Bba 204 PDF

Lesson : 1
JOINT VENTURE
STRUCTURE
1.0 Objective
1.1 Introduction
1.2 Meaning of Joint Venture
1.3 Feature of a Joint Venture
1.4 Differences between Joint Venture, Partnership and Consignment
1.5 Methods of Recording Joint Venture Transactions
1.6 Summary
1.7 Keywords
1.8 Self Assessment Questions
1.9 Suggested Readings
1.0 OBJECTIVE
After reading this lesson, you should be able to

a) Define a joint venture and explain its feature
b) Differentiate between joint venture, partnership and consignment.
c) Account for joint venture transactions under different methods.
1.1 INTRODUCTION
Complexities of a business as huge funds requirements, lack of technical

expertise, sometimes make it difficult to undertake a business assignment
individually like constructing a big building. The alternative available is that
two or more persons join hand to take up that assignment. Joining hand may be
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for finance, for technical know-how, for sharing risk etc. When two or more
persons join together to carry out a specific business and share the profits on
predetermined basis, it is known as a Joint Venture. Joint venture is defined as
a partnership confined to a particular adventure, speculation, course of trade
or voyage, and in which partners, either latent or known use no firm or social
name, and incur no responsibility beyond the limits of the adventure. For
example, Mr. John and Mr. Ibrahim agreed to construct a bridge for municipal
corporation. They pool their resources and technical know how. After they
completed this project, the profits arising thereof will be shared by them in
proportion to their contribution. Whey they are undertaking this project, they
are free to carry on their own business as usual unless otherwise agreed. As
the project ends, the relationship between the parties i.e. co-ventures ceases.
So life of joint venture depends on the duration in which a project completes.
Joint venture is neither a partnership nor it is consignment.
1.2 MEANING OF JOINT VENTURE
A joint venture is usually a temporary partnership without the use of a firm

name, limited to carrying out a particular business plan in which the persons
concerned agree to contribute capital and to share profits or losses. The parties
in a joint venture are known as co-venturers and their liability is limited to the
adventure concerned for which they agree to contribute capital and share profits
or losses. A joint venture may consist of a joint consignment of goods,
speculation in shares, underwriting of shares or debentures, construction of a
building, or any similar form of enterprise.
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1.3 FEATURES OF A JOINT VENTURE
The main features of a joint venture are specifically made clear.
F Two or more person are needed.
F It is an agreement to execute a particular venture or a project.
F The joint venture business may not have a specific name.
F It is of temporary nature. So the agreement regarding the venture

automatically stands terminated as soon as the venture is complete.
F The co-ventures share profit and loss in an agreed ratio. The profits
and losses are to be shared equally if not agreed otherwise.
F The co-ventures are free to continue with their own business unless
agreed otherwise during the life of joint venture.
1.4 DIFFERENCES BETWEEN JOINT VENTURE, PARTNERSHIP AND

CONSIGNMENT
In joint venture and partnership some business is carried on by two or

more persons and the profits are shared by all of them. But there are some
basic differences between the two which are given below:
Partnership Venture Joint Venture

-A Partnership firm always has a name There is no need of firm's name.
-It is of a continuous nature. It comes to an end as soon as the work
is complete.
-Separate set of books have to be There is no need for a separate set
maintained. of books, the account can be
maintained even in one of the
co-venturer's books only.
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- No partner can carry on a similar business. The co-venturers are free to carry
on the business of a similar nature.
-Though the registration of partnership is There no need for registration at all.
not compulsory desirable
- A minor can also be admitted to the A minor cannot be a co-venturer
benefits of the firm. as he is incompetent to enter into a
contract.
Consignment and joint venture are in the nature of an agreement between

different parties but there are many points of differences between the two.
Some of these are given below :
Joint Venture Consignment

-Number of co-ventures is usually Normally two persons are involved, the
two but it can also be more than two. consignor and the consignee.
- The relationship between co-venturers The relationship between the consignor
is that of partnership. Co-venturers are and the consignee is that of principal and
the owners. agent.
- The relationship comes to an end as soon The arrangement may continue for a long
as the venture is completed. time.
- All the co-venturers contribute funds The funds are provided by the consignor.
to a common pool.
- It may be for sale of goods or for It is generally connected with sale of
carrying on any other activity like movable goods.
construction of building, investment in
shares etc.
- The profit is shared by all the co-venturers. The profit belongs to the consignor only.
The consignee is entitled only to his
commission.
- There is joint ownership The consignor owns the goods.
Joint venturers as mentioned earlier are beneficial under the situations

where there are limitations which can not be overcome by single party. By
launching joint venture two or more parties can pool their financial resources
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to undertake a very big venture. Where experience or technical knowledge is a
limitation co-ventures can also pool their expertise. Since joint ventures are
normally big projects, if under unfavorable conditions there are losses then
these losses are also shared thus loss to individual party is lessened.
1.5 METHODS OF RECORDING JOINT VENTURE TRANSACTIONS
Joint venture accounts can be kept under any of the following three
methods :
A) Each co-venture records the transaction in his own books and opens "Joint
Venture Account" and accounts of his fellow partners.
B) One common Joint Venture Account on memorandum basis is prepared to

find the profit or loss made on trading. It is not a part of the double entry
system. Under this system each one of the partners open only one account
which is of the nature of personal account. The account is called. "Joint
venture with ...............a/c."
C) Venturers agree to keep a separate set of books and a person is made incharge
of recording of all transactions. Generally this method is not adopted.
A) Each co-venturer records the transactions
Under this system the "Joint Venture Account" is opened and debited with
the value of goods bought and expenses incurred. Cash account or the party
which has supplied the goods or incurred the expenses will be credited. When
the sales proceeds are received, the party receiving it, will debit cash (for
Debtors) account and credit the Joint Venture Account. The other parties will
debit the recipient party and credit the Joint Venture Account.
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Sometimes, a bill of exchange is drawn by one of the parties and is
discounted. In such a case the discount on the bill should be charged to Joint
Venture Account. Joint Venture Account will now show the profit or loss on
trading. Under this system, each (Joint venturer) partner will open two acconts
i.e. (i) Joint Venture Account (ii) The account of other parties.
Journal Entries : The following journal entries will be passed
1) For Investment in Joint Venture

Joint Venture A/c Dr.
To Cash/Good A/c
(Being the amount of goods supplied or cash put in for Joint Venture)
2) As goods are supplied by the Co-venturer or cash is invested in Joint

Venture by him
Cash A/c (For cash sent) Dr.

To Co-venturer A/c (for goods sent)
(Being goods supplied or cash invested by the other partner)
3). For recording sale of joint venture goods

Cash A/c Dr.
To Joint Venture A/c
(Being Sale of goods made)
3) On sale of joint venture goods by the other party

Co-Venturer A/c Dr.
(Being Joint Venture goods sold by the other partner)
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5) a) For receipt of Bill of Exchange from the other partner
Bills receivable A/c Dr.
To Co-Venturer A/c
(Being bill receivable received)
b) For discounting the bill of exchange

Bank A/c Dr.
To Bills Receivable A/c
(Being bill discounted and discounting charges debited to Joint Venture A/c).
6) Entries in the books of other partner Acceptor's books regarding

acceptance of bills of exchange
Co-venturer A/c Dr.
To Bills Payable A/c
(Being acceptance given)
7) On discounting the bills of exchange by other party i.e. drawer

Joint venture A/c Dr.
To Co-Venturer A/c
8) On commission charged under Joint Venture

To commission A/c
9) On Commission charged by other partner

To Co-Venturer A/c
(Being Commission on sale effected by other partners)

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10) When some products are left unsold and transferred to his own stock.
Purchase A/c Dr.
(Being the unsold goods taken)
11) If the other partner has taken the unsold goods, the entry will be:-
The Co-venturer A/c Dr.
(Being the unsold goods taken by the other partner)
12) Now Joint Venture Account will be closed. If it shows profit then the profit
will be divided in the agreed ratio. The entry will be
Joint Venture A/c
To P & L A/c (own share)
To Co-venturers A/c (their share)
(Being the profit on Joint Venture shared by the parties)
Format of Two accounts to be maintained
Joint Venture Account

Dr. Cr.
Particulars Amount Rs. Particulars Amount Rs.
To Cash A/c (purchased) By Cash A/c
To Cash A/c (Expenses) By Co-venturer
A/c (Goods
To Purchase A/c (Material taken over)
supplied)
To Outstanding Expenses A/c
To Profit transferred to:
Profit & Loss A/c
Co-venturers A/c
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Co-venturer's Personal Account
Particulars Rs. Particulars Rs.
To Joint Venture A/c By Bills Receivables
(Good taken over)
To Cash a/c By Joint Venture A/c

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Illustration - 1
X and Y entered into Joint Venture to sell a consignment of timber

sharing profits and losses equally. X provides timber from stock at mutually
agreed value of Rs. 50000. He pays expenses amounting to Rs. 2500. Y incurs
further expenses on cartage, storage and collieage of Rs. 6500 and receives
cash for sales Rs. 30,000. He also takes over goods to the value of Rs. 10000
for his own use. At the close, X takes over the balance stock in hand which is
valued at Rs. 11000.
Pass Journal Entries to record the above transactions and open the
necessary ledger accounts in the books of X and Y.
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Journal entries in the Books of X
Particulars L.F. Dr. Rs. Cr. Rs.

Joint Venture A/c Dr. 52,500
To Purchase A/c 50,000

To Bank A/c 2,500
(Being timber provided and
expenses incurred)

To Y 6,500
(Being expenses incurred by Y)
Y Dr. 30,000
To Joint Venture a/c
(Being the sale proceeds by Y) 30,000
Y Dr. 10,000
To Joint Venture A/c 10,000
(Y takes over the goods for his use)
Purchase A/c Dr. 11,000
(Being unsold goods taken)
Y Dr. 4,000
Profit and Loss A/c Dr. 4,000
(Being the loss on Joint Venture shared equally)
Bank A/c Dr. 37,500
To Y 37,500
(Being draft received from Y)
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Ledger Account
Joint Venture A/c
To Purchase 50,000 By Y (sale proceeds) 30,000
To Bank (expenses) 2,500 By Y (goods for his use) 10,000
To Y (expenses) 6,500 By Purchases (goods) 11,000
By Y (loss) 4,000
By Profit and Loss A/c 4,000
(Ratio being 1:1)
59,000 59,000
Y's Account
To Joint Venture (Sale) 30,000 By Joint Venture (Expenses) 6,500
To Joint Venture (goods) 10,000 By Bank 37,500

To Joint Venture (goods) 4,000 (Final Settlement)
44,000 44,000
Journal Entries in the Books of Y

Particulars Dr. Cr.
L.F. Rs. Rs.
To X 52,500
(Being the goods supplied and expenses incurred)
To Bank 6,500
(Being the expenses paid)
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Bank Dr. 30,000
(Being the receipt of sale proceeds)
Drawing A/c Dr. 10,000
(Being the goods withdrawn for own use)
X Dr. 11,000
(Being the taking over the balance
stock in hand by X)
X Dr. 4,000
Profit and Loss A/c Dr. 4,000
(For sharing of loss in equal ratio)
X Dr. 37,500
To Bank 37,500
(Being the draft remitted X)
Ledger A/cs
Joint Venture A/c

Dr. Cr.
To X (goods supplied) 50,000 By Bank (by sales) 30,000

To X (expenses) 2,500 By Drawing of goods 10,000
To Bank (expenses) 6,500 By (Balance stock taken by X) 11,000
By X 4000
P & LA/c 4000
(Loss) 8,000
59,000 59,000
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X's A/c
Dr. Cr.
To Joint Venture A/c 11,000 By Joint Venture A/c 52,500
(Good and expenses)
To Joint Venture A/c (Loss) 4,000
To Bank 32,500 52,500
52,500
B) Memorandum Joint Venture Account Method
In the method discussed above each co-venturer records all transactions

relating to the joint venture in the Joint Venture Account opened in his books.
But, under the Memorandum Joint Venture Account Method each co-venturer
will record only those transactions relating to the joint venture which are
directly concerned with him and not those of others.
a) Under this method each co-venturer opens a Joint Venture Account including
the name of the other co-venturer. The heading of the account is 'Joint Venture
with (name of coventurer) Account'. The Joint Venturer with (name of co-venturer)
Account is a personal account and it does not show any profit or loss. The
following entries will be made in this account :
i) Joint Venture with..........................Account Dr.
To cash/Bank/Creditors Account
(Being payments by cheque or cash or liabilities incurred on Joint Venture)
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ii) Cash/Debtors Accounts Dr.
To Joint Venture............Account
(Being sale Cash/Credit made on account of Joint Venture)
b) A separate 'Joint Venture Memorandum Account' is prepared to ascertain

profit or loss in Joint Venture. It is just like profit and loss account, all
the expenses and losses are debited to it and all incomes and gains are
credited to it. All the items of personal accounts will also appear on the
same side of 'Joint Venture Memorandum Account'. The balance of Joint
Venture Memorandum Account shows profits or loss on joint venture
and each party makes an entry for his share of profits or losses. The
journal entry is as under :
Joint Venture with.................Account Dr.
To Profit and Loss Account
(Being profit earned on Joint Ventures)
Or
Profit and Loss Account Dr.
To Joint Venture with................Account
(Being loss effected on Joint Venture)
Illustration - 2
A and B entered into a Joint venture involving the buying and selling of
old railway material with an agreement to share profit or loss equally. (The
amount is in Rs. Hundreds). The cost of the material purchased was Rs. 30,000
which was paid by A, who drew bill of Rs. 20,000 on B at three months' period.
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The bill was discounted by A at cost of Rs. 160. The transactions relating to
the ventures were:
1) A paid Rs. 200 for carriage, Rs. 600 for commission on sales and Rs.
100 for travelling expenses (ii) B paid Rs. 80 for travelling expenses and Rs.
120 for sundry expenses (iii) Sales made by A amounted to Rs. 21,400 less
allowance for faulty goods Rs. 400 and (iv) Sales made by B were Rs. 15,000.
The remaining goods were retained by A and B for their private use and these
were charged to them as Rs. 1600 and Rs. 2400 respectively. A was credited
with sum of Rs. 300 to cover the cost for warehousing and insurance. The
expenses in connection with the discounting to the bill were to be treated as a
charge against the venture. Prepare the ledger accounts in the books of both
the parties and also the memorandum joint venture account.
Solution
Dr. Memorandum Joint Venture A/c Cr.
(Rs. In 000)
To Materials 30,000 By Sales 36,000
To discount on Bill 160 (21000 + 15000)
To carriage 200 By stock taken by
To Commission 600 A 1600 4,000
To Travelling (100+8) 180 B 2400
To Sundry expenses 120
To Warehousing expenses 300
To Profit A : 4220
B : 4220 8,440
40,000 40,000
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In the Books of A
Joint Venture with B A/c
(Rs. in 000)
Dr. Cr.
To Bank (material) 30,000 By Bank (sales) 21,000
To discount on bill 160 By Stock taken 1,600
To Bank By Balance c/d 12,980
Carriage 200
Commission 600
Travelling exp. 100
Warehousing 300 1,200
By Profit & Loss A/c 4,220
35,580 35,580
To Balance b/d 12,980
In the Books of B
Joint Venture with A A/c
Dr. Cr.
(Rs. in '000)

To Bank By Bank (Sales) 15,000
Travelling Exp. 80 By Stock taken 2,400
Sundry Exp. 120 200
To Profit & Loss A/c 4,220
To Balance c/d 12,980
17,400 17400
By Balance b/d 12980
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Sometimes the co-venturers invest money in Joint venture business and
receive back the amounts on different dates. It is quite usual for them to agree
to calculate interest at a certain rate. Each co-venturers is entitled to receive
interest on the amounts invested by him and pay interest on the amounts received
by him. Only net interest receivable from or payable to the conventurer is
recorded in the joint venture account. Thus, the net amount of interest is also
taken into amount before ascertaining the profit or loss on joint venture.
Illustration 3
A and B enter into a joint venture sharing profits and losses equally. A
purchased goods for Rs. 5,000 for cash on January 1, 1999. On the same day
Bought goods for Rs. 10,000 on credit and spend Rs. 1,000 on freight etc.
Further expenses were incurred as follows :
On 1.2.1999 Rs. 1,500 by B
On 12.3.1999 Rs. 500 by A
Sales were made by each one of them as follows :
15.1.1999 Rs. 3,000 by A
13.1.1999 Rs. 6,000 by B
15.2.1999 Rs. 3,000 by A
1.3.1999 Rs. 4,000 by B
Creditors for goods were paid as follows
1.2.1999 Rs. 5,000 by A
1.3.1999 Rs. 5,000 by B

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On March 31, 1999 the balance of stock was taken over by B at Rs. 9,000.
The accounts between the co-venturers were settled by cash payment on this
date. The co-venturers are entitled to interest at 12% per annum. Prepare
necessary ledger accounts in the books of venturers as per Memorandum Joint
Venture Account Method.
Solution
Memorandum Joint Venture Account
Dr. Cr.
To A (cost of goods) 5,000 By A (sales) 6,000
To B (Cost of goods) 10,000 By B (sales) 10,000
To B (Freight etc.) 1,000 By B (interest) 50
To A (expenses) 500 By B (stock taken) 9,000
To B (expenses) 1,500
To A (interest) 135
Profit transferred
A : 3457
B : 3458 6,915
25,050 25050
Joint Venture with B Account

Dr. Cr.
Date Particulars Rs. Date Particulars Rs.
1999 1999
Jan. 1 To Bank A/c 5,000 Jan 15 By Bank A/c 3,000
(Purchase) (Sales)
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Feb. 1 To Bank A/c 5,000 Feb. 15 By Bank A/c 3,000
(Creditors) (Sales)
Mar. 1 To Bank A/c 500 Mar. 15 By Bank A/c 8,902
(Expenses) (Final settlement)
Mar. 31 To Interest a/c 135
Mar. 31 To Profit & Loss
A/c 3,457
14,092 14,902
B's Books
Joint Venture with A Account
Dr. Cr.
1999 1999
Jan 1 To Bank A/c 1,000 Jan 31 By Bank (Sales) 6,000
(Freight)
Feb. 1 To Bank A/c (Exp) 1,500 Mar. 31 By Bank (sales) 4,000
Mar. 1 To Bank A/c (Crs) 5,000 Mar. 31 By Goods A/c 9,000
Stock taken over
Mar. 31 To Profit & Loss A/c 3,458 Mar. 31 By Interest A/c 50
Mar. 31 To Bank A/c 8,092
(Amt. Paid in
Final Statement) 19,050 19,050
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Calculation of Interest :
Payment by A
Date Amount Month Product (Rs.)
1.1.99 Rs. 5,000 3 15,000 (5,000 x 3)
1.3.99 Rs. 500 1 500 (500 x 1)
1.2.99 Rs. 5,000 2 10,000 (5,000 x 2)
25,000
Interest = 25,500 x 12 x 1 = Rs. 255

100 12
Receipts by A
15.1.99 Rs. 3,000 2.5 7,500 (3,000 X 2 )
15.2.99 Rs. 3,000 1.5 4,500 (3,000 x 1 )
12,000
Interest = 12,000 x 12/100 x 1/12 = 120
Net Interest due = 265 - 120 = Rs. 135
Payment by B
1.1.99 Rs. 1,000 3 3,000
1.2.99 Rs. 1,500 2 3,000
1.3.99 Rs. 5,000 1 5,000
11,000
Interest = 11,000 x 12/100 x 1/12 = Rs. 110
Receipts by B
31.1.99 Rs. 6,000 2 12,000
1.3.99 Rs. 4,000 1 4,000
16,000
Interest = 16,000 x 12/100 x 1/12 = Rs. 160
Net Interest due from B = 160 - 110 = Rs. 50
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C) Separate Books
Recording of transactions is done not in books of parties but in a separate

set of books. Co-venturer first contributes to a common bank account and then
all payments are made through it. Accounts of parties are also opened. Profit
or Loss on Joint Venture is transferred to the respective partner's accounts in
due ratios. Finally, the books are closed with the close of the venture.
Three main accounts opened under separate set of accounts are:

1. Joint Venture Account
2. Joint Bank Account, and
3. Personal Capital Accounts of Joint Venturers.
The following entries will be passed under this system
1) When cash is invested by Joint Venturer

Joint Bank A/c Dr.
To Capital Accounts of Joint Venturers.
(Being cash invested by Joint Venturers and deposited into the Bank)
2) When purchases are made for joint venture out of bank A/c
To Joint Bank A/c
(Being Purchase made for Joint Venture)
3) When expenses are incurred for joint venture out of Bank A/c
To Joint Bank A/c
(Being expenses incurred for Joint Venture Account)
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4) When sales are made
Joint Bank A/c Dr.
To Sales
(Being sales made and receipts from sales deposited into Bank)
5) When some products are left unsold and are taken away by Joint Venturers
Capital accounts of Joint Venturer A/c Dr.
(Being unsold stock taken by Joint Venturers)
6 (a) For Profit on Joint Venture account

To capital accounts of Joint Venturers A/c
(Being profit earned on Joint Venturers)
6 (b) The reverse entry will be passed in cases of losses on Joint Venture.
Illustration 4
X and Y enter into joint venture to underwrite public issue of Reliance

Ltd. They agree to guarantee the subscription at par on 1,00,000 shares of Rs.
10 each of Reliance Ltd. and sharing profits and losses in the ratio of 2:3. The
terms with the company are 4.5 % commission payable in cash and 6,000 fully
paid shares of the company. They agreed to pay expenses in connection with
the issue of shares. The expenses incurred are advertisement Rs. 5,000; Printing
and stationery Rs. 2,000 and postage Rs. 600. All expenses are paid by X. The
public subscribed to 88,000 shares only. The remaining shares under the
agreement were duly taken by X and Y who provided the necessary cash equally.
The commission is received in cash and is shared by the co-venturers in the
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ratio of 4:5. The entire holding of the joint venture is then sold in the market
through brokers as follows : 25% at a price of Rs. 9 per share, 50% at a price
of Rs. 8.75 per share, 15% at a price of Rs. 8.50 per share and the remaining
10% is taken over by A and B equally at an agreed price of Rs. 8 per share.
Prepare the Joint Venture Account, Joint Bank Account, Shares Account and
the Accounts of X and Y showing the final statement.
Solution
Joint Venture Account
Dr. Cr.
To By Joint A/c 45,000
Advertisement 5000 (commission)
Printing 2000 By shares a/c 60,000
Postage 600 7,600 (commission)
To Shares A/c 23,400
(Loss on sale)
To profit transferred to
X: 29,600
Y: 44,400 74,000
1,05,000 1,05,000
Joint Bank Account

Dr. Cr.
To X (contribution) 60,000 By Shares A/c 1,20,000
To Y (contribution) 60,000 By X (commission) 20,000
To Joint Venture 45,000 By Y (commission) 25,000
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(Commission) By X (final settlement) 70,000
To Shares A/c (sale for By Y (final settlement) 72,000
cash) 25% 40,500
50% 78,750
15% 22,950 1,42,200
3,07,200 3,07,200
Share Account
To Joint Bank a/c 1,20,000 By Joint Bank A/c 40,500
(Sale of Shares)
To Joint Venture 60,000 By Joint Bank A/c 78,750
(commission) (sale of shares)
By Joint Bank A/c 22,950
(Sale of shares)
By X (shares taken over) 7,200
By Y (shares taken over) 7,200
By Joint Venture A/c 23,400
1,80,000 1,80,000
X's Account
To Joint Bank A/c 20,000 By Joint Venture A/c 7,600
(Commission) (Expenses)
To Shares A/c 7,200 By Joint Bank A/c 60,000
(Commission)
To Joint bank A/c 70,000 By Joint Venture A/c 29,600
(Final Settlement) (Profit)
97,200 97,200
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Y's Account
To Joint Bank A/c 25,000 By Joint Bank A/c 60,000
(Commission) (Commission)
To Shares A/c 7,200 By Joint Venture A/c 44,400
(Profit)
To Joint Bank A/c 72,200
(Final Settlement) 1,04,400 1,04,400
Working Notes
1. Distribution of commission received in cash

4.5 % of Rs. 10,00,000 = Rs. 45,000
Xs shares 4/9 x 45,000 = Rs. 20,000
Y's shares 5/9 x 45,000 = Rs. 25,000
2. Treatment of shares received

Shares received by way of commission
6,000
Shares not subscribed by public
12,000
Total Number of shares received
18,000
a) Sold for cash

25% of 18,000 i.e. 4,500 shares sold @ Rs. 9 per share Rs.
40,500
50% of 18,000 i.e. 9,000 shares sold @ Rs. 8.75 per share
Rs. 78,750
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15% of 18,000 i.e. 2,700 shares sold @ Rs. 8.50 per share
Rs. 22,950.
b) Dividend amongst X and Y

10 % of the remaining shares i.e. 1,800 shares are taken over equally by
X and Y at an agreed price of Rs. 8 per share.
X : 900 shares @ Rs. 8 per share = Rs. 7200
Y : 900 shares @ Rs. 8 per share = Rs. 7200
1.6 SUMMARY
A joint venture is a contractual arrangement between two or more parties
to undertake an economic activity, which is subject to joint control, i.e., agreed
sharing of power to govern the financial and operating policies of an economic
activity, so as to obtain benefits from it. A joint venture arises because of the
limitations of a person due to constraint of available time, money expertise to
execute a job etc. Despite broad similarities between joint venture and
partnership, the two types of business differ considerably. A joint venture can
also be distinguished from the consignment although both forms of business
arise because of inherent limitations of a person to undertake a business
effectively on his own. It is necessary to maintain proper accounts of all
transactions of joint venture so that correct profit or loss on joint venture may
be ascertained. The main methods of recording joint venture transactions are
by creating an independent set of books of the joint venture which do not form
part of the accounting system of an co-venturer, to record all the transactions
of the joint venture, whether, entered by himself or by his co-venturer and to
record only those transactions of the joint venture in which he himself features.
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1.7 KEYWORDS
Joint Venture: When two or more persons joint together to carry out a specific
business and share the profits or losses on predetermined basis, it is known as
a joint venture.
Co-venturer Account: It is a personal account and debited with sales made by
the co-venturer or goods taken by him and is credited with assets given by him
for the venture and expenses paid by him.
Memorandum Joint Venture Account: The profit or loss of the venture is
computed in an account which is not part of the double entry mechanism and is
termed as Memorandum Joint Venture Account.
1.8 SELF ASSESSMENT QUESTIONS
1. Define a joint venture and give its various features. Name the different
methods used to record joint venture transactions.
2. Distinguish joint venture from consignment and partnership.
3. Give the various journal entries to be passed in case where separate set
of books are maintained for recording joint venture transactions.
4. What is a Memorandum Joint Venture Account? Give the various journal
entries when accounts are maintained under this method.
5. Give the various journal entries to be passed in case where no separate
set of books are maintained for recording joint venture transactions.
6. Ramesh and Suresh entered into a joint venture to purchase and sell
hosiery goods. Profit and losses were to be shared equally. Ramesh
financed the venture and Suresh undertook the sales on a commission of
5% on the sales proceeds. Ramesh purchased goods to the value of Rs.
50,000 less 5% trade discount, paid freight Rs. 1,500 and advanced Rs.
1,200 to Suresh to meet expenses. Suresh expended for carriage Rs.
27
300, rent Rs. 450, advertisement Rs. 200 and sundries Rs. 150. Sales
made by Suresh amounted to Rs. 67,500. It was agreed that Ramesh
should receive Rs. 2,500 as interest.
Remaining unsold goods costing Rs. 2,500 were retained by Suresh and
those were charged to him at a price to show the same rate of gross
profit (without charging any expenditure) as that made on the total sales
(excluding those goods taken).
Give journal entries in the books of Ramesh and Suresh and also prepare
the necessary ledger accounts in their books.
7. Vikas and Vishal entered into a joint venture of underwriting 1,00,000
shares of Rs. 10 each at par issued by a joint stock company. The
consideration for underwriting the shares was 2,500 other shares of Rs.
10 each fully paid to be issued to them.
The public took up 90,000 shares and the remaining 10,000 shares of
the guaranteed issued were taken up by Vikas and Vishal who provide
cash equally for the purchase of remaining shares. The entire share
holding of the joint venture was then sold through other brokers: 50% at
a price of Rs. 10 less brokerage 50 paise per share; 20% at Rs. 9.50 less
brokerage 50 paise per share and the balance were taken up by Vikas and
Vishal equally at Rs. 9 per share. Expenses on account of joint venture
were: advertisement Rs. 750 and other expenses Rs. 250. You are
required to prepare; (a) Joint Venture Account; (b) Joint Bank Account;
and (c) Accounts of Vikas and Vishal.
8. A and B entered into a joint venture for the purchase and sale of materials
auctioned by the Government. A agreed to provide funds for the purchase
of materials, and B to devote his time. The profit and loss was to be
shared equally, subject to a credit of Rs. 500 to A by way of interest on
28
his capital. A purchased materials worth Rs. 50,000; and drew a bill at
two months for Rs. 20,000 on B which was duly accepted by the latter.
The bill was discounted at a cost of Rs. 260. The various expenses relating
to the venture were:
a) A paid Rs. 250 for carriage, Rs. 100 for brokerage, and Rs. 50 for
miscellaneous expenses.
b) B paid Rs. 300 for commission, Rs. 200 for insurance, and Rs.
100 for miscellaneous expenses.
The total sales amounted to Rs. 72,000 (cash). There was, however, some
stock of unsold goods which was taken over by both the parties, at Rs.
200 by A and at Rs. 300 by B. B paid the amount due to A. The expenses
in connection with the discounting of the bill were to be treated as a
charge against the venture. Prepare Joint Venture Account in the books
of A and B separately and a Memorandum Joint Venture Account.
9. C of Calcutta and D of Delhi entered into a joint venture for the purpose
of buying and selling second-hand motor cars, C to make purchases and
D to effect sales. The profit or loss was to be shared as to C two-fifths
and D three-fifths. A sum of Rs. 10,000 was remitted by D to C towards
the venture.
C purchased 10 cars for Rs. 8,000, paid Rs. 4,350 for their reconditioning
and sent them to Delhi. His other expenses were -Buying Commission
2 per cent and Sundry Expenses Rs. 350.
D took delivery of the cars by paying Rs. 750 for railway freight and Rs.
375 for octroi. He sold four cars at Rs. 1,600 each, two at Rs. 1,800
each and three at Rs. 2,250 each. He retained the remaining car for
himself at an agreed value of Rs. 2,100. His expenses were-Insurance
Rs. 150; Garage Rent Rs. 250; Brokerage Rs. 685; Sundries Rs. 450.
29
Each party's ledger contains a record of his own transactions on joint
account. Prepare a statement showing the result of the venture and the
account of the venture in each party's ledger as it will finally appear,
assuming that the matter was finally settled between the parties.
1.9 SUGGESTED READINGS
1. Fundamentals of Accounting by R.L. Gupta and V.K. Gupta, Sultan Chand
and Sons, New Delhi.
2. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan Chand
3. Advanced Accounting by Ashok Sehgal and Deepak Sehgal, Taxmann
Allied Services Pvt. Ltd., New Delhi.
4. Advanced Accounts by M.C. Shukla, T.S. Grewal and S.C. Gupta, S. Chand
and Co. Ltd., New Delhi.
5. Fundamentals of Advanced Accounting by R.S.N. Pillai and V. Bagavathi,
S. Chand and Co. Ltd., New Delhi.
6. Studies in Advanced Accounting by S.N. Maheshwari, Sultan Chand and
Sons, New Delhi.
7. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and Neeti
Gupta, Kalyani Publishers, Ludhiana.
30
Lesson : 2
CONSIGNMENT ACCOUNTS
STRUCTURE
2.0 Objective
2.1 Introduction
2.3 Distinction between Consignment and Sale
2.4 Procedure to be followed in case of Consignment
2.5 Accounting Treatment of Consignment Transactions
2.6 Valuation of Stock on Consignment
2.7 Accounting for Loss of Goods
2.8 Invoicing goods higher than cost
2.9 Summary
2.10 Keywords
2.0 OBJECTIVE
a) Understand the meaning of consignment and explain the difference
between consignment and sale
b) Explain the accounting treatment of consignment transactions
c) Account for normal and abnormal losses in consignment
1
2.1 INTRODUCTION
Now-a-days it is quite common that manufacturers or wholesale dealers
despatch goods to their agents at home and abroad to increase their sales. The
knowledge of the agent of the local conditions where he resides proves useful
in increasing the sales. Moreover it is very expensive for the manufactures to
sell the goods directly either in home market or in foreign market. Therefore,
different agents are appointed for different places.
2.2 MEANING OF CONSIGNMENT
It is common practice with practically all manufacturers or wholesalers
to sell goods through agents both within the country and abroad. The goods are
sent to be kept and sold on behalf of and at the risk of sender by the recipient.
The person who forwards the goods for sale is consignor, the person to whom
goods are forwarded for sale is consignee and goods so sent are called Goods
sent on Consignment. Consignment is a means of facilitating sale but is not
actually a sale. Consignment is different from sales. A consignment is returnable
if goods are not sold but in case of sale, the goods are not returnable except
for special reasons, such as on account of damage or if below standard goods
are supplied. When goods are sold to a person the property in them passes to
that person, but when goods are consigned to a person the legal ownership of
the goods remains with the consignor. Hence when goods are sold the
relationship between two parties is that of a creditor and debtor but when the
goods are consigned relationship between the consignors and consignee is
that of principal and an agent.
2.3 DISTINCTION BETWEEN CONSIGNMENT AND SALE
The following points summarize clearly, the difference between a
consignment and a sale.
2
Sr. Basis Consignment Sale
1. Property in goods Ownership remains with Ownership passed to

i.e. Ownership the consignor the buyer
2. Relation Consignee is the agent Buyer is debtor of

of the consignor seller until the
account is settled.
3. Risk and damage Consignee holds the Any subsequent

goods at the risk of the damage to the goods
consignor therefore is the loss of the
subsequent damage to buyer
the goods is the loss of
the consignor
4. Return of goods Goods may be returned if Goods are not

not sold returnable except for
special reasons e.g.
wrong kind or
defective goods etc.
5. Expenses after Recoverable from the To be borne by the

delivery consignor buyer
6. Forwarding letter Proforma invoice Invoice
3
2.4 PROCEDURE TO BE FOLLOWED IN CASE OF CONSIGNMENT
When the goods are despatched by the consignor to the consignee, the consignor
makes out a statement known as proforma invoice like a regular invoice giving
details about the consignment and price which is normally at cost, but
occasionally it may be at invoice price which is above the cost.
The consignee does not become liable for the payment of amount named
in the invoice, but as matter of advance for goods, he usually makes payment in
advance either by accepting a bill or by remitting a bank draft.
(a) Account Sale : The consignee renders to his consignor regularly a

statement showing sales, expenses incurred, commission charged and
remittance made with the resultant balance due by him. This statement is known
as Accounts Sales.
On receipt of Account Sales the consignor shall make entries in his
books of account and complete the Consignment account and the Consignees
account.
(b) Advance on Consignment : It is common practice for the consignor to
ask the consignee for some deposit as a security for goods sent on consignment
to the consignee. It may be paid by any mode of payment-cheque, cash or even
bills of exchange.
(c) Commission : The consignee usually gets a commission for selling the
goods on behalf of the consignor as a fixed percentage on sales. So more the
sales more will be the commission earned by the consignor. But there are some
other kinds of commission which are sometimes given to the consignee for
4
extra burden and activities i.e. Del Credre Commission and over-riding
Commission.
(i) Del Credre Commission : Ordinarily the consignee is not responsible
to the consignor for the payment of money by the purchasers but sometime he
undertakes to guarantee payment due for all the goods he sells on credit and
cash whether his customers pay him or not. In consideration of his this
warranting the solvency of the buyers, he is paid an extra commission called a
Del Credre Commission. The consignee will pay the consignor whether he
himself receives payment from debtors or not. The commission is payable on
total proceeds.
(ii) Over-Riding Commission : It is an extra commission in addition to
ordinary commission. This commission is also calculated on sales like ordinary
commission. This commission is generally given by the consignor to the
consignee to enhance the sale or to boost up the sales of a new product.
(d) Proforma Invoice : Since the goods sent on consignment can not be
treated as sales, the consignor does not prepare proper invoice. He simply
prepares a Proforma invoice and sends it to the consignee, alongwith the goods
despatched. This is prepared with a view to inform the consignee about price
of goods, expenses incurred, mode of transportation and the minimum sale
price at which the goods are to be sold.
(e) Expenses : Expenses relating to consignment of goods are divided into
two categories vis. (i) Non-recurring expenses and (ii) Recurring expenses.
Non-Recurring Expenses : All the expenses which are incurred for bringing
goods to the godown of the consignee are non recurring in nature. Such
expenses are generally goods have reached the consignees place or godown.
5
They are recurring in nature because they may be incurred repeatedly by the
consignor and consignee. The examples of recurring expenses incurred by the
consignor are advertising, discount of bills, commission on collection of
cheques, travelling expenses of salesmen, bad debts etc. The examples of
recurring expenses incurred by the consignee are godown rent; godown
insurance, sales promotion etc.
2.5 ACCOUNTING TREATMENT OF CONSIGNMENT TRANSACTIONS
(A) Books of the Consignor : The consignor opens three accounts in his
ledger.
(1) Consignment Account : It is prepared to ascertain profit or loss on
each consignment e.g. Consignment to Bombay Acount. It is not a personal
account but a special Trading and Profit and Loss account or a nominal account.
(2) Consignees Account : It is prepared to show the balance due to or
from consignee at a particular date. It is a personal account; and
(3) Goods sent on Consignment Account : It is prepared to show the amount
of goods sent to the consignee. This is real account. The balance is credited to
Purchase or Trading Account.
Journal Entries
1 (a) When the goods are sent on consignment at cost or at invoice
price:
Consignment A/c Dr.
To Goods sent on consignment A/c
(Being goods sent on Consignment at cost)
6
(b) If goods are sent at invoice price then one more entry is needed
for making the adjustments. The amount of this entry is the
difference between the invoice price and the cost price. The entry
will be:
Goods sent on consignment A/c Dr.
To Consignment A/c
2. When expenses are incurred by the Consignor:
Consignment A/c Dr.
To Bank A/c
(Being expenses incurred)
3. When the Account Sales is received from the Consignee :
(i) Consignee A/c Dr.
To Consignment A/c
(Being the total sales by consignee)
(ii) Consignment A/c Dr.
To Consignee A/c
(Being the expenses incurred by consignee and with his
Commission)
4. When the consignee remits the cash or bills:
Bank A/c/ Cash A/c/Bills receivable A/c Dr.
To Consignee A/c
(Being Cash/B/R received)
7
5. When bills is discounted with Bank:
Cash A/c/ Bank A/c Dr.
Discount A/c
To Bills receivable A/c
(Being B/R discounted with the Bank)
6. For Stock remaining unsold:
Consignment stock A/c Dr.
To Consignment A/c
(Being the value of stock plus proportionate expenses)
7. For Abnormal Loss of stock:
General Profit & Loss Account A/c Dr.
(with unrecoverable loss)
Insurance company A/c (with total recoverable loss) Dr.
To Consignment A/c (with total loss)
(For the abnormal loss of stock, amount recoverable and amount not
recoverable)
8. For Profit or loss on Consignment:
(i) If there is profit on Consignment
Consignment A/c Dr.
To general Profit and Loss A/c
(Being the Profit on consignment transferred to Profit and Loss A/c)
(ii) If there is loss on Consignment
General Profit and loss Account Dr.
To Consignment A/c
(Being the loss on Consignment transferred to Profit & Loss Account)
8
9. For settlement of account with consignee:
Bank/Bills recoverable Dr.
To Consignee A/c
(Being amount sent for final settlement)
The Goods sent on Consignment Account which shows credit balance
will now be transferred to the Trading Account. Then the entry is :
Goods sent on consignment Account Dr.
To Trading A/c
(Being the goods sent on consignment account transferred to trading
account).
Ledgers
a) Consignment Account : Consignor prepares this account in his ledger.
In it all transactions of a consignment are shown. This account discloses
profit or loss incurred by each consignment. Debit side shows goods
sent on consignment expenses incurred by consignor and consignee,
consignees commission, bad debts etc. Credit side shows total sales
(cash and credit), goods returned, and unsold stock etc. The difference
between the debit and credit totals of Consignment Account is regarded
as profit or loss which is transferred to the Profit and Loss Account and
the Consignment Account stands closed. It is infact a nominal account
and is just like Trading and Profit and Loss Account about which you
must have studied earlier in final accounts. Therefore the principles
applied to Trading and Profit and Loss Account hold good for this account
also. Like Trading and Profit and loss Account all expenses and purchases
are debited to this account and all sales and incomes are credited.
9
b) Goods sent on consignment Account : This account shows the goods
transferred from the consignor to the consignee and goods returned by
the consignee to the consignor. All the goods consigned by the consignor
will be credited to this account and the goods returned by the consignee
are debited to this account. The balance represents the cost of goods
with consignee for sale, and is transferred to the Trading Account.
c) Consignees Account : This account discloses what amount is due from
the consignee. The consignees account is debited with all cash and is
credited by sales effected by the consignee. The various expenses
incurred by the consignee, the commission charged by him as well as
the advance remitted by him are credited to this account. This account
usually shows a debit balance indicating the amount due from the
consignee. At times it may show credit balance, if the advance given by
the consignee is more than the sale affected by him. The balance revealed
by this account is shown in the balance sheet of the consignor.
Illustration 1 : Vimal Mills Ltd. sent 100 pieces of suiting to Lal Garments
House of Delhi on consignment basis. The consignees are entitled to receive
5 per cent commission plus expenses. The cost of Vimal Mills Ltd. is Rs.
200 per suiting. Lal Garments House pays following expenses :
Railway Freight Rs. 500
Godown Rent & Insurance Rs. 1,000
Vimal Mills Ltd. draw on the consignees a bill for Rs. 10,000
which is duly accepted. Subsequently it is discounted for Rs. 9,500. The
consignees informed the consignor of the sale of the entire consignment for
10
Rs. 28,500. Show journal entries and ledger accounts in the book of the
consignor.
Solution
Journal entries in the Book of Vimal Mills Ltd. (Consignor)
Date Particulars Dr. Cr.

Consignment A/c Dr. 20,000
To goods sent on
consignment A/c 20,000
(100 pieces of suiting consigned to Lal
Garments House at cost Rs. 200 per suiting)
Bill receivable A/c Dr. 10,000
To Lal Garment House 10,000
(Being of the bills of exchange received from
consignee)
Cash Account Dr. 9,500
Discount Account Dr. 500
To bill receivable A/c 10,000
(being bill discounted with the bank)
Lal Garment House Dr. 28,500
To Consignment A/c 28,500
(Being gross proceeds of the goods sold)
(being the expenses incurred
by Lal Garment house)
11
(Being Commission @ 5% on sales)
(Being profit on consignment transferred)
Goods sent on
To Trading A/c 30,000
(Being goods sent on consignment
A/c transferred to trading A/c
Ledger Accounts
Consignment Account
Dr. Cr.
To goods sent on 20,000 By Lal Garment House 28,500
consignment A/c (Sales)
To Lal Garments 1,500
(commission)
(Profit on consignment)
28,500 28,500
12
Lal Garments House
Dr. Cr.
To consignment A/c 28,500 By bills receivable 10,000
By Consignment A/c 1,500
(Expenditure)
By Consignment A/c 1,425
(Commission)
By Balance c/d 15,575
28,500 28,500
Goods Sent on Consignment Account

To Trading A/c 20,000 By Consignment A/c 20,000
(transferred)
20,000 20,000
B. Books of the Consignee

Consignee need not pass any entry in his books on the receipt of goods by
him or for expenses incurred by the consignor. He should, in principle, open
the Consignors Account in his books and route all the transactions through it
in the following manner:
1. When cash is remitted or bill is accepted
Consignor A/c Dr.
To Cash A/c/Bills payable A/c
(Being cash remitted or bills accepted).
13
2. When expenses are incurred
Consignor A/c Dr.
To Cash A/c
(Being expenses incurred on consignment)
3. When sale is made on Consignment
(i) For cash sales
Cash a/c Dr.
To Consignors A/c
(ii) For credit sales
Debtors A/c Dr.
To Consignor A/c
(Being goods sold on credit)
4. On remitting balance to consignor after commission
Consignors A/c Dr.
To Cash A/c/Bank A/c
To Commission A/c
(Being cash remitted after commission)
Note : (A) For unsold stock lying with consignee, no entry is to be
passed in his book of account.
(B) Consignee does not pass any entry for profit or loss in his
books.
The consignee also prepares ledger accounts after passing all the journal
entries. The Consignors Account and Commission Account are the two
important account prepared by the consignee in his books. Of course he will
also do the postings to the other accounts such as Consignment Debtors
Account, Consignment Expenses Account and Bills Payable Account etc.
14
(a) Consignors Personal Account : It is the main account of Consignees
books which is prepared for working out the amount due to the consignor.
Whatever amount he receives from sales of goods is credited to this account.
All expenses incurred by the consignor in relation to consignment the
commission due to him and the advance given by him to the consignor will be
debited to this account. Further, if the consignee does not get del credre
commission, the bad debts on account of credit sales are also debited to the
Consignors Account. The balance of this account indicates the amount payable
to the consignor. This account is just the opposite of the Consignees Account
in the books of the consignor.
(b) Commission Account : It is nominal account. It shows the income
earned by the consignee for the services rendered by him. All types of
commission whether ordinary or special, due to the consignee is credited to
this account. The commission account will be debited with bad debts if the
consignee is to bear such loss because of del credre commission.
To continue with the same illustration No. 1, the consignee will have
the following journal entries and ledger accounts:
Journal Entries
Date Particulars L.F. Dr. Cr.

Vimal Mills Ltd. Dr. 10,000
To Bills payable A/c 10,000
(Being bill accepted)
To Cash A/c 1,500
(Being expenses (incurred)
15
Cash A/c Dr. 28,500
To Vimal Mills 28,500
(Being Sales proceeds
received on consignment)
To Commission A/c 1,425
(Being 5% commission on total sales)
B/P A/c Dr. 10,000
To Cash A/c 10,000
(Being bill met on maturity)
Ledger Account
Vimal Mills Ltd. (Consignor)
Dr. Cr.
To Bill payable A/c 10,000 By Cash (sale proceeds) 28,500
To Cash A/c (expenses) 1,500
28,500 28,500
Illustration 2. :- B. Ghosh of Bombay sent on consignment to Alok of Calcutta
300 cases @ Rs. 125 on 1st July 2006 to be sold on his account and at his risk
for 10% commission B. Ghosh incurred Rs. 3,000 expenses on dispatching
the goods to Alok. On July 10, 2006 B. Ghosh received a bill for Rs. 20,000 at
2 months from Alok. On September 30, 2006 Alok sent on account sales
disclosing that 200 cases have been sold for Rs. 160/- each and the remaining
16
cases @ Rs. 150/- each. The account sales also discloses that Alok has incurred
unloading expenses Rs. 600 and selling expenses Rs. 900. He sends a draft for
the net amount due.
You are required to :
(a) Prepare the account sales; and
(b) Enter the transactions in the books of both the parties.
Solution
Account sales of 300 cases received from B. Ghosh to be sold on
his account and risk.
200 cases @ Rs. 160 32,000
100 cases @ Rs. 150 15,000 47,000
Less : Expenses
Unloading expenses 600
Selling expenses 900 1,500
Commission @ 10% on sales 4,700 6,200
RS. 47,000 (Rs. 32,000 + Rs. 15,000)
40,800
Less Bill given as an advance 20,000
on 10.7.1999
Balance (draft enclosed herewith)
20,800
E & O. E. Alok
Calcutta 30th Sept., 2006
17
Journal Entries in the Books of B. Ghosh (Consignor)
Journal
Date Particulars L.F. Dr. Cr.
2006 Consignment A/c Dr. 37,500
July1 To goods sent on
consignment A/c 37,500
(Being 300 cases @ Rs. 125 sent
on consignment to Alok)
July 1 Consignment A/c Dr. 3,000
To Bank A/c 3,000
(Being expenses incurred
on account of goods sent on
consignment)
Sep 10 Bills receivable A/c Dr. 20,000
To Alok 20,000
(Being an acceptance
for 2 months bill from
Alok as an Advance)
Sep 13 Bank Account Dr. 20,000
To Bills Receivable A/c 20,000
(Being the acceptance
of Alok on the due date)
Sep 30 Consignment A/c Dr. 1,500
To Alok 1,500
(Being unloading expenses
Rs. 600 and selling expenses
Rs. 900/- incurred by Alok)
18
Sep 30 Alok Dr. 47,000
To Consignment A/c 47,000
(Being goods sent on
consignment sold by
Alok-200 cases @ Rs. 160
and 100 case @ Rs. 150)
Sep. 30 Consignment A/c Dr. 4,700
To Alok 4,700
(Being commission
payable to Alok @
10% on Rs. 47,000)
Sep 30 Bank A/c Dr. 20,800
To Alok 20,800
(Being amount due from
Alok received)
Sep 30 Consignment A/c Dr. 300
To Profit & Loss A/c 300
(Being profit on consignment
transferred to Profit
and Loss A/c)
Sep.30 Goods sent on 37,500
consignment A/c Dr.
To Trading A/c 37,500
(Being goods sent on
consignment transferred
to Trading A/c)
19
Ledger
Consignment Account
Dr. Cr.
2006
July1 To good sent on 37,500 Sep 30 By Alok (Sales)
consignment A/c 200 cases @ 160 32,000
100 case @ Rs. 150 15,000 47,000
July 1 To Bank A/c (Exp) 3,000
Sep 30 To Alok (Expenses) 1,500
Sep 30 To Alok (Commission) 4,700
Sep 30 To Profit transferred to 300
profit & loss a/c
47,000 47,000
Goods sent on Consignment Account

Dr. Cr.
2006
Sept30 To Trading A/c 37,500 July1 By Consignment to 37,500
Sept30 To Trading A/c 37,500 July1 By Consignment to 37,500
Calcutta a/c
37,500 37,500
20
Bills Receivable Account
Dr. Cr.
2006 2006
Jul10 To Alok 20,000 Sep.13 By Bank A/c 20,000
20,000 20,000
Alok
Dr. Cr.
2006 2006
Sept 30 To Consignment a/c 47,000 Jul 10 By bills receivable 20,000
(Sales) Sep 30 By consignment to 1,500
Calcutta C/c (Exp)
Sep 30 By Consignment A/c 4,700
(Commission)
Sep 30 By Bank a/c 20,800
47,000 47,000
Bank Account
Dr. Cr.
2006 2006
July 1 To balance b/c July 1 By consignment a/c 3,000
Sep 13 To Bills receivable 20,000
Sep. 30 To Alok 20,800 Sep.30 By Bal. c/d
21
Profit and Loss Account
2006
Sep 30 By Consignment to 300
Calcutta a/c
Entries in the Books of Alok (Consignee) Journal

Jul 10 B. Ghosh Dr. 20,000
To Bills payable A/c 20,000
(Being acceptance of bill for 2 months given)
Ghosh Dr. 1,500
To Bank A/c 1,500
(Being unloading expenses Rs. 600
and selling expenses Rs. 900
incurred on account of B. Ghosh)
Sep 13 Bills payable A/c Dr. 20,000
To Bank A/c 20,000
(Being bill met on the due date)
Bank A/c Dr. 47,000
To B. Ghosh 47,000
(Being goods sold on behalf of B. Ghosh)
Sep 30 B. Ghosh Dr. 4,700
(Being 10% commission on
sales charged to B. Ghosh).
22
Sep 30 B. Ghosh Dr. 20,800
To Bank A/c 20,800
(Being bank draft sent to B. Ghosh
for the amount due)
B. Ghosh
2006
Jul 10 To Bills payable A/c 20,000 By bank A/c (sales) 47,000
To Bank A/c 1,500
(expenses)
Sep 30 To commission A/c 4,700
Sep 30 To Bank A/c 20,800
47,000 47,000
Bills Payable Account

2006
Sep 13 To Bank Account 20,000 July 10 B. Ghosh 20,000
Commission Account
2006
Sep 13 B. Ghosh 4,700
Bank Account
2006
July 1 To Balance b/d ? ? By B. Ghosh 1,500
To B. Ghosh 47,000 Sep 13 By Bills payable 20,000
Sep 30 By B. Ghosh 20,800
23
Illustration 3
Suresh and Co. of Bombay sent on consignment to Mahesh & Co. of
Delhi 60 cases cutlery goods costing Rs. 175 per case. Expenses incurred by
the consignor at Bombay were : Freight Rs. 275, insurance Rs. 55 and loading
charges Rs. 20.
Suresh & Co. draw on Mahesh & Co. 2 months bills at sight for Rs.
7,000 which the latter accepts. The charges paid by Mahesh & Co. at Delhi
were unloading Rs. 30, Storage Rs. 85, insurance Rs. 15, Commission is payable
to Mahesh & Co. at 2% on all sales in addition to 1% del credere commission.
The consignee sells for prompt cash 30 cases @ Rs. 225 per case; 25
cases @ Rs. 250 per case and the balance @ Rs. 280 per case. The account was
settled immediately by means of a bank draft.
Write up the transactions and ledger acconts in the books of both the
parties.
Solution
Consignors Books Journal
Consignment to Delhi Account Dr. 10,500
To Goods sent on consignment 10,500
Account
(60 cases consigned @ Rs. 175 per case)
Consignment to Delhi Account Dr. 350

To Bank 350
(expenses on consignment paid)
24
Bills receivable Acount Dr. 7,000
To Mahesh & Co. 7,000
(Being Expenses incurred by consignee)

To Mahesh & Co. 130
(Being Expenses incurred by consignee)
Mahesh & Co. Dr. 14,400

To Consignment to Delhi Account 14,400
(Sales affected by consignee)

To Mahesh & Co. 504
(Being Commission due to
the consignee including del
credre commission on sales
i.e. 2% and 1% of Rs. 14,400)
Bank Account Dr. 6,766

To Mahesh & Co. 6,766
(Being Received bank draft
in settlement of the accounts)
25
Consignment to Delhi Account Dr. 2,916
To General Profit & Loss a/c 2,916
(Being Goods sent on consignment
account closed)
Ledger Account
Consignment to Delhi Account
Dr. Cr.
July 1 To goods sent ton 10,500 By Mahesh & 14,400
consignment a/c Co. (sales)
To Bank (expenses) 350
To Mahesh & Co. 130

(Expenses)
To Mahesh & Co. 504 634
(Commission)
To General Profit &

Loss A/c 2,916
14,400 14,400
26
M/s Mahesh & Cos Account
To consignment to Delhi 14,400 By B/R A/c 7000
A/c (sales)
By Consignment to
Delhi Account
Expenses 130
Commission 504 634
By Bank a/c 6,766
14,400 14,400
GOODS SENT ON CONSIGNMENT ACCOUNT

To Trading A/c (transfer) 10,500 By consignment to 10,500
Delhi A/c
Consignees Books
Journal
Suresh & Co. Dr. 7,000
To Bills payable accepted 7,000
(Suresh & Cos bill accepted)
Suresh & Co. Dr. 130

To cash A/c 130
(Being cash sent on expenses)
27
Cash account Dr. 14,400
To Suresh & Co. 14,400
(Sales effected on consignors behalf)
Suresh & Co. Dr. 504

To Commission A/c 504
(Commission @ 2% and del credre
commission @ 1.5% on Rs. 14,400)
Suresh & Co. Dr. 6,766

To Bank A/c 6,766
(Balance remitted vide draft
No._________ dt. _______ )
Ledger Accounts
M/s Suresh & Cos Account
To bills payable A/c 7,000 By cash (sales) 14,400
To cash (expenses) 130
To Commission A/c 504
To Bank A/c (draft) 6,766
14,400 14,400
Till now we have presumed that all the gods consigned are sold. But in
practice we find that at the time of submitting the account sale, a part of
goods consigned may still be unsold and may be lying with the consignee. In
28
order to calculate the true profit or loss on consignment, the unsold stock
should be valued and accounted for.
2.6 VALUATION OF STOCK ON CONSIGNMENT
Valuations of unsold stock is usually done at cost. Cost, in case of
consignment stock, would include the cost at which the goods are consigned
plus, the proportionate non-recurring expenses. All the non-recurring expenses,
whether incurred by the consignor or by the consignees, are to be taken into
account. In the absence of details of expenditure incurred by the consignee,
all expenses incurred by him are to be taken as recurring expenses and thus are
not to be considered in the calculation of closing stock. In other words, while
valuing the closing stock we add such proportionate expenses to the cost price
that have been incurred upto the time the goods are brought to the place of the
consignee. Any other expenses paid by the consignor or the consignee after
this point will not be considered as these expenses do not add to the value of
the goods. Such expenses are godown rent, selling expenses, carriage outwards,
godown insurance, discount etc.
Usually following expenses are added for calculation of closing
stock : Carriage and Freight, Loading Charges, Custom Duty, Clearing Charges,
Dock Dues, Carriage paid upto the Godown, and Unloading charges.
Following are the expenses which are not considered for calculation
of closing stock : Godown rent, Discount, Bad Debts, Insurance of the goods
in the Godown, and Selling and Distribution expenses.
One can notice that all expenses incurred by the consignor are
considered for valuation of the closing stock. The problem arises only selecting
recurring expenses in case of consignee.
29
The value of unsold stock affects the profit or loss on any consignment
so its valuation and recording in the books of consignor is very important. It is
shown on the credit side of Consignment Account for which the journal entry
passed would be as :
Stock on Consignment A/c Dr.

To Consignment A/c
(Being the values of sold stock)
On the other hand the Consignee, will not pass any entry for the
closing stock. It is because he is not the owner of the goods and does not pass
any entry even when the goods are received or he returns the goods.
2.7 ACCOUNTING FOR LOSS OF GOODS
Goods sent on consignment may be lost or damaged in transit. The
loss of goods may be either (i) normal or (ii) abnormal Treatment in the books
of accounts will depend upon the nature of loss.
Normal Loss : Loss of goods is sold to be normal when it is natural,
unavoidable and is due to inherent characteristic of the goods despatched like
evaporation, sublimation etc. The amount of stock to be carried down is the
proportion of the total cost that the number of units on hand bears to be the
total number units as diminished by loss.
Deficiency of Stock : When there is deficiency of stock at the time of stock-
taking and the consignee is under a liability to account for the missing stock,
the entry will be:
30
Consignee Dr.
To Consignment a/c
(Being the deficiency of stock charged to the consignee).
If, on the other hand, he is not liable, the stock of the consignment
will be shown at the gross figure and the consignment account will be debited
with the loss in stock.
Abnormal Loss : There are the losses which are accidental and not natural
like theft. Abnormal loss may occur in the godown of the consignee or in transit.
Let us see the effect of abnormal loss on the closing stock under both situations.
When the abnormal loss occurs in the godown of the consignee the
valuation of closing stock is not effected because the expenses incurred after
they reach the godown of the consignee are not to be taken into account for
the purpose. Hence, the normal formula will be followed for the valuation of
closing stock. Look at illustration 4 and see how the abnormal loss and the
value of closing stock is calculated when the abnormal loss occurs in the
godown of the consignee.
The treatment in accounts will depend upon whether the unforeseen
loss has been insured against or not. In case of insurance the consignment
account will be credited but the insurance companies or underwriters account
will be debited with the amount of loss (which shall be calculated like valuation
of stock on consignment i.e. including proportionate non-recurring expenses
of both the consignor and the consignee). If the goods are not insured, instead
of Insurance Companys or Underwriters Accounts being debited, Profit and
Loss Account will be debited and consignment account will be credited. In
this way the final net profit on consignment is not adversely affected.
31
Illustration 4 : X of Calcutta sent on 15th January, 2006, a consignment of
500 toys bicycles costing Rs. 100 each. Expenses of Rs. 700 met by the
consignor. Y of Bombay spent Rs. 1,500 for clearance and the selling expenses
were Rs. 10 per bicycle.
Y sold, on 4th April 2006, 300 pieces @ Rs. 160 per piece and again
on 20th June 1999, 150 pieces @ Rs. 172.
Y was entitled to a commission of Rs. 25 per piece sold plus one
fourth of the amount by which the gross proceeds less total commission thereon
exceeded a sum calculated at the rate of Rs. 125 per piece sold. Y sent the
amount due to X on 30th June 2006.
You are required to show the Consignment Account and Ys Account
in the books of X.
Solution
Consignment Account
2006 Rs. 2006 Rs.
Jan 15 To goods sent on 50,000 Apr 4 By Y-sale of 300 48,000
consignment a/c 500 pieces @ Rs. 160
@ Rs. 100
Jan 15 To Bank A/c - Exp. 700 June 20 By Y-sale of 150 25,800
Pieces @ 172
To Y-Clearing Exp 1,500 June 30 By consignment 5,220
stock A/c
Apr 4 To Y-selling Exp 3,000
Jun 20 To Y- selling Exp 1,500
Jun 30 To Commission A/c 12,510
June 30 To Profit & Loss A/c 9,810
Profit on Consignment
79,020 79,020
32
Y Account
2006 Rs. 2006 Rs.
Apr 4 To Consignment A/c 48,000 ? By consignment A/c 1,500
(clearing exp.)
Jun 20 To Consignment A/c 25,800 Apr 4 By consignment A/c 3,000
(selling exp.)
June 20 By consignment A/c 1500
(selling exp.)
Jun 30 By consignment A/c 12,510
commission (2) 55290
By Bank A/c
73,800 73,800
Working Note
(1) Valuation of Closing stock
50 pieces @ Rs. 100 each Rs. 5,000
Plus : Proportionate Expenses
Expenses incurred by X on 500 pieces = Rs. 700
Clearing expenses incurred by Y = Rs. 1500
Total Expenses Rs. 2,200
Therefore, expenses on 50 pieces 2200x50/500 = Rs. 220
Rs. 5,220
33
(2) Calculation of Commission
Let Total Commission of Y be a
a = No. of pieces sold x Rs. 25 + [Gross sale proceeds - (Rs. 125x
No. of pieces sold] - (a)
a = 450 x Rs. 25 + [R. 73,800 - (Rs. 125 x 450] -a)
a = Rs. 45,000 + Rs. 17,500 -a
5a = Rs. 62, 550
Therefore : a = 62,550/5 = Rs. 12,510
2.8 INVOICING GOODS HIGHER THAN COST
Sometimes the goods sent on consignment are priced not at cost but
above cost i.e. at selling or near selling price. The purpose is to hide the real
profit on the consignment from the competitive eye of the consignee. It does
not affect the profits of the consignor. Here a few adjusting entries in respect
of goods sent on consignment and stock are to be made at the end of the financial
year. The entries are as follows :
To bring down the invoice of the goods sent on consignment to cost,
debit goods sent on consignment account and credit consignment account with
the difference in the invoice and the cost price.
(i) Goods sent on consignment A/c Dr.
To consignment A/c
(Being the excess of Invoice price written back)
To adjust the value of the stock lying unsold with the consignee, debit
the consignment account and credit Stock Reserve Account with the difference
in prices.
34
(ii) Consignment A/c Dr.
To Consignment Stock Reserve A/c
(Being the excess of invoice price or value over cost
Price of unsold stock adjusted).
The balance of the goods sent on consignment account will be transferred

to the Trading Account as indicated earlier. The stock on consignment and Stock
Reserve Account will be closed and the balance will be shown in Balance sheet.
Next year the stock on consignment account will be transferred to the

debit of the Consignment Account and Stock Reserve Account will be
transferred to the Consignment Account (of course at the end of the next year.)
Illustration 5
B. Ltd. of Delhi consigned 1,000 cases of milk powder to S. of Bombay.

The goods were charged at proforma invoice value of Rs 10,000 including a
profit of 25% on invoice price. The consignors paid Rs. 600 for freight and
insurance. Consignee paid import duty Rs. 1,000, Dock Dues Rs. 200 and sent
to the Consignors a bank draft of Rs. 4,000 as advance. They sold 80 cases for
Rs. 10,500 and sent for the balance due to the consignors after deducting
commission of 5% on gross sale proceeds. Show ledger accounts in the books
of the consignor.
35
Dr. Consignment Cr.
2006 Rs. 2006 Rs.
To goods sent on 10,000 By S of Bombay 10,500
consignment A/c 25% (consignee)
over cost
To Bank Expenses 600 By Goods sent on 2,500
consignment
To S of Bombay (Exp) 1,200 By Consignment stock 2,360
To consignment stock 500
reserve A/c (25% of
stock Rs. 200
To Profit transferred 2,535
To P & L A/c
15,360 15,360
Dr. S of Bombay (Consignee) Cr.

2006 Rs. 2006 Rs.
To Consignment A/c 10,500 By Bank 4,000
By Consignment A/c
Expenses 1200
Commission 525 1725
By Bank 4,775
10,500 10,500
36
Dr. Goods sent on Consignment Cr.
2006 Rs. 2006 Rs.
To consignment a/c 2,500 By Consignment a/c 10,000
To Trading a/c 7,500
10,000 10,000
Dr. Consignment Stock A/c Cr.

2006 Rs 2006 Rs.
To Consignment A/c 2,360 By balance c/d 2,360
2,360 2,360
Dr. Consignment Stock Reserves A/c Cr.

2006 Rs. 2006 Rs.
To balance c/d 500 By consignment A/c 500
500 500
To balance b/d 500
Working Notes
Valuation of Stock
20 cases of Milk Rs. 100 = Rs. 2,000
Proportionate Expenses = Consignor expenses + Consignee
Expenses = Rs. 600 (freight and insurance + Rs. 1000 (Import
duty) + Rs. 200 (Dock Dues) = Rs. 1800
Expenses on unsold Stock
1800 x 20/100 = 360
Total value = Rs. 2000 + 360 = Rs. 2360
37
Adjustment Entries -
Excess of invoice price over cost price in case of goods sent on
consignment = 10,000 x 25/100 = Rs. 2500.
2.9 SUMMARY
Consignment is a specialised kind of transaction between consignor and

consignee, whereby consignor sends goods to consignee to be sold by the latter
on behalf of the former for a mutually agreed commission. The goods
consigned to the agent cannot be treated as sales at the time of the consignment,
they are treated as sales only when those are sold by the consignee. In a
consignment transaction, the consignor sends goods to the consignee and makes
a bill called Proforma Invoice. The value recorded in the proforma invoice
may be the actual cost to the consignor or actual cost to the consignor plus
mark-up. The objective of consignor in making accounts relating to consignment
are to ascertain the results of consignment and to make final settlement with
the consignee. To achieve this, he prepares consignment account and consignee
account. The consignee makes accounts relating to consignment relating to
consignment to effect the settlement with the consignor and to recognise his
commission entitlement as consignee.
2.10 KEYWORDS
Consignment: A shipment of goods by a manufacturer or wholesale dealer to

an agent to be sold by him on commission basis, on the risk and account of the
former, is known as consignment.
38
Consignor: The person who sends the goods to the agent to be sold by him as
commission basis is called the consignor.
Del Credere Commission: It is a commission which is paid by the consignor

to the consignee for taking additional risk of recovery of debts on account of
sales made on credit by the consignee on behalf of the consignor.
Account Sales: It is a statement which contains the details of sales, expenses

incurred and commission entitlement and balance due to the consignor.
Normal Loss: The normal loss is one which cannot be avoided because of the
basic nature of the goods/processes involved.
1. Define 'Consignment'. What is the difference between a consignment

and a sale of goods?
2. Why goods are sent to consignee at invoice price? What adjustment

entries are recorded in the books of the consignor to find profit on
consignment when goods are invoiced at proforma prices?
3. Give journal entries in respect of consignment transactions in the books

of consignor and consignee.
4. Write short notes on:

a) Del Credere Commission
b) Treatment of normal and Abnormal Losses in Consignment
Account
c) Valuation of Unsold Stock in Consignment
39
5. On 1st July, 2006 Radio House of Delhi consigned 200 Radios to
Banerjee Bros. of the Calcutta. The cost of each radio was Rs. 400. Radio
House paid Rs. 5,000 for freight and insurance. On 7 July, 2006 Banerjee
Bros. accepted a 3 months bill drawn upon them by Radio House for Rs.
50,000, Banerjee Bros. paid Rs. 2,200 as rent and Rs. 1,300 for
advertisement and upto 31st December, 2006 (on which date Radio
House close their books) they sold 180 radios at Rs. 500 each. Banerjee
Bros. were entitled to a commission of 5% on sales.
Give Journal entries and prepare necessary accounts to record the above
transactions in the books of the parties.
6. Arun sends goods on consignment to Seemu. The terms are that Seemu
will receive 10% commission on the price (which is cost plus 25%) and
20% of any price realised above the invoice price. Seemu will meet his
expenses himself, goods to be sent freight paid.
Arun sent goods whose cost was Rs. 16,000 and spent Rs. 1,500 on
freight, forwarding, etc. Seemu accepted a bill for Rs. 16,000
immediately on receiving the consignment. His expenses were Rs. 200
as rent and Rs. 100 as insurance. Seemu sold of the goods for Rs.
19,500. Part of the sales were on credit and one customer failed to pay
Rs. 400. Give Consignment Account and Seemu's Account in the books
of Arun and Arun's Account in the books of Seemu.
7. Dutt of Delhi makes sewing machines at a cost of Rs. 120. On 1st January,
1994 he consigned 200 of them, invoice price Rs. 150 to Khan at Madras
to be sold on behalf of Dutt, Khan receiving a commission of 8% on
40
sales plus 2% del credere and 10% of any profit that may remain on the
basis of invoice price. Khan was to bear all expenses after the machines
reach his godown. Dutt incurred Rs. 500 as forwarding expenses and
insurance.
10 machines were damaged during transit for which Dutt received Rs.
1,050 from insurers. Khan took delivery of remaining machines paying
Rs. 1,140 as freight, octroi duty, cartage, etc. (Subsequently he also paid
Rs. 500 as storage and other charges).
Khan sold 160 machines @ Rs. 180; 100 of them on credit out of which
the proceeds of 5 machines could not be received because of the
disappearance of the customer. Khan remitted the amount due to Dutt.
You are required to prepare the Consignment to Madras A/c and Khan's
A/c in Dutt's Books.



