
27000
100000
40000
2000
2000
258800 258800munotes.in

Page 40

40Working Note: -
1) Sale or Return Goods:
(a) 50% of the goods accepted by the customer and 10% of the goods
for which no intimation is received but period of approval has
expired should be considered as a sale. These goods are already
include in sales and debtors & therefore no adjustment entry is
required for 60% of the goods.
(b) Balance 40% (i.e . 100% -50%-10%) goods, for which period of
approval is not expired cannot be considered as sale. Therefore
(i) Cancel sales (i.e. less from sales and less from debtors) =
40% for Rs. 25000=Rs. 10000
(ii) Include in closing stock = 40% of 15000 (cost) = Rs. 6000
(i.e., at cost and market value, whichever is less).
2) Sales ratio:
Let us assume sales for remaining months=2x each.
Sales for specified months = x each.
Sales from 1 -4-2008 to 31 -12-2008 (9 months)
Apr May Jun July Au g Sep Oct Nov Dec Total
2x +x +x +2x +x +x +x +x +x =11x
Sales from 1 -1-2009 to 31 -3-2009 (3 months)
Jan Feb Mar Total
X +2x +x =4x
Therefore, Sales 9 months : months :11:4.
(3) Depreciation :
Meth od of depreciation is not specified and therefore dep. is
provided on reducing balance method.
Particulars Off.Fumit. Delivery van
20,000
8,00048,000
18,000
12,000
1,20030,000
3,000Cost
Less: Pro For Dep. (1 -4-2013)
W.D.V.
Less: Depreciation @ 10%
W.D.V. o n 31-3-2014 10,800 27,000
(4) Gurantee of Profit (by Deepak to Amit)
Gurantee (for 3 months i.e, 01 -01-2013 to 31 -03-2013)
Total amount receivable by Amit
Salary (9000 x 3/12) 2250
Add: Interest on capital (on Rs. 16000 @ 10% from
14.2.2009 200
Add: Profit [1/10 of (14800 -6050)] 875
3325
Add: Shortfall to be borne by Deepak (Bal.Fig) 675munotes.in

Page 41

41Total amount receivable by Amit 4000
Therefore, Tota l profit Amit=875+675=Rs. 1550.
Profit of Deepak :
Profits [6/10 of (14800 -6050)] 5250
Less: Shortfall of Amit 675
Total profit of Deepak 4575
(5) Fixed capital adjustments :
Fixed capital of Amit 16000
Therefore, Fixe d capital of Deepak (16000x8/1) 128000
Therefore, Fixed capital of Ram (16000x4/1) 64000
(a) Shortfall of Deepak
Shortfall of Rs. 32000 (i.e, 128000 -96000) should be
debited to Deepak’s current account.
(b) Shortfall of Ram
Shortfall of Rs. 16 000(i.e., 64000 -48000) should be
brought in cash by Ram.
Therefore, cash balance increased by Rs. 16000
(6) The Journal Entry to raise Goodwill is
Goodwill A/c ------- Dr.
To Deepak’s Current A/c (⅔)
To Rams Current A/c(⅓)90000
60000
30000
Illustration : 8
Following is the Trial Balance of a firm as on 31stDec. 2013
Debit Rs. Credit Rs.
15,000
7,500
1,500
10,500
1,10,000
25,000
5,200
12,000
5,900
31,000
10,90024,000
12,000
5,000
1,80,000
13,500Drawing : X
Y
Z
Furniture
Purchases
Stock
General Expenses
Salary
Rent & Rates
Debtors
Bank
2,34,500Capita’s X
Y
Z (including Goodwill)
Sales
Creditors
2,34,500
Adjustments:
1) X and Y were partners sharing profits and losses equally.
2) Mr. Z was admitted to the partnership on 1stJuly, 2013.
3) On 31stDecember, 2013 stock was valued at Rs. 23,500.
4) Rent & Taxes paid in advance Rs. 900.munotes.in

Page 42

425) General Exp. Were outstanding Rs. 750.
6) Depreci ate Furniture @ 10% p.a.
7) Share of Goodwill of new partner was valued at Rs. 1,000 on 1st
July, 2013 and is yet to be adjusted
8) Interest on capital to be charged at the rate of 10% p.a.
You are required to prepare Trading, Profit and Loss Account for
the year ended on 31stDecember, 2013 and Balance sheet as of
that date.
[Modified, M.U. Oct., 08]
Solution :
(In the Books of X, Y, Z)
Trading and Profit and Loss A/c.
For the year ended 31stDec., 2013
Dr. Cr.
Particulars Rs. Partic ulars Rs.
25,000
1,10,000
68,5001,80,000
23,500
2,03,500 2,03,500
5,950
12,000
5,000
1,050
44,50068,500To Opening Stock
To Purchases
To Gross Profit c/d
To General Expenses 5,200
Add: Outstanding 750
To Salary
To Rent & Taxes 5,900
Less: Prepaid 900
To Depreciate Furniture
@1 0 %p . a
To Net Profit (full y ear)
68,500By Sales
By Closing Stock
By Gross Profit
68,500
Dr. P & L Appropriation A/c (Year 2013) Cr.
Jan-
June
Rs.July-
Dec
Rs.Jan-
June
Rs.July-
Dec
Rs.
1,200
600
10,225
10,225
--1,200
600
200
6,750
6,750
6,750To Interest on Capital
A/cs.
A (full year)
B (full year)
C( 6m o n t h s )
To Balance Profit
A
B
C(b)20,450 20,250By P & L
(50% of 44,500
each)
[N.P. B/d]22,250 22,250munotes.in

Page 43

4322,250
19,375
18,175
6,95022,250(a)+(b)
Interest + Profit
A( 1 1 , 4 2 5 + 7 , 9 5 0 )
B( 1 0 , 8 2 5 + 7 , 3 5 0 )
C ( Nil + 6,950)22,250
=
=
=
44,50022,250
44,500
Partners Capital A/c
Dr. Cr.
Particulars A
RS.B
Rs.C
Rs.Particulars A
Rs.B
Rs.C
Rs.
15,000
--
28,8757,500
--
23,1751,500
1,000
9,45024,000
500
19,37512,000
500
18,1755,000
--
6,950To Drawing
To Goodwill
To Balance C/d
43,875 30,675 11,950By Balance b/d
By Goodwill
By P & L Appro.
43,875 30,675 11,950
Balance S heet of A, B, & C
As at 31stDec., 2013
Liabilities Rs. Assets Rs.
61,500
750
13,500Furniture 10,500
Less: Deprn. (1,050)
Prepaid Rent
Debtors
Bank
Closing Stock9,450
900
31,000
10,900
23,500Capitals:
A2 8 , 8 7 5
B2 3 , 1 7 5
C 9,450
Outstanding Exp.
Sundry Creditors
75,750 75,750
Note :
In the absence of any information / Instruction, it is assumed that
(a) Profit Sharing Ratio before and after Admission of C as a partner is
equal
(b) Interest on Drawings is to be ignored.
(c) Sales and other expenses were uniform throughout year.
ILLUSTRATIONS: 9 [Admission of partner, when stock on date of
admission given]
A, B were sharing in the ratio of 3:2 admitted C as on 1stOct. 2013 for 1/6
sharemunotes.in

Page 44

44Trial Balance as on 31stMarch 2014 was as under.
Particulars Dr. Rs. Cr. Rs.
40,000
250,000
20,000
30,000
12,000
2,00,000
1,10,000
4,00,000
50,000
6000
1,50,000
28000
--
--
540002,00,000
1,50,000
2,00,000
595000
40,000
1,50,000
15,000Capital A/c
A
B
C( 1 . 1 0 . 2 0 1 3 )
Stock (01.04.13)
Purchases (upto 30.09.13 Rs. 1,00,000]
Sales (upto 30.09.13 Rs. 250000)
Salaries
Rent
Insurance (for the year 30.06.14)
Bills Receivable
Sundry Debtors / Sundry Creditors
Plant and machinery
Wages [upto 30.13.08 Rs. 20,000]
Commission [2% on sales]
Land & Building
Cash on bank
General Reserve (1.04.13)
Bank overdraft
Office Expenses
13,50,000 13,50,000
You are given following information
1) Stock as on 3 0thSept. 13 Rs. 60,000 and as on 31.03.14 Rs.
125000
2) Depreciate Land &Building @5% p.a. and Plant & Machinery
@20% p.a.
3) Plant includes, Plant costing Rs. 2, 00,000 purchased on 1stJan.
2014.
4) Salaries to Partner A -Rs.24, 000 p.a. & C Rs. 1,000 p. m.
5) Rent was increased by Rs. 2,000 p.m. from 01.10.13.
6) C’s Capital includes Rs. 40,000 brought in as his share in
Goodwill.
7) Fixed Capital of Partners should be Rs. 6,00,000 in their
Profit/Loss sharing ration.
Prepare final Accounts of the firm.munotes.in

Page 45

45Solutions:
In the books of M/s A, B, C, & Co.
Trading A/c Profit & Loss A/c for the year ended 31stMarch 2014
Dr. Cr.
Particular 1.4.13 to
30.9.13 (6
m) I1.10.13
to
31.3.14
II (6 m)Particulars 1.4.13
to
30.9.13
I1.10.08
to
31.3.14
II (6 m)
To Opening stock
To Purchases
To Wages
To Gross profit40000
1,00,000
20000
15000060000
150000
30000
230000By Sales
By closing stock250000
60000345000
125000
310000 470000 310000 470000
To Salaries
To Rent
To Insur ance
To Commission
To Office Expenses
To Depreciation
Land &Bldg.
plant & Machinery
To Net Profit b/d10000
12000
3000
5000
27000
3750
20000
6925010000
18000
6000
6900
27000
3750
30000
128350By Gross Profit
B/d150000 230000
150000 230000 150000 230000
Profit & Loss Appropriation A/c for the year ended 31stMarch 14
Dr.. Cr.
Particulars I II Particular I II
12000
--
57250
-12000
6000
-
11035069,250 128350 To Partners
Salaries A
C
To N.P. transfer
to A & B in 3:2
ratio
To N.P. transfer
to A,B,C in 3:2:1
ratio
69250 128350By N.P. B/fd.
69250 128350
Partner’s Capital A/c
Dr.. Cr.
Particulars A B C Particulars A B C
To Goodwill
To Partners
Current A/c
(Bal. fig.)
To Bal C/fd--
127525
300000--
85683
20000040000
84392
100000By Bal. B/d
By Gen. Res.
By Salaries
By Goodwill
By N. Profit Upto
30/6/08
A, B in 3:2 from 1
Oct. to A, B, C in
3:2:1200000
90000
24000
24000
34350
55175150000
60000
--
16000
22960
3678320000 0
--
6000
--
--
18392
427525 285683 224392 427525 285683 224392munotes.in

Page 46

46Working Notes :
1) New P.S. Ratio: C was admitted for 1/6 share
Bal. 1 -1/6=616=5/6to old partners
Partners in old ratio
A=3/5x5/6b=2/5x5/6 C=5/5x1/6
= 15 = 10 =5
A: B: C = 3: 2: 1
Balance Sheet as on 31stMarch 2014
Liabilities Rs. Rs. Assets Rs. Rs.
Partners Capital
A
B
C
Partners C/A
A
B
C
Sundry cre ditors
Bank O.D.
Commission
Payable300000
200000
100000
127525
85683
84392600000
297600
40000
15000
5900Land & Building
Dep.
Plant & Machinery
Less: Dep.
Sundry Debtors
Bills Receivable
Closing stock
Prepaid Insurance
Cash150000
(7520)
400000
50000142500
350000
110000
200000
125000
3000
28000
958500 958500
2) Rent Rs. 30,000 I II
Increase Rs. 2,000 p.m. from 01.01.13
2,000 x 3 -- 6000
Bal. Rent (30,000 -6,000)
= 24000 in Time Ratio 6m, 6m, 12000 12000
12000 18000
3) Insurance Rs. 12,000 p.a. from 1stJuly 13 to 30thJune 14. i.e.
Rs.1000 p.m.
I01 July 13 to 30 Sept. 13 i.e 3 months = 1,000 x 3 = 3,000
II10 Oct. 13 to 31stMar. 14 i.e. 6 months = 1,000 x 6 = 6,000
9,000
Prepaid from 1stApril to 30thJune 14 3000
4) Commission on sales @ 2% Rs.
ICommission = 2,50,000 x 2% = 5,000
IICommission= 3,45,000 x 2% = 6,900
11,900
Less paid (given in Trial Balance) 6,000
Outstanding com. Payable 5,900munotes.in

Page 47

475) Dep. On plant machinery @ 20% p.a.
i) On new plant purchased on 1.10.13 I II
2,00,000 x 20% x 3/12 10,000
ii) Bal Plant [400000 –200000]
200000 x 20% = 40000 in
Time Ratio 20,000 20,000
Total Depreciation 20,000 30,000
6) Closing Stock on 30/06/13 Rs. 60,000 becomes Opening Stock on
01.07.13.
Illustration : 10 [ retirement of partner in between the year]
X, Y & Z sharing in the ratio of 5:3:2 X retired on 1stOct. 2013 B & C
continue business sharing equally.
Following Balances are as on 31stDec. 2013
Particulars Dr.
Rs.Cr.
Rs.
40000
260000
20000
24000
10000
15000
4000
10000
200000
150000
326000600000
9000
200000
150000
100000Opening Stock
Sales
Discount
Purchases
Wages
Salaries
Rent
Bad Debts
Insurance
Sundry Expenses
Capiral’s AIC’s:
X’s
Y’s
Z’s
Land & Building
Plant & Machinery
Building Under construction
1059000 1059000
Adjustments:
1)Outstanding Salary Rs. 4000 & outstanding Rent Rs. 2000 to be
provided.
2)Sales upto X’s retirement amounted Rs. 400000.
3)As per Partnership deed:
a]Provide interest on capital @ 6% p.a
b]Partners salary x’s Rs. 20000 p.a. & z’s Rs. 500 per mth.
c]X was entitled for commission of 1% on net sales.
4)Closi ng Stock on 31stDec. 13 valued at Rs. 50000.
5)Depreciate Land & Building by 5% & Plant & Machinery 10%
p.a.munotes.in

Page 48

486)Balance due to Z on his retirement to be transferred to his loan a/c
carrying interest at 12% p.a.
Ascertain balance payable to Mr. A on 3 1 Dec. 2013.
Prepare Trading, P & L A/c for the year ended 31stDec. 2013 &
Balance Sheet as on 31stDec. 2013.
Trading a/c
For the year ended 31stDec. 2013
Dr. Cr.
Particulars AMT. AMT. Particulars AMT. AMT.
40000
260000
20000
330000600000
50000To Opening Stock
To Purcha ses
To Wages
To Gross Profit c/d
650000By Sales
By Closing Stock
650000
Profit & Loss A/C.
For the year ended 31stDec. 2013.
Dr. Cr.
Particulars 9m t h . 3m t h . Particulars 9m t h . 3m t h .
To Salaries (24000+
O/S-4000)
To Rent (10000+ O/S
2000)
To Bad Debts
To Insurance
To Sundry Expenses
To Depreciation on:
Building
Plant & Machinery
To Interest on Loan
(@ 12% p.a. on
Rs.284500) 3 mth.
To Net Profit c/d21000
9000
10000
3000
7500
7500
11250
--
1567507000
3000
5000
1000
2500
2500
3750
8535
79715By Gross Profit o/d
(in sales ratio 2 1)
By Discount220000
6000110000
3000
2,26,000 1,13,000 2,26,000 1,13,000
Profit & Loss Appropriation A/c.
for the year ended 31stDecember, 2013
Dr. Cr.
Particulars 9 mth. 3 mth. Particulars 9 mth. 3 mth.
To Interest on Capital
X
Y
Z
To Partners Salary:
X
Z
To A’s Commission
To Net Profit Transfer red to9000
6750
4500
15000
4500--
2250
1500
--
1500
--By Net Profit bid 156750 79715munotes.in

Page 49

494000
11300074465A,B,C in 5:3:2 ratio
B&Ce q u a l l y
156750 79715 156750 79715
Balance Sheet
As on 31stDec. 2013
Liabilities AMT AMT. Assets AMT . AMT.
230132
171833
284500
8535401965
293035
2000
4000190000
326000
135000
50000Partners capital A/c:
Y
Z
Z’s loan :
Bal. transferred from capital
Add. O/s Interest for 3 months
O/s Rent
O/s Salary
701000Land & Bldg.
Less: Depreciation
Bldg. Under
construction
Plant & Machinery
Less: Depreciation
Closing Stock200000
10000
150000
15000
701000
Partners Capital A/c
Dr. Cr.
Particulars X Y Z Particulars X Y Z
To X Loan a/c
(Bal
Transferred)
To Bal. B/d284500
----
230132 171833By Bal. B/d
By Interest on
Capital
By Salaries
By Commission
By Net Profit
(Upto Sep)
By Net Profit
(1 Oct to 31 Dec.)200000
9000
15000
4000
56500
--150000
9000
33900
37232100000
6000
6000
22600
37233
284500 230132 171833 284500 230132 171833
Working Notes: -
1] Time ratio ABC partners 1stJan. 2013 to 31stSep. 2013 = 9
months.
B & C partners 1stOct. to 31stDec. 2013 = 3 months.
Therefore time ratio = 3:1.
2] Sales ratio from 1stJan. 2013 to 30thSep. 2013 Rs. 400000.
Sales from 1stOct. 2013 to 31stDec. 2013 Rs. 200000
Therefore Sales ratio = 2: 1.
3] Salaries, rent, insurance, depreciation, sundry exp., are allocated on
time basis as these are related with time.munotes.in

Page 50

504] Gross Profit, discount received, bad debts allocated on sales basis
as these are related with turnover.
Illustration: 11 [Death of a Partner]
The Partnership agreement of T & Z provides that
(a) Profit & losses shall be shared equally.
(b) Interest at 5% p.a., shall be allowed on capital but no interest is to
be charged on drawings.
(c) On the death of one of the partner:
[1] The sur vivor shall pay out the interest of the deceased
partner & purchase his share.
[2] The value of the Goodwill shall be the profits of the
proceeding three years.
[3] The assets are to be taken on the date of death at their
value. T died on 1stApril 2014.
The stock on 31.3.13 was valued at Rs. 28740.
The following trial balance was extracted from the books as on 31stMarch
2014.
Particulars Dr.
Rs.Cr.
Rs.
4500
3500
7550
2630
114700
27490
5800
16360
490
26400
5520
2000
3750
2150040000
20000
163840
18000
350T’s Capital
Z’s Capital
T’s Drawings
Z’s Drawings
Salaries
Rent & Rates
Purchases
Stock (1.04.13)
Traveler’s Commission & Expenses
Wages
Sales
Sales Return
Sundry Debtors
Cash at Bank
Furniture & Fixtures
Sundry Creditors.
General Expenses
Discount
Plant & Machinery
2,42,190 2,42,190
The profits of the preceding three completed years to 30thSep. were Rs.
15000. Rs. 20000 and Rs. 13000 respectively.
Prepare Trading & P & L A/c & Balance Sheet as at 31stMarch
2014 & a stat ement showing the amount payable to the Executors of Tmunotes.in

