12th Accounts by CA, Cma Santosh Kumar Sir

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12th class ACCOUNTS CA/CMA SANTOSH KUMAR
INDEX OF ACCOUNTS
CHAPTER’S NAME PAGE NUMBER

1. ACCOUNTING OF GST 02--04
2. FUNDAMENTAL OF PARTNERSHIP 05--29
3. VALUATION OF GOODWILL 30--42
4. CHANGE IN EXISTING PROFIT RATIO 43--50
5. ADMISSION OF PARTNER 51--84
6. RETIREMENT AND DEATH OF PARTNER 85-- 106
7. DISSOLUTION OF FIRM 107--128
8. NON PROFIT ORGANISATIONS 129--146
9. ACCOUNTING FOR SHARE CAPITAL 147--173
10. ISSUE OF DEBENTURES 174--188
11. REDEMPTION OF DEBENTURES 189--193
12. FINANCIAL STATEMENT OF COMPANY 194--221
13. ANALYSIS OF FINANCIAL STATEMENTS 222--226
14. TOOLS OF FINANCIAL STATEMENT ANALYSIS 227--240
15. RATIO ANALYSIS 241--292
16. CASH FLOW STATEMENTS 293--323
NOTE:- FOLLOW SEQUENCE GIVEN ABOVE WHILE STUDYING
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CHAPTER 1. ACCOUNTING OF GST

Meaning :-Goods and service tax (GST) is a comprehensive indirect tax levied at the prescribed rate on every
supply, i.e., sale of goods and/or service except on petroleum and alcohol for human consumption. Supply of
goods means sale of goods whereas supply of services means rendering of services.
Characteristics of Goods And Services Tax (GST)

1.GST is a comprehensive Indirect tax: GST is a comprehensive indirect tax which replaced all indirect taxes
that were earlier levied except custom duty, taxes on alcohol for human consumption, taxes on petroleum and
taxes levied by Local Bodies.
2.GST is a value added tax: GST is Value Added Tax because GST Paid (termed as Input GST) is set off against
GST collected (termed as output GST). As a results, GST is levied on the incremental value of goods and/or
services supplied (sold). For example, goods purchased for Rs10,000 paying IGST @ 18%,i.e., Rs1800 are sold
for Rs 15,000 charging IGST @ 18%, i.e., Rs 2,700. Rs 1,800 paid at the time of purchase is set off against Rs
2,700 charged at time of sale and balance Rs 900 is payable in the Government Account. In effect, GST is levied
on differential amount of sale and purchase,i.e. 5,000.
3.GST Paid is not Cost: GST paid (Input GST) on purchases of goods and/or service is not a cost for the
purchaser but is an asset since it can be set off against GST collected on sale of goods and/or services.
Similarly, GST collected (Output GST) on sale of goods and/or services is not an income of the seller but is a
liability and is payable in the government account after adjusting Input GST in the prescribed order.
4. Uniform GST Rate on goods and services across all states: Every state and union territories have their own
Goods and Services Tax Acts. However, GST is levied on goods and/or Services supplied (sold) under each
classification at the same rate.
Objective Of Goods And Services Tax (GST)
1. Developing Common national Market: GST is levied at same rate on similar Goods and Services
in all the states and union territories. For example, Computers sold across India are levied GST
(Say) @ 18%. It sets a ground for developing common national market.
2. Ease of Doing Business: In the pre-GST period, there were many indirect taxes administered by
different authorities. As a result, a business had to register itself separately under each such Act
and also had to comply with each such indirect tax. For example, Excise Duty, sales Tax and
Service Tax etc. were separately administered. The introduction of GST has eased the going of
business as it will be registered and administered only under one indirect tax, i.e., GST. Hence,
ease of doing business.
3. No cascading Effect of GST: GST paid (Input GST) on purchases of goods and/or services is set off
against GST collected on sale of goods and/or services. As a result, GST is levied on the difference
between sale value and purchase value. In effect, GST does not have cascading effect.
4. To Simplify Indirect Tax Regime by having one Tax and Fewer rate of taxes: GST has replaced
many indirect taxes (Excise duty, Sale Tax, Service etc.).The earlier indirect tax regime had been
complex both for the Government and business. Since, GST has replaced almost all indirect taxes,
it simplifies the application and administration of indirect taxes.
5. Better Tax Management: GST, being administered through computer system beside it being a
single indirect tax, has resulted in better tax management as tax evasion is controlled besides
timely collection of tax. For example, credit for input GST is granted if the tax payer collecting GST
has paid the tax in government account.
6. Goods becoming cheaper: Since GST paid (Input GST) is set off against GST collected (Output
GST), GST does not have cascading effect as against earlier years when there was no set off of

indirect taxes. (e.g. Excise Duty) paid against indirect taxes collected. As a result, goods and
services have become cheaper.
7. Attracting Foreign Investors: Investments from outside India were not high because of multiple
indirect taxes. Introduction of GST and removal of multiple indirect taxes shall increase Foreign
direct Investment (FDI) in India.
8. Uplifting GDP: The structure of GST is such that is levied at every stage of sale of goods and/or
services. It means businesses will be largely through recorded transactions resulting in tax
collection by the government due to recorded sales resulting in uplifting GDP.
Classification OF GST :- GST in levied under following three categories:
1. Central GST (CGST):- CGST is levied on intra-state supply (supply within the state) of goods or services
or both along with SGST. In case of intra-state supply/sale both CGST and SGST is levied at half of the
prescribed rate of tax. For ex., if rate of GST is 18%, 9% will be levied as CGST and 9% as SGST (or
UTGST).
2. State GST (SGST) or union Territory GST (UTGST):- SGST (or UTGST) is also levied on intra-state supply
(i.e., supply within the state) of goods and/or services or both along with CGST. In case of intra-state
supply(sale) both SGST (or UTGST) and CGST is levied at half of the prescribed rate of tax. For example,
if rate of GST is 18%, 9% will be levied as CGST and 9% as SGST
Note: For the discussion, SGST and UTGST are referred as SGST.
3. Integrated GST (IGST):- IGST is levied on inter-state supply (i.e.supply outside the state) of goods
and/or services,import of goods and/or services into India and export of goods and/or services from
India.
Reverse charge:- Reverse charge means that GST is not charged by the person selling the goods and/or
services or both but is paid by the person purchasing the goods and/or services or both.
Certain purchases of goods and services are placed under Reverse charge. Thus, the seller of goods and/or
services placed under reverse charge will not charge GST but instead the purchaser of goods and/or services
will deposit GST in the Government account and claim it as Input GST. Goods and/or services falling under
reverse charge Mechanism are: payment of fee to lawyer; payment for use of copyright; purchase of Goods
and/or Services by registered person from unregistered person; transports of goods; Insurance commission;
and sponsorship.
Categorising GST FOR Accounting Purpose:- GST paid (Input GST) individually (Input CGST, SGST and IGST) is
set off against GST Collected (Output GST) individually (Output CGST, SGST and IGST) in the prescribed order.
Therefore, it is necessary that separate accounts for Input GST and Output GST for each category of GST, i.e.,
CGST, SGST and IGST be maintained. It will enable the taxpayer to follow prescribed order of setting off the
each category of GST. The GST Account maintained are:
1. Input CGST: Input CGST is the CGST paid on intra-state purchase (supply) of goods and/or Services or
both. Input CGST can be set off against CGST collected, i.e., output CGST and IGST collected (i.e.,
output IGST) in that order. Besides the above, taxpayer may pay CGST in Government Account. It is
also termed as input CGST.
2. Input SGST: Input SGST is the SGST paid on intra-state purchase (supply) of Goods and/or Services
output IGST) in that order. Besides the above, taxpayer may pay SGST in Government Account. It is
also termed as Input SGST.REMEMBER
On intra-state supply of goods and/or services or both, both CGST and SGST are levied at 50% of the
specified rate. For example, if specified rate is 18%, both CGST and SGST will br levied @ 9% each.
3. Input IGST: Input IGST is the IGST paid on inter-state purchase (supply) of Goods and/or Services or
both and it can be set off against IGST collected (i.e., Output IGST), CGST Collected (i.e., Output CGST)
and SGST collected (i.e., Output SGST) in that order. IGST Is also levied on goods and/or services

imported from outside the country. Beside the above, taxpayer may pay IGST in Government Account.
It is also termed as Input IGST.
4. Output CGST: Output CGST is the CGST collected on intra-state sale (supply) of Goods and/or Services
or both along with SGST.
5. Output SGST: Output SGST is the SGST collected on intra-state sale (supply) of Goods and/or Services
or both along with CGST.
6. Output CGST: Output IGST is the IGST collected on intra-state sale (supply) of Goods and /or Services
or both. In the case of intra-state sale only IGST is levied.
ACCOUNTING OF GST PAID (INPUT GST):-

When GST Paid on Supply (Purchase) can be set off against GST Collected?
GST Paid on purchase of goods and/or services or both that can be set off against; GST Collected on
sale of goods and/or services or both is debited to a separate, account head, i.e., Input CGST or Input
SGST or Input IGST as the case Thus, GST Paid on purchases of goods and/or services or both that can
be set off against GST Collected is debited to Input GST (under CGST, SGST or IGST as per category of
GST Paid) Account. Therefore, accounting of GST Paid on purchase of goods and/or services or both
differ depending on whether GST Paid can be set off against GST Collected or not
When GST Paid on Supply (Purchase) cannot be set off against GST Collected?
GST Paid on purchase of goods and/or services or both that cannot be set off against GST Collected on sale
of goods and/or services or both is debited to the expense head or asset head on which it has been paid.
Stating differently, it is accounted as cost. For example, Mohit visits a restaurant and paid a bill or 1,200
inclusive of CGST 100 and SGST 100. GST Paid for food and beverages bill is not allowed to be set off against
GST Collected (Output GST). It means that Mohit should debit Business Promotion Account by 1,200.
Examples of supply/Purchase of Services/goods on which GST Paid cannot be set off and thus,is Cost are:
(i) Food and Beverage Expenses (Restaurant Bills);
(ii) Membership Fee of Club, Health and Fitness Centre;
(iii) Health Insurance;
(iv) Repairs and Maintenance (Building);
(v) Free Gifts to Staff;
(vi) Purchase of Vehicles by a non-transport enterprises;
(vii) Goods and/or Services for personal consumption; and
(viii) Goods and/or services purchased for sale which are exempt from levy of GST
GST paid (Input GST) is reversed in the following cases:
(i) Goods lost or stolen;
(ii) Goods destroyed;
(iii) Goods written off;
(iv) Goods given as gift (charity);
(v) Goods given as free sample; and
(vi) Goods as may be prescribed.
Supply of following Goods and/or services are exempt from levy of GST:
(i) Salaries and wages;
(ii) Supply of services to Government;
(iii) Supply to embassies of other countries/ UNO;
(iv) Educational services;Health services; and
(vii) Electricity and water bills.

CHAPTER 2. ACCOUNTING FOR PARTNERSHIP FIRM– FUNDAMENTALS

Meaning of Partnership as per Section 4 of the Indian Partnership Act, 1932
"Partnership 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."
MEANING OF PARTNERS,FIRM AND FIRM NAME:- the person who have entered into a partnership
with one another individually are called partners and collectively a firm. The name under which the
business is carried is called FIRM NAME.
NATURE OF PARTNERSHIP: Partnership is a separate business entity from accounting point of view.
However from the legal point of view, a partnership firm is not a separate legal entity from its partners. Thus legally,
partners and business are not separate from one another. It means, in case the firm is insolvent/bankrupt, private
estates of the partners become liable to meet the deficiency.
Essential Elements (Main Features) of Partnership
1. There must be two or more persons.

2. There must be an agreement.
3. There must be lawful business.
4. There must be sharing of profits of business.
5. There must be a mutual agency, i.e., the business must be either carried on by all or any of them acting for all.
Rights of Partners
1. Every partner has the right to participate in the management of the business.
2. Every partner has the right to be consulted about the affairs of the business.
3. Every partner has the right to inspect the books of account and have a copy of it.
4. Every partner has the right to share profits or losses with others in the agreed ratio.
5. If a partner has advanced loan, he has the right to receive interest on it at an agreed rate of interest.
6. A partner has the right not to allow the admission of a new partner.
7. After giving proper notice, a partner has the right to retire from the firm.
8. If a partner incurs expenses on the business or he pays some money on behalf of the firm, that partner may
get indemnified against these payments from the firm.
Liabilities of partners:- subject to agreement among the partners,
1. If a partner carries on a business that is similar to that of the firm in competition with the firm and earns
profit from it, the profit earned from such business shall be paid to the firm.
2. If a partner earns profit for self from any transaction of the firm or from the use of firm’s property, the
profit so earned shall be paid to the firm.
Some other Important Provisions of the Partnership Act, 1932
(i) With the consent of all the partners, a minor may be admitted for the benefit of Partnership.
(ii) A person may be admitted as a partner either with the consent of all the existing partners or in accordance
with an express agreement among the partners.
(iii) A partner may retire from the firm either with the consent of all the other partners or in accordance with
an express agreement among the partners.
(iv) Registration of the firm is optional and not compulsory.
(v) Unless otherwise agreed by the partners, a firm is dissolved on the death of a partner.

Partnership Deed: :- Partnership comes into existence by an oral or written agreement. It is better to have
written agreement to avoid any dispute. This written document is known as Partnership Deed. In partnership
deed, details of the terms and conditions of partnership are mentioned. It is a legal document signed by all the
partners and has clauses on the following:
(i) Name and address of the firm.

(ii) Names and addresses of all partners.
(iii)Date of commencement of partnership.
(iv) Capital to be contributed by each partner.
(v) Whether interest is to be allowed on capitals.
(vi) Whether any partner is to be allowed salary.
(vii) The profit-sharing ratio.
(viii) The duties of each partner.
(ix) Method of valuation of goodwill in case of admission, retirement or death of a partner.
(x) Mode of settlement of accounts in case of retirement/death of a partner.
(xi) Durati on of partnership (if an y)
(xii) Mode of Settlem ent of disputes among partners
Benefits or Advantages or importance of having a Partnership Deed
(i) It facilitates functioning of the business.