41
Lesson : 3
BRANCH ACCOUNTS
STRUCTURE
3.0 Objective
3.1 Introduction
3.2 Types of Branches
3.3.1 Branch not keeping full system of accounting
3.3.2 Branch keeping full system of accounting
3.3.3 Foreign Branches
3.4 Summary
3.5 Keywords
3.0 OBJECTIVE
a) Explain the different types of branches
b) Calculate branch profit in head office books on cast basis by using debtor
system, final account systems and stock and debtor system
c) Convert into home currency the results of foreign branches
3.1 INTRODUCTION
As the business of a firm grows in size it open branches in order to

sell its product over a large territories. The main object of keeping branch accounts
is dependent on the nature of the business and specific need of a particular branch.
1
The object of keeping the branch accounts acceptable to all business are to evaluate
the progress and performance of each branch and to know the profit and loss of
each branch separately. By keeping branch accounts we can ascertain the financial
position of each branch on a particular date and know the cash and goods requirements
of various branches. It may be possible to give concrete suggestions for the
improvement in the working of various branches.
3.2 OBJECT OF BRANCH ACCOUNTING
The main object of keeping branch accounts is dependent on the nature

of the business and specific need of a particular branch. The objects of keeping the
branch accounts acceptable to all businesses are:
i) To know the profit or loss of each branch separately.
ii) To ascertain the financial position of each branch on a particular date.
iii) To know the cash and goods requirements of the various branches.
iv) To evaluate the progress and performance of each branch.
v) To calculate commission for payment to the managers, if based on profits of

branch.
vi) To know the profitability of each branch and type of business for expansion
of the business.
vii) To give concrete suggestions for the improvement in the working of the
various branches.
viii) To meet the requirements of specific enactments as all branches of a company

must keep the accounts for audit purposes.
2
3.3 TYPES OF BRANCHES
For the purposes of accounting, branches may be divided into three

classes namely :
1. Branches which do not keep their accounting records, their accounting

is wholly performed at the Head office.
2. Branches which keep their own accounting records independently; and
3. Foreign branches
3.3.1 Branch not keeping full system of Accounting
The main features of these type of branches are as follows :
(a) These branches sell only those goods which are supplied by the Head office.
These branches are not allowed to make any purchases from the outside market.
(b) Head office supplies goods to these branches either at the cost price or
at the invoice price.
(c) All expenses of a regular nature of the branch such as salary, rent,
advertisement etc. are paid by the Head Office.
(d) Some petty expenses e.g. cartage, entertainment etc. are paid by
the branch manager out of the petty cash balance. Petty cash book
may be maintained by the branch either on sample basis or on
imprest system.
(e) Such branches are required to deposit the cash collected by them either
by way of cash sales or cash collected from debtors into the bank account
opened in the name of the Head office.
(f) Sales are made by the branch normally on a cash basis but sometimes
the branches are permitted to sell the goods on a credit basis also.
3
(g) Such branches keep only some memorandum records e.g. stock registers.
A copy of the stock register is forwarded to the Head Office every week
or every month. This statement will show for each item, the opening
stock, the stock received during the period, sales during the period,
breakage losses etc. during the month and the closing stock. The sanction
of the Head Office will be necessary in order to write off the breakage
losses etc. The stock statement will serve the purpose of controlling
the stock at the branch and of the purpose of guiding the Head Office as
to which stocks should be replenished. This statement is normally
required to be submitted by branch to Head office by a fixed day.
Since these type of branches do not keep any account, accounts are
maintained by the Head Office. The system of maintaining accounts by the Head
office depends on the size of the branch, and the degree of control which the
Head office wants to exercise. Keeping in view the above factors the Head office
man maintain the accounts of the branch in any one of the following ways :
(i) Debtors system : This system is generally adopted in the case of

concerns which are fairly of a small size. Under this system for each
branch a separate account is opened in the books of Head office in order
to record all transactions relating to that branch.
(ii) Final Account System : Under this system the office opens a Branch
Trading and Profit and Loss Account and a branch account. Branch
account opened under this system is quite different from the branch
account opened under the debtors system.
(iii) Stock and Debtors System : Under this system the head office opens
for each branch a Branch Stock Account, Branch Debtors Account, Branch
Expenses Account and Branch Adjustment Account in order to find out
the profit or loss made by the branch.
4
(iv) Wholesale branch : This method is adopted when the goods are supplied
to the branch at the wholesale price i.e. at the price at which the goods
are supplied to the wholesalers.
All these systems are explained in the following pages :
1. Debtors System
Under this system a separate account known as the Branch Account

is opened for each branch for the purpose of calculating the profit. Branch
account opened in the books of Head office is in the nature of a nominal
account. The salient features of this type of accounting are as follows :
1. Stock in the beginning and at the end : Stock in the beginning of the period
is shown in the debit side of the branch account while stock at the end of the
period is shown on the credit side of the branch account. Stock is shown at
the cost price.
2. Goods sent to the branch : Goods sent to the branch during the year is
shown on the debit side of the branch account at the cost price. If the
goods are returned by branch to the Head office it is shown in the credit
side of the Branch Account. Alternatively it can be shown by way of a
deduction from the 'Goods sent to the Branch' on the debit side of Branch
Account.
3. Branch expenses paid by the Head Office : Branch expenses paid by

the Head office are shown in the debit side of branch account.
4. Branch expenses paid by branch office : Expenses paid by the branch

do not appear anywhere because they reduce the balance of cash in hand.
Reduced balance of cash appears on the credit side of Branch Account.
5
5. Treatment of branch expenses paid by office when petty cash system
is maintained on the imprest system : If petty cash is maintained at the
branch on the imprest system, then the petty expenses paid by the branch
manager are reimbursed by the Head office. These expenses then take
the form of expenses paid by the head office and are shown in the debit
side of the branch account. The petty cash balance at the end of the period
must be shown on the credit side of the branch account at the same figure
at which it appeared at the commencement of the period.
6. Depreciation on the branch fixed assets : Depreciation on the branch

fixed asset is not shown anywhere in the branch account. Branch Account
is debited with the value of branch fixed asset at the commencement and
is credited with the adjusted value of branch fixed asset at the end.
7. Bad debts, discount allowed, allowances etc. : Similarly bad debts, discount
allowed to customers, allowances, returns from customers are not shown in the
Branch Account because these accounts reduce the figure of debtors at the end.
8. Cash sales and credit sales : The figure of cash and credit sales are not
shown in the Branch Account. These figures are replaced by remittances
which is calculated by adding cash sales and cash received from
customers.
9. Purchase of fixed asset : Where some fixed asset is purchased by the branch it
increases the book value of the fixed asset on the one hand and reduces the
remittances (if purchased on cash) or increases the liabilities (if purchased on
credit.
10. Sale of fixed asset : On the sale of the fixed asset by the branch, the
book value of the fixed asset is reduced on the one hand, and on the
other hand it increases either the remittances (if the sale is for cash) or
increases debtors at the end (if the sale is on credit).
6
Journal Entries : The following journal entries are passed under the Debtor
system :
1. When goods are sent to branch
Branch Account Dr.
To Goods sent to Branch Account
2. When goods are returned by branch
Goods sent to Branch Account Dr.
To Branch Account
3. When cheque is sent to the branch for expenses
Branch Account Dr.
To Bank Account
4. When cash/cheque is received from the branch for remittances
Bank Account Dr.
To Branch Account
5. For closing balances of assets at the branch
Branch Assets Account Dr.
To Branch Account
The closing balances of assets will be shown in the balance sheet

of the Head office. At the beginning of the next accounting period a reverse
entry will be passed.
7
Branch Account Dr.
To Branch Assets Account
6. For closing balances of liabilities at the branch
Branch Account Dr.
To Branch Liabilities Account Dr.
The closing balances of liabilities will be shown in the Balance

Sheet of the Head office. At the beginning of the next accounting period a
reverse entry will be passed.
Branch Liabilities Account Dr.
To Branch Account
7. For transferring profit or loss of the branch
Branch Account (Profit) Dr.
To General Profit and Loss Account
In case of loss the above entry is reversed
General Profit and Loss Account Dr.
To Branch Account (Loss)
8. For goods sent to branch account
To Purchases Account (in trading concerns)
To Trading Account (in manufacturing concerns)
8
Branch Account in the books of Head office will appear as under :
BRANCH ACCOUNT

To Balance b/d By Balance b/d
(opening balances of assets) (opening balances of liabilities)
Cash in hand By Bank Account

Stock in trade (at cost) Cash sales
Sundry debtors Received from debtors
Furniture By Balance c/d
Prepaid Insurance (closing balances of assets)
To Goods sent to Branch A/c Cash in hand
(at cost) Stock in trade (at cost)
To Bank account Sundry debtors
(Expenses paid by H.O.) Furniture
To Balance c/d Prepaid Insurance
(closing balance of liabilities) By General Profit and Loss
To General Profit and Loss Account Account (Loss)
(Profit)
Illustration 1 : ABC Co. of New Delhi opened a branch at Kanpur. The

following is the list of transactions between the Head office and the branch
for the year ending March 31, 2001
Rs.
Stock at Branch on Ist April, 2000 1,500
Goods supplied to Branch during the year 24,000
Cash sent to Branch for
9
Salaries 1,200
Rent 360
Telephone expenses 100
Petty Expenses 150
Remittances received from the branch during the year 27,500

Stock on 31st March,2006 1,250
Balance of Petty Cash 10
All the branch expenses are paid by Head office. Give journal
entries and show the Branch Account in the Head office books.
Solution
Journal
Particulars Rs. Rs.
Branch Account Dr. 1,500
To Branch Stock Account 1,500
(Being the opening balance of branch stock transferred back)
To Goods sent to Branch Account 24,000
(Being the goods sent to the branch during the year)
To Cash Account 1,810
(Being the cash sent to branch to meet the following expenses
Salaries 1,200
Rent 360
Petty expenses 150
Cash Account Dr. 27,500
To Branch Account 27,500
(Being the cash received from the branch)
Branch Stock Account Dr. 1,250
Branch Petty Cash Account Dr. 10
To Branch Account 1,260
(Being the closing balances of stock and petty cash
To General Profit and Loss Account 1,450
(Being the profit at the branch transferred)
10
BRANCH ACCOUNT
Dr. Cr.
To Branch Stock Account 1,500 By Bank Account
To Goods sent to Branch 24,000 Remittances from Branch 27,500
To Cash Account By Branch Stock Account 1,250
Salaries 1,200 By Branch Petty Cash Account 10
Rent 360
Petty expenses 150
To General Profit and Loss Account 1,450
28,760 28,760
When goods are sent to branch at Invoice Price
Goods are marked on invoice price in order to have effective

control on stock and to keep secret from the branch manager the cost price of
the goods and profit made, so that he may not start a competing business with
the concern. Head Office will maintain branch account on the same lines as
already discussed but the entries relating to goods sent to branch, goods
returned by the branch to head office, opening and closing stock at the branch
will be at invoice price and in order to calculate the net profit of the branch,
the following adjustment entries will have to be passed in the head office books
at the end of the accounting period:
(i) For adjustment of excess price of the Opening Stock at Branch :

Stock Reserve Account Dr.
To Branch Account
(ii) For adjustment of excess price of goods sent to branch less returns to
head office :
Goods Sent to Branch Account Dr.
To Branch Account
11
(iii) For adjustments of excess price of the closing stock at the Branch :
Branch Account Dr.
To Stock Reserve Account
Illustration 2 : From the following details prepare Branch Account in the

books of Head Office.
Rs.
Goods sent to Branch at cost 50,000
Goods returned by Branch at cost 3,000
Branch Credit Sales 51,000
Cash Sales at Branch 2,500
Cash remitted to H.O. by Branch 45,000
Expenses paid by H.O. 10,000
Discount allowed to customers by Branch 1,800
Closing stock with Branch at cost 17,000
Closing Debtors (Closing Balance) 7,700
Solution
In the books of Head Office
Dr. BRANCH ACCOUNT Cr.
Rs. Rs.
To Branch Stock at Cost By Remittances by the Branch :
To Branch Debtors 1,000* Rs.
To Goods sent to Branch A/c 50,000 47,000 Cash Sales 2,500
Less : Goods returned to Recd. from
H.O. 3,000 Debtors 42,500* 45,000
To Bank (Expenses paid By Branch stock at cost 17,000
by H.O.) 10,000 By Branch Debtors 7,700
To General Profit & Loss A/c
Profit) 11,700
69,700 69,700
12
BRANCH DEBTORS ACCOUNT
Rs. Rs.
To Balance c/d 1,000 By Cash 42,500
To Credit Sales 51,000 By Discount 1,800
52,000 52,000
2. Final Account System
Sometimes it is required to calculate branch profit or loss by not

preparing Branch Account but preparing Trading and Loss Account at cost and
in addition to this, branch account to be prepared under such circumstances
will be personal account and not nominal account. The branch account will
generally have debit balance which will be equal to net worth at the end. The
working of this method will be clear from the following illustration.
Illustration 3 : A Delhi merchant has a Branch at Madras to which he charges

out the goods at cost plus 25%. The Madras Branch keeps its own Sales Ledger
and transmits all cash received to the Head Office every day. All expenses are
paid from the Head office. The transactions for the Branch were as follows :
Rs. Rs.
Stock 1.4.2005 at invoice price(IP)11,000 Returns Inwards 500
Debtors 1.4.2000 100 Cheques sent to Branch :
Petty Cash 100 Rent 600
Cash Sales 2,650 Wages 200
Credit Sales 23,950 Salary and other expenses 900
Goods sent to Branch at I.P. 20,000 Stock (31.3.2006) 13,000
Collection on ledger accounts 21,000 Debtors 2,000
Goods returned to H.O. 300 Petty Cash (31.3.2006) including
Bad Debts 300 miscellaneous income Rs. 25
Allowances to Customers 250 not remitted 125
(76)
13
Prepare the Branch Trading and Profit and Loss Account and
Branch Account for the year 31.3.2006.
Solution :
BRANCH TRADING AND PROFIT AND LOSS A/C

for the ending 31.3.2006
Rs. Rs.
To opening Stock By Sales :
(Rs. 11,000-2,200) 8,800 Cash 2,650
To Goods Sent to branch A/c Credit 23,950
(20,000-4,000) 16,000 26,600
Less : Returns to H.O. Less: Returns 500 26,100
(300-600) 240 15,760 By Closing Stock
To Wages 200 (13,000-2,600) 10,400
To Gross Profit c/d 11,740 36,500
36,500
To bad Debts 300 By Gross Profit b/d 11,740
To Allowances 250 By Accrued Income 25
To Rent 600
To Salaries and Other Expenses 900
To Net Profit 9,715
11,765 11,765
BRANCH ACCOUNT (PERSONAL) A/C

Rs. Rs.
To Opening Balances : By Remittances (2,650+21,000) 23,650
Stock 8,800 B Balance c/d
Debtors 100 (10,400+2,000+125) 12,525
Petty Cash 100
To Goods Sent to Branch 16,000
Less Returns to H.O. 240 15,760
To Bank (Expenses) 1,700
To Profit 9,715
36,175 36,175
14
3. Stock and Debtors System
In case of this system, the Head Office maintains a number of

accounts for keeping a record of branch transactions in place of one branch
account. A brief description of each of these accounts is given below :
(i) Branch Stock Account : This account is on the pattern of a goods account. The
account helps the Head Office in maintaining an effective control over the Branch
Stock. It tells about shortage or surplus of stock and the closing stock at the Branch.
(ii) Branch Debtors Account : The account is maintained to keep a record

of all transactions related to Branch Debtors and ascertainment of the balance
of the debtors at the end of the accounting period.
(iii) Branch Fixed Assets Account : A separate account for each of the
Branch fixed assets is maintained to record all transactions relating to each of
these fixed assets.
(iv) Branch Cash Account : The account is maintained to record all cash
transactions of the Branch. This is particularly helpful in those cases where
the Branch is not required to send immediately all collections of cash made by
it but to remit money at regular intervals. The account helps the Head Office
in having control over Branch Cash.
(v) Branch Expenses Account : The account is prepared to give to the Head
Office a summary picture of different expenses, bad debts and discounts etc.
incurred at the Branch.
(vi) Branch Adjustment Account : The account is maintained for

ascertaining the gross profit made at the Branch. All loadings in the goods
sent to the branch, opening and closing stocks at the branch and shortage and
surplus of stock etc. are recorded in this account.
15
(vii) Branch Profit and Loss Account : The account is prepared to ascertain
profit or loss made at the Branch. The gross profit or loss from the Branch
Adjustment Account is transferred to this account. It is debited with all other
expenses and losses and credited with all gains and profits. The balance of the
account represents the net profit or loss.
(viii) Goods sent to the Branch Account : The account is prepared to ascertain
the net value of goods sent to the Branch. Goods sent to the Branch and goods
returned by the Branch and loading included in them are recorded in this account.
Journal Entries
The following Journal entries are passed in the books of the Head
Office in case the transactions are recorded according to the Stock and Debtors
System :
(i) For goods sent to the Branch (at invoice price)

Branch Stock Account Dr.
To Goods sent to the Branch Account
(ii) For goods returned by the Branch to the Head Office (at invoice price)
Goods sent to the Branch Account Dr.
To Branch Stock Account
(iii) For Credit Sales at the Branch (at invoice price)

Branch Debtors Account Dr.
(iv) For Cash Sales at the Branch (at invoice price)

Cash Account Dr.
16
(v) For goods returned by Branch Debtors to the Branch (at invoice price)
Branch Stock Account Dr.
To Branch Debtors Account
(vi) For goods returned by Branch Debtors directly to the Head Office
(at invoice price)
(vii) For Goods sent by one Branch to Another
It will be recorded as if the Branch has first returned the goods to the
Head Office and then the Head Office has sent goods to another Branch. For
example, if Branch X sends goods to Branch Y, the following entries will be
passed :
(a) Goods sent to Branch Account Dr.

To X Branch Stock Account
(b)Y Branch Stock Account Dr.

To Goods sent to Y Branch Account
(viii) For Bad Debts, Discount etc.

Branch Expenses Account Dr.
(ix) For Expenses at Branch

Expenses Account Dr.
To Bank Account
17
(x) For Abnormal Shortage (or pilferage or loss) of Stock
Branch Adjustment Account Dr.
(with the amount of loading)

Branch Profit and Loss Account Dr.
(with shortage at cost)
(with the shortage at invoice price)
For surplus at Branch, a reverse entry will be passed.
Any amount received from the Insurance Company for abnormal

loss of stock (if insured), will be debited to Branch Cash Account and Credited
to Profit & Loss Account.
(xi) For Normal shortage or loss of stock :

Branch Adjustment A/c Dr.
To Branch Stock A/c
Any other difference in the Branch Stock Account may also be

transferred to Branch Adjustment Account.
(xii) For transfer of Branch Expenses

Branch Profit and Loss Account Dr.
To Branch Expenses Account
(xiii) For adjustment for loading in the Opening Stock

Stock Reserve Account Dr.
To Branch Adjustment Account
(xiv) For adjustment of loading in Closing Stock

To Stock Reserve Account
18
(xv) For adjustment of loading in Net Goods sent to the Branch Account
(i.e. goods sent less goods returned by branch)
To Branch Adjustment Account
(xvi) For transfer of the balance in goods sent to the Branch Account
To Purchases/Trading Account
(xvii) For Transfer of Gross Profit shown by the Branch Adjustment Account
To Branch Profit and Loss Account.
In case of gross loss, the entry will be reversed
(xviii) For transfer of Net Profit at the Branch

Profit and Loss Account Dr.
To General Profit & Loss Account
In case of net loss, the entry will be reversed
Illustration 4 : On Ist April, 2006, goods costing Rs. 1,32,000 were invoiced
by Madras Head Office to its branch at Delhi and charged at selling price to
produce a gross profit of 25 per cent on the selling price. At the end of the
month the returns from Delhi Branch showed that the sales were Rs. 1,50,000.
Goods invoiced at Rs. 1,200 to Delhi Branch had been returned to Madras
Head Office. The closing stock at Delhi Branch was Rs. 24,000 at selling price.
Record the above transactions in the Branch Stock Account, Branch Adjustment
Account, Goods sent to Branch Account in the Head Office books and close
the said accounts on 30th April, 2006
19
Solution
IN THE BOOKS OF H.O.
BRANCH STOCK ACCOUNT
Rs. Rs.
To Goods sent to Branch A/c By Cash 1,50,000
(Rs. 1,32,000+1/3 By Branch Adjustment A/c
of Rs. 1,32,000) 1,76,000 (Loading) 200
Less : Returns to H.O. 1,200 1,74,800 By Branch P & L A/c (Cost) 600
1,74,800 1,74,800
BRANCH ADJUSTMENT ACCOUNT

Rs. Rs.
To Stock Reserve 6,000 By Goods Sent to Branch 43,700
To Branch Stock A/c (Loading) 200 (1/4 Rs. 1,74,800)
To Branch Profit & Loss A/c
(Gross Profit) 37,500
43,700 43,700
BRANCH PROFIT & LOSS ACCOUNT

Rs. Rs.
To Branch Stock A/c (Cost) 600 By Branch Adjustment A/c
To General P & L A/c (Net Profit) 36,900 (Gross Profit) 37,500
37,500 37,500
GOODS SENT TO BRANCH ACCOUNT

Rs. Rs.
To Branch Adjustment A/c 43,700 By Branch Stock A/c 1,74,800
To Purchases A/c 1,31,100
1,74,800 1,74,800
20
Distinction between wholesale and retail profit at branch
Manufacturers, in addition to selling the goods through the

wholesalers, usually sell the goods directly to the consumers by opening retail
branches. In such a case good are supplied to the retail branches at the same
price at which these are supplied to the wholesalers. The branches in turn sell
the goods to the consumers at a price which is more than the wholesale price.
Difference between the wholesale price at which the goods are received by
these retail branches and the retail prices is the profit earned by these retail
branches. Suppose an article cost Rs. 100 to the Head Office which in turn
supplies these to the wholesalers and their retail branches as the wholesale
price of Rs. 180. The branches sell the goods to the consumers at Rs. 200. The
profit made by the retail branch would be Rs. 200-Rs. 180 i.e., Rs. 20.
Calculation of this additional profit is an important step due to the fact that it
points out that the manufacturers would loose this additional gain in case they
do not open retail branches. Also the comparison of the additional supervision
cost and additional gain may be of some help to the manufacturers to help in
the framing of future policy.
If whole of the goods which are sent by the Head Office to the
retail branches are sold out then there is no problem. But if some of the
goods remain unsold then the Head Office must create a proper reserve by
debiting its own profit and loss account in order to show the branch stock at
cost in the balance sheet. The point to note is that in order to find out the
wholesale profits of branch no reserve for stock are created in the Profit and
Loss Account of branch.
21
Illustration 5 : A Ltd. has a retail branch at Patna, goods are sold to the
customers at cost plus 100%. The wholesale price is cost plus 80%. Goods
are invoiced to Patna at wholesale price. From the following particulars find
out the profit made by Head Office and wholesale profits at branch for the
year ending 31st March, 2006.
Head Office Branch

Rs. Rs.
Stock on Ist April, 2005 25,000
Purchases 1,50,000
Goods sent to branch (at invoice price) 54,000
Sales 1,53,000 50,000
Stock on 31st March, 2006 60,000 9,000
Sales at Head Office are made only on wholesale and that at branch
only to retail customers. Stock at branch is valued at invoice price.
Solution
Trading Account for 2005-2006
Particulars Head Branch Particulars Head Branch

Office Office
Rs. Rs. Rs. Rs.
To Opening Stock 25,000 By Sales 1,53,000 50,000
To Purchases 1,50,000 By Goods sent to Branch 54,000
To goods received from By Closing Stock 60,000 9,000
Head Office 54,000
To Gross Profit 92,000 5,000
2,67,000 59,000 2,67,000 59,000
22
Profit and Loss Account for 2005-2006
Particulars Head Branch Particulars Head Branch
Office Office
To Stock Reserve against By Gross Profit 92,000 5,000
Branch Stock
4,000
To Net Profit 88,000 5,000
92,000 5,000 92,000 5,000
3.3.2 Branch keeping full system of accounting
Branches keeping full system of accounting or independent

branches are those branches which also purchase goods from the market besides
getting the goods from the head office. They can also supply goods to the head
office, pay expenses from the cash realised and deposit cash in their own
account. In other words, these branches operate as an independent unit for all
practical purposes but their only link with the head office is that they are owned
by the head office and whatever their profit or loss will be, that belongs to the
head office.
Such branches keep complete set of double entry books and

prepare their own trial balance, trading and profit and loss account and balance
sheet. Such branches open head office account in their books. This account is
debited by cash sent to the head office, goods supplied to head office, payment
made by the branch for purchase of assets and loss to be borne by the head
office and credited by cash received from the head office, goods received from
the head office, depreciation of branch fixed assets, charge made by head office
for rendering services and profit earned by the branch. Similarly the head office
will also maintain a branch account for each branch. This account will have the
same entries but on the reverse sides.
23
The certain transactions which require special attention are :
(i) Purchase of Branch Fixed Assets : Generally the branch fixed assets
are maintained in the books of head office. When an asset is purchased, the
following entries are passed.
(a) If the payment is made by the branch
Head Office Books

Branch Assets A/c Dr.
To Branch A/c
Branch Books
Head Office A/c Dr.
To Cash A/c
(b) If the payment is made by the head office
Head Office Books

Branch Assets A/c Dr.
To Bank A/c
Branch Books
No Entry
(ii) Depreciation of Fixed Assets : As branch fixed assets are maintained in

the books of head office so entries relating to depreciation will also be passed
through head office account. The following entry will be passed :
H.O. Books
Branch Account Dr.
To Branch Asset A/c
24
Branch Book
Profit & Loss A/c Dr.
To Head Office A/c
(iii) Head Office Expenses : If some services such as administration or

technical are rendered by the head office to the branch then a proportionate
charge for such expenses will be made to each branch by the head office and
entry for that will be as follows :
H.O. Books
Branch Account Dr.
To Profit & Loss A/c
Branch Books
To Head Office A/c
(iv) Reconciliation of transit items : The balance of head office account (in
branch books) and branch account (in head office books) should normally be
same and one will make debit and other will credit for all transactions affecting
these accounts. But these accounts may differ in balances because of the
following reasons :
(a) Cash in transit : Sometimes the branch is remitting the cash to the head
office before the close of the accounting year, say on 28 th December, when the
accounts are closed on 31st December. While remitting the cash to the head
office the branch will debit the head office account but if the remittance is
received by the head office after the closing date of accounting year, say on
4th January, then head office will not give a credit for the same amount of
remittance on 31st December, so the two balances, i.e. H.O. A/c (in Branch
25
books) and Branch Account (in H.O. books) will differ. In order to reconcile
these balances, an adjusting entry will be passed in the books of branch or head
office (if the intimation of such remittance is received by the head office).
Branch Books
Cash in Transit A/c Dr.
To Head Office A/c
OR
Head Office Books

Cash in Transit A/c Dr.
To Branch A/c
(b) Goods in transit : Similarly the two balances may differ because of
goods in transit. Suppose the head office sent goods to the branch on 28th
December but those goods were received by the branch on 4th January (next
year). Head office must have debited the account of branch in its books but
there will be no corresponding credit to head office account in the books but
there will be no corresponding credit to head office account in the books of
branch; so on the last day of accounting year, i.e., 31st December the head
office will pass the following adjusting entry :
Goods in Transit A/c Dr.
To Branch A/c
Cash in transit or goods in transit will be shown as an asset in the

balance sheet.
(v) Inter-branch transactions : If the head office has many branches and
there is a possibility that some branch may supply goods or send cash to the
other branch, such transactions among the branches are called inter branch
26
transactions. Such transactions may be recorded either by maintaining a current
account of a branch in another branch's books or such transactions may be
recorded by all branches by passing entries through head office account. For
example, of goods are supplied by Calcutta branch to Delhi branch and the
head office is at Bombay, then the following journal entries will be passed in
the books of head office and the branches:
Bombay Books
Delhi Branch A/c Dr
To Calcutta Branch
Calcutta Books
Head Office A/c Dr.
To Goods supplied to other branches A/c
Delhi Books
Goods received from other Branches A/c Dr.
To Head Office A/c
(vi) Cash paid by branch on behalf of Head Office : If the branch has paid
some cash (say for purchases made by Head Office) on behalf of Head Office,
then the following entries will be passed in the books of Head Office and the
branch :
Head Office Books

Purchases A/c Dr.
To Branch A/c
Branch Books
Head Office A/c Dr.
To Cash A/c
27
(vii) Cash collected by branch on behalf of Head Office : If the branch has
collected some cash on behalf of Head Office (say for calls in arrears from
the shareholders of Head Office) then the following journal entries will be
passed in the books of Head Office and the branch :
Head Office Books

Branch A/c Dr.
To Calls in Arrears
Branch Books
Cash A/c Dr.
To Head Office A/c
(vii) If a bill is drawn by one branch on another branch : If a bill is drawn

by Agra Branch on Bombay Branch and the Head Office is at Delhi, then the
following entries will be passed in the books of Head Office and branches :
Head Office Books

Agra Branch A/c Dr.
To Bills Payable
B/R A/c Dr.
To Bombay Branch
Agra Branch
B/R A/c Dr.
To Head Office
Bombay Branch
Head Office A/c Dr.
To B/P A/c
28
Illustration 6 : A Calcutta based firm whose accounting year ends on 31st
December has two branches - one at Agra and the other at Varanasi. The branches
keep a complete set of books. On 31st December, 2005, the Agra and Varanasi
Branch Accounts in the Calcutta books showed debit balances of Rs. 30,450
and Rs. 45,000 respectively before taking the following information into
account :
(a) Goods worth Rs. 2,000 were transferred from Agra to Varanasi under
instructions from Head Office.
(b) The Agra Branch collected Rs. 2,500 from an Agra customer of the Head Office.
(c) The Varanasi Branch paid Rs. 5,000 for certain goods purchased by the
Head Office in Varanasi.
(d) Rs. 5,000 remitted by the Agra Branch to Calcutta on 29th December,
2005 received in Calcutta on 3rd January next.
(e) The Varanasi Branch received on behalf of the Head Office Rs. 1,500 as
dividend from a Varanasi Company.
(f) For the year 2005, the Agra Branch showed a net loss of Rs. 1,250 and
the Varanasi Branch a net profit of Rs. 5,400.
Pass Journal entries to record these matters in the Head Office

books, and write up the two Branch Accounts therein.
Solution :
HEAD OFFICE JOURNAL

2005 Rs. Rs.
Dec. 31 Varanasi Branch Account Dr. 2,000
To Agra Branch Account 2,000
(Being the Goods transferred from
Agra to Varanasi Branch)
29
Agra Branch Account Dr. 2,500
To Sundry Debtors Account 2,500
(Being debts collected Agra Branch)
Purchases Account Dr. 5,000
To Varanasi Branch Account 5,000
(Being goods purchased paid for by
Varanasi Branch)
Cash in Transit Account Dr. 5,000
To Agra Branch Account 5,000
(Being cash sent by Agra Branch still in transit)
Profit & Loss Account Dr. 1,250
To Agra Branch 1,250
(Being Agra Branch Loss for 1998)
Varanasi Branch Account Dr. 5,400
To Profit and Loss Account 5,400
(Being Varanasi Branch profit for 1998)
Agra Branch Account

2005 Rs. 2005 Rs.
Dec.31 To Balance b/d 30,450 Dec.31 By Varanasi Branch 2,000
To Sundry Debtors 2,500 Account
By Cash in Transit Account 5,000
By Profit and Loss A/c 1,250
32,950 32,950
Varanasi Branch Account

2005 Rs. 2005 Rs.
Dec.31 To Balance b/d 45,000 Dec.31 By Purchases A/c 5,000
To Agra Branch A/c 2,000 By Balance c/d 48,900
To Dividend Account 1,500
To Profit and Loss A/c 5,400
53,900 53,900
30
3.3.3 Foreign Branches
When a branch is located in a foreign country it is called a foreign

branch. Such branch will keep its books of accounts in foreign currency. The
main problem which the head office is to face under this type of branch is to
convert the branch trial balance from the foreign currency to the currency of
that country where a head office is working in order to incorporate the branch
trial balance in the books of head office. Otherwise for all purposes, this branch
is treated as an independent branch.
Rules for Converting the Branch Trial balance into the Books of Head Office
The following are the main rules which should be taken into
consideration while converting the figures of foreign trail balance in the books
of the head office for the purpose of their incorporation in the books of head
office :
(1) If the fluctuations in the rate of exchange are neither frequent nor violent
the branch trial balance should be converted at a fixed rate of exchange.
(2) If the rate of exchange is subject to frequent and violent fluctuations, then
the following rules should be adopted for converting the branch trail balance :
(i) Fixed Assets and Fixed Liabilities : Fixed assets should be converted
at the rate of exchange prevailing on the day when these assets were purchased
or on the date of contract. Similarly fixed liabilities should be converted at
the rate of exchange ruling on the day when such liabilities were incurred or
the payment was made.
(ii) Floating Assets/Liabilities : These should be converted at the rate of

exchange prevailing on the last day of the year.
31
(iii) Revenue Items : These items should be converted at the average rate
of exchange ruling during the period under review. If fluctuations are violent
then these should be converted each month at the average rate prevailing
during that month.
(iv) Head Office Account : It is converted at the same figure at which branch
account appears in the head office books.
(v) Remittances : These are converted at the figures at which they appear in
the head office books.
(vi) Opening and Closing Stock : Opening stock should be converted at the
rate of exchange prevailing in the beginning of the period and closing stock
should be converted at the rate prevailing on the last day of the period.
After converting the various items of the branch trial balance

according to the above rules, a new trial balance can be prepared but such trial
balance will seldom tally. In order to make it agree, sometimes the difference
is put against a separate account known as 'Difference in Exchange Account'.
If the difference is small, it is closed by transfer to profit and loss account but
if the difference is big, it should be put under a separate account called
'Exchange Fluctuations Account' and will be shown in the Balance Sheet either
as an asset or as a liability depending on whether its balance is debit or credit.
Illustration 7 : ABC Ltd. of Calcutta has a branch in London. The following

are the balances of London Branch on 31st March, 2006. The cash remitted
from London and the London Branch balance appeared in the Calcutta books at
Rs. 19,187 and Rs. 3,27,732 respectively. Convert at the fixed rate of exchange
of 1sh 6 d. to the rupee; make the necessary adjustments in the Calcutta books
and the Head Office Account in branch books.
32
London Branch

Head Office Account 24,579
Remittance to Calcutta 1,440
Creditors 32,805
Profit and Loss A/c 2,973
Profit for the year 2,433
Debtors 25,167
Furniture 1,410
Plant and Machinery 14,973
Stock on 31.3.2001 16,161
Cash at bank 3,492
Cash in Hand 327
62,790 62,790
Solution
LONDON BRANCH
Trial Balance as on 31st March, 2006
Rs. Rs.
Head Office Account 3,27,732
Remittance to Calcutta 19,187
Creditors 4,37,400
Profit and Loss Account 39,640
Profit for the year 32,440
Debtors 3,35,560
Furniture 18,800
Plant and Machinery 1,97,240
Stock on 31.3.2001 2,15,480
Cash at Bank 46,560
Cash in Hand 4,360
Difference in Exchange 25
8,37,212 8,37,212
33
Calcutta Journal
2006 Rs. Rs.
March 31 Difference in Exchange A/c Dr. 25
To London Branch 25
(Being the difference in exchange)
March 31 London Branch A/c Dr. 32,440
(Being London Branch profit fit for the year)
CALCUTTA LEDGER
LONDON BRANCH
2006 Rs. 2006 Rs.

Mar.31 To Balance Mar.31 By Remittance 1,440 19,187
b/d 24,579 3,27,732 " By Difference
" To Profit & in exchange 25
Loss A/c 2,973 39,640 " By Balance c/d 28,545 3,80,600
" To Profit for
the year 2,433 32,440
29,985 3,99,812 29,985 3,99,812
April 1 To Balance
b/d 28,545 3,80,600
LONDON LEDGER
CALCUTTA HEAD OFFICE A/C
2006 2006
March 31 To Remittance 1,440 March 31 By Balance b/d 24,579
To Balance c/d 28,545 By Profit & Loss A/c 2,973
By Profit for the year 2,433
29,985 29,985
April 1 By Balance b/d 28,545
34
3.4 SUMMARY
Sometimes business is carried on in different establishments

which may be in the same town or in various parts of a country or even in
distant countries of the world. The main establishment is called the Head Office
while the remaining ones are called branches. It is desirable to know the profit
or loss made by each branch so that if a branch does not yield into desired
result, steps can be taken to remedy the state of affairs. Hence it is necessary
to maintain the accounts of the branch in such a manner that profit or loss
made at a branch can be ascertained.
3.5 KEYWORDS
Debtor System: Under this system the head office opens a separate account
for each branch in order to record all transactions relating to a branch.
Final Account System: Under this system, head office opens a Trading and
Profit and Loss Account in order to find out profit or loss of each branch and
a branch account.
Stock and Debtors System: Under this system, head office will open various
accounts in order to find the profit or loss of each branch.
Foreign Branch: When a branch is located in a foreign country it is called a

foreign branch.
1. How are the figures in foreign branch trial balance converted in the Head
office books for the purpose of their incorporation in the Head Office
books.
35
2. Explain fully the various debits and credits on the head office account
as would appear in the branch books where the branch maintains an
independent set of books.
3. Explain the adjustments necessary if the goods are invoiced by a Head

Office at cost plus profit price to its branch
4. Jain Bros. operate a retail branch at Delhi. All purchases are made by
the head office at Madras; goods being charged out to the branch at cost
price. All cash received by the branch is remitted to Madras. Branch
petty expenses are paid out of an imprest which is reimbursed by the
head office from time to time. From the following particulars relating
to Delhi branch, you are required to prepare branch account (for
calculating profit) in the books of head office.
Rs. Rs.
April 1, 2006:
Stock at cost 8,000 Petty expenses paid by the
Petty cash 800 branch out of imprest 700
Plant 10,000 Cash sales during the year 70,000
March 31, 2001 : Sale of the plant on July 1, 2006
Stock at cost 7,000 (book value of the plant on the
Goods sent to branch50,000 date of sale Rs. 900) 800
Expenses paid by the head office 5,000
It is required to write off the plant at 20% p.a.
36
5. Shree Nanak of Bombay has a branch at Delhi. Goods are invoiced to the
Branch at cost plus 20%. The expenses of the Branch are paid from
Bombay and the Branch keeps a Sales Journal and the Debtor's Ledger
only. From the information supplied by the Branch, prepare Trading and
Profit and Loss Account of the Branch for the year ending 31st March,
2006 and show the account of the Branch as it would appear in the books
of the Head Office.
Rs. Rs.
Opening Stock (at invoice price) 12,000 Goods received from Head
Closing Stock (at invoice price) 9,000 Office 15,000
Credit Sales 20,500 Goods in Transit from Head
Cash Sales 8,750 Office on 31st March, 2006 1,800
Receipts from debtors 18,950 Expenses paid by Head Office
Sundry Debtors on 31st March, 2006 4,580 for the branch 5,200
6. On January 1, 2006 the goods invoiced by Calcutta Head Office of a

trader to its Madras Branch were Rs. 48,000 at selling price, being 33%
on cost price. For six months ended June 30, 2006, the branch return
showed that the sales were Rs. 29,00. The goods invoiced at Rs. 2,000
were returned by the Branch to the Head Office. The closing stock at
Madras Branch on June 30, 2006 was Rs. 16,800 at selling price.
Record the above transactions showing Madras Branch Stock

Account, Madras Branch Adjustment Account, Madras Profit & Loss A/c,
and Goods Sent to Branches Account in Calcutta Head Office Books
and balance them at June 30, 2006.
37
7. A trading company has its Head Office in London and a trading branch at
Bombay The following is a list of balances on the Bombay books on
31st December, 2006, when the first year's trading ended :
Rs. Rs.
London Account 2,08,000 General Expenses 31,248

Sales 2,25,676 Bank Account 12,641
Purchases 2,61,604 Cash in hand 1,563
Wages & Salaries 43,868 Sundry Debtors 1,06,462
Freight & Insurance 26,608 Sundry Creditors 50,318
Stocks at Bombay on 31st December was valued at Rs. 1,48,500.
The balance of the London Account represents remittances to Bombay

as follows :
8th January Rs. 64,000 purchased at Is. 3 (3/4)d.

6th April Rs. 96,000 purchased at Is. 2d.
17th August Rs. 48,000 purchased at Is. 3d.
Give journal entries to incorporate the Bombay figures and show the
Bombay Branch Account in London books from Ist January to 31st
December.
1. Advanced Accounting by Ashok Sehgal and Deepak Sehgal, Taxmann Allied

Services Pvt. Ltd., New Delhi.
2. Advanced Accounts by M.C. Shukla, T.S. Grewal and S.C. Gupta, S. Chand and
Co. Ltd., New Delhi.
38
3. Fundamentals of Advanced Accounting by R.S.N. Pillai and V. Bagavathi, S. Chand
4. Studies in Advanced Accounting by S.N. Maheshwari, Sultan Chand and Sons,

New Delhi.
5. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and Neeti Gupta,

Kalyani Publishers, Ludhiana.
6. Financial Accounting by P.C. Tulsian, Pearson Education, New Delhi.
39
Lesson : 4
ROYALTY ACCOUNTS
STRUCTURE
4.0 Objective
4.1 Introduction
4.2 Difference between Royalty and Rent
4.3 Important terms in connection with Royalty
4.4 Accounting Procedure
4.4.1 Journal entries in the books of lessee
4.4.2 Journal entries in the books of landlord
4.5 Summary
4.6 Keywords
4.0 OBJECTIVE
After reading the lesson the students should be able to

(i) Understand the meaning of royalty, differentiate royalty and rent, and explain
the various terms related to royalty accounts such as lessor, lessee, dead rent
and shortworking.
(ii) Prepare the royalty accounts in the books of both lessor and lessee.
4.1 INTRODUCTION
Royalty is a periodical payment based on output or sale for the use of a

fixed asset or right to its owner. The payment which is made by one person to
1
another for the use of a certain asset is known as Royalty. The person who makes
the payment to the owner of the asset is known as lessee and the owner of the
asset to whom payment is made is called as lessor or landlord. Thus, royalty is
paid by the publisher to the writer of the book, by the manufacturer to the patentee
or to the owner of oil-wells.
According to J.R.Batliboi
The term royalty expresses an amount payable by one person in return of some
special right or privilege conceded to him by another person, such as the right to publish a
book, or to manufacture and sell a patented article or to work a mine.
Royalty account is a nominal account in nature and is synonymous with

rent account. Since, it is a nominal account, it is debited in the books of lessee as
ordinary business expenditure and credited in the books of landlord as income for
him. Royalty account is closed at the end of every accounting year by transferring
to Profit and Loss Account.
4.2 DIFFERENCE BETWEEN RENT AND ROYALTY

The major differences between rent and royalty are as follows:
1. Rent is paid for the use of tangible assets such as building, machinery,
whereas royalty is paid for the use of intangible assets or special right
such as mines, patent right.
2. Rent is fixed, but the amount of royalty is not fixed and depends on number
of articles produced or sold.
4.3 IMPORTANT TERMS IN CONNECTION WITH ROYALTY
1. Landlord or lessor :- The person who is the owner of the assets and
surrender the right of its use to some other person and receives the
consideration as royalty is called Lessor.
2. Lessee :- The person who pays the royalty in consideration for the use of
that asset is called Lessee.
3. Minimum or Dead or Fixed Rent :- It is the minimum amount of rent which
the lessee is required to pay to landlord whether he (lessee) has desired any
2
benefit or not out of the right or property rented out to him by the lessor. Thus,
such minium rent is fixed at the time of agreement between the two parties. The
fixation of such a rent is in the interest of landlord because it guarantees the
receipt of the minimum amount in case of low output or sales. So a lessee has
to pay minimum rent or royalty, whichever is more. Minimum rent is generally
fixed that is why it may be known as Dead or Fixed or Flat Rent but some time it
may vary also according to the terms of the agreement.
4. Shortworking :- The excess of minimum rent over royalty calculated on
the basis of output or sales is termed as short working.
Shortworking = Minimum Rent - Royalty
For example if minimum Rent is fixed Rs. 10,000 and actual royalty for Ist
and IInd year of output is Rs. 4,000 and 9,500/- respectively, so shortworking
will be Rs. 6,000/- and Rs. 500/- for Ist and IInd year respectively.
5. Recoupment of shortworking :- Usually in the first few years of the
royalty agreement, the work does not gather the required momentum because
of the time taken in the preparation for starting the production, so
shortworkings may arise in first few years. Keeping this in view, royalty
agreement may contain a clause that shortworking can be recouped by the
lessee in the following manner:-
(i) Without any time limit :- According to this clause in the agreement the
time limit for the recoupment of shortworkings is not mentioned. So, the
shortworkings, then, may be recouped throughout the period of the lease.
In such a case the amount of un-recouped shortworkings will be transferred
to the Profit & Loss Account only in the last year of the period of lease
and not earlier.
(ii) When shortworkings can be recouped in a fixed period :- There may be a clause in
the agreement that the shortworkings can be recouped in the given first few years of
the lease such as first three years, first four years or first five years. For example if
a coal mine is leased on Ist Jan. 2000 for a period of 10 years and if shortworkings
can be recouped only during the first 4 years of the lease, the shortworkings will be
recouped upto 2003 only and not afterwards. The balance of shortworkings in 2003
and thereafter will be transferred to Profit & Loss Account.
3
(iii) When shortworkings can be recouped in the next few years :- In this
clause of agreement, the period allowed for recoupment of each years
shortworking is calculated from the year during which the shortworkings
arose. For example, if a mine is leased on Ist Jan 1990 for a period of 20
years and if it is given in the agreement that shortworkings can be
recouped in the subsequent 3 years, then shortworkings of 1990 can be
recouped upto 1993 and shortworkings of 1991 can be recouped upto
1994 and of 1992 upto 1995 and so on. If shortworkings which could
not be recouped during the stipulated period of 3 years that shortworkings
will be transferred to Profit & Loss Account in the year in which the
right of recoupment lapses.
4.4 ACCOUNTING PROCEDURE
The following points need to be noted down before preparing the Royalty Accounts :-
1. Name of Landlord and Lessee. 2. Period of Lease.
3. Commencement of agreement. 4. Royalty Rates.
5. Minimum Rent. 6. Right of recoupment of shortworkings.
7. Mode of payment to Landlord.
A calculation table may be prepared before making the Journal entries
which makes easy solution, The format of table is as follows:-
Year Output Royalty Short Shortwor- Unrecouped Amount

working ing recou- shortworkings paid to
ped transferred to Landlord
P&L Account
Rs. Rs. Rs. Rs. Rs.
4
4.4.1 Journal entries in the books of lessee
There may be three types of situations in order to pass Journal entries in the
books of lessee:-
1. When minimum Rent is more than Royalty.
2. When minimum Rent is equal to Royalty.
3. When minimum Rent is less than Royalty.
Ist Case
When Minimum Rent is more than Royalty :-
(i) When Royalty is due :-
Royalty A/c Dr.

Shortworkings A/c Dr.
To Landlord A/c
(Being Royalty and Shortworkings due to Landlord)
(ii) When payment is made :-
Landlord A/c Dr.
To Cash/Bank
(Being Cash paid to Landlord)
(iii) Closing entry at the end of the year :-
To Royalty A/c
(Being Royalty Account transferred to Profit & Loss A/c.)
5
IInd Case
When Minimum Rent and Royalty are equal
(i) When Royalty is due :-
Royalty A/c Dr.
To Landlord A/c
(Being Royalty due)
(ii) When payment is made:-
Landlord A/c Dr.
To Cash/Bank
(Being Payment made to Landlord)
(iii) For closing Royalty A/c at the end of the year
To Royalty A/c
(Being Royalty Account transferred to Profit & Loss a/c.)
IIIrd Case
When Minimum Rent is less than Royalty and Shortworking recouped.
(i) For Royalty due
Royalty A/c Dr.
To Landlord A/c
(Being Royalty due to Landlord)
6
(ii) For payment & recouped of shortworking
Landlord A/c Dr.
To Cash/Bank
To Shortworking (Recouped)
(Being payment made to landlord and shortworking recouped)
(iii) For closing Royalty a/c and unrecouped shortworking :-
To Royalty A/c
To Shortworking (Unrecouped)
(Being Royalty & Unrecouped shortworking transferred to Profit& Loss A/c.)
Kinds of Royalties
1. Royalties in connection with mines.
2. Royalties regarding oil-wells.
3. Royalties regarding Brick Making
4. Royalties regarding Patents.
5. Royalties regarding copyright.
Illustration-1: Bengal Coal Ltd., leased in a colliery on Ist Jan. 2001 at a

minimum rent of Rs. 15,000 merging into a royalty of Re 1 per ton with a right to
recoup shortworkings over the first three years of the lease. The output for the
first four years of the lease was 8,000, 13,000, 21,000 and 18,000 tones
respectively. Pass necessary journal entries in the books of the company and
show the necessary ledger accounts.
7
Solution
Calculation Table
Year Output Royalty Minimum Short Short Unrecoued Paid to
Rent Workings Workings S.W transfer Landlord
Recouped to P & L A/C.
2001 8,000 8,000 15,000 7,000 - - 15,000
2002 13,000 13,000 15,000 2,000 - - 15,000
2003 21,000 21,000 15,000 - 6,000 3,000 15,000
2004 18,000 18,000 15,000 - - - 18,000
2001 Royalties A/c Dr. 8,000

Dec 31 Shortworking A/c Dr. 7,000
To Landlord A/c 15,000

(Being royalties and short
working due to landlord)
Dec 31 Landlord A/c Dr. 15,000
To Cash A/c 15,000

(Being payment made to
landlord)
Dec 31 Profit & Loss A/c Dr. 8,000
To Royalties A/c 8,000

(Being Royalties A/c trans-
ferred to Profit & Loss A/c.)

Dec.31 Shortworking A/c Dr. 2,000

(Being royalties and short
workings due to landlord)
8
To Cash A/c 15,000

(Being cash paid to landlord)
Dec 31 Profit & Loss a/c Dr. 13,000

(Being Royalties A/c transferred
to Profit & Loss A/c)

Dec 31
(Being royalties due to landlord)
To Cash A/c 15,000

To Shortworking A/c 6,000
(Recouped)
(Being cash paid to landlord
& excess royalty utilized for
recouping the Shortworking)

(Unrecouped)
(Being royalties & Unrecouped
shortworkings transferred to
Profit & Loss A/c)

Dec 31
(Being Royalties due to landlord)

To Cash A/c 18,000
9
(Being Royalty A/c. transferred to
Profit & Loss A/c)

(Unrecouped)
(Being royalties & Unrecouped
shortworkings transferred to
Profit & Loss A/c)

Dec 31

To Cash A/c 18,000

(Being Royalty A/c. transferred to
Profit & Loss A/c)
Ledger Accounts
Royalties Account
2001 Rs. 2001 Rs.
Dec.31 To Landlord A/c. 8,000 Dec.31 By P & L a/c 8,000
2002 8,000 2002 8,000
2003 13,000 2003 13,000
2004 21,000 2004 21,000
18,000 18,000
10
Shortworking Account
2001 Rs. 2001 Rs.

Dec 31 To Landlord A/c. 7,000 Dec 31 By Bal. c/d 7,000
7,000
2002 2002 7,000
Jan 1 To Bal. b/d 7,000
Dec 31 To Landlord A/c. 2,000 Dec 31 By Bal. c/d 9,000
2003 9,000 2003 9,000

Jan 1 To Bal. b/d 9,000 Dec 31 By Landlord 6,000
A/c
Dec 31 By P & L A/c 3,000
9,000 9,000
Landlord Account
2001 Rs. 2001 Rs.

Dec 31 To Cash A/c. 15,000 Dec 31 By Royalties A/c 8,000
Dec 31 By Short 7,000
15,000 Working A/c 15,000
2002 2002
Dec 31 To Cash A/c 15,000 Dec 31 By Royalties A/c 13,000
By Short 2,000
15,000 Working A/c. 15,000
2003 2003
To Short 6,000
Working A/c.
(recouped) 21,000 21,000
2004 2004
18,000 18,000
11
Preparation of Minimum Rent A/c:- When it is asked to prepare a Minimum
Rent Account in the question, the first entry will be split into two journal entries
and other entries will remain same:-
Journal entries when Minimum Rent Account is to be opened:-
(i) Royalties A/c Dr.

Shortworking A/c Dr.
To Minimum Rent
(Being Royalties A/c & Shortworking A/c transferred to Minimum Rent
A/c)
(ii) Minimum Rent A/c Dr.
To Landlord A/c
(Being Minimum Rent due to Landlord)
(iii) Landlord A/c Dr.
To Cash A/c
(Being Payment made to Landlord)
(iv) Profit & Loss A/c Dr.
To Royalties A/c
(Being Royalties A/c transferred to P & L A/c)
So, Minimum Rent Account is opened only for those years when Royalty
is less than Minimum Rent or Shortworking arises and this account is opened
only when it is asked to prepare in the question otherwise there is no need to
prepare it.
12
Payment of Royalty half yearly and payment of current year Royalty during
the next year
When Royalty is payable half yearly, Minimum Rent should also be

calculated for half year to compare it with Royalty. In such cases Royalty A/c and
Shortworking A/c are transferred to Profit & Loss A/c at the end of the year.
Similarly some times the current year Royalty is paid in the next year. In
such cases the entry of Royalty will be passed in the same year but actual payment
of Royalty will be made in the year of payment.
Illustration -2 : Hari Ltd., obtained a Coal mine on lease for 15 years from Ist
Jan 1990 on a Royalty of Rs. 2 per ton of the output, payable half yearly on 30th
June & 31st Dec. every year. The Minimum Rent was fixed at Rs. 8,000 per half
year with a power to recoup shortworkings over the first two years of the lease.
The output was as follows:-
30th June 1990 800 tons
31st Dec 1990 3600 tons
31st Dec 1991 6000 tons
31st Dec 1992 10,000 tons
Hari Ltd. prepare its final accounts annually on 31st Dec. every year and
the Royalty which was due on 31st Dec. 1991 was, infact, paid on 20th January,
1992. Prepare necessary ledger accounts in the books of Hari Ltd., and also show
the items in Profit & Loss A/c and Balance Sheet.
13
Solution
ANALYTICALTABLE
Half year Output Royalty Minimum Short Short Unrecouped Payment

ending on in tonns @Rs.2/- Rent Workings Workings Shortworkings to
Per Ton Recouped transferred Land-
Rs. Rs. Rs. ed Rs. to P&L A/c lord
30.06.90 800 1,600 8,000 6,400 - - 8,000
31.12.90 3,600 7,200 8,000 800 - - 8,000
30.06.91 5,000 10,000 8,000 - 2,000 - 8,000
31.12.91 6,000 12,000 8,000 - 4,000 1,200 8,000
30.06.92 3,650 7,300 8,000 700 - 700 8,000
31.12.92 10,000 20,000 8,000 - - - 20,000
Books of Hari Ltd.

Royalty Account
1990 Rs. 1990 Rs.

Jun 30 To Landlord A/c 1,600 Dec 31 By P & L A/c 8,800
Dec 31 To Landlord A/c 7,200
8,800 8,800
1991 1991
22,000 22,000
1992 1992
27,300 27,300
14
Shortworking A/c
1990 Rs. 1990 Rs.

Jun 30 To Landlord A/c 6,400
Dec 31 To Landlord A/c 800 Dec 31 By Balance c/d 7,200
7,200 7,200
1991 1991
Jan 1 To Balance b/d 7,200 Jun 30 By Landlord A/c 2,000
Dec 31 By Landlord A/c 4,000
Dec 31 By P& L A/c 1,200
7,200 7,200
1992 1992
Jun 30 To Landlord A/c 700 Dec 31 By P & L a/c 700
Landlord A/c
1990 Rs. 1990 Rs.

Jun 30 To Cash A/c 8,000 Jun 30 By Royalty A/c 1,600
Dec 31 To Cash A/c 8,000 Jun 30 By S.W. A/c 6,400
Dec 31 By Royalties 7,200
Dec 31 By S.W. A/c 800
16,000 16,000
1991 1991
Jun 30 To S.W.(recouped) 2,000 Dec 31 By Royalty A/c 12,000
Dec 31 To S.W.(recouped) 4,000
Dec 31 To Bal. b/d 8,000
22,000 22,000
1992 1992
Jan 20 To Cash A/c 8,000 Jan 01 By Bal. b/d 8,000
Dec 31 To Cash A/c 20,000 Jun 30 By S.W. A/c 700
Dec 31 By Royalty A/c 20,000
36,000 36,000
15
Profit & Loss a/c
1990 Rs.
Dec 31 To Royalty a/c 8,800
8,800
1991
Dec 31 To S.W. a/c 1,200
23,200
1992
Dec 31 To S.W a/c 700
28,000
Balance Sheet as on 31st Dec. 1990

Rs. Rs.
Shortworkings 7,200
(Balance)
Balance sheet as on 31st Dec. 1991
Rs. Rs.
Landlord (Amount Due) 8,000
16
Recoupment of Shortworkings in the next or subsequent or following few
years
Illustration-3 : Bharat Coal Co. took a mine on lease from Vijay Yadav for a
period of ten years from 1st January 1991, upon the terms of a royalty of 75 paise
per ton with a minimum rent of Rs.15,000 in the first year and then increasing
every year by Rs.2,000 ,till it reaches Rs.19,000 when it becomes fixed for all
the coming years . Bharat Coal Co. was granted the right of recouping shortworkings
of any year in the subsequent three years .
The output was as follows :-
Years 1991 1992 1993 1994 1995

Output 8,000 18,000 24,000 36,000 44,000
(in tons)
Show Journal Entries in the books of Bharat Coal when :-
(a) there is no Minimum Rent Account, and
(b) there is a Minimum Rent Account .
Solution
Analytical Table
Year Output Royalty Minimum Short S.W Rec- Unrecouped Payment
in tons Rent worki- ouped S.W.transfer to Vijay
ngs to P&L a/c Yadav
Rs. Rs. Rs. Rs. Rs. Rs.
1991 8,000 6,000 15,000 9,000 - - 15,000
1992 18,000 13,500 17,000 3,500 - - 17,000
1993 24,000 18,000 19,000 1,000 - - 19,000
1994 36,000 27,000 19,000 - 8,000 1,000 19,000
1995 44,000 33,000 19,000 - 4,500 - 28,500
17
(a) When there is no Minimum Rent a/c :-
In the Books of Bharat Coal Co.,
Journal
Rs. Rs.
Dec 31 Shortworking A/c Dr. 9,000
To Vijay Yadav A/c 15,000
(Being Royalties & shortwork-
ings due to landlord)
Dec 31 Vijay Yadav A/c Dr. 15,000

To Cash A/c 15,000

Dec 31 Shortworkings A/c Dr. 3,500
(Being Royalties & shortwork-

To Cash A/c 17,000


Dec 31 Shortworkings A/c Dr. 1,000
(Being Royalties and shortwork-
18
To Cash A/c 19,000


Dec 31

To Cash A/c 19,000
To Shortworkings A/c 8,000
(Being cash paid to landlord and
shortworkings recouped)

To Shortworkings A/c
(recouped) 1,000
(Being royalties A/c & Unrecouped
shortworkings transferred to Profit
& Loss A/c)
Dec 31
To Cash A/c 28,500
To Shortworkings A/c 4,500
(Being cash paid and shortwork-
ings recouped)
to Profit & Loss Account)
19
(b) When there is a Minimum Rent Account:-
1991 Minimum Rent A/c Dr. 15,000

Dec 31
(Being minimum rent to
Landlord)
1991
Dec31 Royalties A/c Dr. 6,000
Shortworkings A/c Dr. 9,000
To Minimum Rent A/c 15,000

(Being Royalties A/c & shortwor-
-kings A/c transferred to Minimum
Rent A/c)
To Cash A/c 15,000
Dec 31
(Being Minimum Rent due to
landlord)
Dec 31 Royalties A/c Dr. 13,500

(Being Royalties A/c & shortwork-
ings A/c transferred to Minimum
Rent A/c)
To Cash A/c 17,000
20
Dec 31
(Being minimum rent due to
landlord)
Dec 31 Royalties A/c Dr. 18,000
(Being Royalties & Shortworkings
A/c transferred to minimum rent
A/c)
Dec 31 Vijay Yadav a/c Dr. 19,000
To Cash a/c 19,000
(Being Royalties A/c transferred to
Profit & Loss A/c)
Stoppage of work due to strike and lockout

If the minimum rent was not attained due to stoppage of work, the Royalty
agreements usually contain a provision that the amount of Minimum Rent will be
reduced for that year. Provision for the reduction of Minimum Rent may be
any of the following types:-
(i) Minimum Rent is to be reduced proportionately according to the length of
stoppage of work due to strike or lockout.
(ii) In the year of stoppage, the Minimum Rent is to be reduced by a certain
percentage.
(iii) In some agreements, it is mentioned that in the year of strike, actual
royalties earned for the year will discharge all rental obligations.
21
Illustration- 4 : Haryana Steel Ltd., obtained a lease from Y Ltd., for a coal mine
on Ist Jan 1990 on the following terms:-
1. Royalty at Re. 1 per tonne.
2. Minimum Rent Rs. 12,000 p.a.
3. Recoupment of shortworkings of each year during three years following,
subject to a maximum of Rs. 2,500 p.a.
4. In the event of strike, the minimum rent would be taken pro-rata on the
basis of actual working days but in the event of lockout, the lessee would
enjoy a concession in respect of minimum rent for 50%of the period of
lockout.
Besides the above, Haryana Steel Ltd., have been granted a cash subsidy
equal to 25% of the unrecoupable shortworkings by the Central Govt.
5. Working upto first 6 years is as follows:-
1990 Actual Royalty Rs. 7,000
1994 Actual Royalty Rs. 10,800(Strike for 73 days)
1995 Actual Royalty Rs. 9,700(Lockout for 4 months)
Show the Ledger Accounts in the Books of Haryana Steel Ltd.
Solution
Analytical Table
Year Royalties M.R. S.W. S.W. S.W. Cash Transferred Payment
Recouped Unrecouped Subsidy to P&l a/c to Lanlord
1990 7,000 12,000 5,000 - - - - 12,000
1991 10,200 12,000 1,800 - - - - 12,000
1992 16,100 12,000 - 2,500 - - - 13,600
1993 13,600 12,000 - 1,600 900 225[1] 675 12,000
1994 10,800 9,600[2] - 1,200 600 150[1] 450 9,600
1995 9,700 10,000[3] 300 - - - - 10,000
22
Notes: (1) Cash Subsidy is 25% of Irrecoverable shortworkings.
(2) Minimum Rent is reduced for 73 days i.e.
12,000 x 73 = Rs. 2,400

365
Rs. 12,000 - Rs. 2,400 = Rs. 9,600
(3) Minimum Rent for lockout period for 4 months is
Rs. 12,000 x 4 = Rs. 4,000

42
Therefore, concession in Minimum Rent will be 50% of Rs.4,000 i.e. Rs. 2,000.
Rs. 12,000 - Rs. 2,000 = Rs. 10,000
Books of Haryana Steel Ltd.,
Royalties Account
1990 1990
Dec 31 To Y Ltd., 7,000 Dec 31 By P & L A/c 7,000
1991 7,000 1991 7,000
1992 10,200 1992 10,200

1993 16,100 1993 16,100
Dec 31 To Y Ltd., 13,600 Dec 31 By P & L A/c 13.600
1994 13,600 1994 13,600

1995 10,800 1995 10,800
9,700 9,700
23
Shortworkings Account
1990 1990
Dec31 To Y Ltd. 5,000 Dec31 By bal. c/d. 5,000
5,000 5,000
1991 1991
Jan01 To bal. b/d 5,000
Dec31 To Y Ltd. 1,800 Dec31 By bal. c/d 6,800
6,800 6,800
1992 1992
Jan01 To bal. b/d 6,800 Dec31 By Y Ltd. 2,500
By bal c/d 4,300
6,800 6,800
1993 1993
Dec31 By Cash (Subsidy) 225
Dec31 By P & L A/c 675
Dec31 By bal. c/d 1,800
4,300 4,300
1994 1994
Dec31 By Cash (Subsidy) 150
1,800 1,800
1995 1995
Jan01 To Y Ltd. 300 Dec31 By bal c/d 300
300 300
Y Ltd. Account
1990 1990
Dec31 To Cash A/c 12,000 Dec31 By Royalties A/c 7,000
Dec31 By shortworkings 5,000
12,000 A/c 12,000
1991 1991
Dec31 By shortworkings 1,800
12,000 A/c 12,000
24
1992 1992
Dec31 To Cash A/c 13,600 Dec 31 By Royalties A/c 16,100
To shortworkings 2,500
A/c 16,100 16,100
1993 1993
A/c 13,600 13,600
1994 1994
A/c 10,800 10,800
1995 1995
Dec31 To Cash a/c 10,000 Dec 31 By Royalties A/c 9,700
By S.W. A/c 300
10,000 10,000
4.4.2 Journal Entries in the Books of Landlord
In the books of the lessor or landlord the accounting treatment will be

the reverse of what we have done so far. The following entries will be recorded:
(I) When the royalties received are less than the Minimum Rent and
shortworkings are recoverable out of future years
(a) Lessees Account Dr.
To Royalties Receivable A/c

To Royalties Reserve A/c
(Being Minimum Rent due from Lessee)
(b) Cash A/c Dr.
To Lessees A/c
(Being cash received from Lessee)
25
(c) Royalty Receivable A/c Dr.

(Being Royalty receivable A/c transferred to Profit
& Loss a/c)
(II) When Royalties and Minimum Rent both are equal
(a) Lessees A/c Dr.

(Being Royalties due from Lessee)
(b) Cash A/c Dr.
To Lessees A/c
(Being cash received from Lessee)
(c) Royalty Receivable A/c Dr.

(Being Royalties A/c transferred to Profit
& Loss A/c)
(III) When the Royalties received are more than the Minimum Rent
and power to recoup the shortworkings
(a) Lessees A/c Dr.

(Being Royalties due from Lessee)
(b) Cash A/c Dr.