Page 51

51Solution
M/s T & Z
Trading and P & L Account for the year ended 31stMarch 2014.
Dr. Cr.
Particulars AMT AMT. Particulars AMT. AMT.
163840
49027490
114700
16360
33540163350
28740
192090 192090
1000
500
6330
63307550
2630
3750
5800
1500
1266033540
350To Opening Stock
To Purchases
To Wages
To Gross Profi tc / d
To Salaries
To Rent & Rates
To General Expenses
To Traveler’s Commission &
Expenses
To Interest on Capital for 6
months
T
Z
To Net Profit transferred to
Capital A/c
T
Z
33890By Sales
Less: Sales Retur n
By Closing Stock
By Gross Profit b/d
By Discount
33890
Note: As Profit & Loss A/c is prepaid on date of dea th of partner T,
Therefore there is no need of preparing Profit & Loss A/c in two columns
i.e. Before Death and After Death of Partner
M/s T & Z
Balance Sheet as at 31stMarch, 2014
Liabilities AMT. AMT. Assets AMT. AMT.
40,000
1,000
6,330
47,330
4,500
20,000
500
6,330
26,830
3,50042,830
23,330
18,00021,500
2,000
28,740
26,400
5,520Capital: T
Add: Interest
Profit
Less: Drawings
Capital : Z
Add: Interest
Profit
Less : Drawings
Sundry Creditors
84,160Plant & Machinery
Furniture & Fixtures
Stock
Debtors
Bank
84,160munotes.in

Page 52

52Amount payable to Executor’s of T Rs.
Balance to his Capital A/c 42,830
His share in Goodwill 24,000
66,830
Note: -
Value of Goodwill 3 year’s profit
Total Value of Goodwill Rs. (15000+20000+13000)
Rs. 48,000
T’s share of Goodwill (1/2x 48,000) Rs. 24,000
Because Z has to purchase the share of T The journal entry will be:
Z’s Capital A/c ------------------------- Dr. 24,000
To T’s Capita lA / c 24,000
Illustration: -12 [Death of a Partner in between the year].
K, R & T were sharing in the ratio of 3:2:5 T died on 1stJuly 2013.
Business was continued & K & R were sharing equally same books of a/c
were continued and following.
Trial balance was extracted as on 31stMarch, 2014.
Particulars Dr.
Rs.Cr.
Rs.
18000
15000
9000
260000
300000
100000
200000
75000
15000
404000360000
6000
200000
270000
350000
150000
60000Gross Profit
Salaries
Rent
Insurance
Plant & Machinery
Land & Building
12% Investment
Interest on Investment
K’s Capital
R’s Capital
T’s Capital
Sundry Debtors/Creditors
Bills Receivable/Payable.
Cash
Stock
1396000 1396000
Additional Information:
1] Provide outstanding salary Rs. 2,000
2] Rent was paid Rs. 1,000 per month for the premises acquired on 1st
Oct. 2013.
3] Depreciate Land & Building @ 5% & Plant & Machinery 10% p.a.
4] Plant includes Plant costing Rs. 1, 00,000 acquired on 1stJan.
2014.munotes.in

Page 53

535] As per partnership deed:
a] Retiring partners or in case of death of partners balance
should be transferred to loan, Carrying Interest 18% p.a.
b] Goodwill valued Rs. 120000.
c] Provide interest on capital @ of 6% p.a.
6] Sales were Rs. 300000 upto 1stJuly out of total sales for the year
Rs. 1500000, Pr epare P & L A/c, P & L Appropriation A/c for the
year ended 31stMarch 2014 & Balance Sheet as on that date.
Solution: -
Profit and Loss A/c
for the year ended 31stMarch 2014
Dr. Cr.
Particulars 3m t h . 9m t h . Particulars 3m t h . 9m t h .
To Salaries (8000+ o/s 2000)
To Rent
To insurance
To Depreciation
Land & Building
Plant
To Int. on T’s executors loan A/c
To Net Profit C/d5000
2250
3750
4000
--
6000015,000
6000
6750
11250
14500
59279
184221By-Gross Profit b/d
(in sales r atio 1:4)
By income from
Investment72000
3000288000
9000
75000 2,97,000 75000 297000
Profit & Loss Appropriation A/C.
for the year ended 31stMarch 2014
Dr. Cr.
Particulars 3m t h . 9m t h . Particulars 3m t h . 9m t h .
3000
4050
5250
477009000
12150
--
16307160000 184221 To Interest on Cap ital
K’s
R’s
T’s
To Net Profit Transferred to
Capital
A,B,C in 3:2:5
A&Be q u a l l y1 : 1
60000 184221By Net Profit b/d
60000 184221
Balance Sheet
As on 31stMarch 2014
Liabilities AMT . AMT. Assets AMT. AMT.
343845
401276300000
15000
260000
18500
439100
59279745121
2000
150000
60000
498379120000
285000
241500
9000
100000
6000
200000
75000
15000
404000Partners Capital Bal.
K’s
R’s
Outstanding Salaries
Creditors
Bills Payable
T’s executor
Add: Interest at 18%
p.a. for 9 mths.
1455500Goodwill
Land & Building
Less: Depreciation
Plant & Machinery
Less: Depreciation
Prepaid rent
12% Investment
Interest Accrued On
Investment
Sundry Debtors
Bills Receivable
Cash
stock
1455500munotes.in

Page 54

54Partners Capital A/C.
Dr. Cr.
Particulars K R T Particulars K R T
--
343845--
401276439100200000
36000
12000
14310
81535270000
24000
16200
9540
81536350000
60000
5250
23850
--To T’s executor
loan
A/c (bal.
Transferred)
To Bal. C/d
343845 401276 439100By Bal B/d
By Goodwill
By Interes to n
Capital
By Net Profit
(upto 30 June)
By Net Profit
(upto 31 March)
343845 401276 439100
Note:-In case of death/Retirement of partn er.
I) P & L A/c, P & L app. A/c should be closed upto date of death of
Partner, N.P. should be transferred to old partner in their old ratio.
II) Balance in Retiring / deceased partner should be transferred to
Loan A/c. Interest on loan A/c required to calculate & debit to
Profit & Loss A/c. Then duly net profit should calculated and
transfer to continuing partner’s capital A/c. in their new Ratio.
Illustration 13 :
Jinal and Sameer were in partnership in a wholesale business
sharing profits in the p roportion of 3:2. As from 1stApril 2013 they
admitted Jatin into partnership giving him one -sixth of the profits. Jatin
brought in Rs. 80,000 in cash of which Rs. 30,000 were considered as
being in payment for his share of goodwill and remainder as his ca pital.
The following Trial Balance was extracted from the books
as on 31stMarch, 2014
Debit Rs. Credit Rs.
Sales 2,15,725
Purchases 1,25,730
Discount Received 2,150
Discount Allowed 3,125
Reserve for doubtful debts 1,200
Sundry debtor s 40,200
Sundry creditors 32,540
Stock (1stApril 2013) 42,820
Carriage inward 3,250
Sundry expenses 7,840
Motor vehicles 50,000
Land and Building 80,000munotes.in

Page 55

55Cash in hand 5,040
Telephone expenses 3,240
Postage and Stationary 2,690
Rent, rates and insurance 3,200
Bad debts 400
Investments 60,000
Capital accounts Jinal 65,000
Sameer 35,000
Cash paid by Jatin on 1stApril 2013 80,000
Jinal 5,000
Sameer 4,000
Jatin 2,000
Bank overdraft 6,920
Total 4,38,535 4,38,535
You are required to prepare the fir m’s trading and Profit and Loss
Account for the year ending 31stMarch, 2014 and Balance Sheet as on that
date having regard to the following information :
1.Stock on 31stMarch 2014 was Rs. 42,250.
2.Sundry debtors include item of Rs. 1,200 due from a customer on
account of sales, who has become insolvent.
3.Depreciate Land & Building and Motor vehicles at 5% p.a. and 20%
p.a. respectively.
4.Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5.Goods of to the value of Rs. 800 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 600 only.
Books of Jinal, Samir and Jatin
Trading A/c for the year ended 31 -03-2014
Rs. Rs. Rs. Rs.
To opening Stock 42,820 By Sales 2,15,725
ToPurchases 1,25,730 By Goods
destroyed by fire800
To Carriage
inwards3,250
To Gross Profit 86,975 By closing Stock 42,250
2,58,775 2,58,775munotes.in

Page 56

56Profit and Loss Account
Rs. Rs. Rs. Rs.
To discount Allowed 3,125 By Gross
Profit86,975
To old Bad Debts 400 By Discount
Received2,150
Add : New B.D. 1,200
Add : New RDD 1,950
Less : Old RDD (1,200) 2,350
To Sundry Expenses 7,840
To Telephone Expanses 3,240
To Postage & Stationery 2,690
To Rent , rates & Insurance 3,200
To Depreciation
Land & Building 4,000
Motor Vehicle 10,000 14,000
To loss by fire 200
To Net Profit
Jinal 26,240
Sameer 17,493
Jatin 8,747 52,480
89,125 89,125
Capital Ac count
Jinal Sameer Jatin Jinal Sameer Jatin
Rs. Rs. Rs. Rs. Rs. Rs.
To
Goodwill30,000 By
Balance
b/d65,000 35,000 80,000
To
Drawings5,000 4,000 2,000 By
Goodwill18,000 12,000
To
Balance
c/d1,04,240 60,493 56,747 By Net
Profit26,240 17,493 8,747
1,09,240 64,493 88,747 1,09,240 64,493 88,747
Balance Sheet as on 31 -03-2014
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Land &
Building80,000
Jinal 1,04,240 Less
Depreciation
5%(4,000) 76,000
Sameer 60,493 Motor
Vehicles50,000
Jatin 56,747 2,21,480 Less
Depreciation(10,000) 40,000munotes.in

Page 57

5720%
Investments 60,000
Closing
Stock42,250
Debtors 40,200
Trade Creditors 32,540 Bad Debts 1,200
39,000
Bank Overdraft 6,920 Less : RDD 1,950 37,050
Cash Balance 5,040
Insurance
Claim600
2,60,940 2,60,940
Illustration 14 :
Bhavana, Ravina and Kangana carried on a retail business in
partnership, sharing profits and losses in the ratio 2:1:2.
The following Trial Balance was e xtracted from the books
as on 31stMarch, 2014
Particulars Debit Rs. Credit Rs.
Capital A/c Bhavana 90,000
Ravina 52,000
Kangana 66,000
Plant & Machinery 1,50,000
Investments in govt. securities 50,000
Sales Returns 5,000
Sales 5,65,000
Furniture & Fittings 47,000
Motor Vehicles 60,000
Land & Building 1,00,000
Purchases 2,80,000
Stock as on (1stApril 2013) 46,000
Salaries and Wages 62,000
Office and Trade Expenses 40,200
Rent, Rates and Insurance 15,500
Professional charges 3,500
Debtors / Creditors 51,600 87,000
Provision for Doubtful Debts 500
Balance at Bank 43,700
Drawings : Bhavana 12,000
Ravina 6,000
Kangana 19,000
Bills receivables / Bills payable 18,300 36,200
Printing & Stationery 6,900
Loan from bank 1,20,000
10,16,700 10,16,700munotes.in

Page 58

58You are given the following additional information :
1.Stock on 31stMarch 2014 was valued at Rs. 66,500.
2.A debtor of Rs. 1,600 is to be written off and p rovision against the
remaining debtors should be made at 5%.
3.Provide for the following outstanding expenses as on 31stMarch, 2014
: Printing & Stationary Rs. 2,400 Salaries and Wages Rs. 8,000.
4.Insurance prepaid as on 31stMarch, 2014 Rs. 2,500.
5.Depreciate Land & Building by 5%, Furniture and Fittings by 10%,
Plant & Machinery & Motor Vehicles by 20%.
You are required to prepare :
1.The Trading and Profit and Loss A/c. for the year ended 31stMarch,
2014.
2.The Balance Sheet as on that date.
In the Books of Bhavana, Ravina & Kangana
Trading A/c for the year ended 31stMarch, 2014
Rs. Rs. Rs. Rs.
To opening
Stock46,000 By Sales 5,65,000
To Purchases 2,80,000 Less : Returns 5,000 5,60,000
To Gross Profit 3,00,500 By closing
Stock66,500
6,26,500 6,26,500
Profit and Loss Account for the year ended 31stMarch, 2014
Particulars Rs. Rs. Particulars Rs. Rs.
To Old Bad Debts By Gross Profit b/d 3,00,500
+ New bad debts 1,600
+ New RDD 2,500
-New R DD (500) 3,600
To Salaries 62,000
Add : o/s 8,000 70,000
To Rent, Rates, Insurance 15,500
Less : Prepaid (2,500) 13,000
To Office & Trade Expenses 40,200
To Professional Charges 3,500
To Printing & Stationary 6,900
Add : o/s 2,400 9,300
To Dep
Building 5,000munotes.in

Page 59

59Plant 30,000
Motor Vehicles 12,000
Furniture 4,700 51,700
To Net Profit
Bhavana 43,680
Ravina 21,840
Kangana 43,680 1,09,200
3,00,500 3,00,500
Partn ers Capital Account
Particulars Bhavana Ravina Kangana Particulars Bhavana Ravina Kangana
Rs. Rs. Rs. Rs. Rs. Rs.
To Drawings 12,000 6,000 19,000 By Balance
b/d90,000 52,000 66,000
To Balance c/d 1,21,680 67,840 90,680 By Net
Profit43,68 0 21,840 43,680
1,33,680 73,840 1,09,680 1,33,680 73,840 1,09,680
Balance Sheet as on 31stMarch, 2014
Liabilities Rs. Rs. Assets Rs. Rs.
Capital
A/c’sLand & Building 1,00,000
Bhavana 1,21,680 Less : Dep 5,000 95,000
Ravina 67,840 Plant &
Machinery1,50,000
Kangana 90,680 2,80,200 Less : Dep 30,000 1,20,000
Furniture 47,000
Bank loan 1,20,000 Less : Dep 4,700 42,300
Creditors 87,000 Motor Vehicles 60,000
Bills
payable36,200 Less : Dep 12,000 48,000
O/s
Expen sesInvestments 50,000
Printing &
Stationery2,400 Debtors 51,600
Salaries &
Wages8,000 10,400 Less : New BD 1,600
50,000
Less : New RDD 2,500 47,500
Balance at bank 43,700
Bills Receivable 18,300
Stock 66,500
Prepaid insurance 2,500
5,33,800 5,33,800munotes.in

Page 60

60Illustration 15 :
Karan and Aditya were in a partnership in a retail business sharing
profits in the proportion of 3:2. As from 1stApril 2013 they admitted
Ashish into partnership giving him one -fifth of the profits. Ashish
brought in Rs. 32,000 in cash of which Rs. 6,000 were considered as being
in payment for his share of goodwill and remainder as his capital.
The following Trial Balance was extracted from the books
as on 31stMarch, 2014
Debit Rs. Credit Rs.
Purchases 27,160
Sales 41,265
Sales Returns 525
Purchases Returns 410
Reserve for doubtful debts 1,520
Sundry Debtors 44,020
Sundry Creditors 12,553
Bills Receivable 12,007
Bills Payable 1,195
Stock (1stApril 2013) 3,972
Carriage inward 1,718
Office Salaries 980
Furniture 2,050
Postage, stationery and insurance 1,393
Rent, rates and taxes 420
Bad debts 40
Prepaid insurance 24
Outstanding wages 120
Rent accrued but not paid 90
Capital accoun ts (1stApril 2013)
Karan 21,500
Aditya 21,000
Cash paid by Ashish on 1stApril 2013 32,000
Current accounts :
Karan 5,500
Aditya 5,200
Ashish 6,200
Cash in hand 20,444
Total 1,31,653 1,31,653munotes.in

Page 61

61You are required to prepare the fir m’s Trading and Profit and Loss
Account for the year ending 31stMarch, 2014 and Balance Sheet as on that
date having regard to the following information :
1.Stock at the end was Rs. 20,000.
2.Sundry debtors include item of Rs. 500 for goods supplied to Karan
and item of Rs. 100 due from customer on account of sales, who was
become insolvent.
3.Depreciation on furniture is to be changed at 10% per annum.
4.Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5.Goods to the va lue of Rs. 500 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 200 only.
6.Bills receivable include a dishonored bill of Rs. 500.
In the Books of Karan and Aditya
Trading A/c for the year ended 31stMarch, 2014
Purchase Rs. Rs. Particulars Rs. Rs.
To opening
Stock3,972 By Sales 41,265
To Purchases 27,160 Less : Returns 525 40,740
Less Returns 410 26,750
To Carriage
Inwards1,718 By Goods lost by
fire500
To Gross Profit 28,800 By closing Stock 20,000
61,240 61,240
Profit and Loss Account for the year ended 31stMarch, 2014
Particulars Rs. Rs. Particulars Rs. Rs.
To Old Bad Debts 64 By Gross
Profit b/d28,800
+ New bad debts 100
+N e wR D D 2,196
-New RDD 1,520 840
To Salaries 980
To Postage,
stationary Insurance1,393
To Rent 420
To dep on Furniture 205
To loss by Fire 300
To Net Profit
Karan 11,838
Aditya 7,892
Ashish 4,932 24,662
28,800 28,800munotes.in

Page 62

62Partners Current Account
Particulars Karan Aditya Ashish Particulars Karan Aditya Ashish
To Balance b/d 5,500 5,200 12,200 By
Goodwill3,600 2,400
To Goods taken 500 By Net
Profit11,838 7,892 4,932
To Balance c/d 9,438 5,092 By Balan ce
c/d7,268
15,438 10,292 12,200 15,438 10,292 12,200
Balance Sheet as on 31stMarch, 2014
Liabilities Rs. Rs. Assets Rs. Rs.
Capital
A/c’sFurniture 2,050
Karan 21,500 Less : Dep 205 1,845
Aditya 21,000 Insurance claim 200
Ashish 32,000 74,500 Sundry Debtors 44,020
Less : Karan 500
Current
AccountsLess : New bad debts 100
Karan 9,438 Add : B R Dishounr 500
Aditya 5,092 14,530 Less new RDD 2,196 41,724
Bills Receivable 12,007
Sundry
Creditors12,553 Less : Dishonored 500 11,507
Bills
Payable1,195 Cash 20,444
O/s Wages 120 Closing Stock 20,000
O/s Rent 90Current A/c of Aashish 7,268
1,02,988 1,02,988
Working Notes :
1. New Profit Sharing Ratio Karan Aditya Ashish
OldRatio 3/5 2/5
New Partner 1/5
Remaining in old 3/5 × 4/5 2/5 × 4/5
New Ratio 12/25 8/25 5/25
EXERCISES
Theory Questions
1.Define partnership. what are the main features of partnership?
2.Write short note on Profit & Loss Appropriation A/c of a firm.
3.Explain the adjustments in accounts when a new partner is
admitted.
4.Explain division of expenses based on Time Ratio
5.Distinguish between Fixed Capitals and fluctuating Capitals.
6.Write short notesmunotes.in

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63a)Fixed capital accounts of the partners.
b)Interest on D rawings by the partners.
c)Salary or commission payable to partners.
d)Calculation of new profit sharing ratio on admission of partner.
7.What are rules applicable in the absence of partnership Deed.
a)Interest on Drawings
b)Profit sharing ratio.
c)Interest on partner s loan
d)Salary to partner
e)Interest on capital
8.OBJECTIVE:
A)Choose the appropriate word .
i) Partnership is a legal relationship between persons according
the------------------------
a) Contract Act
b) Companies Act
c) The Indian par tnership Act, 1932
d) Income Tax Act 1961.
ii) The profit sharing ratio among the partner may be --------------
from the ratio to share losses.
a) Equal
b) Same
c) In the Capital ratio
d) Different
iii) The maximum number of persons permitted to form a
partnership for Banking business are ------------ partners.
a) 7 b) 15 c) 10 d) 20
iv) The partnership can not be formed to share ------------------ only.
a) profit b) losses c) profit & loss d) Non of the above.
v) The persons who have agreed to carry on the partnership
business are individually known as ---------------
a) firm b) partners c) Directors d) Creditors
vi) It is a ----------------- relationship between persons c reated
through the partnership Act, 1932.
a) Natural b) Legal c) oral d) Faithfull.
vii) The partnership agreement can be ------------- or written.
a) Oral b) Written as well as oral c) Registered
d) un registered.
viii) In the partnership business the partner’s are collectively called
as------------------
a) Company b) Association c) Firm d) Partnersmunotes.in