(ii) It is helpful in the settlement of disputes arising among partners.
(iii)It helps in avoiding misunderstandings among the partners.
Is it essential to have a partnership deed?
No, it is not essential but desirable to have a partnership deed. In case partnership Deed does not exist,
following Provisions shall be applicable as per partnership Act 1932. (Provisions affecting accounting
treatment in the Absence of Partnership Agreement/Partnership Deed).
(i) Interest is not allowed on Partners' Capitals

(ii) No interest is charged on drawings.
(iii) Partner is not entitled to salary or remuneration for the work done for the firm.
(iv) Interest @ 6% p.a. is allowed on the loans by any partner.
(v) Profits or losses are divided equally among the partners.
PRACTTICAL QUESTIONS:
Question 1 (Provisions of the Indian Partnership Act, 1932). X, Y and Z are partners in a firm. They do not have
a Partnership Deed.
(i) X, who has contributed more capital than other partners, demands interest on capital at 10% p.a. and
share of profit in the capital ratio. But Y and Z do not agree with him.
(ii) Y has devoted full time to run the business and demands a salary of ₹ 5,000 p.m. But X and Z do not
agree with him.
(iii) Z demands interest on the loan of ₹50,000 advanced by him at the market rate of interest @12% p.a.
(iv) Net Profit before taking into account any of the above claims amounted to ₹ 50,000 at the end of the
first year of the business. How will the disputes be settled?
Solution: The partners do not have a Partnership Deed. Therefore, provisions of the Indian Partnership Act,
1932 will apply to settle the disputes:
(i) Interest on capital is not payable to any partner. Therefore, X is not entitled to interest on the capital.
(ii) Remuneration is not payable to any partner. Therefore, Y is not entitled to any salary.
(iii) Interest on loan is payable @ 6% p.a. Therefore, Z is to get interest @ 6% p.a. on ₹ 50,000.
(iv) The profit after interest on loan @ 6% p.a., i.e., ₹ 47,000 is to be distributed equally.
Question 2. X and Y are partners in a firm. They do not have Partnership Deed. What shall be the position in the
following cases?
(i)X devotes more time than Y in the business.X claims that he should get a salary of ₹6,000 per month for it.
(ii)Y has provided a capital of₹ 50,000 whereas X has provided ₹ 5,000 only as capital. X, however, has
advanced₹ 10,000 as loan to the firm. What interest, if any, will be given to X and Y?
(iii) X wants to introduce his son Z into their business. Y objects to his proposal.
(iv)Y wants that profit should be distributed in the ratio of capitals but X wants that it should be distributed
equally.
Solution: In the absence of Partnership Deed, provisions of the Indian Partnership Act, 1932 shall apply to settle
the disputes:
(i) Salary is not payable to any partner. Therefore, X is not entitled to any salary.
(ii) Interest on capital is not payable to any partner. Therefore, X and Y will not get interest
on their capitals. Interest on loan is allowed @ 6% p.a. Thus, X will get interest on loan @ 6% p.a.
(iii) A person cannot be introduced as partner without the consent of all the partners. Therefore,
Z cannot be admitted into partnership because Y objects to it.
(iv) Profits shall be shared equally between X and Y after deducting interest on loan of X @ 6% p.a.on ₹ 10,000.
DISTRIBUTION OF PROFITS AMONG PARTNERS- PROFIT AND LOSS APPROPRIATION

ACCOUNT:-- After having determined the net profit by preparing the Profit and Loss Account, 'Profit and
Loss Appropriation Account' is prepared to show appropriation of Net Profit. This account, is an extension of
the Profit and Loss Account, and is credited with the Net Profit (taken from Profit and Loss Account) and
interest on drawings of the partners (which is loss to the partners but an income for the firm) and debited with
interest on the capitals of the partners, partners' salaries and commissions, etc., (which is a loss for the firm
and income for the partners). If the partners decide, an amount is transferred to Reserve and the balance
profit (Net Divisible Profit) is distributed between/among the partners in their profit-sharing ratio.
Features of Profit and Loss Appropriation Account

1. It is an extension of the Profit and Loss Account.
2. It is prepared only by the partnership firms.
3. It shows the appropriation of net profit for the accounting period.
4. The entries in this account are passed giving effect to the Partnership Deed and/or the
Indian Partnership Act, 1932.
Difference between Profit and Loss Account and Profit and Loss Appropriation Account
Profit and Loss Account Profit and Loss Appropriation Account

1. It is prepared after Trading Account. It is prepared after Profit and Loss Account.
2. It shows the net profit earned or net loss incurred. It shows appropriation of net profit.
3.This account has neither opening nor closing This account may have both opening and closing
balance. balances.
4. Items debited to this account are all expenses Items debited to this account are appropriations of
(charge against profit). profit.
5.The preparation of this account is not based on The preparation of this account is based on partnership
partnership agreement, except for interest on loan agreement.
from partners.
6. While preparing this account, matching principle While preparing this account, matching principle is not
(i.e., revenue is matched against expenses) is followed.
followed.

Limited Liability Partnership(LLP):- LLP is a business like partnership with additional feature of partners’
liability being limited. Thus, it has elements of partnership and company. Another important feature of LLP is
each partner is not responsible or liable for another partner’s misconduct or negligence.
LLP as Constituted in India:- The Limited Liability Partnership Act, 2008 came into effect from 31st March,
2009. LLP is different from a partnership as it operates like a partnership, but in a LLP each partner is protected
from personal liability, except to the extent of his capital contribution in the LLP.
1. LLP is subject to income tax like any other Partnership firm.

2. A partner is not liable for independent or unauthorized actions of other partners, thus allowing
individual partners to be shielded from joint liability created by another partner’s wrongful business
decisions or misconduct.
3. LLP is a body corporate and a legal entity separate from its partners. It has perpetual succession like a
limited liability company. Indian Partnership Act, 1932 is not applicable to LLPs and also the limit on
number of partners cannot exceed the number specified under Section 464 of the Companies Act,
2013, which is at present is 50. The LLP Act, 2008 specifies that at least one of the partners in the LLP
is citizen of India and an Indian national.
4. The Registrar of Companies (ROC) is authorised to register and control LLPs.
Characteristics of LLP:
1. Separate Legal Entity: Like a company, LLP also has a separate legal entity. Therefore, partners and
the LLP are distinct from each other, like a company where company has legal entity separate from its
shareholders.
2. Minimum Capital: Minimum capital of a LLP is not specified. Thus, partners in the LLP decide how
much capital will be contributed by each partner.
3. Minimum Number of Members: A LLP can be established with at least two members who shall also
be the Designated Partners and shall have Director Identification Number (DIN). There is no limit on
the maximum number of partners. Member other than the Designated Partners are required to have
Director Identification Number (DIN).
4. Audit is not mandatory: All companies, whether private or public, are required to get their accounts
audited. However, audit of LLP’s books of account is not mandatory except:
a. If the contributions of the LLP exceeds Rs. 25 Lakhs; or
b. If the annual turnover of the LLP exceeds Rs. 40 Lakhs.
NOTE:- Registration Process of a LLP is same as that of a company.
Benefits of a LLP are:

1. It is more flexible as compared to a company to organize internal structure.
2. There is no maximum limit for the number of partners in LLP.
3. Raising an utilization of funds depends on the partners’ will as against norms prescribed in the
Companies Act, 2013 as applicable to companies.
4. Liability of partners is limited to their contribution as against liability of partners being unlimited in
the case of normal partnership. However, the LLP Agreement is prepared in the same manner as
Partnership Deed is prepared.
Disadvantages of LLP are:
1. Any act of the partner without the knowledge of other partners may bind the LLP.
2. LLP cannot raise money from the public.
3. Venture capital firms generally prefer not to invest in LLPs. Private Limited is preferred over LLP.
Question 3 (Oral Agreement). Halu and Galu are partners in a firm. They have not entered into
Partnership Deep but had agreed on following;

(1) Salary will be paid to Halu @ Rs. 10,000 per month.

(2) Galu will get commission @ 10 % of Net Profit.
(3) Interest will be allowed on capitals @ 10% p.a.
(4) Interest will be charged on drawings @ 10% p.a.
(5) Partner cannot be admitted without the consent of both the partners.
How will be the following disputes resolved?
1. Galu demands to be paid salary as Halu is being paid because his commission is lower.
2. Halu demands that his son Sonu be admitted as partner for 25% share to be given out of his share of
profits to which Galu disagrees.
Solution: Partnership agreement may be written or oral. Therefore, the terms agreed orally between Halu and
Galu is a valid agreement.
1. The demand of Galu to be paid salary as is paid to Halu is not valid in view of agreement of payment
of commission.
2. Halu’s demand to admit Sonu into partnership is also not valid as both the partners had agreed to
admit a new partner with the consent of both the partners.
Question 4. A, B and C are partners sharing profits and losses equally. A and C have granted loan to the firm on
1st October, 2020 of Rs. 2,00,000 and Rs. 4,50,000 respectively. It is agreed that interest @ 9%p.a will be paid
on loan. Books of account of the firm are closed on 31st March every year. Interest on loan is yet to be paid on
31st March 2021. of pass journal entries and prepare ledger accounts of the two partners.
Question 5. Agni and Bhoomi are partners sharing profits and losses in ratio of 2:3 with capitals of Rs. 4,00,000
and Rs. 2,00,000 respectively. On 1st October, 2020, A and B granted loans of Rs.4,00,000 and Rs.2,00,000
respectively to the firm. The Partnership Deed is silent as to interest on Partner’s Loan. Determine the amount
of profit/loss for the year ended 31.3.2021 in each of the following cases to be distributed among partners:
Case 1: If the profit before interest for the year amounted to Rs. 25,000.
Case 2: If the Profit before interest for the year amounted to Rs. 15,000.
Case 3: If the Loss before interest for the year amounted to Rs. 25,000.
Question 6. Yakub and Amrit are partners in M/s Yamrit Pakoda sharing profits and losses equally. Following
trail balance is prepared from the books of account as at 31st March, 2021.
Particulars Dr. (Rs.) Particulars Cr. (Rs.)

Opening Stock 45,000 Sales 12,50,000
Purchases 7,60,000 Purchases Return 10,000
Sales Return 25,000 Sundry Creditors 90,000
Salary and Wages 1,80,000 Capital Accounts:
Rent 1,10,000 Yakub 4,00,000
General Expenses 35,000 Amrit 3,85,000
Sundry Debtors 2,00,000
Furniture and Fixture 50,000
Computers 2,20,000
Machinery 3,00,000
Cash at Bank 75,000
Cash in Hand 25,000
Drawings: Yakub 60,000
Amrit 50,000
21,35,000 21,35,000
Prepare Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account for the years
ended 31st March, 2021 and Balance Sheet as at that date accounting the following adjustments:

(i) Stock as at 31st March, 2021 was Rs. 50,000:

(ii) Rent is Rs. 10,000 per month:
(iii) Depreciate Furniture and Fixture and Computers @ 20% p.a.,Machinery @ 10% p.a.; and
(iv) Interest on Capitals is allowed @ 6% p.a.
Question 7: A and B entered into partnership on 1st April, 2018 without any Partnership Deed. They
st
introduced capitals of Rs 5,00,000 and Rs 3,00,000 respectively. On 31 October 2018, A advanced Rs. 2,00,000
by way of loan to the firm without any agreement as to interest. The Profit and Loss Account for the year
st
ended 31 March, 2019 showed a profit of Rs. 4,30,000, but the partners could not agree upon the amount of
interest on loan to be charged and the basis of division of profits. Pass a Journal entry for distribution of the
profit between the partners and prepare Capital Accounts of both the partners and Loan Account of A.
Question 8. (Rent Payable to a Partner). Ananya and Bhawna are partners sharing profits equally.
Business is being carried from the property owned by Ananya on a yearly rent of Rs. 36,000. Ananya is to get
salary of Rs. 1,20,000 p.a. and Bhawna is to get commission @ 5% of net sales, which during the year was Rs.
40,00,000. Net Profit for the year ended 31st March, 2021 before providing for rent was Rs. 5,00,000. You are
required to draw Profit and Loss Appropriation Account for the year ended 31st March, 2021.
Question 9. Arjun and Bhim are partners sharing profits and losses in the ratio of 3:2 with capitals of Rs.
4,00,000 and Rs. 3,00,000 respectively. Interest on capital is agreed @ 5% p.a. Bhim is to be allowed an annual
salary of Rs. 30,000 which has not been withdrawn. Profit for the year ending 31.3.2021 prior to calculation of
interest on capital but after charging Bhim’s salary is Rs. 1,20,000. A Provision of 5% of the profit is to be made
in respect of commission to the manager. Prepare an account showing the appropriation of Profit.
Question 10 ( Profit and Loss Appropriation Account). A and B started a business on 1st April, 2018 with
capitals of Rs.3,00,000 and Rs. 2,00,000 respectively. According to the Partnership Deed, B is to get salary of
Rs. 5,000 per month, A is to get 10% commission on Profit after allowing salary to B and interest is to be
allowed on capitals @ 6% p.a. Profit-sharing ratio between the two partners is 3:2. During the year, the firm
earned a profit of Rs. 2,50,000. Pass Journal entries for division of profits and prepare Profit and Loss
Appropriation Account. The firm closes its accounts on 31st March every year.
Question 11 (Profit and Loss Appropriation Account). X and Y started business on 1st April, 2020 with capitals
of 5,00,000 each. As per the Partnership Deed, both X and Y are to get monthly salary of Rs.10,000 each and
interest on capitals @ 10% p.a. Drawings during the year were X—Rs. 60,000 and Y—Rs.1,00,000; interest
being chargeable @ 10% p.a.
During the year, the firm incurred a loss of 2,00,000.
Pass Journal entries for the above and prepare Profit and Loss Appropriation Account. The firm close its
accounts on 31st March, every year.
Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars Rs. Particulars Rs.
To Profit and Loss A/c (Net Loss) 2,00,000 By Interest on Drawings A/c:
X 3,000
Y 5,000
8,000
By X’s Capital A/c (Loss) 96,000
By Y’s Capital A/c (Loss) 96,000
2,00,000 2,00,000
Working Note: In the absence of dates of drawings, interest thereon has been calculated for the average
period of 6 months. Thus,
Interest on X's Drawings = Rs. 60,000 x 10/100 x 6/12 = Rs. 3,000;

Interest on Y's Drawings = Rs. 1,00,000 x 10/100 x 6/12 = Rs. 5,000.
Question 12. Arun and Arora were partners in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals on
1st April, 2020 were: Arun Rs. 60,000 and Arora Rs.80,000. They agreed to allow interest on capital @ 12% p.a.
and to charge on drawings @ 15% p.a. The profit of the firm for the year ended 31st March, 2021 before all
above adjustments was 12,600. The drawings made by Arun were Rs.2,000 and by Arora Rs.4,000 during the
year. Prepare Profit and Loss Appropriation Account of Arun and Arora. Show your calculations clearly. The
interest on capital will be allowed even if the firm incurs a loss. (CBSE 2012 modified)
Solution : PROFIT AND LOSS APPROPRIATION ACCOUNT
To Profit and Loss A/c (Net Loss) 4,200 By Interest on Drawings A/c:
(Rs. 12,600 – Rs. 16,800) Arun’s Current A/c 150
Arrora’s Current A/c 300 450
By Net Loss transferred to:
Arun’s Current A/c 2,344 3,750
Arora’s Current A/c 1,406
4,200 2,00,000
When Appropriations of profit are more than Available Profit
Question 13: X and Y are partners sharing profits And losses in the ratio of 3 : 2. X is a non-working partner and
contributes Rs. 20,00,000 as his capital. Y is a working partner of the firm. The Partnership Deed provides for
interest on capital @ 8% p.a. and salary to every working partner @ 8,000 per month. Net profit before
providing for interest on capital and partner's salary for the year ended 31st March, 2021 was Rs. 80,000. Show
the distribution of profit.