Royalties Reserve A/c Dr.
To Lessees A/c
(Being cash received & shortworkings recouped)
26
(c) Royalties Receivable A/c Dr.
Royalties Reserve A/c Dr.
(Being royalty & unrecouped shortworkings transferred to

Profit & Loss A/c)
Illustration-5 : On Ist Jan., a Coal Co., took a Coal mine on lease for 15 years
as the terms of paying a Minimum Rent of Rs. 10,000 per year, merging into a
royalty of 50 paise per tonne. The output was as under:-
Year Ist 2nd 3rd 4th

Output(in tonne) 16,000 18,000 20,000 22,000
In terms of the lease provided that the dead rent not merged in Royalty
could be deducted out of future royalty in excess of the minimum, provided this
recovery was made in the three years following the year in which the shortworking
arose. Record these transactions in the books of the landlord.
Solution
CALCULATION TABLE
Year Output Royalty Minimum Royalty Royalty Reserve Amount

(in tonnes) Receivable Rent Reserve Utilised Transferred Received
@.50p per to P & L A/c
Ton Rs. Rs. Rs. Rs. Rs.
1. 16,000 8,000 10,000 2,000 - - 10,000
2. 18,000 9,000 10,000 1,000 - - 10,000
3. 20,000 10,000 10,000 - - - 10,000
4. 22,000 11,000 10,000 - 1,000 1,000 10,000
27
Books of Landlord (lessor)
JOURNAL
1st Year
Dec31 Lessees A/c Dr. 10,000
To Royalty Receivable A/c 8,000

To Royalty Reserve A/c 2,000
(For amount of royalty receivable
earned and the excess of minimum
rent transferred to royalty reserve A/c)
Dec31 Cash A/c Dr. 10,000
To Lessees A/c 10,000

(For amount received from the lessee)
Dec31 Royalty receivable A/c Dr. 8,000

(For royalty receivable account
transferred to Profit & Loss A/c)
2nd year

To Royalty Reserve A/c 1,000
(For amount of royalty receivable
earned and the excess of minimum
rent transferred to royalty reserve a/c)


28
3rd year

(For royalty receivable earned)


4th year
To Royalty receivable A/c 11,000

(For royalty receivable earned)

Royalty Reserve A/c Dr. 1,000

(For royalty reserve written off to the
extent of shortworkings recouped by
lessee and the balance received in
cash)
Dec 31 Royalty Receivable A/c Dr. 11,000

Royalty reserve A/c Dr. 1,000

(For royalty receivable and the amount
of royalty reserve A/c to the extent of
irrecoverable shortworkings transferred
29
Ledger
Lessees A/c
Dr. Cr.
1st year Rs. 1st Year Rs.

Dec31 To Royalty Dec31 By Cash A/c 10,000
Receivable A/c 8,000
To Royalty
Reserve A/c 2,000
10,000 10,000
2nd year 2nd year
Dec31 To Royalty Dec31 By Cash A/c 10,000
Receivables A/c 9,000
To Royalty
Reserve A/c 1,000
10,000 10,000
3rd year 3rd year
Dec31 To Royalty
Receivable A/c 10,000 Dec31 By Cash A/c 10,000
4th year 4th year

Dec31 To Royalty
Receivable A/c 11,000 Dec31 By Cash A/c 10,000
By Royalty 1,000
Reserve A/c
11,000 11,000
Royalty Receivable Account
1st year Rs. 1st year Rs.

Dec31 To P & L A/c 8,000 Dec31 By Lessees A/c 8,000
8,000 8,000
2nd year 2nd year
9,000 9,000
3rd year 3rd year
10,000 10,000
4th year 4th year
11,000 11,000
30
Royalty Reserve Account
1st year Rs. 1st year Rs.

Dec31 To bal c/d 2,000 Dec31 By Lessees A/c 2,000
2nd year 2nd year

Dec31 To bal c/d 3,000 Jan 1 By bal b/d 2,000
Dec31 By Lessees A/c 1,000
3,000 3,000
3rd year 3rd year

Dec31 To bal c/d 3,000 Jan 1 By bal b/d 3,000
4th year 4th year

Dec31 To Lessees A/c 1,000 Jan 1 By bal. b/d 3,000
Dec31 To P & L A/c 1,000
Dec31 To bal c/d 1,000
3,000 3,000
5th year
Jan 1 By bal b/d 1,000
Sub lease
Some times the terms of the original lease may empower the lessee to
sublet a part of the land or mine to another person as a sub-lease.
It is usual that the terms of agreement between A(original lessee) and
B (original lessor) will be quite different to those between A (original lessee)
and C (sub lessee).
The position of A will be two-fold: as lessee paying royalties to B as
landlord receiving royalties to C. First, as lessee A will prepare the following
Accounts:
(i) Royalty payable Account.
(ii) Lessor or landlords Account i.e., the account of B.
(iii) Shortworkings Recoverable Account.
Secondly, as landlord A will maintain the following accounts:-
(i) Royalty Receivable Account.
(ii) Sub-lessee Account i.e. the account of C.
31
(iii) Royalty Reserve Account.
A will prepare two analytical tables in his books. First Analytical Table
for the calculation of the royalties payable to B and the second Analytical Table
for the calculation of royalties receivable from C.
Illustration-6 : A obtained on Ist Jan 1990, from B a lease of some coal bearing
land. The term being a royalty of Rs. 0.50 per ton of coal raised subject to a
minimum rent of Rs. 2,000 p.a. with a right of recoupment of shortworkings over
the first four years of the lease.
A granted a sub-lease of part of the land to C and a royalty of Rs. 0.75
per ton merging into a minimum rent of Rs. 1,000 p.a. with a right of recoupment
of shortworkings during the two years following the shortworkings.
The output for the first five years as follows:
Year A(tons) C(tons) Total output(tons)
1990 2,200 800 3,000
1991 2,320 1,080 3,400
1992 2,600 1,400 4,000
1993 2,800 1,800 4,600
1994 3,600 2,400 6,000
Give the necessary Ledger Accounts in the books of A .
Solution
Royalties Payable Account
1990 Rs. 1990 Rs.
Dec31 To B (@ 50P.on Dec31 By Royalties recei-
2,200 + 800 tons) 1,500 veable A/c (@ 50P.
on 800 tons) 400
By Production A/c 1,100
1,500 1,500
1991 1991
Dec31 To B (@50P.on Dec31 By Royalties recei-
2,320 + 1,080 tons) 1,700 veable A/c (@ 50P.
on 1,080 tons) 540
1,700 1,700
32
1992 1992
Dec31 To B (@50P. on Dec31 By Royalties recei-
2,600 + 1,400tons) 2,000 veable A/c 700
2,000 2,000
1993 1993
Dec31 To B (@50P. on Dec31 By Royalties recei-
2,800 + 1,800tons) 2,300 veable A/c 900
2,300 2,300
1994 1994
Dec31 To B (@50P. on Dec 31 By Royalties recei-
3,600 + 2,400tons) 3,000 veable A/c 1,200
3,000 3,000
The royalties paid on account of production done by C has been credited to

Royalties payable account so that amount application on own production (i.e.
production done by A) only is transferred to the Production Account)
Shortworkings Account
1990 Rs. 1990 Rs.

Dec31 To B (Rs.2,000
- Rs.1,500) 500 Dec31 By bal c/d 500
500 500
1991 1991
Jan01 To bal b/d 500 Dec31 By bal c/d 800
Dec31 To B (Rs.2,000
- Rs. 1,700) 300
800 800
1992 1992
Jan01 To bal b/d 800 Dec31 By bal c/d 800
800 800
1993 1993
Jan01 To bal b/d 800 Dec31 By B 300
(Irrecoverable
Shortworkings)
800 800
33
Bs Account
1990 Rs. 1990 Rs.

Dec31 To Bank a/c 2,000 Dec31 By Royalty
Payable A/c 1,500
By Short Workings 500
2,000 A/c 2,000
1991 Rs. 1991 Rs.

Dec31 To Bank A/c 2,000 Dec31 By Royalty
Payable A/c 1,700
By Short Workings 300
2,000 A/c 2,000
1992 1992
Dec31 To Bank A/c 2,000 Dec31 By Royalty
Payable A/c 2,000
2,000 2,000
1993 1993
Dec31 To Short Workings 300 Dec31 By Royalty
A/c Payable A/c 2300
Dec31 To Bank A/c 2,000
2,300 2,300
1994 1994
Dec31 To Bank a/c 3,000 Dec31 By Royalty
Payable a/c 3,000
Royalties Receivable Account
1990 Rs. 1990 Rs.

Dec31 To Royalties Pay- Dec31 By C(on 800 tons
able A/c 400 @ 75P.) 600
Dec31 To P & L A/c 200
600 600
1991 1991
able A/c 540 @ 75P.) 810
810 810
34
1992 1992
able A/c 700 @ 75P.) 1,050
1,050 1,050
1993 1993
able A/c 900 @ 75P.) 1,350
1,350 1,350
1994 1994
able A/c 1,200 @ 75P.) 1,800
1,800 1,800
Shortworkings Suspense Account
1990 Rs. 1990 Rs.

Dec31 To Bal. c/d 400 Dec31 By C
400 (Rs.1,000-600) 400
1991 1991 400

Dec31 To Bal. c/d 590 Jan 1 By Bal. b/d 400
Dec31 By C
(Rs.1,000-810) 190
590 590
1992 1992
Dec31 To C 50 Jan 1 By Bal. b/d 590
To P & L A/c(Ir-
recoverable short-
workingss of 1990) 350
To Bal c/d 190
590 590
1993 Rs. 1993 Rs.

Dec31 To C 190 Jan 1 By Bal. b/d 190
190 190
35
Cs Account
1990 Rs. 1990 Rs.
Dec31 To Royalty Rece- Dec31 By Bank A/c 1,000
ivable A/c 600
Dec31 To Shortworkings
Suspense A/c 400
1,000 1,000
1991 1991
ivable A/c 810
Dec31 To Shortworkings
Suspense A/c 190
1,000 1,000
1992 1992
Dec31 To Royalty Rece- Dec31 By Shortworkings
ivable A/c 1,050 Suspense A/c 50
By Bank A/c 1,000
1,050 1,050
1993 1993
Dec31 To Royalty Rece- Dec31 By Shortworkings
ivable A/c 1,350 Suspense A/c 190
By Bank A/c 1,160
1,350 1,350
1994 1994
ivable A/c 1,800
1,800 1,800
Production Account
1990 Rs. Rs.

Dec 31 To Royalty Paya-
ble A/c 1,100
1991
ble A/c 1,160
1992
ble A/c 1,300
36
1993
ble A/c 1,400
1994
ble A/c 1,800
Profit & Loss Account
Rs. 1990 Rs.

Dec31 By Royalty Recei-
able A/c 200
1991
able A/c 270
1992
able A/c 350
Dec31 By Shortworkings
Suspense A/c 350
1993 Rs. 1993 Rs.
Dec31 To Shortwork- Dec31 By Royalty Recei-
ings 500 able A/c 450
1994
Dec31 By Royalty recei-
able a/c 600
Royalties regarding Brick-making and Nazrana paid to landlord

The royalty for brick-making is paid on sand taken out at the rate of per
cubic feet to the owner of the land.
Sometimes, in addition to royalty, landlord charges from the lessee a
lumpsum amount in the very beginning which is known as Nazrana or Advance
Royalty. In such a case a Nazrana Account is opened separately and whole of the
amount divided by the period of the lease is debited to Profit & Loss A/c every
year the amount so arrived.
37
Illustration-7 : A Brick Co., acquired on a 20 years lease, a large plot of land
from Anoop for the purpose of geeing earth. The lease provides that:-
(a) A premium or Nazrana of Rs. 10,000 is to be paid to the landlord on
Ist Jan, 1982 when the period of the lease commenced; and
(b) An annual royalty of 20 paise per 100 cubic feet of earth taken out is
to be paid to him subject to a minimum rent of Rs. 2,000 per year,
any shortworkings to be recouped out of future excess royalty. This
annual royalty is to be paid on 31st Dec. each year.
The quantity of earth extracted by the lessee in 1982, 1983 and 1984 was
8,00,000; 9,00,000 and 12,00,000 cubic feet respectively.
Enter these transactions in the ledger of the three years in the books of A
Brick Co.
Solution
Analytical table
Year Output Royalties Minimum S.W. S.W. Unrecouped Payment

Rent recouped S.W transfe- to land
rred to P & L lord
a/c
1982 8,00,000 1,600 2,000 400 - - 2,000
1983 9,00,000 1,800 2,000 200 - - 2,000
1984 12,00,000 2,400 2,000 - 400 - 2,000
Lease premium or Nazrana Account
Dr. Cr.
1982 Rs. 1982 Rs.
Jan01 To Cash A/c 10,000 Dec31 By P & L A/c 500
Dec31 By Bal c/d 9,500
10,000 10,000
38
1983 1983
9,500 9,500
1984 1984
9,000 9,000
Royalties Account
Dr. Cr.
1982 Rs. 1982 Rs.
Dec31 To Anoop 1,600 Dec31 By P & L a/c 1,600
1,600 1,600
1983 1983
1,800 1,800
1984
2,400 2,400
Shortworking Account
Dr. Cr.
1982 Rs. 1982 Rs.
Dec31 To Anoop 400 Dec31 By Bal. c/d 400
400 400
1983 1983
Jan01 To Bal b/d 400 Dec31 By Bal. c/d 600
Dec31 To Anoop 200
600 600
1984 1984
Jan01 To Bal b/d 600 Dec31 By Anoop 400
Dec31 By Bal c/d 200
600 600
39
Anoops Account
Dr. Cr.
1982 Rs. 1982 Rs.
Dec31 By S.W. A/c 400
2,000 2,000
1983 1983

Dec31 By S.W. A/c 200
2,000 2,000
1984 1984
Dec31 To S.W.A/c 400 Dec31 By Royalties A/c 2,400
Dec31 To Cash A/c 2,000
2,400 2,400
No right to recoup shortworkings
Sometimes nothing is mentioned in the question about the recoupment

of shortworkings. In such cases, shortworkings account is not to be opened at all
and the landlord is to be paid the amount of royalties or the minimum rent,
whichever be the higher. There is no need to calculate the short-workings in such
type of problems.
4.5 SUMMARY
Royalty is a periodical payment based on output or sale for the use of a

certain asset or right like mine, copyright or patent to its owner. Royalty account
is a nominal account in nature and is synonymous with rent account. Before
preparing the royalty accounts, a few points like name of landlord and lessee,
period of lease commencement of agreement, royalty rates, minimum rent, right
of recoupment of shortworkings and mode of payment to landlord should be noted
down. While passing journal entries in the books of lessee, these may be three
40
situations- when minimum rent is more than royalty equal to royalty and less than
royalty. In the books of the lessor or landlord, the accounting treatment will be
the reverse of lessee. Sometimes, the terms of the original lease may empower
the lessee to sublet a part of land or mine to another person as a sub-lease.
4.6 KEYWORDS
Royalty: It is a periodical payment based on output or sale for the use of a fixed
asset or right to its owner.
Lessor: The person who is the owner of the assets and surrenders the right to its use
to some other person and receives the consideration as royalty is known as lessor.
Minimum Rent: It is the minimum amount that the lessor or landlord must receive
whatever be the production or sales in a particular year.
Shortworking: The excess of minimum rent over royalty calculated on the basis
of output or sales is known as shortworking.
Lessee: The person who pays the royalty in consideration for the use of that asset
is called lessee.
1] (a) What do you understand by Royalty ? How does it differ

from Rent?
(b) What is shortworking ? Give the rules of accounts in
this connection.
2] Explain the following terms:

(a) Minimum Rent
(b) Sub -Lease
(c) Royalty Reserve
(d) Advance Royalty
(e) Re-coupment of Shortworkings
41
3] Pass the journal entries in the books of Lessee when :
(a) Royalty is more than the minimum rent .
(b) Royalty is less than the minimum rent .
4] Parbhat Coal Company took a lease of coal mine for a period of 10 years
from 1st January, 1979 upon the terms of a royalty of 80 paise per ton with a
minimum rent of Rs. 10,000 per annum with power to recoup shortworking over
the first five years of the lease.
Output are as follows:
1979 4,000tons 1981 10,000tons 1983 25,000tons
1980 6,000tons 1982 16,000tons 1984 30,000tons
Prepare journal entries and ledger accounts in the books of Parbhat Coal Company.
5] On Ist January, 1978 Manoj Coal Co., Ltd. took a lease of Coal Mine from
X at a Royalty of 50 paise per ton raised with a minimum rent of Rs. 5,000 per
year and with a right to recoup shortworkings during the first four years of the
lease. During the first five years, the output were as follows:
Years 1978 1979 1980 1981 1982
Output(Tons) 6,000 7,000 10,200 12,000 14,000
Give journal entries and write up the Minimum Rent A/c, Royalty
A/c, Landlords A/c and Shortworkings A/c in the books of Manoj Coal Co.
6] Rama Coal Company took a coal mine on lease for a period of 20 years
from 1st Jan., 1992 on a royalty of Rs. 2 per tonne of the output payable half
yearly on 30th June and 31st December. The Minimum Rent was fixed at Rs.
24,000 per year with power to recoup shortworkings over the first three years
of the lease.
42
The output was as follows:-
Half year ending 30th June, 1992 2,000tons

Half year ending 31st December, 1992 2,500tons
Rama Coal Company prepares its final accounts annually on 31st Dec. every
year and the royalty which was due on 31st Dec., 1993 was in fact paid on 10th
Jan. 1994.
You are required to record the above transactions in the ledger of the Rama
Coal Company and also to show the items in the Profit & Loss A/c and Balance
Sheet.
7] X leased a coal mine from Y on a royalty of 75 paise per ton with a minimum
rent of Rs. 24,000 per annum. Each years excess of minimum rent over the actual
royalties was recoupable during the subsequent three years.
The lease, however, stipulated that in the event of strike, the minimum rent
would be reduced proportionately.
The output was as follows:
1989 6,000tons
1990 18,000tons
1991 36,000tons
1992 50,000tons
1993 44,000tons(Strike for 2 months)
1994 20,000tons(Strike for 73 days)
Prepare necessary accounts in the books of X. Also show the amounts in

each years P & L A/c and Balance sheet.
43
8] The Binnie Colliery Company are lessee of a mine at a dead rent of Rs.
2,000 per annum merging into a royalty of 35 paise per ton. Dead Rent paid in
excess of actual royalties is recoupable thereout during the five years succeeding
the year in respect of which such excess was paid. In the event of a strike if the
actual royalty was less than the dead rent, it was to discharge all rental obligations.
The first year in respect of which the dead rent was payable expired on 31st
December 1980. The excess paid in comparison to royalty in respect of first
year was Rs. 2,000 excess paid in second year was Rs. 1,450 and excess paid third
year was Rs. 350. In the fourth year actual royalties amounted to Rs. 2,750, in
the fifth year Rs. 3,250, in the sixth year Rs. 3,600 and in the seventh year (in
consequent of a strike) Rs. 1,850 only. Pass the necessary journal entries to
record these transactions in the books of Binnie Colliery Company.
9] On 1st Jan., 1990 Tagore & Co., took a mine on lease. Under this lease
there is payable a royalty of 80 paise per ton merging in a minimum rent of Rs.
10,000 per year with a right to recoup shortworkings over the first five years of
the lease, but (1) the right to recoup shortworkings will not be in that year in
which output will be less than 6,000tons. (2) In the year in which royalty will be
more than minimum rent, only 40% of the excess will be used for recoupment of
shortworkings.
During the first five years the coal raised was as below:-
Year 1990 1991 1992 1993 1994

Output in tons 5,000 8,000 12,000 15,000 20,000
Prepare necessary accounts in the books of Tagore & Co.
10] X Co. Ltd. hold a lease of minerals from Y for a period of 20 years from
1st Jan., 1989. Under this lease there is payable a royalty of 25 paise a ton merging
in a minimum rent of Rs. 1,000 a year, payable half-yearly on 30th June and 31st
Dec. They granted a sub-lease for 15 years from 1st July, 1989 to Z Co. Ltd., of
44
one-half of the area for a royalty of 50 paise a ton merging in a minimum rent of
Rs. 750 a year, payable half-yearly on 30th June and 31st Dec.
X Co. Ltd. are entitled under the lease from Y to recoup Shortworkings out
of subsequent excess workings throughout the term of lease, but the sub-lease
only allows Z Co. Ltd. to recoup shortworkings out of excess workings, in any of
the three half-years immediately following that in which the shortworkings
occurred. Minerals were worked as follows:
By X Co. Ltd. By Z Co. Ltd.
Half-year ended 30.06.1989 500tons -

Half-year ended 30.12.1989 625tons 375tons
Half-year ended 30.06.1990 2,150tons 450tons
Show the necessary accounts in the Books of X which are balanced on 30th
June.
11] On 1st January, 1981, Shri Som Nath acquired on lease certain oil wells at
a minimum rent of Rs. 24,000 per annum, merging into a royalty of Re.1 per ton
of oil taken out. The shortworkings were recoverable in the next two years, but
on the condition that if full shortworkings could not be recovered in the next year
of the shortworkings, Som Nath will lose his right to recover 50% of the
unrecovered balance of shortworkings.
The output of the first four years was 6,000 tons in first year, 15,000 tons
in the second year, 30,000 tons in the third year and 28,000 tons in the fourth
year.
Open the necessary accounts in the books of Shri Som Nath.
45
12] X, the owner of a patent of Sewing Machines, granted on 1st July, 1985, a
licence for its manufacture to Y at a royalty of Rs. 20 per machine manufactured
subject to a minimum rent of Rs. 50,000 per annum for the first two years and Rs.
60,000 per annum thereafter. If in any year the royalties calculated on the machines
manufactured amounted to less than the minimum rent, Y has the right to recoup
from the surplus during the next two years.
Number of machines manufactured was follows:
Upto 30th June, 1986 2,000 Machines
Assuming that the annual accounts are closed on 30th June, pass the journal
Entries in the books of Y and prepare shortworkings account.
1. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and Neeti Gupta, Kalyani
Publishers, Ludhiana.
3. Principles of Financial Accounting by P.C. Gupta and C.L. Chaturvedi, Shree Mahavir
Book Depot, New Delhi.
4. Financial Accounting by A. Karim, S.S. Khanuja and Piyush Mehta, Sahitya Bhawan
Publishers, Agra.
46
LESSON : 5
ACCOUNTING FOR PARTNERSHIP : BASIC
CONCEPTS AND COMPUTATIONS, ADMISSION OF
NEW PARTNER
STRUCTURE
1.0 Objective
5.1 Introduction
5.2 Essential Features of a Partnership
5.3 Partnership Deed
5.4 Peculiar Aspects of Accounting for Partnership Firms
5.5 Admission of a Partner
5.6 Summary
5.7 Keywords
5.0 OBJECTIVE
a) Explain the important clauses in a partnership deed.
b) Understand the peculiar points relating to accounting for partnership
firms.
c) Compute the value of goodwill of the firm.
5.1 INTRODUCTION
The Indian Partnership Act of 1932 contains the main provisions
which are applicable to partnership firms working in India. According to
this Act "Partnership is the relation between persons who have agreed to
share the profit of the business carried on by all or any of them acting for
1
all". Individually the persons who work in the firm are called partners and the
name with which all partners work collectively is called the firm's name. For
example, A, B and C working in a firm will be called partners and 'ABC & Co.',
the name with which these partners work collectively will be called firm's name.
5.2 ESSENTIAL FEATURES OF A PARTNERSHIP
The following are the essential features of a partnership firm:
i) Persons: In order to constitute a partnership firm, there must be at least
two persons. The maximum number in partnership is 20 in case the firm
is doing ordinary business and 10 in case the firm is engaged in banking
business. This is as per Section 11 of the Companies Act, 1956.
ii) Agreement: In order to have a partnership, it is necessary that there
must be an agreement between partners.
iii) Sharing of profits: It is one of the important terms to constitute a
partnership firm. Generally sharing of profits (or losses) is one of the
important element to constitute a firm.
iv) Business: It includes trade, covation and profession. The firm must be
engaged in a lawful business.
v) Management: The management of the partnership firm will be done
either by all the partners or any one of them on behalf of all other
partners. There is mutual agency among the partners.
Following are the characteristics of partnership :
1. It is a contract between two or more than two persons.
2. A contract is necessary for division of profits/losses.
3. The business may be carried on by all or any of them acting for
all.
2
5.3 PARTNERSHIP DEED
A document in which the terms and conditions of partnership are given
is called Partnership Deed. In a partnership deed, the rights and duties of
partners are given. If there is no partnership deed of a firm, all the provisions
of Partnership Act, 1932 will be applicable with regard to duties, rights and
liabilities of partners. A partnership deed should contain the following
points :
1. Date of agreement.
2. Name and address of the partnership firm.
3. Name and address of the partners.
4. Nature and place of business.
5. Period of partnership, if any.
6. Capital of partners.
7. Profit sharing ratio.
8. Drawings of partners.
9. Interest on capital and on drawings.
10. Salary and commission of partners, if any.
11. Rights, duties and functions of partners.
12. Method of valuation of goodwill.
13. Accounting method at the time of retirement or death of a partner.
14. Arbitration clause to settle disputes among the partners.
15. Method of distribution of assets on the dissolution of the firm.
16. Accounting treatment or procedure at the time of dissolution.
17. Accounting procedures.
18. Any other provision.
3
5.4 PECULIAR ASPECTS OF ACCOUNTING FOR PARTNERSHIP
FIRMS
In sole trading, there is only one owner who invests the capital. The
Capital and Drawing accounts are opened in his name. But in partnership,
Capital Account, Current Account and Drawings account of each partner are
opened separately.
In a partnership contract, all terms and conditions on the basis of which
partnership is started are defined. This contract may be oral or written. To avoid
future disputes, the contract should be in writing, which is called the partnership
deed. In the absence of a written contract, the following rules apply :
1. Distribution of profit and loss among the partners will be equal.
2. No interest on capital will be allowed.
3. No interest will be charged on drawings.
4. No salary is allowable to any partner for doing work in the
capacity of a partner.
5. Interest on loan other than capital is allowed @ 6% per annum.
6. Every partner can equally share the assets of firm at the time of
dissolution.
Profit and Loss Appropriation Account
In partnership, the method of preparing final accounts is the same as for
sole trading. However, in a partnership firm, Profit and Loss Appropriation
Account is required to be prepared to distribute the profits among the partners.
The format of the Profit and Loss Appropriation Account is as under :
4
Rs. Rs.
To Profit and Loss A/c, if any ------- By Profit and Loss A/c -------
(current year loss) (Profit for current year) -------
To Interest on Capital ------- By Interest on Drawings -------
To Salary to Partners ------- By Capital Accounts or -------
To Commission to Partners ------- Current Account of Partners
To Interest on Partner's Loan ------- (Division of Loss)
To Capital or Current -------
Accounts of Partners
(Division of Profit)
Fixed and Fluctuational Capitals

Capital Accounts of partners may be fixed or fluctuating. If Capital
Accounts are fixed, two accounts are prepared for each partner: (i) partner's
Capital Account and (ii) partner's Current Account.
In case of fixed capital, partners' Capital Account are credited only with
that amount of capital at which business is started. Later on, if additional capital
is invested, the capital account is credited and it is debited with the amount
withdrawn permanently. No other adjustment is made in this account.
In partners' Current Accounts, all adjustments regarding interest on
capital, salaries, share of profit and drawings are shown. The balance of this
account always varies and that of Capital Account remains the same.
In case of fluctuating capital, only one account is prepared, which is
called Capital Account. In this account, all items relating to additional capital,
5
interest, drawings, share of profit and salaries, etc. are shown. The balance of
this type of Capital Account in the beginning and in the end will be different
and, as such, it is called Fluctuating Capital Account.
Interest on Capital and Drawings
Interest on capital is allowed only if it is allowed and interest on drawings
is charged only if there is an agreement in this regard. Interest is calculated by
considering the interest rate and time. Interest on capital is written on the Debit
side of Profit and Loss Adjustment Account and Credit side of partners' Capital
Account or Current Account. On the other hand, interest on drawings is written
on the Credit side of Profit and Loss Adjustment Account and again on Debit
side or Capital Account of Current Account.
Illustration 1: A and B are partners and they had Rs. 1,50,000 and Rs. 2,50,000
in their Capital Accounts as on 1st January, 1993. A paid a further sum of Rs.
50,000 on 1st July, 1993 and another Rs. 25,000 on November 1, 1993. B paid
Rs. 1,00,000 on April 1, 1993 and another Rs. 25,000 on August 1, 1993.
A withdrew Rs. 1,000 per month at the beginning of every month and B
Rs. 1,000 at the end of every month. 5% per annum interest on capital and on
drawings is to be considered. Calculate the interest payable and chargeable.
Solution
Interest on Capital :
A Interest on Rs. 1,50,000 of one year = 1,50,000 5/100 = Rs. 7,500
Interest on Rs. 50,000 for 6 months = 50,000 1/25100 = Rs. 1,250
Interest on Rs. 25,000 of 2 months = 25,0002/125/100= Rs. 208.33
8958.33
6
Alternative Method
Product Method:
Under this method the product of capital invested and the number of months
for which it remained in business are determined first and then interest is
calculated for one month on the product. In the above case during first 6 months
capital was Rs. 1,50,000, for next four months it was Rs. 2,00,000 and for the
last two months it was Rs. 2,25,000. Hence, calculation of interest by product
method are as under : Interest (Rs. 150000 6 + 200000 4 + 225000 2)
for one month at 5% per annum.
=(900000 + 800000 + 450000) 5/100 1/12 = Rs. 8958.33
B
Interest on Rs. 1,00,000 for 9 months = Rs. 1000005/1009/12 = Rs. 3,750.00
Interest on Rs.2,50,000 for one year = Rs. 2500005/100 = Rs. 12,500.00
Interest on Rs.25000 for 5 months = Rs. 250005/1005/12 = Rs. 520.83
-----------
16,770.83
------------
Alternative Method
Product Method :
(2500003 + 3500004 + 3750005) for 1 month at 5% per annum.
= (750000 + 1400000 + 1875000) 5/100 1/12 = Rs. 16770.83
Interest on Drawings
Because the same amount either at the beginning or at the end or each
month is withdrawn by a partner, the interest can be calculated by the following
simple formula :
n(n+1)
A. The number of months for which interest is to be calculated =
2
Where, n = the number of months for which interest is payable for the
7
first installment, here, n = 12
=12(12+1) = 78 months
2
Interest = Rs. 1000 78/12 5/100 = Rs. 325

or = (Rs. 1000 12) 6 5/100 = Rs. 325
B 12
Number of months = n(n+1)
2 where n = 11, because the amount
is withdrawn at the end of every months.

= 11 12/2 = 66 months
Interest = Rs. 1000 66/12 5/100 = Rs. 275

or = (Rs. 1000 12) 5 5/100 = Rs. 275
12
Notes
1. If the same amount is withdrawn at the beginning of every month, then
6 month's interest will be calculated on total drawings.
2. If the amount is withdrawn at the end of every month, the interest is
calculated on total drawings for 5 months.
3. If the amount is withdrawn in the middle of every months, 6 months'
interest is calculated on total drawings.
4. If interest on drawings is being calculated but dates of withdrawal are
not given, then 6 months interest will be calculated on total drawings.
Minor Partner
A partner who has not attained the age of majority is called a minor partner. As
8
no agreement can be entered into with a minor, he can only be admitted to the
benefits of an existing partnership with the consent of all the partners. A minor
partner is not personally liable for the debts of the partnership firm but his
share in the partnership property and profits of the firm will be liable for firm's
debts and obligations. He will not be personally liable for any debt of the firm
until he attains the age of majority. He is not liable to share the loss if there is
any. Within six months of his attaining majority or when he comes to know that
the enjoys the benefits of partnership (whichever date is later), he has to elect
whether or not he wants to continue as a partner. He must give public notice if
he dos not want to continue as a partner otherwise he will be deemed to have
elected to be a partner. He will become liable for the debts of the firm since
he was admitted to the benefits of the partnership firm on his election as a
partner.
Illustration 2: Since 1st January, 1996 A, B and minor C are equal partners.
Their Balance Sheet as on 31-12-1999 is as follows:
Liabilities Rs. Assets Rs.
Sundry Creditors 40,000 Cash in hand 15,000
Accumulated Balance in 60,000 Cash at Bank 25,000
Profit & Loss A/c
Capital Accounts: Sundry Debtors 40,500
A 40,000 Stock in Trade 24,500
B 40,000 Plant & Machinery 35,000
C 20,000 Land & Building 60,000
1,00,000
2,00,000 2,00,000
9
(i) Accumulated balance in Profit and Loss Account as given in the Balance
Sheet consists of the following:
Profit of 1997 Rs. 36,000, Loss of 1998 Rs. 18,000, and Profit of 1999 Rs.
42,000.
(ii) Analysis of the books of accounts disclosed the following errors:
(a) A machinery costing Rs. 12,000 purchased in 1998 was debited to
Repairs Account. 10% depreciation on reducing balance method is provided
on plant and machinery.
(b) Rs. 1,080 being the fixed deposit interest due to the firm used by A
for his personal expenses in 1999.
(c) Goods costing Rs. 12,000 sent on sale or return basis have been
recorded as credit sale. The firm's gross profit ratio is 20% on sales.
Prepare Partners' Capital Accounts and Balance Sheet of the firm as on
31-12-1999 giving effect to the above adjustments.
Solution
Calculation of correct profit for various years
1997 1998 1999
Rs. Rs. Rs.
Profit (Loss) as given 36,000 (18,000) 42,000
Add: Machinery wrongly debited to Repairs A/c 12,000
Add: Fixed deposit interest of the firm used by A 1,080
for personal expenses
36,000 (6,000 43,080
Less: 10% Depreciation on WDV of Machinery - (1,200) 1,080
36,000 (7,200) 42,000
Less: Gross Profit on Rs. 12,000 (Goods on sale or
return basis wrongly treated as sale) not yet
realised @ 25% on cost - - 3,000
Correct Profit (Loss) 36,000 (7,200) 39,000
Share of: A 12,000 (3,600) 13,000

B 12,000 (3,600) 13,000
C (Minor Partner) 12,000 - 13,000
10
C being minor partner will not share the loss of 1998 as a minor partner
can be admitted to the benefits of the firm.
Partners' Capital Accounts
A B C A B C
To Fixed Deposit By Balance b/d 40,000 40,000 20,000
Interest 1,080 - - (Opening Capital)
To Balance c/d 60,320 61,400 45,000 By Profit/Loss
(Transfer)
(for 3 years) 21,400 21,400 25,000
61,400 61,400 45,000 61,400 61,400 45,000
Balance Sheet of A, B and C as at 31-12-1999
Sundry Creditors 40,000 Cash in hand 15,000
Capital Accounts: Cash at Bank 25,000
A 60,320 Sundry Debtors (1) 25,500
B 61,400 Stock in Trade (2) 36,500
C 45,000 Plant & Machinery 44,720
(35,000+12,0001,2001,080)
Land & Building 60,000

2,06,720 2,06,720
11
(1) Sundry Debtors as given 40,500
Less: Goods on approval basis wrongly treated as credit sale
(Cost Rs. 12,000+Rs. 3,000 Profit = Rs. 15,000 sale) 15,000
Debtors 25,500
(2) Stocks as given 24,500
Add: Cost of goods sent on approval basis 12,000
Closing Stock 36,500
Past Adjustments
Sometimes after closing the accounts of a partnership firm, it is
discovered that there was some error or omission in those accounts. For
example, interest o capitals or drawings may have been omitted at all, charged
or allowed at high or too low a rate, profits and losses may have been distributed
among the partners in a wrong proportion and so on. In order to correct these
errors and omissions, adjustment entries are to be passed in the usual way.
Illustration 3: A and B had been in partnership for many years as valuers,
sharing profits equally, it had been their custom to ignore fee, earned on
uncompleted matters, when preparing annual accounts. On 1st January, 1996
they entered into a new partnership agreement under which the profits earned
in any year were to be distributed as follows:
Up to Rs. 8,000 equally.
Excess over Rs. 8,000 one-third to A and two-third to B.
Although they shared profits in accordance with new agreement, they continued
to prepare their accounts upon the old basis, i.e., ignoring fees earned on
uncompleted work. At the end of 1998, it was pointed out to them that they
were not following the terms of their agreement, and it was agreed that such
12
correcting entries as might be necessary should be put through as on 31st
December, 1998. The profits already dealt with were as follows:
1996 Rs. 7,500, 1997 Rs. 8,2010; 1998 Rs. 9,350.
The outstanding fees not brought into accounts were:
Rs.
On 31st December 1995 960
On 31st December 1996 1,280
On 31st December 1997 1,550
On 31st December 1998 920
Assuming that the books were duly closed at the end of each year, give the
entries necessary to correct the partners' accounts.
Solution
As the fees outstanding had not been brought into accounts, the profit
already dealt with the wrong. The correct profits after taking these fees into
account would be as follows:
Year Profit Add Fees outstanding Less Fees outstanding at Correct Profit
as given at the end of the year the beginning of the year
(1) (2) (3) (4) (5)=(2)+(3)(4)
Rs. Rs. Rs. Rs.
1995 - 960 - 960
1996 7,500 1,280 960 7,820
1997 8,210 1,550 1,280 8,480
1998 9,350 920 1,550 8,720
The profit already distributed and the profit as should have been
distributed are given in the following Table:
13
Year Profits as already distributed Profit as should have been distributed
Profit as A's B's Correct A's B's
given share share Profits share share
1995 - - - 960 480 480
1996 7,500 3,750 3,750 7,820 3,910 3,910
1997 8,210 4,070 4,140 8,480 4,160 4,320
1998 9,350 4,450 4,900 8,720 4,240 4,480
Total 25,060 12,270 12,790 25,980 12,790 13,190
A has been credited with Rs. 12,270 while he ought to have been credited
with Rs. 12,790. Thus he should be credited with Rs. 520 (Rs. 12,790 Rs.
12,270) more.
B has been credited with Rs. 12,790 while he ought to have been credited
with Rs. 13,190. Thus he should be credited with Rs. 400 (Rs. 13,190 Rs.
12,790) more.
The following entry is required to correct the Partners' Accounts.
Rs. Rs.
Fee outstanding account Dr. 920
To A's Capital Account 520
To B's Capital Account 400
(Being outstanding fee brought into account)
Guarantee
Sometimes, a partner is taken into the firm on the guarantee that he shall
be given a minimum amount of the profits of the firm oven if there are no
14
profits or his share of profit falls short of the guaranteed amount. This guarantee
to the new partner can be given by one of the existing partners or all the existing
partners. For accounting purposes, the guaranteed amount due to the new partner
should be deducted out of the total profits. Then profits of the remaining
partners should be ascertained from the residue (i.e. total profit minus the
guaranteed amount payable to the new partner) and divide the same in the new
profit sharing ratio of the existing partners. This will be more clear from the
following illustrations.
Illustration 4: Red, White and his son Blue were partners in the firm of M/s
Red and White. On 1st April, 1998 Green the Manager was admitted as a partner.
Profits and losses in the new partnership were to be shared as follows:
Red 4/10, White 3/10, Blue 2/10 and a salary of Rs. 600 per annum, and
Green 1/10.
Green has previously been paid a salary of Rs. 1,000 per annum and a
commission of 3 per cent of the profits, after changing his salary and
commission, but before charging any partner's salary.
It was agreed that for the first year of the new partnership, any excess of
his share of the profit over the sum he would have earned had he remained
Manager increased by Rs. 700, should be charged to Red's share of profit.
On considering the draft accounts for the year ended 31st March, 1999,
the partners agreed to the following adjustments:
(a) to provide for a staff bonus of Rs. 5,500.
(b) That Red's son Grey, an employee of the partnership, should receive
an additional bonus of Rs. 250 chargeable against his father's share of profit.
(c) that Rs. 500 of White's share of profit should be credited to his son
Blue.
15
The profits for the year, before making the above adjustments and before
charging Blue's salary amounted to Rs. 32,000.
You are required to prepare a statement showing the division of profits
between partners.
Solution
Profit and Loss Adjustment Account
for the year ended 31st March, 1999
Rs. Rs.
To Green's Capital A/c 2,590 By Net Profit (i) 25,900
25,900 25,900
To Red's Capital A/c (4/9) 10,425 By Balance b/d 23,310
To White's Capital A/c (3/9) 7,819 By Red's Capital A/c
To Blue's Capital A/c (2/9) 5,213 (Amount of Guarantee) (iii) 147

23,457 23,457
Statement showing the final summary of division of profit

Red White Blue Green
Rs. Rs. Rs. Rs.
Salary - - 600 -
Profits 10,425 7,819 5,213 2,590
Transfer from White to Blue - (-) 500 (+) 500 -
Bonus payable to Grey (-) 250 - - -
Excess amount debited for the
guarantee given (-) 147 - - -
10,028 7,319 6,313 2,590
16
Working Notes
(i) Distributable Profit: Rs.
Profit as disclosed by accounts 32,000
Less: Staff Bonus 5,500
26,500
Salary to Blue 600
Profit to be distributed among partners 600
25,900
(ii) Remuneration which Green would have received as Manager:
Salary 1,000
Commission: (26,500 1,000) 3/103 743
1,743
(iii) Amount now being paid to Green:
1/10 of Profits (Rs. 25,900) 2,590
Excess amount [2,590 (1,743 + 7000)] debited to Red 147
5.5 ADMISSION OF A PARTNER
Sometimes a running business may require new partner for the
following reasons :
1. Need of more capital for expansion of business.
2. Need of expertise in managerial or technical field for running
the business.
3. For growth of the business by admitting a reputed person as partner.
4. To admit a new partner in place of an old retiring partner.
When a new partner is admitted in business, he gets two types of rights.
17
1. Right to Share Future Profit-Loss of the Business
When a new partner is admitted in the business, he gets the right to
receive profit in an agreed ratio. This share in profit is sacrificed by the old
partners. To compensate the old partners for this sacrifice, the new partner
pays a price in the form of goodwill adjustment. The method of valuation of
goodwill is usually given in the partnership contract. When new partner comes
into partnership, the profit sharing ratio of old partners is changed.
2. Right to Share in Assets of the firm
When a new partner is admitted in the firm, he also becomes the owner
of firm's assets as per his share, for which he brings in the required capital.
Hence, at the admission of a new partner, revaluation of assets and liabilities
becomes necessary so that there should be no loss to the old partners or the
new partner. At the time of admission of a new partner, the following are the
main considerations which must be settled between the old and the new partners:
1. Determination of new profit sharing ratio.
2. Determination of the value of goodwill and its allocation
among old partners.
3. Revaluation of assets and liabilities of the existing business.
4. Distribution of accumulated profits, reserves and losses.
5. Determination of the capital to be brought in by the new
Partner. Each point is discussed in detail in the following pages :
Determination of New Profit Sharing Ratio
When a new partner joins the firm, the share of old partners is reduced
because they sacrifice some part of their share to the new partner.
The determination of new profit-sharing ratio depends upon the
agreement among the old and new partners. In what ratio the new partner gets
18
his share from the old partners depends upon their agreement. Thus on admission
of a new partner, what the new ratio of all the partners will be is an important
question. In various circumstances, the calculation of new profit-sharing ratio
is made as follows :
If Share of New Partner is Given :
When the share of new partner is given and in the absence of any
direction, the old partners will continue to share the remaining share in their
old profit sharing ratio after deducting the share of the new partner.
Illustration 5
Yogu and Ankit are partners sharing profits and losses in the ratio of
3:2. They admit Atul as a partner for one fourth share in the future profits.
Calculate the new profit-sharing ratio of partners.
Solution
Atul's share is 1/4
Thus remaining share = 1 - =
Hence Yogu's share = 3/5 = 9/20
Now Ankit's share = 2/5 = 6/20
and Atul's share = or 5/20
= 9/20 : 6/20 : 5/20
Hence, the new profit sharing ratio will be = 9 : 6 : 5.
When the New Partner Purchases His Share From Old Partners in a
Certain Ratio
In this case, the share of old partners will be calculated by deducting
that portion which they have sacrificed in favour of a new partner. The remaining
19
share will be treated as the share of old partners. This will be clear from the
following example :
Illustration 6
A and B are partners in a firm sharing profits and losses in the ratio of
3: 2. A new partner C is admitted. A surrenders 1/5 share of his profit in favour
of C, and B surrenders 2/5 of his share in favour of C. Calculate the new profit-
sharing ratio of the partners.
Solution
Sacrifice by A to C = 3/5 1/5 = 3/25
Sacrifice by B to C = 2/5 2/5 = 4/25
Share of C = 3/25 + 4/25 = 7/25
A's new share = 3/5 - 3/25 = (15-3)/25 = 12/25
B's new share = 2/5 - 4/25 = (10-4)/25 = 6/25
Share of A, B and C = 12/25 : 6/25 : 7/25
= 12 : 6 : 7
When Sacrificing Ratio is given
In this case, the sacrifice made by old partners towards the new partner
is given. This is clear from the following example :
Illustration 7
A and B are partners sharing profit or loss in the ratio of 7:5. They admit
their manager C into partnership who is to get one sixth share in the profits.
He acquires his share as 1/24 from A and 1/8 from B. Calculate the new profit
sharing ratio
20
Solution
(Old Ratio - Share given to new partner)
A = 7/12 - 1/24 = (14-1)/24 = 13/24
B = 5/12 - 1/8 = (10-3)/24 = 7/24
C = 1/6
New ratio = 13/24 : 7/24 : 1/6
= 13 : 7 : 4
Sacrificing Ratio When Old and New Ratios are Given
In case, when old and new ratios of partners after admission of a partner
are given, it is necessary to calculate the sacrificing ratio of the old partners
by the formula:
Sacrificing Ratio = Old Ratio - New Ratio.
Illustration 8
X and Y are partners sharing profits or losses in the ratio of 4:3. Z is
admitted and the new ratios are X-7, Y-4 and Z-3 (7:4:3:). Calculate the
sacrificing ratio.
Solution
Sacrificing Ratio = (Old Ratio - New Ratio)
X's sacrifice = 4/7-7/14 = (8-7)/14 = 1/14
Y's sacrifice = 3/7 - 4/14 = (6-4)/14 = 2/14
Thus, sacrificing ratio is 1:2 for X and Y.
Goodwill
Goodwill is the value of the reputation of a firm. When a new partner is
admitted in the partnership, he starts getting share in the profits of the firm
immediately on his entrance. He gets the benefit of the firm's reputation which
has been developed by old partners through their hard work and efforts. Hence,
21
the old partners want some compensation for their previous labour or efforts
made by them to build the firm's reputation. The amount of compensation given
by the new partner to old partners is called goodwill. It is an intangible asset
which is not visible and touchable, but it is subject to fluctuations.
In the words of Lord Macnaugten, "Goodwill is a thing very easy to
describe, very difficult to define. It is the benefit and advantage of the good
name, reputation and connection of a business. It is the attractive force which
brings in customers. It is the thing which distinguishes an old established
business from a new business at first start.....Goodwill is composed of a variety
of elements. It differs in its composition in different trades and in different
business in the same trade."
"The probability that the old customers will report to the old place" is
called goodwill - Lord Alden.
When a new partner gives money for goodwill, he hopes that he would
receive some extra profit from this amount,. If a new partner starts a new
business, he will have to put in a lot of hard work and face difficulties to create
and maintain customers. But when he becomes partner in an old established
business, he does not face any such problem, and is therefore, wiling to pay
for the effort and money spent on establishing the business and providing
credibility to the firm. Thus, we can say that goodwill is the value of the
reputation of a firm which is concerned with the earning capacity of the
business.
Element of Goodwill
Goodwill means the capacity of the business to earn more than normal
profit. In other words, it is the value of reputation of the business. It attracts
more customers. It is an intangible asset of the business. When the reputation
22
of business gets established, its earning capacity becomes automatic. It takes
time to develop goodwill which depends on many factors, mentioned as under:
1. Personal reputation of the owners and manager.
2. Speciality of goods or services provided.
3. Favourable location or site.
4. Patents, Copyrights or Trade Marks.
5. Advantage of an important license with the firm.
6. Advantage of selling a special type of product or raw material
For the above reasons, the firm gets or earns more profit and the one
who purchases the goodwill of firm also purchases the name of the firm. It is
important to note that goodwill exist only when the business is running in
profit. In a business which is running at a loss, there will be no goodwill because
the value of goodwill arises from the future possibility of the firm to earn
profit.
Need for valuation of goodwill of a firm :
1. On Admission of a New Partner : When a new partner comes into the
firm, he gets a share in the future profits. The share of the old partners is
consequently reduced. So, the new partner has to pay for the goodwill besides
his capital. The amount paid for goodwill is distributed among old partners in
their sacrificing ratio. Valuation of goodwill depends on the agreement among
old and new partners.
2. On Retirement or Death of a partner : As a new partner brings in the
amount of goodwill, in the same way, at the time of retirement, a partner receives
his share of goodwill of the firm. At the time of death, the deceased partner's
share of goodwill is to be given to his legal representatives. For this, the need
for valuation of goodwill arises.
23
3. On the Amalgamation of firms : When two or more than two firms are
merged and a new firm is formed, it is called amalgamation. At the time of
amalgamation, like other assets and liabilities, goodwill is also value and
becomes the part of purchase consideration like other assets.
4. On Sale of firm's business to another firm or company, it is very
important to value the firm's goodwill.
5. When profit sharing ratio of the partners is changed, there is a need to
evaluate the goodwill so that the losing partners could be compensated.
Methods of Evaluating Goodwill
The following are the important methods of valuation of goodwill :
(A) Average Profits Method
Under this method, the average of the profits of last three or four years
is calculated. The average profits is multiplied by number of years in which
the anticipated profits will be available. If the goodwill is twice the average
profits of last three years, it is to be valued at two years's purchase of the last
three years average profit.
Value of Goodwill = Average profit Number of year's purchased.
Total profits
Formula = No. of years purchased
No. of years
The following points need to be considered for valuation of average

profit:
1. Abnormal Profit : If in any year, a firm earns abnormal profits, then it is
to be deducted from the firm's profits because it is not or usual or recurring
nature. For example, profit due to rise in prices at the time of war of after
24
floods, etc.
2. Abnormal Loss : If in any year, a firm incurred any abnormal losses,
them it is added back to the profits. These abnormal losses include loss of
stock due to fire, theft or floods, etc.
3. Normal Expenses : If there are any normal expenses which are of
recurring nature and are not deducted from the firm's profit, these should be
deducted, such as insurance premium, etc.
(B) Super Profit Method
In this method, super profit is calculated and it is multiplied with a
specific number to find out the goodwill. Super profit is the profit above the
normal profit being earned by other firms engaged in the same business.
If any old firm is earning equal to the profits being earned by other new
firms engaged in the same type of business, there will be no value of the goodwill
of the old firm. If the old firm is earning more profits than the new firm, there
will be value of the goodwill of the old firm. The greater the difference in such
profits, the higher will be the value of goodwill.
For example, if the investment in the business is of Rs. 5,00,000 and
the rate of profit considered appropriate in similar business is 15%, the normal
profit will be Rs. 75,000 (5,00,000 15/100). This normal profit is compared
with the actual profit earned. If the actual profit is more than the normal profit,
it will be called super profit. Suppose further that the actual profit is Rs.
1,00,000, then (1,00,000 - 75,000) Rs. 25,000 is super profit.
Goodwill = Super profit No. of years purchased.
If the super profit will be available for three years, the value of
25
goodwill will be :
Rs. 25,000 3 = Rs. 75,000
Goodwill = Super profit No. of years purchased
Super Profit = Actual or Average Profit - Normal Profit
Normal Profit = Capital Invested Normal Rate of Return/100
(C) Capitalisation Method
Under this method, it is assumed that if capital invested by the
firm earns a normal profit, there is no goodwill, but if firm earns more than
normal profit, excess capital which might be invested to earn that excess profit
is called goodwill. There are two ways of finding out goodwill under this method:
1. Capitalisation of Average Profit
Under this method goodwill is calculated as :
Goodwill = Normal Capital Employed - Actual Capital Employed
Profit or Average Profit
Normal Capital Employed = X 100
Normal Rate of Return
Suppose the normal rate of profit is 10 per cent and the firm earns Rs.
10,000. If the actual capital employed is Rs. 80,000, then normal capital
employed is calculated as under:
Normal Capital Employed = 10,000 (Profit)100
10 (Normal rate of return)
= Rs. 1,00,0000
Goodwill = Normal Capital Employed - Actual Capital Employed
= 1,00,000 - 80,000 = Rs. 20,000
Thus, the excess of normal capital employed over actual capital is the
value of goodwill.
26
2. Capitalisation of Super Profit
Under this method, first the super profit is capitalized and on that
basis the value of goodwill is determined. Here, super profit is :
= Actual Profit - Normal Profit
After this goodwill is ascertained with the help of following formula :
Goodwill = Super Profit 100

Normal rate of return
Methods of Recording Goodwill on the Admission of a New Partner

Various methods of recording goodwill at the time of admission in a
firm are as under :
1. The amount of goodwill is paid by new partner to old partners outside
the business.
2. Amount of goodwill is brought in cash by new partners in the firm and is
withdrawn by the old partners. In this way, it does not affect the capitals of
partners.
3. When amount of goodwill is bought in cash and retained in the business,
it will increase the capital of the firm.
4. The new partners does not bring in the goodwill in cash but the goodwill
account is raised in the books. Under this method Goodwill Account is debited
and old partners' Capital Accounts are credited in their old profit-loss sharing
ratio. In this case, Goodwill Account will be shown in the Balance Sheet. If
Goodwill Account is written off among all partners in new ratio, it will not be
shown in Balance Sheet.
Treatment of Goodwill in Account
1. When goodwill is paid by new partner to old partners outside the business:
When the amount of goodwill is received by old partners privately or outside
27
the business in case, no entry will be made in the books of firm.
2. When goodwill is brought by new partner and is withdrawn by old
partners: In such a cash, the receipt of goodwill money is recorded in the books
of firm and is transferred to Capital Accounts of old partners in their sacrificing
ratio. The amount, thus, transferred is immediately withdrawn by old partners.
The following entries are recorded in firm's books in the above case :
i) When goodwill is brought in cash
Cash Account Dr.
To Goodwill Account
(Being amount of goodwill brought in cash )
ii) Transferring Goodwill old partners in their sacrificing ratio :
Goodwill Account Dr.
To Old Partners' Capital Account
(Being amount of goodwill transferred to Capital Account)
iii) On withdrawn of goodwill by old partners :
Old Partners' Capital Account Dr.
To Cash Account
(Being goodwill withdrawn)
Alternative Method
Under this method, Cash Account is debited with the amount of goodwill
and new partner's Capital Account is credited. Then new partner's Capital
Account is debited and old partner's Capital Accounts are credited in the
sacrificing ratio.
On bringing the goodwill in cash :
i) Cash Account Dr.
To New Partner's Capital Account
28
(Being brought by new partner for goodwill)
ii) On transferring the goodwill to old partner's Capital Accounts :
New Partner's Capital Account Dr.
iii) To old partners' Capital Accounts
(Being amount of goodwill distributed by old partner' in their sacrificing
ratio).
Old Partners' Capital Account Dr.
To Cash Account
(Being amount of goodwill withdrawn by old partners)
Now the question arises as to the ratio in which goodwill is to be
distributed among old partners when a new a new partner is admitted. Goodwill
will be distributed to old partners in their sacrificing ratio. For example, X
and Y are partners sharing profits and losses in the ratio of 3:2. After admission
of Z as a partner, their new ratio is 2:2:1. Here, the scarifying ratio of X and Y
will be calculated. The scarifying ratio will be calculated as under :
X sacrifices = 3/5 - 2/5 =1/5
Y sacrifices= 2/5 = 2/5= 0
In the above case, the amount of goodwill will be given only to X because
he has sacrificed it to Z and Y will not get any amount of goodwill as he did not
sacrifice any share. If new ratio is not given in the question and it is said that
the new partner will be given 1/5 share, it is assumed that old partners sacrifice
in their old ratio.
3. Amount of Goodwill retained in the Business : In this method the amount
of goodwill is retained in the business. For this, the following entries will be
made :
i) When amount of goodwill is brought in :
Cash Account Dr.
29
To Goodwill Account OR
To New partner's Capital Account
(Being amount of goodwill received)
ii) Amount of goodwill transferred to old partners' Capital Accounts:
New partner's Capital Account Dr.
OR
(Being amount of goodwill transferred to old partners
Accounts in sacrificing ratio)
4. Raising Goodwill Accounts : Sometimes, the amount of goodwill is not
brought in cash by the new partner. Hence, goodwill account is raised with full
value of firm's goodwill and capital account of old partners are credited in the
old profit sharing ratio.
a) When goodwill is raised :
(Being Goodwill Account raised in the books of the firm in old ratio)
b) When goodwill is written off :
All partners' (including new partner)
Capital Accounts Dr.
To Goodwill Account
(Being Goodwill Account transferred to all partners' Capital
Account in the new profit sharing ratio)
When goodwill already appears in the books : If goodwill already appears
in the books, it is transferred to old partner's Capital Accounts in their old
ratio at the time of admission of a new partner. The only entry will be :
30
Old Partners Capital Accounts Dr.
To Goodwill Account
(Being goodwill appeared in B/S is written-off in old ratio)
After this, the entries for goodwill brought in by the new partner will
be passed.
When Goodwill is not brought in Cash and Goodwill Account is raised :
When new partner does not bring goodwill in cash and goodwill already appears
in the Balance Sheet, goodwill will be dealt with as under :
Change in Profit Sharing
Sometimes, partners change their profit-loss sharing ratio. In such a case
to treat the amount of goodwill, the following entries will be made :
1. Raising Goodwill Account : First of all, goodwill is to raised by debiting
the Goodwill Account with full value and crediting all partner's capital accounts
in their old ratio :
To All Partners' Capital Account
(Being Goodwill Account raised in old ratio)
2. Writing off the Goodwill Accounts : After having raised the goodwill,
Goodwill Account will be written off by debiting all partners' Capital Accounts
in the new ratio.
All Partners' Capital Accounts Dr.
To Goodwill Account
(For Goodwill written off in the new ratio)
Revaluation of Assets and Liabilities
Revaluation Account is prepared to revalue various assets and liabilities
of the firm. When a new partner is admitted into a partnership concern, he
31
acquires the ownership rights in the assets of the firm and is also responsible
for the liabilities of the firm. It is, therefore, desirable from the point of view
of the incoming partner as well as the existing partners that the assets and
liabilities as appearing in the Balance Sheet on the date of admission of the
new partner should be properly valued.
It is possible that some of the assets might have appreciated in value or
some of the assets have been shown more than their realizable values. Hence,
these assets must be shown at lower values. Some of the liabilities may not
have been shown in the books, though they will be paid. Thus, if the values of
assets and liabilities as shown in the books of accounts are different than their
actual values, adjustments will have to be made.
For the adjustment of various assets and liabilities, a Profit and Loss
Adjustment or Revaluation Account is prepared. On its debit side is shown
decrease in assets, outstanding expenses and increases in liabilities, and on
the credit side, increase in assets, prepaid expenses and decrease in liabilities
are shown. The balance of this account is transferred to Capital Accounts of
old partners in their old ratio.
Adjustment for Undistributed Profits or Losses and Reserves
i) When a new partner is admitted in the firm, reserves, undistributed
profits and credit or debit balance of Profit and Loss Account are transferred
to old partners' Capital Accounts in their old ratio. For this purpose, the
following journal entries are passed.
Profit and Loss Account (if Profit) Dr.
General Reserve Account Dr.
To old partners' Capital Accounts
(Being profits & reserve distributed in old partners in old ratio)
32
ii) If the debit balance of Profit and Loss Account is shown in the
Balance Sheet, then it will also be transferred to old partners' Capital Accounts
in old ratio.
Old Partners' Capital Accounts Dr.
To Profit and Loss Account
Preparation of Memorandum Revaluation Account
Sometimes, the partners agree that the value of assets and liabilities are
not to be altered and these are to be shown in the books at their old values. In
such a case, increase or decrease in the amount of assets and liabilities will
be recorded in a special account known as Memorandum Revaluation Account.
No corresponding entry is made in assets and liabilities to record changes in
their values. This Memorandum Account is divided into two parts :
i) In the first part, Revaluation Account is prepared in the usual way
as explained earlier and profit or loss is distributed to old partners in old
ratio.
ii) In the second part, all the entries which were shown in the
Revaluation Account will be reversed. It means those items which were shown
on the Debit side of Revaluation Account will now be placed in the credit side
of Memorandum Revaluation Account, and all credit items of Revaluation
Account will be shown in the Debit side of Memorandum Revaluation Account.
Thus, whatever the result (profit or loss) may be, it will be distributed among
all the partners (including the new partner) in new profit sharing ratio.
It is important to keep in mind that, after preparation of Memorandum
Revaluation Account, the result (Profit or Loss) will be reversed as shown by
Revaluation Account. If Revaluation Account show profit, the Memorandum
Revaluation Account will show loss and vice-versa. Secondly, while preparing
the Balance Sheet, all the fixed assets and liabilities (expect cash in hand and
33
bank) are to be shown at original figures. But in capital accounts of partners,
adjustments will be made for profit/loss of both the parts of Memorandum
Revaluation Account.
5.6 SUMMARY
Partnership is the relation between persons who have agreed to share

the profits of a business carried on by all or any one of them acting for all. The
document which contains the terms and conditions regarding the conduct of
partnership business is called partnership deed. The capital accounts of the
partners may be fixed or fluctuating. A minor partner is not personally liable
for the debts of the partnership firm but his share in the partnership property
and profits of the firm will be liable for firm's debts and obligations. The
guarantee of the new partner can be given by one or all the existing partners.
Whenever a partner is admitted into partnership firm, he acquires two rights
namely the right to share in the assets of the partnership and the right to share
in the profits of the business. The main points which require attention at the
time of admission of a partner are calculation of new profit sharing ratio,
revaluation of assets and liabilities, treatment of goodwill adjustment of
undistributed profits and losses and adjustment of capitals in order to bring
these in proportion to profit sharing ratio.
5.7 KEYWORDS
Partnership: It is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.
Partnership Deed: A document which contains details of an express written

agreement between the partners is called partnership deed.
34
Minor Partner: A parties who has not attained the age of majority is called a
minor partner.
Sacrificing Ratio: It means the forgoing a fraction of share in favour of a new

partner by the old over.
Goodwill: Goodwill is the value of the reputation of a firm in respect of profits

expected in future over and above the normal rate of profits.
1. P, Q and R are in the partnership and on 1st January, 1995 their respective
capitals were Rs. 20,000, Rs, 12,000 and Rs, 10,000. Q is entitled to a
salary of Rs. 2,500 and R Rs. 2,000 per annum, payable before division
of profits. Interest is allowed on capital @ 5% per annum but is not
charged on drawings. Of the net divisible profits of first Rs. 10,000; P
is entitled to 40%, Q to 35% and R to 25% and over that amount profits
are shared equally. The profit for the year ended 31st December, 1995
after debiting partnership salaries, but before charging interest on
capitals, was Rs. 18,000 and partners had withdrawn Rs. 800 each.
Prepare partners' accounts for the year.
2. Kakku and Polu started a partnership business on 1st January, 1985. They
contributed Rs. 80,000 and Rs. 60,000 respectively, as their capitals.
The terms of the partnership agreement are as under :
(a) Interest on capital and drawings @ 12% per annum.
(b) Kakku and Polu to get a monthly salary of Rs. 2,000 and Rs. 3,000
respectively.
(c) Sharing of profit or loss to be in the ratio of their capital
contribution.
35
The profit for the year ended 31st December, 1985 before making above
appropriations was Rs. 1,00,300. The drawings of Kakku and Polu were Rs.
40,000 and Rs. 5,000 respectively. Interest on drawings amounted to Rs. 2,000
for Kakku and Rs. 2,500 for Polu.
Prepare the Profit and Loss Appropriation Account and partners' Capital
Account assuming that their capitals are fluctuating.
3. Explain goodwill and describe various methods of valuing goodwill.
4. Explain the treatment of goodwill in case of admission of a new partner

with journal entries.
5. What is Revaluation Account ? How is it prepared ? How is it different

from Memorandum Revaluation Account ?
6. A and B share profits in the proportions of 3/4th and 1/4. Their Balance
Sheet as on 31st December, 1990 was as follows :
Liabilities RS Assets Rs
Sundry Creditors 41,500 Cash at Bank 22,500

Capital Accounts Bills Receivable 3,000
A 30,000 Debtors 16,000
B 16,000 Stock 20,000
Fixtures 1,000
87,500 87,500
36
On January 1, 1991, C was admitted into partnership on the following terms :
i) That C pays Rs. 10,000 for goodwill. Half of this sum is to be
withdrawn by A and B . He pays for 1/5 share Rs. 7,500.
ii) The stock and fixtures are to be reduced by 10 per cent. 5%
provision for doubtful debts is to be created on Sundry Debtors
and Bills Receivable.
iii) That the value of Land and Building is to be appreciated by 20%
iv) There being a claim against the firm for damages, a liability to
the extent of Rs. 1,000 should be created.
v) An item of Rs. 650 included in Sundry Creditors is not likely to
be claimed and hence should be written back.
Draws up Capital Account, Cash Account, Profit and Loss Adjustment

Account and the Balance Sheet of A, B and C. Also indicate the future sharing
ratio, assuming the profit sharing ratio between A and B has not changed.
7. The following was the Balance Sheet of Anurag and Bhawna who were
sharing profits in the ratio of 2/3 and 1/3 on 31st December, 1990.
Creditors 65900 Cash at Bank 1,200

Capitals : Sundry Debtors 9,700
Anurag 30,000 Stock 20,000
Bhawna 20,000 Plant & Machinery 35,000
Building 50,000
1,15,900 1,15,900
37
They agreed to admit Monika into partnership on the following terms :
a) Monika was to be given 1/3 share in profits, and was to bring Rs.
15,000 as capital and Rs. 6,000 as share of goodwill.
b) The value of stock and plant were to be reduced by 10%.
c) A provision of 5% was to be created for doubtful debts.
d) The building account was to be appreciated by 20%
e) The goodwill amount was to be withdrawn by the old partners.
f) Investment worth Rs. 1,400 (not mentioned in the Balance Sheet
were to be taken into account.
Show the Revaluation Account, Capital Accounts and prepare the opening
Balance Sheet of the new firm.
1. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan

Chand and Sons, New Delhi.
2. Advanced Accounting by Ashok Sehgal and Deepak Sehgal,

Taxmann Allied Services Pvt. Ltd., New Delhi.
3. Fundamentals of Advanced Accounting by R.S.N. Pillai and V.