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64ix) To admit a new partner with consent to --------------- partners.
a) Existing b) Majori ty c) Newly admitted d) One partner
x) In absence of agreement, partners share profit on loss in --------
a) capital ratio b) Equally c) Current Account ratio
d) Time devoted for business.
xi)--------- number of partners allowed in case of Retail business a)
maximum 10 b) maximum 20 c) minimum 50 d) minimum 10
xii) The minor partner cannot be personally liable to share -------- of
the firm
a) commission b) profits c) losses d) none of above
xiii) In abse nce of agreement Interest on Loan, at ---------- % p.a. is
payable by the firm
a) 12% p.a. b) Nil c) 6% d) As per Bank rate.
xiv) Partners can contribute capital either in Cash/Bank or ------------
a) only cash b) in kind c) ca sh plus in kind d) by cheque
[Ans. I -c, ii-d, iii-c, iv-b, v-b, vi-b, vii -a, viii -c, ix-a, x-b, xi-c, xii-c, xiii -c, xiv -b]
B)Fill in the Blanks.
I.The persons who have agreed to carry on partnership business are -
---------- known as partners and ------ -----called as a ------------
II.The partnership can not be formed to do -------------- business.
III.The partners may share profit and Loss of the firm -------- ratio.
IV.It is not necessary that partners should contribute ---------- in profit
sharing ratio.
V.A----------- partner is not personally liable to share the losses of
the firm.
VI.In the absence of a partnership agreement interest on -------- should
not be paid to partners.
VII.It is not necessary that partners should contribute -------------- in
profit sharing ra tio.
VIII.Maximum numbers of partners in insurance business --------
persons.
IX.A particular partner may not share ---------- of firm at all.
X.In the ----------- of a partnership Deed, each partner have free
access of all partnership records, Books and Accounts.
[Ans. I) Individual ii) illegal iii) different iv) capital v) minor vi) capital vii)
capital viii) Ten ix) losses x) absence].
C) Substitute the following in a single WORD/Term.
I.Written Agreement of partners.
II.Credit balance in Trading A/cmunotes.in

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65III.A partn er not taking part of in partnership business.
IV.A statement showing financial status of a business.
V.Debit balance in profit & Loss A/c
VI.Part of sundry Debtors irrecoverable.
VII.Expenses accrued but not paid
VIII.Expenses paid in advance.
IX.Any remuneration paid or pay able to partner’s, then it is necessary
to prepare a special A/c.
X.A partner draws a fixed amount at the end of each month, interest
is calculated for months.
XI.Policy on the lives of the Partner is to insure against changes of
disturbance in the business due to death of any partner
XII.A method in which Partner’s Current Accounts are opened
XIII.A partner who only lends his name to the firm.
XIV.In the absence of partnership Deed, which provisions /rates are
applicable.
[Ans. I -Partnership Deed, ii) Gross profit iii) Do rmant partner, iv) Balance sheet, v)
net loss, vi) Bad debts vii) outstanding expenses. Viii) prepaid expenses ix) profit &
loss appropriation x) 5.5 month xi) joint life policy xii) fixed capital xiii) nominal
partner xiv) the Indian partnership Act 193 2.
D)Match the following items in column A and column B.
I)
Column A Column B
i) Opening stock
ii) Carriage paid on plant
purchased
iii) carriage paid on goods sold
iv) partnership Acta) Trading A/c credit side
b) carriage outwards.
c) 19 32
d) 1956
e) Trading A/c debit side
f ) plant & machinery
[Ans. I -e, ii-f, iii-b, iv-1932]
II)
Column A Column B
i) Partnership
ii) Active Partner
iii) Outstanding Expenses
iv) Salaries & Wages
v) Goodwilla) Liability side
b) Trading A/ c
c) Unlimited Liability
d) Working partner
e) Profit & Loss A/c
f ) Intangible assets
[Ans. I -c, ii-d, iii-a, iv-e, v-f]munotes.in

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66III)
Column A Column B
i) Return Inwards
ii) Fixed Assets
iii) Reserve for Bad Debts
iv) Fluctuating Capital metho da) Land & Building
b) No need of current A/cs.
c) Sales Return
d) Sundry debtors
e) Liability side.
[Ans. I -c, ii-a, iii-d, iv-b]
IV)
Column A Column B
i) Closing stock
ii) Trading A/c
iii) Partnership Agreement silent
iv) Partners S alaries
v) Dormant Partnera) Gross Profit
b) Profit / Losses shares equally
c) Assets
d) Profit & loss Appropriation A/c
e) Nominal Partner
f ) Sleeping Partner
[Ans. I -e, ii-a, iii-b, iv-d, v-f]
V)
Column A Column B
i) Retirement of Partne r
ii) Goodwill
iii) Partnership Agreement
iv) Interest on Capital
v) Doubtful of bad debtsa) Executor’s Loan A/cb) Profit & Loss AppropriationA/c
c) Sales Ledger Balances.
d) Retiring partners loan A/c
e) Intangi ble Assets.
f) Partnership Deed.
g) Tangible Assets.
[Ans. I -d, ii-e, iii-f, iv-b, v-c]
9.PROBLEMS
Final Accounts
EX.1
Shraddha and Sneha carried on business sharing profits and losses
in the proportion of 1:9. The partnership agreement provided:
a)Interest be allowed at 15% p.a on capital.
b)Shraddha is entitled to get salary Rs.5000 per quarter of a year.
c)Ignore interest on drawings and current account.munotes.in

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67Trial Balance as on 31stDec, 2013
Particulars Dr. Particulars Cr.
72,000
15,000
12,000
74,000
1,11,000
15,000
10,000
3,000
30,000
25,000
2,10,000
6,500
3,500
7,200
7,800
18,0002,17,000
3,000
20,000
35,000
145,000
20,000
1,80,000Salaries to employees
Partner’s Salary
Rent
Furniture
Motor Car
(Balance on 1.1.13
Rs.1,20,000)
Depreciation at 10% p.a. upto
30.9.13
Insurance
Bad Debts
Bills Receivable
Sundry Debtors
Stock on 31stDecember 13
Bank Balance
Cash on Hand
Shraddha’s Current Account
Sneha’s Curr ent Account
Interest on Capital
Total
6,20,000Gross Profit for the year
Carriage Inward Payable
Bills Payable
Sundry Creditors
Interest free lo an from Reema
Shraddha’s Fixed Capital
Account
Sneha’s Fixed Capital account
Total
6,20,000
Other Information: -
A. Partner’s current accounts were as under -
Particulars Shraddha Sneha
--
1800
15,000--
16,200
--
16,800
(24,000)16,200
(24,000)Opening Balance
Add: Interest credited for 9 months at 12%
p.a.
Add: Salary for 9 months
Less: Withdrawals
Balance as per Trial Balance7,200 7,800
B. Fixed Assets ar e depreciated at the rate of 10% p.a. Provide
balance of depreciation for the year.
C. Through oversight interest on Fixed Capital was provided at the
rate of 12% instead of 15% p.a. as per partnership agreement.
You are required to prepare: -
a) Profit and loss account and Profit and Loss Appropriation Account
for the year ended 31stDecember, 2013.
b) Balance Sheet as on 31stDecember, 2013.munotes.in

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68Ex.2
A and B are partners sharing profits and losses in the ratio 3:2. On
1stOctober, 2013 they admitted C as a p artner on the following
terms: -
a) The new profit ratio to be A -60%; B -30%; C -10%
b) Goodwill of the firm is to be valued at Rs. 27,000/ -on 30th
September 2013. No account for goodwill should be opened in the
books of the firms, adjustments, if any, for the same should be
carried out in the capital accounts of the partners.
c) C’s share to be guaranteed by A at the minimum rate of Rs. 36,000
p.a.
d) Apportion gross profit on the basis of sales, Expenses on the basis
of time.
e) No interest is to be credit ed or charged on partners capital or
current account. The trial balance of the firm as on 31stMarch,
2014 was as follows before adjusting goodwill.
Particulars Dr. Rs. Particulars Cr. Rs.
1,77,660
63,000
51,180
15,000
7,500
7,200
33,360
450
5,400
900
33,750
9,000
18,000
3,60015,000
30,000
30,000
6,000
3,06,000
39,000Purchases
Salaries
Debtors
Drawings
A
B
C
Balance with Bank
Electricity Deposit
Selling Expenses
Office Expenses
Delivery Van
(Purchased on 30 -6-13)
Furniture at cost
(Purchased on 1 -4-13)
Rent & Rates
Electricity office
Total Rs. 4,26,000Creditors
Capital Accounts:
A
B
C
Sales (upto 30 -9-13 Rs.
1,20,000)
Loan from Edulji ( at 12%
p.a. taken on 31 -1-14)
4,26,000
You are required to prepare a Balance Sheet as on 31stMarch,
2014 and Trading and Profit and Loss Account for the year ended on that
date after considering the following
i) Stock on 31 -3-14 was Rs. 60,000.
ii) Accrued expenses but not yet paid: Rent Rs. 5500/ -, Selling
expenses Rs. 1750/ -, Office expenses Rs. 1500/ -
iii) Sales & Debtors include goods sent on sale or approval basis Rs.
12000 but not yet approved as on 31.3.14 These goods were
invoiced at a profit of 100% on cost price.
iv) Depreciation is to be provided: Delivery van @ 20% p.a., Furniture
@ 10% p.a.munotes.in

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69Ex. No.3
Prepare Trading, Profit and Loss Account for the year ended 31st
March, 2014 and the Balance Sheet as on that date from the following
information available from the books of HR & Co.
a) Trial Balance as on 31stMarch 2014
Debit Rs. Credit Rs.
2,00,000
1,50,000
35,000
40,000
15,000
25,000
6,90,000
3,40,000
80,000
40,000
64,000
76,000
37,0001,20,000
1,00,000
20,000
11,12,000
35,000
45,000
2,85,000
75,000Premises
Machinery & Equipment
Bank Balance
Bills Receivable
Current A/c ‘R’
Sales Returns
Purchases
Sundry debtors
Stock in Trade
Salaries
Distribution Expenses
Sundry Expenses.
10% Bonds
Total Rs. 17,92,0 00Capital A/c ‘H’
‘R’
Current A/c ‘H’
Sales
Commission
Bills Payable
Sundry Creditors
‘C’s A/c
17,92,000
b) Additional Information:
1.Stock in trade on 31stMarch, 2014 was Rs. 75,000
2.Outstanding salaries as on 31stMarch 2014 was Rs. 4,.300 and prepaid
insurance included in office expenses was Rs. 2,000.
3.Depreciate premises @ 5% and Machinery & Equipment @ 10%
4.Sales include Rs. 20,000 being goods sent on sale or return basis, the
cost of which was Rs. 15,000. Approval was received for 50% of the
goods sent. Sales also include Rs. 10,000 being sale proceeds of
equipment of the book value of Rs. 8,000 realized on 1 -4-2013.
5.Sundry Debtors include Rs. 20,000 on account of dishonoure of a Bill
Receivable accepted by a customer. Only 50% of the amount is likely
to be recovered. On the balance debtors 5% provision for doubtful
debts is to be create d.
6.H and R shared Profits and Losses in the ratio 2:1.
7.C was admitted as a partner on 1 -10-2014 and deposited Rs. 75,000
with the firm as his capital. ‘C’s is entitled to share 25%, of the
Profit/Losses of the firm. The net profit between the pre admissi on
and post -admission period is to be on time basis.munotes.in

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70Ex. 4
Ashok and Ketan are equal partners. Their trial balance as on
31stMar., 2014 is as follows:
Particulars Dr.Rs. Cr. Rs.
43,800
23,100
1,19,400
24,000
84,000
1,800
6,000
30,000
1,500
600
3,000
10,000
25,200
12,000
83,250
2,10,000
6,750
1,800
9,0002,16,000
66,000
2,16,000
25,000
48,000
1,200
3,000
6,000
58,800
30,000
25,200Ashok Capital
Ketan’s Capital
Opening Stock
Office Rent (Rs.2000 pe rm o n t h )
Purchase and Sales
Provident Fund and Provident Fund Investments
Debtors and Creditors
Discount
Furniture
Drawings : Ashok 15,000
Ketan 15,000
Returns Outward
Dead Stock
Demurrage
Freight and Duty
Advertisements
Bad Debts Reserve
Salaries and Wages
Cash and Bank
Sunil’s Loan (1 -10-2013)
Plant and Machinery
Land and Buildings
Depreciation on Plant & Machinery
Contribution to Provident Fund
Insurance Premium (incl. Rs. 3,600 paid for the year ended
30-9-2014)
Bills Payable
6,95,200 6,95,200
you are required to prepare final accounts for the year ended 31stMarch,
2014 after taking into account the following adjustments:
(1) The closing stock was valued at Rs. 110,000
(2) Provide Depreciation on furniture at 1 0% p.a.
(3) Of the Sundry Debtors Rs. 1,800 are bad and should
be written off. Also maintain a reserve for doubtful debts at 5% on
debtors.
(4) Goods of the value Rs. 6,000 had been received on 25thMarch,
2014 but the purchase invoice was omitted to be recorded in the
purchase book.
(5) Goods valued at Rs. 4,300, withdrawn for personal use by Ketan,
were recorded as credit sales in the sales book as Rs. 6000.
Ex.5
Ram and Bharat were in partnership in a business sharing profits in
proportion of 2:3. As from 1stJanuary 2014 they admitted Kran in to
partnership giving him one -fifth of the profits. Kran brought in Rs. 30,000
in cash of which Rs. 10000 were considered as being in payment for his
share of goodwill and remainder as his capital.munotes.in

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71The follo wing Trail Balance was extracted from the books as on
31stMarch 2014.
Particulars Dr. Rs. Cr. Rs.
1,71,625
5,250
90,200
20,070
15,000
2,175
39,725
--
400
9,795
5,000
15,500
3,240
2,690
4,200
56,000
240
--
4,440
5,000
4,000
2,000
--
--
40,000
--3,62,650
4,125
25,525
11,950
--
--
--
1,200
--
--
--
--
--
--
--
--
--
6100
--
--
--
--
15,000
10,000
30,000
30,000Purchases and sales
Returns
Customer and Creditors
Bills Receivable & Bills Payables
Carriage Inward
Carriage Outward
Stock (01.04.13)
Outstanding Carria ge Inward
Bad debts
Salaries
Furniture
Shop Fittings
Postage and Insurance
Trade Expenses
Rent, Rates and Taxes
Loan to Vishnu (from 01 -01-2014) @ 15%
p.a.
Prepaid Insurance
Rent [from 1.10.13 to 31.03.14]
Cash in hand
Current A/c
Ram
Bharat
Kran
Capital A/c
Ram
Bharat
Cash paid by Kran
Computer
Loan I.C.I.C.I. Bank @ 12% p.a.
4,96,550 4,96,550
You are required to prepare the firm’s Trading and Profit and Loss
Account for the year ending 31stMarch, 2014 an d Balance Sheet as on that
date having regard to the following information.
1)Stock at the end was Rs. 35000.
2)Depreciation on Computer and Furniture is to be charged 10% p.a.
3)One-fifth of the Shop fittings to be written off.
4)Goods worth Rs. 2800 have been destroyed fire and the Insurance Co.
has admitted the claim for Rs. 1,600 only.
5)Bills receivable include a dishonoured bill for Rs. 4,000/ -munotes.in

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726)Debtors include Rs. 3,000 for goods costing Rs. 2,000, supplied to
Bharat and item of Rs. 3,000 due from Customer on account of sales,
who has become insolvent.
7)Net Sales upto 31.12.2013 were Rs. 2, 83,520.
Hint :
[Net sale = 362650 –Sales Return 5250 –Goods taken by
Bharat Rs. 3,000.
= Rs. 3 , 54,400Sales Ratio = 2, 83,520: 70,880
= 4:1]
Example 12 :
Siddhanth and Sankalp were in a partnership in a retail business
sharing profits in the proportion of 3:1. as from 1stApril 201 3 they
admitted Ved into partnership giving him one -fifth of the profits. Ved
brought in Rs. 50,000 in cash of which Rs. 20,000 were considered as
being in payment for his share of goodwill and remainder as his capital.
The following Trial Balance was ext racted from the books
as on 31stMarch, 2014
Debit Rs. Credit Rs.
Purchase and Sales 1,01,620 2,02,650
Discount allowed and received 5,250 4,120
Reserve for doubtful debts 5,200
Sundry debtors and creditors 40,200 17,630
Bills receivable and b ills payable 20,070 11,950
Stock (1stApril 2013) 39,720
Carriage inward 17,180
Sundry Expenses 9,800
Motor vehicles 5,000
Land and Building 15,500
Telephone expenses 3,240
Postage and stationary 2,690
Rent, rates and insurance 4,440
Bad debts 400
Investments 76,000
Capital accounts
Sankalp 35,000
Siddhanth 30,000
Cash paid by Ved on 1stApril 2013 50,000
Drawings
Sankalp 5,000
Siddhanth 4,000
Ved 2,000
Cash in hand 4,440
Total 3,56,550 3,56,550munotes.in

Page 73

73You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31stMarch, 2014 and Balance Sheet as on that
date having regard to the following information :
1.Stock at the end was Rs. 20,000.
2.Sundry debtors include it em of Rs. 300 for goods supplied to Ved and
item of Rs. 1,000 due from customer on account of sales, who has
become insolvent.
3.Depreciation on Motor vehicles is to be changed at 20% p.a. and Land
and Building at 5% p.a.
4.Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5.Goods to the value of Rs. 1,000 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 600 only.
6.Bills receivable include a dishonored bill of Rs. 1,100.
7.Land and Build ing to be depreciated by 5%.
Example 13 :
Hardik and Yatish carried on a retail business in partnership under
the name Yatrik Associates sharing profits and losses in the ratio 5:3.
Trial Balance of Yatrik Associates as on 31stMarch, 2014
Particulars Debit Rs. Credit Rs.
R.D.D. 1,980
Loan taken 3,20,000
Sales 9,50,000
Opening Stock 87,585
Purchase 2,99,745
Wages 27,465
Goodwill 1,20,000
Sundry Expenses 16,340
Discount allowed 3,275
Hardik Drawings 4,200
Yatish Drawings 10,170
Debtors 87,765
Bills Receivable 23,395
Hardiks Capital 60,000
Yatish Capital 1,30,000
Creditors 76,775
Bills Payable 32,225
Outstanding Expenses 3,475
Plant and Machinery 4,55,375
Land and Building 2,57,735
Furniture 44,730
Carriage Inwards 16,235
Carriage Outwards 18,325munotes.in

Page 74

74Office rent 27,525
Salaries 65,565
Repairs 2,355
Bad debts 3,225
Free Sample 18,375
Prepaid Expenses 2,310
Cash in hand 9,120
Salesman Commission 23,200
Discount Received 6,345
Commission Received 13,215
Bank Balance 30,000
16,24,015 16,24,015
You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31stMarch, 2014 and Balance Sheet as on that
date having regard to the fo llowing information :
1.Stock on 31stMarch 2014 was Rs. 1,42,250.
2.Sundry debtors include item of Rs. 2,765 due from a customer on
account of sales, who has become insolvent.
3.Depreciate Land & Building and Plant and Machinery and Furniture at
5% p .a., 10% p.a. and 20% p.a. respectively.
4.Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5.Goods to the value of Rs. 1,845 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 1,000 only.
Example 14 :
Teena, Meena and Beena carried on a retail business in
partnership, sharing profits and losses in the ratio 5:3:2.
The Trial Balance of the firm as at 31stDecember 2013 was as follows
Particulars Debit Rs. Credit Rs.
Capital A/c’s Teen a 80,000
Meena 50,000
Beena 30,000
Current A/c’s Teena 16,000
Meena 12,000
Beena 8,000
Sales 4,65,000
Trade Creditors 37,000
Furniture & fitting s 22,000
Freehold Premises (Purchased during the year) 60,000
Leasehold Premises 45,000
Addition and Alterations to leasehold premises 25,000
Purchase 2,80,000munotes.in

