1.

Accounting for valuation of goodwill and shares

1.1.
Concept and meaning of goodwill
1.2.
Need for valuation of goodwill
1.3.
Factors effecting value of goodwill
1.4.
Methods of evaluating goodwill
1.5.
Super profit method
2. Accounting for valuation of shares (equity shares)
2.1.
Need for valuation of shares
2.2.
Methods
2.3.
Capitalization method
2.4.
Annuity table
3. Accounting for partnership
4. Admission of new partner
5. Retirement and death of a partner
6. Discussion of a partnership firm and piecemeal distribution
7. Amalgamation of a firm and conversion into a limited company
8. Accounting for consignment of goods
9. Accounting for joint ventures
9.1.
Methods of accounting
10. Accounting for branch
11. Accounting for department activity
12. Accounting for package or container
13. Accounting for profession
14. Accounting for royalties
15. Accounting for hire purchase system
16. Accounting for installment system

Chapter 1 Accounting for valuation of goodwill and shares

Concept and meaning of goodwill
The name and fame of an organization is goodwill.

According to Institute of Chartered Accountants of India defines

goodwill as an intangible assets arising from business connections of
trade name or reputation of an enterprise.
Goodwill may also be defined as value of reputation of business
Need for valuation of goodwill
i. To sell the business
ii. To take new partner in partnership and convert into company
iii. To amalgamate of two or more company
iv. To pay wealth tax
Factors effecting value of goodwill
Location
Capital
Nature of business
Efficient management
Contract
Patent right
Quality of product
Government patronage
Methods of evaluating goodwill
A. Average profit
Simple average method
Average profit= total profit for all years/numbers of years
Goodwill=average profit agreed numbers of purc h ase

Weighted average method

Weighted average profit =

( profit weight )
( weightage )

Goodwill=Weighted average profit agreed numbers of purchase

Adjustments:
All expenses which are not likely to occur in future should be
deducted. For e.g. increasing in price
All actual incomes which may not be borne in future should be
deducted. For e.g. salary of directors
All profit expected in the future should be added
Super profit method
Goodwill is valued on the basis of super profit (excess of
actual profit over normal profit of the business is super
profit)
Super profit=Profit earned from business-Normal profit or Market return
Goodwill= Super profit number of agreed purchase

Steps required for calculating goodwill under super profit method

Step 1: To calculate normal profit by multiplying capital employed with
normal rate of return
Step 2: To find out average profit dividing total profit by number of
years
Step 3: To find out super profit by deducting normal profit from average
profit

Step 4: To determine the value of goodwill by multiplying super profit

by number of years purchases.
Capitalization method
On the basis of super profit
Goodwill=

Super profit
Normal profit rate of return

On the basis of average profit

Goodwill=

Average profit
Capital employed
Normal profit rate of return

Annuity method
1
Q=

1
( 1+ r )n
r

Where,
Q= The present value of annuity
r= Rate of interest per Re. per year
n= Number of year

v=

Or

a
1
1
r
( 1+r )n

v =a Annuity factor

Where, v = Present value of annuity or value of goodwill

a = Annuity or annual super profit

n = Number of years
r = Rate of interest per Re. per year
Goodwill=Super profit value of annuity
Goodwill= Average profit value of annuity

Valuation of shares (equity shares)

Need for valuation of shares
To amalgamate and absorb the company
To take loan against the shares
To convert preference shares and debentures into equity shares
To pay wealth tax
To dissolve company
Factors affecting value of shares
Methods of valuation of shares
A. Net assets method/Balance sheet method/Break up
method/Assets basis method/Intrinsic value method/Assets
backing method/Real value method
Value per s h are=

Net assetspreference s h are capital

Number of equity s h are

Net assets= assets+Current asset + Fictitio us assets ( goodwill only)Current liabilitiesDebentures

ALT.1 Fixed assets (at market value)

Investment(at market value)

xxx

Goodwill as valued
Current assets (at realized value)
Total realizable value of assets

xxx

Debentures
Preference share capital
Current liabilities
Total external liabilities
Net worth of Net assets

xxx
xxx

Less

ALT2

Equity share capital

Reserve
Other surplus
Profit on revaluation
Others shareholders fund
Gross Equity

xxx

Less
Loss on revaluation
Fictitious assets
Net worth
Intrinsic value per equity share=