To X’s Capital A/c (interest on Capital) 50,000 By profit and Loss A/C (Net Profit) 80,000
To Y’s Capital A/c (Salary) 30,000
80,000 80,000
PARTNERS' CAPITAL ACCOUNTS: The Partners' Capital Accounts may be maintained by following
any of the two methods:
(i) Fixed Capital Accounts Method;

(ii) Fluctuating Capital Accounts Method.
Fixed Capital Accounts Method: Fixed Capital means capitals of the partners are fixed. When Fixed
Capital Accounts Method is followed, two accounts, i.e., a Capital Account and a Current Account for each
partner are maintained.
(i) Capital Account: Fixed Capital means that the capital remains unaltered, i.e., fixed unless
additional capital is introduced or withdrawal is made from the existing capital. Thus, if fresh
capital is not introduced or capital is not withdrawn, Capital Account of a partner will continue to
show same balance year after year.
(ii) Current Account: Current Account is maintained to record transactions other than
introduction and withdrawal of capital such as interest on capital, interest on drawings, salary or
commission to a partner, share of profits/losses. As a result, the balance of Current Account
fluctuates with every transaction with the partner.
Current Account of each partner is debited with:

(i) Drawings made by him;
(ii) Interest on drawings;
(iii) Share of loss;

(iv) Transfer of any amount to Capital Account permanently.

Similarly, Current Account of each partner is credited with:
(i) Interest on Capital;
(ii) Salary or commission;
(iii) Share of Profit; and
(iv) Transfer of any amount from Capital Account permanently.
Fluctuating Capital Accounts Method:- Under Fluctuating Capital Accounts Method only one
account namely 'Capital Account' is maintained for each partner. All transactions of a partner (e.g., salary or
commission, interest allowed on capital, drawings, interest charged on drawings, share of profit or share of loss,
etc.) are recorded in his Capital Account.
As a result, balances in the Capital Account fluctuates with every transaction. Capital Accounts having credit
balances are shown on the liabilities side while Capital Accounts having debit balances are shown on the assets
side of the Balance Sheet. Fluctuating Capital Method is normally followed for maintaining Capital Accounts
and therefore, in the absence of any instruction, this method should be followed for maintaining the Partners'
Capital Accounts.
Difference between Fixed Capital Account and Fluctuating Capital Account

Basis Fixed Capital Account Fluctuating Capital Account
1. No Of Accounts Two accounts are maintained for each Only one account (viz., Capital Account) is
Maintained partner: Fixed Capital Account and maintained for each partner.
Current Account.
2. Frequency of Balance in Fixed Capital Account does The balance changes frequently from
Change not change except under specific period
circumstances. to period.
3. Adjustment for All adjustments for drawings, interest All adjustments for drawings, interest on
Drawings, etc. on drawings, interest on capital, salary, drawings, interest on capital, salary, share
share of profit/loss are made in Current of profits and losses are made in Capital
Account. Account.
4. Balance It always shows credit balance in Fluctuating Capital Account can also show
Capital Account. debit balance.
Difference between Capital Account and Current Account
Basis Capital Account Current Account

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

Question 14: (When Capitals are Fixed and Fluctuating). A and B are partners with capitals of Rs. 60,000 and
Rs. 20,000 respectively on 1st April, 2020. Net profit (before taking into account the provisions of the Deed) for
the year ended 31st March, 2021 was 24,000. The Partnership Deed provides for the following:
(a) B is entitled to a salary of Rs. 6,000 p.a.
(b) Interest on capitals is to be allowed @ 6% p.a.
(c) Interest on drawings is to be charged @ 5% p.a.
The drawings of the partners A and B were Rs. 6,000 and Rs. 4,000 respectively and interest on
drawings for A being Rs. 200 and for B Rs. 100.
Pass Journal entries for the above and show how profit will be divided between A and B and also show Capital
Accounts of the partners along with their Drawings Accounts: (i) if they are fixed, and (ii) if they are fluctuating.
Solution Profit And Loss Appropriation Account

To Interest on Capital A/cs: By profit and Loss A/c (Net Profit) 24,000
A (6% on Rs. 60,000) 3,600 By Interest on Drawings
B ( 6% on Rs. 20,000) 1,200 4,800 A 200
To B’s Salary A/c B 100
To Profit transferred to: 6,000 300
(Equal share of Profit)
A’s Capital/Current A/c 6,750
B’s Capital/Current A/c 6,750 13,500
24,300 24,300
Question 15 (Commission to Partners and Distribution of Profit). Mata and Rani are partners in a firm. Mata
is to get a commission of 10% of net profit before charging any commission. Rani is to get a commission of 10%
on net profit after charging all commissions. Net profit for the year ended 31st March, 2021, before charging
any commission was Rs. 110,000. Find the commission of Mata and Rani. Also, show the distribution of profit.
Question 16. A, B, and C are partners in a firm. According to the Partnership Deed, the partners are entitled to
st
draw Rs.7,000 per month. On the 1 day of every month A, B and C drew Rs.7,000; Rs.6,000 and Rs. 5,000
respectively. Interest on capitals and interest on drawings are fixed @ 8% and 10% respectively. Profit for the
year ended 31st March, 2019 was 7,55,000 out of which 2,00,000 are to be transferred to General Reserve. B
and C are entitled to receive salary of Rs. 30,000 and Rs.45,000 p.a. respectively and A is entitled to receive
commission @ 10% on net distributable profits after charging such commission. On 1st April, 2018, the
balances of their Capital Accounts were Rs.5,00,000; Rs.4,00,000 and Rs. 50,000 respectively.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2019 and Capital Accounts of
Partners in the books of the firm.
COMPUTATION OF INTEREST ON DRAWINGS:-- Drawings mean the amount withdrawn, in cash or in

kind, by partners for their personal use. Drawings may be out of capital or against profits. Drawings out of
capital means withdrawal of part of capital while drawings against profit mean withdrawal of amount against
profit earned during the year by the firm. Drawings out of capital is also known as permanent drawings and
drawings against profits is also called Regular drawings.
Difference between Drawings Against Profit and Drawings Against Capital

Basis Drawing Against Profit Drawing Against Capital
1. Where Debited It is debited to Drawings Account. It is debited to Capital Account.
2. Part It is a part of expected profit. It is a part of capital.
3. Effect It does not reduce capital. It reduces capital.
4. Interest It is considered to calculate It is considered to calculate interest
interest on drawings. on capital.

Question 17. In a Partnership, partners are charged interest on drawings @ 15% p.a. During the year ended
on 31st March, 2019, a partner drew as follows:
Date 1st May, 2018 1st August 2018 30th September, 2018 31st January, 2019 31.3.2019
Amount (Rs.)
2,000 5,000 2,000 6,000 2,000
What is the interest chargeable from the partner?
Question 18 (When drawings are made for a period of 6 months only). A, B and C are partners sharing profits equally.
A drew regularly Rs.6,000 in the beginning of every month for the six months ended 30th September, 2018. B drew
regularly Rs.6,000 at the end of every month for the six months ended 30th September, 2018. C drew regularly 6,000
in the middle of every month for the six months ended 30th September, 2018. Calculate interest on drawings @ 5%
p.a. when the books are closed on 31st March every year.
Question 19 (Interest on Drawings). A partner draws Rs. 1,000 per month. Under the Partnership Deed, interest on
drawings is to be charged @ 15% p.a. Calculate interest that should be charged to the partner if drawings are made:
(i) in the beginning of the month,

(ii) in the middle of the month, or
(iii) at the end of the month.
Question 20 (When there is regular Drawings at Quarterly Intervals). Calculate interest on drawings of Mr. Sid
@ 10% p.a. for the year ended 31st March, 2021 in each of the following alternative cases:
Case 1. If he withdrew Rs. 6,000 in the beginning of each quarter.
Case 2. If he withdrew Rs. 6,000 at the end of each quarter.
Case 3. If he withdrew Rs. 9,000 in the middle of each quarter.
Question 21. A, B and C started a firm on 1st October, 2018 sharing profits equally. A drew regularly Rs. 4,000
in the beginning of every month for the six months ended 31st March, 2019. B drew regularly Rs. 4,000 at the
end of every month for the six months ended 31st March, 2019. C drew regularly Rs. 4,000 in the middle of
every month for the six months ended 31st March, 2019.
Calculate interest on drawings @ 5% p.a. for the period ending 31st March, 2019.
Solution : Total Drawing of each partner = Rs. 4,000 X 6 = Rs. 24,000.

Case 1 Case 2 Case 3
( ) ( ) ( )
=Rs. 24,000 X =Rs. 24,000 X = Rs. 24,000 X
IMPORTANT NOTE. If the date of withdrawal is not given, then interest on total drawings for the year is
calculated for six months on the average basis.
Question 22. Calculate interest on drawings of Rahu @ 10% p.a. for the year ended 31st March, 2020 in each of
the following alternative cases:
Case: 1. If his drawings during the year were 30,000.
Case 2. If he withdraws 2,500 per month during the year.
Answer: Case 1. Assuming that drawings were made evenly throughout the year, interest on drawings has
been calculated for an average period of 6 months.
Interest on Drawings = 30,000 x 10/100 x 6/12 = 1,500.

Case 2. Total Drawings = 2,500 x 12 = 30,000

Interest on Drawings = 30,000 x 10/100 x 6/12 = 1,500.
Important Note:1. If the date of drawings is not given then the Interest on Total Drawings is calculated for
half of the accounting period.
Important note 2. When the rate of interest is given without the word 'per annum' (p.a.), interest is charged
for whole year without considering the time factor.
Question 23. Calculate interest on A's drawings @ 10% if he withdrew Rs.2,50,000 during the year.
Solution Interest on drawings = Rs. 2,50,000 x 10/100 = Rs. 25,000.
Question 24. X and Y are partners sharing profits and losses in the ratio of 2 : 3 with capitals of 2,00,000 and
1,00,000 respectively. Pass the necessary Journal entry or entries for distribution of profit/loss for the year ended
31st March, 2021 in each of the alternative cases:
Case 1. If Partnership Deed is silent as to the interest on capital and the profit for the year is Rs.20,000.
Case 2. If Partnership Deed provides for interest on capital @ 6% p.a. and loss for the year is Rs.15,000.
Case 3. If Partnership Deed provides for interest on capital @ 6% p.a. and the profit for the year is Rs. 21,000.
Case 4. If Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit and the profit for
the year is Rs.20,000.
Case 5. If Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit and the profit for
the year is Rs. 2,000.
Case 6. If. Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit and
the profit for the year is Rs.18,000.
Question 25: A and B contribute Rs. 4,00,000 and Rs. 2,00,000 respectively as capital on which they agree to
pay interest @ 6% p.a. Their respective share of profit is 2 : 3 and the profit (before interest) for the year is
30,000. Show the relevant account to allocate interest on capitals:
if the Partnership Deed is silent about the treatment of interest on capital, and
If interest is a charge as per the Partnership Deed.
Question 26: (Calculation of Opening Capital). A and B are partners in a business and their capitals at the end
of the year were Rs. 7,00,000 and Rs. 6,00,000 respectively. Calculate their opening capital considering the
following information:
(a) Drawings of A and B for the year were Rs. 75,000 and Rs. 50,000 respectively.
(b) B introduced capital of 1,00,000 during the year.
(c) Interest on capital credited to the Capital Accounts of A and B were Rs. 15,000 and Rs. 10,000
respectively.
(d) Interest on drawings debited to the Capital Accounts of A and B were Rs.7,500 and Rs. 5,000 respectively.
(e) Share of profit credited to Capital Accounts was 1,00,000 each.
Solution: CALCULATION OF OPENING CAPITAL
Particulars A(Rs.) B(Rs.)
Capitals at the end 7,00,000 6,00,000
Add: Drawings during the year 75,000 50,000
Interest on Drawings 7,500 5,000
7,82,500 6,55,000
Less: Capital Introduced during the year …… 1,00,000
Interest on Capital 15,000 10,000
Share of Profit for the year 1,00,000 1,00,000
(1,15,000) (2,10,000)
Capitals in the beginning
6,67,500 4,45,000

Alternatively, Capital Account of each partner may be prepared may to determine Opening Capitals as follows:
Dr. Partners’ Capital Accounts Cr.

Particulars A (Rs.) B(Rs.) Particulars A (Rs.) B (Rs.)
To Drawings A/c 75,000 50,000 By Balance b/d 6,67,500 4,45,000
To Interest on Drawings 7,500 5,000 (Balancing Figure)
To Balance c/d (Given) 7,00,000 6,00,000 By Cash/Bank A/c …. 1,00,000
(Add. Capital Introduced)
By Interest on Capital A/c 15,000 10,000
By Profit and Loss Approp. 1,00,000 1,00,000
A/c (Share of Profit)
7,82,500 6,55,000 7,82,500 6,55,000
Question 27: A and B are partners in a business and their capitals at the end of the year were Rs. 7,00,000 and Rs.
6,00,000 respectively. Calculate their opening capitals considering the following information:
(a) Drawings of A and B for the year were Rs. 75,000 and Rs. 50,000 respectively.
(b) B introduced capital of Rs. 1,00,000 during the year.
(c) Interest on capital credited to the Capital Accounts of A and B were Rs. 15,000 and Rs. 10,000 respectively.
(d) Interest on drawings debited to the Capital Accounts of A and B were Rs. 7,500 and Rs. 5,000 respectively.
(e) Share of loss debited to Capital Accounts was Rs.20,000 each.
Solution CALCULATION OF OPENING CAPITAL
Particulars A (Rs.) B (Rs.)
Capitals at the end 7,00,000 6,00,000
Add: Drawings during the year 75,000 50,000
Interest on Drawings 7,500 5,000
Share of Loss for the year 20,000 20,000
8,02,500 6,75,000
Less: Capital Introduced during the year …. 1,00,000
interest on Capital 15,000 10,000
15,000 1,10,000
Capitals in the beginning
7,87,500 5,65,000
Question 28: (Calculation of Interest on Capital). A and B started business on 1st April, 2020 with capitals of Rs. 6,00,000
and Rs. 4,00,000 respectively. During the year, A introduced Rs. 1,00,000 to the firm as additional capital on 1st October,
2020. They withdrew Rs.50,000 per month for household expenses against profits. Interest on capital is to be allowed @
10% per annum. Calculate interest payable to A and B for the year ended 31st March, 2021.
Question 29. Ramesh and Naresh are partners in a firm. Their capitals as on 1st April, 2018 were Rs. 2,50,000 and Rs.
1,50,000 respectively. They share profits equally. On 1st July, 2018, they decided that their capitals should be
Rs.2,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing capital. Interest on
capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ended 31st March, 2019.
ANSWER: Interest on Ramesh’s Capital and Naresh’ Capital :Rs 17,000 and Rs 15,000.
Question 30. From the following Balance Sheet of KUKU and TUTU, calculate interest on capital @5 % p.a. for the
year ended 31st March, 2019: BALANCE SHEET as at 31st March, 2019:
Liabilities Rs. Assets Rs
KUKU’s Capital A/c 90,000 Sundry Assets 2,10,000
TUTU’s Capital A/c 80,000
Reserve 40,000
2,10,000 2,10,000