Bagavathi, S. Chand and Co. Ltd., New Delhi.
4. Studies in Advanced Accounting by S.N. Maheshwari, Sultan Chand

5. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and

Neeti Gupta, Kalyani Publishers, Ludhiana.
38
LESSON : 6
RETIREMENT AND DEATH OF A PARTNER
STRUCTURE
6.0 Objective
6.1 Introduction
6.2 Accounting Procedure at the time of retirement of a Partner
6.2.1 Treatment of Goodwill
6.2.2 Revaluation of Assets and Liabilities
6.2.3 Adjustment of Accumulated Reserves and Losses
6.2.4 Calculating the amount due to the retiring partner and its payment
6.3 Death of a Partner
6.3.1 Calculation of Deceased Partner's Share of Profit
6.3.2 Treatment of Life Policy
6.4 Summary
6.5 Keywords
6.0 OBJECTIVE

a) Discuss the accounting procedure at the time of retirement of a partner.
b) Explain the procedure of calculation of profit and treatment of life policy at the
time of death of a partner.
6.1 INTRODUCTION
A new partner is admitted in the firm when such a need arises, the same way, a
partner may like to retire after giving due notice. His accounts are settled upto the date
on which he retires. He will have his share of profit (or loss) upto that date, a share in
1
the old reserves and the Goodwill of the firm. A balance sheet is prepared on the day of
his retirement and his capital account is completed upto the date. Either he is paid cash
in full for his capital account or partly he is paid with a promise to pay the balance at a
future date. In such a case his capital account is transferred to the Loan A/c and shown
as a liability in the balance sheet. It may be paid in instalments afterwards.
Usually, the manner, in which a partner shall retire is mentioned in the partnership
deed. When a partner retires he is entitled to his share in the following accounts:
1. The retiring partner is entitled to his share out of the past accumulated profits
and reserves in his profit-sharing ratio.
2. He is also entitled to his share of profit upto the date of his retirement. Suppose
the books of accounts of the firm are closed on 31st March every year and the partner
is retiring on 30th June. He is entitled to his share of profit for this 3 months' period
i.e., from 1st April to 30th June.
3. When a partner retires he is paid for his share of goodwill in the firm.
4. According to the terms of the Partnership Deed the value of all assets and
liabilities are revalued on the retirement of a partner. For this purpose, a Revaluation
Account is prepared. He is entitled to his share of profit (or loss) on the revaluation of
assets and liabilities.
In the absence of any agreement to the contrary, the profit sharing ratio between the
remaining partners remains unchanged after his retirement.
6.2 ACCOUNTING PROCEDURE AT THE TIME OF RETIREMENT OF A

PARTNER
The following problems arise when a partner retires from the firm and remaining
partners continue with the business :
2
1. Treatment of goodwill
2. Revaluation of assets and liabilities
3. Adjustments of accumulated reserve and losses
4. Calculating the amount due to the retiring partner and its payment.
6.2.1 Treatment of Goodwill
When a partner retires from the firm remaining partners are benefitted because
future profit is shared only by them. For example, if A, B and C are partners and their
profit sharing ratio is 2 : 2: 1. If B retires from the firm, A and C will distribute the
profits in 2:1 ratio or a new ratio.
A and C will get share of B. Hence, A and C will compensate the retiring partner
B in the gaining ratio. When a new partner is admitted in the firm, he pays the amount of
goodwill and if a partner retires from the firm, the remaining partners compensate the
retiring partner by paying for the goodwill.
Gaining ratio is the difference of new ratio and old ratio. If there is no other
agreement, remaining partners will share the profits in the same ratio in which they
shared earlier before the retirement of a partner. In such a situation, the gaining ratio of
the remaining partners would be their old ratio.
For example, A B and C are sharing profits in the ratio 3:2:1. C retires from the
firm. In this case, new ratio of A and B will be 3:2.
Illustration 1
i) A, B and C were sharing profit and loss in the ratio of 2:3:1. Calculate the new
ratio and the gaining ratio when (a) A retires, (b) B retires and (c) C retires.
ii) A, B and C were partners sharing profit and loss in the ratio of 2:3:1. C retires
and A and B decide to share future profit and loss in the ratio of 3:4. Calculate the
gaining ratio.
3
iii) A, B and C were partners sharing profit and loss in the ratio of 2:3:1. C retires
and his share is taken by A and B in the ratio of 2:1. Find the new ratio.
Solution
i) (a) When A retires, the new ratio of B and C will be 3:1.
This will also be their gaining ratio.
(b) When B retires, the new ratio of A and C will be 2:1.
(c) When C retires, the new ratio of A and B will be 2:3
ii) Gaining Ratio = New Ratio Old Ratio

Gain of A = 3/7 - 2/6 = 4/42
Gain of B = 4/7 - 3/6 = 3/42
Thus, the gaining ratio of A and B is 4/42 : 3/42 or 4:3
iii) Share got by A from C = 1/6 2/3 = 2/18

Share got by B from C = 1/6 1/3 = 1/18
New ratio of A = 2/6 + 2/18 = 8/18
New ratio of B = 3/6 + 1/18 = 10/18
Hence, new ratio of A and B = 8/18 : 10/18 or 8 : 10 or 4 : 5
Adjustment of Goodwill
Having understood the gaining ratio of new partners, let us discuss how the
goodwill will be adjusted in accounts. The following are the methods of treating goodwill
in books in case of retirement :
1. When Goodwill account is raised with full value
Under this method, Goodwill Account is debited with full value of Goodwill
and the partners Capital Accounts, including retiring partners Capital Account are
credited in the old ratio. Goodwill will be show in the Balance Sheet at full value.
4
2. When goodwill account is raised with full value and written off by
remaining partners
Under this method, first of all Goodwill Account is debited with full value and
all partners (including retiring partner) Capital Accounts are credited in the old ratio.
Secondly, remaining partners Capital Accounts are debited in new ratio and Goodwill
Account is credited. Hence, the Goodwill Account is closed. It will be shown in Balance
Sheet.
3. When goodwill is raised only with the share of the retiring partner
and then written off by remaining partners
In this case, firstly Goodwill Account is debited and retiring partners Capital
Account is credited with his share of goodwill. Secondly, Capital Accounts of remaining
partners are debited in their gaining ratio and Goodwill Account is credited. Hence,
Goodwill Account will be closed.
4. When retiring partners share of Goodwill is to be adjusted in the Capital

Accounts of remaining partners without raising Goodwill Account
In this case, the retiring partners share of goodwill is calculated and debited to
continuing partners Capital Accounts in their gaining ratio with corresponding credit
being given to retiring partners Capital Account.
Note : From the above explanation, it is clear that when we deal with the total
value of goodwill (Opening Goodwill Account or Closing Goodwill Account), we should
use either the old ratio or the new ratio. If we adjust the share of goodwill of the retiring
partner only we should use only the gaining ratio.
Illustration 2
A, B and C are partners sharing profits and losses in the ratio of 4:3:2. B retires
and on retirement the goodwill of the firm is valued at Rs. 43,200, No goodwill appears
5
in the books. A and C agree to share future profits in the ratio of 5:3. Find the gaining
ratio and pass the journal entries for goodwill in each of above cases.
Solution
Old ratio between A, B and C = 4:3:2
New Ratio between A and C = 5:3
Gaining ratio = New ratio old ratio
A = 5/8 - 4/9 = (45 - 32)/72 = 13/72
C = 3/8 - 2/9 = (27 - 16)/72 = 11/72
Hence, A and C will compensate B in the ratio of 13 : 11
(a) When the full value of goodwill is raised in the books :
Rs. Rs.
Goodwill A/c Dr. 43,200
To As Capital A/c 19,200
To Bs Capital A/c 14,400
To Cs Capital A/c 9,600
(Goodwill raised and credited to
partners capital accounts in old ratio)
Note : Goodwil will appear in the Balance Sheet as an asset until it is written off.
(b) When the full value of goodwill is raised in the books and written off :
Rs. Rs.
(Being the Goodwill credited to all
partners in old ratio)
As Capital A/c Dr. 27,000
Cs Capital A/c Dr. 16,200
To Goodwill A/c 43,200
(Being the Goodwill written off in the new ratio)
6
(c) When the retiring partners share of goodwill is raised and written off :
Rs. Rs.
(Being Bs share of Goodwill)
To Goodwill A/c 14,400
(Goodwill written off in the gaining
ratio of 13:11)
(d) When the goodwill is adjusted in Capital Account without opening a Goodwill
Account :
Rs. Rs.
(Being due to B adjusted between A and C in
their gaining ratio)
Note : In all the above cases, B gets a credit for Rs.14,400 being his share of
goodwill of the firm which comes from A and C in their gaining ratio of 13:11.
When goodwill already exists in the books at the time of retirement, the need
for its revaluation arises to find out increase or decrease in its value. If the value has
increased, Goodwill Account will be debited and Capital Accounts of all partners will
be credited in their old ratio with the amount of increase. On decrease in its value, a
reverse entry will be made.
7
6.2.2 Revaluation of Assets and Liabilities
Revaluation of assets and labilities is also required at the time of retirement of

a partner in the same way as it is done in case of admission of a partner. The profit or
loss which results from revaluation will be transferred to all partners Capital Accounts
in their old profit sharing ratio. For this purpose, a Revaluation Account or Profit
and Loss Adjustment Account is prepared. If the remaining partners wish to show
assets and liabilities at their old values Memorandum Revaluation Account will be
prepared.
6.2.3 Adjustment of Accumulated Reserves and Losses
At the time of retirement, if general reserve, credit balance of Profit and Loss
Account or other undistributed profits are given in the Balance Sheet, they are credited
in the old partners Capital Accounts in old profit sharing ratio. For this, the following
journal entry is made:
Reserve or Profit and Loss A/c Dr.
To Partners Capital A/c
(Old ratio)
If the partners want that only retiring partners Capital Account be credited with
his share in undistributed profits, then the following entry will be made.
Reserves or Profit and Loss A/c Dr.

To Retiring Partners Capital A/c
(With the share of retiring partner)
Remaining undistributed profits will be shown in the Balance Sheet after

retirement.
If the remaining partners want that, without changing the amount of reserves or
profit, share be given to retiring partner, the following entry will be made :
8
Continuing Partners Capital A/c Dr.
(In their gaining ratio)
To Retiring Partners Capital A/c
6.2.4 Calculating the amount due to the retiring partner and its payment
The retiring partners Capital Account is credited with his share of capital, share
of goodwill, share of profit on account of revaluation and undistributed profits and
reserves of last years. This account will be debited with his drawings, share in revaluation
loss and other losses. If payment is no made to the retiring partner, the amount due is
transferred to his loan account. According to Section 37 of Partnership Act, the retiring
partner can have either interest @ 6% per annum on this amount due or the profit
earned by remaining partners with the help of this amount from the date of retirement.
For this, the journal entry will be :
Retiring Partners Capital A/c Dr.
To Retiring Partners Loan A/c
If remaining partners bring cash to pay off the retiring partner then, journal
entry will be :
Bank A/c Dr.
To Continuing Partners Capital A/c
(For cash brought in by partners in the agreed
ratio to pay off the retiring partner)
Payment in Instalments
Capital Account of the retiring partner is settled as per agreement. It may be

settled in two ways :
1) Payment in instalments with interest
2) Payment in a fixed number of instalments of equal amount (including interest).
Amount of instalment can be calculated with the help of Annuity Table.
9
Note : In the absence of any information, balance of retiring partners Capital Account
will be transferred to his Loan Account.
Illustration 3
A, B and C were carrying on business in partnership sharing profits and losses in

the ratio of 3 : 2 : 1, respectively. On 31st December, 1985, the Balance Sheet of the
firm stood as follows :

Sundry Creditors 13,590 Cash 5,900
Capital Accounts : Debtors 8,000
A : 15,000 Stock 11,690
B : 10,000 Building 23,000
C : 10,000 35,000
48,590 48,590
B retires on the above mentioned date on the following terms :

(i) Building be appreciated by Rs. 7,000.
(ii) Provision for bad debts be made @ 5% on Debtors.
(iii) Goodwill of the firm be valued at Rs. 9,000 and adjustment in respect be
made without raising a Goodwill Account.
(iv) Rs. 5,000 be paid to B immediately and the balance due to him be treated
as loan carrying interest @ 6% per annum. Such loan is to be paid in
three equal annual instalments together with interest.
Pass the journal entries to record the above mentioned transactions and show
the Balance Sheet of the firm as it would appear immediately after Bs retirement.
Prepare Bs Loan Account till it is finally closed.
10
Solution
Journal
Dr. Cr.
Particulars Rs. Rs.
Building A/c Dr. 7,000
To Revaluation A/c 7,000
(Being appreciation in the value of Building)
Revaluation A/c Dr. 400
To Provision for Bad Debts 400
(Being provision for bad debts created on debtors)
Revaluation A/c Dr. 6,600
(Being profit on revaluation credited to
old partners)
Cs Capital A/c Dr. 750
(Being Bs share of goodwill adjusted in gaining
ratio of 3:1 in A and C)
Bs Capital A/c Dr. 5,000
To Bank A/c 5,000
(Being the amount paid to B on retirement)
To Bs Loan A/c 10,200
(Balance of amount due to B transferred to
his loan account)
11
Balance Sheet
as on 1st January, 1986

Sundry Creditors 13,590 Cash 900
Bs Loan A/c 10,200 Debtors 8,000
Capital Accounts : Less : Prov. for bad debts 400 7,600
A : 16,050 Stock 11,690
B : 10,350 26,400 Building 23,000
Add : Appreciation 7,000 30,000
50,190 50,190
Bs Loan Account
1986 Rs. 1986 Rs.
Dec.31 To Bank 3,816 Jan. 1 By Balance b/d 10,200
To Balance c/d 6,996 Dec. 31 By Interest A/c 612
10812 10,812
1987 1987
Dec. 31 To Bank 3,816 Jan. 1 By Balance b/d 6,996
To Balance c/d 3,600 Dec.31 By Interest A/c 420
7,416 7,416
1988 1988
Dec.31 To Bank 3,816 Jan. 1 By Balance b/d 3,600
Dec. 31 By Interest A/c 216
3,816 3,816
Working Notes
(i) New Profit-Loss sharing Ratio :
Old Profit-sharing Ratio of A, B and C = 3/6 : 2/6 : 1/6, After Bs
retirement the ratio between A & C will be = 3 : 1 or 3/4 : 1/4
12
(ii) Gaining Ratio of A and C :
Gain to A = 3/4 - 3/6 = (18-12)/24 = 6/24
Gain to C = 1/4 - 1/6 = (6-4)24 = 2/24
Hence the gaining ratio is 6/24 : 2/24 or 3 : 1
(iii) According to Annuity Table .37410981 should paid every your to repay
rupee one with 6 per cent interest in 3 years. The annual instalment for
payment of Rs. 10,200 comes to Rs. 10,200 .37410981 = Rs. 3,816
Illustration 4
P and Q were working in partnership profits and losses equally. On 31 December,

1996, P decided to retire and in his place his son R was admitted as partner from 1
January, 1997, with 1/3 share of profit.
Balance Sheet
as on December 31, 1996

Sundry Creditors 14,700 Goodwill 15,000
Capital Accounts : Land & Building 40,050
P : 54,300 Motor Car 12,000
Q : 48,000 1,02,300 Furniture 9,300
Sundry Debtors 24,150
Cash at Bank 16,500
1,17,000 1,17,000
It was decided that:

a) The goodwill would be raised to Rs. 20,000.
b) The car would be taken over by P at its book value.
c) The value of land and buildings would be increased by Rs. 8,280.
13
d) Q and R would introduce sufficient capital to pay off P and to leave
thereafter a sum of Rs. 7,350 as bank balance, so as to make their capital
proportionate to their share of profits.
e) The Capital payable by R was to be gifted to him by his father.
f) The new partners decided not to show goodwill as an asset.
The new arrangements were duly complied with. Show the partners Capital
Account and the Bank Account.
Solution
Capital to be brought in by the partners :
Total Capital of the new firm :
Rs.
Goodwill 20,000
Land and Buildings 48,330
Furniture 9,300
Cash at Bank 7,350
Total Assets 1,09,130
Less : Creditors 14,700
Total Capital of Q and R 94,430
Qs Capital = 94,430 2/3 62,953
Rs Capital = 94,430 1/3 31,477
Amount payable to P :
Rs.
Ps Capital 54,300
His share of profit on revaluation :
Goodwil 5,000
Land & Buildings 8,280
13,280 1/2 = 6,640
14
60,940
Less : Capital of R to be gifted by P 31,477
29,463
Less : Car taken over 12,000
Balance payable in cash 17,463
Amount to be brought in by Q : Rs.
Qs Capital 48,000
His share, 1/2 of profit on revaluation 6,640
Existing Capital 54,640
Qs share in the new firm 62,953
Cash to be brought in by Q = Rs. 62,953 - Rs. 54,640 = Rs. 8,313
Capital Accounts
P Q R P Q R
To Rs Capital A/c 31477 - - By Balance b/d 54300 48000 -
To Motor Car A/c 12000 - - By Revaluation A/c 6640 6640 -
To Bank A/c 17463 - - By Bank A/c - 8313 -
To Goodwill A/c - 13333 6667 By Ps Capital A/c - - 31477
To balance c/d - 49620 24810
60940 62953 31477 60940 62953 31477
Bank Account
Rs. Rs.
To Balance b/d 16500 By Ps Capital A/c 17463
To Qs Capital A/c 8313 By Balance c/d 7350
24813 24813
15
Illustration 5
A, B and C share profits and Losses as 1 : 2 : 2. On 31 st December, 1989 when

A decided to retire, their capitals were Rs. 27,000; Rs. 54,000 and Rs. 54,000
respectively. A agreed to keep his capital in the firm as a loan subject to 6% per annum
interest. However, he was to receive a share in the profits after charging interest on
capital and loan of new firm for the year 1990, of only an amount equal to 1/3 of his
share in the old firm. On 1st January, 1990 D was admitted who paid Rs. 18,000 for his
capital and Rs. 12,000 for his 1/7 share of goodwill. The goodwill was shared by B and
C in their respective ratios.
In 1990, the firm earned a profit of Rs. 67,020, before charging interest on
loan of A and on capital @ 5 percent. Show the profit sharing ratios for the year 1990.
Also show the Capital of the partners on 31st December. 1990.
Solution
for the year ended 31st December, 1990
To interest on As Loan 1620 By Net profit 67020
(6% on Rs. 27,000)
To Interest on Capital :
(@ 5%)
B on Rs. 60000 3000
C on Rs. 60000 3000
D on Rs. 18000 900 6900
To As Loan A/c
(1/15 of Rs. 58,500) 3900
To Profit Transferred to
Capital Accounts
B : 3/7 23400
C : 3/7 23400
D : 1/7 7800 54600
67020 67020
16
Capital Accounts
P Q R P Q R
1990 1990
Dec. 31 Jan. 1
To Balance c/d 86400 86400 26700 By Balance b/d 54000 54000 -
By Goodwill A/c 6000 6000 -
By Cash - - 18000
Dec. 31
By Interest A/c 3000 3000 900
By P & L A/c 23400 23400 7800
86400 86400 26700 86400 86400 26700
Working Notes
(1) A is entitled to 1/3 of his previous share = 1/5 1/3 = 1/15
(2) Profit sharing ratio among B, C and D for 1990 and 1991 and 1991
will be 3/7, 3/7 and 1/7 respectively, calculated as :
B + C = 1 - 1/7 = 6/7
Bs Share = 6/7 1/2 = 3/7
Cs Share = 6/7 1/2 = 3/7
(3) As share in firms profit = Rs. (Rs. 67,020 - Rs. 1,620 - Rs. 6,900)
1/15 = Rs. 3,900
6.3 DEATH OF A PARTNER
The accounting treatment at the time of death of a partner is same as at the time
of retirement. Main difference between the two is that of closing of the account of
business. Deceased partners capital account is credited with his opening capital, interest
on capital up to his death, his share in undistributed profits, revaluation profits, firms
17
profits from the date of the last balance sheet up to his death and with his share of
goodwill. Drawings, interest on drawings and losses are debited in the deceased partners
Capital Account and the remaining amount is transferred to his legal representatives
account. Legal representative can receive either interest at 6 per cent per annum, on
the amount due from the date of death to the date of settlement or the profit earned
with the help of that amount.
Most of the points have already been discussed in the retirement of a partner
but the following two points require special attention:
i) Calculation of deceased partner's share of profit.
ii) Treatment of life policy or policies.
These will be discussed one by one.
6.3.1 Calculation of Deceased Partner's Share of Profit
The deceased partner's share of profit is to be determined either on the basis of

time or turnover.
(a) On the basis of time: In this case, it is assumed that the profit during the
previous year has been earned uniformly in all months during the year, provided previous
year is taken as the base for calculation of profit. Sometimes average profits of the
past three or four years is taken as base rather than the previous year. Whatever base
may be taken, it is to be multiplied by the period for which the deceased partner remained
in the firm and also his profit sharing ratio at the time of his death. For example A, B,
and C are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. B dies on
14th March, 1996. The average of the last three years is Rs. 30,000. B's share of profit
on the basis of time is calculated as under:
Average yearly profit = Rs. 30,000
Rs. 30,000 73
Profit for 73 days i.e., Jan. 1 to March 14, 1996 = = Rs. 6,000
365
B's share = 2/6 6,000 = Rs. 2,000
18
(b) On the basis of turnover: In this method, average past profit is divided
into two portions i.e., before the death and after the death on the basis of ratio of
turnover to the date of death to average turnover and then deceased partner's share is
calculated and credited to his capital account. For example, A, B and C are partners in
a firm sharing profits and losses in the ratio of 3 : 2 : 1. B dies on 14th March, 1996.
Turnover from 1st January, to 14th March, 1996 is Rs. 42,000. Average turnover of the
last three years is Rs. 60,000 and profit is Rs. 30,000. B's share of profit on this basis
will be calculated as under:
Average turnover = Rs. 60,000
Sales to the date of death = Rs. 42,000.
Profit to the date of death = Rs. 42,000 . = Rs. 21,000
B's share of profit = 21,000 = Rs. 7,000.
6.3.2 Treatment of Life Policies
1
To make an arrangement for the payment of amount belonging to deceased partner
3
to his legal representative, the firm can get insured the life of all the partners jointly or
individually. Premiums on life policies are paid out of firms funds and this is debited
to firms Profit and Loss Account. Amount received in the form of claim from the life
insurance company is credited to all the partners in their profit/loss sharing ratio. In
the case of individual policies also, the deceased partner is entitled to his share in the
surrender value of policies of all the partners. Other partners are also entitled to their
respective share in the amount of policy of the deceased partner.
Illustration 6
Brown and Smith are partners. The partnership deed provides inter alia:
i) That the Account be balanced on 31st December each year.
ii) That the profits be divided as follows : Brown 1/2; Smith 1/3 and carried
to a Reserve account 1/6.
19
iii) That in the event of the death of a partner, his executors be entitled to be
paid :
(a) The capital to his credit at the date of death.
(b) His proportion of reserve at the date of last balance sheet.
(c) His proportion of profit to date of death based on the average profits of
the last three completed years.
(d) By way of goodwill his proportion of the total profits for the three
preceding years.
On 31st December, 1989, the Ledger balance were :
Rs. Rs.
Browns Capital 9,000
Smiths Capital 6,000
Reserve 3,000
Creditors 3,000
Bills Receivable 2,000
Investments 5,000
Cash 14,000
21,000 21,000
The profit for three years were :
1987 Rs. 4200, 1988 Rs. 3900, 1989 Rs. 4500. Smith died on 1st May, 1990
Show the accounts as between the firm and Smiths died on 1st May, 1990
Solution
Effective profit sharing ratio between Brown and Smith is 3 : 2 Smiths share in
the profits to the date of death :
20
Rs.
Profit for 1987 4,200
Total Profits 12,600
Average = Rs. 12,600/3 = Rs. 4,200

Profit for 4 months upto May 1, 1990 = 4,200 1/3 = Rs. 1,400
Smiths share therein = Rs. 1,400 2/5 = 560
Smiths share in Goodwill :
Goodwill = Rs. 12,600
Smiths share = Rs. 12,600 2/5 = Rs. 5,040
Smiths Capital Account
Rs. Rs.
1990 1990
May, 1 May 1
To Smiths Executors A/c 12,800 By Balance b/d 6,000
By Reserve A/c 1,200
By P & L suspense A/c 560
(Profit upto death)
By Goodwill A/c 5,040
12,800 12,800
Smiths Executors Account

Rs.
1990
May 1
By Smiths Capital A/c 12,800
12,800
21
Joint Life Policy
Accounting treatment of Joint Life Policy may be done by any of following

methods:
1. First Method: When payment of premium is considered as a business

expenditure
Under this method, the amount of premium is charged to Profit and Loss Account
of each year and the amount received from insurance company on the death of any
partner is treated as income. Bank Account will be debited and Joint Life Policy Account
will be credited with the amount received from the insurance company on the death of
a partner. Then Joint Life Policy Account is closed by transferring it to all the partners
Capital Accounts (including the deceased partner) in their profit sharing ratio. The
main problem in this method is that no surrender value of policy is shown in the books.
2. Second Method : When surrender value is treated as an asset
In this method at the time of payment of premium, the Joint Life Policy Account
is debited and Bank Account is credited. That amount of premium which is more than
surrender value at the end of year, it is assumed as loss with which Profit and Loss
Account is debited and Joint Life Policy Account is credited. Joint Life Policy Account
(Surrender Value) is shown as asset in the Balance Sheet.
At the time of death of any partner, Bank Account is debited and Joint Life
Policy Account is credited with the amount received. Credit balance of Joint Life Policy
Account is considered as profit and transferred to all partners capital accounts in their
profit-loss sharing ratio.
The main advantage of this method is that surrender value is considered

as an asset and disadvantage is that the premium is not shown fully as an expense in
Profit and Loss Account.
22
3. Third Method : When premium is considered as an asset
With the amount of premium paid, Joint Life Policy Account is debited and
Bank Account is credited. Joint Life Policy Account is shown as an asset in the Balance
Sheet. At the time of death of any partner, Bank Account is debited and Joint Life
Policy Account is credited. After his, if there is any credit balance in Joint Life Policy
Account, it is distributed among all partners in their profit sharing ratio.
4. Fourth Method : When payment of premium is treated as an investment

and a Reserve Account is opened -
1. Premium is debited to Joint Life Policy Account.
2. Every year amount equal to the premium is debited to Profit and Loss
Appropriation Account and credited to Joint Life Policy Reserve Account.
3. Joint Life Policy Account and Joint Life Policy Reserve Account are
adjusted in such a way that the balance in each account is equal to
surrender value of the policy.
4. At the death of a partner Joint Policy Account is credited with the amount
received. Credit balance of Joint Policy Reserve Account is transferred
to Joint Life Policy Account and Joint Life Policy Account is closed by
transferring to Capital Accounts of all the partners in their profit sharing
ratio.
Under this method, surrender value is shown on the assets side and Joint Life
Policy Reserve Account on liabilities side of Balance Sheet.
Main advantage of this method is that surrender value is shown in Balance Sheet
and all premium is charged from Profit and Loss Appropriation Account.
Illustration 7: (a) A and B are partners in a firm. On April 1, 1997 they took
out a Joint Life Policy without profits for Rs. 30,000 upon which an annual premium
of Rs. 1,400 is payable. A and B share profits in the ratio of 2 : 1. On March 31, 1998
23
B died and Rs. 30,000 is received from the Insurance Company.
Journalise the above transactions. Premium is to be adjusted through Profit and

Loss Account.
(b) A and B who shared profits in the ratio of 3 : 2 took a joint life policy on
May 1, 1995 for Rs. 30,000. The annual premium was Rs. 1,300. The surrender value
of the policy was:
1995 Nil; 1996 Rs. 400; 1997 Rs. 900; 1998 Rs. 1,450
B died on September 15, 1995 and the amount of the policy was received on
Dec. 341, 1998. The books are closed on Dec. 31, each year.
Show Joint Life Policy Account and Joint Life Policy Reserve Account assum-
ing that premiums were written off through Joint life Policy Reserve Account.
Solution
Journal Entries
1997 Rs. Rs.

April 1 Joint Life Policy Premium A/c Dr. 1,400
To Bank A/c 1,400
(Being the payment of annual premium)
1998
Mar. 31 Profit and Loss Account Dr. 1,400
To Joint Life Policy Premium A/c 1,400
(Being Premium charged to P & L A/c)
Mar. 31 Insurance Company A/c Dr. 30,000
To Joint Life Policy A/c 30,000
(Being the amount of J.L.P. due for receipt)
24
Mar. 31 Bank Account Dr. 30,000
To Insurance Company A/c 30,000
(Being the receipt of claim from Insurance Company)
Mar. 31 Joint Life Policy A/c Dr. 30,000
(Being the amount of policy distributed between
partners in the ratio of 2 : 1)
(b) Joint Life Policy Account
1995 Rs. 1995 Rs.

May 1 To Bank A/c 1,300 Dec. 31 By J.L.P. Reserve A/c 1,300
1996 1996
May 1 To Bank A/c 1,300 Dec. 31 By J.L.P. Reserve A/c 900
By Balance c/d 400
1,300 1,300
1997 1997
Jan. 1 To Balance b/d 400 Dec. 31 By J.L.P. Reserve A/c 800
May 1 To Bank A/c 1,300 By Balance c/d 900
1,700 1,700
1998 1998
Jan. 1 To Balance b/d 900 Sept. 15 By Bank A/c 30,000
May 1 To Bank A/c 1,300 By J.L.P. Reserve A/c 900
Dec. 31 To Capital A/c:
A 17,220
B 11,480
30,900 30,900
25
Joint Life Policy Reserve Account
1995 Rs. 1995 Rs.

Dec. 31 To Joint Life Dec. 31 By P & L
Policy A/c 1,300 Approp. A/c 1,300
1996 1996
Dec. 31 To Joint Life Dec. 31 By P. & L
Policy A/c 900 Approp. A/c 1,300
To Balance c/d 400
1,300 1,300
1997 1997
Dec. 31 To Joint Life Dec. 31 By Balance b/d 400
Policy A/c 800 By P & L Approp. A/c 1,300
To Balance c/d 900
1,700 1,700
1998 1998
Sept. 15 To Joint Life Sept. 15 By Balance b/d 900
Policy A/c 900
6.4 SUMMARY
The only difference between admission and retirement of a partner is that in

case of the former, the new partner joins the firm whereas in case of retirement, an old
partner leaves the firm because of certain reasons. The main points which require
attention in case of retirement of partner are treatment of goodwill, revaluation of
assets and liabilities, adjustment of accumulated reserves and losses, and calculation
of total amount due to the retiring partner. The problems which arise in case of death of
a partner are similar to those of a retiring partner except that the death of a partner may
occur at any time whereas the retirement of a partner is planned. The points which
26
require special attention at the time of death of a partner are calculation of deceased
partner's share of profit and treatment of life policy or policies
6.5 KEYWORDS
Gaining Ratio: The ratio in which the continuing partners acquire the outgoing partner's
share is called as gaining ratio. Surrender value: It is the value which is payable
immediately to the insured on surrendering all rights of the policy (policies) to the
insurer.
Memorandum Revaluation Account: Sometimes it may be derived not to alter the

value of assets and liabilities in the books, a Memorandum Revaluation Account will
be opened.
1. What is goodwill ? Explain the different methods of treating goodwill in accounts

at the retirement of a partner.
2. What is a joint life policy? What is its objectives? Discuss the various methods
of recording joint life policy amount in partnership books.
3. A, B and C were partners sharing profit and losses in the ratio of 1:2:1
respectively. The following are some of the particulars relating to the firm :
a) The firm had taken life insurance policy on their lives independently; A
for Rs. 5,000; B for Rs. 7,500 and C for Rs. 5,000
b) The partnership Deed provides that in the event of death of a partner, his
share of profits for the portion of the current year in which the partner
was alive should be calculated on the basis of the average profit of the
previous two completed years.
d) Goodwill should be calculated on the basis of two yours purchase of
average profit of the previous two completed years.
27
e) The capitals of the partners as on December 31, 1983 were- A : Rs.
25,000; B : Rs, 37,500 and C : Rs. 22,500 carrying 6 per cent per annum
interest on capital.
C died on April, 1984 and had drawn Rs. 3000 from 1st January to the date of
his death. The Insurance Company paid the amount due on Cs Policy on 1st June, 1984
and the surrender value of the remaining policies was one-fifth of the sums assured.
The firms profits for the previous three years were; 1981 Rs. 10,500, 1982 Rs.
11,000 and 1983 Rs. 11,500.
Prepare the Capital Account of C and also ascertain the amount due to his legal
representative.
4. Ravi, Shanker and Sastry are partners sharing profits and losses as 6:5:4. They
have a Joint Life Policy for Rs. 2,00,000 on which they pay Rs. 7,500 per annum as
premium and debit the same to Profit and Loss Account as premium. Accounts are
closed annually on 31 December.
Shanker died on 1st April, 1995 and his legal representatives are entitled to :
i) His capital as appearing in the last Balance Sheet.
ii) Interest on capital at 6 per cent per annum to the date of death.
iii) His share of profit calculated till date of his death on the basis of the
previous years profit; and
iv) His share of goodwill calculated as two years purchase on the average of
the last three years profit before inclusion of the policy premium as
business expense.
Shankers drawing in 1995 amounted to Rs. 3000. His capital shown in 1994
Balance Sheet was Rs. 80000. The profit for the three years 1992, 1993 and 1994 after
inclusion of the policy premium as business expense amounted to Rs. 65000, Rs. 64000
and Rs. 69000 respectively.
Prepare Shankers Capital Account
28
5. A, B and C were carrying on business with the following assets with effect from
1-1-1980; Furniture Rs. 18,000; Machinery Rs. 72,000, Cash Rs. 10,000, Debtors Rs.
20,000. Their profit-sharing ratio was 5 : 3 : 2. Capital is also shared in the same ratio.
B died on 30-6-80. His son claimed his fathers interest in the firm.
The following was the settlement :
a) Allow his capital to his credit on the date on death.
b) Give 5% per annum interest on his capital.
c) He had been drawing at Rs. 600 per month which he with drew in the beginning
of each month. He be allowed to retain these drawings as a part of his share of
profit.
d) Interest at 6% per annum be charged on his drawings.
e) They had separate life policies for which the premium had been paid out of
Profit and Loss Account of the firm : A Rs. 50,000; B Rs. 60,000 and C Rs.
30,000. The surrender value of As policy was 50 per cent whereas of Cs policy
it was 40 per cent.
f) Goodwill was evaluated twice the average of profits which were Rs. 3,600.
Prepare Bs Personal Account.
6. Azad, Binod and Chandan sharing profits in the ratio of 2 : 2 : 1 took out a joint
life policy in 1995 for Rs. 3,00,000. A premium of Rs. 18,000 being paid
annually on January 1. The surrender value of the policy on 31st December of
various years was as follows:
1995 Nil
1996 Rs. 5,400
1997 Rs. 12,000
1998 Rs. 23,400
1999 Rs. 40,000
Binod died on May 15, 1998.
29
Prepare the necessary ledger accounts along with journal entries assuming:
(i) no joint life policy account is maintained, (premium paid is treated as on expense).
(ii) Joint life policy account is maintained as an asset at surrender value.
(iii) Joint life policy is maintained on as asset at surrender value along with a joint life
policy reserve account.
1. Fundamentals of Accounting by R.L. Gupta and V.K. Gupta, Sultan Chand and
Sons, New Delhi.
New Delhi.
30
LESSON : 7
AMALGAMATION OF PARTNERSHIP FIRMS
STRUCTURE
7.0 Objective
7.1 Introduction
7.2 Accounting Treatment in the Books of the Amalgamating Firms
7.3 Books of the New Firm
7.4 Summary
7.5 Keywords
7.6 Self Assessment Question
7.0 OBJECTIVE
After reading this lesson you should be able to know

(a) Accounting entries to be passed to close the books of the amalgamated
firms.
(b) Treatment of assets and liabilities not taken over by the new firms in the
books of amalgamated firms
7.1 INTRODUCTION
Amalgamation of firms takes place when two or more firms working

independently amalgamate themselves and in their place a new firm is formed to take
over their businesses. This is done to avoid competition, to reduce unnecessary
advertisement expenditure, to gain monopoly in the market, to have more capital and
skill and to have internal and external economies of large scale production.
The following problems may arise when existing firms are amalgamated to form
a new company:
1
(a) The new firm may take over some assets and liabilities at book value and
some assets and liabilities at revised values.
(b) The new firm may not take over some assets and liabilities of the existing
firms.
(c) The new firm may agree to pay some amount for the goodwill which may
be more or less than the amount of goodwill, if any, already appearing in
the books of the existing firms.
7.2 ACCOUNTING TREATMENT IN THE BOOKS OF THE

AMALGAMATING FIRMS
The following steps may be taken to close the books of the old firms:
(i) All assets and liabilities should be revalued in order to ascertain the true capital
brought by each partner into the new firm. For this purpose each firm will prepare a
revaluation account relating to its own assets and liabilities and profit or loss on
revaluation will be transferred to the partners capital accounts in the profit sharing
ratio. This revaluation is done in the same way as was done at the time of admission or
retirement of a partner.
(ii) All reserves, profits and losses appearing in the balance sheets of old firms are
transferred to the partners capital accounts in their profit sharing ratio.
(iii) If some assets and liabilities are not taken over by the new firm, these are closed
by transfer to capital accounts of the partners in the ratio of their capitals and not in the
profit sharing ratio. Division of assets and liabilities taken over by the partners is done
in the ratio of capitals because it amounts to return or addition of Capital.
(iv) Goodwill, if valued, should be raised in the firms books by passing necessary
entries.
(v) New firms account is debited with the difference of assets and liabilities taken
over by passing the following entry:
2
New Firms A/c Dr.
Liabilities A/c Dr.
To Assets A/c
Assets and liabilities are taken at revised values for the purpose of the above
entry.
(vi) Partners capital accounts (i.e. final amount due) are closed by transfer to the
new firms account by passing the following entry:
Partners Capital A/cs Dr.
To New Firms A/c
7.3 BOOKS OF THE NEW FIRM
Books of the new firm are opened by passing the following entries:
(i) Assets (taken over) Dr.
To Liabilities (taken over)
To Capital A/cs of the Partners
as calculated in step (vi) above.
(ii) Adjust capital accounts of the partners in the light of the requirements of the
new firm such as a partner brings in capital or withdraws it; entry for that is passed.
Illustration 1
On 1st January, 1985, A & B and X & Y who had previously been engaged in
competitive business agreed to amalgamate. The Balance Sheets of the two firms on
31st December, 1984 were as follows :
3
Liabilities A&B X&Y Assets A&B X&Y
Rs. Rs. Rs. Rs.
Creditors 1500 12500 Stock 15500 22000
B/P 3000 ---- Debtors 24500 38000
Bank Overdraft ---- 5150 Building 10000 ----
A's Capital 25000 ---- Plant & 2500 10000
B's Capital 25000 --- Machinery
X's Capital ---- 26250 Bank 750 ----
Y's Capital ---- 26250 Furniture 250 150
National 1000 ----
Saving
Certificate
54500 70150 54500 70150
A valuation of assets of both the firms was made, and it was agreed that the
building and plant and machinery belonging to A & B should be taken over by the new
firm at Rs. 12500 and Rs. 5000 respectively. X & Y were to be credited with Rs. 2500
as the value of certain patent rights they possessed became the property of the
partnership and were not included in their Balance Sheet. All the other assets and
liabilities were taken over at the values stated in the respective Balance Sheet except
the National Saving Certificate belonging to A & B, which were not taken over. It was
agreed that A & B should introduce cash to make their capital equal to total of X & Y.
Pass Journal entries in the books of the old firms and opening entries in the
books of the new firm. Also prepare the Balance Sheet of the new amalgamated firm.
4
Solution
Books of A & B
Journal Entries
Dr. Cr.
Particulars Rs. Rs.
Building Account Dr. 2500
Plant & Machinery A/c Dr. 2500
To Revaluation Account 5000
(Being increase in the value of assets)
Revaluation Account Dr. 5000
(Being profit on revaluation transferred to
Capital Accounts in equal ratio)
M/s. A & B, X & Y Account Dr. 58500
To Building Account 12500
To Plant & Machinery Account 5000
To Furniture Account 250
To Stock Account 15500
To Debtors Account 24500
To Bank Account 750
(Being Assets taken over transferred to new firm)
A's Capital Account Dr. 500
B's Capital Account Dr. 500
To NSC Account 1000
(Being taking NSC by A & B in the ratio of their Capitals)
A's Capital Account Dr. 27000
B's Capital Account Dr. 27000
To A & B, X and Y Account 54000
(Being transfer of Capital of A & B to new firm)
5
Books of X & Y
Journal Entries
Dr. Cr.
Rs. Rs.
Patents Account Dr. 2500
To X's Capital Account 1250
To Y's Capital Account 1250
(Being unrecorded patents created in books in
Profit and Loss Ratio)
M/s. A & B, X & Y Account Dr. 72650
To Plant & Machinery Account 10000
To Furniture Account 150
To Patents Account 2500
(Being assets take over by new firm)
Creditors Account Dr. 12500
Bank Overdraft Dr. 5150
To M/s. A & B, X & Y Account 17650
(Being liabilities transferred to new firm)
X's Capital Account Dr. 27500
Y's Capital Account Dr. 27500
To M/s A & B, X & Y Account 55000
(Being transfer of Capital Accounts of X and Y new firm)
6
Books of A & B, X, & Y
Journal Entries
Dr. Cr
Particulars Rs. Rs.
Bank Account Dr. 750
Building Account Dr. 12500
Plant & Machinery Account Dr. 5000
Furniture Account Dr. 250
Stock Account Dr. 15500
Debtors Account Dr. 24500
To Creditors Account 1500
To B/P Account 3000
(Being Assets and Liabilities of M/s. A & B and
Capital Accounts taken over by new firm recorded)
Stock Account Dr. 22000
Debtors Account Dr. 38000
Plant & Machinery Account Dr. 10000
Furniture Account Dr. 150
Patents Account Dr. 2500
To Bank Overdraft 5150
To Creditors Account 12500
To X's Capital Account 27500
To Y's Capital Account 27500
(Being Assets and Liabilities of M/s X & Y and
Capital Accounts taken over by new firm recorded)
Bank Account Dr. 1000
(Being Cash brought by A & B)
7
Balance Sheet of M/s A & B, X & Y
as on 1st January 2005
Capital Accounts Stock 37500

A 27500 Debtors 62500
B 27500 Furniture 400
X 27500 Patents 2500
Y 27500 Building 12500
Bank Overdraft 3400 Plant & Machinery 15000
Creditors 14000
B/P 3000
130400 130400
Illustration 2
The balance sheets of M/s A & B and M/s C & D as on December 31, 1996 were
as follows :
Liabilities A&B C&D Assets A&B C&D

Rs. Rs. Rs. Rs.
Capital A/c Land & 10000 12000
A 10000 ----- Workshop
B 10000 ----- Machinery 7000 8000
C ----- 10000 & Tools
D ----- 10000 Furniture 3000 3500
Creditors 15000 10000 & Fixtures
Loan ----- 10000 Debtors 6000 8500
Outstanding 2000 3000 Cash at 3000 1000
Expenses Bank
Stock 8000 10000
37000 43000 37000 43000
8
The two firms decided to amalgamate to form ABCD & Co. on 1 January, 1997.
The partners continue to share equally as they were doing before the merger. Prior to
amalgamation the following revaluation of assets and liabilities should be made:
A&B C&D
Land and Workshop 10000 10000
Machinery and tools 7000 8000
Furniture and Fixtures 2500 2500
Debtors 5500 7000
Stock 8000 8000
Outstanding Expenses 2000 2000
In addition, the following things are to be carried out :
a) The new firm will not take over the loan of C & D.
b) The goodwill of A and B and that of C and D should be valued initially at Rs.
10000 and Rs. 5000 respectively, but for the purpose of the new firm, the
combined goodwill of the firm should be Rs. 12000/-
e) Each partner should have Rs. 14000 as capital in the new firm and that cash
should be brought in, if necessary.
Show :
i) The Two Revaluation accounts
ii) Capital Accounts before and after the amalgamation
iii) The Opening Balance Sheet of the new firm.
9
Solution
In the Books of A&B
Revaluation Account
Dr. Cr.
Particular Rs. Particular Rs.
To Furniture & 500 By Goodwill Account 10000

Fixtures Account
To Debtors Accounts 500
To Profit:
A 4500
B 4500 9000
10000 10000
Capital Accounts
Dr. Cr.
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To ABCD & 14500 14500 By Balance c/d 10000 10000
Co. Account By Revaluation 4500 4500
Account (Profit)
14500 14500 14500 14500
In the Books of C & D
Revaluation Account
Rs. Rs.
To Land & 2000 By Goodwill Acount 5000
Workshop A/c By Loss :
To Furniture & 1000 C 1000
Fixtures Account D 1000 2000
To Outstanding
Expenses Account 500
7000 7000
10
Capital Account
Dr. Cr.
Particulars C D Particulars C D
Rs. Rs. Rs. Rs.
To Revaluation A/c 1000 1000 By Balance c/d 10000 10000

(Loss) By Loan Account 5000 5000
To ABCD & Co. 14000 14000
15000 15000 15000 15000
In the Books of ABCD & Co.
Capital Accounts
Dr. Cr.
Particulars A B C D Particulars A B C D
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Goodwill 750 750 750 750 By Sundries 14500 14500 14500 14500
Account By Cash 250 250 250 250
To Balance c/d 14000 14000 14000 14000
14750 14750 14750 14750 14750 14750 14750 14750
Balance Sheet of ABCD & Co.
as on January, 1997
Capital Accounts Goodwill 12000
A 14000 Land & Workshop 20000
B 14000 Machinery & Tools 15000
C 14000 Furniture & Fixtures 5000
D 14000 Debtors 14500
Creditors 25000 Less : Provision 2000 12500
Outstanding Exps. 5500 Stock 18000
Less : Provision 2000 16000
Cash 6000
86500 86500
Note : Since the goodwill of the new firm is Rs. 12000, Rs, 3000 has been
written off.
11
Illustration 3
Two partnership firms, carrying on business under the names of Black & Co.
and White & Co., decide to amalgamate into Grey & Co. with effect from April 1,
1999. The respective Balance Sheets as on March 31, 1999 are given below :
Balance Sheet of Black & Co.
as on March 31, 1999
B's Capital A/c 19000 Plant & Machinery 20000
Sundry Creditors 10000 Stock in trade 20000
Bank Overdraft 15000 A's Capital A/c 4000
44000 44000
A and B share profits and losses in the proportion of 1:2.
Balance Sheet of White & Co.
as on March 31, 1999
X's Capital A/c 10000 Goodwill 10000
Y's Capital A/c 2000 Stock in trade 5000
Sundry Creditors 28000 Sundry debtors 10000
Cash in hand 6000
Cash at bank 9000
40000 40000
X and Y share profits and losses equally.
The following further information is given :
1. All fixed assets are to be devaluated by 20%
2. All stock in trade is to be appreciated by 50%
3. Black & Co. owe Rs. 5000 to White & Co. as on March 31, 1999
4. Goodwill is to be ignored for the purpose of amalgamation.
5. The fixed Capital Account in the new firm are to be :
12
Rs. Rs.
A 2000 ; B 3000
B 1000 ; Y 4000
6. B takes over the bank overdraft of Black & Co., and gifts to A the amount
of money to be brought in by A to make up his capital contribution.
7. X is paid off in cash from White & Co., and Y brings in sufficient cash to
make up his required capital contribution.
Pass journal entries to close the books of both the firms as on March 31, 1999
Solution
Journal Entries in the books of Black & Co.
Dr. Cr.
Particulars Rs. Rs.
To Plant & Machinery A/c 2000
(Being plant and Machinery devalued by 20%)
Stock in Trade A/c Dr. 10000
Sundry Creditors A/c Dr. 3000
To Revaluation A/c 13000
(Being appreciation in stock in trade
and gain in settling debt)
To A's Capital A/c 3667
To B's Capital A/c 7333
(Being the profit on revaluation)
Bank Overdraft A/c Dr. 15000
To B's Capital A/c 15000
(Being the bank overdraft taken by B)
13
B's Capital A/c Dr. 2333
To A's Capital A/c 2333
(Being the deficiency of A's Capital A/c
made good by B to have a balance of
Rs. 2000 in A's Capital A/c)
Grey & Co. A/c Dr. 41000
To Plant & Machinery A/c 8000
To Stock in trade A/c 30000
To Sundry Debtors A/c 10000
(Being the assets and liabilities transferred
to Grey & Co. for closing the books of the firm)
A's Capital A/c Dr. 2000
B's Capital A/c Dr. 39000
To Grey & Co. 41000
(Being the Capital Account of the partners
closed by transferring to Grey & Co.)
Journal Entries in the books of White & Co.
Dr. Cr.
Particulars Rs. Rs.
Stock in Trade A/c Dr. 2500
(Being the appreciation in the value of stock in trade)
To Goodwill A/c 10000
(Being debt due from Black & Co.
settled at the concession of Rs. 3000
and goodwill written off)
14
X's Capital A/c Dr. 5250
Y's Capital A/c Dr. 5250
(Loss transferred to Capital Account)
To Cash A/c 3750
(Being excess capital refunded to X)
Cash A/c Dr. 7250
To Y's Capital A/c 7250
(Being cash brought by Y to make his capital of Rs. 4000)
Grey & Co. A/c Dr. 5000
To Stock in trade A/c 7500
To Cash in hand A/c 9500
To Cash at Bank A/c 9000
(Being the assets and liabilities transferred
to Grey & Co. to close the books of the firm)
To Grey & Co. 5000
(Being Partners' Capital Account closed
by transferring to Grey & Co.)
Note : The excess amount of Rs. 36000 in B's Capital Account will be treated as loan
from B in the books of Grey & Co. as the company has no liquid assets from
which this amount can be paid to A.
15
Illustration 4
The balance sheets of two firms M/s Good & Better and M/s Slow & Fast, as on
January 1, 1999 were :
Balance Sheet
Good & Slow & Good & Slow &
Better Fast Better Fast

Liabilities Rs. Rs. Assets Rs. Rs.
Creditors 12500 10000 Building 18750 ----

Reserves 7500 ---- Plant 25000 ----
Capital A/c : Stock 12500 32500
Good 25000 ----- Debtors 6250 18750
Better 18750 ---- Cash 1250 8750
Fast ---- 12500
---- 37500
63750 60000 63750 60,000
Good & Better shared profits in the ratio of 3 :2 and Slow & Fast in the ratio of
5 :3. The two firms decided to amalgamate and the new profit sharing ratio among
Good, Better, Slow and Fast was to be 3:2:3:2. The other terms were:
1. Goodwill of M/s Good & Better was valued at Rs. 25000/- and that of M/s Slow
& Fast at Rs. 18750/-. The new firm was not to retain goodwill in the books.
2. Stock of M/s Slow & Fast was valued at Rs. 31250 and a provision of 5% was
required against the debtors.
3. In the case of M/s Good & Better, Rs. 750 of the debtors was to be written off.
Building were valued at Rs. 25000 and the Plant at Rs. 22500.
4. The total capital of the firm was fixed at Rs. 1,00,000 to be contributed by
partners in their profit sharing ratio and necessary adjustments were to be made
in cash. Show the incorporating entries and the Balance Sheet of the new firm
called M/s Good and Fast.
16
Solution
Journal Entries in the books of Good and Fast
Dr. Cr.
Particulars Rs. Rs.
Goodwill A/c Dr. 25000
Building A/c Dr. 25000
Plant A/c Dr. 22500
Stock A/c Dr. 12500
Debtors A/c Dr. 5500
Cash A/c Dr. 1250
To Creditors A/c 12500
To Better's Capital A/c 32950
(Being the assets and liabilities taken
over from Good and Better)
Stock A/c Dr. 31250
Cash A/c Dr. 8750
To Reserve for bad debts A/c 938
To Slow's Capital A/c 47851
To Fast's Capital A/c 18711
(Being the assets and liabilities taken
over from Slow and Fast)
17
Good's Capital A/c Dr. 13125
Better's Capital A/c Dr. 8750
Slow's Capital A/c Dr. 13125
Fast's Capital A/c Dr. 8750
(Being the goodwill written off)
Cash A/c Dr. 10039
To Fast's Capital A/c 10039
(Being the cash brought in by Fast
to adjust his capital)
Good's Capital A/c Dr. 3175
Better's Capital A/c Dr. 4200
Slow's Capital A/c Dr 4726
To Cash A/c 12101
Balance Sheet
as on January 1, 1999
Sundry Creditors 22500 Building 25000

Capital Account : Plant 22500
Good 30000 Stock 43750
Better 20000 Debtors 24250
Slow 30000 Less : Provision 938 23312
Fast 20000 Cash 7938
122500 122500
18
Working
Good Better Slow Fast
Rs. Rs. Rs. Rs.
Capital before adjustment 25000 18750 37500 12500
Profit on revaluation 16800 11200 10351 6211
Reserve 4500 3000
Capital on the date of amalgamation 46300 32950 47851 18711
M/s Good and Fast

Cash Account
Dr. Cr.
To Good and Better 1250 By Good's Capital A/c 3175
To Slow and Fast 8750 By Better's Capital A/c 4200
To Fast's Capital A/c 10039 By Slow's Capital A/c 4726
By Balance c/d 7938
20039 20039
Illustration 5
X and Y are partners of X & Co. sharing profits and losses in the ratio of 3:1 and
Y and Z are partners of Y & Co. sharing profit and losses in the ratio of 2:1. On 31st
March, 1998 they decide to amalgamate and form a new firm M/s XYZ & Co., where
X, Y and Z would be partners sharing profits and losses in the ratio of 3:2:1. The Balance
Sheets of two firms on the above date are as under :
19
Balance Sheet
X & Co. Y & Co. X & Co. Y & Co.
Capital Fixed Assets :

X 480000 --- Building 100000 ---
Y 320000 400000 Machinery 300000 320000
Z --- 200000 Furniture 40000 12000
Reserves 100000 300000 Current Assets :
Creditors 240000 232000 Stock 240000 280000
Due to X & Co. --- 200000 Debtors 320000 400000
Bank Loan 160000 --- Cash at Bank 60000 180000
Cash in Hand 40000 20000
Due from 200000 ---
Y & Co.
Advances --- 120000
1300000 1332000 1300000 1332000
The amalgamated firm took over the business on the following terms
(a) Building of X & Co. was valued at Rs. 200000, (b) Machinery of X &
Co. was valued at Rs. 450000 and that of Y & Co. at Rs. 400000, (c) Goodwill valued
X & Co. Rs. 100000 and Y & Co. Rs. 82000 but the same will not appear in the books
of XYZ & Co., (d) Partners of the new firm will bring the necessary cash to pay other
partners to adjust their capitals according to the profits sharing ratio. Show journal
entries in the books of M/s. XYZ & Co. and prepare the Balance Sheet as on 31.3.1998.
20
Solution
Particulars Dr. (Rs.) Cr. (Rs.)
Building A/c Dr. 200000
Machinery A/c Dr. 450000
Furniture A/c Dr. 40000
Stock A/c Dr. 240000
Cash at Bank A/c Dr. 60000
Cash in Hand A/c Dr. 40000
Due from Y & Co. A/c Dr. 200000
To Bank Loan A/c 160000
To X's Capital A/c 817500
(Being the Assets and Liabilities
of X & Co. taken over)
Machinery A/c Dr. 400000
Furniture A/c Dr. 12000
Stock A/c Dr. 280000
Cash at Bank A/c Dr. 180000
Advances A/c Dr. 120000
To Due to X & Co. A/c 200000
To Z's Capital A/c 354000
(Being the Assets and Liabilities of Y & Co. taken over)
21
Z's Capital A/c Dr. 30333
(Being Goodwill written off)
Bank A/c Dr. 369833
To X's Capital A/c 338500
To Z's Capital A/c 31333
(Being the cash brought in by X and Z
to make capital proportionate)
To Bank A/c 369833
(Being the excess capital withdrawn by Y)
Due to X & Y Co. Dr. 200000
To Due from Y & Co. A/c 200000
(Being the elimination of mutual indebtedness
of the merged firm X & Co. and Y & Co.)
Balance Sheet of M/s XYZ & Co.
as on 31.3.98
Capital : Building 2,00,000

X 10,65,000 Machinery 8,50,000
Y 7,10,000 Furniture 52,000
Z 3,55,000 Stock 5,20,000
Creditors 4,72,000 Debtors 7,20,000
Bank Loan 1,60,000 Advances 1,20,000
Cash at Bank 2,40,000
Cash in hand 60,000
27,62,000 27,62,000
22
Working Notes
(i) Statement showing the Computation of Purchase Consideration :
Particulars Dr. (Rs.) Cr. (Rs.)
Assets Rs. Rs.
Goodwill 100000 82000
Building 200000 ----
Machinery 450000 400000
Furniture 40000 12000
Stock 240000 280000
Debtors 320000 400000
Cash at Bank 60000 180000
Cash in Hand 40000 20000
Due from Y & Co. 200000 ----
Advances ---- 120000
1650000 1494000
Liabilities
Creditors 240000 232000
Due to X & Co. ---- 200000
Bank Loan 160000 ----
400000 432000
Purchase Consideration 1250000 1062000
(assets - liabilities)
(ii) Statement showing the Computation of Proportionate Capitals
Particulars Rs.
M/s XYZ & Co. (Rs. 1250000 + 1062000) 2312000
Less : Goodwill Adjustment 182000
Total Capital of new firm 2130000
X's proportionate Capital (Rs. 2130000 x 3/6) 10,65,000
Y's proportionate Capital (Rs. 2130000 x 2/6) 7,10,000
Z's proportionate Capital (Rs. 2130000 x 1/6) 3,55,000
23
(iii) Statement showing the Computation of Capital Adjustments :
Particulars X Y Z Total
Rs. Rs. Rs. Rs.
Balance transferred from X & Co. 817500 432500 ---- 1250000
Balance transferred from Y & Co. ---- 708000 354000 1062000
817500 1140500 354000 2312000
Less : Goodwill written off
in the ratio of 3 : 2 : 1 91000 60667 30333 182000
a) Existing Capital 7,26,500 10,79833 3,23,557 21,30,000
b) Proportionate Capital 10,65,000 7,10,000 3,55,000 21,30,000
c) Amount to be paid in
[paid off] (a - b) 338500 [369833] 31333 ----

Capital Account (In the Books of X & Co.)
Dr. Cr.
Particulars X. Y Particulars X Y
Rs. Rs. Rs. Rs.
To Capital A/c 817500 432500 By Balance b/d 480000 320000

M/s XYZ & Co. By Reserve (3:1) 75000 25000
(transfer) By Goodwill ( 3:1) 75000 25000
By Realisation A/c* 187500 62500
817500 432500 817500 432500
*For Building Rs. 100000 and Machinery Rs. 150000
24
Capital Account (In the Books of Y & Co.)
Dr. Cr.
Particulars X. Y Particulars X Y
Rs. Rs. Rs. Rs.
To Capital A/c 708000 354000 By Balance b/d 400000 200000

M/s XYZ & Co. By Reserve (2:1) 200000 100000
(transfer) By Goodwill (2:1) 54667 27333
By Realisation A/c* 53333 26667
708000 354000 408000 354000
*For Machinery Rs . 80000
7.4 SUMMARY
When two or more firms carrying on business of same or similar nature, it

would be natural if they amalgamate their business to avoid competition. It involves
closure of old firms and birth of a new firm. The accounting implication of this exercise
is the closing of the books of the amalgamating firms and opening of the books of the
new firm. The new firm taken over the assets/liabilities of the amalgamating firms at
their current net worth and values them accordingly. The assets/liabilities not taken
over by the new firm are realised by the partners of amalgamating firms themselves.
7.5 KEYWORDS
Amalgamation of Firm: It takes place when two or more firms working independently
amalgamate themselves and in their place a new firm is formed to take over their
business.
Amalgamating Firm: In case of amalgamation, the firms amalgamating (old firms)

are known as amalgamating firms.
25
1. Define amalgamation of firms? What entries are passed to close the books of
the firms which are amalgamated.
2. How will you treat asset and liabilities not taken over by the new firms in the
books of the amalgamated firms?
3. The Balance Sheet of two firms M/s Slow & Speed and M/s Sure & Steady as on
January 1, 1995 were:
Balance Sheet
Slow & Sure & Slow& Surr &
Speed Steady Speed Steady
Liability Rs. Rs. Assets Rs. Rs.
Creditors 10000 8000 Building 15000 ----
Reserves 6000 ---- Plant 20000 ----
Capital Stock 10000 26000
Slow 20000 ---- Debtors 5000 15000
Speed 15000 ---- Cash 1000 7000
Sure ---- 30000
Steady --- 10000
51000 48000 51000 48000
Slow & Speed shared profits in the ratio of 3 :2 Sures Steady shared profits in
the ratio of 5:3. The two firms decided to amalgamate and the new profit sharing ratio
among Slow & Speed, Sure & Steady was to be 3:2:3:2. The other terms were :
a. Goodwill of Slow & steady was valued at Rs. 2000 and that of Sure & Steady at
Rs. 15000. The new firm was not to retain goodwill in the books.
b. The stock of Sure & Speed was valued at Rs. 20,000 and a provision of 5% was
required against their debtors.
c. In the case of Slow & Speed, Rs. 600 of the debtors was to be written off.
Building were valued at Rs. 20000 and plant at Rs. 18000.
d. The total capital of the firm was fixed at Rs. 80000 to be contributed by partners
in their profit sharing ratio and necessary adjustments were to be made by cash.
4. M/s Mani & Co. having Vairamani and Velumani as equal partners, decided to
amalgamate with M/s Swami & Co. having Radhaswami and Rangaswamy as equal
partners on the following terms and conditions :
26
a. The new firm named M/s Mani Swami & Co., to take over the investments at
10% depreciation; land at Rs. 40,000; premises at Rs. 22,500; machinery at Rs.
4500 and to take over only the trade liabilities of both the firms. The debtors is
taken at book value including reserve.
b. M/s Mani Swami & Co. to pay Rs. 6000 to each firm for goodwill.
c. Typewriters at the written off value of Rs. 400 belong to Swami & Co. and not
appearing in the Balance Sheet, were not taken over by the new firm.
d. It was also agreed that the furniture belonging to both the firms should not be
taken over by the new firm.
e. All the four partners in the new firm to bring Rs. 80000 as capital in equal share.
f. The following were the Balance Sheets of both the firms on the date of
amalgamation :
Balance Sheet
Mani Swami Mani Swami
& Co. & Co. & Co. & Co.
S. Creditors 10000 5000 Cash at Bank 7500 4000

Bills Payable 2500 ---- Investments 5000 4000
Bank Overdraft 1000 5000 Debtors 5000
Vairamani's Loan 3000 ---- Less :
Capital A/c ---- ---- Reserve 500 4500 4000
Vairamani 17500 ---- Furniture 6000 3000
Velumani 11000 ---- Premises 15000 ----
Radhaswami ---- 18000 Land ---- 25000
Rangaswami ---- 10000 Machinery 7500 ----
General Reserve 4000 1500 Goodwill 4500 ----
Investment 1000 500
Fluctuation fund
50000 40000 50000 40000
Pass journal entries in the books of both the firms and show the Balance Sheet
of M/s. Mani Swami & Co.
27
5. B and S are partners of S & Co. sharing profits and losses in the ratio of 3:1 S
and T are partners of T & Co. sharing profits and losses in the ratio of 2:1.
On October 31, 1999 they decided to amalgamate and form a new firm M/s B S
T & Co. wherein B, S and T would be partners sharing profits and losses in the ratio of
3 : 2 : 1.
Balance Sheet
S & Co. T & Co. S & Co. T & Co.
Due to X & Co. 40000 ---- Cash in hand 10000 5000
Due to S & Co. ---- 50000 Cash at bank 15000 20000
Other Creditors 60000 58000 Due from T&Co. 50000 ----
Reserve 25000 50000 Due from S&Co. ---- 30000
Capital A/c Stock 60000 70000
B 120000 ---- Other Debtors 80000 100000
S 80000 100000 Furniture 10000 3000
T ---- 50000 Vehicles ---- 80000
Machinery 75000 ----
Building 25000 ----
325000 308000 325000 308000
The amalgamation firm took over the business on the following understanding :
1. Goodwill of S & Co. was worth Rs. 60000 and that of T & Co. Rs. 50000,
Goodwill account was not to be opened in the books of the new firm, the
adjustments being recorded through Capital Accounts of the partners.
2. Building, Machinery and Vehicles were taken over at Rs. 50000, Rs. 90000 and
Rs. 100000, respectively.
3. Provision for doubtful debts has to be carried forward at Rs. 4000 in respect of
the debtors of S&Co. and Rs. 5000 in respect of the debtors of T & Co.
28
It is requested to :
(a) Compute the adjustment necessary for goodwill.
(b) Pass Journal entries in the books of M/s BST & Co., assuming that excess/
deficit capital (taking T's capital as base) with reference to share in profits are
to be transferred to Current Accounts.



6. Principles of Financial Accounting by P.C. Gupta and C.L. Chaturvedi, Shree

Mahavir Book Depot, New Delhi.
29
LESSON : 8
DISSOLUTION OF THE FIRM
STRUCTURE
8.0 Objective
8.1 Introduction
8.2 Modes of Dissolution of Firm
8.3 Settlement of Accounts on Dissolution
8.4 Accounting Treatment on Dissolution of a Partnership Firm
8.5 Summary
8.6 Keywords
8.0 OBJECTIVE

(a) Do the settlements as per Section 48 of the Indian Partnership Act, 1932.
(b) Pass journal entries and close the books of the firm in case of dissolution
of a partnership firm.
8.1 INTRODUCTION
The Indian Partnership Act, 1932 recognizes the difference between the
'dissolution of partnership' and dissolution of firm'. The dissolution of partnership
between all the partners of a firm is called the dissolution of the firm. Thus, it is the
complete breakdown of a partnership and partners do not continue them. On the other
hand, dissolution of the partnership means a reconstitution of the firm due to the
retirement of a partner or the insolvency of a partner or the death of a partner and the
1
remaining partners provide for the continuance of the firm in pursuance of an express
or implied agreement to that effect. On dissolution of a firm the firm's assets are
realised and the liabilities are discharged because the firm is to be closed, whereas on
dissolution of a partnership, the share of the outgoing partner is ascertained and the
firm is not closed.
8.2 MODES OF DISSOLUTION OF FIRM
The various ways in which a firm may be dissolved are given as under:
(1) Dissolution by agreement. A firm is dissolved when all the partners agree
that it should be dissolved. A partnership firm is the creation of an agreement; similarly
a firm can be dissolved by an agreement.
(2) Dissolution on the happening of contingencies. A firm is dissolved in

any of the following ways unless there is a contract between the partners to the contrary.
These are: (i) by the expiry of the term of duration of the firm, (ii) by the completion
of the adventure for which the firm was constituted, (iii) by the death of a partner, and
(iv) by the adjudication of a partner as insolvent.
(3) Dissolution by notice of partnership at will. When the partnership is at

will, the firm may be dissolved at any time by any partner giving notice in writing to all
the other partners of his intention to dissolve the firm.
(4) Compulsory dissolution or dissolution by the operation of law. A firm

is compulsorily dissolved-different ways as: (i) When all the partners except one
become insolvent. (ii) When all the partners become insolvent. (iii) When the business
becomes illegal. (iv) Where the number of partners exceed twenty in case of ordinary
business or ten in case of banking business.
(5) Dissolution by the court. At the suit of a partner, a court may order the dissolution
of the firm in different ways as: (i) when a partner becomes of unsound mind, (ii) when
2
a partner suffers from permanent incapacity and becomes incapable of performing his
duties as a partner, (iii) when a partner is guilty of misconduct affecting the business of
the firm, (iv) when a partner commits wilful or persistent breaches of agreement, (v)
when a partner has transferred the whole of his interest in the firm to a third party or
when his share has been attached under a decree or sold under process of law, (vi) when
the business of the firm cannot be carried on except at a loss, and (vii) when the court
is satisfied as to grounds which render it just and equitable to dissolve the firm.
8.3 SETTLEMENT OF ACCOUNTS ON DISSOLUTION
The mode of settlement of accounts on a dissolution of the firm is as follows as

given in Section 48 of the Indian Partnership Act, 1932.
Section 48 of the Indian Partnership Act, 1932 governs the settlement of accounts
on the dissolution of firm. The main points of this section are enumerated below:
1. All the assets of the firm (including the original contribution of the partners,
additional contribution of the partners and the additional contribution made to
make up deficiencies of capital) must first be applied in paying of all the debts
of the firm, i.e., the money due to the third parties.
2. If after paying these liabilities, there is surplus left, the same should be applied
in repaying the loans taken from the partners over and above the capital
contributed by such partner. If the surplus is not sufficient to pay loans of all the
partners, advances should be paid rateably.
3. The residue shall be compared with total of the capitals of the partners. The
difference between the residue and the total capital should be transferred to the
capital accounts in the ratio in which the partners share the profits and losses.
This will make the total of the balances in the capital account equal to cash
available and then the cash will be paid to each partner equal to the amount due
(after adjusting profit or loss).
3
To summarize the above provisions, following procedure must be carefully
followed :-
1. Pay the outsiders ie. the third parties first. For this apply the assets of the firm.
2. Then surplus, if any, may be used to repay loans received from the partners of
the dissolved firm.
3. Any remaining amount is to be compared with the total capital of the firm. Any
difference is to be transferred to the respective partners accounts in the profit/
loss sharing ratio. This will lead to the total cash available after the above
adjustments. The same will be paid to each partner as per the balances of capital
accounts.
Firm Debts and Private Debts
Where there are partnership debts and private debts of the partners in their
individual capacity, the assets of the firm shall be applied in the first instance in payment
of the debts of the firm and surplus of assets, if any, would be paid to the partners in the
proportion in which they were entitled to share profits. similarly, the private property
of each partner shall be applied first in the payment of his private debts, and the surplus
of private assets, if any, would be handed over to the firm if the firm needs it for the
payment of its debts.
8.4 ACCOUNTING TREATMENT ON DISSOLUTION OF A

PARTNERSHIP FIRM
On dissolution of a firm, the books of account will have to be closed. But this is
not possible until all the assets of the firm have been realised in cash or otherwise
disposed off (may be taken over by the partners of the erstwhile dissolved firm.)
Further, all the liabilities of the firm including partners loans and capital should
be paid off.
4
To close the books of account, following steps have to be followed :-
1. Realisation account is opened and all assets except cash or bank balances are
transferred to the debit side of the realisation account at book values.
Realisation account Dr
To stock
To debtors
To investments
To plant and machinery etc.
Note :- This way the accounts of these assets will stand closed. The assets against
which some fund, reserve or provision is created should be debited to realisation account
at gross value. The provision should be credited to the realisation account. This way the
relevant account will stand closed.
2. The account of liability to third party (excluding partner's loans and capitals)
should be transferred to the credit side of realisation account at book value.
The entry will be:-
Sundry creditors A/c Dr
Bills payable A/c Dr
To Realisation A/c
3. When assets are sold for cash, the actual amount received should be debited to
cash or bank account and credited to realisation account. If a partner takes asset
then following entry is done
Partner's Capital A/c Dr
To Realisation A/c
The account will be credited with the value agreed upon
5
4. For expenses incurred during the course of the dissolution of the firm, following
entry shall be made:-
Realisation A/c Dr
To cash/bank
5. For liabilities towards third party, following entry shall be done
Sundry Creditors A/c Dr
To cash/bank
If a partner agrees to discharge a liability, then the entry will be
Realisation A/c Dr
To partner's capital account.
6. The difference of two sides of the realisation account now represents profit or
loss on realisation. The amount so obtained should be transferred to the capital
account of the partners in the ratio in which they share profits. Realisation
account will be debited (if credit side is bigger or credited if the debit side is
bigger.
7. Partner's loan should then be paid off. The entry will be:
Partner's loan Dr
To cash/bank
8. If there is reserve fund or profit and loss account in the books, it should be
transferred to capital account in the profit sharing ratio.
9. Now the balance, if any, standing to the debit of a partner's capital account will
be brought in by him.
6
Entry will be:-
Cash A/c Dr
To Partner's Capital A/c
10. The amount standing to the credit of the partner's capital account will then be
paid off.
Entry will be:-
Partner's capital A/c
To cash account.
Note : the above steps will close all the accounts. If an account remains open that
means there has been some mistake.
Illustration 1: A, B and C were in partnership sharing profits and losses in the

proportion of one-half, one-third and one-sixth respectively. On June 30, 1998 they
dissolved the partnership. The following Balance Sheet represented the position of the
firm on that date:
Balance Sheet as at .........