Net worth
No . of shares

B. Yield or market value method

a. Earning yield
Shares are valued on basis of expected earning and
normal rate of return

xxx

Value per share =

Expected rate of earnings

paid up value of shares
Normal rate of return

Where,
Expected rate of earnings=

Profit after tax

100
Paid up value of s h ares

b. Dividend yield
Shares are valued on basis of expected dividend and
normal rate of return
Value per s h are=

Expected rate of dividend

paid up value of s h ares
Normal rate of return

Where,
Expected rate of dividend=

Dividend available
100
Paid up valueof s h ares

c. Earning capacity
Value per share is calculated on basis of disposable profit
of the company
Value per s h are=

Capitalized value
Number of equity s h ares

Capitalized value=

profit availabe for dividend

100
Normal rate of return

Chapter 2 Accounting for partnership

Chapter 3 Admission of new partner
Chapter 4 Retirement and death of a partner
Chapter 5 Dissolution of a partnership firm and piecemeal
distribution
Chapter 6 Amalgamation of a firm and conversion into a limited
company
Chapter 7 Accounting for Failure of Company
Chapter 8 Accounting for consignment of goods (long questions)
Difference between consignment and sales
Basis
Consignment
Ownership Ownership of goods remains
with consigner until sales is
effected by consignee

Relationshi

Relationship between consigner

Sales
Ownership of goods
immediately
transferred to the
buyer when sale is
made.
Relation between two

Expenses

Risk
Return of
goods

Sale
proceeds

Statement

Stock
Commissio
n

and consignee are of principal

and agent. Relationship
continued till terminated.

parties is that of seller

and buyer and they
terminated as soon as
payment is made and
goods are delivered.
Expenses incurred by consignee Any expenses incurred
to execute sales and expenses
after sale is not borne
incurred by the consignor to send by the seller.
goods to consignee, both are
borne by consigner.
Risk of goods under consignment When sale is made risk
is always with consignor.
is transferred to buyer.
Consignee can return unsold
A buyer cannot return
goods to the consigner since
goods unless goods are
those are the properties of
found defective or
consignor.
damaged or the seller
agrees to.
To sales proceeds are remitted to This case does not
consignor by consignee after
arise in sale.
deducting expenses incurred by
him along with his commission
on sales
For details of goods sold and
buyer need not submit
expenses incurred him,
any account sales to
consignee sends account sales to seller
consignor.
Unsold stock with consignee will Buyers unsold stock
treated as stock of consignor
do not attract seller
It is main consideration
consignee performs selling
activity only for commission

Terms:
1. Consignment
2. Consigner
3. Consignee
4. Consignment inward and outward
5. Pro-forma invoice
6. Account sales
7. Commission
i.
ii.
iii.

Ordinary/single commission
Del-create commission
Special commission

Consignment expenses
A. Non-recurring expenses
Expenses incurred till the goods reach the godown of consignee are non
recurring expenses.
All should be borne by consignor.
The value of goods increases.
Must be included in cost of consignment
Take into consideration while calculating unsold stock, closing stock or
damaged goods loss
Expenses of consignor
Packing
Carriage
Dock dues

Expenses of consignee
Unloading charge
Dock dues
Import duty

Landing charge
Freight
Insurance

Octroi
Carriage to godown

B. Recurring expenses
Expenses paid after receiving consigned goods are known as recurring
expenses.
Expenses are of recurring nature and do not increase the value of goods.
Expenses should be borne by consigner
Expenses of consignor
Bank charge
Expenses incurred on damaged
Goods received back

Accounting treatment
Transactions
1. Goods sent on consignment

2. Expenses incurred by
consignor
3. Advance received from
consignee

Expenses of consignee
Storage charge
Insurance
Brokerage
Advertising
Salary to salesmen
Expenses on goods returned
Goods damaged
Commission on sales

Entries
Consignment to . a/c.Dr
To Goods sent on
consignment a/c
Consignment to . a/c.Dr
To Bank a/c
Bank/Cash/Bills receivable a/c
Dr
To consignee a/c

4. Bills discounted

5. Discount on Bills transferred

to Profit and loss a/c
6. Expenses paid by consignee
7. Goods sold by consignee
8. Commission due to consignee

Bank a/c.Dr
Discount a/c.Dr
To Bills receivable a/c
Profit and loss a/c.Dr
To Discount a/c
Consignment to . a/c.Dr
To consignee a/c
consignee a/c.Dr
To Consignment to . a/c
Consignment to . a/c.Dr
To consignee a/c