During the year ended 31st March, 2019, KUKU's drawings were 10,000 and TUTU's drawings were 30,000. Profit
for the year ended 31st March, 2019 was 60,000. The amount of Reserve, i.e., 40,000 is transferred from Current
Year's profit to strengthen the financial position of the firm.
Answer: opening capital of KUKU and TUTU Rs 90,000 and 1,00,000.
Question 31: X and Y are partners sharing profits in the ratio of 3 : 2. On 31st March, 2018 after closing the books of
account, their capitals are Rs.10,00,000 and Rs.12,50,000 respectively. On 1st May, 2017, X had introduced an
additional capital of Rs.2,50,000 and Y withdrew Rs.1,25,000 from his capital. On 1st October, 2017, X withdrew
5,00,000 from his capital and Y introduced Rs.6,25,000. After closing the accounts, it was discovered that Interest
on Capital @ 6% p.a. has been omitted. During the year ended 31st March, 2018, X's drawings and Y's drawings
were Rs.2,50,000 and Rs.1,25,000. Profits (before interest on Capital) during the year were 5,00,000. Calculate
Interest on Capital if the capitals are (a) fixed and (b) fluctuating.
Answer: when capitals are Fixed: X Y

Opening capital 12,50,000 7,50,000
Interest on capital 73,750 56,875
when capitals are Fluctuating: X Y

Opening capital 12,00,000 6,75,000
Interest on capital 70,750 52,375
Question 32: (Transfer of Profit to General Reserve). X and Y are partners sharing profits and losses in the ratio of 7: 3.
Their Capital Accounts as at 1st April, 2018 stood at X— Rs. 5,00,000; Y—Rs. 4,00,000. The partners are allowed interest
on capital @ 5% p.a. The drawings of the partners during the year ended 31st March, 2019 amounted to Rs. 72,000 and
Rs. 50,000 respectively. The profit for the year before allowing interest on capital and salary to Y @ Rs. 5,000 per month
amounted to Rs. 8,00,000. 10% of the net profit is to be set aside as General Reserve.
Pass the Journal entries for Appropriation. Prepare Profit and Loss Appropriation Account for the year ended 31st March,
2019, and Capital and Current Accounts of the partners.
Question 33: (Transfer of Profit to General Reserve). X and Y are partners sharing profits and losses in the ratio of 7 : 3.
Their Capital Accounts as at 1st April, 2020 stood at X—Rs. 5,00,000; Y— Rs. 4,00,000. The partners are allowed interest
on capital @ 5% p.a. The drawings of the partners during the year ended 31st March, 2021 amounted to Rs.72,000 and
Rs.50,000 respectively. The profit for the year before allowing interest on capital and salary to Y @ 5,000 per month
amounted to 8,00,000. 10% of the divisible profit is to be set aside as General Reserve. Prepare an account showing the
allocation of profits, Partners' Capital and Current Accounts.
Hints: Amount transferred to General Reserve: 10% of 695000 (i.e. 800,000-25,000-20,000-60,000) = 69,500
Question 34 (Value Based and Profit and Loss Appropriation Account). Ram and Mohan are partners in a firm. They
admitted Rakhi as a partner without capital for 1/3rd share in the profit of the firm. She is blind by birth but having good
management qualities. The new partnership agreement provides for the following:
(i) 10% of the trading profit will be donated to Prime Minister's Relief Fund.
(ii) 5% of the trading profit will be donated to the National Blind Relief Fund.
(iii) Products will be sold at a discount of 15% on Maximum Retail Price to the people living below poverty line.
(iv) New retail shops will be opened in the Naxal affected areas of the country.
(v) New jobs of sales persons will be reserved for the girls belonging to Scheduled Castes and Scheduled Tribes.
Trading profit of the firm for the year ended 31st March, 2012 was Rs.10,00,000, identify any four values considered by
Ram, Mohan and Rakhi while preparing new Partnership Deed and also prepare 'Profit and Loss Appropriation Account' of
Ram, Mohan and Rakhi for the year ended 31st March, 2012. (Delhi 2013 C)
Solution: Following Values are considered by Ram, Mohan and Rakhi while preparing new Partnership Deed:
(i)Sensitivity towards differently abled people, (ii)Responsibility towards nation. Providing entrepreneurial
opportunities and creating employment in naxal affected areas.(iii)Providing employment opportunities for the
upliftment of girls belonging to Scheduled Castes and Scheduled Tribes.

PROFIT AND LOSS APPROPRIATION ACCOUNT

To Prime Minister’s Relief Fund 1,00,000 By Profit and Loss A/c 10,00,000
To National Blind Relied Fund 50,000 (Trading Profit)
To Net Profit transferred to:
Ram’s Capital A/c 2,83,333
Mohan’s Capital A/c 2,83,333 8,50,000
Rakhi’s Capital A/c 2,83,334
10,00,000 10,00,000
Question 35. On 1st April, 2020, Precious, Noble and Perfect entered into partnership with capitals of Rs. 60,000, Rs.
50,000 and Rs. 30,000 respectively.
st
Perfect advanced Rs. 10,000 as loan to the partnership on 1 October, 2020. The Partnership Deed contained the
following clauses:
(i) Interest on capital @ 6% p.a.
(ii) Interest on drawings @ 6% p.a. Each drew Rs. 4,000 at the end of each quarter commencing from 30.6.2020.
(iii) Working partners Precious and Noble to get a salary of Rs. 200 and Rs.300 per month respectively.
(iv) Interest on loan was given to Perfect @ 6% p.a.
(v) Noble is to get rent of Rs. 2,000 per month for use of his building by the firm. It is paid to him by cheque at the
end of every month.
(vi) Profits and losses are to be shared in the ratio of 4 : 2 : 1 up to 70,000 and above Rs.70,000 equally. Net profit of
the firm for the year ended 31st March, 2021 (before the above adjustments) was Rs. 1,35,000. Prepare Profit
and Loss Appropriation Account and Capital Accounts of Partners assuming capitals be fixed.

To Interest on Capital A/cs: By Profit and Loss A/c (Net Profit) 1,10,700
Precious 3,600 (Rs. 1,35,000 – Rs. 24,000 being rent Rs.300
Noble 3,000 being Interest on Loan)
Perfect 1,800 8,400 By Interest on Drawings A/cs
To Partner’s Salaries A/cs: Precious 360

Precious 2,400 Noble 360
Noble 3,600 6,000 Perfect 360 1080
To share of Balance Profit transferred to
Current A/cs:
First Rs 70,000:
Precious (4/7) 40,000
Noble (2/7) 20,000
Perfect (1/7) 10,000
Next Rs. 27,380 (i.e., Rs.97,380 – Rs.70,000)
Precious (1/3) 9,127
Noble ( 1/3 ) 9,127
Perfect (1/3) 9,126
1,11,780
PAST ADJUSTMENTS
Question 36. P and Q were partners in a firm sharing profits equally. Their fixed capitals were Rs. 1,00,000 and Rs.
50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate of 10% per annum. For
the year ended 31st March, 2016, the profits of the firm were distributed without providing Interest on Capital.
Pass necessary adjustment entry to rectify the error. (Delhi 2017)

Solution: ADJUSTMENT ENTRY

Q’s Current A/c …DR. 2,500
To P’s Current A/c 2,500
(Being the adjustment of omission of Interest on Capital
Question 37. A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Following was the
st
Balance Sheet of the firm as at 31 March, 2019:
Liabilities Rs. Assets Rs.

Capital A/cs: Sundry Assets 80,000
A 60,000
B 20,000
80,000 80,000
Profit 30,000 for the year ended 31st March, 2018 was divided between the partners without allowing interest on
capitals @ 12% p.a. and salary to A @ 1,000 per month. During the year, A withdrew 10,000 and B Rs 20,000.
Solution: JOURNAL
Date Particulars L.F Dr (Rs.) Cr.(Rs).
2018
March 31 B’s Capital A/c …..Dr. 5,280
To A’s Capital A/c 5,280
(Being interest on capitals and salary to A not charged, now adjusted)
Working Notes: Calculation of Opening Capital:

Particulars A (Rs) B (Rs)
Closing Capital 60,000 20,000
Less: Profit already credited (3:2) 18,000 12,000
42,000 8,000
Add: Drawings already debited 10,000 20,000
Capital in the beginning 52,000 28,000
Question 38: (Profits Apportioned without Providing for Interest on Capital and Interest on Drawings). Mannu and
Shristhi are partners in a firm sharing profits in the ratio of 3 : 2. Following is the Balance Sheet of the firm as on
31st March, 2019:
BALANCE SHEET as at 31st March, 2019
Mannu’s Capital 30,000 Drawings
Shrishti’s Capital 10,000 40,000 Mannu 4,000
Shristhi 2,000 6,000
Other Assets 34,000
40,000 40,000
Profit for the year ended 31st March, 2019 was 5,000 which was divided in the agreed ratio, interest @ 5% p.a.
on capital and 6% p.a. on drawings was inadvertently omitted. Adjust interest drawings on an average basis for
6 months. Give the adjustment entry. (NCERT, Modified Years)
Solution: ADUSTING JOURNAL ENTRY
Date Particulars L.F Dr.(Rs) Cr. (Rs)
2018
March 31 Shristhi’s Capital A/c …Dr. 288
To Mannu’s Capital A/c 288
(Being adjustment passed for omission of interest on capital and drawings)
Question 39. On 31st March, 2014, balances in the Capital Accounts of Eleen, Monu a Ahmad after making adjustments for
profits and drawings were Rs. 1,60,000, Rs. 1,20,000 and Rs. 80,000 respectively. Subsequently, it was discovered that the
interest on capital drawings had been omitted.
(i) The profit for the year ended 31st March, 2014 was 40,000.
(ii) During the year, Eleen and Monu each withdrew a total sum of Rs.24,000 in equal installments in the beginning of each
month and Ahmad withdrew a total sum of Rs.48,000 in equal installments at the end of each month.

(iii) The interest on drawings was to be charged @ 5% p.a. and interest on capital was to be allowed @ 10% p.a.
(iv) The profit-sharing ratio among the partners was 2 : 1 : 1.
Showing your working notes clearly, pass the necessary rectifying entry. (Delhi 2015 C)
Solution :
Date Particulars Dr. (Rs.) Cr. (Rs.)
2014 Eleen’s capital A/c …Dr. 3,850
March 31 To Manu’s Capital A/c 2,950
To Ahmad’s Capital A/c 900
Working Notes (i) Calculation of Opening and Interest on Capitals:

Particulars Eleen (Rs.) Monu (Rs.) Ahmad (Rs.)
A. Closing Capitals 1,60,000 1,20,000 80,000
B. Add: Drawings already Debited 24,000 24,000 48,000
C. Less: Profit already Credited 1,84,000 1,44,000 1,28,000

20,000 10,000 10,000
D. Opening Capitals 1,64,000 1,34,000 1,18,000
1,64,000 x 10/100 (1,34,000 X 10/100) 1,18,000 X 10/100
E. Interest on Capital = Rs. 16,400 = Rs. 13,400 = Rs. 11,800
Total Interest on Capital = Rs. 16,400 + Rs. 13,400 + Rs. 11,800 = Rs. 41,600.
(ii) Interest on Drawings (for Eleen and Monu 6.5 Months and for Ahmad 5.5 Months):
Eleen = Rs. 24,000 X
Monu = Rs. 24,000 X
Ahmad= Rs. 48,000 X
Total Interest on Drawings = Rs. 2,400
Question 40: X, Y and Z are partners. They have omitted to provide interest on capital @ 10% p.a. for
three years ended 31st March, 2019. Their fixed capitals on which interest was to be calculated
throughout were: X-Rs.10,000; Y-Rs. 8,000 and Z-Rs. 7,000. Their profit-sharing ratios were: 2017-1:2:2;
2018-5:3:2; 2019- 4 : 5 : 1. The firm earned profit of Rs.2,500 in each year. Pass necessary adjustment
Journal entry.
Solution Adjustment Journal Entry
2019
March 31 Y’s Current A/c …Dr. 600
To X’s Current A/c 250
To Z’s Current A/c 350
(Being the interest on capital omitted to be provided, now adjusted)
Question 41: On 31st March, 2019, Capital Accounts of E, M and A after making adjustments for profits, drawings, etc.,
were as E—Rs. 8,00,000; M—Rs. 6,00,000 and A — Rs. 4,00,000. Subsequently it was found that interest on capital and
interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. Drawings during the
year were: E- Rs. 2,00,000; M—Rs. 1,50,000 and A – Rs. 90,000. Interests on drawings chargeable to the partners were:
E – Rs. 5,000; M—Rs. 3,600 and A —Rs. 2,000. The net profit during the year amounted to Rs. 12,00,000. The profit-
sharing ratio of the partners was 3 : 2 : 1. Pass necessary adjustment entry for rectifying the above errors of omission.
Solution: RECTIFYING ENTRY

31.3.18 E’s Capital A/c …Dr. 5,700
To M’s Capital A/c 100
To A’s Capital A/c 5,600
(adjustment entry recorded due to omission of Interest on Capital and Drawings)

Question 42: (Interest on Capital Provided at a Higher Rate). X, Y and Z are partners in a firm sharing
profits and losses in the ratio of 5: 3 : 2. Their fixed capitals were Rs. 3,00,000; Rs.2,00,000 and Rs.
1,00,000 respectively. For the year ended 31st March, 2021, interest on capital was credited to them @
10% p.a. instead of 8% p.a. Showing your working notes clearly, pass necessary adjustment Journal entry.
Solution: Adjustment Entry

2018
April 1 Y’s Current A/c …Dr. 400
To X’s Current A/c 400
(Being the interest on capital excessive charged, now rectified)
Question 43: (Rectification of Interest on Capital less Allowed). A, B and C are partners in a firm sharing profits and
losses in the ratio of 2 : 2 : 1. Their capitals (fixed) are 1,00,000; 80,000: and 70,000 respectively. For the year 2018-19,
interest on capital was credited to them @ 9% p.a. instead of 12%. Give the adjustment Journal entry. (Foreign 2004)
Solution : Adjustment Journal Entry