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75Stock as on (1stJanuary 2013) 42,000
Salaries and Wages 64,000
Office and Tr ade Expenses 45,200
Rent, Rates and Insurance 10,500
Professional charges 3,500
Debtors 20,600
Provision for Doubtful Debts 500
Balance at Bank 43,700
Drawings : Teena 17,000
Meena 11,000
Beena 9,000
Bills payable 15,200
Bills receivables 18,300
Printing & Stationary 6,900
Loan from bank 10,000
7,23,700 7,23,700
You are given the f ollowing additional information :
1.Stock on 31stDecember, 2013 was valued at Rs. 46,000
2.A debtor of Rs. 600 is to be written off and provision against the
remaining debtors should be made at 5%.
3.Provide for the following outstanding expenses as on 31stDecember
2013 :
a)Office and Trade Expenses Rs. 2,400 Salaries and Wages Rs.
6,000.
b)Rates prepaid as on 31stDecember 2013 Rs. 2,500.
4.Depreciate furniture and fittings by 10%.
5.Professional charges include Rs. 2,500 fees paid in respect of the
acquisition of the leasehold premises, which are to the capitalized.
You are required to prepare :
1.The Trading and Profit and Loss A/c. for the year ended 31st
December, 2013.
2.The Balance Sheet as on that date.
3.Partners Current Accounts.
munotes.in

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764
PIECEMEAL DISTRIBUTION
Unit Structure :
4.0 Objective
4.1 Introduction
4.2 Classification of Liabilities
4.3 Order of Payment of Cash to Partners
4.4 Important Points
4.5 Check Your Progress
4.6 Illustrations on Piecemeal Distribution
4.7 Exercise
4.0 OBJECTIVE
After studying theunitthe student will be able to:
Classif y the liabilities of the business .
Describe the methods of allocation of cash among the partners .
Solve the practical problems.
4.1 INTRODUCTION
In the previous chapter we have studied D issolution of Partnership
Firm. O n dissolution of the firm business of the firm is closed, all the
assets of the firm are sold and all the liabilities of the firm are paid off.
The surplus remaining thereafter is paid to the partners against their loan
account and their capital account balances. Here we assume that all these
transactions take place on the same day. But in practice it takes time to
dispose off all the assets. The payment of liabilities has to be done as and
when the cash is available. It has to be in a specific order. This recovery
of assets in installments a nd payment of liabilities in installments is called
asPIECEMEAL DISTRIBUTION OF CASH.
4.2CLASSIFICATION OF LIABILITIES
1.External Liabilities
2.Internal Liabilities
3.Partner’s Capital Accounts
4.2.1External Liabilities
These are amounts payable to outsi de parties. These are further
classified into
a.Preferential Liabilities :munotes.in

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77These include amounts payable in priority to all liabilities. These are
Government dues like Income Tax, Sales T ax,Excise Duties etc.
Employees’ Dues like outstanding wages, outs tanding salaries, provident
fund dues, etc.
Dissolution expenses :These are theexpenses incurred for the purpose of
successful carrying out of dissolution like payment for preparation of
dissolution deed, advertisement and brokerage for disposal of asse ts.
b.Other Liabilities :
These are further classified into :
Secured liabilities : These are liabilities / loans secured against some or all
the assets of the f irm. If it is secured by a char ge on a specific asset then
amount realized b y sell of that par ticular asset shall be utilized for
payment of these liabilities. For example bank overdraft secured against
stock, mortgage loan against land and buildings. If these liabilities are not
secured against a specific asset but on all the assets in general t hen amount
realized shall be first utilized to pay off these liabilities.
Unsecured Liabilities : These are liabilities incurred during the normal
course of business for which no security is given. For example sundry
creditors, bills payable, loan from sp ouse of partner, etc. these liabilities
are paid when all above liabilities are paid in full. If the amount available
with the firm is not sufficient to pay all these liabilities, then the amount is
paid in the ratio of their out standings .
4.2.2Interna l liabilities
Partner ’sloans: If a partner has giv en any loan to the firm then it will be
paid after all the above liabilities have been paid in full but before
anything is paid to partners against their capital accounts. If two or more
partners have gi ven loans to the firm and cash available is insufficient to
pay these loans in full then the amount will be paid in the ratio of
outstanding balance of the loan.
4.2.3Partners Capital Account
After all the above liabilities are paid the cash available i s paid to partners
against their capital account by adopting any one of the following two
methods.
Excess Capital Method (Highest Relative Capital Method /Quotient
Method) Maximum Loss Method (Not in the syllabus)
4.2.3.1 Excess Capital Methods / Proporti onate Capital Method -
This method is applied where the partners have not contributed
their capitals in the profit sharing ratio. Some partner have contributedmunotes.in

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78more capitals than other partners. Hence it is required to pay such partners
before other partn ers are paid. The method of calculating surplus capitals
is as follows –
Step No. Particulars
I Computation of Adjusted Capital:
Take capital account balances as per Balance Sheet
Add: General Reserve/Reserve funds/Profit and Loss
A/c Credit B alance in Profit Sharing Ratio
Less: Profit and Loss A/c Debit Balance
II Write Profit Sharing Ratio
III Find Capital Contribution per unit of profit i.e. Step I / Step II
IV Find out the partners with lowest capital contribution per unit of
profit. Taking his capital as base find out Proportionate Capital of
all the partners.
V Find out the Excess Capital –Step I -Step IV (Adjusted
Capital –Proportionate Capital)
If there’re more than two partners then do the same process again
VI Write Profit Sharing Ratio
VII Find capital contribution per unit of profit –Step V / Step VI
VIII Find out the partners with lowest capital contribution per unit of
profit. Taking this capital as base find out proportionate capital of
all th e partners.
IX Find out the Excess Capital –Step V --Step VIII
4.3ORDER OF PAYMENT OF CASH TO PARTNERS :
After cash is paid for all internal and external liabilities cash should be
paid to partners against their capital accounts as follows : (Ste p No. IX,
Step No. VIII, Step No. IV)
a)Pay to the partner who is having ultimate excess. (Step No. IX)
b)Pay out the excess amount of other partners in their Profit Sharing
Ratio. (Step No. VIII)
c)After the payment of excess capital, the capitals of the part ners will
be in their profit sharing ratio. (Step No. IV) All the available cash
should be paid in Profit sharing ratio.munotes.in

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79d)If any partner is taken over any asset then it should be assumed
that he bri ngs necessary cash in the fir m. It should be added in the
cash available and then total available cash should be distributed
among the partners as above.
e)The balance left unpaid represents loss on realization. Payment
more than the dues represents profit on realization.
4.4 IMPORTANT POINTS
a)If any reserve is to be created for dissolution / realization expenses,
it should be created by setting aside cash after payment of
Government and Employees’ dues. If finally actual expenses are
less than the reserve, the excess should be distributed among the
partners.
b)If there is any contingent liability (like bill discounted with the
bank not yet matured) cash should be set aside after payment of all
external liabilities, but before making any payments to the
partners. If the liability arises it should be paid from th e cash
reserved. If the liability does not arise, the cash kept in reserve will
be distributed among the partners when it becomes certain that the
liability is not to be paid.
c)If nothing is mentioned about security of a liability the same
should be treate d as unsecured.
d)In case of a secured liability, payment should be made for such
liability only if the asset charged for that liability is realized.
However if any other asset is realized then the secured liability
should be treated at par with other unse cured liabilities and
payment should be made proportionately.
4.5CHECK YOUR PROGRESS
1.Define the following terms:
Preferential liabilities
Adjusted Capital
Piecemeal Distribution of Cash
Internal Liabilities
2.Fill in the blanks:
In Piecemeal D istribution amounts realized from assets are
distributed in the order ___________.
Excess capital Method is applied where the partners have
not contributed there capitals in the ____________.
Preferential Liabilities include Government dues like
________.munotes.in

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80If two or more partners have given loans to the firm and the
cash is in sufficient for full payment then the loans will be
paid in the ________ ratio.
3.Calculate the Adjusted Capital from the following:
X,Y and Z are sharing profits and losses in the ratio 3:2:1.The Capital
Account is showing credit balances of Rs. 60,000, 20,000 and 30,000
respectively ,Genera lReserve is Rs. 60,000 and P&L A/c Debit Balance
Rs. 12,000.
4.6ILLUSTRATIONS ON PIECEMEAL DISTRIBUTION
Illustration 1:
P, Q, R are partners sh aring profits and losses in the ratio of 4:2:1. they
decided to dissolve the partnership as on 31stMarch 20 14when their
Balance Sheet was as follows:
Balance Sheet
Liabilities Rs. Assets Rs.
Creditors
General Reserve
Bank Overdraft
Capital : P
Q
R23,200
37,800
65,000
1,60,000
3,20,000
2,60,000Cash in hand
Investment
Stock
Debtors
Machinery
Furniture
Building680
60,000
2,56,600
90,800
65,200
9,800
3,82,920
8,66,000 8,66,000
All creditors have to be paid off Rs.4800 /-have to be provided for
realization expenses. Thereafter all cash received should be distributed
among the partners. The amounts were realized in installments as follows
–
Rs.
1st
2nd
3rd
4th60,000
32,320
4,60,000
1,83,680
The actual realizati on expenses were Rs.2400/ -. Prepare a statement
showing distribution of cash as per Excess Capital Method.
Solution :
(In the books of P, Q & R a Partnership Firm)
Statement of Excess Capitalmunotes.in

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81P
Rs.Q
Rs.R
Rs.Total
Rs.Order
Capital 1,60,000 3,20,0002,60,000
Add : General
Reserve21,600 10,800 5,400 2,65,500
A. Adjusted
Capital(TotalRs.777800)1,81,600 3,30,800 2,65,400
B. Profit Sharing
Ratio4 2 1
C. (A/B) = CapitalPer Unit45,400 1,65,400 2,65,400
D. Proportionate
Capital
(P’s capital as
Base)(1,81,600) (90,800) (45,400) 3,17,800 III
E. Excess Capital(A-D)NIL2,40,000 2,20,000
F. Excess Capitalper Profit Unit1,20,000 2,20,000
G. Proportionate
Excess Capital2,40,000 1,20,000 3,60,000 II
H. Fin al Excess
CapitalNIL1,00,000 1,00,000 I
(E-G)
Total 7,77,800
Payment order:
(1)Pay 1stRs.100000/ -to R.
(2)Then Rs.240000 and Rs.120000 to Q and R respectively.
(3)Then to P, Q and R in their profit sharing ratio 4:2:1.
Statement showing Piecemea lDistribution of Cash
Particulars Cash
Rs.Bank
O/DCreditorsRs.P
Rs.Q
Rs.R
Rs.Balance1stRealisationRealisation Exp.Prov.PaidO/D &CreditorsProportionately68060,000(4,800)55,880(55,880)65,000
(41,180)23,200
(14,700)1,81,600 2,30,800 2,65,400munotes.in

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82Balance due
IInd Realisation
Paid O/D &
Creditors----
32,320
(32,320)23,820
(23,820)8,500
(8,500)1,81,60023,080 26,540Balance dueIIIrd Realization -Paid to C FinalExcess-
4,60,000
(1,00,000)- - 1,81,6002,30,800
(1,00,000)2,65,400Balance(-)P a i dt oBa n dC(2:1)3,60,000
(3,60,000)- --2,30,800
(2,40,000)1,65,400
(1,20,000)
-
1,83,680
2,400BalanceIVth RealizationAdd : RealizationExp. Prov notrequiredPaid to all (4:2:1)1,86,080
1,86,0801,81,600
(1,06,330)90,800
(53,166)45,400
(27,964)Balance (Loss onRealisation)=131720-
75,27037,634 18,816
Illustration 2: -
ABC dissolved their firm on 31stDec 20 13when their Balance Sheet as
follows :-
Liabilities Rs. Assets Rs.
Capital
A 60000
B 48000
C 40000
Partner’s Loan :
A2 0 0 0 0
B1 6 0 0 0
Sundry Creditors148000
36000
80000Sundry Assets 264000
264000 264000
Partners shared Profit and Loss in the ratio 2:1:1
Assets were realized as follows.
1st= 50,000, 2nd= 98,000, 3rd= 80,000
Show Piecemeal Distribution of Cash.
Working Note –Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balanc eb / d 60000 48000 40000
II Profit Sharing Ratio - 2 1 1
III Unit Value
(Capital contribution /
Profit)III 30000 48000 40000
IV Proportionate Capital XII 60000 30000 30000munotes.in

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83V Excess Cap I-IV - 18000 1000 0
VI Profit Sharing Ratio 1 1
VII Unit Value VVI - 1800010,000
VIII Proportionate Capital XVI 10000 10000
IX Excess Capital V-VIII - 8000 -
Payment Chart
A B C
I (9)
II (8)
III (4)-
-
600008000
10000
30000-
10000
30000
60000 48000 40000
Solution :
Statement showing Piecemeal Distribution of Cash
Partners Loan Partners Capital Date Particulars Cash Total Claims Sundry
Cr.
A B A B C01/01/091stBalance b/d
Cash Realised
Less : Paid to
Creditors-
50000
(50000)264000
(50000)80000
(50000)20000
-16000
-60000
-48000
-40000
-
2ndBalance
Cash Realised
Less : Paid to
Creditors-
98000
(30000)214000
(30000)30000
(30000)20000
-16000
-60000
-48000
-40000
-
Balance
Less: Paid to
Partners Loan68000
(36000)184000
36000-
-20000
2000016000
1600060000
-48000
-40000
-
Illustration 3: -
ABC were in partnership sharing profits and losses equally. They agreed
to dissolve their partnership on 30thJune 2013. When their balance sheet
was as under.
Liabilities Rs. Assets Rs.
Creditors
Capital
A6 0 0 0 0
B4 5 0 0 0
C3 0 0 0 038000
135000Bank
Debtors
Stock
Plant & Machinery3600
69000
75400
25000
173000 173000
The real izations were as follows : -munotes.in

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84Debtors Plant StockExpenses
July 30000 10000 37000 3000
Aug20000 8500 23000 2000
Sept10000 - 1000 -
On 30thSept remaining debtors amounting to Rs.9000/ -were taken over
by B at 50% of book value.
Prepare statement sh owing Piecemeal Distribution of Cash.
Statement showing Piecemeal Distribution of Cash
Capital Date Particulars Cash Total
claimCreditors
A B C
01/07/13 Balance b/d
Less : Paid to Creditors3600
(3600)173000
(3600)38000
(3600)60000
-45000
-30000
-
Balance
Cash
Less : Paid to Creditors-
74000
(34400)169400
-
(34400)344000
-
(34400)60000
-
-45000
-
-30000
-
-
Balance
Less: Paid to A39600
(15000)135500
(15000)-
-60000
(15000)45000
-30000
-
Balance
Less : Paid to B & C24600
(24600)120000
(24600)-
-45000
(12300)45000(12300)30000
-AugBalance
Cash realized
Less : Paid to A & B-
49500
(5400)95400
-
(5400)-
-
-32700
-
(2700)32700
-
(2700)30000
-
-SepBalance
Less : Paid to all partners44100
(44100)90000
(44100)-
-30000
(14700)30000(14700)30000
(14700)
Balance
Cash Realized
Add : -Debtors taken
over by B-
11000
450045900
-
--
-
-15300
-
-15300
-
-15000
-
-
Balance
Less : -Paid to all in PSR15500
15500-
(15500)-
--
(5166)-
(5167)-
(5167)
Loss on Realisation - 30400 - 10134 10133 10133
Working Note –Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balance b/d 60000 45000 30000
II Profit Sharing Ratio 1 1 1
III Unit Value III 60000 4500030,000
IV Proportionate
CapitalXI I 30000 30000 30000
V Excess Cap I-IV 30000 15000 -
VI Profit Sharing Ratio 1 1 -
VII Unit Value VVI 3000015000-munotes.in

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85VIII Proportionate
CapitalX VI 15000 15000 -
IX Excess Capital V-VIII 15000 - -
Payment Chart
A B C
I Steps : 9II Steps : 8III Steps : 415000
15000
30000-
15000
30000-
-
30000
Total60000 45000 30000
Illustration 4: -
A, B, C were in business sharing profits and losses 3:4:5 they decided to
dissolve their firm 1stJuly 2013. Following is the Balance Sheet as on 1st
July 2013.
Liabilities Rs. Assets Rs.
Capital
A1 2 0 0 0
B8 0 0 0
C4 0 0 0
Sundry Creditors
A’s Loan24000
10000
2000Sundry Assets 36000
36000 36000
The amt realized were as follows.
15/7 5000
31/7 10000
15/8 5000
31/8 2000
6/9 6000
30/9 5000
Show a detail statement of piecemeal distribution of cash.
14
Statement showing Piecemeal Distribution of Cash
Date Particulars Cash Total Creditors A’s Loan A B C
1/7
15/7Balance b/d
Cash Realised
Less : Paid to Creditors-
5000
(5000)36000
(5000)10000
(5000)2000
-
-12000
-
-8000
-
-4000
-
-
31/7Balance
Cash Realised
Less : Paid to Creditors-
(10000
)
(5000)31000
-
(5000)5000
-
(5000)2000
-
-12000
-
-8000
-
-4000
-
-
Balance 5000 26000 - 2000 12000 8000 4000munotes.in

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86Less: Paid to A’s Loan (2000) (2000) - (2000) - - -
Balance
Less : Paid to A3000
(3000)24000
(3000)-
--
-12000
(3000)8000
-4000
-
15/8Balance
Cash realized
Less : Paid to A-
5000
(3000)21000
-
(3000)-
-
--
-
-9000
-
(3000)8000
-
-4000
-
-
Balance
Less : Paid to A & B in
3:42000
(2000)18000
(2000)-
--
-6000
(857)8000
(1143)4000
-
31/8Balance
Cash Realized
Less : Paid to A & B-
2000
(2000)16000
(2000)5143
(857)6857
(1143)4000
-
6/9Balance
Cash Realized
Less : Paid to A & B-
6000
(4400)14000
(4400)4286
(1886)5714
(2514)4000
-
Balance
Less : Paid to all in PSR1600
(1600)9600
(1600)2400
(400)3200
(533)4000
(667)
30/9Balance
Cash Realized
Less : Paid to all in PSR-
5000
(5000)8000
(5000)2000
(1250)2667
(1667)3333
(2083)
Balance –Loss on
Realisation- 3000 750 1000 1250
Working Notes
1. Step Excess Capital
Step No. Particulars Formula A B C
I Opening bal 12000 8000 4000
II Profit Sharing
Ratio3 4 5
III Unit Value III 4000 2000 800
IV Proportionate
CapitalXI I 2400 3200 4000
V Excess Cap I-IV 9600 4800 -
VI Profit Sharing
Ratio3 4 -
VII Unit Value VVI 3200 -
VIII Proportionate
CapitalXV I 3600 4800 -
IX Excess Capital V-VIII 6000 - -
Payment Chart1200munotes.in

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87A B C
Steps : 9
8
46000
3600
2400-
4800
3200-
-
4000
Total 12000 8000 4000
Illustration 5: -
A, B & C are partners, profit sharing ratio 1:1:2. Balance sheet as
on 31stMarch 2014.
Liabilities Rs. Assets Rs.
Capital
A 12000
B 9000
C 6000
A’s Loan
B’s Loan
Creditors
Govt tax27000
3750
2500
3000
1500Buildings
Plant & Machinery
Stock19750
11750
6250
37750 37750
It was mutually agreed that the realization of the asset should be
distributed at the end of each month. Month by realization of assets and
expenses were as follows –
Month Asset Expenses
30thApril
31stMay
30thJune
31stJuly7360
9100
7800
4780360
850
300
280
All the assets were fully realized by 31stJuly 2014.
Working Note –Statement showing Excess Capital
Step No. Particulars Formula A B C
I Opening bal 12000 9000 6000
II Profit Sharing
Ratio1 1 2
III Unit Value III 12000 9000 3000
IV Proportionate
CapitalXI I 3000 3000 6000
V Excess Cap I-IV 9000 6000 -
VI Profit Sharing
Ratio1 1
VII Unit Value VVI 9000 6000 -munotes.in