9. Closing stock with consignee

10. Bad debts on credit sales
a) If del-credere commission is
given
b) If del-credere commission is
given
11. For profit and loss
12. Final settlement on
13. For goods sent on
consignment transferred to
trading a/c or purchase a/c

Chapter 9 Accounting for joint ventures

Methods of accounting
A. Without keeping separate set of books
Joint venture account
Co-venture account

B. With keeping separate set of books

Joint venture account
Joint bank account
Co-venture account

Commission %of net profit after charging such commission=net profit before charging such commission

com

Commission %of net profit before charging such commission=net profit before charging such commission

Journal entries
Date Particular

L/
F

Dr amount

Cr amount

Note: if the journal entries are made in the book of the coventure we must include bank in the name that entries are made.

co

Chapter 10 Accounting for branch

Stock reserve is calculated and kept by head office only in making
branch account if head office column is given the difference in value of
goods sent to branch should not be calculated because it has dual effect
in Dr and Cr of trading and profit and loss account.
In the book of head office the all the account are kept in making cost
price base and in the book of branch office the all the account are kept in
making invoice price base.
Chapter 11 Accounting for department activity
Chapter 12 Accounting for package or container
Important terms:
1.
2.
3.
4.
5.
6.

Cost price
Charged out price
Returnable price
Hire charge
Container retained
Returnable container

Accounting treatment of containers

a) Non-returnable containers
When a separate charge is made
When no separate charge is made
b) Returnable containers
When a separate charge is made
When no separate charge is made

Methods of calculating
Step I Container A/c
Recorded of container only
Always Debit equals to Credit
All are valued at cost price
Step II Container Reserve/deposit/provision A/c
Recorded of container only
Always Debit equals to Credit
All are valued at returnable price
Step III Containers trading and P/L a/c
Containers direct expenses- trading
Containers indirect expenses- P/L
Note: If Step I is not prepared separately it will be included in Step III.

Stock in hand
Particular
Opening stock
Purchase
Returned by customer

Amount Particular
Sent to customer
Scrap sold
Container destroyed
Closing stock in hand

Amount

Container with customer

Particular

Amount Particular

Amount

Opening balance with

customer
Sent out to customer

Sent to customer
Returned by customer
Retained balance with
customer
Closing stock in hand

Chapter 13 Accounting for profession

Chapter 14 Accounting for royalties
Chapter 15 Accounting for hire purchase system
Important terminology
Hire seller/ vendor/ owner
Hire purchase/buyer
Cash price/cash value
Down payment
Hire purchase price=cash value + interest
Hire purchase charge
Analytical table
Year
Down
payment
1
2

Cash
value

Interest
-

Installmen
t

Balance

Depreciatio
n

3
4

Chapter 16 Accounting for installment system

Difference between hire purchase system and installment system
(Imp)
Analytical table
Year

Cash
value

Interest

Down
payment
1
2
3
4

Installmen
t

Balance

Depreciatio
n

Journal entries in the book of purchaser/buyer

Date

Particular

L/F Debit
amount

Credit
amount

Down
Assets a/c..Dr
payment Interest suspense a/cDr
To Vendor a/c
(Being assets purchased on
installment system)
Vendor a/cDr
To Bank a/c
(Being down payment made)
1
Interest a/cDr
To Interest suspense a/c
(Being interest due)
Vendor a/cDr
To Bank a/c
(Being first installment paid)
Depreciation a/cDr
To Assets a/c
(Being depreciation charged on
assets)
P/L a/c..Dr
To depreciation a/c
To interest a/c
(Being interest and depreciation
transferred to profit and loss
account)
2, 3.
Same as 1

Journal entries in the book of seller

Date

Particular

Down
Buyer a/c..Dr
payment
To Sales a/c
To Interest suspense a/c
(Being assets sold on installment
system)
Bank a/c Dr
To Buyer a/c
(Being down payment received)
1
Interest suspense a/cDr
To Interest a/c
(Being accrued interest
receivable)
Bank a/cDr
To Buyer a/c
(Being first installment received)
Interest a/c..Dr
To P/L a/c
(Being interest transferred to
profit and loss account)
Sales a/cDr
To Trading a/c
(Being sales of assets transferred
to trading account)
2,
Interest suspense a/cDr
To Interest a/c
(Being accrued interest
receivable)
Bank a/cDr
To Buyer a/c

L/F Debit
amount

Credit
amount

3, 4.

(Being Second installment

received)
Interest a/c..Dr
To P/L a/c
(Being interest transferred to
profit and loss account)
Same as 2

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