2018
April 1 B’s Current A/c …Dr. 600
To C’s Current A/c 600
(Being the interest less charged on capital, now rectified)
Working Note: -- Interest on capital has been credited @ 9% instead of 12%. So, interest @ 3% should be
credited to partners and the total of this should be debited to partners in their profit-sharing ratio
because firm’s profit is reduced up to that extent.
TABLE SHOWING ADJUSTMENT TO BE MADE
Partners Amount that should be Credited (Cr.) Amount that should be debited (Dr.) Net Effect
A (Rs. 1,00,000 X 3/100) = Rs. 3,000 (Rs. 7,500 X 2/5) = Rs. 3,000 …
B (Rs. 80,000 X 3/100) = Rs. 2,400 (Rs. 7,500 X 2/5) = Rs. 3,000 Rs. 600 Dr.
C (Rs. 70,000 X 3/100) = Rs. 2,100 (Rs. 7,500 X 1/5) = Rs. 1,500 Rs. 600 Cr.
Rs. 7,500 Rs. 7,500
Question 44: A, B and C are partners in a firm. Though there is no provision in the Partnership Deed for interest on capital,
this has been provided the accounts @ 5% p.a. for the two years ended 31st March, 2018 and 31st March, 2019. Their
fixed capitals on which interest was calculated throughout were: A- Rs. 50,000; Rs.-240,000 and C – Rs. 30,000. During the
two years, they shared profits as follows:
2017-18 - 5:3:2
2018-19 - 2:2:1
You are required to pass an adjustment entry as at 1St April, 2019.
Solution: ADJUSTMENT ENTRY

Date
2018
April 1 C’s Current A/c …Dr…600
To A’s Current A/c 400
To B’s Current A/c 200
(Being the interest on capital wrongly provided in the accounts for two
years, now adjusted)

Question 45: (Calculation of Interest on Capital when Closing Balances of Capital are given). A, B, C and D are
partners sharing profits and losses in the ratio of 4 : 3 : 3 : 2 and their respective capitals on 31 st March, 2021 were
Rs. 30,000; Rs. 45,000; Rs. 6 0,000 and Rs. 45,000. After closing and finalising the accounts, it was found that interest
on capital @ 6% p.a. was omitted. Instead of altering the signed accounts it was decided to pass a single adjustment
st
entry on 1 April, 2021 crediting or debiting the respective Partners' Capital/Current Accounts.
Solution ADJUSTMENT ENTRY

2021
April 1 A’s Current A/c …Dr. 1,800
To C’s Current A/c 900
To D’s Current A/c 900
(Being the interest on capital omitted in the accounts, now adjusted)
Question 46. P. Q and R are partners in a firm. Their Capital Accounts stood at Rs. 30,000 Rs, 15,000 and Rs.
15,000 respectively on 1st April, 2020. As per the provisions of the Deed: (i) R was to be allowed a
remuneration of Rs. 3,000 per annum (ii) Interest @ 5% p.a. was to be provided on capital and (iii) Profits were
to be divided in the ratio of 2 : 2 :1. Ignoring the above terms, net profit of Rs.18,000 for the year ended 31st
March, 2021 was distributed among the three partners equally. Pass an adjustment entry to rectify the error.
Show the workings clearly.
Solution: Adjustment Entry

2021
April Q’s Current A/c …Dr. 450
1 To P’s Current A/c 300
To R’s Current A/c 150
(Being the adjustment made for omissions in previous year)
Question 47. A, B and C were partners. Their capitals were A- 30,000; B –Rs. 20,000 and C Rs. 10,000 respectively.
According to the Partnership Deed, they were entitled to an interest on capital at 5% p.a. In addition, B was also
entitled to draw a salary of Rs. 500 per month. C was entitled to a commission of 5% on the profits after charging the
interest on capital, but before charging the salary payable to B. Net profit for the year was Rs. 30,000 distributed in
the ratio of capitals without providing for any of the above adjustments. The profits were to be shared in the ratio of 5:2:3.
Pass necessary adjustment entry showing the workings clearly. (Delhi 2010)
Solution:
A’s Current A/c …Dr. 3,675
To B’s Current A/c 930
To C’s Current A/c 2,745
Working Notes:
1. It is presumed that capitals of the partners are fixed.

2. Net Profit 30,000
Less: Internet on Capital (Rs. 1,500 + Rs. 1,000 + Rs. 500) 3,000
Profit after Charging Interest on Capital 27,000
C’s Commission = 5/100 X Rs. 27,000 = Rs. 1,350.

Question 48: The capitals of X,Y and Z as on 31st March, 2019 amounted to Rs. 1,50,000, Rs. 5,50,000 and
Rs. 11,00,000 respectively. The profits amounting to Rs. 3,00,000 for the year 2018-19 were
distributed in the ratio of 4 : 1 : 1 after allowing interest on capital @ 10% p.a. During the year, each partner
withdrew Rs. 50,000 per month in the beginning of each month. The Partnership Deed was silent as to profit
sharing ratio and interest on drawings but provided for interest on capital @ 12% p.a. Showing your working
clearly, pass the necessary adjustment entry to rectify the above error.
Question 49: P, Q and R are partners in a firm. Their Capital Accounts stood at Rs. 3,00,000; Rs. 1,50,000 and Rs.
1,50,000 respectively on 1st April, 2018. As per the provisions of the Deed: (i) R was to be allowed remuneration
of 36,000 per annum, (ii) Interest @ 5% p.a. was to be provided on capital and (iii) Profits were to be distributed
in the ratio of 2 : 2 : 1. Ignoring the above terms, net profit of Rs.1,80,000 for the year ended 31st March, 2019
was distributed among the three partners equally. Pass the Journal entries to rectify the above errors.
Solution
2018
April 1st P’s Capital A/c …Dr. 60,000
Q’s Capital A/c ….Dr. 60,000
R’s Capital A/c .Dr. 60,000
To Profit and Loss Adjustment A/c 1,80,000
(Being the share of profit wrongly credited to partners, now reserved)
Profit and Loss Adjustment A/c ….Dr. 36,000

To R’s Capital A/c 36,000
(Being the remuneration credited to R’s Capital Account)
P’s Capital A/c …Dr. 30,000
To P’s Capital A/c
15,000
To Q’s Capital A/c
7,500
(Being the interest on capitals @ 5% p.a. credited to capital Accounts
of respective partners)
1,14,000
Profit and Loss Adjustment A/c …Dr. 45,600
To Q’s Capital A/c 45,600
(Being the divisible profit credited to Partners’ Capital Accounts in
the Ratio of 2:2:1)
Question 50: A and B are partners sharing profits and losses in the ratio of 3 : 2. At the end of the year, i.e., on
st
31 March, 2019, (after division of the year's profit), they decided to take C into partnership with effect from
1st April, 2016. As C was getting annual salary of Rs. 45,000, he had also advanced Rs. 3,00,000 to the firm by
way of a loan which he is getting interest @ 10% p.a. During the three financial years, firm's profits after adjusting
salary to C, interest on loan and interest on the capital of the partners were:

Year Ended
31st March, 2017 Profit Rs.4,00,000
31st March, 2018 Loss Rs. 2,00,000
31st March, 2019 Profit Rs. 6,00,000
According to the new agreement, C is to be given annual salary of Rs. 35,000 and 1/5th share in the profits of
the firm. C's loan shall be treated as his capital from the beginning and similar to other partners, his capital will
carry interest @ 6% p.a. Record necessary entries to give effect to the above arrangement.
Solution
2018 April C’s Loan A/c …Dr. 3,00,000
1 To C’s Capital A/c 3,00,000
(Being C’s loan converted into his capital)
2018
April 1 A’s Capital A/c (Rs. 64,800 X 3/5) …Dr. 38,880
B’s Capital A/c (Rs. 64,800 X 2/5) …Dr. 25,920
To C’s Capital A/c 64,800
(Being the excess credit given to C borne by A and B in the ratio of 3:2)
GUARANTEE OF PROFIT TO A PARTNER:-A partner may be admitted in the firm on a guarantee in respect of
his minimum profit from the business. Such a guarantee may be given even to an existing partner. Such a
guarantee to the incoming partner is given either by:
(a) all the old partners in an agreed ratio, or

(b) some of the old partners.
When all the partners guarantee that one of the partners shall be given a minimum amount of profit, we have to
calculate the following two amounts separately:
1. Share of profit as per profit-sharing ratio, and

2. Minimum guaranteed profit.
The higher of the above two is to be given to that partner. The balance of profit (total profit minus profit given to
the guaranteed partner) is shared by the remaining partners in the profit-sharing ratio.
Question 51. A, B and C are partners in a firm sharing profits and losses in the ratio of 4 : 2 :1. It is provided that C's
share in profit would not be less than Rs 37,500. The profit for the year ended 31st March, 2021 amounted to Rs. 1,57,500.
Pass Journal entries in the books of firm and prepare Profit and Loss Appropriation Account.
Question 52. P and Q were partners in a firm sharing profits in the ratio of 5 : 3. On 1st April, 2014 they admitted R as
a new partner for 1/8th share in the profits with a guaranteed profit of Rs. 75,000. The new profit-sharing ratio
between P and Q will remain the same but they agreed to bear any deficiency on account of guarantee to R in the
ratio 3 : 2. The profit of the firm for the year ended 31st March, 2015 was Rs.4,00,000. Prepare Profit and Loss
Appropriation Account of P, Q and R for the year ended 31st March, 2015. (Delhi 2016)
Solution PROFIT AND LOSS APPROPRIATION ACCOUNT
Particualars Rs. Particualrs Rs.
To Net Profit transferred to: By Profit and Loss A/c (Net Profit) 4,00,000
P’s Capital A/c 2,18,750
Less: Deficiency in R’s Share 15,000 2,03,750
Q’s Capital A/c 1,31,250
Less: Deficiency in R’s Share 10,000 1,21,250
R’s Capital A/c 50,000
Add: Deficiency in Profit Share 25,000 75,000
4,00,000 4,00,000

Working Notes(i) New Ratio of P, Q and R = 35 : 21 : 8. (ii) R's Share of Profit = 1/8 of 4,00,000 = Rs. 50,000;
whereas,R's guaranteed profit =75,000. Deficiency in R's share (Rs. 25,000) is to be borne by P and Q in the
ratio of 3 : 2. Thus, P and Q will meet the deficiency of Rs.15,000 and 10,000 respectively.
QUESTION 53. P. Q and R are partners sharing profits in the ratio of 5 : 4 : 1 respectively. R is guaranteed that his
share of profit in any year will not be less than Rs. 50,000. The profit for the year ending 31st March, 2021 is Rs.
3,50,000. Amount of shortfall in the profits of R will be borne by P and Q in the ratio of 3 : 2 respectively. Pass
necessary Journal entry regarding deficiency borne by P and Q.
Solution: In the Books of the firm
2021
March 31 P’s Capital A/c …Dr. 9,000
Q’s Capital A/c …Dr. 6,000
(Being the shortfall in the share of profit of R, borne by
P and Q in the ratio of 3:2)
QUESTION 54:(Guarantee of Profits by one Partner). X, Y and Z are partners in a firm. Their profit-sharing ratio is 5 : 3 :
2. Z is guaranteed a minimum profit of Rs. 10,000 every year. Any deficiency arising is to be met by Y. The profits for the
two years ended 31st March, 2018 and 2019 were Rs. 40,000 and Rs. 60,000 respectively. Prepare Profit and Loss
Appropriation Account for the two years.
Solution: Profit and Loss Appropriation Account

To Profit transferred to: By Profit and Loss A/c 40,000
X’s Capital A/c (5/10) 20,000 (Net Profit)
Y’s Capital A/c (3/10) 12,000
Less: Deficiency in Z’s Share 2,000 10,000
Z’s Capital A/c (2/10) 8,000
Add: Deficiency Recovered from Y 2,000 10,000
40,000 40,000
PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2019 Cr.
To Profit transferred to: By Profit and Loss A/c 60,000
X’s Capital A/c (5/10) 30,000 (Net Profit)
Y’s Capital A/c (3/10) 18,000
Z’s Capital A/c (2/10) 12,000
60,000 60,000
Note: Z’s share in profits is more that the minimum guaranteed amount, so there is no need for any adjustment.
QUESTION 55. Anwar, Bishwas and Divya are partners in a firm. Their Capital Accounts stood at Rs.
8,00,000; Rs. 6,00,000 and Rs. 4,00,000 respectively on 1st April, 2013. They shared-profits and losses in
the ratio of 3 : 2 : 1 respectively. Partners are entitled to interest on capital @ 6% per annum and salary to
Bishwas and Divya Rs. 4,000 per month and 6,000 per quarter respectively as per the provisions of
Partnership Deed.
Bishwas's share of profit including interest on capital but excluding salary is guaranteed at a minimum of
Rs. 82,000 p.a. Any deficiency arising on that account shall be met by Divya. Profit for the year ended
31st March, 2014 amounted to Rs. 3,12,000. Prepare Profit and Loss Appropriation Account for the year
ended 31st March, 2014. (Delhi 2013)
Question 56 (Guarantee of Profit when partnership starts during the year). X, Y and Z entered into
partnership on 1st July, 2018 to share Profit and Losses in the ratio of 3 : 2 :1. X personally guaranteed
that Z's share of profit after charging interest on capital @ 6% per annum would not be less than 36,000

p.a. The capital contributed by X- Rs. 2,00,000; Y Rs. 1,00,000 and Z - Rs.1,00,000. Profit for the year
ended on 31st March, 2019 was Rs.1,38,000. Prepare Profit and Loss Appropriation Account.
Solution : PROFIT AND LOSS APPROPRIATION ACCOUNT
To Interest on Capital: By Profit and Loss A/c 1,38,000
X 9,000 (Net Profit)
Y 4,500
Z 4,500
To Profit transferred to : 18,000
X 53,000
Y 40,000
Z 27,000 1,20,000
1,38,000 1,38,000
QUESTION 57: (Guarantee of Profit to a Partner in Case of Loss). A, B and C are partners having
capitals, of Rs.10,00,000; Rs.8,00,000 and Rs. 6,00,000 respectively in a firm and sharing profits and
losses equally. C is guaranteed a minimum profit of Rs. 1,00,000 as share of profit every year. The firm
incurred a loss of Rs. 3,00,000 for the year ended 31st March, 2021. You are required to show the
necessary accounts for division of loss and giving effect to minimum guaranteed profit to C.
Solution PROFIT AND LOSS APPROPRIATION ACCOUNT

To Profit and Loss A/c (Net Loss) 3,00,000 By Loss transferred to :
A’s Capital A/c 1,00,000
B’s Capital A/c 1,00,000
C’s Capital A/c 1,00,000
3,00,000 3,00,000
PARTNER’S CAPITAL ACCOUNTS
Particulars A (Rs.) B (Rs.) C (Rs.) Particulars A (Rs.) B (Rs.) C (Rs.)
To Profit and Loss By Balance b/d 10,00,000 8,00,000 6,00,000
Appropriation A/c 1,00,000 1,00,000 1,00,000 By A’s Capital A/c …. … 1,00,000
To C’s Capital A/c 1,00,000 1,00,000 … By B’s Capital A/c …. … 1,00,000
(Guaranteed Profit)
To Balance C/d 8,00,000 6,00,000 7,00,000
10,00,000 8,00,000 8,00,000