Creditors 15,000 Cash at Bank 1,500
Reserve for Contingencies 5,000 Stock 25,000
Bank Loan 5,000 Debtors 24,000
Cs Loan A/c 5,000 Bills Receivable 1,000
As Capital A/c 30,000 Buildings 28,500
Bs Capital A/c 15,000
Cs Capital A/c 5,000
80,000 80,000
Stock, Debtors and Buildings realised Rs. 16,500, Rs. 20,000 and Rs. 18,500
respectively. Bills Receivable were realised in full. Rs. 10,000 were spent in meeting
7
the contingent liabilities for which only Rs. 5,000 were reserved. The Creditors were
paid at a discount of Rs. 500. The expenses of realisation amounted to Rs. 600.
Close the books of the firm and draw the necessary ledger accounts.
Solution
Journal Entries
1998 Rs. Rs.
June 30 Realisation A/c Dr. 78,500
To Stock A/c 25,000
To Sundry Debtors A/c 24,000
To bills Receivable A/c 1,000
(Being the transfer of Stock, Sundry Debtors,
Bills Receivable and Buildings to
Realisation A/c at Book value)
June 30 Sundry Creditors Dr. 15,000
Reserve for Contingencies Dr. 5,000
Bank Loan A/c Dr. 5,000
To Realisation A/c 25,000
(For various liabilities transferred to
Realisation A/c at Book value)
June 30 Bank A/c Dr. 56,000
To realisation A/c 56,000
(Being the amount realised on sale of assets)
Stock 16,500
Bills Receivable A/c 1,000
Buildings 18,500
56,000
8
June 30 Realisation A/c Dr. 600
To Bank A/c 600
(Being payment of Realisation Expenses)
June 30 Realisation A/c Dr. 29,500
To Bank A/c 29,500
(Being Sundry liabilities paid at discount of Rs. 500)
S. Cr. at a Dis. of Rs. 500 14,500
Contingencies 10,000
Bank Loan 5,000
29,500
June 30 As Capital A/c Dr. 13,800
(Being loss on realisation transferred to
Partners Capital A/c)
June 30 Cs Loan A/c Dr. 5,000
To Bank A/c 5,000
(For Cs Loan paid)
June 30 As Capital A/c Dr. 16,200
Bs Capital a/c Dr. 5,800
Cs Capital A/c Dr. 400
To Bank A/c 22,400
(Being Balance Paid to partners)
9
Ledger
Realisation Account
Rs. Rs.
To Sundry Assets A/c 78,500 By Sundry Liabilities A/c 25,000
To Bank A/c (expenses) 600 By Bank A/c (Assets realised) 56,000
To Bank A/c 29,500 By Capital A/c (loss transferred)
(Sundry Liabilities paid) A 1/2 Share 13,800
B 1/3 Share 9,200
C 1/6 Share 4,600
1,08,600 1,08,600
Bank Account
Rs. Rs.
To Balance b/d 1,500 By Realisation A/c (expenses) 600
To Realisation A/c By Realisation A/c
(Sale Proceeds of Assets) 56,000 (Payment of Liabilities) 29,500
By Cs Loan A/c 5,000
By As Capital A/c 16,200
By Bs Capital A/c 5,800
By Cs Capital A/c 400
57,500 57,500
10
Cs Loan Account
Rs. Rs.
To Bank A/c 5,000 By Balance b/d 5,000
Partners Capital Accounts
Particulars A B C Particulars A B C
To Realisation A/c 13,800 9,200 4,600 By Balance b/d 30,000 15,000 5,000
To Bank A/c 16,200 5,800 400
30,000 15,000 5,000 30,000 15,000 5,000
Illustration 2:J, S and R were in partnership sharing profits and losses in the ratio of
3 : 2 : 1. Their Balance Sheet as on 31st December, 1998 was as follows:
Balance Sheet
Rs. Rs.
Capital Accounts Buildings 10,000
J 12,000 Plant 22,000
S 8,600 Stock 6,000
R 10,400 31,000 Joint Life Policy 6,200
Reserve Fund 3,000 Debtors 5,000
Employees Provident Fund 3,000 Accrued Interest 1,000
Depreciation Reserve 5,000 Cash 2,800
Creditors 11,000
53,000 53,000
11
It was agreed to dissolve the firm, and the terms of the dissolution were:
(i) J took over Buildings at Book Value and agreed to pay off creditors.
(ii) Accrued Interest was not collected whereas there was a contingent liability of
Rs. 600 which was met.
(iii) Other assets realised: Plant: Rs. 25,000, Stock: Rs. 5,000, Debtors Rs. 4,600.
(iv) Realisation expenses Rs. 600
Prepare Realisation Account, Capital Accounts and Cash Account.
Solution
Dr. Realisation Account Cr.

To Buildings A/c 10,000 By Employees Provident
To Plant A/c 22,000 Fund A/c 3,000
To Stock A/c 6,000 By Depreciation Reserve A/c 5,000
To Joint Life Policy A/c 6,200 By Creditors A/c 11,000
To Debtors A/c 5,000 By Js Capital A/c 10,000
To Accrued Interest A/c 1,000 (Building taken over)
To Js Capital A/c By Cash A/c (Assets realised):
(Creditors taken over) 11,000 Plant Rs. 25,000
To Cash A/c (Payment of Stock 5,000
Contingent Liability) 600 Debtors 4,600 34,600
To Cash A/c (Expenses paid) 600 By Capital Accounts:
To Cash (Employees P.F.) 3,000 (Loss transferred)
J Rs. 900
S 600
R 300 1,800
65,400 65,400
12
Capital Accounts
Particulars J S R Particulars J S R
To Realisation A/c 10,000 By Balance b/d 12,000 8,600 10,400
(Building taken By Reserve Fund 1,500 1,000 500
over) By Realisation
To Realisation A/c 900 600 300 A/c (Creditors
(Loss on taken over) 11,000
Realisation)
To Cash A/c 13,600 9,000 10,600
(Final payment)
24,500 9,600 10,900 24,500 9,600 10,900
Cash Account
Rs. Rs.
To balance b/d 2,800 By Realisation A/c 600

To Realisation A/c 34,600 (Contingent Liabilities)
(Sales of Assets) By Realisation A/c 600
(Realisation Expenses)
By Realisation A/c (E.P.F.) 3,000
By Js Capital A/c 13,600
By Ss Capital A/c 9,000
By Rs Capital A/c 10,600
37,400 37,400
13
Sale To A Company
Often a Partnership firm converts itself into a joint stock limited company or
sells its business to an existing one. Broadly, the procedure already discussed above
will be followed for closing the books of the firm. Realisation A/c will be opened and
assets transferred to it, so also liabilities (but not if liabilities are not taken over by the
company). The purchase consideration paid by the company is credited to, Realisation
A/c. If expenses are incurred by the firm, the amount will be debited to the realisation
account. If the creditors are taken over by the company, no further treatment is necessary
(beyond transferring them to the realisation account). But if the creditors are to be
paid by the firm, the actual amount paid to them will be debited to liability account
concerned. The difference between the book figure and the actual amount paid should
be transferred to the realisation account. The profit or loss on realisation will be
transferred to the capital account in the profit sharing ratio.
Usually, the company takes over all the assets including cash. The same will be
transferred to the realisation account.
Further, the company will discharge the amount due from it in the form of cash,
debentures and shares. Separate accounts will be opened for debentures and shares
received. Partners will divide the debentures and shares among themselves in the absence
of an express agreement in the ratio of their final claims, ie; in the ratio of capitals
standing after the loss or profit on realisation (and other reserves and profits) has been
transferred.
14
Illustration 3: Mr. M and Mr. D were carrying on business as equal partners. The
firms Balance Sheet as on 31st December, 1998 was as follows:

Sundry Creditors 65,500 Stock 54,000
Bank Overdraft 30,000 Plant and Machinery 1,82,000
Bills Payable 12,500 Office Furniture 15,000
Capital Accounts: Book Debts 73,000
M 1,50,000 Joint Life Policy 9,500
D 1,48,000 Leasehold Premises 34,500
Profit and Loss A/c (debit balance) 26,000
Drawings Account:
M 9,000
D 3,000
4,06,000 4,06,000
The business was carried on till 30th June 1999. The partners withdrew in equal
amounts half the amount of profits made during the period of six months (from January-
June 1999) after 10% p.a. had been written off leasehold premises, 10% p.a. off plant
and machinery and 5% p.a. off office furniture. Meanwhile sundry creditors were
reduced by Rs. 10,000. On 30th June, 1999 stock was valued at Rs. 63,400. Bills payable
were reduced by Rs. 2,300 and bank overdraft by Rs. 15,000. Book debts were valued
at Rs. 65,000, the joint life policy was realised for Rs. 9,5000 and the amount was
utilised to reduce the bank overdraft and other items remained the same as on 31st
December, 1998.
On 30th June, 1999 the firm sold the business to a Limited Company. The value
of the goodwill was estimated at Rs. 1,08,000 and the rest of the assets were valued on
the basis of the Balance Sheet as on 30th June 1999. The Company paid the purchase
consideration in fully paid equity shares of Rs. 10 each, at par.
15
You are required to prepare a Realisation Account and Capital Accounts of the
partners as on 30th June 1999.
Solution
Realisation Account
1999 Rs. 1999 Rs.
June 30 To Leasehold Premises 32,775 June 30 By Sundry Creditors 55,500
To Plant & Machinery 1,72,900 By Bank Overdraft 5,500
To Office Furniture 14,625 (Rs. 30,000Rs. 15,000
To Stock 63,400 Rs. 9,500 Proceeds of
To Book Debts 65,000 Joint Life Policy)
To Profit on Realisation By Bills Payable 10,200
transferred to: By Limited Company 3,85,500
(3)
Ms Capital A/c 54,000
Ds Capital A/c 54,000
1,08,000
4,56,700 4,56,700
16
Partners Capital Accounts
1999 M D 1999 M D
Rs. Rs. Rs. Rs.
Jan. 1 To Profit & Loss A/c 13,000 13,000 Jan. 1 By Balance b/d 1,50,000 1,48,000
(Debit Balance) June 30 By Profit & Loss
Jan. 1 To Drawings 9,000 3,000 A/c (2) 17,500 17,500
June 30 To Drawings 8,750 8,750 June 30 By Realisation A/c 54,000 54,000
(Half of Profit upto Profit
June 30, 1999 with-
drawn)
June 30 To Shares in Limited
Company 1,90,750 1,94,750
2,21,500 2,19,500 2,21,500 2,19,500
Working Notes
(1) Statement Showing Value of Net Assets as at 30th June, 1999.
Rs. Rs.
Leasehold Premises 34,500
Less: Depreciation @ 10% p.a. for 6 months 1,725 32,775
Less: Depreciation @ 10% p.a. for 6 months 9,100 1,72,900
Furniture 15,000
Less: Depreciation @ 5% p.a. for 6 months 375 14,625
Stock 63,400
Book Debts 65,000
3,48,700
17
Less: Sundry Creditors 55,500
Bank Overdraft (Rs. 15,000 Rs. 9,500
Proceeds of Joint Life Policy. It has been
assumed that bank overdraft of Rs. 15,000 is
before crediting proceeds of Joint Life Policy) 5,500
Bills Payable 10,200
71,200
Value of Net Assets as on June 30, 1999 2,77,500
(2) Calculation of Profit Earned from Jan. 1, 1999 to June 30, 1999.
Rs. Rs.
Net Assets as on 30th June, 1999 2,77,500
Less: Net Assets as on 1st January, 1999:
Stock 54,000
Office Furniture 15,000
Book Debts 73,000
Joint Life Policy 9,500
Leasehold Premises 34,500
3,68,000
Less: Sundry Creditors 65,500
Bank Overdraft 30,000
Bills Payable 12,500
1,08,000
2,60,000
Increase in Net Assets after Drawings 17,500
Add: Profit withdrawn by partners 17,500
Net Profit for 6 months from 1-1-99 to 30-6-99 35,000
18
(3) Calculation of Purchase Consideration:
Rs.
Value of Net Assets as on 30th June, 1999 as per Working Note (1) 2,77,500
Add: Goodwill 1,08,000
Purchase Consideration 3,85,500
Insolvency of partners
If at the time of dissolution, a partner owes a sum of money to the firm. He has
to make payment to the firm.
However, if he is insolvent, it may not be possible to recover the whole of the

amount. Thus, the sum which is recoverable from an insolvent partner is a loss the
question arises, what entry should be made in the books of account of the firm to take
care of such a loss. ? Whether to treat it as an ordinary loss to be shared by the solvent
partners in the profit sharing ratio or whether to treat it as an extraordinary loss. To
decide the treatment, decision in "Garner vs. Murray" is followed.
In this case, the court decided that such loss shouldn't be treated as an ordinary
loss. The judgement in this case gave a detail account of the treatment to be done,
which is as follows:
The solvent partners should bring in cash equal to their share of loss on realisation.
The loss due to the insolvency of a partner should be divided among the other
partners in the ratio of capitals then standing (ie: after partners have brought in
cash equal to their share of the loss on realisation)
In other words, the loss due to the insolvency of partner has to be borne by the
solvent partners in the ratio of their capitals standing just prior to dissolution.
19
Illustration 4
A, B and C were equal partners. On 31st December, 1999, the position was as follows:-
Rs.
A's Capital 2,000 Cash 1,500
B's Capital 600 C's Capital 200
Loss on 900
Realisation
2,600 2,600
C is insolvent and can pay nothing. Close the books of the firm.
Solution
Cash Account
1999 Rs. Rs.
31st Dec To Balance b/d 1,500 31st Dec By A's capital A/c 1,615
31st Dec To A's Capital 300 31st Dec By B's Capital 485
31st Dec To B's Capital 300
2,100 2,100
Capital Account
A B C A B C
To Bal b/d 200 By bal b/d 2,000 600
To Loss on 300 300 300 By cash-to 300 300
Realisation make loss
To C's Cap 385 115 on realisation
A/c - Loss By A's capital 385
written off in By A's capital 115
the ratio of
20:06
To cash 1,615 485
2300 900 500 2300 900 500
Fixed and Fluctuating capital
If the ratio in which an insolvent partner 's loss is to be written off is the ratio of
capitals just prior to dissolution or as last agreed upon, the fact of capital being fixed
or fluctuating is important.
If the capital is fixed, this ratio will be used to divide the insolvent partner's loss
But if the capital is fluctuating, following step will be taken :-
20
a) Make adjustment in respect of reserves or profit and loss account, etc.
However, no adjustment will be made in respect of loss on realisation
(b) Then the insolvent partner's loss will be divided in the ratio of capital after making
adjustment in reserves as discussed above.
An example will make the point clear.
Suppose there are three partners A,B,C sharing profit and loss equally. A's capital
is Rs. 10,000 B's capital is Rs. 6,000
C's capital is Rs. 4,000 (debit balance)
There is a reserve fund of Rs. 6,000. Here firstly, the reserve fund will be divided
among A,B,C. Hence, partners will be credited with Rs. 2,000 each. Now C is insolvent then:-
If the capitals are fixed, the loss on C's capital account will be borne by A and B
in the ratio of 10:6, i.e.: capitals without adjustment for reserve.
If the capitals are fluctuating, the loss on C's capital account will be borne by A
and B in the ratio of 12:8 ie capitals after adjustment for reserve.
Note : The rule of Garner Vs Murray need not always result in equitable
distribution.; It considers only the capitals standing in the books and not the
private estates of solvent partners. It is possible that a partner who has contributed
large capital, is made to bear a large proportion of an insolvent partner's loss as
compared to a partner who is richer but has not contributed so much capital. If a
partner is lucky to have withdrawn all his money away before the dissolution, so
that his capital account doesn't show a credit balance. In this case, he will bear
no part of the loss due to a partner's insolvency. To avoid such an eventuality,
there is generally a clause in the partnership deed laying down how a loss on an
insolvent partner's Capital account will be shared by the solvent partners. If such
a clause exists, the same will preferred over the Garner Vs Murray decision.
21
Illustration 5: X, Y and Z are partners sharing profits and losses in the ratio of 4 : 2 :
3. On 1st January, 1999, they agreed to dissolve the partnership on which date their
Balance Sheet was as follows:

Profit and Loss 4,500 Buildings 45,000
Reserve Fund 12,600 Machinery 15,000
Bills Payable 4,100 Furniture 3,700
Loan from X 4,000 Debtors 31,000
Capital Accounts: Investments 24,000
Z 3,000 Bills Receivable 5,600
Y 46,000 Cash at Bank 6,500
X 68,000 Cash in hand 1,000
1,51,200 1,51,200
The assets realised: Investments Rs. 20,400; Bills Receivable and Debtors Rs.
28,000; Stock Rs. 14,550; Furniture Rs. 2,050; Machinery Rs. 8,600; Buildings Rs.
26,400. All the liabilities were paid off. The cost of realisation was Rs. 600, Z had
become bankrupt and Rs. 1,024 only was recovered from his estate once and for all.
Partners were finally paid off. Show the realisation account, the Bank account, and the
capital accounts of the partners, when the capitals are fluctuating.
22
Solution
Realisation Account
Rs. Rs.
To Buildings 45,000 By Bills Payable 4,100
To Machinery 15,000 By Sundry Creditors 9,000
To Furniture 3,700 By Bank (Assets Realised) 1,00,200
To Stock 19,400 By Loss on Realisation transferred
To Debtors 31,000 To Capital A/cs
To Investments 24,000 X 19,600
To Bills Receivable 5,600 Y 9,800
To bank (Bills Payable & Creditors) 13,100 Z 14,700
To Bank (Cost of Realisation) 600 44,100

1,57,400 1,57,400
Capital Accounts
X Y Z X Y Z
To Realisation A/c By Profit & Loss A/c 2,000 1,000 1,500
(Loss) 19,600 9,800 14,700 By Profit & Loss A/c 2,000 1,000 1,500
To Zs Capital A/c By Reserve Fund 5,600 2,800 4,200
(Rs. 4,976 in the
ratio of 75,600: 75,600 49,800 8,700

49,800) 3,000 1,976 By Bank Account
To Bank A/c 72,600 47,824 (Realisation loss
brought in) 19,600 9,800

By Bank Account 1,024
By Xs Capital A/c 3,000
By Ys Capital A/c 1,976

95,200 59,600 14,700 95,200 59,600 14,700
23
Bank Account
Rs. Rs.
To Balance b/d 6,500 By Realisation A/c 13,100
To Cash in hand 1,000 By Realisation A/c 600
To Realisation A/c 1,00,200 By Xs Loan A/c 4,000
To Xs Capital A/c 19,600 By Xs Capital A/c 72,600
To Ys Capital A/c 9,800 By Ys Capital A/c 47,824
To Zs Capital A/c 1,024
1,38,124 1,38,124
When all partners are insolvent
If all the partners are insolvent, the creditors can't be expected to be paid in full.
All the cash available, together with whatever can be received from the private estates
of the partners, will be paid to the creditors after the expenses of realisation are met.
The realisation account should be prepared in the usual course. However, creditors
shouldn't be transferred to this account nor will payment to creditors be debited to this
account. The loss on realisation should be transferred to the capital accounts of partners
in the profit sharing ratio. The available cash should then be paid to the creditors. The
amount remaining unpaid should be transferred to Deficiency account. The balances of
Partner's Capital accounts should also be transferred. Thus, the books will be closed.
Illustration 6: A, B and C are three partners sharing profits and losses in the ratio of
2 : 2 : 1. They decide to dissolve the firm and following is their Balance Sheet on the
date of dissolution:
24
Rs. Rs.
Creditors 13,000 Cash 4,500
Reserve Fund 10,000 Stock 12,300
Profit and Loss Account 5,000 Sundry Debtors 15,600
As Capital Account 20,000 Furniture 4,200
Bs Capital Account 10,000 Plant and Machinery 16,000
Cs Capital Account 5,400
58,000 58,000
The assets realised as follows:
Stock Rs. 11,400; Sundry Debtors Rs. 12,200 and Furniture Rs. 2,400.
Plant and Machinery is taken over by A at Rs. 12,500. Creditors were paid off in
full. A contingent liability for Bills Receivable discounted materialized to the extent
of Rs. 400.
C is insolvent but his estate pays Rs. 2,400. Give accounts to close the books of
the firm:
(1) If the capitals are fixed.
(2) If the capitals are fluctuating.
Solution
25
(1) If the Capitals are fixed
Realisation Account
Rs. Rs.
To Stock 12,300 By Creditors 13,000
To Sundry Debtors 15,600 By Cash Account:
To Furniture 4,200 Stock 11,400
To Plant & Machinery 16,000 Sundry Debtors 12,200
To Cash Account 13,000 Furniture 2,400 26,000
(Creditors paid)
To Cash Account 400 By As Capital A/c:
(Bills Discounted) (Plant & Machinery
taken) 12,500
By Loss on Realisation
transferred to
Capital Accounts:
A2/5 4,000
B2/5 4,000
C1/5 2,000 10,000
61,500 61,500
Cash Account
Rs. Rs.
To Balance b/d 4,500 By Realisation Account
To Realisation Account (Creditors paid) 13,000
(Assets realised) 26,000 By Realisation Account
To Cs Capital Account 2,400 (Bills discounted) 400
To As Capital Account 4,000 By As Capital Account 12,167
To Bs Capital Account 4,000 By Bs Capital Account 15,333
40,900 40,900
26
As Capital Account
Rs. Rs.
To Realisation Account By Balance b/d 20,000
(Loss on Realisation) 4,000 By Reserve Fund 4,000
To Realisation Account By Profit & Loss Account 2,000
(Plant & Machinery taken) 12,500 By Cash Account 4,000
To Cs Capital Account
(2/3rd share of Cs
deficiency) 1,333
30,000 30,000
Bs Capital Account
Rs. Rs.
To Cs Capital Account By Profit & Loss Account 2,000
(1/3rd share of Cs By Cash Account 4,000
deficiency) 667
20,000 20,000
Cs Capital Account
Rs. Rs.
To Balance b/d 5,400 By Reserve Fund 2,000
(Loss on Realisation) 2,000 By Cash Account 2,400
By As Capital Account
(2/3rd share of deficiency) 1,333
By Bs Capital Account
(1/3rd share of deficiency) 667
7,400 7,400
27
(2) If the Capitals are fluctuating
There will be no difference in Realisation Account, so it should not be prepared again.
Cash Account
Rs. Rs.
To Balance b/d 4,500 By Realisation Account
To Realisation Account (Creditors paid) 13,000
(Assets realised) 26,000 By Realisation Account
To Cs Capital Account 2,400 (Bills discounted) 400
To As Capital Account 4,000 By As Capital Account 12,262
To Bs Capital Account 4,000 By Bs Capital Account 15,238
40,900 40,900
As Capital Account
Rs. Rs.
(Plant & Machinery taken) 12,500 By Cash Account 4,000
To Cs Capital Account
(13/21rd share of Cs
deficiency) 1,238
30,000 30,000
28
Bs Capital Account
Rs. Rs.
To Realisation Account 4,000 By Balance b/d 10,000
To Cs Capital Account By Reserve Fund 4,000
(8/21) share of Cs By Profit & Loss Account 2,000
deficiency 762 By Cash Account 4,000
20,000 20,000
Cs Capital Account
Rs. Rs.
To Balance b/d 5,400 By Reserve Fund 2,000
(Loss on Realisation) 2,000 By Cash Account 2,400
By As Capital Account
(13/21 share of deficiency) 1,238
By Bs Capital Account
(8/21 share of deficiency) 762
7,400 7,400
Note: Deficiency has been divided in proportions to capitals which stood before the
date of dissolution.
A B
Rs. Rs.
Capital 20,000 10,000
Reserve Fund 4,000 4,000
Profit & Loss Account 2,000 2,000
26,000 16,000
Therefore, ratio of capitals 26,000 : 16,000 or 13 : 8.
29
Gradual Realisation of the Assets And Piecemeal Distribution
Now the main point is to find out how to distribute cash among partners for
return of capital. The available cash can't be distributed in profit sharing ratio (unless
the capitals are in profit sharing ratio.)
The cash available can't also be distributed in the ratio of capitals which may be
different from the profit sharing ratio. The rule to follow in piecemeal distribution is
that the partners whose capital is more than proportionate to other partner's capitals
(considering the profit sharing ratio) should first be refunded so much to bring their
capitals to proportionate levels.
After this, the cash available should be distributed among the partners in the
profit sharing ratio. Each partner's position has to be compared with that of others.
Illustration 7: A, B and C share profits and losses in the ratio of 3 : 2 : 1. Their

Balance Sheet is as follows:
Rs. Rs.
Creditors 50,000 Land & Buildings 70,000
As Loan 10,000 Plant and Machinery 40,000
Capitals: Stock 25,000
A 50,000 Debtors 20,000
B 10,000 Cash 5,000
C 40,000
1,60,000 1,60,000
The partnership is dissolved and the assets are realised as follows:

1st Realisation Rs. 40,000
2nd Realisation Rs. 30,000
3rd Realisation Rs. 54,000
4th Realisation Rs. 7,000
30
Prepare a statement showing how the distribution should be made.
Solution
Statement showing distribution of cash
Creditors As As Bs Cs
Loan Capital Capital Capital

Rs. Rs. Rs. Rs. Rs.
Amount due 50,000 10,000 50,000 10,000 40,000
Cash in hand paid to Creditors 5,000

45,000
Amount on 1st Realisation paid to Creditors 40,000
5,000
Amount on Second Realisation Rs. 30,000
Less: Paid to Creditors 5,000 5,000
25,000
Less: As Loan paid 10,000 10,000
15,000
Less: Paid to C 15,000
15,000
50,000 10,000 25,000
Amount on 3rd Realisation 54,000
Less: Paid to C 8,333 8,333

45,667 50,000 10,000 16,667
Less: Paid to A and C 45,667 34,250 11,417
15,750 10,000 5,250

Amount on 4th Realisation 7,000
Less: Paid to A and C 1,000 750 250
6,000 15,000 10,000 5,000

Less: Paid to Partners A, B & C 6,000 3,000 2,000 1,000
Balance unpaid as Realisation Loss 12,000 8,000 4,000
31
Explanation: In the 2nd Realisation, there remains a balance of Rs. 15,000 to be utilised
towards repayment of capitals. Capitals are not in their profit-sharing ratio : Bs Capital
for 2/6th share is Rs.10,000. So As Capital must be Rs. 15,000 and Cs Capital Rs.
5,000. Thus, their capitals are in excess of their profit-sharing ratio by Rs. 35,000
each. Between A and C, the ratio is 3 : 1; so first Rs. 23,333 (Rs. 15,000 out of the
second realisation and Rs. 8,333 out of the third realisation) are paid to C to make his
capital equal to his profit sharing arrangement with A. The balance of Rs. 45,667 of the
third realisation is distributed between A and C in the ratio of 3 : 1. The capitals of
these partners being still proportionately in excess of Bs Capital by Rs. 750 and Rs.
250 respectively, so they are paid Rs. 750 and Rs. 250 respectively. Now capitals of all
the partners come in their profit sharing arrangement. The balance of Rs. 6,000 of the
fourth realisation is distributed between them in their profit sharing ratio of 3 : 2 : 1.
8.5 SUMMARY
Dissolution means termination of a partnership agreement. Dissolution of

partnership means a change in the relationship of the partners. Dissolution of partnership
firm means that the firm comes to an end and ceases to function as a firm. Any partnership
may be dissolved on account of many reasons. On dissolution of the firm, the settlement
of accounts among partners is done in accordance with the partnership deed. In the
absence of any agreement, the rules stated in Section 48 of the Partnership Act shall
apply when the partnership firm is dissolved, a Realisation Account is opened for
disposing of all the assets of the firm and making payments to all the creditors. No
special treatment is given to goodwill, it is treated like other assets. If a partner is
insolvent, then his deficiency which he is not able to bring will be borne by the other
solvent partners in accordance with the decision in Garner vs. Murray. While determining
the capital ratio of the solvent partners, distinction should be observed between fixed
and fluctuating capital. When there is gradual realisation of assets, it is necessary to
avoid the unpleasant consequences of a partner's account being overdrawn distributing
32
case of various realizations of assets in such a way that the final unpaid balance of the
capital of each partner is left in his profit-sharing ratio.
8.6 KEYWORDS
Dissolution of Partnership: It means a change in the relationship of the partners.
Dissolution of Partnership Firm: It refers to the winding up of business in partnership.
Garner vs. Murray Decision: In the absence of any agreement to the contrary, the
deficiency on the insolvent partner's capital account must be borne by other solvent
partners the proportion to their capitals which stood before the dissolution of the firm.
1. Differentiate between dissolution of partnership and dissolution of firm. State

how and under what circumstances a firm may be dissolved.
2. Give the entries needed to close the books of the firm upon its dissolution.
3. Examine the underlying principles of Garner vs. Murray decision in the

dissolution of partnership with suitable illustrations.
4. The Balance Sheet of a firm on 31st March, 1999 was as follows :-
X's Capital 5,000 Freehold Prop 8,000
Y's Capital 4,000 Investments 2,000
Z's Capital 3,000 Book Debts 1,000
Sundry Creditor: 2,000 Cash at Bank 3,000
14,000 14,000
The Partnership was dissolved as on 31 March, 1999. The sundry creditors were paid at
a discount of 5% X agreed to takeover the Freehold Property at Rs. 9,000. Y the
investments at rs. 1,500 and Z the book debts at Rs. 600. The expenses of realisation
came to Rs. 110.
33
Close the books of the firm.
5. A, B and C sharing profits in the proportion of 3:2:1 agreed upon dissolution of
their Partnership on 31 march, 1999. The balance sheet on this day was as
follows:-

Capital Accounts Machinery 40,500
A 40,000 Stock In Trade 7,550
B 20,000 60,000 Investments 20,830
Mrs. A's Loan 10,000 Joint Life Policy 14,000
Creditors 18,500 Debtors 9,300
Life Insurance Fund 14,000 less:- prov. 600 8,700
Investment Fluct. 6,000 Current Account- 11,500
Fund Cash at Bank 5,420
108,500 108,500
The Life Policy is surrendered for Rs. 12,000. The investments are taken over
by A for Rs. 17,500 A agrees to discharge his wife's loan. B takes over all the stock at
Rs. 7,000 and Debtors amounting to Rs. 5,000 at Rs. 4,000. Machinery is sold for Rs.
55,000. The remaining Debtors realise 50% of book value.
The expenses of realisation amount to Rs. 600.
It is found that an investment not recorded in the books is worth Rs. 3,000. The
same is taken over by one of the creditors at this value. Final accounts of the partners
on completion of the dissolution of the firm.
6. Slow, Sure and Fast were Partners sharing profits and losses in the ratio of 3:2:1
On 31st March, 1998 their Balance Sheet was as follows:-
34
Liabilities Rs. Assets Rs. Rs.
Sundry Creditors 15,400 Cash at Bank 3,500
Bills payable 3,600 Stock 19,800
Slow's Loan A/c 10,000 Debtors 15,000
Capitals Account Less:- Provision 1,000 14,000
Slow 20,000 Joint Life Policy 4,000
Sure 16,000 Plant and Machine 43,700
Fast 8,000
Reserve Fund 12,000
85,000 85,000
The firm was dissolved on 1st April, 1999. Joint Life Policy was taken over
by Slow at Rs. 5,000. Stock realised Rs. 18,000. Debtors realised Rs. 14,500. Plant
and Machinery was sold for Rs. 36,000.
Liabilities were paid in full. In addition one bill for Rs. 700 under discount was
dishonoured and had to be taken up by the firm. Assume there were no expenses.
Give Journal entries and the necessary ledger accounts to close the books of
the firm.
7. A,B and C commenced business on 1st April, 1998 with capitals of Rs. 50,000,
Rs. 40,0000 and Rs. 30,000. Profits and Losses were shared in the ratio of 4:3:3.
Capitals carried interest at 5% per annum. During 1998 and 1999, they made profits of
Rs. 20,000 and Rs. 25,000 (before allowing interest) Drawings of each partner were
Rs. 5,000 per year.
On 31st March, 1999 the firm is dissolved. Creditors on that date were Rs. 12,000.
The assets realised Rs. 1,30,000 net. Give the necessary accounts to close the books of
the firm.
35
3. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and Neeti
Gupta, Kalyani Publishers, Ludhiana.
5. Principles of Financial Accounting by P.C. Gupta and C.L. Chaturvedi,
Shree Mahavir Book Depot, New Delhi.
6. Financial Accounting by A. Karim, S.S. Khanuja and Piyush Mehta,
Sahitya Bhawan Publishers, Agra.
36
LESSON -9
COMPANY ACCOUNTS : ACCOUNTING FOR SHARES

AND SHARE CAPITAL
STRUCTURE
9.0 Objective
9.1 Introduction
9.2 Meaning and Characteristics of a Company
9.3 Types of Shares
9.4 Types of Share Capital
9.5 Issue of Shares
9.5.1 Accounting for Issue of Shares
9.5.2 Under-Subscription
9.5.3 Over-Subscription
9.5.4 Issue of Shares at a Premium
9.5.5 Issue of Shares at a Discount
9.5.6 Calls in Arrears
9.5.7 Calls in Advance
9.5.8 Forfeiture of Shares
9.5.9 Reissue of Forfeited Shares
9.5.10 Surrender of Shares
9.5.11 Redemption of Preference Shares
9.6 Summary
9.7 Keywords
1
9.0 OBJECTIVE
At the end of this lesson, you would be familiar with
(a) Accounting Treatment for Issue of Shares
(b) Forfeiture of Shares
(c) Redemption of Preference Shares
9.1 INTRODUCTION
To overcome the limitations of inadequacy of funds and unlimited liability of

sole-proprietorship and partnership firms, one of the most convenient form of
organisation that grew with expansion of business requiring huge funds is the joint
stock company form of organisation or simply, a company. In India, joint stock
companies are governed by the provision of the Companies Act, 1956.
9.2 MEANING AND CHARACTERISTICS OF A COMPANY
Section 3(1) (i) of the Companies Act, 1956 defines a Company as " a company
formed and registered under this Act or an existing company". An "existing company"
means a company formed and registered under any of the former Companies Act.
In common parlance, a company may be defined as an artificial person created by

law, having a corporate and legal personality distinct and separate from its members,
perpetual succession and a common seal. The essential characteristics of a company are:
1. It is a voluntary association of persons.

2. It is an incorporated (registered) association.
3. It is an artificial person created by law.
4. It has a separate legal entity.
5. It has a perpetual succession. This means that it can be created and
woundup by the law only.
6. It has a common seal i.e. official signature of the company.
2
7. The liability of the members is generally limited to the extent of the unpaid
value of the shares held by them.
8. The shares of a company are freely transferable except in case of a
private limited company.
9.3 TYPES OF SHARES
The capital of the company is usually divided into certain indivisible units of a
fixed amount. These units are called shares. Share means share in the capital of a
company. The person owing a share or shares of a company is called a shareholder. A
share is evidenced by a share certificate which is issued by a company under the common
seal. It specifies the number of shares held by each shareholder. Shares are movable
property and are transferable in the manner provided in the articles of association.
There are two types of shares which a company may issue i.e. (1) Preference Shares
(2) Equity Shares.
1. Preference Shares
Preference shares are those which carry :
(a) a preferential right as to the payment of dividend during the lifetime of the
company- it may be fixed or a fixed rate, and
(b) a preferential right as to the return of capital when the company is wound up.
Preference Shares are of the following types :
(a) Cumulative Preference Shares
A preference share is said to be cumulative when the arrears of dividend are

cumulative and such arrears are paid before paying any dividend to equity shareholders.
Unless otherwise stated, a preference share is always to be a cumulative one.
3
(b) Non-cumulative Preference Shares
In case of these shares dividend is not allowed to accumulate. The right to claim
dividend will lapse if there are no sufficient profits in a particular year.
(c) Participating Preference Shares
These are those shares which are entitled not only to a fixed rate of dividend but
also to a share in the surplus profits which remain after dividend has been paid at a
certain rate to equity shareholders.
(d) Non-Participating Preference Shares
Non-participating preference shares are entitled only to a fixed rate of dividend

and do not share in the surplus profits. Unless otherwise stated, the preference shares
are presumed to be non-participating.
(e) Convertible Preference Shares
These are those shares which can be converted into equity shares within a certain
period.
(f) Non-convertible Preference Shares
There preference shares do not carry the right of conversion into equity shares.
(g) Redeemable Preference Shares
The shares which can be redeemed after a fixed period or after giving the
prescribed notice, as desired by the company. After the commencement of Companies
(Amendment) Act, 1988, no company limited by shares can issue any preference share
which is irredeemable.
2. Equity Shares
Shares which are not preference shares, are known as equity shares. These shares
do not carry any preferential right. Equity shareholders enjoy voting rights. But there is
4
no obligation to the company to pay dividends at a fixed rate every year. Even at the
time of winding up of a company, they receive their capital only after payment to
preference shareholders.
9.4 TYPES OF SHARE CAPITAL
Share capital means capital raised by a company by the issue of shares. The
main divisions of share capital are:
(a) Authorised or Registered or Nominal Capital
The amount of capital with which the company intends to be registered is called
authorised capital or registered capital or nominal capital. It is the maximum amount
which the company is authorised to raise by way of public subscription. This is
mentioned in the 'Capital Clause' of the Memorandum of Association and beyond which
the company cannot raise unless the capital clause in the Memorandum of Association
is altered in accordance with the provisions of Section 94 of Companies Act, 1956.
(b) Issued Capital
The part of the authorised capital which is offered to the Public for subscription
is called issued capital.
(c) Subscribed Capital
The part of the issued capital for which applications are received from the public
is called subscribed capital.
(d) Called up Capital
This is the part of subscribed capital which has been called up.
(e) Paid up Capital
The part of called up capital which is actually paid by the members is known as
paid up capital. That part of called up capital which has not yet been received is known
as 'Calls in Arrear'. Thus, Called up Capital-Calls in Arrear = Paid up Capital.
5
(f) Reserve Capital
It refers to that portion of uncalled share capital which shall not be capable of
being called up except in the event and for the purpose of the company being wound up.
9.5 ISSUE OF SHARES
A company can issue shares in two ways :

1. for consideration other than cash
2 for cash.
These shares may be issued at par or at a premium or at a discount. Such issue

price may be payable either in lumpsum alongwith application or in instalments at
different stages e.g. partly on application, partly on allotment, partly on call.
9.5.1 Accounting for issue of Shares
(1) For consideration other than cash
When a company purchases a running business and pay to vendors the purchase
consideration in the form of shares instead of making the payment to the vendor in
cash, it issues its fully paid shares, such issue of share is called as the issue of shares
for consideration other than cash. Such issue of shares are disclosed separately under
the head 'Share Capital' (Sub-head-Subscribed Capital) in the Balance Sheet of a company.
The accounting entries to be made are :
a) On purchase of assets
Sundry Assets A/c Dr.
To Vendor's A/c
(Being purchase of business)
b) On issue of shares
Vendor's A/c Dr.
To Share Capital A/c
(Being issue of shares as payment of the price of the business)
6
(2) For Cash
The Companies Act stipulates that when shares are issued to public for cash, the
company has to come out with prospectus. The procedure involved is as follows :
(a) Application
To collect capital from public, a public company issues a prospectus inviting

the public to submit applications to take up shares of the company. The prospectus
contains the details of the amount which the applicants have to pay as application money
and allotment money. The company may demand the full value of share on application
itself or it may demand only a part of it. However, the application money demanded
should not be less than 5% of the nominal value of the share.
On receipt of application money, the journal entry will be as follows:

Bank Account Dr.
To Share Application A/c
(Being receipt of application money - shares @ Rs.----per share)
(b) Allotment
After receiving the applications, the directors take steps to allot the shares.
Allotment of shares means acceptance of the offer of the applicant for the purchase of
shares. Directors have discretionary power either to reject or to accept partially or to
accept all the applications. Applicants to whom the shares will be allotted will be issued
letters termed as "Letter of Allotment" to that effect. They will also be required to pay
allotment money as per terms of the prospectus. The journal entries will be as follows :
On acceptance of Applications
Share Application A/c Dr.
(Being the application money transferred to Share Capital A/c)
7
Those applicants who could not be allotted any share, their application money
will be returned. The necessary journal entry is :

To Bank A/c
(Being the application money of shares returned)
Once the allotment is made and any further amount is required to be paid
on each share, the allotment money becomes due to the company which the allottees
are liable to pay. For this the following entry will be passed:
Share Allotment A/c Dr.
(Being money due on allotment as per resolution no......dated .......)
On the receipt of allotment money

Bank A/c Dr.
To Share Allotment A/c
(Being money received on allotment)
(c) Calls
The balance due, if any, on shares after taking into account application money
and allotment money may be asked for by the Board of Directors in a number of
instalment depending upon the terms of issue . Each such instalment is known as a
"Call". There can be maximum three calls. The journal entries are as follow:
On making the first call

Share First Call A/c Dr.
(Being the first call money due as per resolution no...........
dated ..................)
8
On receipt of the money of first call
Bank A/c Dr.
To Share First Call A/c
(Being money received on first call)
Notes:
(i) Similar entries may be made for the second and third call through Share Second
Call Account and Share Third Call Account, respectively. In case of last call, the
word 'final' is also added to the concerned "Share Call Account'. In case the
entire balance is payable on a single call, usually, the term 'Share Call Account'
is used.
(ii) In order to distinguish one type of share from the other one, the name of the
share i.e. Equity or Preference must be prefixed with the word 'Share' e.g.
Preference Share Capital A/c, Equity Share Capital A/c.
ILLUSTRATION I : ABC Corporation Ltd. was registered on Ist January, 1998 with a
capital of Rs.10,00,000 divided into 1,00,000 shares of Rs.10 each. The company
offered 44,000 shares; applications were received for the whole of shares and Re. 1
per share was received with application. On Ist February, these shares were allotted and
Rs.2 per share was duly received on 28th February as allotment money. A first call of
Rs.3 per share was made on Ist March and the call money on all shares were received.
The final call of Rs.4 per share was made on Ist June and the amount due, was received
by 30th June. Pass the necessary Journal entries and prepare Balance Sheet as at 30 the
June, 1998.
9
Solution
Journal
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
01.01.98 Bank A/c Dr. 40,000
To Share Application A/c 40,000
(Being the application money received
on 40,000 shares @ Re.1 per share)
01.02.98 Share Application A/c Dr. 40,000
To Share Capital A/c 40,000
(Being the application money
adjusted)
02.02.98 Share Allotment A/c Dr. 80,000
(Being the allotment due on
40,000 shares @ Rs.2 per share)
28.02.98 Bank A/c Dr. 80,000
To Share Allotment A/c 80,000
(Being the allotment money
received)
01.03.98 Share Ist Call A/c Dr. 1,20,000
To Share Capital A/c 1,20,000
(Being the Ist Call money due on
40,000 shares @ Rs.3 per share)
01.03.98 Bank A/c Dr. 1,20,000
To Share Ist Call A/c 1,20,000
(Being the share Ist call money
received on 40,000 share @
Rs. 3 per share)
01.06.98 Share Second & Final Call A/c Dr. 1,60,000
(Being the share second & final
call money due on 40,000
shares @ Rs.4 per share)
30.06.98 Bank A/c Dr. 1,60,000
To Share Second & Final Call A/c 1,60,000
(Being the share second & final
call money received on 40,000)
10
Balance Sheet as on 30th June 1998
Share Capital Current Assets : 4,00,000
Authorised Capital : Cash at Bank
1,00,000 shares of Rs.10 each 10,00,000
Issued Capital:
40,000 shares of Rs.10 each 4,00,000
Subscribed Capital:
40,000 shares of Rs.10 each 4,00,000
4,00,000 4,00,000
9.5.2 Under Subscription
When the number of shares applied for is less than the number of shares offered
by the company, such a situation is known as under-subscription of shares. For Example,
a company has offered 10,000 shares to public but the public applied for 8000 shares
only, it is called a case of under-subscription. In such a case, it must be ensured that the
company has received the minimum subscription and the entries for application,
allotment and calls will be made only for 8000 shares.
9.5.3 Over-Subscription
Shares are said to be over-subscribed when the numbers of shares applied is

more than the number of shares offered. For example a company has offered 10,000
shares to public but the public applied for 18,000 shares, it is called a case of over-
subscription. The company may treat the excess applications received in one or more
of the following ways:
(a) Certain applications may straightway be rejected. Application money will be

refunded to such applicants. The necessary journal entry in this case will be :
To Bank A/c
(Being refund of the application money)
11
(b) Partial allotment may be done. Partial allotment means allotment of a smaller
number of shares than the number of shares applied for.
(c) Pro-rata allotment may be done. Allotment on pro-rata basis means that allotment
is made to each applicant or some applicants on a proportionate basis. For example a
company offers 10000 shares to the public, applications are received for 18,000 share.
No allotment is made to applicants for 3000 shares and the rest are allotted shares on
a pro-rata basis. It means applicants for 15,000 shares have been allotted 10,000 shares
or every applicant of this group has been allotted two shares for three applied.
In case the company adopt (b) or (c) alternative, the company has to adjust the
excess application money received. Company can use the excess application money
received, for money due on allotment. For example, Ram applies for 150 shares and
pays Rs.2 per share as application money. He gets only 120 shares and the money due
on allotment is Rs.3 per share. The following journal entry will be passed to transfer
excess application money from "Share Application Account" to "Share Allotment
Account".
Share Application A/c Dr. 60
To Share Allotment A/c 60
(Being excess money received on application transferred to
Share Allotment A/c)
Surplus money exceeding that due on allotment should be refunded to the

allottees within eight days after the company becomes liable to pay.
ILLUSTRATION 2: A company offers 10,000 shares of Rs.10 each to the public for
subscription. The money is payable as follows:
Rs. 2 on Application
Rs. 3 on Allotment, and
Rs. 5 on First & Final Call
12
The company receives applications for 12,000 shares. The shares are
allotted on a pro-rata basis. All allottees pay the allotment and final call moneys on due
dates. Make the necessary journal entries.
Solution :
Journal Entries
Particulars Dr. (Rs.) Cr.(Rs.)
(1) Bank Account 24,000
To Share Application Account 24,000
(Being application money received in
cash on 12,000 shares @ Rs. 2 per share)
(2) Share Application Account 24,000
To Share Capital Account 20,000
To Share Allotment Account 4,000
(Being transfer of application money due
on 10,000 shares and adjustment of
excess money to share allotment account)
(3) Share Allotment Account Dr. 30,000
(Being allotment money due on 10,000
shares @ Rs.3 per share)
(4) Bank Account Dr. 26,000
To Share Allotment Account 26,000
(Being allotment money received)
(5) Share First & Final Call Account Dr. 50,000
(Being Ist & Final Call money due on
10,000 shares @ Rs. 5 per share)
(6) Bank Account Dr. 50,000
To Share First & Final Call Account 50,000
(Being receipt of first & final call money)
13
9.5.4 Issues of shares at a premium
When a share is issued at a price which is above its face value then it is said to
be issued at a premium. The excess of issue price over the face value is called as the
amount of 'Share Premium'. The abolition of the Controller of Capital Issues and the
introduction of free pricing by companies for their issues of shares and debentures has
encouraged many companies to issue shares at a premium. According to Sec.78 of
Companies Act, the amount of share premium received by a company must be credited
to a separate account called the Share Premium account. The amount of share premium
may be used by the company only for the following purposes:
(a) for the issue of fully paid bonus shares to the members.
(b) for writing off preliminary expenses.
(c) for writing off the expenses of or the commission paid or discount
allowed on any issue of shares or debentures of the company.
(d) for providing premium payable on the redemption of any redeemable
preference shares or debentures of the company.
Accounting Entries
(a) If the premium is paid with application money, the following entries will be
passed:
(i) Bank A/c Dr.
To Share Application A/c
(Being share application money, alongwith premium received)
(ii) Share Application A/c Dr.
To Share Premium A/c
(Share application money transferred to Share Capital A/c and
Share Premium A/c)
14
(b) If the share premium is received alongwith the allotment money, then the
following entries will be passed :
(i) Share Allotment A/c Dr.
To Share Premium A/c
(Being the allotment money and share premium money
due on........... Shares)
(ii) Bank Account Dr.
To Share Allotment Account
(Being the receipt of allotment money alongwith share
premium account)
(c) If the share premium is received in parts say, on application as well as allotment
or allotment and first call, entries on the same pattern discussed above can be passed.
Alternative method
There is an alternative method for treatment of share premium. No entry is

passed for share premium when if becomes due. But on the receipt of share premium,
the 'Share Premium Account' is credited with the amount of share premium received.
The advantage of this method is that the Share Premium Account will not have to be
debited in the event of the forfeiture of shares in case share premium money has not
been received.
ILLUSTRATION 3: XYZ Co. Ltd. was registered with an authorised capital of

Rs.5,00,000 divided into 50,000 shares of Rs.10 each Of this, 20,000 shares were
issued for public subscription. The share amount was called up as under :
On Application....... Rs.2 per share
On Allotment......... Rs. 5 per share (including
premium Rs.2 per share)
15
On First Call.......... Rs.2 per share
On Final Call......... Rs. 3 per share.
Public applied for 25, 000 shares. The Directors decided to refund the
application money on 3,000 shares and adjust on remaining 2,000 shares towards
allotment money due. All the amounts were duly received.
Pass Journal Entries.
Solution
Journal Entries in the Books of XYZ Co. Ltd.
Particulars Dr. Cr.

Rs. Rs.
(1) Bank A/c Dr. 50,000
(Being application money of Rs.2 per
share received on 25,000 shares)
(2) Share Application A/c Dr. 50,000
To Share Capital 40,000
To Bank A/c (3,000 x Rs.2) 6,000
To Share Allotment A/c (2000 x Rs.2) 4,000
(Being application money on 20,000 shares
transferred to capital A/c, excess appli-
cation money on 3,000 shares refunded
and on 2,000 shares transferred towards
allotment)
(3) Share Allotment A/c Dr. 1,00,000
To Share Premium A/c 40,000
(Being allotment money of Rs.3 per
share and share premium of Rs.2 per share
due on 20,000 shares allotted)
16
(4) Bank A/c Dr. 96,000
(Being allotment money alongwith
share premium duly received)
(5) Share First call A/c Dr. 40,000

(Being Ist call of Rs.2 per share due
on 20,000 shares allotted)
(6) Bank A/c Dr. 40,000
To Share First Call A/c 40,000
(Being Ist call money duly received)
(7) Share Final Call A/c Dr. 60,000
(Being a final call of Rs.3per share due
on 20,000 shares allotted)
(8) Bank A/c` Dr. 60,000
To Share Final Call A/c 60,000
(Being final call money duly received)
9.5.5 Issues of shares at a discount
When the amount payable on shares is less than the face value of the shares, it is
said to have issued them at a discount.
According to Section 79 of the Companies Act, 1956 a company can issue shares
at a discount if the following conditions are satisfied:
a) The shares which are to be issued at a discount should be of a class which has
already been issued.
17
b) This should be authorised by passing a resolution at the general meeting and
sanctioned by the Company Law Board.
c) The maximum rate of discount at which the shares are to be issued should be
specified in the resolution and the maximum limit is 10%.
d) At least an year should have been collapsed from commencement of the business
by the company before the shares are issued at a discount.
e) The share should be issued at a discount before two months after the sanction
from the Company Law Board has been obtained or as specified by the Company
Law Board.
The 'Discount on Issue of Shares Account' appears on the assets side of the
Balance Sheet under the head "Miscellaneous Expenditure" and is written-off against
Profit and Loss Account or Share Premium Account over a period of years.
9.5.6 Calls in arrears
Some shareholders may not pay allotment money or call money in time. If any
amount has been called by the company and a shareholder has not paid that money till
the last date fixed for the payment thereof, this is known as calls in arrears. The amount
of calls in arrears in shown by way of deduction from the called-up capital in the Balance
Sheet. The directors can charge interest on calls-in-arrears at a rate specified in the
Articles of Association from the last date fixed for payment to the date of actual
payment. But if the Articles of Association are silent, Table A shall be applicable which
empowers the Board of Directors to charge interest at a rate not exceeding 5% p.a.
However, the directors have the authority to waive the payment of interest on calls in
arrears at their discretion.
18
The journal entries in respect of calls in arrears are as follows:
When a call becomes due

Share...........Call A/c Dr.
(Being call money due)
When money of a call is received
Bank A/c Dr.
To Share..........Call A/c
(with the amount actually received
excluding the amount of a call in arrear)
At the end of the accounting year, the amount outstanding on account of a call
will be transferred to 'Calls in Arrears A/c'.
Calls in Arrears A/c Dr.
To Share ....... Call A/c
In case shareholders makes payment of a call in arrear with interest, the
entry will be :
Bank A/c Dr.
To Calls in Arrears A/c
To Interest A/c
(Being interest received on call in arrear)
9.5.7 Calls in advance
A company, if its Articles of Association permit, may receive from shareholders

the amount remaining unpaid on shares held by them even though the amount has not
been called up. The amount so received is credited to Calls in Advance Account.
When a call is made, the appropriate amount is transferred from Call in Advance Account
to the relevant call. Table A gives a power to the company to accept calls in advance
19
from its shareholders and also provides for payment of interest at a rate not exceeding
6% per annum. The journal entries in respect of calls in advance are as follows :
Bank A/c Dr.

To Call in Advance A/c
(Being the amount of calls received in advance)
Share .......Call A/c Dr.
(Being the amount due on ......call on all shares including those on which call
has been received in advance)
Bank A/c Dr.
Calls in Advance A/c Dr.
To..... Call A/c
(Being the amount received on ...........call)
ILLUSTRATION 4: On Ist March, 1999 X Ltd., makes an issue of 20,000 equity

shares Rs.10 each payable as below:
On application Rs.2; on allotment Rs.3(including premium); on first and final

call Rs.6 (three months after allotment).
Applications were received for 26,000 shares and Directors made allotment in
full to the applicants demanding ten or more shares and returned money to the applicants
for 6,000 shares. One shareholder who was allotted 40 shares paid first and final call
with allotment money and another shareholder who was allotted 60 shares did not pay
allotment money on his shares, but later on he paid allotment money with the first and
final call. Directors have decided to charge and allow interest, as the case may be, on
calls in arrears and calls in advance respectively according to the provisions of Table A.
Give the necessary journal entries in the books of the company.
20
Solution
Journal Entries
1999 Particulars Dr. (Rs.) Cr. (Rs.)

Mar.1 Bank A/c Dr. 52,000
(For application money received on 26,000
shares @ Rs. 2 per share)
Mar.1 Share Application A/c Dr. 52,000
To Share Capital 40,000
To Bank A/c 12,000
(For application money of 20,000 shares
transferred to share capital account and
application money of 6,000 shares
refunded)
Mar.1 Share Allotment A/c Dr. 60,000
(For allotment money and share premium
due on 20,000 shares @ Rs.2 and Re.1 per
share respectively as per resolution of the
Board of Directors dated..............)
Mar.1 Bank A/c Dr. 60,060
To Calls in Advance A/c 240
(For the receipt of allotment money @ Rs.3
on 19,940 shares and advance call money on
40 shares @ Rs.6 each)
21
June1 Share First and Final Call A/c Dr. 1,20,000
(For the amount due in respect of First
and Final Call on 20,000 shares @ Rs.6
per share as per resolution of the Board
of Directors dated ........)
Bank A/c Dr. 1,19,940
To Share First Call A/c 1,19,760
(For the amount received on account of First
and Final call on 19,960 shares @ Rs.6 and
calls in arrears of allotment)
Calls in Advance A/c Dr. 240

To Share First & Final Call A/c 240
(Adjustment of calls in advance against the
First and Final Call)
Interest on Calls in Advance A/c Dr. 3.60

To Bank A/c` 3.60
(Interest paid on Calls in advance i.e. Rs.240 for
3 months @ 6% p.a.)
Bank A/c 2.25

To Interest on Calls Arrears A/c 2.25
(Receipt of interest on calls in arrear i.e.
Rs.180 for 3 months @ 5% p.a.)
22
9.5.8 Forfeiture of shares
When a shareholder who has been called upon to pay the amounts due on the
shares held by him defaults such payment, the company can exercise the right to forfeit
the shares. Forfeiture of shares means the cancellation of allotment to defaulting
shareholders and to treat the amount already received on such shares as forfeited to
the company. However, the following conditions must be satisfied in order to be sure
that the forfeiture of shares is valid :
a) The power to forefeit shares must be expressly given by the company's Articles.
b) The procedure given in the Articles must be followed.
c) There should be a default by the shareholder in payment of a valid call.
d) A notice of demand, requiring the shareholder to pay calls within the specified
period and specifying the amount, must be given.
e) The Board of Directors must pass a resolution for forfeiture of shares.
The following points should be kept in mind while passing an accounting entry
for forfeiture of shares :
a) the amount called up on the share forfeited.
b) the amount unpaid on various calls (including allotment) on the shares forfeited.
c) the amount received on the shares forfeited.
The following journal entry is passed at the time of forfeiture of shares

considering the terms of issue:
Forfeiture of Shares Issued at Par

Share Capital A/c Dr. (with the amount called up on
shares forfeited)
To Unpaid Calls A/c (with the amount which
became due but not paid)
To Forfeited Shares A/c (with the amount already received)
(Being ..............shares forfeited for non-payment of .........)
23
Forfeiture of Shares Issued at Premium
If the forfeited shares were issued at a premium, the Share premium account
would be debited only if the amount of the premium remained unpaid; otherwise no
debit can be given to share premium account in view of the restriction imposed by Sec.
78(2) of Companies Act, 1956. The journal entry for forfeiture will be:
Share Capital A/c Dr. (with the amount called up on Shares

forfeited)
Share Premium A/c Dr. (with the amount of premium not

received)

(Being .........shares forfeited for non-payment of ...............)
Forfeiture of Shares issued at Discount
Share Capital A/c Dr. (with the amount called up on

shares forfeited)

To Discount on Issue of Shares (with the amount of discount originally

allowed)
(Being............shown forfeited for non-payment of ..............)
24
9.5.9 Reissue of forfeited shares
Forfeited shares become the property of the company and the directors of the
company are empowered to reissue the forfeited shares if authorised by its Articles of
Association. Such reissue can be at par, premium or discount. However, in case they
are reissued at discount, the amount of discount should not exceed the actual amount
received on forfeited shares. In other words, there cannot be any loss on account of
reissue of forfeited shares. The purchaser of forfeited reissued shares is liable for
payment of all future calls duly made by the company. The accounting entries for the
reissue of forfeited shares in various cases are :
On reissue of forfeited shares originally issued at par or at a premium

Bank A/c Dr. (with the amount received on reissue)
Forfeited Shares A/c Dr. (with the discount allowed on reissue)

To Share Capital A/c (with the amount credited as paid up)
(Being reissue of forfeited Shares)
On reissue of forfeited shares originally issued at a discount.
Bank A/c Dr. (with the amount received on reissue)
Discount on Issue of Shares A/c Dr. ( with the discount originally allowed)
Forfeited Shares A/c Dr. (with the discount allowed on reissue)
To Share Capital A/c (with the amount credited as paid up)
(Being reissue of forfeited shares)
Treatment of Balance Left on the Forfeited Shares Account
If all the forfeited shares have been reissued, the balance standing to the credit
of Forfeited Shares Account is a capital profit and, therefore, it will be transferred to
Capital Reserve Account. The journal entry will be
25
Forfeited Shares A/c Dr.
To Capital Reserve A/c
(Being profit on reissue of forfeited shares transferred to capital reserve)
In case only a part of the forfeited shares have been reissued, only the
proportionate profit on reissue of forfeited shares will be transferred to Capital Reserve
Account and the balance on the Forfeited Shares Account relating to shares not yet
reissued is carried forward and is shown by way of addition to Paid-up capital in the
Balance Sheet.
ILLUSTRATION 5: A holds 100 shares of Rs.10 each on which he has paid Re. 1 per
share as application money.
B holds 200 shares of Rs.10 each on which he has paid Re 1 on application and
Rs.2 on allotment.
C holds 300 shares of Rs.10 each and has paid Re 1 on application, Rs.2 on
allotment and Rs.3 for the first call.
They all fail to pay their arrears and the second call of Rs.2 per share and the
Directors, therefore, forfeited their shares. The shares of C were then reissued at Rs.7
per share as fully paid-up.
Give the necessary journal entries to record the above transactions.
26
Solution :
JOURNAL
Rs. Rs.
Share Capital A/c Dr. 4,800
To Share First Call A/c 900
To Share Second Call A/c 1,200
To Forfeited Shares A/c 2,500
(Being forfeiture of 600 shares)
Bank A/c Dr. 2,100
Forfeited Shares A/c Dr. 900
(Being 300 shares reissued at Rs.7 each
fully paid up)
Forfeited Shares A/c Dr. 900
To Capital Reserve A/c 900
(Being surplus on forfeiture and reissue
of 300 shares transferred to capital reserve)
Working Notes :
1. Amt. not paid :
Allotment First Call Second Call
A 200 300 200
B - 600 400
C - - 600
200 900 1,200
27
2. The amount transferred to Capital Reserve has been calculated as follows :
Rs.
Amount received on C's shares
(300 x 6) 1,800
Less Discount allowed on reissue (300 x 3) 900
Net gain 900
Forfeiture and reissue of shares when there is over subscription and pro
rata allotment
In the case of over-subscription, some application are rejected altogether, some

applications are allotted in full and others are allotted on pro-rata basis. When there is
a pro-rata allotment and some share are forfeited, then the calculation of amount to be
forfeited poses a problem. In such case the following procedure may be adopted :
(a) Calculate the total number of shares applied for on the basis of allotted shares
or vice-versa.
(b) Calculate the total amount received on application by multiplying the number
of shares with application money. This is the amount which is to be forfeited on
default.
(c) Deduct the amount due on application on allotted shares and calculate balance
i.e., money received in advance and to be adjusted on allotment.
(d) Calculate the amount due on allotment on such shares and deduct the amount
already received as advance on application. This gives the amount in arrear on
allotment and is credited to share allotment account at the time of forfeiture of
shares.
ILLUSTRATION 6: The Satara Chemicals Works Ltd. issued for public subscription
1,00,000 shares of Rs.100 each at a premium of Rs.20 per share, payable as under :
28
Rs.20 per share on application; Rs.50 per share on allotment (including
premium); Rs.20 per share on first call and balance on final call.
Applications were received for 1,50,000 shares. The shares were allotted pro-
rata to the applicants of 1,20,000 shares, the remaining applications being rejected.
Money overpaid on application was utilised towards sums due on allotment .
Kisan Lal to whom 4000 shares were allotted failed to pay allotment and calls
money and Ram Lal, to whom 5,000 shares were allotted failed to pay the two calls.
These shares were forfeited after the second call made.
Give Journal Entries
Solution
Journal of Satara Chemicals Works Ltd.