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88VIII Proportionate
CapitalXV I 6000 6000 -
IX Excess Capital V-VIII 3000 - -
Payment Chart
A B C
Steps : 9
8
43000
6000
3000-
6000
3000-
-
6000
Total 12000 9000 6000
Statement showing Piecemeal Distribution of Cash
Capitals Date Particulars Cash
AvailableTotal
ClaimGovt Creditors A’s
LoanB’s
Loan
A B C
1/4
30/6Balance b/d
Cash Realised
Less : Exp-
7360
36037750 1500 3000 3750 2500 12000 9000 6000
Cash
Less : Paid to Govt7000
(1500) (1500) (1500) - - - - - -
Balance Creditors
Less: Paid to G5500
(3000)36250
(3000) -3000
(3000)3750
-2500
-12000
-9000
-6000
-
Balance
Less : Paid to A &
Bl o a n2500
(2500)33250
(2500)- - 3750
(1500)2500
(1000)12000
-9000
-6000
-
31/5Balance
Cash A/c (9100 -
300)
Less : Paid to A &
Bl o a n-
8750
(3750)30270
(3750)-
-
--
-
-2250
(2250)1500
(1500)12000
-
-9000
-
-6000
-
-
Balance
Less : Paid to A’s
Capital5000
(3000)27000
(3000)-
--
--
--
-12000
(3000)9000
-6000
-
Balance
Less : Paid to A &
BC a p i t a l2000
(2000)24000
(2000)-
--
--
--
-9000
(1000)9000
(1000)6000
-
30/6Balance
Cash A/c (7800 -
300)
Less : Paid to A &
B-
7500
(7500)22000
-
(7500)-
--
--
-
--
-
-8000
-
(3750)8000
-
(3750)6000
-
-
31/7Balance
Cash
Less : Paid to A &
B-
4500
(2500)14500
-
(2500)- - 4250
(1250)4250
(1250)-
Balance
Less : Paid to all in
PSR2000
(2000)12000
(2000)3000
(500)3000
(500)6000
(1000)
Loss on Realisation - 10000 2500 2500 5000
Balance
Less : Paid to B32000
(8000)14800 0
(8000)-
--
--
-60000
-48000
(8000)40000
-
BalanceLess : Paid to B & C24000
(20000)140000
(20000)-
--
--
-60000
-40000(1000040000
(10000)munotes.in

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89)
Balance
Less : Paid to A, B
&C4000
(4000)120000
(4000)-
--
--
-60000
(2000)30000
(1000)30000
(1000)
Balance
Cash Realized
Less : Paid to all in
Profit Sharing Ratio-
80000
(80000)116000
(80000)58000
4000029000
2000029000
20000
Loss on realization - 36000 18000 9000 9000
Illustration 6: -
Ajay, Vijay & Vishal were in partnership in profit sharing ration5:3:2.
Balance sheet as on 31stMarch 20 14.
Liabilities Rs. Assets Rs.
Capital
Ajay 40000
Vijay NIL
Ajay’s Loan
Sunil’s Loan
Bank Loan
Creditors40000
14000
16000
4000
30000Cash
Debtors
Stock
Vishal Capital500
44000
49500
10000
104000 104000
Realizations we re–
15/04/2014 19500
31/05/2014 10000
31/07/2014 20000
31/08/2014 6000
30/09/2014 8000
Vishal brought necessary cash at the time of last realization. Show
Piecemeal Distribution of Cash.
Statement showing Piecemeal Distribution of Cash
Date Particulars Cash Total
ClaimsCreditors Bank
LoanSunil Ajay Ajay Vijay Vishal
1/4
15/4Balance b/d
Cash Realised500
1950094000 30000 4000 16000 14000 40000 - (10000)
Cash
Less : Paid to Creditors,
Bank Loan, Sunil20000
(20000) (20000) (12000) (1600) (6400)-
--
--
--
-
31/5Balance
Cash Realized
Less: Paid to Creditors,
Bank Loan, Sunil-
10000
(10000)74000
(10000)18000
(6000)2400
(800)9600
(3200)14000
-4000
--
-(10000)
-
31/6Balance
Cash Realized
Less: Paid t o Creditors,
Bank Loan, Sunil-
30000
(20000)64000
(20000)12000
(12000)1600
(1600)6400
(6400)14000
-4000
--
-(10000)
-
Balance
Less : Paid to Ajay Loan10000
(10000)44000
(10000)-
--
--
-14000
(10000)40000
--
-(10000)
-munotes.in

Page 90

90Balance - 34000 - - - 4000 40000 - (10000)
31/7Cash Realised
Less : Paid to Ajay Loan20000
(4000)(4000) -
--
--
-(4000)- - -
Balance
Less : Paid to Ajay Cap16000
(16000)30000
(16000)-
--
--
--
-40000
(16000)-
-(10000)
-
31/8Balance
Cash Realised
Less : Paid to Ajay-
6000
(6000)14000
(6000)-
-
--
-
--
--
-24000
(6000)-
-(10000)
-
30/9Balance
Cash Realised
Add : Cash Received
from Vishal-
8000
100008000
10000-
-
--
-
--
-
--
-
-18000
-
--
-
-(10000)
10000
Balance
Less : Paid to Ajay18000
(18000)18000
(18000)-
--
--
--
-18000
(18000)-
--
-
- - - - - - - - -
Note -Since only Ajay has Credit Balance in Capital Statement of
excess Capital can not be prorated.
Illustration 7: -
Following is the Balance Sheet of A, B & C who share P&L in the ratio
4:3:1 on 31stMarch 2013 on which date they dissolve their partnership.
Balance Sheet as on 31stMarch 2013.
Liabilities Rs. Assets Rs.
Sundry Creditors
Bank O/D
Capital A/c
A7 0 0 0 0
B3 0 0 0 0
C5 0 0 0 026250
8750
150000Bldg
Machin ery
Stock
Debtors50000
55000
20000
60000
185000 185000
1.Bank O/D is secured against stock.
2.The assets realized following amounts which were immediately
distributed.
May 31 –Debtors Rs.20000/ -
July 31 –Stock Rs.15000/ -
Sep 30 –Debtors Rs.25000/ -
Oct 31–Machinery Rs.40000/ -
Dec 31 –Bldg Rs.65000/ -
No further sums could be realized. Show Piecemeal Distribution.
Working Note –Statement showing Excess Capital
Step No. Particulars Formula A B C
I Opening bal 70000 30000 50000
II Profit Sharing Ratio 4 3 1
III Unit Value III 17500 10,000 50000
IV Proportionate
CapitalXI I 40000 30000 10000
V Excess Cap I-IV 30000 - 40000
VI Profit Sharing Ratio 4 - 1
VII Unit Value VVI 7,500 - 40000munotes.in

Page 91

91VIII Proportionate
CapitalX VI 30000 - 7500
IX Excess Capital V-VIII - - 32500
Payment Chart
A B C
Steps : 9
8
4-
30000
40000-
-
3000032500
7500
10000
Total70000 30000 50000
Statement showing Piecem eal Distribution of Cash
Date Particulars Cash Total Creditors Bank O/D A B C
1/04/13
31 JulyBalance b/d
Cash Realised
Less : Paid to Creditors
& Bank O/D-
20000(20000)185000
(20000)26250
(15000)8750
(5000)70000
-30000
-50000
-
31 JulyBalance
Cash Realised
Less : Paid to Bank O/D-
15000
(3750)165000
(3750)11250
-3750
(3750)70000
-30000
-50000
-
Balance
Less: Paid to Creditors11250(11250)161250
(11250)11250
(11250)NIL
-70000
-30000
-50000
-
30 SepBalance
Cash Realized
Less: Paid to Creditors-
25000(25000)150000
(25000)-
-
--
-
-70000
-30000
-50000
(25000)
31 OctBalance
Cash Realised
Less : Paid to Creditors-
40000
(7500)125000
(7500)-
--
-70000
-30000
-25000
(7500)
Balance
Less : Pai d to A & C32500(32500)117500
(32500)-
-
--
-
-70000
(26000)30000
-17500
(6500)
31 DecBalance
Cash Realised
Less : Paid to A & C-
65000
(5000)85000
(5000)-
--
-44000
(4000)30000
-11000
(1000)
Balance
Less : Paid to all in PSR60000
(60000)80000
(60000)-
-
--
-
-40000
(30000)30000
(22500)10000
(7500)
Loss - 20000 -
--
-10000 7500 2500
Illustration 8: -
A, B & C are partners sharing profits and losses equally. Their Balance
Sheet as on date of dissolution was follows.
Liabilities Rs. Assets Rs.
Sundry Creditors
General Reserves
Due to Bank
Capital A/c
A8 0 0 0 0
B1 6 0 0 0 011000
18000
33000Cash
Investment
Stationary
Sundry debtors
Bank
Furniture140
30000
128300
45400
32600
4120munotes.in

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92C1 3 0 0 0 0 370000 Land & Building 191440
432000 432000
All the sundry creditors have to be paid away. A sum of Rs.2400/ -has to
be provided for expenses of realization and subject to this all cash received
should be immediately distributed among partners the amount realized
were : -
1 32260
2 36000
3 212000
4 92600
Expenses of r ealization Rs.3000/ -.
Prepare statement showing Piecemeal Distribution of Cash.
Working Note –Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balance b/d 86000 166000 136000
II Profit Sharing Ratio 1 1 1
III Unit Value III 86000 166000 136000
IV Proportionate Capital XII 86000 86000 86000
V Excess Cap I-IV - 80000 50000
VI Profit Sharing Ratio - 1 1
VII Unit Value VVI - 80000 50000
VIII Proportionate Ca pital XVI - 50000 50000
IX Excess Capital V-VIII - 30000 -
Payment Chart
A B C
Steps : 9
8
4-
-
8600030000
50000
86000-
50000
86000
Total86000 166000 136000
Statement showing Piecemeal Distribution of Cash
Date Particulars Cash Total Creditors Bank O/D A B C
1 Balance b/d
Add : Cash
Less : Distribution Exp
Less : Paid to Creditors
& Bank (1:3)140
32260
(2400)
(30000)432000
(30000)11000
(7500)33000
(22500)86000
-166000
-136000
-
2Balance
Cash Realised
Less : Paid to Creditors-
36000
(14000)402000
(14000)3500
(3500)10500
(10500)86000 166000 136000munotes.in

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93& Bank O/D
Balance
Less: Paid to Bank22000
(22000)388000
(22000)NIL
-NIL
-86000
-166000
(22000)136000
-
3Balance
Cash Realised
Less: Paid to Bank-
212000
(8000)366000
(8000)-
-
--
-
-86000
-144000
(8000)136000
-
Balance
Less: Paid to Bank &
Creditors204000
(100000)358000
(100000
)-
--
-86000
-136000
(50000)136000
(50000)
Balance
Less : Paid to all104000
(104000)258000
(104000
)-
--
-86000
(34666)86000
(34667)86000
(34667)
4Balance
Cash Realised
Less : Exp-
92600
(600)154000 -
--
-51334 51333 51333
Balance
Less : Paid to all92000
(92000)154000
(92000)-
--
-51334
(30667)51333
(30667)51333
(30666)
Loss on realization - 62000 - - 20666 20666 20667
Illustration 9: -
P, Q & R were in Partnership sharing Profits & Losses in the ratio of
4:5:1. Their Balance Sheet as on 31stDecember 2013 is as under: -
Liabilities Rs. Assets Rs.
Capit al A/c
P
Q
R
Sundry Creditors
Loans
P
Q
Reserves75000
60000
15000
50000
30000
15000
50000Cash in hand
Other Assets15000
280000
295000 295000
The Partnership is dissolved and the assets were realized as under: -
1stRealisation: Rs.50000/ -
2ndRealisation: Rs.100000/ -
3rdRealisation: Rs.85000/ -
On the date of the dissolution there was a contingent liability of Rs.5000/ -
against the firm which was settled at Rs.3500/ -at the time of 2nd
realization. Realisation expenses were estimated at Rs.10000 /-but those
actually amounted to Rs.7500/ -. R took over stock worth Rs.2500/ -at themunotes.in

Page 94

94time of 3rdrealization. The firm was forced to pay Rs.3000 to sales tax
authorities as fine out of the 3rdrealization for which no provision was
made prepare a statem ent showing distribution under Excess Capital
Method.
Working Note –Statement showing Excess Capital
Particulars P Q R
Capitals (as given) 75,000 60,000 15,000
Add Reserves 20,000 25,000 5,000
Actual Capitals 95,000 85,000 20,000
PSR 4 5 1
Capitals per unit of PSR 23,750 17,000 20,000
Capitals in PSR 68,000 85,000 17,000
Excess Capital 27,000 NIL 3,000
PSR 4 1
Excess Capital p.u. of PSR 6,750 3,000
Excess Capital in PSR 12,000 3,000
Extra Excess Capital 15,000 NIL
First pay Extra Excess Capital to P Rs. 15,000
Next pay Excess Capital to P and R Rs. 15,000 in the ratio 4:1
Next pay P, Q and R in PSR 4:5:1
28
Statement showing Piecemeal Distribution of Cash
Date Particulars Cash Rs. Creditors Loan P
Rs.Loan QRs.Capital
PRs.Capita l
QR s .Capital
RR s .
1 Opening Balances 15,000 50,000 30,000 15,000 95,000 85,000 20,000
Add : First
Realisation50,000
65,000
Less: Cash Kept
aside for contingent
Liab. Rs. 5,000estimated realizationexp. Rs. 10,00015,000
50,000
Less: Paid to
creditors50,000 50,000
NIL NIL
Second Realisation 1,00,000
Add: Surplus
available from
amount
Kept aside for
contingent liab.
(5000 -3500) 1,500
10,1500
Less: Paid to P & Q
loan45,000 30,000 15,000munotes.in

Page 95

9556,500 NIL NIL
Less: Extra Excess
Cap. Paid to P15,000 15,000
41,500 80,000
Less: Excess Cap.
To P & Q in the
Ratio 4:1 15,000 12,000 3,000
26,500 68,000 17,000
Less:P a i dt o P,Q
& R in PSR 4:5:126,500 10,600 13,250 2,650
NIL 57,400 71,750 14,350
Third Realisation 85,000
Add: Surplus
available from
amount
kept aside for
estimated
realization
Expenses (10,000
-7,500)2,500
87,500
Less: Sales Tax
fine paid3,000
84,500
Less: Stock taken
Over by R2,500
11,850
Less: Padi to P &
Q for stock taken
over by R 22,500 10,000 12,500 -
62,000 47,400 59,250 11,850
Less: paid to P, Q
& R in PSR 4:5:162,000 24,800 31,000 6,200
Loss on
Realisation- 22,600 28,250 5,650
Note:
1) Keep aside cash for estimated realization expenses and contingent
liability at the beginning.
2)Excess amount of RS. 1500 kept aside for contingent liability has been
added to the 2ndrealization.
3)Excess amount of Rs. 2500 kept a side for realization expenses has
been added to the third realization.
4)Sales tax fine of Rs. 3000 has to be paid first from the third realization
being preferential creditor.
5)Stock taken over by R Rs. 2500 has been deducted from his capital
balance Rs. 10,000 has been paid to P & Rs. 12,500 to Q for stock
taken over by R.munotes.in

Page 96

96PSR P Q R
Cash paid 4 5 1
250
(Proportionately in PSR)
Illustration 10: -
The partners X,Y & Z have called upon you to assist them in winding up
the affairs of their partnership on 30thJune 2013. Their Balance Sheet as
on that date is given below:
Liabilities Rs. Assets Rs.
Sundry Creditors
Capital Accounts
X
Y
Z34,000
1,34,000
90,000
63,000Cash at Bank
Sundry Debtors
Stock in trade
Plant & Eq uipment
Loan –X
Loan –Y12,000
44,000
28,000
1,98,000
24,000
15,000
3,21,000 3,21,000
1.The partners share profit and losses in the ratio of 5:3:2
2.Cash is distributed to the partners at the end of each month
3.A summary of liquidation transac tions are as follows:
July 2013
Rs. 33,000 –Collected from Debtors balance is uncollectible
Rs. 20,000 –Received from sale of entire Stock.
Rs. 2,000 –Liquidation expenses paid
Rs. 16,000 –Cash retained in the business at the end of month
August 2013
Rs. 3000 –Liquidation expenses paid as part payment of his capital, Z
accepted a piece of equipment for Rs. 20,000 (book value Rs. 8,000)
Rs. 5,000 –Cash retained in the business at the end of the month
September –2013
Rs. 1,50,000 –received on s ale of remaining plant & equipment
Rs. 2,000 –liquidation expenses paid. No cash retained in the
business.
Prepare a statement showing distribution of cash by applying
proportionate capital method.
Solution: –Statement of Excess Capital
X
Rs.Y
Rs.Z
Rs.
Balance 1,34,000 90,000 63,000
Less: Loans 24,000 15,000 -
1,10,000 75,000 63,000
Profit sharing Ratio 5 3 2
Taking X’s capital as the (22,000) (25,000) (31,500)munotes.in

Page 97

97Basis (1=22,000) 1,10,000 66,000 44,000
9,000 19,000
Profit sharing Ration 3 2
Unit value (3000) (9500)
Taking Y’s Capital as the 9,000 6,000
basis (1= 3000)
- 13,000
Calculation of proportionate Capital after take over of equipment
X
Rs.Y
Rs.Z
Rs.
Balance on 1.9.2013 1,10,000 67,000 30,000
Profit Sharing Ra tio 5 3 2
Unit value (22,000) (22,334) (15,000)
Taking Z’s capital as the basis
1 = 15,000 75,000 45,000 30,000
35,000 22,000 -
Note: If the share of partner in that realisation less than the value of asset
the asset is given to the partner concer ned but it disturbs the earlier
calculation of surplus capital. Hence Surplus capital of partners is decided
again.
Statement showing Distribution of Cash
Date Particulars Cash Rs. Total
Rs.Creditors
Rs.X
Rs.Y
Rs.Z
Rs.
Balances 34,000 1,34,00 090,000 63,000
Less : Loans
taken24,000 15,000
2,82,000 34,000 1,10,000 75,000 63,000
June 2013
Cash Balance 12,000
Paid to
Creditors12,000 12,000 12,000
2,70,000 22,000
July 2013
1stRealisation 53,000
Less: Expenses 2,000
51,000
Less: Cash
Retained16,000
35,000
Paid to
creditors22,000 22,000 22,000
13,000 2,48,000 -
Paid to Z 13,000 13,000 13,000
Balance due - 2,35,000 - 1,10,000 75,000 50,000
Aug 20 13
Secondmunotes.in

Page 98

98Realisation
July Balance
retained16,000
Less: Expenses 3,000
13,000
Less: Cash
retained5,000
8,000
Paid to Y 8,000 8,000 - 8,000
Equipment
given to Z- 20,000 - 20,000
- 2,07,000 1,10,000 67,000 30,000
Sep 2013
Final
RealisationAugust Balanceretained5,000
Sale of plant 1,50,000
1,55,000
Less: Expenses 2,000
1,53,000
Less:Paid to X&Y57,000 57,000 35,000 22,000
96,000 1,50,000 75,000 45,000 30,000
Paid to X, Y &
Z
In 5 : 3: 2 96,000 96,000 48,000 28800 19200
54,000 27,000 16,200 10,800
Illustration No. 11
Partnership of L, M & N was dissolved on 31stOctober 2013 on
which date their Balance Sheet stood as under:
Liabilities Rs. Assets Rs.
Capital A/cs: Goodwill 80,000
L 1,20,000 Buildings 52,500
M 1,30,000 Furniture 10,000
N 90,000 3,40,000 Stocks 1,52,000
Reserve 60,000 Debtors 1,35,500
Creditors 40,000 Cash 10,000
4,40,000 4,40,000
The partners were sharing profits & loss in the ratio of 3:2:1 respectively.
They decided to distribute the cash as and when it was received L agreed
to work as receiver on a remuneration of Rs. 5,000 and to bear all
expenses of realization when it was completed be found that he had spentmunotes.in