10,00,000 8,00,000 8,00,000
Note: C is guaranteed a profit of Rs. 1,00,000 p.a. Loss incurred by the firm is Rs.3,00,000. Out of which
Rs.1,00,000 is debited to C's Capital Account. Therefore, C's Capital Account is to be credited by the amount
of deficiency Rs. 2,00,000 (Rs. 1,00,000 share of loss debited plus Rs.1,00,000 guaranteed profit) which is
shared equally by A and B
Question 58: A, B and C are partners in a firm sharing profits and losses in the ratio of 12 : 8 : 5. Partner C is
guaranteed a minimum profit of Rs. 50,000 p.a. by the firm. The profits and losses for the years ended 31st
March were: 2016—Profit Rs.2,00,000; 2017—Profit Rs. 3,00,000, and 2018—Loss 2,00,000 .Pass necessary
Journal entries.
Solution:
Particulars 2015-16 (Rs.) 2016-17 (Rs.) 2017-18 (Rs.)
(i) Guaranteed Profit to C 50,000 50,000 50,000
(ii) C’s Actual Share of
Profit as per profit
ratio 12:8:5 40,000 60,000 (40,000) Loss
(Rs. 2,00,000 x 5/25) (3,00,000 X 5/25) (2,00,000 x 5/25)
(iii) Deficiency [(i)- (ii)] 10,000 …. 90,000

QUESTION 59: (Minimum earning Guaranteed by a Partner to the Firm and Minimum Profit
Guaranteed by the Firm to a Partner). Three Chartered Accountants X, Y and Z form a partnership,
sharing profits and losses in the ratio of 3 : 2 : 1 subject to the following conditions:
(i) Z's share of profits is guaranteed to be not less than Rs. 30,000 p.a.
(ii) Y gives a guarantee to the effect that the gross fee earned by him for the firm shall not be less
than the average gross fee earned by him during the preceding five years when he was carrying
on the profession alone (the average of which works out at Rs. 50,000).
Profit for the first year (year ended 31st March, 2021) of the partnership is Rs. 1,50,000. The gross fee earned by
Y for the firm is Rs. 32,000. Prepare Profit and Loss Appropriation Account after giving effect to the above.
st
QUESTION 60. Suresh, Sahil and Sumit are partners sharing profits in the ratio of 5 : 3 : 2. During the year ended 31
March, 2021, the firm earned profit of Rs.3,50,000. Prepare Profit and Loss Appropriation Account giving effect to the
following:
(i) Each of the partner is to get remuneration of Rs. 60,000 p.a.
st
(ii) Interest on Capital is to be allowed @ 10% p.a. Capitals of Suresh, Sahil and Sumit as on, 1 April,
2020 were—Rs. 5,00,000; Rs.5,00,000 and Rs. 7,50,000 respectively.
(iii) Interest on Drawings charged was: Suresh Rs. 10,000; Sahil Rs.20,000; and Sumit Rs. 25,000.
(iv) Sumit is guaranteed minimum profit of Rs.1,50,000 after above appropriations.
QUESTION 61: (Manager admitted as a partner and Guarantee of Profit given by one Partner). X and Y are
partners in a firm sharing profits in the ratio of 4 : 1. They decide to admit Z, their manager, as a partner with effect from
1st April, 2018 for 1/8th share in profits. Z, as a manager, was getting salary of Rs.8,000 per month and commission of
5% of the net profits after charging such salary and commission.
As per the terms of the Partnership Deed, any excess amount which Z shall be entitled to receive as a partner
over the amount which have been due to him as a manager, would be borne by X out of his share of profit.
Profit for the year ended 31st March, 2019, amounted to Rs. 13,56,000 before salary and commission.
Prepare the Profit and Loss Appropriation Account for the period ending 31st March, 2019.

Particualrs Rs. Particualrs Rs.
To Profit transferred to : By Profit and Loss A/c 13,56,000
X’s Capital A/c 9,46,500 (Net Profit)
Y’s Capital A/c 2,40,000
Z’s Capital A/c 1,69,500 13,56,000
13,56,000 13,56,000
THEORY BASED QUESTIONS

1. Define Partnership.
2. State any two essential features or characteristics of partnership besides minimum number of
partners and profit sharing.
3. Does partnership firm has a separate legal entity? Give reason in support of your answer.
(Delhi 2017)
4. What is the maximum number of partners that a partnership firm can have? Name the Act that
provides for the maximum number of partners in a partnership firm.
(Delhi and Foreign 2016)
5. A group of 40 people want to form a partnership firm. They want your advice regarding the maximum
number of persons that can be there in a partnership firm and name of the Act under whose
provision it is given. (AI 2016.)
6. Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not
exist?
7. State any two rights of a partner besides profits of business, participating in business and right to be
consulted about affairs of the business.
8. What is a Partnership Deed? (Foreign 2004, Delhi 2010)
9. Why is it considered better to make a partnership agreement in writing? (NCERT)
10. X and Y are partners. Y wants to admit his son K into business. Can K become the partner of the firm?
Give reason. (Delhi 2014 C)

11. Neha, a partner, owns a building in which the firm carries its business. The firm pays her Rs.10,000 as
rent of the building. To which account rent will be debited?
12. What is meant by 'Fixed Capital' of a Partner? (Delhi 2016 C)
13. What is meant by 'Fluctuating Capital' of a Partner? (Al 2016 C)
14. Distinguish between 'Fixed Capital Account' and 'Fluctuating Capital Account' on the basis of credit
balance. (Al 2017)
15. Give four items that may appear on the credit side of the Partner's Current Account.
[Hints: (i) interest on capital, (ii) salary, (iii) commission, (iv) share of profit.]
16. Give three items that may appear on the debit side of the Partner's Current Account.
[Hints: (i) interest on drawings, (ii) drawings, (iii) share of loss.]
17. Give two circumstances in which the Fixed Capitals of partners may change.
(Al, Delhi and Foreign 2009)
18. List the item that may appear on the debit side of a Partner's Fixed Capital Account.
19. What share of profit would a sleeping partner who has contributed 75% of the total capital get in the
absence of a deed? (Delhi 2011 c)
20. State the provisions of Indian Partnership Act regarding the payment of remuneration to a partner the
services rendered. (Delhi 2012, Al 2012)
21. Can a partner be exempted from sharing losses in a firm? if yes, under what circumstances? (Delhi
2009)
[Hint: Yes, if partners have agreed that one or more of them shall not be liable for losses.]
22. Somesh and Ramesh are partners in a firm with capitals of Rs. 3,00,000 and Rs. 4,00,000 respectively.
They do not have a Partnership Deed. Ramesh wants to share the profits in the ratio of capitals. State
with reasons whether the claim is valid. (Delhi 2008)
23. State the provisions of Indian Partnership Act,1932 regarding interest on partner's capital and interest
on partner's loan when there is no Partnership Deed. (AI 2010C)
24. Explain briefly the meaning of guarantee of minimum profit.
25. State one difference between Fixed Capital Account and Fluctuating Capital Account of partners.
(Al 2008 C, 2014)
26. What is meant by 'unlimited liability of a partner'? (Delhi 2010)
[Hint: Unlimited liability means that the liability of a partner is joint and several. The personal assets
of the partner can be utilised for paying a firm's debts.]
PRACTICAL PRACTICE QUESTIONS

27. Sajal and Kajal are partners sharing profits and losses in the ratio of 2 : 1. On 1st April, 2020 their
Capitals were: Sajal Rs.50,000 and Kajal Rs. 40,000.
Prepare Profit and Loss Appropriation Account and the Partners' Capital Accounts at the end of the years
after considering the following items:
(a) Interest on Capital is to be allowed @ 5% p.a.
(b) Interest on the loan advanced by Kajal for the whole year,the amount of loan being Rs.30,000.
(c) Interest on partners' drawings @ 6% p.a. Drawings: Sajal Rs. 10,000 and Kajal Rs. 8,000.
(d) 10% of the divisible profit is to be transferred to Reserve.
st
The net profit for the year ended 31 March, 2021 Rs. 68,460.
Note: Net profit means net profit after debit of interest on loan by the partner.
[Ans.: Closing Balances of Capital A/cs: Sajal—Rs. 80,900; Kajal-Rs. 53,110; Share of Profit: Sajal—
Rs.38,700; Kajal- Rs.19,350; Reserve Rs. 6,450]
28. A and B are partners sharing profits and losses in the ratio of 3 : 1. On 1 st April, 2020, their capitals
st
were: A Rs. 50,000 and B Rs. 30,000. During the year ended 31 March, 2021 they earned a net profit
of Rs. 50,000. The terms of partnership are:
(a) Interest on capital is to be allowed @ 6% p.a.
(b) A will get a commission @ 2% on turnover.
(c) B will get a salary of Rs 500 per month.
(d) B will get commission of 5% on profits after deduction of all expenses including such commission.

Partners' drawings for the year were: A Rs. 8,000 and B Rs. 6,000. Turnover for the year was Rs. 3,00,000.
After considering the above facts, you are required to prepare Profit and Loss Appropriation Account and
Partners' Capital Accounts.
[Ans.: Commission of B-Rs. 1,581; Share of Profit: A-23,714; B-7,905; Capital A/cs: A- 74,714; B-Rs.41,286.]
29. A, B and C were partners in a firm having capitals of Rs. 50,000; Rs. 50,000 and Rs. 1,00,000
respectively. Their Current Account balances were A Rs: 10,000; B Rs. 5,000 and C Rs. 2,000 (Dr.).
According to the Partnership Deed the partners were entitled to an interest on Capital @ 10% p.a. C
being the working partner was also entitled to a salary of Rs. 12,000 p.a. The profits were to be
divided as:
(a) The first Rs. 20,000 in proportion to their capitals.
(b) Next l 30,000 in the ratio of 5 : 3 : 2.
(c) Remaining profits to be shared equally.
The firm earned net profit of Rs. 1,72,000 before charging any of the above items.
Prepare Profit and Loss Appropriation Account and pass Journal entry for the appropriation of profits.
(Foreign 2009)
[Ans.: Divisible Profit-Rs. 1,40,000; A's share- Rs.50,000; B's share-Rs.44,000; C’s share Rs.46,000.+
30. A and B are partners sharing profits in the ratio of 3 : 2 with capitals of Rs. 50,000 and Rs. 30,000
respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of Rs 2,500.
During the year profit prior to interest on capital but after charging B's salary amounted to Rs. 12,500.
A provision of 5% of the profits is to be made in respect of Manager's Commission.
Prepare an account showing the allocation of profits and the Partners' Capital Accounts.
[Ans.: Share of Profit: A-Rs. 4,170 and B-Rs. 2,780; Balances of Capital A/cs: A- Rs.57,170 and B-37,080.]
[Hint: Manager's Commission is a charge against the profit. Hence, it should be provided before
appropriation (such as partner's salary, interest on capital).

Chapter 3: Goodwill : Nature and Valuation

Meaning of Goodwill:--Goodwill is an intangible asset and an important aspect for an enterprise. It is something
which places an enterprise at an advantageous position due to which the enterprise is able to earn higher profits
without putting in extra efforts. It is so because the efforts have already been made in the past which have now
put the enterprise in an advantageous position. For example, if the enterprise has rendered good service to its
customers, the customers will be satisfied from the quality of service, which in all likelihood will bring them
back to the enterprise. In turn, the enterprise will achieve higher sales and, thus, higher profits.
"Goodwill is nothing more than the probability that the old customers will resort to the old place."-Lord Eldon
Characteristics/Nature/features of Goodwill:-- On the basis of above definitions, the characteristics of

goodwill that emerge are:
1. It is an intangible asset, i.e., an asset which cannot be seen or touched.

2. It cannot have an existence separate from that of an enterprise.
3. Its value depends on the subjective judgment of the valuer.
4. It helps to earn higher profits.
5. It is an attractive force which brings in customers to old place of business.
6. It comes into existence due to various factors such as locational advantages, favourable
contracts, brands, location and market reputation.
Need for Valuing Goodwill :-- The need for valuation of goodwill arises in the following circumstances:
1. When there is a change in the profit-sharing ratio.

2. When a new partner is admitted.
3. When a partner retires or dies.
4. When partnership firm is sold as a going concern.
5. When two firms amalgamate.
Factors Affecting the Value of Goodwill:- The goodwill of a firm is affected by all the factors which increase
the earning capacity of the firm. These factors are:
1. Efficient Management: If the management is capable and competent, the firm will earn
high profits which will increase the value of goodwill.
2. Location: If the business is located at a favourable place, resulting in increased customer walk-in and,
therefore increased sales.
3. Favourable Contracts: Sometimes, a firm enters into long-term contracts for sale and
purchase of goods at favourable prices. This will also affect profits and goodwill of the firm.
4. Advantage of Patents: Normally, patents are necessary for the manufacture or production
of certain types of articles. A firm which possesses the necessary patents will have a good value for its goodwill.
5. Access to Supplies: When supplies of materials are difficult to get, there will be a high value for goodwill
for a firm which has good arrangements for getting supplies.
6. Quality: If a firm enjoys good reputation for the quality of its products, there will be a ready sale and the
value of its goodwill, therefore, will be high.
7. Market Situation: If a firm is in a business wherein demand for the products dealt in is higher than the
supply, it will lead to lower capital requirement and higher profit. It will thus, increase the value of goodwill.
8. Nature of Business: If the business of a firm is of the nature where the products dealt in are in high
demand although not short in supply, the profit will be higher. It will, thus, increase the value of goodwill.
9. Other Factors: (a) After sale service, (b) Past performance of the enterprise,
(c) Good customer relations, and (d) Good labour relations, etc.
Classification of Goodwill:-- Goodwill can be classified into two categories:
1. Purchased Goodwill; and 2. Self-generated Goodwill.
1. Purchased Goodwill: It is the Goodwill that is acquired by making a payment. For example, when a business
is purchased, the excess of purchase consideration of its Net Assets (i.e., Assets — Liabilities) is the Purchased
Goodwill. As per AS-26, only purchased goodwill can be shown in books of account.
Features of Purchased Goodwill

 It arises on the purchase of a business or purchase of a brand, etc.
 Since the consideration is paid for it, it is recorded in the books of accounts.
 It is shown in the Balance Sheet as an asset.
 Value of Goodwill is a subjective judgment but it is ascertained when both purchaser and
seller agree to its valuation.
 It is amortised at the earliest but not later than its useful life.
Question 1: (Purchased Goodwill). COC Pvt Ltd acquired the business of Shivam for a net consideration of Rs.
6,00,000 payable by cheque. The assets acquired and liabilities taken over are:
Assets: Rs. Liabilities: Rs.