Dr. Cr.
Rs. Rs.
(1) Bank A/c Dr. 30,00,000
To Share Application A/c 30,00,000
(Being application money of Rs.20 per
share received on 1,50,000 shares
applied for)
(2) Share Application A/c Dr. 30,00,000
To bank A/c 6,00,000
To Share Allotment A/c 4,00,000
(Transfer of application money on 1,00,000
shares actually allotted to Capital A/c; on
30,000 shares refunded; and on 20,000
shares (being pro-rata basis allotment)
to share allotment A/c)
29
(3) Share Allotment A/c Dr. 50,00,000
To Share Premium A/c 20,00,000
(Being allotment money of Rs.30 and
Premium of Rs.20 per share due on
1,00,000 shares allotted)
(4) Bank A/c Dr. 44,16,000
(Being receipt of the remaining allotment
money)
(5) Share First Call A/c Dr. 20,00,000
(Being Ist Call of Rs.20 per share due on
1,00,000 shares)
(6) Bank A/c Dr. 18,20,000
(Being receipt of Ist Call money on 91,000
shares i.e.; 1,00,000 shares - 4000 - 5000
shares on which call not received)
(7) Share Final Call A/c Dr. 30,00,000
(Being a final call of Rs.30 per share due
on 1,00,000 shares)
(8) Bank A/c Dr. 27,30,000
To Share Final Call A/c 27,30,000
(Being final call money received on
91,000 shares)
(9) Share Capital A/c Dr. 9,00,000
Share Premium A/c 80,000
To Share Forfeited A/c 3,46,000
To Share Final Call A/c 2,70,000
(Being forfeiture of 9,000 shares of Rs.100 each fully
called-up; for non-payment of various calls, and amount
of premium not received on 4,000 shares debited to share
premium A/c)
30
9.5.10 Surrender of shares
After the allotment of shares, sometimes a shareholder is not able to pay the
further calls and returns his shares to the company for cancellation. Such voluntary
return of shares to the company by the shareholder himself is called surrender of shares.
Surrender of shares has no separate accounting treatment but it will be like that of
forfeiture of shares. The same entries (as are passed in case of forfeiture of shares)
will be passed in case of surrender of shares.
9.5.11 Redemption of preference shares
According to Sec.100 of the companies Act, a company is not allowed to return

to its shareholders the share capital without the permission of the Court. However the
company can issue a special category of shares known as Redeemable Preference
Shares, which the company can redeem during its life time as per the provisions of
Sec.80 of the Companies Act. The following important provisions regarding the
redemption of Preference Shares are given under Section 80 of the Companies Act.
1. Such Shares cannot be redeemed unless they are fully paid-up.
2. Such shares can be redeemed either out of profits which would be available for
dividend or out of the proceeds of a fresh issue of shares made with the object
of redemption.
3. When shares are redeemed out of profits available for distribution for dividend,
a sum equal to the nominal amount of the shares so redeemed must be transferred
out of profits to a reserve account to be called 'Capital Redemption Reserve
Account'.
4. Capital Redemption Reserve Account can be used for issuing fully paid bonus
shares to the shareholders.
31
5. Any premium payable on redemption of preference shares should be provided
either out of profits or out of the share premium account.
Accounting Entries
The following are the accounting entries to be passed in the books of a company
which wants to redeem its redeemable preference share capital:
(i) For making partly paid up shares fully paid up

(a) Redeemable Preference Share Final Call A/c Dr.
To Redeemable Preference Share Capital A/c
(Being final call being made)
(b) Bank A/c Dr.
To Redeemable Preference Share Final Call A/c
(For money realised on final call)
(ii) For redeeming out of profits
Profit & Loss A/c/Revenue Reserve A/c Dr.
To Capital Redemption Reserve A/c
(iii) For a fresh issue of shares
Bank A/c
To Share Capital A/c Dr.
(In case of issue of shares at premium or discount, the
relevant account should be credited or debited)
iv) Making provision for payment of premium on redemption of
preference shares
Share Premium/Profit and Loss/Revenue Dr.
Reserve A/c
To Premium on Redemption of Preference Shares A/c
32
(v) For money due to redeemable preference shareholders
Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
To Redeemable Preference Shareholders/Preference Shares
Redemption A/c
(vi) For making payment to redeemable preference shareholders
Redeemable Preference Shareholders A/c Dr.
To Bank A/c
(vii) For issue of bonus shares
(a) Capital Redemption Reserve/Share Premium/
Revenue Reserve A/c Dr.
To Bonus Payable A/c
(b) Bonus Payable A/c Dr.
ILLUSTRATION 7: Following is the Balance Sheet of Moon Ltd., as on 31st December
1998.
Balance Sheet
Share Capital Sundry Assets 8,00,000
50,000 Equity Shares
of Rs.10 each 5,00,000
2,000 6% Redeemable
Preference Shares
of Rs.100 each 2,00,000
Sundry Creditors 50,000
8,00,000 8,00,000
33
The Directors of the company decided to issue 20,000 equity shares of
Rs.10 each at par and use the proceeds to redeem the preference shares.
Pass the journal entries and show the Balance-Sheet after the redemption
is completion is complete.
Solution
Journal Entries
Rs. Rs.
31.12.98 Redeemable Preference Share
Capital A/c Dr. 2,00,000
To Preference Shareholders A/c 2,00,000
(Being amount of capital Payable
on redemption)
31.12.98 Bank A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(Being amount received on issue
of 20,000 equity shares of Rs.10
each, for the purpose of redemption)
31.12.98 Preference
Shareholder's A/c Dr. 2,00,000
To Bank 2,00,000
(Being the payment of the amount
due to the redeemable preference
shareholders)
34
Balance Sheet
Share Capital Sundry Assets 8,00,000
70,000 Equity Shares
of Rs.10 each 7,00,000
8,00,000 8,00,000
Note : The Redeemable preference Share Capital is now replaced by additional Equity
Share Capital. Equity shares will now be 70,000. (50,000 as per balance-sheet + newly
issued 20,000 shares).
9.6 SUMMARY
A company si a voluntary and autonomous association of certain persons with

capital divided into numerous transferable shares formed to carry out a particular
purpose in common. These are two types of shares which a company may issue i.e.
preference shares and equity shares. Share capital of a company is divided into different
categories namely authorised, issued, subscribed, called-up, paid-up and reserve capital.
A company can issue shares for cash and for consideration other than cash. When shares
and issued to public for cash, the company issues prospectus, receive applications,
make allotments and make calls. In case the issue price of a share is more than the
fixed value/par value of a share, the issue of shares is said to be at a premium. If a
shareholder defaults in payment of instalments of issue price of a share called by the
company, the Board of Directors may decide to forfeit the shares held by the defaulting
shareholder by following the procedure laid down in the articles of association of the
company.
35
9.7 KEYWORDS
Company: It is a voluntary and autonomous association of persons with capital divided

into numerous transferable shares formed to carry out a particular purpose in common.
Paid-up Capital: The part of the called up capital which is offered and is actually paid
by the members is known as paid-up capital.
Share: Authorised capital of a company is split up into units with definite face value
called shares.
Preference Shares: These are those shares which carry certain priorities in regard to
the payment of dividend and return on capital over the equity shares.
Under-Subscription: When the number of shares applied for by the public is less than
the number of shares issued by the company, the issue is said to be under-subscribed.
Surrender of Shares: Voluntary return of shares to the company by the shareholder

himself is called surrender of shares.

1. What is meant by Share Capital? Explain the different categories of share capital
with the help of an illustration.
2. Distinguish between
(a) Over-subscription and under-subscription.
(b) Calls in arrears and calls in advance.
(c) Forfeiture of shares and surrenders of shares.
3. Give the journal entries only with narration of the following:
(a) Forfeiture of shares issued at a premium.
(b) Forfeiture of shares issued at a discount.
(c) Redemption of redeemable preference shares.
(d) Interest on calls in advance.
36
4. What are the provision of Companies Act, 1956 regarding redemption of
redeemable preference shares?
5. A limited company offered for subscription 50,000 equity shares of Rs.10 each
at a premium of Rs.1.25 per share and 2,500 six per cent cumulative preference
shares of Rs.100 each at par. The shares were payable as follows :
On application Rs.3.75 per equity share (including the premium) and Rs.25 per
preference shares ; on allotment Rs.2.50 per equity share and Rs.25 per
preference share; on first and final call the balance due in both cases.
The public applied for 80,000 equity shares and 2,000 preference shares.
Applications for 5,000 equity shares were declined, the application money being
returned. The remaining applicants received allotment for two-thirds of their
applications. Applications for preference shares were allotted in full.
Give journal entries to record these transactions in the company's books.
6. New Ventures Ltd. made an offer of 1,00,000 Equity Shares of Rs.10 each
payable as follows:
On application Rs.2 per share
On allotment Rs. 2 per share
On first call Rs. 3 per share
On second call Rs.3 per share
Applications were received for 1,60,000 shares and allotments were made pro-
rata to the applicants for 1,50,000 shares, the remaining applications being
refused and money refunded. Application money paid in excess by the allottees
was adjusted with the money due on allotment.
Romesh the holder of 200 shares failed to pay the allotment money and on his
failure to pay the first call, the shares were forfeited.
Karim another shareholder to whom 500 shares were allotted failed to pay the
first and second call amounts and his shares were also forfeited after making
the second call.
37
Out of the forfeited shares, 600 shares were reissued as fully paid on payment
of Rs.9 per share.
You are required to show the journal entries for recording the forfeitures and
re-issue of the shares.
7. A company has 4,000 6% redeemable preference shares of Rs.100 each fully
paid. The company decides to redeem the shares on December 31, 1998 at a
premium of 5 per cent. The company makes the following issues:
(a) 1,000 equity shares of Rs.100 each at a premium of 10 percent.
(b) 1,000 9% debentures of Rs.100 each.
The issue was fully subscribed and all the amounts were received. The redemption
was duly carried out. The company has sufficient profits. Give journal entries.


New Delhi.

5. Principles of Financial Accounting by P.C. Gupta and C.L. Chaturvedi, Shree

Mahavir Book Depot, New Delhi.
38
LESSON -10
ACCOUNTING FOR DEBENTURES
STRUCTURE
10.0 Objective
10.1 Introduction
10.2 Classification of Debentures
10.3 Distinction between Debentures and Shares
10.4 Issue of Debentures
10.5 Interest on Debentures
10.6 Redemption of Debentures
10.7 Summary
10.8 Keywords
10.0 OBJECTIVE
By reading this lesson, you would know about
(a) Accounting Treatment for issue of debentures
(b) Entries for issue and redemption of debentures
10.1 INTRODUCTION
The financial requirements of a company may be met by raising share
capital or by going for public borrowing. One kind of such a public borrowing
is issue of debentures. Debenture is the acknowledgment of a debt given
under the seal of the company and contains a contract for the repayment of
the principal at a specified date and for the payment of interest at fixed rate
percent until the principal sum is repaid. A debenture holder is not entitled
to vote in the meetings of the company. Rate of interest payable on
debenture is fixed and generally less than the rate of dividend payable on
1
equity shares. One advantage to the company in issuing debentures is the
interest on debentures is allowed to be deducted for the purpose of taxable
income computation of the company.
10.2 CLASSIFICATION OF DEBENTURES

A company may issue various kinds of debentures with different rights
as given below :
(A) From Security Point of view
1. Naked Debentures
Naked debentures or unsecured debentures are those which are not
secured on any asset. The general solvency of the company is the only
security for the holders of these debentures.
2. Secured Debentures
Secured debentures are those which are secured either on a particular
asset or on all the assets of the company. In India, only the secured
debentures can be issued.
(B) From Redemption Point of view

1. Redeemable Debentures
These are the debentures under which the principal money is paid off
to the debenture holders on the expiry of the fixed term.
2. Irredeemable Debentures
In the case of irredeemable debentures the company does not give
any undertaking of repaying the money borrowed by issuing debentures, after
a fixed time or within a fixed period during the continuance of business by
the company. Company may repay debentures at any time it may choose to
do so, but the creditors cannot compel the company to repay them at any
certain time. They shall, however, be repaid when the company goes into
liquidation or makes a default in the payment of interest.
2
(C) From Conversion Point of view
1. Convertible Debentures
Convertible debentures are those which give an option to debenture
holders to convert them into equity or preference share at a stated rate of
exchange after a certain period.
2. Non-Convertible Debentures
These are those debentures, the holders of which do not have a right
to convert them into shares.
(D) From Priority Point of view

1. First Debentures
First debentures are those debentures which are paid first before any
payment is made to another type of debentures.
2. Second Debentures
Debentures which are payable after the redemption of the first
debentures are known as second debentures.
(E) From Transferability Point of view
1. Registered Debentures
Registered debentures are those which are payable to the persons
whose name appears in the Register of Debenture holders. Interest is paid
to the registered holder. These can be transferred only by executing a transfer
deed.
2. Bearer Debentures
Bearer debentures are treated as negotiable instruments and are
transferable by delivery alone. The names of the holders of such debentures
are not required to be registered in the Register of Debenture holders.
Interest is paid to the person who produces the interest coupon attached to
it.
3
10.3 DISTINCTION BETWEEN DEBENTURES AND SHARES
The following are the points of distinction between debentures and
shares :
(i) Creditorship Security v. Ownership Security : Whereas a debenture
is a creditorship security, a share is an ownership security. It means that a
debentureholder is a creditor of the company, while a shareholder is a part-
owner of the company. It is the fundamental distinction between a debenture
and a share.
(ii) Certainty of return : A debentureholder is certain of return on his
investment. The company has to pay interest on debentures at the fixed rate
agreed upon at the time of issue even if it suffers heavy losses. A shareholder
cannot get dividends if the company does not earn profits. As a matter of
fact, even when a company earns a profit, its Directors may decide to plough
back the profits and not declare a dividend. Thus, there is no certainty of
return on investment in shares.
(iii) Order of repayment on winding up : In case of winding up of a
company, the amount of debentures will be repaid before any amount is
paid to shareholders to return share capital.
(iv) Restrictions on issue at a discount : There are not restrictions on
issue of debentures at a discount, but there are legal conditions which have
to be fulfilled to issue shares at a discount.
(v) Mortgage : There can be mortgage debentures. It means that assets
of the company can be mortgaged in favour of debentureholders by way of
security. But there can be no mortgage shares.
(vi) Convertibility : Debentures which can be converted into shares at
the option of debentureholders can be issued. But shares convertible into
debentures cannot be issued.
4
10.4 ISSUE OF DEBENTURES
The entries for issue of debentures is exactly the same as in the case
of shares. The only differences are that the term 'Debenture' is substituted
for the word 'Share' and the percentage of interest is pre-fixed to term
'Debenture'. They can also be issued at par, premium or discount. However,
the legal restrictions regarding use of premium money or issuing at discount
applicable in case of shares, are not applicable to debentures. A company
can issue debentures in any of the following ways :
a) for cash
b) for consideration other than cash
c) as collateral security
Issue of debentures for cash
The debentures can be issued at par value, at premium or at discount.

The cash receivable on issue of debentures can be collected in one lump
sum or by installments as is done in the case of shares. The accounting
entries are given below :
1. For receipt of application money
Bank A/c Dr.
To Debenture Application A/c
2. On allotment of debentures
Debenture Application A/c Dr.
To Debentures A/c
(Being transfer of debenture application money)
Debenture Allotment A/c Dr.
To Debentures A/c
(For allotment money due)
Bank A/c Dr.
To Debenture Allotment A/c
(Being receipt of allotment money)
5
In case allotment is made at premium and premium is to be received
on allotment, the entry for amount due on allotment will be :
To Debentures A/c
To Debenture Premium A/c
In case allotment is made at discount, the entry will be :
Discount on issue of Debentures A/c Dr.
To Debentures A/c
3. On First call:
Debentures First Call A/c Dr.
To Debentures A/c
(Being First/Second/Final call due)
Bank A/c Dr.
To Debenture First Call A/c
(Being First call money received)
Note : Similar entries may be made for the Second Call and Third Call through
Debenture Second Call Account & Debenture Third Call Account
respectively. In case of last call the word " Final" is also added to the
concerned Debenture Call Account.
ILLUSTRATION 1 : A company issued 10,000 debentures of Rs.100 each

for subscription. The debenture money was payable money was payable as
follows:
Rs.30 on application, Rs.40 on allotment, Rs.20 on first call and
Rs.10 on second and final call. A person who holds 200 debentures failed
to pay the amount due on allotment. He, however, pays this amount with the
first call money. Another person who is holding 400 debentures paid all the
calls in advance on allotment.
Give journal entries in the books of the company.
6
Solution
JOURNAL
Dr. Cr.
Rs. Rs.
Bank Account Dr. 3,00,000

To Debentures Application Account 3,00,000
(Being the receipt of the application money
on 10,000 debentures @ Rs.30 per debenture)
Debenture Application Account Dr. 3,00,000
To Debenture Account 3,00,000
(Being the transfer of the application
money on 10,000 debentures
to debentures account)
Debenture Allotment Account Dr. 4,00,000

To Debentures Account 4,00,000
(Being the allotment amount due on
10,000 debenture @ Rs.40 per debenture)
To Debenture calls in advance Account 12,000
(Being the receipt of allotment money on
9,800 debentures and call money @ Rs.30
per debenture on 400 debentures)
Debenture First Call Account Dr. 2,00,000
(Being the first call due on 10,000 debentures
@ Rs.20 per debentures)
Debentures call in advance Account Dr. 8,000
To Debenture First Call Account 8,000
(Being the transfer of Rs.8,000 received in
advance on 400 debenture first call account)
To Debenture First Call Account 1,92,000
To Debenture Allotment Account 8,000
(Being the receipt of the arrears of the
allotment and the amount due on account
of first call)
7
Debenture Second & final Call AccountDr. 1,00,000
(Being the amount due on 10,000
debentures @ Rs.10 per debenture)
Bank Account Dr. 96,000
Debenture calls in advance Account Dr. 4,000
(Being the adjustment of debentures
calls in advance and receipt of second
call on debentures)
Terms of issue of debentures
A company is free to issue the debentures on any terms it likes. These

terms may not only relate to issue but also to redemption. The following
possibilities of the issue and redemption of debentures may, however, be
considered :
Case No. Conditions of Issue Conditions of Redemption
I Issue at par Redemption at par
II Issue at premium Redemption at par
III Issue at discount Redemption at par
IV Issue at par Redemption at premium
V Issue at discount Redemption at premium
1. Debentures issued at par and payable at par

On issue of debentures
Bank A/c Dr.
To Debentures A/c
On Payment
Debentures A/c Dr.
To Bank A/c
In case money is received in different installments, say on application,

allotment, first call etc., entries will be made in the manner already
discussed in the previous pages.
8
2. Debentures issued at discount and payable at par
On Issue
Bank A/c Dr.
Discount on issue of debentures A/c Dr.
To Debentures A/c
In case money is received in installments, the entry for discount will
be made with money due on allotment.
Debenture allotment A/c Dr.
Discount on issue of debentures A/c Dr.
To Debentures A/c
On payment
Debentures A/c Dr.
To Bank A/c
3. Debenture issued at premium payable at par

On issue
Bank A/c Dr.
To Debentures A/c
To Premium on issue of debentures A/c
In case money is received in installments, the entry for premium,

will be made with money due on allotment unless otherwise stated.

To Debentures A/c
To Premium on Issue of Debentures A/c
On payment
Debentures A/c Dr.
To Bank A/c
4. Debentures issued at par, payable at premium

On issue
Bank A/c Dr.
Loss on issue of debentures A/c Dr.
To Debentures A/c
To Premium on redemption of
debentures A/c
9
In case the money is received on debentures in installments, the entry
for the amount of premium payable on redemption, will be made with the
entry for money due on allotment.
Debenture allotment A/c Dr.

To Debentures A/c
To Premium on redemption of debentures A/c
On payment
Debentures A/c Dr.
Premium on redemption of debentures A/c
To Bank A/c Dr.
5. Debentures issued at discount, payable at premium
On issue
Bank A/c Dr.
To Debentures A/c
To Premium on redemption of Debentures A/c
In case money on debentures is received in installments, the entry of

loss on issue will be made with allotment at in case of point (4).
On payment
The entry on payment will also be the same as indicated in point (4).
Issue of shares for consideration other than cash

Sometimes the companies may go for issue of debentures towards
consideration for purchase of any fixed asset. In such cases the journal entry
would be :
i) For purchase of asset
Asset A/c Dr.
To Vendor A/c
(Being purchase of assets)
10
ii) For issue of debentures
Vendor A/c Dr.
To Debentures A/c
(Being issue of debentures)
Issue of debentures as collateral security

When a company borrows money from the outsiders like, banks,
financial institutions it may issue debentures as an additional security
besides giving the principal security on assets. These debentures are issued
to the lender on the understanding that in case the company pays back the
loan they will be returned to the company, but in case it fails to pay the
loan, the lender will be the debenture holder to the extent of debentures so
held and will have all the rights which are available to the debenture holders
of that class.
There are two ways of dealing with such debentures in the accounts
of the company.
1. No entry is made in the books of accounts of the company. A note is

given in the Balance Sheet regarding depositing of the debentures as
collateral security.
2. The transaction may be recorded in the books of accounts of the
company by passing the following entry:
(a) On the issue of such debentures

Debenture Suspense A/c Dr.
To Debenture A/c
(b) On release of such debentures
Debentures A/c Dr.
To Debenture Suspense A/c
ILLUSTRATION 2: A Ltd. made the following issue of debentures:

(i) For cash at 90 per cent but payable at 110 per cent; debentures of
Rs.10,000.
11
(ii) To a creditor who supplied machinery costing Rs.1,00,000; 1,100
debentures of Rs.100 each.
(iii) To Bank for a loan of Rs.7,00,000 as collateral security, 10,000
debentures of Rs.100 each.
Journalise the transactions.
Solution
JOURNAL
Dr. Cr.
Rs. Rs.
(i) Bank A/c Dr. 9,000
Loss on issue of Debentures A/c Dr. 2,000
To Debentures A/c 10,000
To Premium on redemption of Debenture A/c 1,000
(Being issue of 100 debentures of Rs.100 each
90 per cent but payable at 110 per cent)
(ii) Vendor's A/c Dr. 1,00,000
Discount on Issue of Debentures A/c Dr. 10,000
To Debentures 1,10,000
(Being allotment of 1,100 debentures of
Rs.100 each to the vendor in discharge of
the purchase consideration of Rs.1,00,000
for machinery purchased)
(iii) Either no entry may be passed and simply
a note to that effect may be given in the
Balance Sheet or the following entry may be
passed :
Debenture Suspense A/c Dr. 10,00,000
To Debentures A/c 10,00,000
(Debentures issued by way of collateral
security to the bank)
12
Writing off the loss on issue of debentures
The loss on issue of debentures i.e., the discount on issue of

debentures or premium payable on redemption of debentures appears on
the assets side of the Balance Sheet as a fictitious Asset and it is prudent to
write it off as early as possible. The loss can be written-off from any capital
profit including the share premium or revenue profit by the following entry:
Capital Reserve/P&L A/c Dr.
To Loss (discount) on issue of debentures
However writing off the loss on issue of debentures is not a legal
necessity.
In case such loss is written off from Profit and Loss Account as a
deferred revenue expenditure, the amount to be written off each year will
be calculated as follows :
1) When debentures are to be redeemed after a fixed period.

When the debentures are to be redeemed after a fixed period, the
amount of loss is written off evenly over the years after which the debentures
will be redeemed as the company enjoys the benefits evenly throughout the
period of debentures.
2) When debentures are to be redeemed in installments.

When the debentures are to be redeemed in installments, the funds
used each year go on diminishing and hence the loss on issue of debentures
is also divided over different years in the ratio of amount of debentures
outstanding at the beginning of each year.
ILLUSTRATION 3: On Ist January, 1994, a limited company issue

debentures of the face value of Rs.1,00,000 at a discount of 6%. The
debentures were repayable by annual drawings of Rs.20,000 made on 31
December each year. The directors decided to write off the discount on
13
issue over the period of the debentures in such a way as to charge each year
with an amount proportionate to debentures outstanding in that year.
Show the amount of the discount that should be written off in each of
the five years.
Solution
Year Total amount Ratio Proportion Amount to be
of debentures to be written written off
outstanding off
1994 1,00,000 5 5/15 5/15 of Rs.6,000=2,000
1995 80,000 4 4/15 4/15 of Rs.6,000=1,600
1996 60,000 3 3/15 3/15 of Rs.6,000=1,200
1997 40,000 2 2/15 2/15 of Rs. 6,000= 800
1998 20,000 1 1/15 1/15 of Rs. 6,000= 400
15 6,000
10.5 INTEREST ON DEBENTURES

Interest on debentures is charged to the Profit and Loss Account.
While paying the interest on debentures, it is the obligation on the company
concerned to deduct the income-tax before making payment of interest to
debenture holder. The following journal entries and passed in this
connection :
(i) When interest on debentures is due
Interest on Debentures Account (with gross amount) Dr.
To Income-tax Account (with income-tax)
To Debentureholders Account (with net amount)
(ii) When net amount due is paid
Debentureholders Account Dr.
To Bank Account
14
Interest on debentures is transferred to the debit side of Profit and
Loss Account. The credit balance of Income-tax Account is shown on the
liabilities side of the Balance Sheet. As and when it is paid to the Government
this account is debited and bank account will be credited.
10.6 REDEMPTION OF DEBENTURES

Redemption of debentures means to discharge the liability on account
of debentures. The terms of redemption are stated in the prospectus inviting
application for debentures. The various sources out of which the debentures
may be redeemed are (a) out of profits (b) out of capital (c) Redemption by
conversion (d) Redemption by purchase of debentures in the open market,
and (e) out of provisions made for redemption.
1. Redemption out of profits
When debentures are redeemed out of profits, profits of the company

are utilised for the purpose of redemption with holding the same for
dividend. In such a case, the following journal entries will be passed :
(a) If the debentures are to be redeemed at par

Debentures A/c Dr.
To Debenture-holders' A/c
(b) If the debentures are to be redeemed at a premium
Debentures A/c Dr.
Premium on Redemption of Debentures A/c Dr.
To Debenture-holder's A/c
(c) If the debentures are to be redeemed at a discount
Debentures A/c Dr.
To Debenture-holders' A/c
To Profit on Redemption of debentures A/c
15
(d) For amount paid on redemption
Debenture holder Account Dr.
To Bank
(e) For transfer of Profit
Profit & Loss Appropriation Account Dr.
To Debentures Redemption Reserve Account
(f) When balance of Debentures Redemption Reserve Account is not
required for redemption and is transferred to General Reserve Account
Debenture Redemption Reserve Account Dr.
To General Reserve
The balance of general reserve is a free reserve and will be available
for all purposes.
2. Redemption out of capital
If debentures are redeemed out of capital or profits are not utilised

for redemption of debentures, such redemption is said to be out of capital.
When debentures are redeemed out of capital, the following journal entry
is made:
Debentures A/c Dr.
To Bank A/c
Such redemption will not affect the balance of either Profit and Loss
Account or Debentures Redemption Reserve Account. This method is
preferred as it does not mix the amount unpaid to debentureholders with
the debentures account.
3. Redemption by conversion
Redemption by conversion means redeeming the debentures by

converting them into new class of debentures or shares. Such option is
16
exercised by the debentureholders only when they find it beneficial from
their viewpoint. The new shares or debentures can be issued either at par or
at a premium or at a discount. The following journal entry will be made :
Old Debenture A/c Dr.
To New Debentures or Share Capital A/c
In case the new issue is at discount/premium
Old Debenture A/c Dr.
Discount on Issue of Shares/ Debentures A/c Dr.
To New Share Capital/Debenture A/c
To Premium on Issue of Shares/Debentures A/c
ILLUSTRATION 4: On July 1, 1996 A Ltd. gave notice of its intention to

redeem its outstanding Rs.4,00,00,000 4% Debenture stock on January
1, 1997 at 102 per cent and offered the holder, the following options :
(1) To apply the redemption money to subscribe for :

(a) 6% Cum. Pref. shares of Rs.20 each at Rs.22.50 per share
accepted by the holders of Rs.1,71,00,000 stock, or
(b) 6% Debenture stock of Rs.96% accepted by the holders of
Rs.1,44,000 stock, or
(2) To have their holdings redeemed for cash if neither of the options
under (1) was accepted.
You are required to show the journal entries necessary to record the
redemption and allotments under (1) and (2) and to state the amount of cash
required to satisfy the option.
17
Solution
JOURNAL
Dr. Cr.
Rs. Rs.
4% Debentures A/c Dr. 4,00,00,000
Premium on Redemption of Debentures A/c Dr. 8,00,000
To Debenture-holders A/c 4,08,00,000
(Redemption of Debentures of Rs.4,00,00,000
at 102 per cent)
Debentureholders A/c Dr. 1,74,42,000

To 6% Cum. Preference Share Capital A/c 1,55,04,000
To Share Premium A/c 19,38,000
(Debenture holders of Rs.1,71,00,000 (Re-
redemption value Rs.1,74,42,000) accepted
Cum. Pref. Shares of Rs.20 each at Rs.22.50
per share)
Debenture-holders A/c Dr. 1,46,88,000
Discount on Issue of Debentures A/c Dr. 6,12,000
To 6% Debentures A/c 1,53,00,000
(Debenture-holders of Rs.1,44,00,000
(redemption value Rs.1,46,88,000) issued
new 6% Debentures at Rs.96 per cent)
Debenture-holders A/c Dr. 86,70,000
To Bank 86,70,000
Debenture holders of Rs.85,00,000 (Re-
demption value Rs.86,70,000) paid in
cash).
Total amount required for Redemption is
Rs.4,08,00,000, i.e. 102
4,00,00,000 x
100
18
4. Redemption by purchase of debentures in the open market
A company can purchase its own debentures in the open market i.e.
in a stock exchange either for immediate cancellation or for the purpose of
keeping them as investments. This kind of purchase will be generally taken
up specially when they are quoted at the low prices. The advantage in this
method is that the company can redeem the debentures at its convenience,
i.e. whenever it has surplus funds. The purchase may be at the prices less
than the paid up value of the debentures. In such case the company earns
profits on cancellation of such debentures. The said profit is a capital profit
and it can be used for writing-off of any capital loss such as discount on
issue of debentures, etc., or it can be transferred to capital reserve.
Some times the debentures may be purchased in the open market at

the higher prices than the nominal value of the debentures. In such cases,
the company suffers a loss and again it is a capital loss which can be written
off either from the Profit & Loss Account or from any capital profit.
The journal entries which are required to passed are given below :
1. When debentures are purchased in the open market for immediate
cancellation
(a) On purchase of own debentures for immediate cancellation on profit
Debentures A/c Dr.
To Bank A/c
To Profit on Redemption of Debentures A/c
(b) On purchase of own debentures for immediate cancellation on loss
Debentures A/c Dr.
Loss on Redemption of Debentures A/c Dr.
To Bank A/c
19
(c) On transfer of profit on redemption
Profit on Redemption of Debentures A/c Dr.
II When debentures are purchased in the open market for investment
purpose
(a) On purchase of own debentures
Own Debentures A/c Dr.
To Bank A/c
(b) On cancellation of own debentures
Debentures A/c Dr.
To Own Debentures A/c
To Profit on Redemption of Debentures A/c
(c) On transfer of profit on redemption
Profit on Redemption A/c Dr.
5. Redemption out of provisions
It is always a wise policy for the company to make arrangements in

advance to repay the known liability for redemption of debentures. This can
be done by making provision otherwise it will be difficult for the company
to arrange lumpsum to repay debts. This is possible by adopting either the
sinking fund method or insurance policy method.
Sinking fund method

Sinking fund is created by setting aside every year a certain sum of
money in Profit and Loss Appropriation Account, investing it in outside
securities and reinvesting the interest received. Thus investments
accumulate to the desired figure at the end of the desired period When the
time of redemption comes the securities are realised and the sale proceeds
20
are utilised for the purpose of redemption. The amount to be invested
annually can be ascertained from the Sinking Fund Tables. This method
resembles with that of Depreciation Fund Method. The accounting entries
in such case are :
(A) At The End of the First year

(1) Profit and Loss Appropriation A/c Dr.
To Debenture Sinking Fund A/c
(Being Amount set aside from profits
for redemption)
(2) Sinking Fund Investment A/c Dr.
To Bank A/c
(Being amount set aside invested in securities)
(B) At the End of Second Year & Subsequent Year
(1) Bank A/c Dr.
To Interest on Sinking Fund Investment A/c
(Being Interest received on the investments at ...%)
(2) Interest on Sinking Fund Investment A/c Dr.
To Sinking Fund A/c
(Being interest on investment transferred
and credited to Fund A/c)
To Sinking Fund A/c
(Being amount set aside from profits for redemption of
debentures)
To Bank A/c
(Being amount set aside plus interest
received invested in securities)
21
(C) At the End of Last Year (When Debentures Are to be Redeemed)
(1) Bank A/c Dr.
To Interest on Sinking Fund Investment A/c
(Being interest received)
(2) Interest on Sinking Fund Investment A/c Dr.
To Sinking Fund A/c
(Being interest transferred)
To Sinking Fund A/c
(Being sales proceeds of investments)
(4) Bank A/c Dr.
To Sinking Fund Investment A/c
(Being sales proceeds of investments)
To Sinking Fund A/c
(Being profit on sale of investment transferred)
OR
Sinking Fund A/c Dr.
To Sinking Fund Investment A/c
(Being loss on sale of investment transferred)
(6) Debentures A/c Dr.
To Bank A/c
(Being debentures redeemed)
(7) Sinking Fund A/c Dr.
To General Reserve A/c
(Being transfer of Sinking A/c balance)
22
ILLUSTRATION 5: A Company issued Rs.2,00,000 in 5% Debentures of
Rs. 100 each at par, repayable at the end of 5 years at a premium of 6% . A
Sinking Fund at 4% compound interest is created for the redemption of
debentures.
You are required to prepare Sinking Fund Account and Sinking Fund
Investment Account for 5 years (Re. 1 per year at 4% compound interest
amounts to Rs.5.4613 in 5 years).
Solution :
When the amount is Rs.5.4163, the annual instalment is Re.1
When the amount is Rs.2,12,000 (Rs.2,00,000 Debentures
+ Rs.12,000 premium on redemption of debentures),

The annual instalment is 2,12,000
= Rs. 39,141
5.4163
23
SINKING FUND ACCOUNT
Dr. Cr.
Rs. Rs.
Year1 To Balance c/d 39,141 Year 1 By P & L Appro- 39,141
priation A/c
Year2 To Balance c/d 79,848 Year 2 By Balance b/d 39,141
By Interest on
Sinking Fund
Investment A/c 1,566
By P & L Appro-
priation A/c 39,141
79,848 79,848
Year 3 To Balance c/d 1,22,183 Year 3 By Balance b/d 79,848
By Int. on Sinking
Fund Investment A/c 3,194
By P & L. Appro-
priation A/c 39,141
1,22,183 1,22,183
Year 4 To Balance c/d 1,66,211 Year 4 By Balance b/d 1,22,183
By Int. on Sinking
Fund Investment A/c 4,887
By P & L Appro-
priation A/c 39,141
1,66,211 1,66,211
Year 5 To Loss on issue Year 5 By Balance b/d 1,66,211
of Debentures By Int. on Sinking
A/c 12,000 Fund Investment A/c 6,648
To General By P & L Appro- 39,141
Reserve A/c 2,00,000 priation A/c
2,12,000 2,12,000
24
SINKING FUND INVESTMENT ACCOUNT
Dr. Cr.
Rs. Rs.
Year 1 To Bank A/c 39,141 Year 1 By Balance c/d 39,141
Year 2 To Balance b/d 39,141 Year 2 By Balance c/d 79,848

To Bank A/c 40,707
79,848 79,848
Year 3 To Balance b/d 79,848 Year 3 By Balance c/d 1,22,183
To Bank A/c 42,335
1,22,183 1,22, 183
Year 4 To Balance b/d 1,22,183 Year 4 By Balance c/d 1,66,211

BY Bank A/c 44,028
1,66,211 1,66,211
Year 5 To Balance b/d 1,66,211 Year 5 By Bank A/c 1,66,211
Insurance policy method

The company may take an insurance policy for redemption of
debentures in place of purchasing investments. The policy will be taken for
a period which will enable the company to get the required money on the
required date. The amount of premium will have to be paid in the beginning
of the year.
Accounting Entries
In the first and subsequent accounting years
On payment of premium:
Debenture Redemption Fund Policy A/c Dr.
To Bank A/c
At the end of the accounting year
For setting aside the amount of premium
P & L Appropriation A/c Dr.
To Debenture Redemption Fund A/c
25
In the last year
On payment of premium
Debenture Redemption Fund Policy A/c Dr.
To Bank A/c
For setting aside the amount of premium

P & L Appropriation A/c Dr.
To Debenture Redemption Fund A/c
On realising the amount of policy

Bank A/c Dr.
To Debenture Redemption Fund Policy A/c
On payment of debentures
Debenture A/c Dr.
To Bank A/c
On transfer of Debenture Redemption Fund to General Reserve

Debenture Redemption Fund A/c Dr.
To General Reserve A/c
ILLUSTRATION 6: A company issued Debentures of Rs.3,00,000 on 1

January 1992 and decided to provide for their redemption by means of an
insurance policy Rs.3,00,000. The annual premium was Rs. 95,000.
Prepare the necessary ledger accounts assuming that the amount of
policy was duly realised and debentures were paid.
26
Solution
DEBENTURES ACCOUNT
Rs. Rs.
1992 1992
31Dec. To Balance c/d 3,00,000 1 Jan. By Bank 3,00,000
3,00,000 3,00,000
1993 1993
31Dec. To Balance c/d 3,00,000 1 Jan. By Balance b/d 3,00,000
3,00,000 3,00,000
1994 1994
31 Dec. To Bank 3,00,000 1 Jan. By Balance b/d 3,00,000
3,00,000 3,00,000
DEBENTURES REDEMPTION FUND ACCOUNT

Rs. Rs.
1992 1992
31Dec. To Balance c/d 95,000 31Dec. By Bank 95,000
95,000 95,000
1993 1993
31Dec. To Balance c/d 1,90,000 1 Jan. By Balance b/d 95,000
31Dec. By P&L App.A/c 95,000
1,90,000 1,90,000
1994 1994
31 Dec. To General Res. 3,00,000 1 Jan. By Balance b/d 1,90,000
31Dec. By P & L App. A/c 95,000
By Deb. Red.Fund 15,000
Policy A/c
3,00,000 3,00,000
27
DEBENTURES REDEMPTION FUND POLICY ACCOUNT
Rs. Rs.
1992 1992
1Jan. To Bank 95,000 31Dec. By Balance c/d 95,000
95,000 95,000
1993 1993
1Jan. To Balance b/d 95,000 31Dec. By Balance c/d 1,90,000
1 Jan. To Bank 95,000
1,90,000 1,90,000
1994 1994
1 Jan. To Balance b/d 1,90,000 31Dec. By Bank 3,00,000
1 Jan. To Bank 95,000
31 Dec.To Debenture
Red. Fund A/c 15,000
3,00,000 3,00,000
10.7 SUMMARY
A debenture is a written acknowledgement of debt by a company under its

common seal. A company may issue various kinds of debentures with different
rights. A company can raise funds for operation of busienss by issue of shares and
debentures. However, these two ways of raising funds can be differenciated. A
company can issue debentures for cash, for consideration other than cash and as
collateral security. A company is free to issue the debentures on any terms it likes.
These terms may not only relate to issue but also to redemption. The various sources
out fo whcih the debentures may be redeemed are out of profits, out of capital,
redemption by conversion, redemption by purchase of debenture in the open market
and out fo provisions made for redemption.
10.8 KEYWORDS
Debenture: It is a written acknowledgement of debt by a company under its common

seal.
28
Registered Debenture: These are those debentures which are payable tot he persons
whose name appear in the register of debenture holders.
Redemption of Debentures: Repayment of amount due to the debenture holders

at an agreed date is called redemption of debentures.
Collateral Security: When debentures are issued as subsidiary to the principal

security against a loan or bank overdraft, such an issue of debentures is known as
issue of debentures as collateral security.
1. What is a debenture? Describe the various methods for redemption
of debentures. Give Illustrations.
2. Explain with the help of journal entries how Sinking Fund Method
for redemption of debentures is used.
3. State how will you deal with loss on issue of debentures in the books
of accounts.
4. Journalise the following transactions :
(a) Debenture issued at 95 payable at 100.
(b) Debenture issued at 95 repayable at 105.
(c) Debenture issued at 100 repayable at 105.
(d) Debenture issued at 105 repayable at 100.
5. A company issued debentures of the face value of Rs.100,000 at a

discount of 6%. The debentures were repayable by annual drawings
of Rs.20,000. How would you deal with the discount on debentures?
Show the discount account in the company's ledger for the period of
duration of debentures?
6. On Ist January 1987, a company issued 20,000 Debentures of Rs.100

each for 10 years on the condition that debentures could be redeemed
by the company at a premium of 2% by giving six months notice at
any time after 5 years, either by payment of cash or by allotment of
29
shares or by other debentures according to the option of the debenture
holders.
Necessary notice was given on Ist March, 1992 informing the

debenture holders about the company's intention to redeem
debentures on Ist Sept., 1992, either by payment of cash, or by
allotment of 8% preference shares of Rs.100 each at Rs.120 per share
or by issuing 4% debentures of Rs.100 each at Rs.98. Holders of
4,000 debentures accepted preference shares, holders of 9,800
debentures accepted preference shares, holders of 9,800 debentures
accepted the offer of 4% debentures and the rest claimed cash.
Pass necessary journal entries for the redemption of debentures.
7. The Debenture Redemption Fund of Export Industries Ltd. stood at

Rs.16,000 represented by Rs.20,000 (nominal) investments. The
debentures stood in the books at Rs.50,000 and the company sold
Rs.12,000 (nominal) investments at Rs.84 for the purpose of
redeeming Rs.10,000 debentures at a premium of 1 per cent. You are
required to show the ledger accounts to record the above transactions
(Ignore interest and brokerage).

2. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan Chand and
Sons, New Delhi.
30
LESSON -11
PREPARATION OF FINAL ACCOUNTS OF A COMPANY
STRUCTURE
11.0 Objective
11.1 Introduction
11.2 Preparation of Final Accounts
11.3 Profit and Loss Account
11.4 Profit and Loss Appropriation Account
11.5 Balance Sheet
11.6 Special Points to be noted while preparing Final Accounts
11.7 Summary
11.8 Keywords
11.0 OBJECTIVE
After reading this lesson, you will be conversant with

(a) Requirements of the Companies Act for presentation of Profit
and Loss Account and Balance Sheet
(b) Profit and Loss Appropriation Account
(c) Accounting Treatment of Special Items while preparing Final
Accounts of a company.
11.1 INTRODUCTION
Final accounts, as we know, are prepared to show business profit over

a period of time and to reveal the business position (financial) at a point of
time. A company, like any other forms of business organisation, has also to
prepare its final accounts every year. Preparation of final accounts is
1
compulsory for a company. The Companies Act has made it obligatory for
every limited company to prepare, present and publish its final accounts
every year, in order to protect and safeguard the interest of the owners.
Section 209 and Section 210 deal with the provisions of preparation of
final accounts for a company. Section 209 makes it compulsory for a
company to keep certain books of account and Section 210 governs the
preparation of the final accounts.
11.2 PREPARATION OF FINAL ACCOUNTS
The principles and methods of preparing the final accounts of joint

stock companies are the same as in the case of the sole proprietorship or
partnership firms. However, in addition to these principles, a joint stock
company must conform to certain legal provisions as given in the Companies
Act, in respect of form and content of the final accounts.
The final accounts of a company consists of :
(i) Profit and Loss Account (Inclusive of Manufacturing & Trading A/c)
(ii) Profit and Loss Appropriation Account
(iii) Balance Sheet
11.3 PROFIT AND LOSS ACCOUNT
The Companies Act does not give any fixed form of Profit and Loss
Account but 'Requirement as to Profit and Loss Account' are given in Part-
II of Schedule VI. Generally, it consists of Manufacturing and/or Trading
Account.
Form and contents of Profit and Loss Account
Sub-section (2) of Section 211 of the Companies Act, 1956 requires

"Every Profit and Loss Account of a company shall give true and fair view
of the profit or loss of the company for the financial year and comply with
2
the requirements of Part II of Schedule VI so far as they are applicable
thereto.
Provided that nothing contained in this sub-section shall apply to any

insurance or banking company, or any company engaged in the generation
or supply of electricity or to any other class of company for which a form
of Profit and Loss Account has been specified in or under the Act governing
such class of company".
It is also given in sub-section (3) of Section 211 that the Central

Government may, by notification in the Official Gazette exempt any class
of companies from the compliance with any of the requirements in Schedule
VI if, in its opinion, it is necessary to grant exemption in the public interest.
Any such exemption may be granted either unconditionally or subject to
such conditions as may be specified in the notification.
Requirements of companies act with respect to Profit and Loss

Account
Part II of Schedule VI of the Companies Act does not prescribe any

format for the Profit and Loss Account but only outlines the information
to be included. In general, the Profit and Loss Account should be so made
out as to clearly disclose the result of the working of the company during
the period covered by the account. The Profit and Loss Account should also
disclose every material feature, including credits or receipts and debits or
expenses in respect of non-recurring transactions or transactions of an
exceptional nature. The various items of receipts and expenses should be
arranged under the most convenient heads.
Revenues
With respect to revenues received by a company, the following are
3
required to be shown as per Part II of Schedule VI:
a) The turnover or the aggregate amount of sales effected by the
company. If more than one class of goods have been sold by the
company, then the amount of sales in respect of each class of goods
sold along with details of quantities sold should be disclosed.
b) In the case of companies rendering or supplying services, the gross
income derived from services rendered or supplied.
c) Amount of income from investment distinguishing between trade
investments and other investments.
d) Other income by way of interest, specifying the nature of income.
e) Profits on investments.
f) Profits (which are material in amount) in respect of transaction which
are of a kind not usually undertaken by the company or undertaken in
circumstances of an exceptional or non-recurring nature.
g) Miscellaneous income.
h) Dividends from subsidiary companies.
Expenses
The following are the expenses which must be disclosed in the Profit
and Loss Account :
a) In the case of manufacturing companies, the value of the raw materials
consumed, giving item-wise break up and the quantities consumed.
While giving this break up, as far as possible, all important basic raw
materials should be shown as separate items. In the case of
intermediates or components procured from other manufacturers and
consumed, if the number of items are too many to be included in the
break up, then such items should be grouped under suitable headings
without mentioning the quantities. However, all those items which in
4
value individually account for 10 per cent or more of the total value
of the raw material consumed should be shown distinctly in the break
up with details of quantities consumed.
b) In the case of manufacturing companies, the opening and closing stock
of good produced, giving break up in respect of each class of goods
indicating the quantities of each class of goods produced.
c) In the case of trading companies, the value of purchases made and of
the opening and closing stocks. This information should be provided
in respect of each class of goods traded by the company. The quantity
details should also be provided.
d) If a company is both a manufacturing and a trading company, it is
sufficient if the total amounts are shown in respect of the opening
and closing stocks, purchases, sales and consumption of raw material
with value and quantity details.
e) In the case of companies having works in progress, the opening and
closing values of the works in progress.
f) The amount provided for depreciation, renewals or diminution in value
of fixed assets. If no provision has been made for depreciation, this
fact should be stated and the quantum of arrears of depreciation should
be disclosed by way of a note.
g) Consumption of stores and spare parts.
h) Power and fuel.
i) Rent.
j) Repairs to buildings.
k) Repairs to machinery.
l) Salaries, wages and bonus.
m) Contribution to provident fund and other funds.
n) Workmen and staff welfare expenses.
5
o) Insurance.
p) Rates and taxes, excluding taxes on income.
q) Miscellaneous expenses. Any item under which expenses exceed one
per cent of the total revenue of the company or Rs.5,000 whichever
is higher must be shown as a separate and distinct item against an
appropriate account head in the Profit and Loss Account and should
not be combined with any other item and shown under this head of
'Miscellaneous Expenses'.
r) Losses on investments.
s) Losses on transaction which are of a kind, not usually undertaken by
the company or undertaken in circumstances of an exceptional or non-
recurring nature, if material in amount.
t) The amount of interest on the company's debentures and other fixed
loans stating separately the amount of interest if any, paid or payable.
u) The amount of income tax payable.
v) The aggregate amount of the dividends paid, and proposed, and stating
whether such amounts are subjected to deduction of income tax or
not.
w) Provisions for losses of subsidiary companies.
x) Amounts reserved for repayment of share capital and repayment of
loans.
y) Any material amounts set aside to reserves, but not including
provisions made to meet any specific liability, contingency or
commitment. Any material amounts withdrawn from such reserves.
z) Any material amounts set aside to provisions made for meeting
specified liabilities, contingencies or commitments. Any material
amounts withdrawn from such provisions, as no longer required.
6
In addition to the above expenses, expenses relating to sales such as
commission paid to sole selling agents and other selling agents, brokerage
and discount on sales, other than the usual trade discount should also be
shown separately.
The amount by which any items shown the Profit and Loss Account
are affected by any change in the basis of accounting if material should be
disclosed separately.
In respect of all items shown in the Profit and Loss Account, the
corresponding amounts for the immediately proceeding financial year
should also be given.
Notes to Profit and Loss Account

Accounting to Part II of Schedule VI, certain information has to be
provided by way of notes to Profit and Loss Account. The information to be
so provided is outline below :
1. The following payments provided or made during the financial year
to the directors (including managing directors or manager, if any, of the
company, the subsidiaries of the company and any other person):
i) Managerial remuneration paid or payable under Section 198
of the Companies Act
ii) Other allowances and commission including guarantee
commission
iii) Any other perquisites or benefits in cash or in kind (stating
approximate money value where practicable)
iv) Pensions
v) Gratuities
vi) Payments form provident funds, in excess of subscriptions and
interest thereon
7
vii) Compensation for loss of office
viii) Consideration in connection with retirement from office
If commission is payable to the directors including managing director

or manager as a percentage of profits, then the notes should give a statement
showing the computation of net profit in accordance with the provisions of
the Companies Act and also give details of the calculation of such
commission.
2. The notes should contain detailed information with regard to amounts

paid to the auditor, whether as fees, expenses or otherwise for services
rendered. These payments should be classified into payments received by
the auditor as,
a) auditor
b) as advisor, or in any other capacity, in respect of
i) taxation matters
ii) company law matters
iii) managements services and
c) in any other manner.
3. In the case of manufacturing companies, the notes should give detailed
quantitative information in respect of each class of goods manufactured
with regard to the following:
a) the licensed capacity (where license is in force)
b) the installed capacity and
c) the actual production
4. The notes to the Profit and Loss Account should also contain the
following information:
a) Value of imports calculated on C.I.F. basis by the company
during the financial in respect of :
8
i) raw materials
ii) components and spare parts
iii) capital goods
b) expenditure in foreign currency during the financial year on
account of royalty, know-how, professional, consultation fees,
interest and other matters.
c) value of all imported raw materials, spare parts and components
consumed during the financial year and the value of all
indigenous raw materials, spare parts and components similarly
consumed and the percentage of each to total consumption.
d) the amount remitted during the year in foreign currencies on
account of dividends, with a specific mention of the non-
resident shareholders and the number of shares held by them
on which dividends were paid.
e) earnings in foreign exchange classified under the following
heads, namely:
i) export of goods calculated in F.O.B. basis.
ii) royalty, know-how, professional and consultation fees
iii) interest and dividend
iv) other income, indicating the nature thereof.
5. The notes to the Profit and Loss Account should also contain break
up of the expenditure incurred on employees who
i) if employed throughout the financial year were in receipt of
remuneration for that year which in the aggregate was not less than
Rs.300,000 or
ii) if employed for part of the financial year were in receipt of
remuneration for any part of that year at a rate which in the aggregate
was not less than Rs.25,000 per month.
9
This note should also indicate the number of employees falling in each of
the above two categories. Usually the remuneration paid is broken up into
a) Salaries, Perquisites etc. and
b) Contribution to Provident and other funds.
11.4 PROFIT AND LOSS APPROPRIATION ACCOUNT
The account showing the disposal of profits is known s Profit and

Loss Appropriation Account. The balance on Profit and Loss Account is
transferred to this Profit and Loss Appropriation Account. Profits available
for dividend to shareholders are known as divisible profits. The Directors
may decide to retain a certain amount to strengthen the companies finances.
The amount retained may take the form of transfer to various reserves and
funds. It is a wise policy to keep aside certain portion of divisible profit in
the form of reserves and funds before distributing entire divisible profits
among the shareholders as dividend. Therefore, the account which shows
how the divisible profits of the company have been dealt with is known as
Profit and Loss Appropriation Account, as appropriation means to keep
aside.
The amount brought forward from the previous year is put on the credit
side together with current year's profit. On the debit side of this account,
the following items are usually found :
i) Transfer to General Reserve.

ii) Transfer to Divided Equalisation Fund - (Dividend Equalisation Fund
means a fund created out of profits available for dividend for the
purpose of stable dividend policy i.e. making the rate of dividend
uniform from year to year).
iii) Transfer to Sinking Fund for Redemption to Debentures.
iv) Dividend (Interim/Final, paid or proposed).
v) Balance if any, carried to B/Sheet. Therefore, this Account, generally
appears as under :
10
Dr. Cr.
To Bal. b/d (Dr. bal. from By Balance b/d from
last year if any , as per last year
Trial Balance) (As per Trial Balance)
To Net Loss during the By Savings in the provision
year, if any for Taxation
To General Reserve By Net Profit during the
(transfer) year (as per P & L A/c)
To Dividend Equalisation By Transfer from Reserves,
Fund (transfer) if any
To Sinking Fund for Redem- By Bal. c/d to Balance Sheet
ption of Debentures
To Transfer to other
Reserves & Funds
To Dividend
(Interim or Final;
Paid/or proposed)
To Balance c/d to
Balance Sheet
Profit and Loss Appropriation Account is a part and parcel of Profit

and Loss Account showing the disposal of divisible profits. The balance on
this account is shown as a separate item in the Balance Sheet.
11.5 BALANCE SHEET
According to Section 210 of the Companies Act, a company is

required to prepare a Balance Sheet at the end of each trading period. Section
211 requires the Balance Sheet to be set up in the prescribed form. This
provision is not applicable to banking, insurance, electricity and the other
11
companies governed by special Acts. The Central Government has also the
power to exempt any class of companies from compliance with the
requirement of the prescribed form if it deems to be in public interest. The
object of prescribing the form is to elicit proper information from the
company so as to give a 'true and fair' view of the state of the company's
affairs. As a matter of fact both window dressing and creating secret reserves
will be considered against the provisions of Section 211.
Section VI, Part I gives the prescribed form of a company's Balance

Sheet. Notes and instructions regarding various items have been given in
brackets below each item. It may be noted that if information required to
be given under any of the items or sub-items in the prescribed form cannot
be conveniently given on account of lack of space, it may be given in a
separate schedule or schedules. Such schedules will be annexed to and form
part of the Balance Sheet.
Schedule VI, Part I permits presentation of Balance Sheet both in

horizontal as well as vertical forms. The forms with necessary notes,
explanations, etc., are given below:
12
(A) HORIZONTAL FORM OF BALANCE SHEET
SCHEDULE VI PART I
(See Section 211)
Balance Sheet of ..................(Here enter the name of the company) as on ...........(Here enter the date as which the
balance sheet is made out)
Figures Figures Figures Figures
for the for the for the for the
previous Liabilities current previous Assets current
year year year year
Rs. Rs. Rs. Rs.
(1) (2) (3) (4) (5) (6)
Share Capital : Fixed Assets:
Authorised......Shares of Rs........each Distinguishing as for as possible
Issued : (distinguishing between the between expenditure upon
various classes of capital and stating the (a) goodwill
particulars specified below, in respect (b) land
(c) buildings
13
of each class)....shares of Rs........each.
(d) leaseholds
Subscribed : (distinguishing between (e) railway sidings
the various classes of capital and stating (f) plant and machinery
the particulars specified below, in (g) furniture and fittings
respect of each class).......shares of (h) development of property
Rs............each ........Rs.called up. (i) patents, trade marks and designs
(j) livestock, and
(Of the above shares.........shares are (k) vehicles, etc.
allotted as fully paid up pursuant to a
contract without payments being (Under each head the original cost and
received in cash. Of the above the additions thereto and deductions
therefrom during the year, and the total
shares......shares are allotted as fully
depreciation written off or provided up
paid up by way of bonus shares)
to the end of the year is to be stated.
(1) (2) (3) (4) (5) (6)
Specify the source from which bonus Depreciation written off or provided
shares are issued, e.g.....capitalisation shall be allotted under the different asset
of profits or Reserves or from Shares heads and deducted in arriving at the value
Premium Account. of Fixed Assets.
Less : Calls unpaid In every case where the original
(i) By Directors cost can not be ascertained, without
(ii) By Others unreasonable expense or delay, the
Add : Forfeited shares valuation shown by the books is to be
(amount originally paid up) given. For the purpose of this paragraph,
such valuation shall be the net amount at
(Any capital profit on reissue of which on asset stood in the company's
forfeited shares should be transferred books at the commencement of this Act
to Capital Reserves). after deduction of the amounts
14
Notes : previously provided or written off for
1. Te r m s o f r e d e m p t i o n o r depreciation or diminution in value, and
conversion (if any) of any redeemable where any such asset is sold, the amount
preference capital are to be stated of sale proceeds shall be shown as
deduction.
together with earliest date of
redemption or conversion. Where sums have been written off
on a reduction of capital or a revaluation
2. Particulars of any option on of assets, every Balance Sheet, (after the
unissued Share Capital are to be first Balance Sheet) subsequent to the
specified. reduction or revaluation shall show the
3. Particulars of the different reduced figures with the date of the
classes of preference shares are to be reduction in place of the original cost.
given. Each Balance Sheet for the first five
(1) (2) (3) (4) (5) (6)
These particulars are to be given years subsequent to the date of the
alongwith Share Capital. reduction, shall show also the amount of
the reduction made.
In the case of subsidiary
companies, the number of shares held Similarly, where sums have been
by the holding company as well as by added by writing up the assets, every
the ultimate holding company and its Balance Sheet subsequent to such writing
subsidiaries shall be separately stated up shall show the increased figures with
in respect of Subscribed Share Capital. the date of the increase in place of the
The auditor is not required to certify the original cost. Each Balance Sheet for the
first five years subsequent to the date of
correctness of such share-holdings as
the writing up shall also show the amount
certified by the management).
of increase made.
(1) Capital Reserves Showing nature of investments and
(2) Capital Redemption Reserves
15
mode of valuation, for example, cost or
(3) Share Premium Account market value, and distinguishing between:
(showing details of its utilisation in the (1) Investments in Government or Trust
manner provided in Section 78 in the Securities.
year of utilisation). (2) Investments in shares, debentures
(4) Other Reserves specifying the or bonds.
nature of each Reserve and the amount (Showing separately shares fully paid up
in respect thereof. and partly paid up and also distinguishing
Less: Debit balance in Profit and Loss the different classes of shares and showing
Account (if any). also in similar details investments in
(The debit balance in the Profit and shares, debentures or bonds of subsidiary
Loss Account shall be shown as a companies).
deduction from the uncommitted (3) Immovable properties.
(1) (2) (3) (4) (5) (6)
reserves, if any). (4) Investments in the capital of
(5) Surplus, i.e., balance in Profit partnership firms.
and Loss Account after providing for
(Aggregate amount of company's quoted
proposed allocations, namely: Investments and also the market value
Dividend, Bonus or Reserves. thereof shall be shown).
(6) Proposed additions to Reserves.
(7) Sinking Funds. (Aggregate amount of company's
unquoted investments shall also be
Additions and deductions since shown).
last Balance Sheet to be shown, under Current Assets, Loans and Advances:
each of the specified heads. The word (A) CURRENT ASSETS :
"fund" in relation to any "Reserve" (1) Interest accrued on Investments.
should be used only where such under (2) Stores and spare parts.
Reserve is specifically represented by (3) Loose Tools.
16
earmarked investments). (4) Stock-in-trade.
(5) Work-in-Progress.
Secured Loans:
(1) Debentures. (In respect of (2) and (4), mode of
(2) Loans and Advances from Banks. valuation of stock shall be stated and the
(3) Loans and Advances from amount in respect of raw materials shall
subsidiaries. also be stated separately where
(4) Other Loans and Advances. practicable. Mode of valuation of work-
in-progress shall be stated).
(Loans from directors and/or manager
(6) Sundry Debtors.
should be shown separately).
(a) Debts outstanding for a period
Interest accrued and due on Secured exceeding six months.
Loans should be included under the (b) Other debts
appropriate sub-heads under the head Less Provisions:
(1) (2) (3) (4) (5) (6)
"Secured Loans." (The amounts to be shown under Sundry
Debtors shall include the amounts due in
The nature of security to be specified respect of goods sold or services rendered
in each case. or in respect of other contractual
Where loans have been guaranteed by obligations but shall not include the
managers and/or directors, a mention amounts which are in the nature of loans
thereof shall also be made and also the or advances).
aggregate amount of such loans under In regard to Sundry Debtors
each head. particulars to be given separately of :
In case of Debentures, terms of (a) debts considered goods and in
redemption or conversion (if any) are to respect of which the company is
be stated together with earliest date of fully secured;
redemption or conversion. (b) debts considered good for which
17
the company holds no security
Unsecured Loans : other than the debtor's personal
(1) Fixed Deposits. security; and
(2) Loans and Advances from (c) debts considered doubtful or bad.
subsidiaries.
(3) Short Term Loan and Advances: Debts due by directors or other
(a) From Banks. officers of the company or any of them
either severally or jointly with any other
(b) From Others.
person or debts due by firms or private
(Short term loans include those which
companies respectively in which any
are due for repayment not later than one directors is a partner or a director or a
year as at the date of the Balance Sheet. member to be separately stated.
(4) Other Loans and Advances : Debts due from other companies under the
(a) From Banks same management within the meaning of
(1) (2) (3) (4) (5) (6)
(b) From Others sub-section (IB) of Section 370 to be
(Loans from directors and/or manager disclosed with the names of the
should be shown separately). companies. The maximum amount due by
directors or other officers of the
Interest accrued and due on Unsecured company at any time during the year to
Loans should be included under the be shown by way of a note.
appropriate sub-heads under the head
"Unsecured Loans." The Provision to be shown under
this head should not exceed the amounrt
(Where Loans have been guaranteed by of debts stated to be considered doubtful
manager, and/or directors, a mention or bad and any surplus of such Provision,
thereof shall also be made together with if already created, should be shown at
the aggregate amount of such loans under every closing under "Reserves and
Surplus" (in the Liabilities side) under a
18
each head. This does not apply to Fixed
Deposits). separate sub-head "Reserve for Doubtful
Current Liabilities and Provisions: or Bad Debts.")
A Current Liabilities: (7A) Cash balance on hand.
(1) Acceptance. (7B) Bank Balances:
(2) Sundry Creditors. (a) with Scheduled Banks.
(3) Subsidiary Companies. (b) with others.
(4) Advance payments and unexpired (In regard to bank balances particulars to
discounts for the portion for be given separately of -
which value has still to be given, (a) the balance lying with Scheduled
e.g. in the case of the following Banks on current accounts, call
companies: accounts and deposit accounts.
Newspaper, Fire Insurance, Theatres, (b) the names of the bankers other than
Clubs, Banking, Steamship companies, Scheudled Banks and the balances
etc.
(1) (2) (3) (4) (5) (6)
(5) Unclaimed Dividends. lying with each such banker on
(6) Other Liabilites (if any), current account, call account and
(7) Interest accrued but not due on deposit account and the maximum
loans. amount outstanding at any time
B. Provisions during the year with each such
banker; and
(8) Provision for Taxation.
(9) Proposed Dividends. (c) the nature of the interest, if any, of
(10) For contingencies. any director or his relative in each
(11) For Provident Fund Scheme of the bankers (other than
(12) For insurance, pension and similar Scheduled Banks referred to in (b)
staff benefit schemes.amounts above]
(13) Other provisions. B) Loans and Advances :
(8) (a) A d v a n c e s a n d l o a n s t o
19
A foot-note to the Balance Sheet may subsidiaries.
be added to show separately (b) Advances and loans to
(1) Claims against the company not partnership firms in which the
acknowledged as debts. company or any of its
(2) Uncalled liability on shares subsidiaries is a partner.
partly paid. (9) Bill of Exchange.
(3) Arrears of fixed cumulative (10) Advances recoverable in cash or in
dividends. kind or for value to be
r e c e i v e d , e . g . , R a t e s , Ta x e s ,
(The period for which the dividends are Insurance, etc.
in arrears or if there is more than one (11) Balances with Customs, Port Trust,
class of shares, the dividends on each etc. (where payable on demand).
such class that are in arrear, shall be The instructions regarding Sundry
stated. The amount shall be stated Debtors apply to "Loans and Advances"
(1) (2) (3) (4) (5) (6)
before deduction of income-tax, except also. The amounts due from other
that in the case of tax-free dividends the companies under the same management
amount shall be shown free of income- within the meaning of sub-section (IB) of
tax and the fact that it is so shown shall Section 370 should also be given with the
be stated). name of the companies; the maximum
(4) Estimated amount of contracts amount due from every one of these at
remaining to be executed on any time during the year must be shown).
capital account and not provided Miscellaneous Expenditure :
for. (to the extent not written off or adjusted).
(5) O t h e r m o n e y s f o r w h i c h t h e (1) Preliminary expenses.
company is contingently liable. (2) Expenses including commission or
brokerage or underwriting or
(The amount of any guarantees subscription of shares or
given by the company on behalf of debentures.
20
directors or other officers of the (3) Discount allowed on the issue of
company shall be stated and where shares or debentures.
practicable, the general nature and (4) Interest paid out of capital during
amount or each such contingent construction (also stating the rate
liability, if material, shall also be of Interest).
specified). (5) Development expenditure not
adjusted.
(6) Other sums (specifying nature).
(Show here the debit Balance of
Profit and loss Account carried
forward after deduction of the
uncommitted reserves, if any).
Notes :
(1) Paise can also be given in addition to Rupees, if desired.
(2) Dividends declared by subsidiary companies after the date of the
Balance Sheet should not be included unless they are in respect of a
period which closed on or before the date of the Balance Sheet.
(3) Any reference to benefits expected from contracts to the extent not
executed shall not be made in the Balance Sheet but shall be made in
the Board's report.
(4) Particulars of any redeemed debentures which the company has power
to issues should be given.
(5) Where any of the company's debentures are hold by a nominee or a
trustee for the company the nominal amount of the debentures and
the amount at which they are stated in the books of the company shall
be stated.
(6) A statement of investments (whether shown under "investment" or
under "Current Assets " as Stock-in-Trade) separately classifying trade
investments and other investments should be annexed to the Balance
Sheet, showing the names of the bodies corporate (including
separately the names of the bodies corporate under the same
management) in whose shares or debentures, investments have been
made (including all investments whether existing or not, made
subsequent to the date as at which the previous Balance Sheet was
made out) and the nature and extent of the investments so made in
each such body corporate; provided that in the case of an investment
company, that is to say, a company whose principal business is the
acquisition of shares, stock , debentures or other securities, it shall
be sufficient if the statement shows only the investments existing on
the date as at which the Balance Sheet has been made out. In regard
21
to the investments in the capital of partnership firms, the names of
the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given in the statement.
(7) If, in the opinion of the Board, any of the current assets, loans and
advances have not a value on realisation in the ordinary course of
business at least equal to the amount at which they are stated, the
fact that the Board is of that opinion shall be stated.
(8) Except in the case of the first Balance Sheet laid before the company
after the commencement of the Act, the corresponding amounts of
the immediately preceding financial year for all items shown in the
Balance Sheet shall be also given in the Balance Sheet. The
requirements in this behalf shall, in case of companies preparing
quarterly or half-yearly accounts, etc., relate to the Balance Sheet
for the corresponding date in the previous year.
(9) Current accounts with Directors and Manager, whether they are credit
or debit, shall be shown separately.
(10) The information required to be given under any of the items or sub-
items in the Form, if it cannot be conveniently included in the Balance
Sheet itself, shall be furnished in a separate Schedule or Schedules
to be annexed to and forming part of the Balance Sheet. This is
recommended when items are numerous.
(11) Where the original cost (of fixed assets) and additions and deductions
thereto, relate to any fixed asset which has been acquired from a
country outside India, and in consequence of a change in the rate of
exchange at any time after the acquisition of such assets, there has
been an increase or reduction in the liability of the company, as
expressed in Indian currency, for making payment towards the whole
or a part of the cost of the asset, or for repayment of the whole or a
22
part of monies borrowed by the company from any person, directly
or indirectly, in any foreign currency specifically for the purpose of
acquiring the assets (being in either cases the liability existing
immediately before the date on which the change in the rate of
exchange takes effect), the amount by which the liability is so
increased or reduced during the year, shall be added to, or as the case
may be, deducted from the cost, and the amount arrived at after such
addition or deduction shall be taken to be the cost of the fixed assets.
Explanation :1. This paragraph shall apply in relation to all Balance Sheet
that may be made out as at the 6th day of June 1966, or any day thereafter
and where, at the date of issue of the notification of the Government of
India, in the Ministry of Industrial Development and Company Affairs
(Department of Company Affairs), G.S.R.No.129, dated the 3rd day of
January, 1968, any Balance Sheet in relation to which the paragraph applied,
has already been made out and laid before the company in annual general
meeting, the adjustment referred to in this paragraph may be made in the
first Balance Sheet made out after the issue of the said notification.
Explanation 2: In this paragraph, unless the context otherwise requires,
the expression "rate of exchange", "Foreign currency" and "Indian currency"
shall have the meanings respectively assigned to them Under Subsection
(1) of Section 43A of the Income-tax Act, 1961 (43 of 1961), and
Explanation 2 and Explanation 3 of the said sub-section shall as far as may
apply in relation to the said paragraph as they apply to the said sub-section
(1).
B) VERTICAL FORM OF BALANCE SHEET
Vertical form of Balance Sheet inserted as Part B of Part I of
Schedule VI to the Companies Act 1956 by G.S.R. No.220(E) dated
12.3.1979 is as follows :
23
Name of the Company...........
Balance Sheet as at ...............
Schedule Figures as at Figures as
No. all the end of the end of
current previous
financial financial
year year
1 2 3 4
1. Source of Funds
(1) Shareholder's funds:
(a) Capital
(b) Reserves and surplus
(2) Loans funds :
(a) Secured loans
(b) Unsecured loans
Total
II. Application of Funds
(1) Fixed assets :
(a) Gross block
(b) Less : depreciation
(c) Net block
(d) Capital work-in-progress
(2) Investments
(3) Current assets, loans and advances :
(a) Inventories
(b) Sundry debtors
(c) Cash and Bank balance
(d) Other current assets
(e) Loans and advances
Less:
Current liabilities & provisions
(a) Liabilities
(b) Provisions
Net current assets.
(4) (a) Miscellaneous Expenditure
to the extent not written off or
adjusted
(b) Profit and Loss Account
Total
24
Notes :
1. Details under each of the items in Vertical Balance Sheet be given in
separate Schedules.
2. The Schedules referred to above, accounting policies and explanatory
notes that may be attached shall form an integral part of the Balance
Sheet.
3. The figures in the Balance Sheet may be rounded off to the nearest
'000 or '00 as may be convenient or may be expressed in terms of
decimals of thousands.
4. A foot note to the Balance Sheet may be added to show separately
contingent liabilities.
In India, a joint stock company can prepare its Balance Sheet either
in horizontal or vertical form. Of the two forms of the Balance Sheet, vertical
form is a better form because it speaks out the correlation of every item
with the other items and conveys more meaning to the layman.
11.6 SOME SPECIAL POINTS TO BE NOTED WHILE PREPARING

FINAL ACCOUNTS
(1) Interest on Debentures

Debentures carry a fixed rate of interest. Profit or no profit,
interest on debentures must be paid and debited to Profit and Loss A/c. If
the Trial Balance does not indicate the payment of interest at all or in full
the unpaid amount is to be shown in the Balance Sheet alongwith Debentures,
if it is outstanding or under 'Current Liabilities', if it is accrued.
(2) Interest on Investment
Interest for the full period or for the period of investments
standing in the books must be provided for and credited to Profit and Loss
A/c.
25
(3) Discount on Debentures/Shares, Preliminary Expenses,
Underwriting Commission, Advertising Suspense A/c etc.
The amount asked to be written off should be debited to Profit
and Loss A/c and remaining balance (i.e. to the extent not written off) should
be shown in the Balance Sheet under the heading,"Miscellaneous
Expenditure".
(4) Profit on sale of Fixed Assets
Profit on sale of asset should be treated as Capital Profits,
and shown under the heading "Reserves and Surplus" on the liabilities side.
(5) Debenture Interest and Dividend Paid - Less Tax X%
Companies are required to deduct Income-tax at source. The
amount deducted from Debenture interest or Dividend (by way of tax
deducted at source) is payable to Government. Debit Profit and Loss A/c
with the gross amount (100%) and Tax-deducted at source is to be shown
under "Current Liabilities".
(6) Receipts of Interest/dividend - less Tax X%
Sometimes company receives interest or dividend from other
company-less tax, deducted at source. Amount deducted at source is advance
payment of tax Credit Profit and Loss A/c with the amount of gross income
(100%) and Tax deducted at source to be shown on asset side under the
heading "Loans and Advance" or to be adjusted against tax payable by the
company.
(7) Depreciation of Fixed Assets
According to the requirements of the Companies Act, fixed
assets are to be shown in the Balance Sheet at their cost price less
depreciation written off the date of purchase of asset to the date of Balance
Sheet. If Depreciation Fund is given in he Trial Balance it is to be deducted
from the respective assets.
26
(8) Interest on Sinking Fund Investments
Interest received on sinking fund investments is to be credited
to Sinking Fund for Redemption of Debentures and not Profit and Loss A/c.
(9) Calls-in-Advance & Share Forfeited A/c
Calls in-Advance A/c is shown in the Balance Sheet on the
liability side under the heading "Share Capital" or under "Unsecured Loans".
If the forfeited shares are not reissued then the balance on Share
Forfeited A/c is to be shown under the heading 'Subscribed Capital' on the
liability side as addition thereto.
(10) Share premium A/c

This is shown on the liability side of the Balance Sheet under
the heading, "Reserves and Surplus".
(11) Provision for Taxation
(a) Provision for taxation to be made in the current year (given in
the adjustment) is to be debited to Profit and Loss A/c.
(b) If given in the Trial Balance : (Previous Year's)
(i) If no payment of tax is made, then this provision plus current
year's provision to be shown under the heading "Provisions"
on the liability side of the Balance Sheet.
(ii) If payment of tax is also shown in the Trial Balance, the amount
paid is to be deducted from the amount of provision for taxation
and if there is any balance of provision for taxation it is to be
credited to Profit & Loss Appropriation A/c. If the provision
made (last year's) is less than the actual Income-tax paid for
the last year, it is adjusted against (i.e. balance) current year's
provision to be made).
27
(12) Dividend
The share in the profits payable to shareholders is known as
Dividend. A dividend once declared , becomes a debt. Dividend is paid out
of profits on paid-up capital of the company. Calls-in-Advance cannot be
treated as part of paid up capital for declaration of dividends.
(a) Proposed Dividend : Unless otherwise stated, the dividend at given
rate is calculated on paid-up capital and it is (amount of proposed dividend)
is debited to Profit and Loss A/c Appropriation A/c and shown on the liability
side of the Balance Sheet under the heading "Provisions".
(b) Interim Dividend : An Interim Dividend is a dividend paid by the
directors at any time between two annual general meetings. It is always
debited to Profit and Loss Appropriation A/c. The interim dividend is usually
paid for a period of six months. Its calculation depends upon the language
of the rate of dividend.
The directors may recommend another dividend when the final figures
of profits are available. Such dividend is known as final dividend. When
final dividend is declared, interim dividend is not adjusted unless the
resolution specifies otherwise.
(c) Unclaimed Dividend : Dividend declared but not claimed by some
shareholders for some reason, such amount of dividend (not claimed) is
known as "Unclaimed Dividend". It is always shown on the liability side of
the Balance Sheet under the heading "Current Liabilities ".
(13) Managerial Remuneration

The total managerial remuneration payable by a company to its
managerial personnel for any financial year must not exceed eleven per cent
of the net profits of the company of that financial year. In any year if profits
are inadequate then the company, with the approval of the Central Govt.
28
may pay by way of minimum remuneration up to Rs.50,000. Net profits of
the company for this purpose are to be computed as per Sections 349-351.
ILLUSTRATION I : The following balances appeared in the books of Moon
light Co. Ltd. as on 31st March, 1999.
Dr. Cr.
Issued, Subscribed and Paid up Capital : Rs. Rs.
(60,000 Equity shares of Rs.10 each) 6,00,000
General Reserve 2,50,000
Unclaimed dividends 6,526
Trade creditors 36,858
Building 1,00,000
Purchases 5,00,903
Sales 9,83,947
Manufacturing expenses 3,59,000
Establishment 26,814
General Charges 31,078
Machinery 2,00,000
Motor vehicles 15,000
Furniture 5,000
Opening Stock 1,72,058
Book debts 2,23,380
Investments 2,88,950
Depreciation reserve 71,000
Cash 72,240
Director's fees 1,800
Interim dividend 15,000
Interest on investments 8,544
Profit & Loss A/c Ist April 1998 16,848
Staff provident fund 37,500
20,11,223 20,11,223
29
From these balances and the following information, prepare the
company's Balance Sheet as on 31st March, 1999 and its Profit and Loss
Account for the year ended on that date.
(a) The stock on 31st March, 1999 was valued at Rs.1,48,680.
(b) Provide Rs.10,000 for depreciation on fixed assets, Rs.6,500
for managing director's commission and Rs.1,500 for the
company's contribution to the staff provided fund.
(c) Interest accrued on investments amounted to Rs.2,750.
(d) A provision of Rs.8,000 for taxes in respect of the profit for
1998-99 is considered necessary.
(e) The directors propose a final dividend @ 4%.
(f) A claim of Rs.2,500 for workmen's compensation is being
disputed by the company.
Solution
Moonlight Co. Ltd.
Trading and Profit and Loss Account for the year
ended 31st March, 1999
Dr. Cr.
Rs. Rs.
To Opening stock 1,72,058 By Sales 9,83,947
To Purchases 5,00,903 By Closing Stock 1,48,680
To Manufacturing Exp. 3,59,000
To Gross profit transferred
to Profit & Loss Account 1,00,666
11,32,627 11,32,627
To Establishment Exp. 26,814 By Gross profit 1,00,666
To General charges 31,078 By Interest on
To Directors fees 1,800 Investment 8,544
To Depreciation reserve 10,000 Add Interest
To Commission to managing accrued 2,750 11,294
director 6,500
To Staff Provident fund 1,500
To Provision for taxation 8,000
To Net profit transferred to
Profit & Loss App. A/c 26,268
1,11,960 1,11,960
30
To Interim dividend 15,000 By balance b/d 16,848
To proposed dividend 24,000 By Net Profit for the 26,268
To balance c/d 4,116 year
43,116 43,116
Moonlight Co. Ltd.