Page 99

99Rs. 1050 towa rds the expenses. Following details of realization were
available:
December 2013
January 2014
February 2014Rs. 45,000
Rs. 1,20,000
Rs. 1,14,000
There was some stock of the book value of Rs. 9,000 lying unsold and it
was taken over by N at an a greed value of Rs. 5,000.
You are required to prepare the following (using excess capital method)
1. Statement of Surplus Capital
2. Statement showing monthly distribution of cash available.
Solution:
Statement showing surplus capital:
Step
No.Particu lars Formula L
Rs.M
Rs.N
Rs.
Capital Balances 1,20,000 1,30,000 90,000
Add: Reserve 30,000 20,000 10,000
I Adjusted Capitals 1,50,000 1,50,000 1,00,000
II Profit sharing Ratio 3 2 1
III Unit values 50,000 75,000 1,00,000
IV Proportionate C apital
(Base L)1,50,000 1,00,000 50,000
V Surplus Capital - 50,000 50,000
VI Profit sharing ratio 2 1
VII Unit values 25,000 50,000
VIII Proportionate Capital
(Base M)50,000 25,000
IX Absolute surplus - 25,000
Payment chart (IX, VIII, I V)
I - - 25,000
II - 50,000 25,000
III 1,50,000 1,00,000 50,000
1,50,000 1,50,000 1,00,000
Statement showing Piecemeal Distribution of Cash
Capital Accounts (Adjusted) Date Particulars Cash Total
ClaimsCreditors
L M N
1/11/13 Balance du e 4,40,000 40,000 1,50,000 1,50,000 1,00,000
Cash Balance 10,000
Less: Remuneration to L (5,000)
5,000munotes.in

Page 100

100Less: Paid to creditors (5,000) (5,000) (5,000)
- 4,35,000 35,000
Dec 13 Realisation in Dec 2013 45,000
Less: Paid to creditors (35,000) (35,000) (35,000)
10,000 4,00,000 -
Less: Paid to M (10,000) (10,000) (10,000)
- 3,90,000 1,50,000 1,50,000 90,000
Jan 14 Realisation in Jan 2014 1,20,000
Less: Paid to M & N to
clear
Surplus capital 90,000 (90,000) (50,000) (40,000)
30,000 3,00,000 1,50,000 1,00,000 50,000
Less: Paid to all partners
in PSR30,000 (30,000) (15,000) (10,000) (5,000)
- 2,70,000 1,35,000 90,000 45,000
Feb 14 Cash Realised 11,400
Less: Paid to all in PSR 11,400 1,14,000 57,000 38,000 19,000
- 1,56,000 78,000 52,000 26,000
Feb 14 Cash 6,000
Less: Paid to All in PSR (6,000) (6,000) 3,000 2,000 1,000
Loss on Realisation 75,000 50,000 25,000
Illustration 12 :
Avani, Binal and Cindy are partners sharing profits and losses in
the ratio of 4:2:1. They decided to dissolve the partnership as on 31st
March 2013 when their Balance Sheet was as follows :
Balance Sheet as on 31stMarch, 2013
Liabilities Rs. Assets Rs.
Creditors 16,820 Cash in hand 500
General Reserve 9,780 Investment 16,000
Capital : Avani 16,000 Machinery 38,740
Binal 32,000 Debtors 6,520
Cindy 26,000 Building 980
Furniture 37,860
1,00,600 1,00,600
All creditors have to be paid off. Rs. 300 has to be provided for
realization expenses.
Thereafter all cash received should be distributed among the
partners.munotes.in

Page 101

101The amounts were realized in installments as follows :
Rs.
1st20,000
2nd3,500
3rd46,00 0
4th24,000
The actual realization expenses were Rs. 500. Prepare a statement
showing piecemeal distribution of cash as per Excess Capital Method.
Solution :
Statement of Excess Capital :
Sr. Particulars Avani Banal Cindy
Balance B/f 16,000 32,000 26,000
Add : General Reserve 5,600 2,800 1,400
Total 21,600 34,800 27,400
Profit Sharing Ratio 4 2 1
Unit Value 5,400 17,400 27,400
Proportionate capital taking A as
base21,600 10,800 5,400
Excess Capital --24,000 22,000
Profit Shari ng Ratio 2 1
Unit Value 12,000 22,000
Proportionate capital taking B as
base24,000 12,000
Ultimate Surplus 10,000
Sr.
No.Particulars Cash
AvailableTotal
claimsCreditors Avani Binal Cindy
Balance B/f 500 1,00,600 16,800 21,600 34,800 27,400
Less : reserve for
Expenses300
Balance 200
Less : paid to
Creditors200 200 200
Balance 0 1,00,400 16,600 21,600 34,800 27,400
Add 1stRealisation 20,000
Less : paid to
Creditors16,600 16,600 16,600
Balance 3,400 83,800 0 21,600 34,800 27,400
Less : Paid to Cindy 3,400 3,400 3,400
Balance 0 80,400 21,600 34,800 24,000
2ndrealization 3,500munotes.in

Page 102

102Less : Paid to Cindy 3,500 3,500 3,500
Balance 0 76,900 21,600 34,800 20,500
3rdrealization 46,000
Less : paid to Cindy 3,100 3,100 3,100
Balance 42,900 73,800 21,600 34,800 17,400
Less paid to Binal &
Cindy36,000 36,000 24,000 12,000
Balance 6,900 37,800 21,600 10,800 5,400
Less paid to all in
PSR6,900 6,900 3,943 1,971 986
Balance 0 30,900 17,657 8,829 4,414
4thRealisation 24,000
Less : realization
expenses200
Balance 23,800
Less : paid to all in
PSR23,800 23,800 13,600 6,800 3,400
Loss on Realisation 7,100 4,057 2,029 1,014
Illustration 13 :
Jam, Bread and Butter are partners sharing profits and losses in the
ratio of 2 : 2 : 1. They decided to dissolve the partnership as on 31stMarch
2013 when their Balance Sheet was as follows :
Balance Sheet as on 31stDecember, 2013
Liabi lities Rs. Assets Rs.
Creditors 15,000 Cash in hand 9,000
Income tax Payable 4,000 Investment 7,500
Bank loan (secured on
stock)30,000 Machinery 17,800
Jams loan 11,000 Debtors 66,400
Capital Jam 40,000 Building 60,000
Bread 40,000 Furniture 9,300
Butter 30,000
1,70,000 1,70,000
Bank took over Stock and could realize Rs. 25,000 only. Rs. 3,000
were paid for repairing furniture to get better price.
Thereafter all cash received was distributed among all other
liabilities and the partners.
The amounts realized and expenses incurred were in installments
as follows.
Month Cash realized Rs. Expenses Rs.
January 2014 13,400 1,400munotes.in

Page 103

103February 2014 17,200 2,200
March 2014 11,500 1,500
April 2014 32,750 2,750
May 2014 36,640 1,640
Solution :
Statement of Excess Capital :
Sr. Particulars Jam Bread Butter
Balance B/f 40,000 40,000 30,000
Profit Sharing Ratio 2 1 1
Unit Value 20,000 40,000 30,000
Proportionate capital taking Jam as
base40,000 20,000 20,000
Excess Capital 20,000 10,000
Profit Sharing Ratio 1 1
Unit Value 20,000 10,000
Proportionate capital taking Butter
as base10,000 10,000
Ultimate Surplus 10,000
Statement Showing Piecemeal distribution of Cash
munotes.in

Page 104

104
*after payment of Rs. 25,000 recovered from Stock
Illustration 14 :
Sonam, Nidhi and Pooja are partners sharing profits and losses in
the ratio of 4:2:1. They decided to dissolve the partnership as on 31st
March 2013 when their Balance Sheet was as follows :
Balance Sheet as on 31stMarch, 2013
Liabilities Rs. Assets Rs.
Capital : Sonam 1,00,000 Land & Building 50,000
Nidhi 60,000 Machinery 1,50,000
Pooja 20,000 Debtors 45,000
10% Bank Loan
(unsecured)40,000 Stock 34,500
Bills Payable 30,000 Cash and Bank 500
Creditors 30,000
2,80,000 2,80,000
Rs. 800 has to be provided for realization expenses.
Thereafter all cash received should be distributed among the
partners.
The amounts were realized in installments as follows :munotes.in

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105Rs.
1st60,300
2nd50,000
3rd79,000
4th27,700
The actual realization expenses were Rs. 500. Prepare a statement
showing piecemeal distribution of cash as per Excess Capital Method.
Solution :
Statement of Excess Capital :
Sr. Particulars Sonam Nidhi Pooja
Balance B/f 1,00,000 60,000 20,000
Profit Sharing Ratio 4 2 1
Unit Value 25,000 30,000 20,000
Proportionate capital taking Pooja
as base80,000 40,000 20,000
Excess Capital 20,000 20,000 --
Profit Sharing Ratio 4 2
Unit Value 5,000 10,000
Proportionate capital taking
Sonam as base20,000 10,000
Ultimate Surplus 10,000
Particul
arsCash
Availa
bleTotal
claimsBK
Loa
nB.P. Credit
orsSona
mNidh
iPooj
a
Balance
B/f500 2,80,0
0040,0
0030,0
0030,000 1,00,0
0060,0
0020,0
00
Add:
Cash real60,300
Less :
reserve
for
Expense
s800
Balance 60,000
Less :
paid to
Creditors60,000 60,000 24,0
0018,0
0018,000
Balance --2,20,0 16,0 12,0 12,000 1,00,0 60,0 20,0munotes.in

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10600 00 00 00 00 00
Add 2nd
Realisati
on50,000
Less :
paid to
Credit,
loan, bs40,000 40,000 16,0
0012,0
0012,000
Balance 10,000 1,80,0
00-- -- --1,00,0
0060,0
0020,0
00
Less :
Paid to
Nidhi10,000 10,000 10,0
00
Balance --1,70,0
001,00,0
0050,0
0020,0
00
3rd
realizatio
n79,000
Less :
Paid to
Sonam,
Nidhi30,000 30,000 20,000 10,0
00
Balance 49,000 1,40,0
0080,000 40,0
0020,0
00
Balance --91,000 52,000 26,0
0013,0
00
4th
Realisati
on27,700
Add :
Excess
Re300
28,000
Less :
paid to
all in
PSR28,000 28,000 16,000 8,00
04,00
0
Loss on
Realisati
on--63,000 36,000 18,0
009,00
0
4.7EXERCISE
Pr.1A, B, and C carrying on business is partnership decided to dissolve it
on and from 30thSept. 2013. The following was their Balance sheet on
that date:munotes.in

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107Liabilities Rs. Assets Rs.
Capital Accounts: Sundry Assets 8,000
A 2,800 Cash & Bank 1,000
B 200 Advertisement
Suspense A/c900
C 1,000 4,000
Profit & Loss 3,900
Loan from A 2,000
9,900 9,900
As per the arrangements with the bank, the partners were allowed
to withdraw an amount of Rs.500 only at present and the balance amount
of Rs.500 could be withdrawn only after 1stDecember,2009
It was decided that after keeping aside an amount of Rs. 2,000
for estimated realization ex penses the available cash should be distributed
between the partners immediately.
The following were the realisation.
Fixed Assets
Rs.Current Assets
Rs.
31stOctober, 2013 1,000 1,900
25thNovember, 2013 2,600 2,000
20thDecember, 2013 (Final) 1,000 900
Actual realisation expenses amounted to Rs. 1,100 only. Prepare the
statement showing the distribution of cash between the partners. under
excess capital method.
Pr. 2 On 31stDecember, 2013 the Balance Sheet of the partners X, Y and
Z (sharing Pro fit and Losses in the ratio of 2:4:6 (respectively) is as
follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Sundry Assets 16,000
A 3,600 Cash 2,000
B 2,400 Advertisement
Suspense A/c1,800
C 2,000 8,000
Profit & Loss 7,800
Loan from A 4,000
19,800 19,800
On Jan 1, 2014 the partners decide to dissolve the firm and
distribute the proceeds as and when realised.
Prepare a statement showing the distribution according to exc ess
capital Method. The realisations are as below:munotes.in

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108Gross
Realisation
Rs.Realisation
Expenses
Rs.
March 1, 2014 4,450 150
April 15, 2014 6,850 250
April 30, 2014 2,250 250
Pr. 3 Lamb, Deer and Peacock were in partnership, their respective shares
being 1:2:2. The following was their Balance Sheet on 31stDecember,
2013. On which date they decided to dissolve the firm.
Liabilities Rs. Assets Rs.
Creditors 30,000 Cash 18,000
Income -Tax payable 8,000 Stock 80,000
Loan from bank
(Secured by pledge of
stock60,000 Debtors 1,20,000
Deer’s Loan 22,000 Furniture 72,000
Partner’s Capital: Motor car 50,000
Lamb 80,000
Deer 80,000
Peacock 60,000 2,20,000
3,40,000 3,40,000
1. The bank could realize only Rs. 50,000 on disposal of stock
2. A sum of Rs. 6,000 was spent for furniture on getting a better price.
3. Other assets were realised as follows
In January, 2014 Rs. 24,000
In February, 2014 Rs. 30,000
In March, 2014 Rs. 20,000
In April, 2014 Rs. 60,000
InMay, 2014 Rs. 70,000
The partners distributed the cash at and when available. Show the
distribution of cash on the basis of ‘Highest relative capital’.
Pr. 4 Gunen, Dinen, and Biren who were partners sharing profit and losses
in the ratio of 3:2:1 deci ded to dissolve their firm as on 1stJanuary, 2014
on the basis of the following balance sheet:munotes.in

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109Liabilities Rs. Assets Rs.
Creditors 50,000 Cash at Bank 10,000
Capital A/cs Debtors 1,10,000
Gunen 40,000 Stock 30,000
Dinen 35,000
Biren 25,000 1,00,000
1,50,000 1,50,000
It was agreed that Dinen will be in charge of realisation at commission of
5% on Realisations and after meeting expenses and his commission the net
amount would be distributed piecemeal as a nd when realised. The
following schedule of realisation is available.
Month
(2014)Realisation
Rs.Expenses
Rs.
January 30,000 1,000
February 20,250 1,100
March 35,100 900
April 25,000 1,250
May (Final) 30,250 750
1,40,600 5,000
Prepare a state ment to show how the amount will be distributed
amongst the partners.
Pr.5 Partnership of Urmila, Manisha, and Karishma was dissolved on 31st
October, 2013 on which date their Balance Sheet stood as under:
Liabilities Rs. Assets Rs.
Capital A/cs Goodw ill 80,000
Urmila 1,20,000 Building 53,000
Manisha 1,30,000 Furniture 10,000
Karishma 90 ,000 3,40,000 Stock 1,52,000
Reserve 60,000 Debtors 1,35,000
Creditors 40,000 Cash 10,000
4,40,000 4,40,000
The partnership were sharing profi ts and losses in the ratio of 3:2:1
respectively. They decide to distribute the cash as and when it was
received. Urmila agreed to work as receiver on a remuneration of Rs.
20,000/ -and to bear all expenses of realisation. When it was completed,
he found t hat he had spent Rs. 4,200/ -towards the expenses. Following
details of realisation were available:munotes.in

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110December 2013 Rs. 32,000
January 2014 Rs. 2,42,000
February 2014 Rs. 1,40,000
There was some stock of the book value of R. 36,000 lying unsold
and it was taken over by Karishma an agreed value of Rs. 20,000.
You are required to prepare the following (Using Excess Capital
Method)
(a) Statement of surplus capital
(b) Statement showing monthly distribution of cash available.

munotes.in

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1115
AMALMAGATION OF FIRMS I
Unit Structure :
5.0 Objectives
5.1 Introduction
5.2 Meaning and Objectives of Amalgamation
5.3 Treatment in the Books
5.4 Solved Illustrations
5.5 Exercise
5.0OBJECTIVES
After studying the unit the students will be able to:
Define the term Amalgamation.
Calculate the amount of Purchase Consideration
Understand the accounting procedure for amalgamation.
After studying the unit the students will be able to solve the practical
problems on amalgamation.
5.1 INTRODUCTION
Busin ess firms grow and expand through business combinations.
Such combinations also help firms to secure operating efficiencies, avoid
competition among them and economies of scale.
Amalgamation means merger or combination of two or more
existing firms. Two or more existing business entities merged themselves
into one entity, is known as amalgamation. After amalgamation of firms,
amalgamating firms [existing/old firms] get dissolved, lose their
existences and new firm is formed which is called as amalgamated firm.
5.2 MEANING AND OBJECTIVES OF
AMALGAMATION
Meaning
A partnership firm is formed with two or more persons. But it can
also be formed in any of the following ways.
A)When tw o or more sole proprietors form new partnership firm,
B)When one exi sting partnership firm absorbs a sole proprietorship.
C)When one existing partnership firm absorbs another partnership firm.munotes.in

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112D)When two or more existing partnership firm from n ew partnership
firm.
The ICAI has issued Accounting Standard A.S. 14 .Accounting for
amalgamation. It is mandatory in nature. The standard classifies the
amalgamation into two categories, namely.
a) Amalgamation in nature of merger.
b) Amalgamation in nature of purchase.
According to Accounting Standard A.S14, the term amal gamation
includes absorptions. [Acquisitions]
There are two methods of accounting f or Amalgamations, as per
A.S.14.
1. Pooling of interest method [confined to amalgamation
of companies only]
2. Purchase method.
Objective sof Amalgamation
1.To enlarge the size of the firm.
2.To reduce overhead or expenses.
3.To avoid cut throat competition among the firms carrying on similar /
complementary business
4.To achieve both external and internal economies of large scale i.e.
purchasing bulk quantities, saving in transport ation expenses etc.
5.To increase productivity and profitably of the firm.
6.To expand the business operations by having more resources like
broader capital base, more man power.
Consequences
Primarily the following consequences take place upon amalgamati on.
1.Dissolution of existing amalgamating firms.
2.Formation of a new firm [called amalgamated firm] to take over
business of existing / old firms.
5.3 TREATMENT IN THE BOOKS OF ACCOUNTS
5.3.1 General Instructions
There are given the following points in the practical problem :
1.Balance sheet of two existing firms / sole Proprietary concerns on date
of amalgamation, which enables to close books of old firms, transferee
capitals balances to new firm.
2.Terms and conditions of amalgamations i.e. revaluation of various
asset and liabilities of both the firms, valuation of Goodwill, disposal
of assets or liabilities not taken over by new firm, certain more
transaction before or after amalgamation.munotes.in

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113The students are required to :
1.Ascertain purchase considerati on.
2.Close books of old firms.
3.Accounting entries in books of new firm.
a.For recording Purchase Consideration.
b.Goodwill treatment.
c.Capital adjustment upon amalgamation.
d.Elimination of inter firm Owings, (if any)
4.Preparation of Balance Sheet of the New Firm.
5.3.2 Purchase Consideration:
Purchase consideration is the agreed amount to be paid by the
purchasing firm to old firm. It can be calculated as follows:
A)Net asset method -Under this method, purchase consideration is
equal to net asset taken over by the New firm at agreed value s. Net asset
means all assets taken over at agreed value s/ other wise at book value s
less liabilities taken over by the purchasing firm.
The purchase consideration is calculated as under:
Particulars ₹₹
A. Agreed value sof assets taken over
Goodwill X
Land & Building X
Stock X
Sundry Debtors X
Cash & Bank X XX
Less: B. Agreed value sof liabilities assumed
Sundry Creditors X
Bill Payable X
Bank Loan X
Outstanding Exp enses X [XX]
Purchase consideration [A -B] XXX
You are required to take care about the following terms:
i)Business is taken over, implies all assets & Liabilities are taken
over at agreed value unless mentioned that particular asset or
liability i s not taken.
ii)Cash / Bank balance should be included in Purchase Consideration,
only to the extent taken over by the new firm & that much balance
should be transferred to Realisation a/c.
iii)If it is mentioned that only trade liabilities are taken over, then
creditors and bills payable are taken over by the by new firm, not any
other liabilities.munotes.in