Furniture 30,000 Creditors 5,20,000
Inventory 7,60,000 Salaries Payable 75,000
Debtors 1,50,000 Outstanding Expenses 10,000
Pass the necessary Journal entries.
2. Self-generated Goodwill: It is an internally generated goodwill which arises from a number of factors (such
as good location, efficient management, good quality of products, etc.) that a running business possesses due to
which it is able to earn higher profit.
Features of Self-generated Goodwill
 It is generated internally, generally over the years.

 As per AS-26, internally generated goodwill is not to be recorded in the books of accounts.
 Valuation depends on the subjective judgment of the valuer.
Methods of Valuation of Goodwill :-The methods for valuing goodwill are:
1. Average Profit Method, 2. Super Profit Method, and 3. Capitalisation Method
1. Average Profit Method: Goodwill under Average Profit Method can be calculated using Simple Average
Profit Method or Weighted Average Profit Method.
(i) Simple Average Profit Method: Under the Simple Average Profit Method, normal profits earned
by the business for the specified number of years are considered. Profits earned are totalled and
average is determined. Average profit as calculated is multiplied by a number of years' purchase to
arrive at the value of goodwill.
Note:- Number of years' purchase means for how many years the firm will earn the same amount of
profit because of its past efforts after change of ownership.

This method is based on the assumption that a newly started business will not earn any profit during the initial
years of its operation. Hence, one who purchases a running business pays goodwill for being in a position to
earn profit in the initial years of business.
Question 2 : (Average Profit Method when Past Adjustments are Made). Sikander purchased Anita's business
on 1st April, 2019. It was agreed to value goodwill at three years' purchase of average normal profit of the last
four years. The profits of Anita's business for the last four years were:
Year Ended Rs.

31st March, 2016 90,000
31st March, 2017 1,60,000
31st March, 2018 1,80,000
31st March, 2019 2,20,000
It was observed from the books of account that:
1. During the year ended 31st March, 2016, an asset was sold at a gain (profit) of Rs. 10,000.
2. During the year ended 31st March, 2017, a machine got destroyed in accident and 30,000 was written off as
loss in Profit and Loss Account.
3. During the year ended 31st March, 2018, firm's assets were not insured due to oversight. Insurance
premium being 10,000. Calculate the value of goodwill.
Question 3. A, B and C are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decide to
take D into partnership from 1st April, 2018 for 1/4th share in the profits. For this purpose, goodwill is to be
valued at twice the average annual profit of the previous three or four years, whichever is higher. The annual
profit for the purpose of goodwill for the past four years were:
Year Ended Rs.

31st March, 2018 48,000
31st March, 2017 30,300
31st March, 2016 31,200
31st March, 2015 42,200
Calculate value of goodwill.
Solution: CALCULATION OF AVERAGE PROFIT
Based on Past three Year’s Profits Rs. Based on Past four years’ Profits Rs.
Year Ended 31st March, 2018 48,000 Year Ended 31st March, 2018 48,000
Year Ended 31st March, 2015 42,200
Total Profit 1,09,500 Total profit 1,51,700
Number of Years 3 Number of Years 4

Average Profit 36,500 Average Profit 37,925
Four years' average profit is higher than three years' average profit. Therefore, value of Goodwill will be two times of Rs.
37,925, i.e., Rs. 37,925 x 2 = Rs. 75,850.
Question 4: A, B and C are partners sharing profits and losses equally. They agree to admit D for equal share. For this
purpose, goodwill is to be valued at 4 years' purchase of average profit of last five years. Profits for past 5 years were:
Year Ended 31st March, 2015 31st March, 31st March, 2017 31st March, 2018 31st March, 2019
2016
Profit/(Loss) 40,000 75,000 1,00,000 1,30,000 (1,20,000)
(Rs.)

On 1st April, 2018, 5 cycles costing Rs.20,000 were purchased and were wrongly debited to Travelling Expenses.
Depreciation on cycles was to be charged @ 25%. Calculate value of goodwill.
Question 5: (Average Profit Method when Past Adjustments are Made). A and B are partners sharing profits equally.
They admit C into partnership for equal share. Goodwill was agreed to be valued at two years' purchase of average profit
of last four years. Profits for the last four years were:
Year Ended Rs.

st
31 March, 2016 70,000
31st March, 2017 1,00,000
31st March, 2018 55,000 (Loss)
st
31 March, 2019 1,50,000
The books of account of the firm revealed as follows:
1. The firm had abnormal gain of Rs. 10,000 during the year ended 31st March, 2016.
2. The firm incurred abnormal loss of Rs.20,000 during the year ended 31st March, 2017.
3. Repairs to car amounting to Rs.50,000 was wrongly debited to vehicles on 1st May, 2017.
Depreciation was charged on vehicles @ 10% on Straight Line Method.
4. A Bad Debt of Rs.5,000 was omitted to be written off in the year 2018-19.
Calculate the value of Goodwill.
(ii) Weighted Average Profit Method: Weighted Average Profit Method is a method whereby weight is assigned to
each year and thereafter, normal business profit of each year is multiplied by the assigned weight to determine the
value. Recent year's profit being more relevant in determining value of goodwill, is assigned higher weight.
Weighted Average Profit Method is considered better as compared to Simple Average Profit Method as it gives more
weightage to the profits of recent years.This method is particularly effective when profits show rising or falling
trends.
Question 6. The profits of a firm for the last five years were:
Year Ended 31st March, 2014 31st March, 2015 31st March 2016 31st March 2017 31st March 2018
Profit (Rs.) 40,000 48,000 60,000 50,000 36,000
Calculate value of goodwill on the basis of three years' purchase of the weighted average profit after assigning
weights 1,2,3,4 and 5 respectively to the profits for years ended 31st March, 2014, 2015, 2016, 2017 and 2018.
Solution:
Year Ended Profit (Rs.) Weights C Weighted Profit (Rs.)
A B D = BXC
31st March, 2014 40,000 1 40,000
31st March, 2015 48,000 2 96,000
31st March, 2016 60,000 3 1,80,000
31st March, 2017 50,000 4 2,00,000
31st March, 2018 36,000 5 1,80,000
Total 12 6,96,000
Weighted Average Profit =
Goodwill= Weighted Average Profit x Number of Years’ Purchase = Rs. 46,400 x 3 = Rs. 1,39,200.
Question 7: (Weighted Average Profit Method when Past Adjustments are Made). Calculate the goodwill of a
firm on the basis of three years' purchase of the weighted average profit of the last four years. Profits of these
four years ended 31st March were:

Year Ended 31st March, 2012 31st March, 2013 31st March 2014 31st March 2015
Profit (Rs.) 40,400 49,600 40,000 60,000
The weights assigned to each year ended 31st March are: 2012-1; 2013-2; 2014-3 and 2015-4. You are provided
with the following additional information:
(i) On 31st March, 2014, a major plant repair was undertaken for Rs. 12,000 which was charged to revenue. The
said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on
Reducing Balance Method.
(ii) The Closing Stock for the year ended 31st March, 2013 was overvalued by Rs. 4,800.
(iii) To cover management cost an annual charge of 9,600 should be made for the purpose of goodwill valuation.
Question 8. Profits earned during last three years by X Ltd are as follows:
2004 --- 5,00,000
2005 --- 6,00,000
2006 --- 4,00,000
Calculate goodwill on the basis of three year’s purchase price by
(a) average profit method
(b) weighted average profit method(if weights are not given)
(c) weighted average profit method if weights given are 1,3,6 respectively.
Question 9 (Calculation of Future Maintainable Profits) TATA Ltd. desirous of selling its business to COC Ltd. has
earned the following profits (after tax) in the past three years: Rs. 4,00,000, Rs. 5,50,000 and Rs. 6,40,000.
Following facts need to be taken into consideration:
(i) Directors' fees Rs. 50,000 per year will not be payable by COC Ltd. whose existing board can easily manage the
additional work.
(ii) Rent of Rs. 10,000 per month paid by TATA Ltd. will not be a charge against the profits of COC Ltd. as the latter
company has its own premises.
(iii) TATA Ltd. has not transferred its trade investments to COC Ltd. Hence, interest of Rs. 9,000 would not be
earned by the purchasing company.
(iv) TATA Ltd. had outsourced some of its business work for an annual contract of Rs. 1,24,000. However COC Ltd.
has enough surplus staff to manage the same. Hence savings of this cost. Calculate the Future Maintainable Profits.
 SUNO MERI BAAT DHYAN SE

While calculating average profits (Average future maintainable profit) for the purpose of valuation of goodwill
certain adjustments are made, which are as follows:
(a)All non-recurring and abnormal expenses and losses not likely to occur in the future are added back to profits.
(b) Non-recurring or casual income not likely to recur in future are deducted from such profits.
(c) Expenses and losses expected to occur in future are deducted from such profits, (e.g. increase in rent,
managerial remuneration etc.)
(d) All profits likely to accrue in the future are added.
After above adjustments, average of the past years profits is calculated. Then such average profit is multiplied by
certain number of years, say 4 years. The resultant amount will be value of goodwill.
Question 10. (Simple Profit Method) COC Ltd. agreed to purchase business of WIPRO Ltd. For that purpose, goodwill
is to be valued at three years' purchase of the average of previous 4 year's adjusted profits. The profits for the
years ending 31.12.2016 to 31.12.2019 were as follows: Rs. 40,400; Rs. 49,600; Rs. 50,000; Rs. 60,000. Following
additional information is available as under:
a) On 01.09.2018 major repair expenditure to plant and machinery for Rs. 12,000 was charged to revenue. This
was agreed to be capitalized for goodwill subject to 10% p.a. depreciation on diminishing balance method.
b) The closing stock for the year ending 31.12.2017 was over-valued by Rs. 4,800.

c) In order to cover cost of management, an annual charge of Rs. 9,600 should be made for valuation of goodwill.
Compute value of Goodwill.
Super Profit Method: Capital employed in a business yields profit. Some of the enterprises earn more profit,
while others earn less profit or incur loss on the same amount of capital employed. When a similar type of
business earns profit at a certain percentage of the capital employed, it is called normal return. But a buyer's
advantage lies in the excess of the normal return on capital employed. It is only such enterprises which enjoy
goodwill. The excess of actual profit over the normal profit is known as super profit.
Goodwill, under this method, is valued on the basis of following three values:
(I) Average Profits: it is also called average future maintainable profits.
(II) Normal Rate of Return: Normal Rate of Return is the rate of return normally earned by other
firms of similar size and nature.
(III) Capital Employed: Capital employed means capital invested in the firm to carry on business.
Capital employed may be calculated by any of the following two methods:
(a) Liabilities Side Approach:
Capital Employed = Capital + Reserves - Fictitious Assets - Non-trade Investments.
(b) Assets Side Approach:
Capital Employed = All Assets (except goodwill, fictitious assets and Non-trade Investments)-
Outside Liabilities.
Question 11: (Super Profit Method). A firm earned net profits during the last three years as:
Year I II III
Profit (Rs.) 18,000 20,000 22,000
The capital investment of the firm is 60,000. Normal return on the capital is 10%. Calculate, value of goodwill
on the basis of three years' purchase of the average super profit for the la, three years.
Solution:
(i) Average Profit =
(ii) Normal Profit = Rs. 60,000 x 10/100 = Rs. 6,0000
(iii) Super Profit = Average Profit – Normal Profit
= Rs. 20,000 – Rs. 6,000 = Rs. 14,000
(iv) Goodwill = share Profit x Number of Years’ Purchase

= Rs. 14,000 x 3 = Rs. 42,000.
Question 12: (Super Profit Method when Past Adjustments are Made). Alok and Aakash are in M/s Mega
Enterprises. They admit Ashish as partner w.e.f. 1.4.2018. They to value goodwill at 3 years' purchase by Super
Profit Method for which they decided average of last 5 years profits. The profits for the last five years were:
Year ended Rs.

31st March, 2014 2,00,000 (Including gain of Rs. 25,000 from sale of fixed assets
st
31 March, 2015 1,70,000 (Including abnormal loss of Rs. 50,000)
st
31 March, 2016 2,10,000
st
31 March, 2017 2,30,000
st
31 March, 2018 2,50,000
Capital employed in the firm is Rs 15,00,000 and normal rate of return in similar business is 10%. Calculate
value of goodwill.
Solution: Calculation of Normal Profit

Year Ended Profit (Rs.) Adjustment (Rs.) Normal Profit (Rs.)
31st March, 2014 2,00,000 (25,000) 1,75,000
31st March, 2015 1,70,000 50,000 2,20,000
31st March, 2016 2,10,000 …. 2,10,000
31st March, 2017 2,30,000 …. 2,30,000
31st March, 2018 2,50,000 …. 2,50,000

1. Average Profit =
2. Calculation of Normal Profit : Normal Profit =
3. Calculation of Super Profit :

Super Profit = Average Profit – Normal Profit
= Rs. 2,17,000 – Rs. 1,50,000 = Rs. 67,000.
4. Value of Goodwill = Super Profit x Number of Years’ Purchase
= Rs. 67,000 x 3 = Rs. 2,01,000.
QUESTION 13. (Super Profit Method when Past Adjustments are Made). Aaloo and Tamatar are partners in
M/s Maina Enterprises. They admit Pyaj as partner w.e.f. 1st April, 2019. They decided to value goodwill at 3
years' purchase by Super Profit Method for which they decided to take average of last 5 years profits. The
profits for the last five years were:
Year ended Rs.