Balance Sheet as on 31st March, 1999
Share Capital Rs. Fixed Assets Rs.

Authorised Buildings 1,00,000
60,000 Equity shares of Machinery 2,00,000
Rs. 10 each 6,00,000 Furniture 5,000
Issued and Subscribed Motor vehicles 15,000
60,000 Equity shares of 3,20,000
Rs. 10 each 6,00,000 Less Depreciation
Reserve & Surplus 2,50,000 reserve 81,000 2,39,000
Profit and loss account 4,116 Investments 2,88,950
Secured loans Nil Current Asses, Loans
Unsecured loans Nil and Advances
Current liabilities and (A) Current Assets
Provisions Interest accrued on
(A) Current Liabilities Investments 2,750
Trade creditors 36,858 Stock 1,48,680
Unclaimed dividends 6,526 Book debts 2,23,380
Commission to managing Cash 72,240
director 6,500 (B) Loans & Advances Nil
(B) Provisions Misc. Expenditure Nil
Staff provident fund 39,000
Provision for taxation 8,000
Proposed dividend 24,000
9,75,000 9,75,000
Contingent Liabilities : Claim of Rs. 2,500 for workmen's

compensation is being disputed by the company.
31
11.7 SUMMARY
The procedure of finalisation of accounts of companies is similar to that of

a non-corporate entity except for certain legal requirements and certain peculiar
items in case of company final accounts. Section 211 of the Companies Act deals
with preparation and presentation of final accounts of companies. Part II of Schedule
VI deals with the preparation of the Profit and Loss Account of Companies and
Provision Contained therein hold good for the Income and Expenditure Account
prepared by non-profit organisations. In India, a company can prepare its balance
sheet either in horizontal or vertical form. Of the two forms of the balance sheet,
vertical form is a better form because it speaks out the correlation of every item
with the other item and conveys more meaning to the layman.
11.8 KEYWORDS
Final Accounts: It is popularly used in respect of two basic financial statements

namely Profit and Loss Account and the Balance Sheet.
Capital Reserves: It includes amounts which are not earned during normal
operations of the business and are not available for distributed.
Surplus: It refers to the credit balance of Profit and Loss Account after proposed
allocations or appropriations for dividend, bonus, transfer to reserves, etc.
Current Liability: It means those liabilities which fall due for payment within
one year as at the date of balance sheet.
Preliminary Expenses: Preliminary expenses are those expenses which are

incurred on the formation of the company.
32
1. "Every Balance Sheet of Company shall give a true and fair view of
the state of affairs of the company as at the end of the financial year
and shall subject to the provision of Sec 211 of the Companies Act,
be in the form set out in Part I of Schedule VI ....................".
Amplify and give the form of Balance Sheet.
2. What are the various heads under which profits are usually
appropriated by companies and for what reason?
3. The following is the Trial Balance on March 31, 1998 of the Partial
Manufacturing Co. Ltd.
Rs. Rs.
Stock on 1st April, 1997 7,500
Sales 35,000
Purchases 24,500
Productive wages 5,000
Discounts 700 500
Salaries 750
Rent 495
General expenses (including insurance) 1,705
Profit and loss account 1st April, 1997 1,503
Dividend paid August 1997 500
Interim dividend paid February 1998 400
Capital 10,000 Re.1 shares fully paid 10,000
Debtors and creditors 3,750 1,750
Plant and machinery 2,900
Cash in hand and at bank 1,620
Reserves 1,550
Loan to managing director 325
Bad debts 158
50,303 50,303
Stock on 30th June 1960 Rs.8,200.

You are required to make out the Trading Account, Profit and Loss
account for the year ended 31st March, 1998, and the Balance Sheet as on
that date. You are also to make provision in respect of the following.
33
(1) Depreciate machinery @10% per annum.
(2) Reserve 5% discount on debtors.
(3) Allow 2% discount on creditors.
(4) Provide managing director's commission 15% of the net profit before
deducting his commission.
(5) One month rent Rs.45 per mensem was due on 30th June.
(6) Six months insurance included in general expenses was unexpired at
Rs.75 per annum.

2. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan Chand and

Sons, New Delhi.

5. Fundamentals of Advanced Accounting by R.S.N. Pillai and V. Bagavathi, S.

Chand and Co. Ltd., New Delhi.

New Delhi.
34
LESSON : 12
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
STRUCTURE
12.0 Objective
12.1 Introduction
12.2 Meaning of Amalgamation, Absorption & Reconstruction
12.3 Purchase consideration
12.4 Accounting treatment of Amalgamation, Absorption and External Reconstruction
12.5 Inter-Company Owings
12.6 Inter-Company Holding
12.7 Internal Reconstruction or Capital Reduction
12.8 Summary
12.9 Keywords
12.0 OBJECTIVE

a) Define amalgamation, absorption and reconstruction.
b) Appreciate the different modes of determining the purchase consideration.
c) Know the accounting treatment in the books of transferor company and transferee
company.
12.1 INTRODUCTION
Sometimes companies carrying on similar business combine with each other to

obtain the economies of large scale production or to avoid the disastrous results of cut
throat competition. It is being done by Amalgamation and Absorption. The term
1
amalgamation is used when two or more companies carrying on similar business go
into liquidation and a new company is formed to take over their business. The term
absorption is also used when an existing company takes over the business of one or
more existing companies. These concepts have been modified by the Accounting
Standard 14 (AS-14) "Accounting for Amalgamation", issued by the Institute of
Chartered Accountants of India. This standard is applicable in respect of accounting
periods commencing on or after 1st April, 1995 and is mandatory in nature. This standard
specifies the procedure of accounting for amalgamations and the treatment of any
resultant goodwill or reserve.
12.2 MEANING OF AMALGAMATION, ABSORPTION AND

RECONSTRUCTION
Amalgamation
Amalgamation means, when two or more existing companies go into liquidation

and a new company is formed to take their business e.g. A Ltd. And B. Ltd. are two
companies, they decide to liquidate and a new AB Ltd. is formed. A Ltd. and B Ltd.
lose their separate legal entity as soon as they merge into new company AB Ltd.
Absorption
Absorption means when one or more existing companies go into liquidation

and an existing company take over their business e.g. if existing A Ltd. goes into
liquidation and another existing company B Ltd. take over its business. The legal entity
of A Ltd. will come to an end when it is take over by B Ltd.
Reconstruction
The object of reconstruction of a company is not to bring about a merger but to

re-organize or reconstitute its business/capital structure. Reconstruction is of two
types:-
2
a) External reconstruction : External reconstruction means when an existing
company usually a loss making company liquidates and a new company or an existing
sound company takes over that company.
b) Internal reconstruction : Internal reconstruction is a process of reduction in the

capital of existing company without going into liquidation.
12.3 PURCHASE CONSIDERATION
The agreed price payable by the purchasing company to the vendor company
(liquidating company) for the acquisition of business is called purchase consideration.
The purchase consideration is determined keeping in view the value of assets and
liabilities of vendor company. The purchase consideration may be determined following
any of the following methods :-
i) Lump sum Method : When the amount of purchase consideration is fixed in a

lump sum it is called lump sum method. Both purchasing and vendor company bargain
and determine this price.
ii) Net Assets Method : Under net assets method the value of purchase consideration
is fixed by deducting from the value of taken over by purchasing company, the value of
liabilities taken over. For example if the assets are of Rs. 5,00,000 and liabilities of
Rs. 1,00,000, the purchase consideration will be Rs. 4,00,000.
Under this method only those assets and liabilities will be considered in
calculating the purchase consideration which have been actually agreed to be taken
over. Other items like Reserves and Surpluses, miscellaneous expenditure, capital
loss (shown in assets side of balance sheet) and fictitious assets will not be considered
for calculating purchase consideration.
3
Illustration 1 : The following is a balance sheet of A Ltd.
Balance Sheet of A Ltd.

as on

Share capital 50,000 Goodwill 20,000
5000 equity share
of Rs. 10/ each Land & Building 15,000
5% Debentures 10,000 Plant & Machinery 25,000
General reserves 2,000 Debtor 6,000
Profit & Loss A/c 10,000 Cash 2,000
Preliminary Expenses 2,000
80,000 80,000
B Ltd. another company takes over the business of company A Ltd. and take
over the following assets and liabilities on agreed value. Assets are Goodwill Rs. 18,000,
Land & Building Rs. 20,000, Plant & Machinery Rs. 30,000, Stock Rs. 8,000, Debtors
Rs.5,000 and Liabilities are Sundry Creditors Rs.6,000. Calculate purchase
consideration.
Solution: The Calculation of Purchase consideration
Value of assets taken over by B Ltd.

Goodwill 18,000
Plant & Machinery 30,000
Stock 8,000
Debtors 5,000
81,000
4
Less liabilities taken over by B
Sundry creditors 6,000
Purchase consideration 75,000
Points to be considered while calculating purchase consideration under net assets

method :
a) Assets include cash in hand and cash at bank unless otherwise stated, but
shall not include any fictitious assets like preliminary expenses,
underwriting commission, discount on issue of shares and debentures,
profit and loss (Dr.) etc.
b) If any particular assets is not taken over by purchasing company, it shall
not be included in purchase consideration.
c) Liabilities include all third party liabilities like creditor, bills payable
etc.
d) Liabilities shall not include any past accumulated profits or reserves such
as general reserve, capital reserve, dividend equalization fund, share
premium, sinking fund, etc.
e) If any liability is not taken over by the purchasing company, it shall not
be considered in the calculation of purchase consideration.
iii) Net Payment Method : Under this method, the purchase consideration is calculated
by adding the payments made by the purchasing company in the form of shares,
debentures and cash.
Illustration 2 : In the above illustration suppose B Ltd. agrees to give for every 10
shares in A Ltd. 15 shares of Rs. 10 each, Rs. 8 paid up. B Ltd. also agree to discharge
the debentures at a premium of 5% by the issue of its own debenture and pay Rs. 5,000
in cash to discharge the creditor
Solution: The purchase consideration will be
5
(i) Shareholder of A Ltd. will get Rs.
5000X15/10 = 7500 share of Rs. 10 each, Rs. 8 paid up 60,000
(ii) Debenture holders of A Ltd. will get debentures in B Ltd. 10,500
(iii) Cash for creditors 5,000
75,500
Points to be considered at the time of calculating purchase consideration under

Net Payment Method
a) All the payments made by the purchasing company to shareholders,
debenture holders and other creditors of vendor company in the form of
cash, share or debentures must be taken into account.
b) The assets and liabilities taken over by the purchasing company will not
be considered in calculating purchase consideration.
c) If the liquidation expenses of vendor company are paid by the purchasing
company as part of purchase consideration, the same should be added to
the purchase consideration.
12.4 ACCOUNTING TREATMENT OF AMALGAMATION, ABSORPTION

AND EXTERNAL RE-CONSTRUCTION
Closing entries in the books of vendor company
1) For transferring assets taken over by purchasing company through realisation account.
Realisation a/c Dr.
To various Assets (Individually at book value)
2) For transferring liabilities taken over by purchasing company.
Various liabilities a/c Dr. ( individually at book value)
To Realisation a/c
3) For purchase consideration due
Purchasing companys a/c Dr. (with the purchase consideration)
To Realisation a/c
6
4) For receiving purchase consideration from purchasing company
Bank a/c Dr.
Shares in purchasing company a/c Dr.
Debentures in purchasing company a/c Dr.
To purchasing companys a/c
5) For assets sold by the vendor company not taken over by the purchasing company
Bank a/c Dr.
Realisation a/c (if loss on sale of assets) Dr.
To assets a/c
To realisation a/c (if profit on sale of assets)
6) For liquidation expenses
a) If the expenses are to be met by vendor company
Realisation a/c Dr.
To Bank a/c
b) if the expenses are paid by purchasing company
No entry
c) If the expenses are included in purchase consideration and not paid separately by
purchasing company
Realisation a/c Dr.
To Bank a/c
7) For liabilities not taken by the purchasing company when paid by the vendor company
Various liabilities a/c Dr.
Realisation a/c (if excess payment is made) Dr.
To Bank a/c
Or Shares in purchasing Co. a/c
Or Debentures in purchasing Co. a/c
To realisation a/c ( if less payment is made)
7
8) For closing realisation account
a) If profit
Realisation a/c Dr.
To Equity Shareholders a/c
b) If loss
Equity Shareholders a/c Dr.
To realization a/c
9) For transferring preference share capital
Preference share capital a/c Dr.
To preference shareholder a/c
10) For transferring equity share capital and accumulated profit
Equity share capital a/c Dr.
General reserve a/c Dr.
Debenture redemption fund a/c Dr.
Dividend equalization reserve Dr.
Share premium a/c Dr.
Accident compensation fund Dr.
(to that extent it does not denote liability)
Share forfeiture a/c Dr.
Any other reserve or fund a/c Dr.
To equity shareholder a/c
11)For transferring accumulated losses and expenses not written off
Equity shareholder a/c Dr.
To profit and loss a/c
To discount or commission on share or debentures
To preliminary expenses
8
12) For paying shareholders
Preference shareholders a/c Dr.
Equity shareholder a/c Dr.
To bank or share or debentures in purchasing company.
Opening entries in the Books of the Purchasing Company
1) On acquisition of business from vendor company

Business purchase a/c Dr.
To liquidator of vendor Co.
(with the amount of purchase consideration)
2) When the assets and liabilities are taken over from the Vendor company
Sundry assets (individually) a/c Dr. (with the revalued value)
To business purchase (Purchase consideration)
Note i) If the debit total is greater than the credit total, the difference has to
treated as capital profit and credited to capital reserve a/c.
ii) If the credit total is greater then the debit total, the difference has to
treated as capital loss and debited to goodwill a/c.
3) When the purchase consideration is satisfied :
Liquidator of vendor Co. a/c Dr. (with purchase consideration)

To preference share capital a/c (with the preference share issued by purchasing
company)
To equity share capital (with the equity share issued by purchasing company)
To share premium (if new share will be issued on premium) to debentures a/c
(debentures issued by purchasing company)
To Bank a/c (cash paid by the purchasing company)
9
4) If the liquidation expenses of the vendor company are born by the purchasing
company, the same is to be treated as capital loss.
Goodwill a/c Dr.
To Bank a/c (with the amount of expenditure)
5) With the formation expenses of the purchasing company, if any
Preliminary Expenses a/c Dr.
To Bank a/c
6) If there are both goodwill and capital reserve, Goodwill may be written off against
capital reserve
Capital Reserve a/c Dr.
To Goodwill (with the amount written off)
Note Either Goodwill a/c or Capital reserve a/c whichever is greater will appear in
the Balance sheet.
7) If any liability is discharged by the purchasing company
Respective liability a/c Dr.
To Share Capital a/c
To Debentures a/c
To Bank A/c
Illustration 3 (Amalgamation of Companies)
The following are the balance sheet of X Co. Ltd. and Y Co. Ltd. on 31st March,
1998:
10
X Co. Ltd.

Share Capital 4000 40,000 Building 20,000
Equity share of Rs.10/-
Each fully paid up Machinery 40,000
General Reserve 15,000 Stock 15,000
Profit and Loss a/c 5,000 Debtors 10,000
6% Debentures of Rs.100/ 20,000 Cash 2,000
each
Trade Creditors 5,000
Employees Provident Fund 2,000
87,000 87,000
Y Co. Ltd.

Share Capital Machinery 20,000
2,500 equity share of Rs.10/- Stock 5,000
fully paid up 25,000 Debtors 5000
Trade Creditors 5,000 Less provision
For Doubtful
Debts 500 4,500
Cash 500
30,000 30,000
The two companies agree to amalgamate and form a new company called Z Co.
Ltd. which takes over the assets and liabilities of both the companies on 1st April, 1998.
The Assets of X Co. Ltd. are taken over at a reduction of 10% with the exception
of buildings which is taken at its book value. Y Co. Ltd. will receive 10% of the net
11
valuation of their respective business as Goodwill. The entire purchase price is to be
paid by Z Co. Ltd. in fully paid equity shares of Rs.10/- each.
Give journals entries to close the books of X Ltd. and Y Ltd. and show opening
entries in the books of Z Ltd. Also prepare the opening balance sheet in the books of
Z Co. Ltd. as on 1st April, 1998.,
Solution
Calculation of Purchase Consideration
X Co. Ltd. Y. Co. Ltd.

Rs. Rs.
Assets taken over
Building 20,000 -
Machinery 36,000 20,000
Stock 13,500 5,000
Debtors 9,000 5,000
Cash 2,000 500
Gross Assets 80,500 30,500
Less Liabilities taken over X Co. Ltd. Y. Co. Ltd.
Rs. Rs.
6% Debentures 20,000 -
Trade Creditors 5,000 5,000
Employees Provident Fund 2,000 -
Provision for Doubtful Debts - 500
27,000 5,500
Net Assets 53,500 25,000
Add : Goodwill @ 10% on Net Assets - 2,500
Purchase Consideration 53,500 27,500
12
Journal of X Co. Ltd.
1998 Dr. (Rs.) Cr. (Rs.)
April 1 Realisation a/c 87,000
To Building a/c 20,000
To Machinery a/c 40,000
To Stock a/c 15,000
To Debtor a/c 10,000
To Cash a/c 2,000
(Being transfer of Sundry assets at their book value)
6% Debenture a/c 20,000
Trade Creditors a/c 5,000
Employees Provident Fund a/c 2,000
To Realisation a/c 27,000
(Being transfer of sundry liabilities at their
book value)
Z Co. Ltd. a/c 53,500
(Being purchase Consideration due)
Equity Shareholder a/c 6,500
(Being transfer of loss on realisation)
Equity share in Z Co. Ltd. a/c 53,500
To Z Co. Ltd. 53,500
(Being receipt of purchase consideration)
13
Equity Share Capital a/c 40,000
General Reserve a/c 15,000
Profit and Loss a/c 5,000
To Equity Shareholder a/c 60,000
(Being transfer of share capital and Past
Accumulated profit and reserves)
Equity shareholder a/c 53,500
To Equity Share in Z Co. Ltd. a/c 53,500
(Being final payment to equity shareholder)
Realisation a/c of X Co. Ltd.
Particulars Amount Particulars Amount
Rs. Rs.
To Building a/c 20,000 By 6% Debenture a/c 20,000
To Machinery a/c 40,000 By Trade Creditors a/c 5,000
To Stock a/c 15,000 By Employees Provident 2,000
Fund a/c
To Debtors a/c 10,000 By Z Co. Ltd. (Purchase 53,500
To Cash a/c 2,000 Consideration)
By Equity shareholder 6,500
A/c (Loss on realisation a/c)
87,000 87,000
14
Journal of Y Co. Ltd.
1998 Dr. (Rs.) Cr. (Rs.)
1 April Realisation a/c Dr. 30,500
To Machinery a/c 20,000
To Stock a/c 5,000
To Debtor a/c 5,000
To Cash a/c 500
(Being transfer of sundry assets at their book value)
Provision for Doubtful Debts a/c Dr. 500
Trade Creditors a/c Dr. 5,000
Z Co. Ltd. a/c Dr. 27,500
(Being purchase consideration due)
Realisation a/c Dr. 2,500
To Equity shareholder a/c 2,500
(Being transfer of profit on realisation)
Equity share in Z Co. Ltd. a/c Dr. 27,500
To Z Co. Ltd. a/c 27,500
(Being receipt of Purchase Consideration)
Equity share Capital a/c Dr. 25,000
To Equity Shareholder a/c 25,000
(Being transfer of share capital)
Equity shareholder a/c Dr. 27,500
To Equity share in Z Co. Ltd. a/c 27,500
(Being final payment to equity shareholders)
15
Realisation a/c Y Co. Ltd.
Rs. Rs.
To Machinery a/c 20,000 By Provision for 500
Doubtful Debts
To Stock a/c 5,000 By Trade Creditors 5,000
To Debtor a/c 5,000 By Z Co. Ltd. (Purchase 27,500
Consideration)
To Cash a/c 500
To Equity share holder 2,500
a/c (Profit on realisation)
33,000 33,000
Journal of Z Co. Ltd.
Dr. (Rs.) Cr. (Rs.)
1988
April 1 Business purchase a/c Dr. 81,000
To Liquidator of X Co. Ltd. 53,500
To Liquidator of Y Co. Ltd. 27,500
(Being acquisition of business of X Co. Ltd. and Y Co. Ltd.)
Good will a/c Dr. 2,500
Buildings a/c Dr. 20,000
Machinery a/c Dr. 56,000
Stock a/c Dr. 18,500
Debtors a/c Dr. 14,000
Cash a/c Dr. 2,500
To Provision for Doubtful Debts a/c 500
To 6% Debentures a/c 20,000
To Trade Creditors a/c 10,000
16
To Employees Provident Fund a/c 2,000
To Business Purchase a/c 81,000
(Being taking over of assets and liabilities of the vendor companies)
Liquidator of X Co. Ltd. Dr. 53,500
Liquidator of Y Co. Ltd. Dr. 27,500
To Equity share Capital a/c 81,000
(Being allotment of 8100 equity shares to Vendors as fully paid up for
consideration other than cash)
Opening Balance Sheet of Z Co. Ltd. as on 1 April, 1998
Share Capital Fixed Assets
Authorized Capital xxx Goodwill 2,500
Issued and subscribed Buildings 20,000
Capital Machinery 56,000
8100 Equity share of Current Assets
Rs. 10 each fully paid up 81,000 Stock 18,500
6% Debentures of Rs. 100 20,000 Debtors 14000
each
Unsecured loans Nil Less provision for
Current Liabilities and Doubtful Debts 500 13,500
Provisions Cash 2,500
A. Current Liabilities
Trade Creditors 10,000
B. Provision
Employees Provident Fund 2,000
1,13,000 1,13,000
17
Illustration 4 (Amalgamation of Companies)
B Ltd. and C Ltd. were competing companies both of which had incurred losses
in recent years. Their respective balance sheet as on 30th June 1998 were as follows :
Balance Sheet of B. Ltd.
Issued Capital Patents 2,500
10,000 equity shares of Plant 40,000
Rs. 10 each fully Furniture &
paid up 1,00,000 Fittings 4,600
Bank overdraft 6,050 Stock 42,460
Creditors 18,560 Debtors 15,630
P & L a/c 19,420
1,24,610 1,24,610
Balance Sheet of C Ltd.
Issued Capital
12,000 equity shares 60,000 Goodwill 10,000
of Rs.5 each fully paid Patent 8,000
P & L a/c 640 Plant 21,000
Creditors 8,310 Furniture &
Fittings 3,280
Stock 16,990
Debtors 9,550
Cash 130
68,950 68,950
In order to eliminate competition and provide for more economical working as

well as to make it possible to introduce fresh capital, the following arrangements were
made and carried into effect :
18
a) Both companies were to be wound up, a new company A Ltd. being formed to
take over both business.
b) A Ltd. took over the floating assets of both companies at book values and the
fixed assets at the following valuations :
B.Ltd. C. Ltd.
Goodwill 1,000 1,000
Patents 500 2,000
Plant 27,000 11,000
Furniture and Fittings 3,000 2,300
31,500 16,300
c) The consideration for the assets of B Ltd. was satisfied by the issue of 1,200,
9% preference shares of Rs.10 each and Rs. 64,490 in Rs. 10 equity shares of A
Ltd. fully paid and the balance in cash; whereas and for the assets of C Ltd.
Rs.34,300 in Rs. 10 equity shares of A Ltd. and the balance in cash.
d) The liquidator of B Ltd. transferred the preference shares to a loan creditor for
Rs. 12,000 in satisfaction of his claim. The equity shares were distributed pro-
rata among the shareholders of each of the original companies, the cash being
just sufficient to satisfy the creditors of each company and the expenses of
liquidation which amount to Rs. 500 and Rs. 300 respectively. For B. Ltd. and C
Ltd.
e) In order to provide the necessary cash A Ltd. issued 100, 7.5% debentures of
each Rs.100 each at a discount of 5% and 1800, 9% preference shares of Rs.10
each at par; these were fully paid up.
19
You are required to show the (i) necessary ledger accounts in the books of B
Ltd. and C Ltd. (ii) Opening entries in the books of A Ltd. and (iii) to prepare the
opening balance sheet of A Ltd.
Solution: Calculation of Purchase Consideration :
Assets taken over C Ltd. Rs. B Ltd. Rs.

Goodwill 1,000 1,000
Patents 500 2,000
Plant 27,500 11,000
Furniture and Fittings 3,000 2,300
Stock 42,460 16,990
Debtors 15,630 9,550
Net Assets or Purchase consideration 89,590 42,840
Purchase consideration to be satisfied as follows :

9% Preference shares in A Ltd. 12,000 -
Equity shares in A Ltd. 64,490 34,300
Cash 13,100 8,540
89,590 42,840
B Ltd.s Ledger
Realisation Account
Dr. Rs. Rs. Cr.
To Patents 2,500 By A Ltd. 89,590
To Plant 40,000 By Creditors a/c 10
To Furniture & Fittings 4,600 By equity share 16,090
To Stock 42,460 holders a/c
To Debtors 15,630
To cash (expenses) 500
1,05,690 1,05,690
20
A Ltd.
To Realisation a/c 89,590 By 9% Pref.shares 12,000

In A Ltd.
By equity shares in 64,490
A Ltd.
By Cash a/c 13,100
89,590 89,590
Bank Overdraft Account
To cash a/c 6,050 By Balance b/d 6,050
Creditors Account
To 9% Preference share 12,000 By Balance b/d 18,560

In A Ltd.
To Cash a/c 6,550
To Realisation a/c 10
18,560 18,560
9% Preference Shares in A Ltd.
To A Ltd. 12,000 By Creditors a/c 12,000
12,000 12,000
Equity Shares in A Ltd.

To A Ltd. 64,490 By equity share 64,490
Holder a/c
64,490 64,490
21
Cash Account
To A Ltd.s a/c 13,100 By Realisation a/c 500
(exp.)
By Bank overdraft 6,050
By Creditors 6,550
13,100 13,100
Equity Shareholders Account
To Realisation a/c 16,090 By equity share 1,00,000

To P/L a/c 19,420
To equity share in A Ltd. 64,490
1,00,000 1,00,000
C Ltd.s Ledger
Realisation Account
Rs. Rs.
To Goodwill 10,000 By A Ltd. 42,840
To Patents 8,000 By equity share 26,340
To Plant 21,000 holders a/c
To furniture & fittings 3,280
To Stock 16,990
To Debtors 9,550
To Cash (exp.) 300
To Creditors 60
69,180 69,180
22
A Ltd.
To Realisation a/c 42,840 By equity shares in 34,300
A Ltd.
By Cash 8,540
42,840 42,840
Creditors Account
To Cash a/c 8,370 By Balance b/d 8,310

By Realisation a/c 60
8,370 8,370
Equity Share in A Ltd.
To A Ltd. 34,300 By equity share 34,300

Holder a/c
34,300 34,300
Cash Account
To Balance b/d 130 By Realisation 300

To A Ltd.s a/c 8,540 (exp.)
By Creditors 8,370
8,670 8,670
To Realisation a/c 26,340 By equity share 60,000

To equity share in 34,300 Capital a/c
A Ltd.s a/c By Profit & Loss a/c 640
60,640 60,640
23
A Ltd.s Journals
Dr. Cr.
Business Purchase a/c 1,32,430
To Liquidator of B Ltd. 89,590
To Liquidator of C Ltd. 42,840
(Being acquisition of business of B Ltd.
as per agreement dated..)
Goodwill a/c Dr. 2,000
Patents a/c Dr. 2,500
Plants a/c Dr. 38,000
Furnitures & Fittings Dr. 5,300
Stock a/c Dr. 59,450
Debtors Dr. 25,180
To Business Purchase a/c 1,32,430
(Being taking over of assets and liabilities
of the vendor companies
Bank a/c Dr. 27,500
To 9% Pref. Share application and 18,000
Allotment a/c
To 7 %Debenture application and 9,500
Allotment a/c
(Being application money on 1800 9% preference
shares @ Rs.10 per share and 100 7 %
Debenture of Rs. 100 each and Rs. 95 each)
24
9% Preference share application & 18,000
Allotment a/c Dr.
7% Debenture app. & allotment a/c Dr. 9,500
Discount on issue of debenture a/c Dr. 500
To 9% Preference share capital a/c 18,000
To 7 % Debenture a/c 10,000
(Being allotment 1800 9% Preference shares of
Rs.100 each at per and 100 7 %
Debentures of Rs.100 each at a discount
of 5% as per Boards resolution dated.)
Liquidator of B Ltd. Dr. 89,590
Liquidator of C Ltd. Dr. 42,840
To 9% Pre. Share capital a/c 12,000
To equity share capital a/c 98,790
To Bank a/c 21,640
(Being allotment of 1200 9% Preference shares
of Rs. 10 each and 9,879 equity shares of
Rs.10 each issued to vendors as fully paid
Up for consideration other than cash and
The payment of balance in cash as per
Boards resolution dated.)
25
Balance Sheet of A Ltd. as at 30th June 1997
Share Capital : Fixed Assets :
Authorised Capital Goodwill 2,000
Patents 2,500
Plant 38,000
Furniture & Fittings 5,300
Issued or Subscribed Investments NIL
Capital :
3,000, 9% Preference Shares Current Assets :
of Rs. 10 each Fully paid up 30,000 Loans and Advances :
A Current Assets :
9879 Equity shares of Rs. 10 Stock 59,450
each Fully paid up 98,790 Debtors 25,180
(Of the above shares, 1200, Bank Balance 5,860
9% Preference shares and
9,879 Equity shares issued to B. Loans and Advances
vendors for consideration Miscellaneous
other than cash). Expenditure :
Discount on Issue of
Debenture. 500
Reserve & Surplus NIL
Secured Loan :
100, 7-1/2% Debenture
of Rs. 100 each 10,000
Unsecured Loan : NIL
Current Liabilities and NIL
Provisions
1,38,790 1,38,790
26
Illustration : 5(Absorption)
The following is the Balance Sheet of Dee Ltd. As on 31.12.98
Share Capital : Buildings 1,70,000
40,000 equity shares of 4,00,000 Plant & Machinery 4,00,000
Rs.10 each
General Reserve 50,000 Investment 50,600
Profit & Loss A/c 29,600 Debtors 1,40,500
5% Debentures 2,50,000 Stock 80,700
Creditors 1,28,700 Cash at Bank 16,500
8,58,300 8,58,300
Dee Ltd. was absorbed by Comet Ltd. on the above mentioned dated on the
following terms and conditions :
Comet Ltd. to-

(a) assume all liabilities and to acquire all assets except investment which
were sold by Dee Ltd. for Rs. 45,000,
(b) Discharge the Debentures of Dee Ltd. at a discount of 5% by the issue
6% Debentures of Rs. 100 each in Comet Ltd.,
(c) Issue two equity shares of Rs. 5 each in Comet Ltd. at Rs. 6 per share and
also to pay Rs. 2 per share in cash to the shareholders of Dee Ltd. in
exchange of every share in Dee Ltd.,
(d) Pay the cost of absorption Rs. 2,500 as part of purchase consideration.
Dee Ltd. sold in the open market 1/4th of the shares received from Comet
Ltd. at the average rate of Rs. 5.50 per share.
Show the necessary Ledger accounts in the books of Dee Ltd. and the Opening
entries in the books of Comet Ltd.
27
Solution :- Calculation of Purchase Consideration
Particulars Amount Mode of Payment

Shareholders- (Rs.)
(i) 80,000 equity shares
40,000x2 of Rs.5 each at
Rs. 6 each, i.e.
80,000xRs.6 4,80,000 Equity Shares
(ii) Cash 40,000xRs.2 80,000 Cash
(iii) Debenture holders-
5% Debentures 2,50,000
Less : Discount @ 5%
12,500 2,37,500 6% Debentures
(iv) Cost of absorption 2,500 Cash
8,00,000
Dee Ltds Ledger
Realisation Account
Dr. Rs. Cr. Rs.
To Building A/c 1,70,000 By Creditors A/c 1,28,700
To Plant & Machinery A/c 4,00,000 By Comet Ltd. 8,00,000
To investment A/c 50,600 By Cash A/c 45,000
To Debtors A/c 1,40,500 (Investment Realised)
To Stock A/c 80,700 By 5% Debentures A/c 12,500
To Bank A/c 16,500 (Discount)
To Cash A/c (Exp.) 2,500
To Equity Share in 10,000
Comet Ltd. (Loss on Sale)
To Equity
Shareholders A/c 1,15,000
(Profit transferred)
9,86,200 9,86,200
28
Comet Ltd.
Dr. Rs. Cr. Rs.
To Realisation A/c 8,00,000 By Equity Shares in 4,80,000
Comet Ltd.
By 6% Debentures in 2,37,500
Comet Ltd.
By Cash 82,500
8,00,000 8,00,000
Equity Shares in Commet Ltd.
To Comet Ltd.s A/c 4,80,000 By Cash A/c 1,10,000

By Realisation A/c 10,000
By Equity Share
Holder/s A/c 3,60,000
4,80,000 4,80,000
6% Debentures in Comet Ltd.
To Comet Ltd. 2,37,500 By 5% Debenture-

Holders A/c 2,37,500
Cash Account
To Comet Ltd. 82,500 By Realisation A/c 2,500

(Exp.)
To Realisation 45,000 By Equity
To Equity Share in Shareholders A/c 2,35,000
Comet Ltd.s A/c 1,10,000
2,37,500 2,37,500
29
5% Debenture Holders Account
To Realisation A/c 12,500 By 5% Debentures A/c 2,50,000

To 6% Debentures in
Comet Ltd. 2,37,500
2,50,000 2,50,000
Rs. Rs.
To Equity Share in By Equity Share
Comet Ltd.s A/c 3,60,000 Capital A/c 4,00,000
To Cash A/c 2,35,000 By General Reserve 50,000
A/c
By P/L A/c 29,600
By Realisation A/c 1,15,400
5,95,000 5,95,000
Comet Ltds Journal
Dr. Cr.
Business Purchase A/c Dr. 8,00,000
To Liquidators of Dee Ltds A/c 8,00,000
(Being acquisition of the business of Dee
Ltd. as per agreement dated__________)
Building A/c Dr. 1,70,000
Plant & Machinery Dr. 4,00,000
Debtors A/c Dr. 1,40,000
Stock A/c Dr. 80,700
Bank A/c Dr. 16,500
Goodwill A/c Dr. 1,21,000
To Creditors A/c 1,28,700
To Business Purchase A/c 8,00,000
(Being taking over of assets and liabilities
of the vendor Company)
30
Liquidator of Dee Ltds A/c Dr. 8,00,000
To equity share Cap. A/c 4,00,000
To 6% Debenture A/c 2,37,000
To Bank A/c 82,500
(Being allotment of 80,000 equity shares
of Rs.5 each at a Premium of Re.1
each and 2,375 6% Debenture of
Rs.100 each issued to vendors as
Fully paid up for consideration other
than cash and the balance paid in
cash as per Boards resolution dated)
Illustration6 (Absorption)
Thin and Co. Ltd. was absorbed by Jhick & Co. Ltd., as on 31st March, 1998. All
the assets and liabilities of Thing & Co. Ltd. was taken over by Thick & Co. Ltd. The
valuation at which the assets were taken up was as follows :
(i) Stock at 15% above book-value.
(ii) Plant and Machinery at 20% above book value;
(iii) Goodwill at Rs.1,00,000;
(iv) Debtors were taken subject to a provision of 10% for doubtful debts;
(v) The fire insurance policy against which premium was paid in advance could not
be assigned and so lapsed;
(vi) The income-tax refund claim was taken at Rs.5,000.
There was a claim of Rs.3,000 against the workmens Compensation Fund which
was admitted by the Company but was not paid.
The purchase consideration was paid in so many fully paid shares of the Thick &
Co. Ltd. as may be distributed at three shares to the holders of every two shares of Thin
31
& Co. Ltd. and the balance in cash. The following are the balance sheets of both the
Companies as on 31.03.1998.
Liabilities Thick of Thin of Assets Thick & Thin &
Co. Ltd. Co.Ltd. Co. Ltd. Co. Ltd.
Authorised Goodwill 2,00,000 60,000
Capital, Equity Plant &
Share of Rs.10 Machinery 1,00,000
Each. 15,00,000 15,00,000 Stock in Trade 3,12,000 80,000
Sundry Debtor 2,65,000 56,000
Issued & Prepaid Insurance - 700
Subscribed Capital Income Tax
Equity Shares of Refund - 6,000
Rs.10 each Fully Cash in Hand 869 356
Paid-up 8,00,000 2,00,000 Cash in Bank 14,000 8,300
General Res. 1,00,000 50,000
P/L A/c 20,502 12,900
Workmens
Compensation
Fund 12,000 9,000
Sundry Creditor 58,567 30,456
Staff Provident
Fund 10,000 4,000
Provisional
Taxation 12,000 5,000
10,13,069 3,11,356 10,13,069 3,11,356
32
You are required to-
(i) Show the necessary ledger accounts in the books of Thin & Co. Ltd.
(ii) Show the necessary Journal entries in the books of Thick & Co. Ltd.
(iii) Prepare the Balance sheet of Thick & Co. after absorption.
Solution:- Calculation of Purchase Consideration
Assets taken over Rs. Rs.
Goodwill 1,00,000
Plant & Machinery (1,00,000+20%) 1,20,000
Stock in trade (80,000+15%) 92,000
Sundry Debtors (56,000-10%) 50,400
Income Tax Refund Claim 5,000
Cash in Hand 356
Cash at Bank 8,300
Gross Assets taken over 3,76,056
Less : Liabilities taken over
Staff Provident Fund 4,000
Provision For Taxation 5,000
Workmens Compensation Fund 3,000 42,456
Net Assets or Purchase Consideration 3,33,600
Purchase consideration to be satisfied as follow :
20,000x2/3 = 30,000 equity share of Rs.10 each 3,00,000
Cash 33,600
3,33,600
33
Ledger of Thin & Co Ltd.
Realisation Account
Rs. Rs.
Goodwill 60,000 By Sundry Creditors A/c 30,456
To Plant & Machinery A/c 1,00,000 By Workmens
To Stock-in-Trade A/c 80,000 Compensation Fund A/c 3,000
To Sundry Debtors A/c 56,000 By Staff Provident Fund
To Income Tax Refund Claim A/c 4,000
A/c 6,000 By Provision For Taxation
To Prepaid Insurance 700 A/c 5,000
To Cash in Hand A/c 356 By Thick & Co. Ltd. 3,33,600
To Cash at Bank A/c 8,300
To equity share holder A/c
Profit 64,700
3,76,056 3,76,056
Thick & Co. Ltd.
To Realisation A/c 3,33,600 By equity Shares in Thick

& Col. Ltd. 3,00,000
By Cash A/c 33,600
3,33,600 3,33,600
Equity Shares in Thick & Co. Ltd.
To Thick & Co. Ltd. 3,00,000 By equity shareholders A/c 3,00,000
34
Cash Account
To Thick & Co Ltds A/c 33,600 By equity shareholders A/c 33,600
To equity shares in By equity Share Capital

Thick & Co. Ltd. A/c 3,00,000 A/c 2,00,000
To Cash A/c 33,600 By General Reserve A/c 50,000
By Profit & Loss A/c 12,900
By Workmens
Compensation Fund A/c 6,000
By Realisation A/c 64,700
3,33,600 3,33,600
Journal of Thick & Co. Ltd.
Dr. (Rs.) Cr. (Rs.)

Goodwill A/c Dr. 1,00,000
Plant & Machinery A/c Dr. 1,20,000
Stock-in-trade A/c Dr. 92,000
Sundry Debtors A/c Dr. 56,000
Income Tax Refund Claim Dr. 5,000
Cash at Bank Dr. 8,300
To Provision for Doubtful Debts A/c 5,600
To Sundry Creditors A/c 30,456
To Staff Provident Fund A/c 4,000
To Provision for Taxation A/c 5,000
To Workmens Compensation Fund A/c 3,000
To Liquidator of Thin & Co. Ltds A/c 3,33,600
(Being taking over of assets and liabilities of Thin & Co. Ltd. as per agreement
date______)
35
Liquidator of Thin & Co. Ltds A/c Dr. 3,33,600
To Equity Share Capital A/c 3,00,000
To Bank A/c 33,600
(Being allotment of 30,.000 equity shares of Rs. 10 each issued to vendors as fully
paid up for consideration other than cash and the balance paid in cash as per Board
Resolution date__________)
Balance Sheet of Thick & Co. Ltd. as at 31st March, 1988
Liabilities Assets
Authorised Capital Goodwill 3,00,000
1,50,000 Equity shares Plant & Machinery 4,32,000
of Rs. 10 each 15,00,000 Investment :
Issued & Subscribed Current assets, Loans and
Capital : Advances :
1,10,000 equity shares A. Current Assets :
of Rs.10 each Stock in Trade 3,57,000
fully paid up 11,00,000 Sundry
Reserves & Surplus : Debtors = 2,77,200
General Reserve 1,00,000 Less:Provision=5,600 2,71,600
Profit & Loss A/c 20,502 Cash Balance in Hand 1,225
Workmens B. Loans & Advances :
Compensation Fund 15,000 Income Tax Refund
Secured Loan : Claim 5,000
Bank overdraft 11,300 Misc. Expenditure NIL
Unsecured Loan : NIL
Current Liabilities &
Provisions :
A. Current Liabilities :
B. Provisions :
Provision for taxation 17,000
Staff Provident Fund 14,000
13,66,825 13,66,825
36
Illustration No. 7 (External Reconstruction)
The following is the Balance Sheet of Rocket Ltd. as at 31st March, 1998 :
Authorised and Issued
Capital : Patents 1,50,000
50,000 equity shares of Freehold Property 2,00,000
Rs.10 each fully paid up 5,00,000 Stock-in-Trade 1,70,000
Debtors 2,60,000
60,000, 6% Preference Cash at Bank 6,000
shares of Rs.5 each fully Profit & Loss A/c 4,06,000
paid up 3,00,000
5% Debentures 2,00,000
Sundry Creditors 1,60,000
Accured Interest on
Debenture 32,000
11,92,000 11,92,000
The following scheme of reconstruction was passed and sanctioned :
(1) A new company by the name of Rocket (1998) Ltd. to be formed to take over
the entire business of Rocket Ltd.
(2) One equity share of Rs.10, Rs.5 per share paid up is to be given in exchange of
every two equity shares of Rocket Ltd.
(3) One 5% Preference Share of Rs.100 each is to be given in exchange of every 30
preference share of Rocket Ltd.
(4) 5% Debentures of Rocket Ltd. will be discharged together with the amount of
interest accured by the issue of equity shares of Rs.10 each fully paid.
(5) The Creditor will receive 50% of their dues in cash and 25 % in equity shares of
Rs. 10 each and the balance is to be forgone.
37
(6) The equity shares issued as Rs.5 per share paid-up to be made Fully paid up
receiving cash from the holders.
(7) The Authorised Capital of Rockets (1998) Ltd. is to be Rs.8,00,000 divided
into 60,000 equity shares of Rs.10 each and 2,000, 5% Preference shares of
Rs.100 each.
You are required to-
(i) Show the closing entries in the books of Rocket Ltd.
(ii) Show the opening entries in the books of Rocket (1998) Ltd. and
(iii) Prepare the opening Balance Sheet of Rocket (1998) Ltd. utilising any Profit
on taking over to write down the value of the Patents. The Preliminary Expenses
amounted to Rs.6,000.
Solution
Calculation of Purchase Consideration

Particulars Amount (Rs.) Mode of Payment
Equity Shareholders:-
25000 equity shares (i.e. 50,000/2) of Rs.10
each, Rs.5 per Share credited (25,000x5) 1,25,000 Equity Shares
6% Preference Shareholders-
2,000 Preference Share (i.e. 60,000/30) of
Rs.100 each Fully paid up (2,000x100) 2,00,000 5% Preference Shares
5% Debenture holders-
Debenture 2,00,000
Add Accured Int. 32,000 2,32,000 23,200 equity shares of Rs.10 each
Creditors
(i) 50% of Rs.1,60,000 80,000 Cash
(ii) 25% of Rs.1,60,000 40,000 4,000 equity shares of Rs. 10 each
Net Payment or Purchase Consideration 6,77,000
38
Journal of Rocket Ltd.
Dr. Cr.
Realisation A/c Dr. 7,86,000
To Patent A/c 1,50,000
To Freehold Property A/c 2,00,000
To Stock-in-Trade A/c 1,70,000
To Debtors A/c 2,60,000
To Cash at Bank A/c 6,000
(Being transfer of Sundry Assets on sale of business to Rocket (1998) Ltd.)
Rocket (1998) Ltd. Dr. 6,77,000
To Realisation A/c 6,77,000
(Being purchase Consideration becoming due)
Sundry Creditors A/c Dr. 40,000
(Being amount Foregone by the Creditors)
Equity Shares in Rocket (1998) Ltd. A/c Dr. 3,97,000
5% Pref. Shares in Rocket (1998) Ltd. Dr. 2,00,000
Cash A/c Dr. 80,000
To Rocket (1998) Ltd. 6,77,000
(Being receipt Purchase Consideration)
5% Debentures A/c Dr. 2,00,000
Accrued Int. on Debentures A/c Dr. 32,000
To 5% Debenture-holders A/c 2,32,000
(Being amount due on redemption)
5% Debenture-holders A/c Dr. 2,32,000
To Equity Share in Rocket (1998) Ltd. 2,32,000
(Payment to Debenture-holders in the Form of equity shares received from the
purchasing Company).
39
Sundry Creditors A/c Dr. 1,20,000
To Equity Share in Rocket (1998) Ltd. 40,000
To Cash A/c 80,000
(Being payment to Sundry Creditors)
6% Preference Share Capital A/c Dr. 3,00,000
To 6% Preference Shareholders Ltd. 3,00,000
(Being transfer to Pref. Share Capital to Preference Shareholders A/c)
6% Preference Shareholders A/c Dr. 1,00,000
To Realisation A/c 1,00,000
(Being amount Foregone by the Preference Shareholders)
Realisation A/c Dr. 31,000
To Equity Shareholders A/c 31,000
(Being profit on realisation transferred)
6% Pref. Shareholders A/c Dr. 2,00,000
To 5% Pref. Shares in Rocket Ltd. 2,00,000
(Being payment to Prefer. Shareholders)
Equity Share Capital A/c Dr. 5,00,000
To Equity Shareholders A/c 5,00,000
(Being transfer of Equity Share Capital to Equity Shareholders A/c)
Equity Shareholders A/c Dr. 4,06,000
To Profit & Loss A/c 4,06,000
(Being transfer of accumulated losses to equity Shareholders A/c)
Equity Shareholders A/c Dr. 1,25,000
To Equity Shares in Rocket Ltd. 1,25,000
(Being payment to Equity Shareholder)
40
Journal of Rocket (1998) Ltd.
Dr. Cr.
Patents A/c Dr. 1,50,000
Freehold Property A/c Dr. 2,00,000
Stock-in-Trade A/c Dr. 1,70,000
Debtors A/c Dr. 2,60,000
Cash at Bank A/c Dr. 6,000
To Liquidator of Rocket Ltd. 6,77,000
To Capital reserve A/c 1,09,000
(Being taking over of the assets of Rocket Ltd. as per agreement dated____________).
Capital reserve A.c Dr. 1,09,000
To Patent A/c 1,09,000
(Being writing off of Patents against the Profit on taking over the business of Rocket Ltd.)
Liquidator of Rocket Ltd. Dr. 6,77,000
To Equity Share Capital 3,97,000
To 5% Pref. Share Cap. A/c 2,00,000
To Bank A/c 80,000
(Being allotment of 25,000 equity shares of Rs.10 each, Rs. 5 Share being paid up,
27,200 equity shares of Rs.10 each Fully paid up, 2,000 5% Pref. Shares of Rs.100
each Fully paid up to vendors. For consideration other than cash and the Balance paid in
cash as per Boards resolution dated ____________)
Bank A/c Dr. 1,25,000
To Equity Shares Capital A/c 1,25,000
(Being call Money on 25,000 Equity Shares @ Rs.5 per Share)
Preliminary Expenses A/c Dr. 6,000
To Bank A/c 6,000
(Being payment of Preliminary Expenses)
41
Balance Sheet of Rocket (1998) Ltd. as at 31st March, 1998

Share Capital : Fixed Assets : 41,000
Authorised Capital- 6,00,000 Patents 2,00,000
60,000 equity shares of Rs.10 Freehold Property
each 2000 5% Pref. Shares of Investments :
Rs.100 each. 2,00,000 Current Assets, Loans
Advances :
8,00,000 A. Current Assets
Stock-in-trade 1,70,000
Issued and Subscribed Capital : Debtors 2,60,000
52,200 Equity Shares of Rs.10 Bank Balance 45,000
each Fully paid up. 5,22,000
2000, 5% Pref. Shares of B. Loans & Advances :
Rs.100 each, Fully Paid up. 2,00,000 Miscellaneous
(All the above shares are Expenditure
issued to vendors for Preliminary Expenses 6,000
consideration other than cash).
7,22,000 7,22,000
12.5 INTER COMPANY OWINGS
If there are inter-company owings resulting from purchase and sale of goods
between the vendor company and the purchasing company, the same have to be cancelled
in the books of the purchasing company when the accounts are consolidated. The
following are the examples of such items :
1. Common Debts-(I) If the purchasing company owes an amount to the vendor

company, the same is in the Sundry Debtors of the vendor company and Sundry Creditors
42
of the purchasing Company. If the vendor company owes an amount to the purchasing
company the same is in the Sundry of purchasing company and Sundry Creditors of the
vendor company. The entry for the cancellation of this common item will be follows
in the book of purchasing company.
Sundry Creditor Account Dr. (with the amount of inter company owing)
To Sundry Debtors A/c
Note : (i) The above entry for cancellation of common items has to be passed after
the acquisition entries are passed in the usual way.
(ii) Such an item will not affect the vendor company in any way and hence no entry
will be required in the books of vendor.
2. Adjustment of unrealised profit included in the unsold stock of the vendor

company which was sold by the purchasing company
(i) Stock of the vendor company includes goods sold by the purchasing company.
For this, no separate entry is required to be passed in the books of purchasing
company, only the amount of stock has to be reduced while passing the entries
on acquisition.
(ii) Stock of purchasing company includes goods sold by the vendor company at a
profit. The following adjustment entry has to be passed in the books of purchasing
company.
Goodwill or Capital Reserve A/c Dr.
To Stock A/c (with the amount of unrealised profit)
43
12.6 INTER-COMPANY HOLDINGS
Inter Company holdings may be possible in any of the following ways :

i) Share may be held by the purchasing company in the vendor Company or
ii) Share may be held by the vendor company in the purchasing company, or
iii) Share may be held by both companies in each other.
a) If share are held by purchasing company in the vendor company :
In such a case the purchase consideration has to be adjusted for shares already
held by the purchasing company since the purchasing company is the owner of the
proportionate assets of vendor company. Under the net assets method of calculating
purchase consideration, it should be reduced proportionately. While under the net
payment method, purchase consideration should be calculated on the basis of outside
shareholder and creditors only.
As the vendor company is not supposed to received any price of the share held
by the purchasing company, it has to close that part of share capital by transfer to the
Realisation A/c. Entry will be
Share Capital A/c Dr.
To Realisation A/c
(With the paid up values of the share held by the purchasing company)
Similarly, the purchasing company has to cancel its investment in share of the
vendor company since it has got no value after the merger. The entry required for this
is :
Goodwill or Capital Reserve A/c Dr.
To Investment in share A/c
(as the case may be with the cost of shares)
44
Note : It would be better, however to credit the investment in Share A/c alongwith the
entry recorded the assets and liabilities taken over. In such a case, the goodwill or
capital reserve will be automatically adjusted.
b) If share are held by the vendor company in the purchasing company
In such a case, share held by the vendor company in the purchasing company
will appear as an asset in the books of vendor company. But it is important to note here
that at the time of taking over the assets of the vendor company, the purchasing company
can not take over its own shares. The treatment of this item in the books of both
companies will be as follows.
In the books of the vendor, such share held in the purchasing company should
not be transferred to Realisation A/c. Instead such share should be applied in paying
off the share holders of the company. But if such shares are revalued at the time of sale
of the business, the profit or less on revaluation should be adjusted through the
Realisation A/c by debiting or crediting the same in Purchasing Company A/c.
In the books of the purchasing company, no debit should be given for this asset
of the vendor company at the time of acquisition of assets. If purchase consideration
is determined under the net payment method, the purchasing company must deduct the
number of share already held by the vendor company from the purchase consideration
while making payment to the vendor company. For example, the purchasing company
acquires the business of the vendor company and in exchange allots 3 shares of Rs. 10
each for every share of Rs. 20 each. If the vendor companys share Capital consists of
10,000 share of Rs. 20 each, it is supposed to received 10000 x 3 = 30,000 shares of
Rs. 10 each. Now, if 5000 shares of the purchasing company are already held by the
vendor company the purchasing company will issue only (30000 5000) 25,000
shares to the vendor company in the satisfaction of purchase consideration.
45
c) If shares are held by both the companies in each other
In such a case the value of share of both the companies has to be ascertained
first with the help of an algebraic equation because the value of shares in one company
will affect the value of shares in the other company. From the value of share of both
the companies, thus determined, the proportionate value of shares held by both the
companies in each other has to be deducted to arrive at the amount due to the outsiders.
The purchase consideration in such a case has to be determined on the basis of the
amount due to outsiders.
Illustration No. 8
The following are balance sheets of A Co. Ltd. and B. Co. Ltd. on 31.12.1998.
Liabilities A Ltd. B. Ltd. Assets A.Ltd. B.Ltd.