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114B)Lump sum method -under this method amount of purchase
consideration is given in lump sum. There is no need to calculate purchase
consideration as i t is directly given in the sum i.e. in the problem.
However, difference in Purchase consideration and net assets taken
over, may be Goodwill or Capital Reserve.
Goodwill = Purchase consideration less Net Assets taken over
Capital Reserve = Net Asset s less Purchase consideration.
5.3.3 ACCOUNTING PROCEDURES FOR CLOSING BOOKS OF
OLD FIRM (AMALGAMATING FIRM):
Accounting entries in the books of existing firm / sole proprietor :
Open following ledger accounts:
1.Realisation account.
2.Partner’s Cap ital Account (columnar)
3.New firm account.
4.Cash / Bank account.
Journal Entries in the books of old firm [A malgamating firm]
STEP I
A] for transferring Balance Sheet items at book value:
1.For transferring sundry assets :
Realization a/c Dr.
To Sundry Assets [individually]
Notes :All the assets should be transferred at book values.
Cash/Bank bal. should be transferred to the extent it is taken over.
Debtors should be transferred at gross amount; R.D.D should be
credite d to Realization a/c.
Provision for depreciation should be credited to Realization a/c.
Fictitious assets and accumulated losses should not be transferred to
Realisation a/c.
All the assets should be transferred whether taken over or not by the
new firm.
2.For transferring accumulated losses:
Partner Capital a/c Dr.
To Profit & Losses a/c
[Inoldprofit sharing Ratio]munotes.in

Page 115

1153.For transferring Liabilities:
Sundry Liabilities a/c Dr.
To Realization a/c
4.For transferring Reserves :
Reserves a/c Dr.
To Partners’ Capital a/c [old ratio]
STEP II
1.For recording Purchase consideration:
New Firm a/c Dr.
To Realization a/c
2.For Assets taken over by partn er:
Partners Capital a/c Dr.
To Realisation a/c
3.For sale of Asset:
Cash/Bank a/c Dr.
To Realisation a/c
4.For liabilities taken over by partner:
Realisation a/c Dr.
To. Partne r Capital a/c
5.For payment of liabilities not taken over:
Realisation a/c Dr.
To Cash / Bank a/c
6.For realization expenses:
Realisation a/c Dr.
To Cash a/c, or,
To Partners Capitala/c [if, paid bythe partner]
7. For asset taken over by creditor in settlement of liabilities:
No entry, as both accountants are already transferred to Realisation a/c. &
their accounts are already closed.
8.For tr ansferring profit on Realisation:
Realization a/c Dr.
To Partners Capital a/c [old p.s.r.]munotes.in

Page 116

1169.For transferring loss on Realisation:
Partners Capital a/c [old p.s.r.] Dr.
To Realisation a/c
10. For transf erring Partners Capital Bal:
Partners Capital A/c [individually] Dr.
To New Firm a/c
11. For final settlement:
Partners Capital a/c Dr.
To Cash a/c
After passing above entries new firms a/c is automatical ly closed and
books of old. firm [ amalgamating firm[ are closed.
5.3.4 ACCOUNTING ENTRIES IN THE BOOKS OF THE NEW
FIRM [AMALGAMATED FIRM]:
For recording various Assets & liabilities taken over,
A.If net acquired assets is equal to purchase consideratio n.
[If it is calculated by the Net Asset method]
Sundry Assets a/c
Dr.
To Liabilities a/c
To A Capital a/c
To B Capital a/c
To R.D.D .A/C [if any]
B.If net acquired assets is more than purchase consideration:
Sundry Assets a/c Dr.
To Liabilities a/c
To A Capital a/c
To B Capital a/c.
To R.D.D.A/C [if any]
To Capital Reserve a/c
C.If net acquired assets is less than the amo unt of purchase
consideration: [P.C]
Sundry Assets a/c Dr.
Goodwill a/c Dr.*
To Liabilities a/c
To A Capital a/c
To B Capital a/c
To R.D.D. A/C [if any]munotes.in

Page 117

117Note:
In case p.c. is taken by lump sum method, GOODWILL OR
CAPITAL RESERVE may be bal. f ig.
Partner’s capital accounts shall be credited by the amounts transferred
from old firm.
Similar entry should be passed for recording various Assets &
liabilities taken over from other firm.
Goodwill treatment
For writing off Goodwill in new profit s haring ratio.
All Partners Capital A/c Dr.
(In New Profit Sharing Ratio)
To Goodwill a/c
(Total Goodwill)
For elimination inter firm debts :
Before amalgamation one firm might have sold goods to another firm,
which may haver e m a i n edunpaid, e.g. A sold goods worth ` 25,000 on
credit to B..IF A & B are amalgamated as AB & CO., sundry Debtors of A
includes B ` 25,000 & sundry creditors of B includes A ` 25,000, after
merger , AB & co. have to cancel / reduce / eliminate S. Debtors as well as
S. Credit ors by ` 25,000.
Sundry Creditors a/c/Loan a /c[taken] Dr.
To Sundry Debtors a/c/Loan a/c [given]
Capital Balance transferred from old firm may no tbe in their new P.S. R.,
Total Capital of the new firm may fixed & to be maintained for i ndividual
capital contribution of the partners working should be as under:
For Capital adjustment in new P.S.R.
Partner A B C D
Capital bal. transferred from old firm x X x x
Less: Goodwill written off [x] [x] [x] [x]
Balance left x X x x
Fixed Capital in new P.S.R ……………… [x] [x] [x] [x]
Surplus or [ shortage ] in capital to be adjusted x X x[x]
Entry:for transferring
excess capital:Partner’s capital a/c Dr
To Partner’s Current a/c / Cash a/c, or
To Partner’s Loan a/c
Entry for adjusting
shortage in capital:Partner’s Current a/c / Cash a/c / Partners
Loan a/cDr.
To Partner’s Capital a/cmunotes.in

Page 118

118Preparation of Balance Sheet of the New Firm:
Add up all individual assets of both firms taken over by the new firm
at agreed value, show on the Asset side of the Balance Sheet, R.D.D
should be deducted from S. Debtors on assets side of the Balance Sheet.
Add up all individual liabilities of both firms taken over by the new
firmat assumed value, show on the liability side of the Balance Sheet.
All the above figures should be taken from purchase consideration,
after considering additional entries passed in the books of new firm.
5.4SOLVED PROBLEMS
Illustration s:1
A and B carrying on independent business and their position on
31.03.2013 isreflected in the Balance Sheet given below:
LiabilitiesA
`B
` AssetsA
`B
`
Sundry
Creditors2,20,000 94,000 Stock -in-trade 3,40,000 1,96,000
Outstanding
Expenses1,500 4,000 Sundry
Debtors1,78,000 74,000
Bills Payable 25,000 ---Cash 2,000 400
Capital 3,06,000 1,91,000 Bank 26,000 15.000
Furniture 5,500 3.600
Investments 1,000 ---
5,52,500 2,89,000 5,52,500 2,89,000
Both of them to form a partnership firm from 1.04.2013 in the style
of AB & CO. on the following terms:
a]The capital of the partnership firm would be ` 4 ,80,000 and to be
contributed by them in the ratio of 2:1.
b]The assets of individual business to be revalued as under:
Assets of A :Stock to be written -down by 15% doubtful debtors
estimated ` 16,526 furniture to be revaluated at
`4,000, market value of investments at `2,000.
Assets of B : Stock to be written -up by 10%, provision for doubtful
debt required at ` 7, 100, rest the asset s are the be
taken over at book -value.
c]The firm takes over only trade liabilities.
You are required to pass necessary Journal Entries in the books of A
and B. also prepare the opening Balance Sheet of the firm as on 1.04.2013.munotes.in

Page 119

119Solution:
In the book so fA
Date Particulars L.F. `D r . `C r .
1.04.13 Realisation a/c Dr. 5,51,000
To Stock a/c 3,40,000
To Sundry Debtors a/c 1,78,000
To Cash a/c 500
To Bank a/c 26,000
To Furniture a/c 5,500
To in vestment a/c 1,000
[being transfer of assets at book
value]
Creditors Dr. 2,20,000
Outstanding Expenses a/c Dr. 1,500
Bills Payable a/c Dr. 25,000
Realisation a/c 2,46,500
[being transfer of liabilities at book
value]
Realisation a/c Dr. 1,500
To Cash 1,500
[being outstanding expenses paid]
AB & Co. a/c Dr. 2,37,974
To Realisation a/c 2,37,974
[being Purchase consideration due]
A’s capital a/c Dr. 68,026
To Realisation a/ c 68,026
[being realization loss transferred
to Capital a/c]
A’s capital a/c Dr. 2,37,974
To AB & Co. a/c 2,37,974
[being balance in capital a/c
transferred to close the books on
account]
In the books of B
Date Particulars L.F. Amount Amount
1.04.13 Realisation a/c Dr. 2,85,000
To Stock a/c 1,96,000
To Sundry Debtors a/c 74,000
To Cash a/c 400
To Bank a/c 11,000munotes.in

Page 120

120To Furniture a/c 3,600
[being transfer of assets at book
value]
Realisation a/c Dr. 4,000
To Bank a/c
[being outstanding expenses paid ] 4,000
Creditors Dr. 94,000
Outstanding Expenses a/c Dr. 4,000
To Realisation a/c 98,000
[being transfer of liabilities at book
value]
AB & Co. a/c Dr. 2,03,500
To Realisation a/c 2,03,500
[being Purchase consideration due]
B’s capital a/c Dr. 12,500 12,500
To Realisation a/c
[being realization loss transferred
to Capital a/c]
A’s capital a/c Dr. 2,03,500
To AB & Co. a/c 2,03,500
[being balance in capital a/c
transferred to close the books o f
account]
Balance Sheet of AB & Co. as on April, 1st2013.
Liabilities ` ` Assets ` `
Partners
CapitalFurniture 7,600
A 3,20,000 Investment 2,000
B 1,60,000 4,80,000 Stock 5,04,600
Sundry
Creditors3,14,000 Sundry
Debtors2,52,000
Bills
Payable25,000 RDD (23,626) 2,28,374
Bank 37,000
Cash 90
brought in
by A82,026
82,926
Less: Paid
toB(43,500 ) 39,426
8,19,000 8,19,000munotes.in

Page 121

121Calculation of purchase consideration :
Particulars A` B` Total `
A) Assets taken over.
Furniture 4,000 3,600 7,600
Investments 2,000 - 2,000
Stock 2,89,000 2,15,600 5,04,600
Sundry debtors 1,78,000 74,000 2,52,000
Bank 26,000 11,000 37,000
Cash 500 400 900
A 4,99,500 3,04,600 8,04,100
B Less: Liabilities assumed
Sundry Creditors 2,20,000 94,000 3,14,000
Bills Payable 25,000 - 25,000
R.D.D 16,526 7,100 23,626
B 2,61,526 1,01,100 3,62,626
Net Assets taken over by the AB &
Co Purchase consideration (A -B)2,37,974 2,03,500 4,41,474
A B
Fixed Capital as per agreement ` 3,20,000 1,60,000
Less : Capital balance transferred ` (2,37,974 )(2,03,500 )
Cash to be introduced + / withdrawn [ -] 82,026 (43,500 )
Illustration 2
Two partnership firm, carrying on business under the style of Anand
& Co. [partners N & C] and Ashok & Co. [partners K&P ] respectively,
decided to amalgamate into 2 A & Co. with effect from 01stApril 2014.
the respective Balance Sheet of the both the firms as on 31stMarch 2014
are a below:
Liabilities Anand &
Co`Ashok &
Co`Assets Anand &
Co`Ashok &
Co`
Capital : C 1,90,000 Goodwill 50,000
K 1,00,000 Land &
Building1,00,000 -
P 20,000 Stock 2,00,000 50,000
Bank Loan 1,50,000 Sundry
Debtors1,00,000 1,00,000
Creditors 1,00,000 95,000 Cash in
hand- 15,000munotes.in

Page 122

122Capital N 40,000
Total ` 4,40,000 2,15,000 Total ` 4,40,000 2,15,000
Profit sharing ratio are N & C = 1 :2, K & P = 1 : 1. Agreed terms are :
A)Land & Building to be devalued by 20%.
B)All stocks are to be appreciated by 50%.
C)Anand & Co owes `50,000 to AK & Co. as on 31stMarch 2014. This is
settled at ` 20 ,000.
D)Goodwill to ignored for the purpose of amalgamation.
E)The fixed capitals in the new firm 2A & co. are to be N ` 20,000, C `
30,000, K `10,000 & P ` 40,000.
F)C take over the Bank loan of Anand & Co., & gifted to N the amount
of money to be bro ught in by N to make up his capital contribution.
G)K is paid off in cash from AK & Co. P bring in sufficient cash to make
up his required capital contribution .Pass necessary Journal entries to
close the books of both firms.
Give Balance Sheet of 2A & Co, as on 01stApril, 2014.
Solution:
In the book of Anand & Co.
Date Particulars L.F. Dr. ` Cr. `
31.03.14 Realisation a/c 4,00,000
To land & Building a/c 1,00,000
To stock a/c 2,00,000
To Sundry Debtors a/c 1,00,00 0
[being various assets
transferred at book value]
Sundry Creditors a/c 1,00,000
Bank Loan a/c 1,50,000
To Realisation a/c 2,50,000
[being various liabilities
transferred at book value]
2A & co. a/c 4,10,000
To R ealisation a/c 4,10,000
[being purchase
consideration due]
Realisation a/c Dr. 1,50,000
To C’s Capital a/c 1,50,000
[being Bank loan taken
over by C]
Realisation a/c Dr. 1,10,000
To N’s capital a/c 36,667munotes.in

Page 123

123To C’s Capital a/c 73,333
[profit on realization
transferred to partner’s
capital]
C’s capital a/c. Dr. 23,333
To N’s capital a/c 23,333
[being Deficit in N’s capital
gifted by C]
N’s capital a/c Dr. 20,000
C’s capital a/c 3,90,000
To 2A & co. 4,10,000
[balanced in capital
accounts of the partners
transferred to 2A & Co.]
In the Books of As hok& Co.
Date Particulars L.F. Dr. Cr.
31.03.14 Realisation a/c 2,00,000
To Goodwill a/c 50,000
To stock a/c 50,000
To Sundry Debtors a/c 1,00,000
[being various assets
transferred at book value]
Sundry Creditors a/c 95,000
To Realisation a/c 95,000
[being creditors transferred at
book value]
2A & co. a/c 50,000
To Realisation a/c 50,000
[being purchase consideration
due]
K’s capital a/c 27,500
P’s capital a/c 27,500
To Realisation a/c 55,000
[being loss on realization
transferred to partners
equally]
Bank a/c 47,500
ToP’s capital a/c 47,500
[being necessary amount
brought in by P to make up hismunotes.in

Page 124

124required capital contribution]
K’s capital a/c. 62,500
To Bank a/c 62,500
[Being excess capital
refunded]
K’s capital a/c 10,000
P’s capital a/c 40,000
To 2A & co. 50,000
[balance in capital accounts of
the partners transferred to 2A
& Co.]
Calculation of Purchase Consideration
Assets Taken Over Anand & Co. ` AK & Co. ` Total `,
Land & Building 80,000 --- 80,000
Stock 3,00,0 00 75,000 3,75,000
Sundry Debtors 1,00,000 70,000 1,70,000
(A) 4,80,000 1,45,000 6,25,000
Liabilities taken over
Sundry Creditors (B) 70,000 95,000 1,65,000
Purchase Consideration
[A-B]4,10,000 50,000 4,60,000
Balance Sheet of 2A & Co. 1 April 2014
Liabilities ` Assets `
Partner’s Capital : Land &
Building80,000
N 20,000 Stock 3,75,000
C 30,000 Sundry Debtors
K 10,000 [1,70,000 -
20,000]1,50,000
P 40,000
1,00,000
Sundry Creditors 1,65,000
Less : Inter -co.
Owing 20,000 1,45,000
C’s Loan 3,60,000
Total`6,05,000 Total ` 6,05,000
After adjustment of reduction in inter company o wing by `30,000.munotes.in

Page 125

125C’s capital balance transferred 3,90,000 however bal. required was
30,000. Hence excess capital transferred to c’s loan a/c [3,90,000 30,000] .
Sundry creditors A/c Dr. 20,000
To Sundry Debtors A/c 20,000
Inter firm owing eliminate d in the books to firm Z A & Co., as
both firms are magead into one .
Illustrations : 3
A and B and C and D are Partner’s in A & Co and C & Co.
respectively. A&Ba r e sharing in the ratio 3,2 and C& D are sharing in
equal proportion. Their balance shee ts as on 31stDecember 2014 were as
under.
Balance Sheet of A & Co as on 31stDecember, 2014.
Liabilities ` Assets `
Capital Accounts Machinery 60,000
A 75,000 Furniture 5,000
B 50,000 Stock 50,000
Reserves 40,000 Debtors 75,000
Loan from UTI 20,000 Bank 7,000
Bank
Creditors 15,000 Cash 3,000
Total ` 2,00,000 Total ` 2,00,000
Balance Sheet of C.D & Co. on 31stDecember 2014
Liabilities ` Assets `
Capital Accounts Goodwill 25,000
C 60,000 Furniture 5,000
D 55,000 Stock 70,000
Reserves 25,000 Debtors 45,000
Loan from IDBI 10,000 Bank 3,000
Cash 2,000
Total ` 1,50,000 Total ` 1,50,000
They decided to amalgamate and form a new firm ABCD & Co. on
1stJanuary 2015.
Terms of amalgamat ion :
1)The new firm shall take over all the assets and liabilities of both the
firms.
2)Provision for doubtful debts shall be made at 5% on debtors.munotes.in

Page 126

1263)Goodwill is to be valued at 2 years purchase of the last 4 years average
profits.
4. The profits o f the firms are.
Year A & Co. ` C & Co. `
2011 30,000 20,000
2012 45,000 30,000
2013 35,000 40,000
2014 54,000 30,000
5. Machinery of A & Co. is undervalued by ` 15,000. This value is now
to be adjusted property.
You are required to gi ve :
1) Ledger Accounts in the books of both the firms.
2) Balance Sheet of ABCD & Co.
Solution :
In the books of A & Co.
Realisation A/c
Dr. Cr.
Particulars ` ` Particulars ` `
To M achinery 60,000 ByCreditors 15,000
To Furniture 5,000 By UTI Loan 20,000
To Stock 50,000 By ABCD & Co 2,58,250
To Debtors 75,000
To Bank 7,000
To Cash 3,000
To Profit on
Realisation
Transferred to
A 55,950
B 37,300 93,250
Total ` 2,93,250 Total ` 2,93,250munotes.in

Page 127

127Partner’s Capital A/c
Dr. Cr.
Particulars A B Particulars A B
To ABCD &
Co.1,54,950 1,03,300 By Balance
b/d75,000 50,000
By Reserve 24,000 16,000
By
Realisation
Profit55,950 37,300
1,54,950 1,03,300 1,54,950 1,03,300
ABCD & Co. A/c
Dr. Cr.
Particulars ` Particulars `
To Realisation A/c 2,58,250 By Partner’s Capital
A/c A1,54,950
B 1,03,300
2,58,250 2,58,250
In the Books of C & Co.
Realisation A/c.
Dr. Cr.
Particulars ` ` Particulars ` `
To Goodwill 25,000 By IDBI Loa n 10,000
To Furniture 5,000 By ABCD &
Co.1,72,750
To Stock 70,000
To Debtors 45,000
To Bank 3,000
To Cash 2,000
To Profit on
Realisation
transferred to
C 16,375
D 16,375 32,750
Total ` 1,82,750 Total ` 1,82,750munotes.in

Page 128

128Partner’s Capital A/c.
Dr. Cr.
Particulars ` ` Particulars ` `
To ABCD & Co. 88,875 83,875 By Balance b/d 60,000 55,000
By Reserves 12,500 12,500
By Realisation 16,375 16,375
88,875 83,875 88,875 83,875
ABCD & Co. A /c.
Dr. Cr.
Particulars ` Particulars `
To Realisation A/c 1,72,750 By Partner’s Capital 88,875
C
D 83,875
1,72,750 1,72,750
Balance Sheet of ABCD & Co. as on1stJan. 2015
Particulars ` ` Assets ` `
Capital A/c’s Goodwill 1,42,000
A 1,54,950 Furniture 10,000
B 1,03,300 Machinery 75,000
C 88,875 Stock 1,20,000
d 83,875 4,31,000 Debtors 75,000
Creditors 15,000 45,000
Uti Bank Loan 20,000 1,20,000
IDBI Loan 10,000 Less : RDD 6,000 1,14,000
Bank 10,000
Cash 5,000
Total ` 4,76,000 Total ` 4,76,000
Working Notes :
a) Goodwill Valuation Average Profit Method.
Year A&C o C&C o
2010 30,000 20,000
2011 45,000 30,000
2012 35,000 40,000
2013 54,000 30,000
1,64,000 1,20,000Average Profit = 1.64,000 / 4 1,20,000 / 4
= 41,000 = 30,000munotes.in

Page 129

129Goodwill = 2 year purchase of Average profit
= 41,000 x 2 = 30,000 x 2
= 82,000 = 60,000
Working Note Number : 2
Purchase Consideration :
Particulars A & Co. ` C & Co. ` Total `,
Assets taken over at agreed
values
Goodwill 82,000 60,000 1,42,000
Machinery 75,000 - 75,000
Furniture 5,000 5,000 10,000
Stock 50,000 70,000 1,20,000
Debtors 75,000 45,000 1,20,000
Bank 7,000 3,000 10,000
Cash 3,000 2,000 5,000
A 2,97,000 1,85,000 4,82,000
Less : Liabilities taken over at
agreed values
UTI Bank Loan 20,000 - 20,000
IDBI Bank Loan - 10,000 10,000
Creditors 15,000 - 15,000
RDD 5% 3,750 2,250 6,000
B 38,750 12,250 51,000
Purchase Consideration (A -B)` 2,58,250 1,72,750 4,31,000
Total columns is useful for preparing Balance Sheet of the new firm.
Illustration : 4.
Two independent firms of Par tner’s ship carrying on business
under the name and style of XY and sons and AB Associates agreed to
amalgamate their business in to one firm from 31stDecember, 201 3XY &
Sons had two Partner’s X and Y whereas AB & Associates has two
Partner’s A and B The partner’s shared the profits and losses in ratio of
their capitals. Their balance sheets as on 31stDecember, 2013 were as
under.
XY & Sons
Liabilities ` Assets `
Capital A/c’s Furniture 5,600
X 56,000 Building 56,000
Y 28,000 Stock 28,560
Credi tors 20,000 Debtors 21,000munotes.in

Page 130

130Bills Payable 8,000 Bank 7,840
Mortgage Loan 7,000
Total ` 1,19,000 Total ` 1,19,000
AB & Associates
Liabilities ` Assets `
Capital A/c’s Furniture 7,000
A 33,600 Stock 25,620
B 22,400 Debtors 28,000
Creditors 28,000 Investments 21,000
Bills Payable 7,000 Bank 9,380
Total ` 91,000 Total ` 91,000
Terms of amalgamations were as under: -
a)The new firm shall carry on business under the name and style AXBY
& Associates
b)Mortgage Loan of XY and Sons and investm ents of AB & Associates
shall not be taken over by the new firm.
c)Goodwill of XY & Sons was valued at ` 10,200/ -and that of AB &
Associates at ` 12,000/ -.
d)Building of XY and sons was taken as undervalued by ` 14,000/ -.
e)Stock of XY and Sons to be d epreciated by ` 5,600/ -and that of AB
and Associates to be appreciated of ` 2,800/ -.
f)5% may be provided as Bad Debts Reserve of both the firms.
g)The capital of the new firm shall be ` 1,12,000/ -which will be
contributed by each partner in the profi t sharing ratio i.e. x -3, Y-2, A-
3, B-2 to be adjusted through current accounts.
You are required to close the books of both the firms by means of
journal entries and also give necessary journal entries in the books of new
firm. Also prepare the balance sheet of the new firm after the
amalgamation.
Solution
Journal entries in the books of XY & Sons.
Sr. Particulars Dr.` Cr.`
1. Relisation A/c. Dr. 1,11,560
To Furniture 5,600
To Building 56,000
To Stock 28,560
To Debtorsmunotes.in

Page 131

131(Being Sundry Assets transferred at
Book Value)21.000
2. Creditors A/c. Dr. 20,000
Bills Payable A/c. Dr. 8,000
To Realisation A/c 28,000
(Being sundry liabilities transferred
at Book Value)
3. Mortgage Loan A/c. Dr. 7,000
To Bank A/c. 7,000
(Being Mortgage Loan repaid)
4. Realisation A/c. Dr. 840
To Bank A/c 840
(Being remaining bank balance
transferred to Realisation)
5. New Firm A/c. Dr. 1,01,550
To Realisation A/c. 1,01, 550
(Being sale of business recorded)
6. Realisation A/c. Dr. 17,550
To X’s Capital A/c 11,700
To Y’s Capital A/c 5,850
(Being profit on Realisation
transferred to Partner’s capital in
profit sharing ratio.)
7. X’s Capital A/c. Dr. 67,700
Y’s Capital A/c. Dr. 33,850
To New Firm A/c 1,01,550
(Being Capital Accounts of both
the Partner’s transferred to new
firm account)
Dr. Realisation A/c. Cr.
Particulars ` Particulars `
ToFurniture 5,600 By Creditors 20,000
To Building 56,000 By Bills
Payable8,000
To Stock 28,560 By AX ByA / c 1,01,550
To Debtors 21,000
To Bank 840
To Profit Transferred
to porter’s capitalmunotes.in

Page 132

132X : 11,700
Y: 5,850 17,550
Total ` 1,29,550 Total `1,29,550Dr. AXBY A/c. Cr.
Particulars ` Particulars `
To Realisation 1,01,550 ByXCapital 67,70 0
By Y Capital 33,850
1,01,550 1,01,550
Dr. Partner’s Capital A.c. Cr.
Particulars X Y Particulars X Y
To AXB y.s A/c 67,700 33,850 By Balance
B/d56,000 28,000
By
Realisation
A/c11,700 5,850
67,700 33,850 67,700 33,850
Journal Entries in the books of AB & Associates.
Sr. Particulars Dr.` Cr.`
1. Realisation A/c. Dr. 91,000
To Furniture 7,000
To Stock 25,620
To Debtors 28,000
ToInvestment 21,000
To Bank 9,380
(Being Sundry assets transferred to
Realisation)
2. Creditors A/c. Dr. 28,000
Bills Payable A/c. Dr. 7,000
To Realisation A/c 35,000
(Being sundry liabilities transferred
to Realisation )
3. New Firm A/c. Dr. 48,400
To Realisation A/c 48,400
(Being sale of business recorded)
4. A’s Capital A/c Dr. 12,600munotes.in

Page 133

133B’s Capital A/c Dr. 8,400
ToRealisation A/c 21,000
(Being investments distributed
amongst Partner’s
5. Realisation A/c Dr. 13,400
To A’s Capital 8,040
To B’s Capital 5,360
(Being profit on Realisation
transferred to Partner’s capital.)
6. A’s Capital A/c Dr. 29,040
B’s Capital A/c Dr. 19,360
To New Firm A/c 48,400
(Being A & B’s Capital transferred
to new firm)
Dr. Realisation A/c Cr.
Particulars ` Particulars `
To Furniture 7,000 By Creditors 28,000
To Stock 25,620 By Bills Payable 7,000
To Debtors 28,000 By New Firm 48,400
To Investments 21,000 By Partner’s Capital 21,000
To Bank 9,380
To Profit transferred
To Capital A/c
A 8,040
B 5,360 13,400
Total ` 1,04,400 Total ` 1,04,400
Dr. Partner’s Capital A/c Cr.
Particulars A B Particulars A B
To Realisation 12,600 8,400 By Balance b/d 33,600 22,400
To New Firm 29,040 19,360 By Realisation 8,040 5,360
41,640 27,760 41,640 27,760munotes.in

Page 134

134Dr. A X B Y is A/c Cr.
Particulars ` Particulars `
To Realisation 48,400 By Partner’s Capital
A 29,040
B 19,360
Total ` 48,400 Total ` 48,400
In the books of AXBY (New Firm)
Journal Entries :
Sr. Particulars Debit. ` Credit. `
1. Furniture A/c Dr. 5,600
Building A/c Dr. 70,000
Stock A/c. Dr. 22,960
Debtors A/c Dr. 21,000
Bank A/c. Dr. 840
Goodwill A/c Dr. 10,200
To Creditors A/c 20,000
To Bills Payable A/c 8,000
To RDD A/c 1,050
To X’s Capital A/c 67,700
To Y’s Capital A/c 33,850
(Being assets and liabilities of XY
& Sons taken over)
2. Furniture A/c. Dr. 7,000
Stock A/c. Dr. 28,420
Debtors A/c. Dr. 28,000
Bank A/c. Dr. 9,380
Goodwill A/c. Dr. 12,000
To Creditors A/c 28,000
To Bills Payable A/c 7,000
To RDD A/c 1,400
To A’s capital A/c 29,040
To B’s capital A/c 19,360
(Being asset s and liabilities of AB
& Associates taken over)
3. X Capital A/c. Dr. 6,660
Y Capital A/c. Dr. 4,440
A Capital A/c. Dr. 6,660munotes.in

Page 135

135B Capital A/c. Dr. 4,440
To Goodwill A/c. 22,200
(Being Goodwill written of in new
P.S.R.)
4. X Capi tal A/c. Dr. 27,440
Y Capital A/c. Dr. 7,010
To X Current A/c 27,440
To Y Current A/c 7,010
(Being excess in capital account of
X & Y transferred to current
account)
5. A’s Current A/c. Dr. 11,220
B’s Current A/c. Dr. 7,480
To A’s Capital A/c 11,220
To B’s Capital A/c 7,480
(Being deficit of capital account
adjusted through current account.)
Partner’s Capital A/c
Particulars X Y A B Particulars X Y A B
To
Goodwill6,660 4,440 6,660 4,440 By Old Fir m 67,700 33,850 29,040 19,360
To Current
A/c27,440 7,010 - -By Current
A/c- -11,220 7,480
To Balance
C/d33,600 22,400 33,600 22,400
Total 67,700 33,850 40,260 26,840 67,700 33,850 40,260 26,840
Balance Sheet of AXBY & Co as on 1stJanuary, 2014
Liabilities ` Assets `
Capital A/c’s Furniture 12,600
X 33,600 Building 70,000
Y 22,400 Stock 51,380
A 33,600 Debtors 49,000
B22,400 1,12,000 Less:Rdd (2,450 ) 46,550
Creditors 48,000 Bank 10,220
Bills Payable 15,000 Current A/c’s
Current A/c
X 27,440 A 11,220
Y 7,010 34,450 B 7,480 18,700munotes.in

Page 136

136Total ` 2,09, 450Total ` 2,09, 450
Working Notes
Purchase Consideration:
Particulars XY & Sons AB & Associates
Assets taken over at agreed values
Furniture 5,600 7,000
Building 70,000 -
Stock 22,960 28,420
Debtors 21,000 28,000
Bank 840 9,380
Goodwill 10,200 12,000
Total A 1,30,600 84,800
Less: Liabilities taken over at agreed
values
Creditors 20,000 28,000
Bills Payable 8,000 7,000
RDD 1,050 1,400
B 29,050 36,400
Purchase Consideration: (A -B) 1,01,550 48,400
Illustration : 5
R & Y were partners in O & Co. decided to amalgamate with I &
Co, where D & K, partner : New firm call ed as AK & Co.
As on 31stDecember 2013 the balance sheets of the firms were as
follows.
O & Co.
Liabilities ` Assets `
Capital A/c’s Freehold Property 74,000
R 1,53,000 Furniture & Fixtures 18,000
Y 1,10,000 Motor Vehicles 30,000
Creditors 52,000 Stocks 83,000
Investments 8,000
Debtors 68,000
Bank Balance 34,000
Total 3,15,000 Total 3,15,000munotes.in

Page 137

137I & Co.
Liabilities ` Assets `
Capital A/c’s Property 1,00,000
D 1,13,000 Furniture & Fixture 14,000
K 74,000 Vehicles 18,000
Creditors 60,000 Stock 66,000
Bank Overdraft 9,000 Debtors 58,000
Total 2,56,000 Total 2,56,000
The terms and conditions of amalgamation were as f ollows.
A. Provision for doubtful debts @ 5% to be made in resp ect of debtors
and a provision for discount receivable @ 2.5 % to be made in
respect of creditors.
B. A. K. & Co. to take over the old Partner ship assets @ following
values.
O & Co. ` Id Co. `
Stock 84,500 63,900
Motor Vehicles 28,000 13,000
Furniture & fixtures 16,000 -
Property 1,00,000 -
Goodwill 63,000 45,000
C. The property and fixtures of I & Co. not to be taken over by AK
& Co. (these assets were sold for `1,35,000 cash on 1st
January, 2013)
D. Y to take over her firm’s inv estments at a valuation of `7,600.
E. The capital of AK & Co. to be `5,40,000 and to be contributed
by the Partner’s in profit sharing rations 6:5 : 4:3 any adjustment to
be made in cash.
F. R. Y were sharing in 4:3, D K were sharing in 3:2 ratio.
You are required to give ledger accounts closing the books of old Partner
ship firms and also prepare the balance sheet of AK & Co.munotes.in

Page 138

138Solution:
In the books of O & Co.
Dr. Realisation A/c Cr.
To Property 74,000 By Creditors 52,000
To Fixtures 18,000 By New Co 3,05,400
To Vehicles 30,000 By Capital 7,600
To Stock 83,000
To Investments 8,000
To Debtors 68,000
To Profit transferred to
R Capital A/c 48,000
Y Capital A/c 36,000 84,000
3,65,000 3,65,000
Dr. Partner’s Capital A/c Cr.
Particulars R Y Particulars R Y
To Realisation
A/c7,600 By balance
B/d1,53,000 1,10,000
To Cash A/c 19,430 14,570 By
Realisation
A/c48,000 36,000
ToA.K. &C o 1,81,570 1,23,830
2,01,000 1,46,000 2,01,000 1,46,000
Dr. A.K & Co. A/c Cr.
To Realisation A/c 3,05,400 By Partner’s Capital
R 1,81,570
Y 1,23,830
3,05,400 3,05,4 00munotes.in

Page 139

139In the books of I & Co.
Dr. Realisation A/c Cr.
To Property A/c 1,00,000 By Creditors A/c 60,000
To Fixtures A/c 14,000 By AK & Co. 1,18,500
To Vehicles 18,000 By Cash 1,35,000
To Stocks 66,000
To Debtors 58,000
To Profit transferred to
D 34,500
K 23,000 57,500
3,13,500 3,13,500
Dr. Partner’s Capital A/c Cr.
Particulars D K Particulars D K
To Cash 75,600 50,400 By balance
B/d1,13,000 74,000
ToAK& Co. 71,900 46,600 By
Realisation34,500 23,000
1,47,500 97,000 1,47,500 97,000
Dr. AK & Co. Cr.
To Realisation A/c 1,18,500 By Partner’s Capital
D 71,900
K 46,600
1,18,500 1,18,500
Dr. Cash A/c Cr.
To Realisation A/c 1,35,000 By Balance B/d 9,000
ByDCapital A/c 75,600
ByKCapital A/c 50,400
1,35,000 1,35,000
In the books of AK & Co.
Dr. Cash A/c Cr.
To Y Capital A/c 26,170 By R Capital A/c 1,570
ToDCapital A/c 48,100 By Balance C/d 1,16,100
ToKCapital A/c 43,400
1,17,670 1,17,670munotes.in

Page 140

140Dr. Partner’ Capital A/c Cr.
Partic
ularsR Y D K Parti
cular
sR Y D K
To
Cash1,570 - - -By
Old
Firm1,81,570 1,23,830 71,900 46,600
To
Balanc
e C/d1,80,000 1,50,000 1,20,000 90,000 By
Cash26,170 48,100 43,400
Total 1,81,570 1,50,000 1,20,000 90,000 1,81,570 1,50,000 1,20,000 90,000
Balance Sheet of AK & Co.
As On 1stJanuary 2014
Liabilities ` ` Assets ` `
Capital A/c’s Stock 1,48,400
R 1,80,000 Vehicles 41,000
Y 1,50,000 Fixtures 16,000
D 1,20,000 Property 1,00,000
K 90,000 5,40,000 Goodwill 1,08,000
Creditors 1,12,000 Debtors 1,26,000
Less:Prov 2,800 1,09,200 Less:R.D.D (6,300 ) 1,19,700
Cash 1,16,100
Total ` 6,49,200 Total ` 6,49,200
Working Notes
1. Purchase Consideration
Particulars O&C o . I&C o Total
Assets taken over at agreed values Stock 84,500 63,900 1,48,400
Vehicles 28,000 13,000 41,000
Fixtures 16,000 - 16,000
Property 1,00,000 - 1,00,000
Goodwill 63,000 45,000 1,08,000
Debtors 68,000 58,000 1,26,000
Prov. For discount on creditors 1,300 1,500 2,800
3,60,800 1,81,400 5,42,200
Less: Liabili ties taken over at agreed
values
Creditors 52,000 60,000 1,12,000
Reserve for Doubtful Debts 3,400 2,900 6,300
Purchase Consideration 3,05,400 1,18,500 4,23,400
Illustration : 6
Amin & Naman were in business on their own account as business.
They decided to amalgamate as on 31stDecember 2013, the new business
to be known as Navamin and associates. The mbalance sheet sas on that
date were as follows:munotes.in

Page 141

141Amin & Co.
Liabilities ` Assets `
Amin’s Capital 22,000 Freehold Premises 37,000
Sundry Credito rs 10,000 Plant 4,000
Bank overdraft 11,000 Stock 1,000
Debtors 1,000
Total 43,000 Total 43,000
Naman & Co.
Liabilities ` Assets `
Naman’s Capital 12,000 Leasehold Premises 15,000
Debtors 4,000
Bank 2,500
Trade Creditors 15,000 Plant 5,000
Stock 500
Total 27,000 Total 27,000
The terms and conditions of a amalgamation were as follows:
A)Profits and losses to be shared in the ratio 2:3.
B)Goodwill to be valued at one year ’s purchase of average profits
of previous three years profits.
C)Goodwill to be written off immediately.
D)Freehold property of Amin is not taken over by the firm, which
is sold by him for `32,000 on 1.01.2014 and the proceedsere deposited
in the firm’s bank account.
E)Certain assets to be revalued as follows.
Amin & Co ` Naman & Co `
Leasehold premises - 20,000
Debtors - 3,000
Plant 5,000 -
The profits & losses of the two businesses for the past three years were as
following.
Year Amin & Co Naman & Co
2011 Loss (2,000 ) 10,000
2012 21,000 15,000
2013 14,600 17,000
You are required to prepare:
1. Ledger accounts to close the books of both Amin & Co and Naman
& Co.munotes.in