Rs. Rs. Rs. Rs.
Share Capital 4,00,000 1,50,000 Sundry Assets 5,60,000 2,00,000
Profit & Loss Goodwill 40,000 50,000
A/c 75,000 1,25,000 Profit & Loss
Creditors 1,25,000 A/c 25,000
6,00,000 2,75,000 6,00,000 2,75,000
A Ltd. holds 1000 shares in B. Ltd. at cost Rs.25,000 and B. Ltd. holds 500
share in A Ltd. at cost Rs. 70,000 in each case included in the Sundry Assets. The
shares of A Ltd. are of Rs.100 each fully paid, the share of B Ltd. are Rs. 50 each, Rs.
30 paid.
The two companies agree to amalgamate and form a new company AB Ltd. on
the basis :
j) The shares which each company holds in the other are to be valued at book value
having regard to the goodwill valuation as A Ltd. Rs.1,50,000 and for b Ltd, the
value of goodwill is Rs.25,000.
46
ii) The new shares are to be a nominal value of Rs.50 each, credited as Rs.25 paid.
Prepare balance sheet of AB Ltd. and a statement showing shareholdings in the

new company attributable to the members of the old companies.
Solution
Balance Sheet of AB Ltd. as on 31.12.98

Authorised Goodwill
Issued & Subscribed Capital A Ltd. 1,50,000
23,500 share of Rs.50 each, B Ltd. 25,000 1,75,000
Rs.25 per share paid. 5,90,000
(consideration other than
cash) Sundry Assets
Current Liabilities : A Ltd. 5,35,000
Sundry Creditor B Ltd. 1,30,000 6,65,000
A Ltd. 1,25,000
B Ltd. 1,25,000 2,50,000
8,40,000 8,40,000
Statement of Shareholder in the New Company AB Ltd.
A Ltd. B.Ltd.
Purchase Consideration 5,07,950 82,050
::Number of share to be issued by the
new company 5,07,950 82,050
25 25
= 20,318 = 3,282
47
Number of shares held by outsiders at Present (4000-500) (5000-1000)
-3500 -4000
::Ratio in which shares are to be
distributed to the members. 3500:20318 4000:3282
Note : It is evident from the above that fraction certificate has to be issued by the
company to facilitate distribution of shares among the members.
Working Notes
1) Value of Shares of A Ltd. and B Ltd. other than mutual holdings :

A Ltd. B.Ltd.
Rs. Rs.
Sundry Asset excluding
Share held by A Ltd. and
B Ltd. 5,35,000 1,30,000
Goodwill 1,50,00 25,000
6,85,000 1,55,000
Less Creditors 1,25,000 1,25,000
Value of Shares other 5,60,000 30,000

than mutual holdings.
2) Total value of Share :

A Ltd. = 5,60,000 x 1/5th of the value of Shares in B Ltd.
B Ltd. = 30,000 x 1/8th of the value of Shares in A Ltd.
Let A denotes the value of share in A Ltd.
And B denotes the value of share in B Ltd.
A 5,60,000 + 1/5 B (i) &
B = 30,000 + 1/8 A (ii)
48
Substituting the value of A in equation (ii) we get
B = 30,000 + 1/8 (5,60,000 + 1/5 B)
= 30,000 | 70,000 | 1/40 B
B = 1,02,564 (approx.)
Now putting the value of B in equation (i) we get
A = 5,60,000 + 1/5 x 102564
A = 5,80,513 (Approx.)
Value of each share in
A Ltd. = 5,80,513/4000 = 145.13 (approx.)
B Ltd. = 1,02,564/5000 = 20.51 (approx.)
Purchase Consideration
A Ltd. B. Ltd.
Rs. Rs.
Total value of Shares 5,80,513 1,02,564
Less: 1/8th share held by B Ltd. 72,564
Less: 1/5th share held by A Ltd. 20,513
Amount due to outsiders 5,07,949 82,051
Cr. 5,07,950 Cr. 82,050
Total purchase consideration = (5,07,950 + 82,050) = Rs. 5,90,000
12.7 INTERNAL RECONSTRUCTION OR CAPITAL REDUCTION
Reduction of Capital can be carried out by a Company in any of the following

ways :
i) By reducing the liabilities of the shareholders in respect of any unpaid amount

on the share held by them.
ii) By paying off surplus capital, if any, which is much in excess of needs of the
company. This can be done with or without reducing the liability on the shares.
49
iii) By cancelling the paid up share capital which has been lost in the course of the
business and which is not represented by assets. This can also be done with or
without reducing the liability on the shares. This is the most common method
adopted by companies to write off their huge accumulated losses.
Accounting Entries
i) When the Liability of the shareholders in respect of the unpaid amount on the
share held by them is reduced.
Share Capital (Partly paid up) A/c Dr.
To Share Capital (Fully paid up) A/c
(With the paid up amount of the shares)
Note : In such a case, the paid up share capital of the company will remain
unaffected.
ii) When the surplus capital, if any, which is much in excess of the needs of the
company is paid off :
a) Share Capital A/c Dr.
To Share holder A/c
b) Share holders A/c Dr.
To Bank A/c
(with the amount refunded)
Note : In such a case, the paid up capital of the company will be reduced by the
amount paid office.
iii) If the paid up share which has been lost in the course of business is cancelled :-
a) If the face value of shares is changed by the reduction of Capital-
Share Capital (old) A/c Dr. (Which the paid up
Value of the old share)
To Share Capital (New) A/c (Which the paid up
Value of the old share)
To Capital Reduction A/c (with the difference)
Or To Reconstruction A/c
50
Or (a) If the face value of shares remains unchanged by the reduction of Capital
Share Capital A/c Dr.
To Capital Reduction A/c (with the amount of reduction)
Note : The net effect in both the above case will be same.
b) If the debenture holders and Creditor also make some sacrifice towards
the reconstruction-
Debentures A/c Dr.
Sundry Creditors A/c Dr.
To Capital Reduction A/c (With the amount of sacrifice)
c) If the value of any assets is appreciated-
Respective Assets A/c Dr. (With the amount of appreciation)
To Capital Reduction A/c
Note : In case there is an appreciation in the value of any asset, the preparation of the
Reconstruction A/c would be the most appropriate one.
d) When the accumulated losses and fictitious assets are written off and
over valuation of assets, is written down to their present values-
Capital Reduction A/c Dr. (With the total amount written off)
Or Reconstruction A/c Dr.
To Profit and Loss A/c (As the case may be)
To Goodwill A/c
To Trade Mark A/c
To Patents A/c
To Plant & Machinery A/c
51
e) If there is any surplus in Capital Reduction A/c or Reconstruction A/c,
the same should be transferred to the Capital reserve A/c-
Capital Reduction A/c Dr. (With the amount of surplus)
Or Reconstruction A/c Dr.
To Capital reserve A/c
Note :- The amount to be written off can not exceed the amount available in the Capital
Reduction A/c or Reconstruction A/c. But, if any reserve appears in the books of the
Company, the same may be utilised in writing off the accumulated losses and fictitious
assets.
Balance Sheet :- While preparing the Balance sheet of the company after
reconstruction is duly carried out, the following points should be taken into
consideration-
i) The words And Reduced should be added to the name of the company, if the
court so directs.
ii) So far as fixed assets are concerned, the amount written off under a scheme of
reconstruction must be shown for five years.
52
Illustration9: The Balance Sheet of B Ltd. as on 30th June 1998 is given below :
Balance Sheet
Liabilities Amount Assets Amount
Rs. Rs.
Authorised Capital
25,000 Equity Share of Rs.20 Plant 2,00,000
each 5,00,000 Patents 1,00,000
3,000, 6% Preference share
of Rs.100 each 3,00,000 Debtors 35,000
Bills Receivable 12,000
3,00,000 Stock 45,000
Cash at Bank 7,000
Issued & Subscribed Capital Profit & Loss A/c 99,000
15,000 Equity Shares of Preliminary Exp. 5,800
Rs.20 each, fully paid 3,00,000
1000, 5% Preference Share
of Rs.100 each, Rs.80 per
share paid up. 80,000
600, 7% Debentures of
Rs.100 each 60,000
Bills payable 5,000
Outstanding Interest on
Debentures 8,800
5,03,800 5,03,800
53
A special resolution was passed and confirmed by the court to the following
effect :
i) That 1000 6% Preference share of Rs.100 each, Rs. 80 per share called up, be
reduced to 1000 6% Preference share of Rs.60 each, Rs. 40 per share paid up.
ii) That 15,000 Equity Share of Rs.20 each fully paid up be reduced to the same
number of fully paid up share of Rs. 10 each.
iii) That 600 7% Debentures of Rs.100 each be reduced to 600 8% Debentures of

Rs.90 each.
iv) That the debenture holder to forego the accumulated debenture interest due to
them.
v) That the Sundry Creditor agreed to forego 20% of their dues in exchange for
equity share of 80% of their dues.
vi) That the sum thus rendered available be applied as follows :
a) The balance to the debit of Profit and Loss account and Preliminary Expenses
account be completely written off.
b) The Plant and Patents be written down by 25% and 40% respectively.
c) The balance left if any, to be, carried forward to Capital Reserve Account.
You are required to show the necessary journal entries and to prepare the Balance
Sheet of the company after the reconstruction is duly carried out.
54
Solution
Journal of B Ltd.
Dr. Cr.
Rs. Rs.
1998
June 30 6% Preference Share Capital A/c Dr. 40,000
To Capital Reduction A/c 40,000
(Being reduction of 1000 6% Preference share of Rs.100 each, Rs. 80
per share paid up into 1000 6%. Preference share of Rs.60 each, Rs.40 per share paid
up as per Capital resolution date____vide Courts order dated__________).
June 30 Equity Share Capital (old) A/c Dr. 3,00,000
To Equity Share Capital (New) A/c 1,50,000
To Capital Reduction A/c 1,50,000
(Being reduction of 1500 equity share of Rs.20 each, fully paid up into
1500 equity share of Rs.10 each fully paid up as per special resolution Courts order
date____________).
June 30 7% Debenture A/c Dr. 60,000
To 8% Debenture A/c 54,000
To Capital reduction A/c 6,000
(Reduction of 600 7% Debenture of Rs.100 each into 600 8% Debenture
of Rs.90 each as per special resolution date______vide Courts order dated________)
June 30 Outstanding Debenture
Interest A/c Dr. 8,800
To Capital Reduction A/c 8,800
(Being cancellation of debenture invest under the scheme)
55
June 30 Sundry Creditors A/c Dr. 50,000
To Equity Share Capital A/c 40,000
To Capital Reduction 10,000
(Being allotment of 4,000 equity shares of Rs.10 each fully paid upto
creditors and transfer of the balance 20% of their dues foregone to Capital Reduction
A/c as per Boards resolution dated__________)
June 30 Capital Reduction A/c Dr. 1,94,800
To Preliminary Expenses A/c 5,800
To Plant A/c 50,000
To Patents A/c 40,000
(Being utilisation of the amount available in Capital Reduction A/c to
write off the debit balance of Profit & Loss A/c, Preliminary Expenses A/c and to
write down the value of Plant and Patent under the Scheme)
June 30 Capital Reduction A/c Dr. 20,000
To Capital Reserve A/c 20,000
(Being transfer of surplus to Capital Reserve A/c)
56
Balance Sheet of B Ltd. as on 30th June 1998
Rs. Rs.
50,000 Equity Shares of each 5,00,000 Plants 1,50,000
Patents 60,000
5,000 6% Preference Share of Investments :
Rs. 60 each 3,00,000 Current Assets & Loans
Advances :
8,00,000
Issued and Subscribed A. Current Assets :
Capital : Stock 45,000
19000 Equity Share of Rs.10 Debtors 35,000
each fully paid 1,90,000 Bank Balance 7,000
1000 6% Preference share of B. Loans and Advances :
Rs.60 each, Rs.40 each paid up 40,000 Bills Receivable 12,000
Reserve & Surplus : Miscellaneous Exp.
Capital Reserve 20,000
Secured Loans :
600 8% Debentures of Rs.90
each, fully paid up 54,000
Current Liabilities & Provisions.
A. Current Liabilities
Bills Payable 5,000
B. Provisions :
3,09,000 3,09,000
57
12.8 SUMMARY
Amalgamation refers to combining of business of two or more existing
companies of business of two or more existing companies. For accounting purposes, it
is assumed that all liabilities are taken over by the transferee company and then liabilities
actually not taken over are discharged by making direct payment to the parties. The
purchase consideration may be determined by lump sum method, net assets method
and net payment method. Amalgamation of a company involves realisation of assets
and settlement of claims of various stakeholders. For this purpose, Realisation Account
is opened which shows the net result of realisation of assets and settlement of claims
of various stakeholders excluding equity shareholders. Inter-company owings
represented by common debtors and or bills of exchange are cancelled by passing an
additional entry in the books of the transferee company.
12.9 KEYWORDS
Amalgamation: It is used when two or more existing companies go into liquidation
and a new company is formed to take over their business.
Absorption: It is used when one or more existing company (or companies) goes into
liquidation and some existing company takes-over its business.
External Reconstruction: It is used when one existing company goes into liquidation
and a new company is formed to take over its business.
Inter-company Owings: If any amount is owed by the purchasing company to the
vendor company or vice-versa at the time of amalgamation or absorption of companies,
it is inter-company owings.
1. Define amalgamation and external reconstruction. What entries are passed by a

company to close its books when it is purchased by another company?
58
2. What entries should be passed in the books of a company that goes into
liquidation for the purpose of amalgamation?
3. Define purchase consideration. Explain the different methods of determining

purchase consideration.
4. D Ltd. and A Ltd. carrying on similar business agree to amalgamated by

transferring their undertaking to a new Company A D Ltd.
The balances sheet of the two companies as on the date of transfer were as follows :
Liabilities D Ltd. A Ltd. Assets D. Ltd. A Ltd.
Rs. Rs. Rs. Rs.
Share Capital Land &
Equity Share Building 4,65,000 2,55,000
Capital of Plant &
Rs.100 each 5,00,000 3,00,000 Machinery 5,60,000 3,58,000
6% Preference Furniture &
Share of Fittings 79,000 34,000
Rs.100 each 5,00,000 2,50,000 Stock 81,500 52,000
5% Debentures 40,000 Sundry Debtors 56,000 24,600
General Cash at Bank 87,000 22,500
Reserve 2,00,000 70,000 Cash in Hand 6,400 3,900
Profit & Preliminary
Loss A/c 1,15,000 55,000 Expenses 55,100
Sundry Creditors 75,000 35,000
13,90,000 7,50,000 13,90,000 7,50,000
59
The term of agreement were as follows :
a) The purchase consideration consisted of
i) The assumption of liabilities of both the Companies
ii) The discharge of the debentures in A Ltd. at a premium of 5% by the
issue of 7% debentures in A D Ltd.
iii) The issue of 10 equity shares of Rs.10 each at a premium of Rs. 2 per
share for each preference share held in both the Companies.
iv) The share of 10 equity shares of Rs.10 each equity share of D Ltd. and 5
equity share of Rs.10 each at a premium of Rs.2 per share and Rs. 80 in
cash for every equity share in A Ltd.
b) All the assets and liabilities of the two companies were taken over at their book
value except a provision @ 5% to be raised on debtors.
c) In order to raise working capital and to pay the purchase consideration A D Ltd.
decide to issue 30,000 equity share of Rs.10 each at a premium of Rs.3 per
share.
You are required to pass the journal entries in the books of D Ltd. to close its
accounts, and show the opening balance sheet of A D Ltd.
5. The Balance Sheet of A Ltd. on 31st Dec. 1998 was as follows :
Share Capital : Land & Buildings 2,30,000
8000 Equity Shares of Plant & Machinery 1,80,000
Rs.50 each fully paid up 4,00,000 Furniture 20,000
General Reserve 50,000 Stock 90,000
Workmens Accident Sundry Debtors = 1,00,000
Compensation fund (Outstanding Less Provision
Liabilities Rs.8000) 30,000 for Doubtful
1000, 7% Debentures of Rs. 50 each 50,000 Debts = 5,000 95,000
60
Sundry Creditors 40,000 Cash 2,000
Bank Overdraft 10,000 Discount on issue of
Staff Provident Fund 40,000 Debentures 3,000
6,20,000 6,20,000
The business of the company is taken by B Ltd. on that date. The purchase
consideration is to be discharged as follows :
a) A payment of Rs.10 for every share in A Ltd.
b) A further pay in cash Rs.10 for every debenture in A Ltd. in full discharge
of the debentures.
c) An exchange of 5 shares in B Ltd. of Rs.10 each at the Market Value of
Rs.15 per share, for every 2 share in A Ltd.
d) The expenses of liquidation Rs.5000 were borne by A Ltd. show the
Realisation A/c, cash and pass the journal entries.
6. A Ltd. and B Ltd. are two companies carrying on business in the same line.
Their balance sheet as on 31.12.1998 are given below :
Balance Sheet
Liabilities A Ltd. B. Ltd. Assets A Ltd. B. Ltd.
Rs. Rs. Rs. Rs.
Full paid up Land and
Equity Share Building 1,00,000
Of Rs.10 each 6,00,000 2,00,000 Plant &
General Machinery 7,00,000 3,00,000
Reserve 4,00,000 2,00,000 Investments 1,00,000
Secured Loan 6,00,000 1,00,000 Stock 9,00,000 4,00,000
Current Debtors 3,00,000 1,00,000
Liabilities 6,00,000 4,00,000 Cash at Bank 1,00,000 1,00,000
22,00,000 9,00,000 22,00,000 9,00,000
61
The two companies decide to amalgamate into A B Ltd. The following further
information is given :
a) A Ltd. holds 8000 share in B Ltd. @ Rs.12.50 each.
b) All assets and liabilities of two companies, except investment are taken
over by A B Ltd.
c) Each share in B Ltd. is valued @ Rs.25 for the purpose of the
amalgamation.
d) Shareholder in A Ltd. and B Ltd. are paid off by issuing to them sufficient
number of equity shares of Rs.10 each in A B Ltd. as fully paid up at par.
e) Each share in A Ltd. is valued @ Rs.15 for the purpose of amalgamation.
Show journal entries to close the books of both the companies and balance
sheet of A B Ltd.
7. Given below is the Balance Sheet of H Ltd. as at March 31, 1998.
Balance Sheet
40,000 share of Rs.10 each Land & Building 3,20,000
fully paid. 4,00,000 Plant & Machinery 1,30,000
Creditors 3,00,000 Stock 70,000
Debtors 1,20,000
Cash 500
Preliminary Expenses 5,000
Profit & Loss A/c 54,000
7,00,000 7,00,000
The following scheme of reconstruction was arranged :
i) The company to go into liquidation and a new company with an authorised capital
of Rs.8,00,000 to be formed to take over the assets and liabilities.
62
ii) Preferential Creditor of Rs.10,000 included in the above Balance Sheet are to
be paid in full.
iii) Unsecured Creditors to receive either (a) 50% of their claim in cash or (b) 6%
debenture in the new company equivalent to their claim, at par.
iv) Shareholder of H Ltd. to be allotted one share in the new company of Rs.10
each, Rs. 5 paid for every existing share held by them.
v) Reconstruction costs amounting to Rs.6000 to be paid by H Ltd. from cash

made available by the new company.
Half of the unsecured creditor in value of opted out for immediate cash payment
for which purpose necessary cash was made by the new company which made a call of
Rs.5 each on the partly paid share allotted as aforesaid. The new company value all
assets/except Land & Building taken over from H Ltd. at par.
Prepare the Balance sheet of new company after the above transaction are
concluded.
8. The following is the Balance Sheet of P Ltd. as on 31-12-1998.

Authorised & Issued Capital Loan & Building 2,50,000
80,000 Equity share of Plant & Machinery 6,00,000
Rs.10 each fully paid 8,00,000 Stock 2,35,000
5% Debentures 5,00,000 Cash 26,000
Accrued Interest 25,000 Profit & Loss A/c 2,50,000
Sundry Creditors 2,85,000
16,10,000 16,10,000
The debentures are held by G Ltd. who also hold 20,000 shares acquired during the past
two year at a total cost of Rs. 1,45,000.
63
Negotiation between the two companies resulted in an agreement for the absorption of
P Ltd. by G Ltd. upon the following terms :
a) That G Ltd. takes over the assets and liabilities of P Ltd. as on 31-12-1999 at
their book value, subject to the revaluation of the Plant and Machinery at
Rs.4,50,000.
b) That the amount due in respect of debenture be set off against the purchase
consideration and that they be cancelled on the completion of the transaction.
c) That the outside shareholder in P Ltd. be given Rs.10 share issued at par by G
Ltd. on the basis of such shares being worth Rs.15 each and in P Ltd. being
worth Rs.5 each.
The arrangement was approved by the necessary resolution of the shareholder

in P Ltd. Show journal entries required to close the books of P Ltd. and to record the
transactions in the books of G Ltd. including the transfer required to close accounts
therein relating to the share and debentures in P Ltd.

5. Fundamentals of Advanced Accounting by R.S.N. Pillai and V. Bagavathi,
S. Chand and Co. Ltd., New Delhi.
6. Studies in Advanced Accounting by S.N. Maheshwari, Sultan Chand and
Sons, New Delhi.
64
LESSON : 13
CO-OPERATIVE ACCOUNTING
STRUCTURE
13.0 Objective
13.1 Introduction
13.2 Feature of Co-operative Society
13.3 Types of Co-operative Society
13.4 Importance of Book-keeping in Co-operative Societies
13.5 Cooperative System of Accounting
13.6 Accounting Procedure in Co-operatives
13.7 Summary
13.8 Keywords
13.0 OBJECTIVE

(a) Define a co-operative society and explain its features.
(b) Discuss the co-operative system of accounting.
(c) Explain the accounting procedure in a co-operative society.
13.1 INTRODUCTION
Co-operation is the basis of domestic social life. It imbues the spirit of self help and
man to man assistance to generate economic wealth and advancement of social transformation.
1
The Co-operative organisation is a form of organisation for the economic upliftment of weaker
section of society. Under this form of organisation, a large number of people set up and run
any economic activity for their own benefit and for the benefit of other people like them.
The Co-operative movement in India started in 1904 to protect weaker section of
society from exploitation of rich people (capitalist). The primary objective of this movement is
how to protect economically weaker section of society from oppression of economically
strong segment of society? The objective of Co-operative organisation is totally different
from other form of business organisations. These forms are not set up for profit but for protecting
and upliftment of its members and also other weaker people of the society.
Co-operative societies are voluntary associations started with the aim of service to its
members. In simple words The Co-operative societies are the voluntary associations of a
large number of economically weak people for the protection of their interest with their combined
efforts and combined resources. The India Co-operative Societies Act. 1912 defines Co-
operative in Section 4 as a society which has its objectives of promotion of economic interest
of its members in accordance with Co-operative principle.
13.2 FEATURES OF CO-OPERATIVE SOCIETY
A Co-operative society will have the following broad features :-
1. Voluntary membership
The members in any co-operative can enter or leave the society any time on their
choice. No member can force any individual to enter or leave the society. There are a few
rules and regulation in the co-operative which have to be abides by the its member. Voluntary
membership is a most important principle of any co-operative and this is the main principle
behind the success of co-operative movement.
2. Democrative Management
The democrative procedure is followed by co-operatives for their management. The
management or body to control the day to day activity of co-operative is elected by its member.
The members are owner of the co-operative and from time to time they give instructions to the
management for better control of operation of society.
3. One man, One Vote
The another important principle of these societies is equity of its member. All members
have right to cast one vote in the matters of co-operative irrespective of their investment size.
2
In joint stock company, the member has voting right according to share held by him, But here
votes are just given upon membership and one member has one vote only.
4. Service Motive
The main motive of co-operative is service. The society is always set up for betterment
of society and its member. All other forms of business organisation like Partnership, Joint
stock company, Sole proprietor etc. are set up for making profit for their owner. But societies
are for providing services. Even if the co-operatives earn profit that is just for the betterment
of its member, the main motive always remains service.
5. Equity in distribution of surplus
Like the voting right the members of Co-operative also enjoy equity in participation of
profit. The surplus of co-operative is not distributed like Joint stock company on the basis of
investment. In co-operative the profit or surplus is distributed either on their service basis or
sometimes equally to all members. The Indian Co-operative Society Act has given guidelines
for the distribution of the surplus. Under the act a certain percent of profit is paid in form of
interest or dividend on capital and certain percent is kept as Reserves and rest spent on welfare
to members.
6. Compulsory Resignation
The registration of the Co-operative society is must. After making a voluntary association
of a minimum person required, the registration has to be taken before starting the functions of
co-operative. In India minimum ten members are required for getting registration of any co-
operative under the India Co-operative Act 1912. The registration are made by State level
offices which functions under State Government.
7. Control of State Government
The Co-operative societies are to follow certain rules and regulations formed by state
government. In India, as said earlier the co-operatives are registered in state level office under
Indian Co-operative Act-1912.
8. Cash Trading
All the transactions of the co-operative society will be on cash basis. Co-operative
Society can only flourish on cash trading principle basis. The chances of bad debts and losses
due to delayed payment are eliminated with cash trading in co-operative societies. The society
can provide for exemptions with approval of all its members.
3
13.3 TYPES OF CO-OPERATIVE SOCIETIES
Different types of Co-operatives are working with a single motive of protection and
betterment of weaker section. But the ways and areas of operation are different. Some
important types of co-operative are :
1. Consumer co-operatives
These co-operative societies are started to help lower and middle class people by
providing them necessary goods at reasonable rates. The member of these Co-operatives
contribute capital and elect some executive and management members to look after the day to
day working of the society. The societies purchase the goods in bulk quantity directly from the
producers and sell it to its members and common people after charging a very reasonable
small profit. So the people get the goods at lower price. In India, all co-operative store selling
basic commodities are running under this type of co-operative forms.
2. Producers Co-operatives
The Co-operatives are set up to protect the small and cottage producers from big and
multinational industrialist. These co-operatives are divided into following two types :
a) Producers Co-operatives : The various small producers or handicraft producers
are the members of such societies. The society is set up at a common place where all members
can come. The members can work as an employees in the society and are paid wages for
there services. All the raw material required by the member is supplied by the society. The
society collects the output of its member, sell it in the market and earn profit. This profit is
distributed in members again after keeping some reserves.
b) Industrial Service Co-operatives : These Co-operatives are for small and cottage
industries. The members are again small producers. The co-operative society purchase raw
material in bulk quantity and supply it to members. The society also supply the required
machines. Members makes the products which are collected by the society and sold in market
to earn profit. Profit is distributed in the members.
3. Marketing Co-operative
This type of Co-operative provide market to the cottage producers. This type of
society protect its members from the exploitation of the middleman. The society take the
production of various members and pool it together. The society than arrange the various
services like grading, warehousing, transportation, insurance and financing etc. The goods are
sold directly by the society in the market without any middleman. So members get better price
for their products. Society also provide market information to its members.
4
4. Housing Co-operatives
These Co-operative are set up for providing houses to low and middle income group
people. These societies purchase land and construct houses for these members. Societies
also arrange loans for its members from financial institution and government agencies. Sometimes
societies purchase land in bulk and distribute plots to the members. In conclusion the purpose
of all these societies is to help their member in purchasing land and constructing houses.
5. Credit Co-operatives
These Co-operatives societies are set up for providing financial assistance to the farmers
and other weaker section. The main motive of these co-operatives are to protect the weaker
section people and farmers from the exploitation of money lender, who charge exorbitant
interest rate on the loan. The Rural co-operatives get loans from State Co-operative Bank or
Regional Rural Bank where as in urban areas it is provided by Urban banks.
13.4 IMPORTANCE OF BOOK KEEPING IN CO-OPERATIVE SOCIETIES
We know a Co-operative organisation is a business as well as a welfare institution.

Equitable economic benefit to members is its prime goal. In the first place, a business cannot
be run in a go-as-you-like style. Well planned operations are must and recorded accounts can
only supply required information for the purpose. Secondly, equitable distribution of the gains
of business (supply of scare/seasoned items and net surplus earned) is made possible when
you keep records of purchases and sales and so on. In fact, accounting is the language of
business. No business expression is possible without it.
13.5 CO-OPERATIVE SYSTEM OF ACCOUNTING
Co-operative system of accounting is one in which both receipt and payment effect of
a particular transaction is recorded in a book of original entry and posted accordingly. In case
of interest both amount received and paid are taken separately and not the balance (either
debit/credit). It basically follows double entry system. It is a simplified indigenous system. But
some small co-operatives also follows Single Entry System in their accounting.
a) Double Entry System : Any business involves transaction i.e. action resulting in transfer
of money from one party to another or transfer of goods or services of money value. In
business money is the common denominator and any transaction is carried out in term of
money or money value paid/payable or received/receivable. Thus any transaction involves
receiving and giving goods or services or money. The system under which both the aspects of
5
a transaction is recorded, is called double-entry system of book-keeping. Thus Double entry
system of book-keeping means a system whereby twofold aspects of each transactions are
recorded in the books of accounts. One aspect (giver) is credited and the other (receiver) is
debited. From this we get a formula that every debit has a corresponding credit of equal
amount of money value and vice-versa.
Total Debit = Total Credit
Double-entry system can better be defined as a system under which both the credit as
well as debit aspects are entered in the books of accounts.
b) Single Entry System : Single entry system as the name goes, does not record both
the aspects and as such amounts to incomplete recording of transaction. There are variation in
such incomplete recording. But usually personal aspects and cash aspects are recorded. For
example, cash received entered in the Cash Book is posted to the Credit of the concerned
personal account(s). But items of receipts like cash sales, interest etc. are not posted. This is
a fragmented approach.
Difference between Single Entry System and Double Entry System
S.No. Norms Single Entry System Double Entry System
1 Testing Accuracy Since double aspects of each Recording credit and debit
of accounts transaction are not recorded, aspects of transactions makes
arithmetical accuracy is not the test a sure fire.
these
2 Calculation of As no nominal account is With complete records,

business results recorded business result accounts to ascertain surplus or
(Profit & Loss) cannot be deficity can be readily
ascertained easily. prepared.
3 Financial In absence of records of real With ready availability of

position accounts, books fail to property accounts, a statement
(Balance Sheet) provide details of assets and of affair or balance sheet can
liabilities and no balance be prepared.
sheet can be prepared.
6
4 Information flow Incomplete records and By and large information can
hence no information is be relied upon
reliable
5 Fraud and Errors Provides almost free ground There is always a check on
for frauds and errors. It is fraud errors and
difficult to detect a misappropriation.
misappropriation.
6 Use Value Very low, if at all. It is It is highly revealing and as

rather confusing. highly facilitating.
Finally, single entry system is a crude and incomplete system and cannot stand the test
in comparison to a complete and workable thing like double entry system.
Rules of Double Entry System
Accounts record the facts relating to business transactions. A transaction cannot take
place unless there are two parties. A transaction involves giving and receiving of benefits in the
shape of moneys worth (goods or services). It has to be remembered that :-
a) There are a number of other cooperatives, individuals or firms with which a cooperative
has to deal.
b) The Co-operative enterprise must also have some fixed assets like furniture, land and
building, plant and machinery, equipments, etc.
c) A Co-operative Society in course of its business shall have to incur expenses like,
wages, salary, rent, postage and obviously earns income and may incur losses.
All these type of transactions are divided into three basic nature of accounts, under
double entry system. viz.
a) Personal account
b) Real account and
c) Nominal account
7
Accounts
Personal A/C Impersonal
Real Nominal
1. Personal Account : This accounts involves all the persons in any

transaction. The person includes all human beings called real persons and
artificial persons, who are created by law e.g. Capital (Owners Accounts).
Ram account, Debtors, Creditors, Bank, Business house, Sonitpur Agriculture
Co-operative Society. NEFED etc.
Rule : Debit the receiver, Credit the payer or supplier.
e.g. Ram sold goods to Sham on credit.
Ram and Sham both are human beings, therefore belongs to personal a/c
Sham is receiver, therefore debit him.
Ram is supplier, therefore credit him.
2. Real account :- All the real things are included in this accounts. In terms of account
this account includes all the assets e.g. Building, Machinery, Furniture, Goodwill, Cash, Stock
etc.
Rule : Debit what comes in and credit what goes out.
e.g. Purchase Machinery for Cash.
Cash and Machinery are real things, so are part of real a/c
Machinery purchase means comes in, therefore, debit it.
Cash is paid means going out, therefore credit it.
3. Nominal account : This account involves incomes, losses, and expenses, e.g.
salaries, rent, depreciation, commission, wages and carriage etc.
Rule : Debt all incomes and gains, Credit all loss and expenses.
e.g. Received Commission in cash.
Cash is a real thing, therefore is a part of real account and comes in so Debit it.
Commission received is an income, therefore, is a part of nominal account. Incomes
are to be credited according to rule of nominal account, so credit it.
8
S.No. Transaction Two a/cs Nature of Rule of Debit and Explanation Dr. Cr.
involved the a/c Credit Account Account
1. Started business with Cash Real a/c Dr. what comes in Cash comes in the Cash Capital
Rs. 50,000 Capital Personal a/c Cr. The payer business Proprietor 50000 50000
/supplier paid money
2. Purchase furniture of Rs. Furniture Real a/c Dr. What comes in Furniture comes in Furniture Naresh
10000 from Naresh Naresh Personal a/c Cr. Supplier Naresh supplied 10000 10000
furniture
9
3 Paid Salaries Rs. 5,000 Salaries Nominal a/c Dr. Expenses Salaries Paid Salaries Cash
Cash Real a/c Cr. What goes out Cash paid out 5000 5000
4 Paid Rs. 5000 to Naresh Naresh Personal a/c Dr the receiver Naresh received Naresh Cash
Cash Real a/c Cr. What goes out cash paid out 5000 5000
5. Commission received Cash Real a/c Dr.What comes in All Cash comes in Cash Commission
Rs. 4000 Commission Nominal a/c incomes are to be commission is 4000 4000
credited an income
13.6 ACCOUNTING PROCEDURE IN CO-OPERATIVES
1. Journal : The accounting procedure in cooperatives is as follows:
Like the accounting procedure of any business house, in the Co-operative also the first
step is to write financial transactions in Journal. All the financial transactions are recorded in
Journal.
Journal
Date Particular L.F. Amount Dr. Amount Cr.
2. Book of Accounts: Different books may be used in different types of Co-operative

societies according to their nature of work. The following books are generally used by these
Co-operative Societies.
i) Day Book:- This book is again prepared every day. All the transaction from the
journal are recorded in this book, but cash items are not recorded in this book, because the
same are recorded in Cash book.
10
Day Book
Debit
Credit
General L.F. Personal L.F. Particular Amount Total Amount General L.F. Personal L.F. Particulars Amount Total Amount
11
ii) General Ledger :- This is also called control Ledger. All accounts Capital and
Revenue. (Expenses, Incomes, Assets and Liabilities) are opened in this book on separate
pages. The transaction are passed in this book from Day book daily in the evening. The
various accounts in this book are closed on a particular day or at the end of each year. The
procedure to close the accounts is called Balancing. The most important function of this
book is to control the personal Ledger. The proforma of the book is similar to the Ledger.
General Ledger
Date Particulars Day Book Debit Credit Dr/Cr Balance
Folio Amount Amount Amount
iii) Personal Ledger :- These are the simple ledger accounts prepared from the Day
book. The difference between Personal Ledger and General Ledger is only that in General
Ledger all the accounts are recorded in one book on different page, where as in Personal
Ledger one account is recorded in one book. The proforma of the Personal Ledger is same as
General Ledger. These Personal Ledgers are also closed on the day on which General Ledger
are closed.
iv) Trial Balance :- On the day of the closing of the book we find the balance
amount in each ledger account. The statement of the balances of the ledgers is called Trial
Balance. The statement is to be prepared to find out mathematical accuracy in our accounting
system and to prepare final accounts (Trading, Profit & Loss account and Balance Sheet). In
trial balance all assets and expenses are shown in Debit side, where as all incomes, Liabilities
and Capital are shown in credit side.
Trial Balance
Of _____________________ Co-operative
As on __________________________
Name of a/c L.F. Debit balance Credit Balance
12
V) Trading, Profit & Loss account
This is a one statement of the Final account. This statement is prepared to find out the
profit/loss of the society. All the income and expenses are included in this statement. In the
Trading account opening stock purchases and direct expenses are taken in Debit side where
as the sale and closing stock are taken in credit side, the difference in the account is called
Gross profit it is in debit side and Gross loss if it is in debit side and Gross loss if it is in credit
side.
Profit and loss account is a statement of all the income and expenses of the year. All
the expenses are shown Debit side and incomes are shown in credit side. The difference, if in
Debit side is called Net profit and, if in credit side Net loss.
Trading and Profit and Loss A/c
Of ________________ Co-operative
Dr. For the year ended Cr.
Particulars Amount Particular Amount
vi) Balance Sheet :- This is the last statement in the accounting procedure. The
statement is prepared to know the financial position or financial soundness of any Co-operative
Society. All the capital items of the society i.e. various assets own by it and its liabilities are
included in this statement. The statement gives a comparative position of assets and liabilities
of the Co-operative on a particular day.
Balance Sheet
Of ________________ Co-operative
as on __________________________
13
Illustration and Exercise
i) The Sampla Thrift & Credit Co-operative Society bought one share No. 1 of Rs. 100/
- and paid Rs. 2/- as admission fee.
ii) Raikot Agricultural Service Co-operative Society was admitted as member. Two
shares numbering 2 & 3 of Rs. 100/- each were allotted to it. The society also paid
Rs. 2.00 for admission fee.
iii) Sh. Ram Lal opened a Saving Bank deposit a/c with Rs. 900/- and Cheque Book No.
1 containing cheques numbering 1 to 15 was issued to him.
iv) The Society purchased stationery articles worth Rs. 104/- in cash from M/S Narula
Stationary Mart Panipat.
v) Postage and Stamps worth Rs. 12/- were purchased by the bank for its daily use.
(Cash in hand 1088)
2nd Jan 98
i) S. Kartar Singh opened a Saving Bank A/c with Rs. 1700/- and cheque Book No.
2 containing cheques numbering 16 to 30 was issued to him.
ii) The Panipat Handloom Weavers Co-operative Society was enrolled as member of
the bank. The society purchased 3 shares numbering 4 to 6 of Rs. 100/- each and
deposited Rs. 2/- as admission fee.
iii) Current a/cs were opened by Sh. Paras Ram with Rs. 840/- and Sansar Chand with
Rs. 480/- Current a/c Cheque Book No. 1 & 2 having cheques numbering CA/0001
to CA0020 and CA/0021 to CA0040 respectively were issued to them.
iv) The Nilo Kheri M.P. Co-operative Society deposited Rs. 4000/- as fixed deposit for
one year @ 3% and fixed deposit receipt No. p-Co-op/0001 was issued to him.
v) The Bank opened a current a/c with the State Bank of India (Panipat) with Rs. 2500/-.
The State Bank issued cheque Book containing cheques numbering 30001 to 30050
to the Bank.
vi) Furniture worth Rs. 150/- was purchased for use in the bank.
(Cash balance Rs. 5760/-)
3rd Jan 98
i) The Babar Pur Service Co-operative Society became member of the bank by purchasing
14
one share No. 7 of Rs. 100/- and paying Rs. 2/- as admission fee.
ii) S. Kartar Singh opened a S.B. a/c with Rs. 440/- and cheque Book containing cheques
numbering 31 to 45 was given to him.
iii) S. Mohinder Singh deposited Rs. 375/- in his newly opened current a/c. The Bank
issued him cheque Book No. 3 containing cheque CA0041 to CA0060.
iv) Sh. Kailash Chand Jain opened a Fixed Deposit a/c with Rs. 2000/- for six months @
2% and fixed Deposit Receipt No. P-Co-op/0002 was issued to him.
v) The Bank purchased N.S. Certificates worth Rs. 5000/- in cash.
vi) One Iron Safe was purchased for Rs. 400/- from M/s Reliance Traders, Delhi. The
bill is still outstanding.
(Cash in hand Rs. 3677)
4th Jan 98.
i) Third Five Year Plan Bonds of the face value of Rs. 2000/- were purchased in cash at
98. The brokers Commission @ 50 p. percent amounted to Rs. 10/-
ii) The Sampla Thrift & Credit Co-op Society was advanced a loan of Rs. 500/- vide
promote No. P.Co-op-L/10001 through Shri Ram Das Cashier.
iii) Sh. Ram Lal withdrew Rs. 240/- from his S.B. a/c per cheque NO. 1 of 3rd Jan., 98.
iv) S. Karnail Singh deposited Rs. 240/- in his newly opened current a/c The Bank issued
Ch. Book No. 4 having Cheques numbering CA/0061 to CA/0080.
v) The Bank purchased one share No. HB 3116 Hr. State Co-op of the Bank Ltd,
Chandigarh of Rs. 100/- and paid Rs. 5/- as admission fee.
vi) The Nurpur Co-operative Store become member of the Bank. Share NO. 3 & 9 Rs.
100/- each were allotted to it. The store paid Rs. 2/- as admission fee.
6th Jan. 98
i) S. Karnail Singh issued cheque No. 16 for Rs. 350/- on his saving Bank a/c in favour
of Shri Mangal Sain which was duly paid.
ii) The Panipat Handloom Weavers Co-operative Society was advanced a clean loan of
Rs. 1000/- per pronote NO. P.Co-L/0021 through Shri Ram Ditta Mal member.
iii) The Bank with drew Rs. 250/- from its current a/c with the State Bank of India per
cheque No. 30001 dated 6.1.98 through its cashier.
iv) Shri Virender Kumar open a saving Bank a/c with Rs. 210/- Cheque Book containing
cheques numbering 56 to 60 was issued to him.
15
7th January, 1998
i) Preet Nagar Agricultural Service Society was admitted member. Share No. 10 of Rs.
100/- was allotted to the society. The society also paid Rs. 2/- a admission fee.
ii) A loan of Rs. 750/- was given to Rai Koot Agricultural Service Social Vide Pronote
No. P-Co-op.L/10041 through Shri Inderjit V. President.
iii) Sh. Paras Ram withdrew Rs. 240/- from his current a/c vide cheque No. CA/0001
dated 6.1.98 per self.
iv) Rs. 1000/- were withdrawn from the current a/c with State Bank of India vide cheque
No. 30002 dated 6.1.98.
(Cash Balance Rs. 516)
8th Jan.
i) Shri Ved Parkash opened a S.B. a/c with the Bank (Panipat Urban Bank) with Rs.
325/- cheque No. 61 to 75 were given to him for withdrawing money from the Bank.
ii) Shahpur Labour and Construction Co-op. Society became member. The society
purchased three shares 11 to 13 of Rs. 100/- each and paid Rs. 2/- as admission fee.
iii) The Sampla Thrift & Credit Co-op. Society repaid its loan amounting to Rs. 250/-
through its cashier Shri Ram Dass.
iv) Shri Sansar Chand deposited Rs. 240/- in his current a/c
v) Shri Ram Saran Singh deposited Rs. 1500/- in fixed a/c for months at 2% vide F.D.R.
No. P.Co-op F/0003.
vi) Rs. 3000/- were deposited in the current a/c with State Bank of India.
(Balance Rs. 133/-)
9th Jan 98
i) Shri Ram Lal deposited Rs. 165/- in his S.B. a/c.

ii) Gannaur Industrial Co-operative Society Ltd. purchased five shares numbering 14 to
8 of Rs. 100/- each and paid Rs.2/- as admission fee.
iii) Babar Pur Service Co-operative Society was advanced a loan of Rs.400/- per pronote
No. P-Co-op./10061 dated 6th Jan 1998 through Shri Jagdish Chander member.
iv) Mohinder Singh deposited Rs. 225/- in his current a/c.
(Cash Balance Rs. 625)
16
10th Jan 98
i) Rs. 270/- were given to Nurpur Co-operative. Store as loans Pronote No. P-Co-op.
L/0041 was obtained from the store.
ii) The Panipat Handloom weavers Co-operative Society deposited Rs. 400/- towards
its loan a/c.
iii) Gurmit Singh deposited Rs. 115/- in his newly opened S.B. a/c Saving Bank withdrawal
cheques No. 76 to 90 were supplied to him.
iv) Kartan Singh withdrew Rs. 240/- from his S.B. a/c per cheque No. 31 dated 10.1.98
favouring Ajit Singh.
v) S. Karnail Singh deposited Rs. 160/- in his current a/c.
(Cash Balance Rs. 790/-)
11th Jan 98
i) Shri Virender Kumar withdrew Rs. 120/- from his S.B. a/c per cheque No. 16 dated
11.1.98.
ii) Preet Nagar Agricultural Service Society borrowed Rs. 800/- per pronote No.P-Co-
op.L/0051 dated 10th Jan. through Shri Ram Sarup.
15th Jan 98
i) Gian Singh opened S.B a/c with Rs. 460/- cheques numbering 91 to 105 were supplied
to him.
ii) Karam Singh deposited Rs. 150/- in his S.B. a/c
iii) Shahpur Labour and Construction Co-op. Society borrowed Rs. 6000/- on the security
of pronote No. P-Co-op. Society borrowed Rs. 6000/- on the security of pronote
No. P-Co-op.L/0061 through Duni Chand President.
iv) Raikot Agricultural Service Co-operative Society returned its loan Rs. 405/-
v) Kartar Singh deposited Rs. 135/- in his S.B. a/c.
vi) Mohinder Singh withdrew Rs. 400/- from his Current a/c vide cheque No. C.A.0041-
1-98.
16th Jan 98.
i) Shri Ved Parkash issued Cheque No. 61 on his S.B. a/c for Rs. 185/- favour of Shri
Moti Ram. The payment was duly made by the Bank.
ii) The Gannaur Industrial Co-operative Society was given a loan of Rs. 950/- per p.L/
17
0071.
iii) Nurpur Co-operative Society borrowed Rs. 330/- from vide pronote No.p-Co-op.L/
0042 dated 15.1.59 through Shri Ram Dass.
iv) Sh. Sansar Chand withdrew Rs. 320/- from his current a/c per cheque No. C.A.
0021 dated 16.1.98.
v) S. Bhagwan Singh deposited Rs. 1520/- in his fixed Deposit a/c for one year @ 2%.
18th Jan 98
i) S. Balbir Singh deposited Rs. 640/- in his newly opened S.B. a/c Cheque Book having
cheques from 106 to 120 was supplied to him.
ii) Sh. Ram Lal issued Ch. No. 2 for Rs. 340/- in favour of Sh. Sulekh Chand on his S.B.
a/c. The amount is paid.
iii) Babar Pur Co-op Society returned its loan Rs. 180/-.
iv) Paras Ram withdrew Rs. 400/- from his current a/c vide cheque no. CA 0002 dated
17.1.98, per Kartar Chand.
v) S. Karnail Singh deposited Rs. 340/- in his S.B. a/c
(Balance Rs. 355/-)
19th Jan.98
i) S. Gurmit Singh withdrew Rs. 55/- from his S.B. a/c per cheque No. 76,
ii) Sh. Virender Kumar deposited Rs. 335/- in his S.B. a/c
iii) The Panipat Handloom weavers Co-op Society returned Rs. 209 towards its loan
a/c.
22th Jan.98
i) Sh. Gian Singh issued cheque No. 91 for Rs. 243/- on his S.B. a/c in favour of M/s
Punjab Traders, Panipat. The amount was paid by the Bank.
ii) Preet Nagar Agricultural Service Society repaid its loan Rs. 240/- through Ram Sarup.
iii) S. Kartar Singh withdrew Rs. 165/- from his S.B. a/c per cheque No. 32 dated
22.1.98 per Avtar Singh.
iv) Nurpur Co-operative Society repaid its loan Rs. 200/-.
v) S. Mohinder Singh withdrew Rs. 180/- from his current a/c per cheque No. CA 0042
dated 22.1.98.
18
24th Jan. 98
i) S. Balbir Singh withdrew Rs. 187/- from his S.B. a/c per cheque No. 106
(Balance Rs. 687/-)
ii) Sh. Ram Lal deposited Rs. 134/- in his S.B. a/c.
iii) Sh. Ved Parkash deposited Rs. 345/- in his S.B. a/c through Sh. Ishwar Chand.
iv) Shahpur Labour Construction Co-op. Society paid Rs. 300/- towards its loan a/c per
Sh. Duni Chand president.
v) Sh. Sansar Chand withdrew Rs. 150/- from his current a/c per cheque No. CA/0022
dated 24/1/98 per self.
25th Jan. 98
i) Sh. Karam Singh withdrew Rs. 215/- from his S.B. a/c per cheque No.17 per Sh.
Naresh Kumar.
ii) Sh. Virender Kumar withdrew Rs. 245/- from his S.B. a/c per cheque No.47 per Sh.
Vijay Singh.
iii) The Gannaur Industrial Co-op. Society repaid its loan amounting to Rs.90/-.
iv) Babarpur Co-op. Society was advanced a loan of Rs.180/- Vide pronote No. L/
0032 dated 24/1/98. Through Inder Singh member.
i) Karnail Singh withdrew Rs.500/- from his current a/c vide cheque No. AC/0061
dated 25/1/98.
ii) 27th Jan. 98
i) Sh. Gurmit Singh deposited Rs.47/- in his S.B. A/c through Rajinder Singh.
ii) S. Balbir Singh issued Ch.No.107 on his Saving Bank a/c for Rs.450/- in favour of
Sh. Mohan Lal.
iii) The Sampla Thrift & Credit Co-op. Society repaid its loan amounting to Rs. 150/-
through Sh. Ram Dass.
iv) The Panipat Handloom wavers Co-op. Society was advanced a loan of Rs.500/- vide
P.No.L/00112 dated 26-1-98.
v) Preet Nagar Agricultural Serving Society borrowed Rs.440/- vide pronote No. L/
0052 dated 26-1-98.
19
vi) Parash Ram withdrew Rs.300/- from his current a/c vide cheque No. CA/0003 dated
27-1-98. Per self.
vii) Rs.1000/- were withdrew from the current a/c with State Bank.
(Balance Rs. 86/-)
29th Jan 98
i) Sh. Ved Parkash withdrawn Rs.195/- from his S.B. a/c per ch. No.62 through S.
Narayan Singh.
ii) Gian Singh deposit Rs.108/- in his S.B. a/c.
iii) Raikot Agricultural Service Society returned Rs.175/- towards its loan a/c.
iv) Nurpur Co-op. Society repaid its loan amounting to Rs.250/-.
(Balance Rs.424/-)
31st Jan 98
i) Sh. Karam Singh withdrew Rs.425/- from his S.B. a/c per cheque No.18 dated 30-
1-98 per self.
ii) Sampla Thrift & Credit Co-op. Society was given a loan of Rs.400/- vide Pronote
No. P-Co-op.L/0002 dated 29-1-98 through Ram Murti member.
iii) The Gannaur Industrial Co-op. Society repaid its loan amounting Rs.160/-.
iv) Babarpur Co-op. Society was advanced a loan of Rs.250/- vide pronote No. L/0033
of 30-1-98 through Inder Singh member.
v) Preet Nagar Co-op. Society repaid its loan amounting to Rs.300/-.
vi) Shahpur L/C Co-op. Society was advanced a loan of Rs.400/- vide pronote No.11/
0062 dated 29-1-98.
vii) Sh. Sansar Chand withdrew Rs.75/- from his current a/c per cheque No. CA/00233.
viii) Mohinder Singh deposited Rs.140/- in his current a/c.
ix) Rs.600/- were withdrawn from the Bank (State Bank).
(Balance Rs. 74/-)
20
Day Book 1st. January, 1998
The Panipat Urban Co-operative Bank Ltd. Panipat
Debit
Credit
General Pero Particulars Amount Total Gener Perso Particulars Amount Total
L.F. nal Rs. P. Amount al nal Rs. P. Amount
L.F. Rs. P. L.F. L.F. Rs. P.
Share Capital a/c Stationery a/c
By Cost of one share No.1 to Sampla 100.00
To Cost of Stationary Purchased 104.00 104.00
Trift & Credit C.S. 300.00
By Amount from Rai Kot Agricultural Postage
Service C.S. To cost of postage stamp
21
Share No. 2 & 3 200.00 purchased 12.00 12.00
Admission Fee a/c

By Amount from Sampla Thrift and
Credit Co-op. Society. 2.00
By Raikot Agri. Service Co-op 4.00

Society 2.00
Saving Bank a/c
By amount deposited by Sh. Sham Lal 900.00 900.00
Total
Total 116.00
1204.00
Opening Balance Cash in Hand 1088.00
Nil
Grand Total 1204.00 Crand Total 1204.00
Day Book 2nd. January, 1998
The Panipat Urban Co-operative Bank Ltd. Panipat
General Pero Particulars Amount Total Gener Perso Particulars Amount Total
L.F. nal Rs. P. Amount al nal Rs. P. Amount
L.F. Rs. P. L.F. L.F. Rs. P.
Share Capital a/c Current a/c With State
By amount from the Panipat Bank of India
Handloom Weaver's Co-op. Society 300.00 300.00
To amount deposited in the bank 2500.00 2500.00
Saving Bank a/c Furniture a/c
By amount from Sh. Karam Singh 1700.00 1700.00 To cost of furniture purchased 150.00 150.00
as per detail on Voucher
Current a/c
22
By amount from Sh. Paras Ram 840.00 1320.00
By amount from Sh. Sansar Chand 480.00
Fixed Deposit a/c
By amount from Nilo Kheri M/P
Coop. Society. 4000.00 4000.00
Admission fee a/c (Cash-Rs. Five thousand
By amount from Panipat H. Weaver's seven hundered and Sixty
Co-op. Society 2.00 2.00 only)
Total 7322.00 Total 2650.00
Opening Balance 1088.00 Cash in hand 5760.00
G. Total 8410.00 G. Total 8410.00
General Ledger
Share Capital Account
Date Particular Day Debit Credit Dr. Balance

Book or
Folio Cr.
Rs. P. Rs. P. Rs. P.
1.1.1998 By amount
from Day 1 300 00 Cr. 300 00
Book
2.1.1998 By amount
from Day 2 600 00 Cr. 300 00
Book
Admission Fee Account

Book or
Folio Cr.
1.1.1998 By amount
from Day 1 4 00 Cr. 4 00
Book
2.1.1998 By amount
from Day 2 2 00 Cr. 6 00
Book
Saving Bank Account

Book or
Folio Cr.
1.1.1998 By amount
from Day 1 900 00 Cr. 900 00
Book
2.1.1998 By amount
from Day 2 1700 00 Cr. 2600 00
Book
23
Fixed Deposit Account

Book or
Folio Cr.
2.1.1998 By amount
from Day 1 4000 00 Cr. 4000 00
Book
Current Deposit Account

Book or
Folio Cr.
2.1.1998 By amount
from Day 2 1320 00 Cr. 1320 00
Book
Loan to Members Account

Book or
Folio Cr.
4.1.1998 To amount 3 500 00
from Dr. 500 00
5.1.1998 To amount 4 1000 00

Dr. 1500 00
24
Current Account with State Bank of India (Panipat)

Book or
Folio Cr.
2.1.1998 By amount
from Day 2 2500 00 Dr. 2500 00
Book
Furniture Account
Date Particular Debit Credit Dr. Balance

or
Cr.
2.1.1998 To amount of
furniture as 150 00 Dr. 150 00
per Day Book
...2
25
Stationary Account

or
Cr.
1.1.1998 To cost of
Stationary per 104 00 Dr. 104 00
Day Book....1
Postage Account

or
Cr.
1.1.1998 To cost of
postage as per 12 00 Dr. 12 00
Day Book....1
26
Loan Ledger
Name The Sampla Th. & Credit Co-op Society P.O. M.C.L Classification No. And Date of Pronote
Sampla, Tehsil Rohtak Registrars order
District Rohtak No. Date Account
Cheque Bonds Issued
Date : 4.1.98
Principal Interest
Date No. of Particulars Debit Credit Balance No. of Prod Date Particulars Debit Credit Balance
Pronote Days ucts
4.1.98 P-Co- To amount 500 00 500 00 4 2000 31.1. To interest 3 40 3 40
op. L/1000 advanced 98 up to 31.1.98
through @ 6% (say..)
Sh. Ram
27
Dass
Cashier
By amount 250 00 250 00 19 4650 18.2. By amount 3 40 Nill
8.1.98 received
received 98
27.1.98 By amount 150 00 100 00 4 400
To amount 400 00 500 00 1 500

31.1.98 10002
advanced
through
Sh. Ram 28 7550
Murti
Member
Illustration 2
The following is the list of balances of the Gohana Marketing Coop. Society Ltd., as
on 31.12.98. Prepare a Trial Balance as on that date
Rs P. Rs. P.
Share Capital 17220.00 Postage Spent 183.18
Stock at Commencement 12000.00 Reserve Fund 2450.00
Salaries of the staff 2850.00 Commission Earned 2640.00
Admission Fee 175.00 T.A. to Directors 334.62
Interest Received 1153.00 Sales Account 70,915.56
Rent of office Building 940.00 Shares held 1800.00
Purchases 54,380.00 Interest Recoverable 430.00
Interest on Deposits Paid 618.00 Carriage on goods 680.00

purchased
Salaries payable 140.00 Returns outwards 572.34
Interest (Cr.) 230.00 Discount allowed by 850.50

Creditors
Furniture & fixture 1750.00 Return inwards 725.00
Stationary and printing 437.75 Undistributed Profits 795.00
Loans advanced to 18,242.25 Security Deposit with 1200.00

Members D.W.S.
Audit Fee payable 840.00 Discount allowed 238.00
Sundry Creditor 6000.00
Cash in hand 632.00
Deposit in C.B. Branch 6540.00
28
Solution
The Gohana Marketing Coop Society Ltd.
Trial Balance as on 31.12.1998
Debit Balance Amount
Rs. P. Credit Balance Amount
Rs. P.
Stock at Commencement 12000.00 Share Capital a/c 17220.00
Salaries of the staff 2850.00 Admission Fee 175.00
Rent of office Building 940.00 Interest Received 1153.00
Purchases 54380.00 Salaries payable 140.00
Interest on Deposits 618.00 Interest payable 230.00
Furniture & fixture 1750.00 Audit Fee Payable 840.00
Stationary and printing 437.75 Sundry Creditors 6,000.00
Loans advanced to Members 18,242.25 Reserve Fund 2450.00
Cash in hand 632.00 Commission Earned 2640.00
Deposit in C.B. Branch 6540.00 Sales a/c 70,915.56
Postage spent 183.18 Returns outwards 572.34
T.A. to Directors 334.62 Discounts allowed by 850.50

Creditors
Share held 1800.00 Profit (undistributed) 795.00
Interest Recoverable 430.00
Carriage on goods 680.00

purchased
Returns inwards 725.00
Security Deposits with 1200.00

D.W.S.
Discount allowed 238.60
Total 1,03,981.40 Total 1,03,981.40
29
Illustration 3
From the following Trial Balance of the Bhiwani Marketing Co-operative Society for the year
ending 31.12.1998. Prepare Trading a/c, Profit & Loss a/c and Balance Sheet as on that date
Dr. Balance Cr. Balance
Stock of goods (Opening) 6800 Share Capital a/c 18655
Purchases 17580 Funds 3240
Freight & Carriage 1840 Sales 21437
Octroi & Terminal Taxes 234 Interest received 348
Wages to Coolies 425 Sundry Creditors 6475
T.A. of Staff 164 Salaries Payable 280
Salaries a/c 2654 Return outwards 189
Building 5760 Deposits 1000
Stationary & Printing 159
Postage & Telephone 45
Saving Bank a/c with C.B. 6520
Bhiwani
Cash in hand 214
Sundry Debtors 7244
Depriciation 150
Interest paid 237
Furniture 1250
Return from Debtors 348
Total 51624 Total 51624

Note : Stock in hand on 31.12.1998 was valued at Rs. 3560/-
30
Solution : The Bhiwani Marketing Co-operative Society Ltd.
Trading Account
Dr. Cr.
To opening Stock 6800 By Sales 21347
To purchase 17580 Less Return 348 21089

Less Returns 189 17391
By closing stock 3560
To Freight & Carriage 1840 By Gross Loss 2041
transferred to P/L a/c
To Octroi & Terminal taxes 234
To wages 425
26690 26690
Dr. Cr.
To Gross loss from 2041 By Interest Received 348
Trading a/c
To salaries a/c 2654 By Net Loss to 5102
Balance Sheet
To T.A. to Staff 164
To Stationary & Printing 159
Postage & Telegrams 45
To Depriciation 150
To Interest Paid 237
31
Balance Sheet as on 31.12.98
LIABILITIES AMOUNT ASSETS AMOUNT
Share Capital 18655 Cash in hand 214
Funds 3240 Saving Bank a/c with 6520

C.B. Bhiwani
Deposits 1000 Building 5760
Sundry Creditors 6475 Sundry Debtors 7244
Salaries Payable 280 Furniture 1250
Stock a/c 3560
Net Loss as per P/L a/c 5102
Total 29,650 Total 29,650
Illustration 4
The following is the Trial Balance of the Gurgaon Transport Co-operative Society as
on 31.4.99. Prepare a Profit & Loss a/c and Balance Sheet as on that date.
Dr. Balance Rs. Cr. Balance Rs.

Pay of Drivers 46822 Share Capital a/c 150875
Pay of Conductors 22134 Reserve Fund 87519
Cash in hand 3461 Lorry Income 245678
Police Vouchers Recoverable 984 Clean Loan from Central 75642
Vehicle insurance Paid 18236 Members Deposits 34680
Fleet of Vehicles 556789 Contract Bookings 28247
Petrol Consumed 23456 Interest on Loans Payable 3456
Pay & allowances of office Staff 34567 Loan from Punjab Motor 112500
Printing & Stationary 9876 Petrol Bills Payable 13482
Stock of Stationary 2104 Carriage of Mails 8679
Stock of Spare Parts 6789 Profit & Loss a/c Balance 11234
Stock of Petrol in Lorries 1235 Miscellaneous income 650
Adda Fees Paid 6824
32
Painting Charges 3651
Furniture 4262
Shares of C.B. Purchased 2150
Entertainment to Visitors 846
Income tax Refundable 3567
Saving Bank a/c with C.B. 1486
Repairs to Lorries 9732
Loose Tools Stock 10523
General Charges 3148
Adjustments :-
(i) Fleet of vehicles is to be depreciated @ 10%.
(ii) Insurance amounting to Rs. 2468/- is unexpired.
(iii) Petrol Bills of Rs. 784/- Painting Bills, Rs. 416/- were outstanding.
(iv) Rs. 650/- were received and included in contract Booking a/c but the service was yet
to be performed.
(v) Interest of Rs. 1125/- on Loans was payable.
Solution
The Gurgaon Transport Co-operative Society Ltd.
Profit & Loss account for the year ending 31.4.99
To Pay of Driver 46822 By Lorry Income 245678

To Pay of Conductors 22134 By Contract 28247
Booking
To Pay & allowance of Staff 34567 Less received in 650 27597
advance
To Vehicle Insurance Paid 18236 By carriage of mails 8679
Less unexpired 2468 15768 By miscellaneous income 650
33
To Petrol 23456
Petrol Bills Payable 784 24240
To Printing & Stationary 9876
To Adda fees paid 6824
To Painting Bills Paid 3651
To Painting Bills 416 4067
payable
To Repairs to Lories 9732
To General Charges 3148
To Interest on Loans 1125
To Depriciation on Lorries 55678
@10%
To Net Profit carried to 47777
Balance Sheet
Total 2,82,604 Total 2,82,604
Balance Sheet as on 31.4.99
LIABILITIES AMOUNT ASSETS AMOUNT
Share Capital 150875 Cash in hand 3461
Reserve Fund 87519 S.B. deposit with C.B. 1486
Member deposits 34680 Fleet of Vehicles 556789
Clean Loan from C.B. 75642 Less depreciation 55678 501111

@ 10%
Loan from Punjab Motor 112500 C.B. Share purchased 2150
Finance
Payable item Furniture 4262
Interest as per Printing & Stationary 2104
Stock
34
Trial Balance 3456 Spare Parts Stock 6789
Interest as per 1125 4581 Petrol Stock 1235

Adjustment
Petrol Bills payable 13482 Loose Tools stock 10523
Petrol Bills payable 784 14266 Police voucher recoverable 984
Painting Bills Payable 416 Income Tax refundable 3567
Contract Booking received 650 Insurance Paid in Advance 2468
in advance
Profit & Loss a/c
Last Balance 11234
Profit as per P/L a/c 47777 59011
Total 5,40,140 Total 5,40,140
13.7 SUMMARY
Co-operative societies are voluntary associations of persons started with the aim of
service to its members. Different types of co-operatives are working with a single motive of
protection and betterment of weaker sections of the society with different ways and area of
operations. Co-operative system of accounting is one in which both receipt and payment
effect of a particular transaction is recorded in a book of original entry and posted accordingly.
Different books may be used in different types of co-operative societies accordingly to their
nature of work.
13.8 KEYWORDS
Co-operative Society: It is a society which has its objectives of promotion of economic

interest of its members in accordance with co-operative principles.
Co-operative System of Accounting: It is a system in which both receipts and payments

effect fo a particular transaction are recorded in a book of original entry and posted accordingly.
35
Day Book: This is a book in which all the transactions from the journal are recorded in this
except the cash items.
Double Entry System: It is a system under which both the aspects of a transaction is recorded.
1. Define a co-operative society. Discuss the features of a co-operative society.
2. What are the different types of co-operative societies?
3. Explain the accounting procedure in a co-operative society.
4. Prepare the Trial Balance of Sampla Credit Co-operative Society from the following
balances:
Rs. P. Rs. P.
Cash in hand 321.00 Postage 37.89

Stationary and Printing 82.11 Loan to members 4375.50
Furniture a/c 150.00 National Saving Certificate 500.00
Paid up Share Capital 2235.00 Deposit by members 3450.00
Deposit by Non-members 960.00 Rent a/c 180.00
Share held of another Co-op. 800.00 Salaries 240.00
Reserve Fund 820.00 Buildings 5000.00
Loan from Central Bank 4325.00 Profit & Loss a/c 1843.60
Rohtak Cr.
Stock of Sugar 1200.25
Interest Payable 167.50
Fertilizer stock 980.75
Interest Recoverable 123.40
Common Good Fund 204.00
Contribution to Prov. Fund 14.20
36
5. The following is the Trial Balance of the Bopa Rai Agricultural Service Society
on 30.6.98. Prepare Profit & Loss Account and Balance Sheet.
Dr. Balance Amount Cr. Balance Amount
Cash in hand 223 Shares 7345
S.B. Deposit with P.O. 107 Interest Received 4567
Salary of Staff 300 Admission Fee 93
Rent of Building 180 Members Deposits 5678
Stationary & Printing 144 Non Members Deposit 3456
Furniture 400 Dividend on shares 20
Spray Pump 270 Interest on National Saving 45
Certificate
Stock of Fertilizer 540 Reserve Fund 785
Shares of C.B. Jullundur 150 Common Good Fund 165
Share of Bhogpur Sugar Mill 400 Interest Payable 216
Share of P.B. Jullundur 100 Central Bank Loan 11311
National Saving Certificate 800
Interest Paid & Payable 1896
On Loan to Members 27983
Profit & Loss Balance 184
37
Adjustments i) Consider Rs. 311/- as bad out of amount due from members as loan.
ii) Interest on Loans was recoverable Rs. 94/-.
iii) Depreciate Furniture @ 5%.

iv) Stationary worth Rs. 36/- was purchased on credit but it could not be vouched.
Note : This years Profit & Loss a/c discloses a Profit. Last years Profit and Loss a/c
indicated Loss. Hence the balance i.e. resultant Profits will be shown on the liabilities
side of the Balance Sheet.
6. From the following Ledger Balances of the Hansi Co-operative Agricultural Society
Ltd. as on 30.6.98 Prepare Trading a/c, Profit & Loss a/c and Balance Sheet as on
that date.
Dr. Balances Cr. Balances
Previous Stock of Sugar 500 Sale of Sugar 2600

Sugar Purchased 2500 Sale of Agricultural Seed 325
Freight & Octroi 55 Fertilizer 100
Wages 25 Interest Received on Loans 3500
Agricultural Seed Purchased 300 Admission Fee 10
Salaries 1200 Members Share Capital a/c 20000
Audit Fee paid 225 Government Share Capital a/c 5000
Interest Paid 400 Member Deposit 40000
Stationary Consumed 20 LoanfromCentralCo-op.Bank 30000
Office Rent 60 Non-members Deposits 35000
Contribution to Co-op. 50 Reserve Fund 6000
Week Celebrations
News Papers Subscriptions 50 Common Good Fund 500
Loan to members 132000 Building Fund 2000
National Savings Certificates 8000 Last years Profits 3000
Shares Purchased 500
Building 500
Advance with Execution Agent 50
Furniture & Spray Pump 400
Cash in hand 1200
Total 1,48,035 Total 1,48,035
7. The following is the Trial Balance of the Palwal Co-op Union Ltd ; as on
31.12.98. Prepare Profit & Loss Account and Balance Sheet.
38
Dr. Balances Cr. Balances
Interest Paid and Payable 4316.13 Share Capital 103450.00

Establishment 1461.13 Reserve Fund 4544.00
Dearness allowances 156.70 Common Good Fund 1265.00
Cash in hand 5514.25 Bad & Doubtful Debt fund 1356.45
Postage in hand 7.13 Current Deposits by Individuals 24345.00
Current a/c with C.B.Gurgaon 843.62 S.B. Deposit by Societies 48418.72
Investments 48,500.00 Employees Prov. Fund 942.18
Security with Agr. Deptt. 200.00 Govt. Audit Fee Deposits 1560.00
Fixed Deposit with State 75540.00 Interest on loans 4675.00
Co-op. Bank
Contribution to Prov. Fund 115.40 Interest on Investments 3412.48
Postage Spent 34.25 Commission on sale 118.32
of Fertilizers
Library Books 75.00 Overdraft with State 7456.00
Bank of India
Furniture & Fittings 1.00 Suspense Interest 4532.48
Stationary & Printing 148.00 Interest Payable on 1435.83
Fixed Deposits
Stock of Books for sale 546.37 Employees Securities deposits 764.14
Income Tax Recoverable 1275.30 Admission fee 26.00
Interest Recoverable 4532.43 Fixed Deposits 75276.00
Interest accured but not yet due 845.15
Profit & Loss a/c balance 4283.65
Travelling Expenses 238.35
General Charges 542.54
Depreciation on investments 460.00
Discount allowed 15.82
Sitting Fee 183.38
Loans advanced to Members 125450.00
Land and Building 7850.00
Audit Fee Paid 342.00
Shares held of C.B. 100
Rs. 283577.60 Rs. 283577.60
39
The following list of balances was taken from the general Ledger of the Moga Co-op
Mortgage Bank as on 30.5.98. Prepare Profit & Loss a/c & balance sheet.
Dr. Balances Amount Cr. Balances Amount
On Loan to Members 234568 Share Capital 83700

Rent of Office Paid 1432 Interest Earned 6789
Printing & Stationary 765 Staff Security Deposit 750
Postage 234 Loan from S.L.M.B. 150780
Shares of S.L.M.B. 800 Admission Fee 4185
Shares of Co-op. Bank 100 Deposits 351
Furniture 2345
Cash in hand 189
General Charges 321
Interest Recoverable 1234
Staff Salaries 4567
Rs. 246555 246555
8. The following is the Trial Balance of the Kaithal Multi Purpose Coop. Society on
31.12.1997. Prepared Profit & Loss a/c and Balance Sheet.
Debit Balance Amount Credit Balance Amount
Cash in Hand 176 Shares 6842
Stock of Sugar 2354 Interest Received 4567
On Loan to Members 17875 Admission Fee 25
Establishment 3456 Sundry Creditors 9876
Sundry Debtors 7654 Bill Payable 382
Discount allowed 352 Deposits 5430
Interest Paid 743 Reserve Fund 4264
Stationary & Printing 468 Investment Depreciation Fund 961
Postage 38 Central Bank Loan 15600
40
Furniture 800 Discount Received 145
Investment in Govt. Security 4560 Profit & Loss a/c 2157
Interest Recoverable 346
Stock of fertilizer 740
Building 9800
Audit Fee Paid 195
General Charges 234
Saving Bank a/c with C.B. Branch 458
Rs. 50249 Rs. 50249
Adjustment :-
i) Stock of Sugar was valued at Rs. 2768/-.
ii) Stock of Fertilizer valued at Rs. 965/-
iii) Interest on Loans to members to the extent of Rs. 880/- Could not be vouched before
the close of the year.
iv) Govt. Securities are to be depreciated by Rs. 345/- out of Depreciation Fund.
v) Depreciate furniture 5%
1. Fundamentals of Accounting by R.L. Gupta and V.K. Gupta, Sultan Chand and Sons,
New Delhi.
2. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan Chand and Sons,
New Delhi.
3. Advanced Accounting by Ashok Sehgal and Deepak Sehgal, Taxmann Allied Services
Pvt. Ltd., New Delhi.
6. Studies in Advanced Accounting by S.N. Maheshwari, Sultan Chand and Sons, New
Delhi.
7. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and Neeti Gupta, Kalyani
Publishers, Ludhiana.
41

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Lesson : 1

After reading this lesson, you should be able to

Complexities of a business as huge funds requirements, lack of technical

1.2 MEANING OF JOINT VENTURE

A joint venture is usually a temporary partnership without the use of a firm

The main features of a joint venture are specifically made clear.

F Two or more person are needed.

F It is an agreement to execute a particular venture or a project.

F The joint venture business may not have a specific name.

F It is of temporary nature. So the agreement regarding the venture

1.4 DIFFERENCES BETWEEN JOINT VENTURE, PARTNERSHIP AND

In joint venture and partnership some business is carried on by two or

Partnership Venture Joint Venture

Consignment and joint venture are in the nature of an agreement between

Joint Venture Consignment

- There is joint ownership The consignor owns the goods.

Joint venturers as mentioned earlier are beneficial under the situations

1.5 METHODS OF RECORDING JOINT VENTURE TRANSACTIONS

B) One common Joint Venture Account on memorandum basis is prepared to

A) Each co-venturer records the transactions

Journal Entries : The following journal entries will be passed

1) For Investment in Joint Venture

2) As goods are supplied by the Co-venturer or cash is invested in Joint

Joint Venture A/c Dr.

(Being goods supplied or cash invested by the other partner)

3). For recording sale of joint venture goods

(Being Sale of goods made)

3) On sale of joint venture goods by the other party

b) For discounting the bill of exchange

6) Entries in the books of other partner Acceptor's books regarding

7) On discounting the bills of exchange by other party i.e. drawer

8) On commission charged under Joint Venture

9) On Commission charged by other partner

(Being Commission on sale effected by other partners)

Joint Venture Account

Particulars Rs. Particulars Rs.

To Joint Venture A/c By Bills Receivables

(Good taken over)

To Cash a/c By Joint Venture A/c

X and Y entered into Joint Venture to sell a consignment of timber

Particulars L.F. Dr. Rs. Cr. Rs.

To Purchase A/c 50,000

Joint Venture A/c Dr. 6,500

Particulars Rs. Particulars Rs.

To Joint Venture (Sale) 30,000 By Joint Venture (Expenses) 6,500

To Joint Venture (goods) 10,000 By Bank 37,500

Journal Entries in the Books of Y

Joint Venture A/c

To X (goods supplied) 50,000 By Bank (by sales) 30,000

Particulars Rs. Particulars Rs.

To Joint Venture A/c 11,000 By Joint Venture A/c 52,500

(Good and expenses)

To Joint Venture A/c (Loss) 4,000

To Bank 32,500 52,500

B) Memorandum Joint Venture Account Method

In the method discussed above each co-venturer records all transactions

i) Joint Venture with..........................Account Dr.

(Being payments by cheque or cash or liabilities incurred on Joint Venture)

(Being sale Cash/Credit made on account of Joint Venture)

b) A separate 'Joint Venture Memorandum Account' is prepared to ascertain

Joint Venture with.................Account Dr.

To Profit and Loss Account

(Being profit earned on Joint Ventures)