st
31 March, 2015 3,00,000 (Including gain of Rs. 35,000 from sale of fixed assets
31st March, 2016 1,70,000 (Including abnormal loss of Rs. 40,000)
st
31 March, 2017 Loss 3,10,000 ( including insurance claim received Rs 30,000)
31st March, 2018 6,30,000
31st March, 2019 3,50,000
Capital employed in the firm is Rs 12,00,000 and normal rate of return in similar business is 10%. Calculate
value of goodwill.
Question 14: (Super Profit Method). Average net profit of XYZ expected in the future is 54,000 per year. The
average capital employed in the business is 3,00,000. Normal profit expected from capital invested in this class
of business is 10%. The remuneration of the partners is estimated to be 9,000 p.a. Find out the value of
goodwill on the basis of two years' purchase of super profit.
Solution: normal profit = 3,00,000 x 10%= 30,000, super profit Rs 15,000, goodwill = 30,000.
Question 15. The average profit earned by a firm is Rs.80,000 which includes undervaluation of stock of Rs.
8,000 on an average basis. The capital invested in the business is Rs. 8,00,000 and the normal rate of return is
8%. Calculate goodwill of the firm on the basis of 7 times the super profit. (Delhi 2015 C)
Hints: Adjusted Average Profit = Rs. 80,000 + Rs. 8,000 = Rs.88,000, Normal Profit = Rs 64,000,
Super Profit = Rs. 24,0000, Goodwill = Rs. 24,000 x 7 = Rs. 1,68,000.
Note: Undervaluation of stock reduces the net profit. Hence, it is added to determine adjusted profit.
Question 16 (Calculation of Average Profit). On 1st April, 2016, a firm had assets of Rs. 3,00,000
including cash of Rs.5,000. The Partners' Capital Accounts showed a balance of Rs. 2,00,000 and the
Reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at
Rs. 2,00,000 at four years' purchase of super profit, find the average profit of the firm.
HINTS: Goodwill =50,000, Normal Profit =30,000. Average Profit = 50,000 + 30,000 = 80,000.
Note: As outside liabilities are not given, they are assumed to be nil. Thus, capital employed = Total Assets.
Question 17. The average profit earned by a firm is Rs. 2,50,000 which includes overvaluation of stock of Rs.
10,000 on an average basis. The capital invested in the business is Rs. 14,00,000 and the normal rate of return
is 15%. Calculate goodwill of the firm on the basis of 4 times the super profit. (Al 2015 C)
Hints : Adjusted Average Profit Rs. 2,50,000 – Rs. 10,000 = Rs. 2,40,000
Normal Profit = Capital Employed (Investment) x Normal Rate of Return/100

= Rs. 14,00,000 x 15/100 = Rs. 2,10,000

Super Profit = Rs. 30,000, Goodwill = Rs. 1,20,000.
Note: Overvaluation of stock increases the net profit. Hence, it has been deducted to calculate adjusted
average profit.
Question 18. (Calculation of Average Profit). M/s. Haiya India has assets of Rs. 5,00,000 whereas
liabilities are: Partners' Capitals— Rs. 3,50,000, General Reserve Rs. 60,000 and Sundry Creditors
Rs.90,000. If normal rate of return is 10% and goodwill of the firm is valued at Rs. 90,000 at 2 years'
purchase of super profit, find average profit of the firm.
Difference between Average Profit and Super Profit
Basis Average Profit Super Profit

1. Meaning It is average of the profits of past It is the excess of average profit
agreed years. over normal profit.
2. Normal Rate of Return Normal rate of return is not Normal rate of return is considered
relevant in the calculation of while calculating the super profit.
average profit.
3. Average Capital Employed Average capital employed is not Average capital employed is taken
considered while calculating into account while calculating the
average profit. super profit.
4. Relevance of Valuing Goodwill Average profit is relevant for Super profit is relevant for Super
Average Profit Method, Super Profit Method and Capitalisation of
Profit Method and Capitalisation Super Profit Method of valuation of
Method of valuation of goodwill. goodwill.
1. Capitalisation Method: Under the Capitalisation Method, goodwill can be valued either by:
(i) Capitalisation of Average Profit Method; or
(ii) Capitalisation of Super Profit Method.
(i) Capitalisation of Average Profit: Under this method, goodwill is calculated by deducting actual
capital employed (i.e., Net Assets as on the date of valuation) in the business from the
capitalised value of average profit on the basis of Normal Rate of Return. Capitalised value of the
business is ascertained by capitalising average profit earned at the normal rate of profit. It is
calculated as follows:
Capitalised Value of the Business = ( )
Net Assets = All Assets (other than goodwill, fictitious assets and non-trade investments) at their current
values minus' outsiders' liabilities.
Question 19 (Capitalisation Method). A firm earned Rs. 60,000 as profit, the normal rate of return being
10%. Assets of the firm are Rs. 7,20,000 (excluding goodwill) and Liabilities are Rs. 2,40,000. Find the value of
goodwill by Capitalisation of Average Profit Method.
Solution: Total Capitalised Value of the Firm =

Net Assets of the Firm= Total Assets – Liabilities
= Rs. 7,20,000 – Rs. 2,40,000 = Rs. 4,80,000.
Goodwill = Total Capitalised Value of Firm – Net Assets
= Rs. 6,00,000 – Rs. 4,80,000 = Rs. 1,20,000.
Question 20. Puneet and Tarun are in restaurant business having credit balance in their fixed Capital Accounts
as 2,50,000 each. They have credit balances in their Current Accounts of 30,000 and 20,000 respectively. The
firm does not have any liability. They are regularly earning profits and their average profit of last 5 years is Rs

1,00,000. If the normal rate of return is 10%, find the value of goodwill by capitalisation of Average Profit
Method.
Solution: Capitalised Value of the Business =
= Rs. 1,00,000 X
Capital Employed = Rs. 2,50,000 + Rs. 2,50,000 + Rs. 30,000 + Rs. 20,000 = Rs. 5,50,000
Goodwill = Rs. 10,00,000 - Rs. 5,50,000 = Rs. 4,50,000.
(ii) Capitalisation of Super Profit: Under this method, goodwill is calculated by capitalising super
profit at the normal rate of return. Thus, as a first step Super Profit is determined on the same
basis as is determined under Super Profit Method, which is capitalised at the Normal Rate of
Return to determine the value of goodwill.
For calculating the goodwill under this method, the steps are:
1. Calculate actual Capital Employed (i.e., Net Assets as on the date of valuation) of the firm.
Net Assets = All Assets (other than goodwill, fictitious assets and non-trade investments)-
Outside Liabilities.
2. Calculate Normal Profit on Capital Employed by using the following formula:
Normal Profit = Capital Employed x Normal Rate of Return/100.
3. Calculate Average Profit of past years as per information given in question.
4. Calculate Super Profit, i.e., Actual Average Profit - Normal Profit.
5. Goodwill = Super Profit x
Question 21. Average profit of the firm is Rs.1,50,000. Total assets in the firm are Rs. 16,00,000 ( including non
trade investment of Rs 1,20,000 and goodwill Rs 80,000) and outside liabilities are Rs. 4,00,000. In the same
type of business, the normal rate of return is 10% of the capital employed.
Hints : Capital Employed =Rs. 10,00,000, Normal Profit= Rs 1,00,000

Super Profit = Rs 50,000,Goodwill = Rs 5,00,000.
Question 22. A business has earned average profit of Rs. 1,00,000 during the last few years and the normal
rate of return in similar business is 10%. Find out the value of Goodwill by:
(i) Capitalisation of Super Profit Method; and

(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
Assets of the business were Rs. 10,00,000 and its external liabilities Rs. 1,80,000. (Delhi 2011)
Hints:
(i) As per capitalisaiton of super Profit Method:

Goodwill = .
(ii) As per Super Profit Method:
Goodwill = Super Profit X Number of Years’ Purchase
= Rs. 18,000 x 3 = Rs. 54,000.
Question 23. J and K are partners in a firm. Their capitals are: J Rs. 3,00,000 and K Rs. 2,00,000. During the year ended
31st March, 2010 the firm earned a profit of Rs. 1,50,000. Assuming the normal rate of return is 20%, calculate the
value of goodwill of the firm:

(i) By Capitalisation Method; and

(ii) By Super Profit Method if the goodwill is valued at 2 years' purchase of super profit (Foreign 2011)
Solution:
(i) Capitalisation Method:
Total Capitalised value of the Firm =
Goodwill = Total Capitalised Value of Business – Capital Employed
= Rs. 7,50,000 – Rs. 5,00,000 = Rs. 2,50,000.
*Capital Employed = Capitals of J and K = Rs. 5,00,000.
(ii) Super Profit Method:
Normal Profit = Capital Employed x Normal Rate of Return/100

= Rs.5,00,000 x 20/100 = Rs. 1,00,000
Average Profit = Rs. 1,50,000
= Rs. 1,50,000 – Rs. 1,00,000 = Rs. 50,000
Goodwill = Super Profit x Number of years purchase
= Rs. 50,000 x 2 = Rs. 1,00,000.
Question 24. From the following information, calculate value of goodwill of M/s. Shaloo and Galu:
(i) At three years’ purchase of Average Profit.

(ii) At three years’ purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average Profit.
Information:
(a) Average Capital Employed – Rs. 10,00,000.

(b) Net Profit/Loss of the firm for the past years: 2015 – Rs. 1,60,000 ( Profit ); 2016 – Rs. 1,40,000
(Profit); 2017 – Rs. 2,70,000 ( Profit).
(c) Normal Rate of Return on capital is 11%.
(d) Remuneration to each partner for his service to be treated as a charge on profit – Rs. 2,500 per
month.
(e) Assets (excluding goodwill) – Rs. 11,00,000; Liabilities – Rs. 1,00,000.
Question 25. Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average
profit of the last three years. The profit for first year was 1,00,000, profit for the second year was twice the
profit of the first year and for the third year profit was one and half times of the profit of the second year.
[Ans.: Goodwill—Rs.3,00,000.] [Hint: Profit for 2nd year = Rs.1,00,000 x 2 = Rs.2,00,000; Profit for 3rd year =
Rs.2,00,000 x 1.5 =Rs. 3,00,000.]
Question 26. A and B are partners sharing profits in the ratio of 3 : 2. They decided to admit C as a partner
from 1st April, 2021 on the following terms:
(i) C will be given 2/5th share of the profit.
(ii) Goodwill of the firm will be valued at two years' purchase of three years' normal average
profit of the firm.
Profits of the previous three years ended 31st March, were:
2021—Profit Rs. 30,000 (after debiting loss of stock by fire Rs. 40,000).
2020—Loss 80,000 (includes voluntary retirement compensation paid 1,10,000).
2019—Profit 1,10,000 (including a gain (profit) of 30,000 on the sale of fixed assets).
You are required to value the goodwill. [Ans.: Value of Goodwill Rs.1,20,000.]

Question 27. X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into partnership
for 1/4th share in goodwill. Z brings in his share of goodwill in cash. Goodwill for this purpose is to be
calculated at two years' purchase of the average normal profit of past three years. Profits of the last three
years ended 31st March, were:
2019—Profit Rs. 50,000 (including profit on sale of assets Rs. 5,000).
2020—Loss Rs. 20,000 (including loss by fire Rs. 30,000).
2021—Profit Rs. 70,000 (including insurance claim received Rs.18,000 and interest on investments
and Dividend received Rs.8,000).
Calculate value of goodwill. Also, calculate goodwill brought in by Z.
[Ans.: Goodwill— Rs.66,000; Z shall bring 1/4th of Rs.66,000 = Rs. 16,500 as Goodwill.]
Question 28. A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take C
st
into partnership for 1/4th share on 1 April, 2021. For this purpose, goodwill is to be valued at four times the
average annual profit of the previous four or five years whichever is higher. The agreed profits for goodwill
purpose of the past five years are:
Year 2016-17 2017-18 2018-19 2019-20 2020-21
Profit (Rs.) 14,000 15,500 10,000 16,000 15,000
Find the value of goodwill. [ Ans. : Goodwill – Rs. 56,500.]
Question 29. Sumit purchased Amit's business on 1st April, 2021. Goodwill was decided to be valued at two
years' purchase of average normal profit of last four years. The profits for the past four years were:
Year Ended 31st March, 2018 31st March, 2019 31st March, 2020 31st March 2021
Profit (Rs.) 80,000 1,45,000 1,60,000 2,00,000
Books of Account revealed that:
(i) Abnormal loss of Rs.20,000 was debited to Profit and Loss Account for the year ended 31st
March, 2018.
(ii) A fixed asset was sold in the year ended 31st March, 2019 and gain (profit) of Rs. 25,000 was
credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2020 assets of the firm were not insured due to oversight.
Insurance premium not paid was Rs. 15,000.
Calculate the value of goodwill. [Ans.: Value of Goodwill-Rs. 2,82500.]
Question 30. X and Y are partners in a firm. They admit Z into partnership for equal share. It was agreed
that goodwill be valued at three years' purchase of average profit of last five years. Profits for the last five
years were;
Year Ended 31st March, 2014 31st March, 2015 31st Mach, 2016 31st March, 31st March, 2018
2017
Profit (Rs.) 90,000 (Loss) 1,60,000 1,50,000 60,000 1,77,000
Books of Account of the firm revealed that:
(i) The firm had gain (profit) of 50,000 from sale of machinery sold in the year ended 31st March
2015. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of 20,000 incurred in the year ended 31st March, 2016 because
machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2016 amounting to Rs.
1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written
down Value Method.
Calculate the value of goodwill. [Ans.: Value of Goodwill—Rs. 3,00,000.]
Question 31. A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2019, C is
admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years’
purchase of last three years' profits (after allowing partners' remuneration). Profits to be weighted 1 : 2 : 3, the
greatest weight being given to last year. Net profit before partners' remuneration were 2016-17: Rs. 2,00,000;

2017-18: Rs. 2,30,000; 2018-19: Rs. 2,50,000. The remuneration of the partners estimated to be Rs. 90,000 p.a.
Calculate amount of goodwill. [Ans.: Goodwill- Rs. 2,90,000.]
Question 32. Manbir and Nirmal are partners and they admit Aahat into partnership. It was agreed to value
goodwill at three years' purchase on Weighted Average Profit Method taking profits of last five years. Weights
assigned to each year as 1, 2, 3, 4 and 5 respectively to profits for the year ended 31st March, 2017 to 2021.
The profits for these years were: Rs. 70,000, Rs. 1,40,000, Rs. 1,00,000, Rs. 1,60,000 and Rs. 1,65,000
respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of Rs. 20,000 in the year ended 31st March, 2017.
(ii) There was an abnormal gain (profit) of Rs. 30,000 in the year ended 31st March, 2018.
(iii) Closing Stock as on 31st March, 2020 was overvalued by Rs. 10,000.
Calculate the value of goodwill. [Ans.: Value of Goodwill-4,17,000.]
Question 33. Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average
profit of the last four years. The appropriate weights to be used and profits are:
Year 2015-16 2016-17 2017-18 2018-19
Profit (Rs.) 1,01,000 1,24,000 1,00,000 1,40,000
Weight 1 2 3 4
On a scrutiny of the accounts, the following matters are revealed:

(i) On 1st December, 2017, a major repair was made in respect of the plant incurring Rs. 30,000
which was charged to revenue. The said sum is agreed to be capitalised for goodwill
calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year 2016-17 was overvalued by Rs.12,000.
(iii) To cover management cost, an annual charge of Rs. 24,000 should be made for the purpose
of goodwill valuation.
(iv) In 2016-17, a machine having a book value of Rs. 10,000 was sold for Rs.11,000 but the
proceeds were wrongly credited to Profit and Loss Account. No effect has been given to
rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance
method. [Ans.: Value of Goodwill- Rs.3,12,702.]
Question 34. Gupta and Bose had a firm in which they had invested Rs. 50,000. On an average, the profits
were Rs. 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years'
purchase of profits in excess of profits @15% on the money invested. Value the goodwill.
[Ans.: Goodwill Rs. 34,000.]
Question 35. The total capital of the firm of Sakshi, Mehak and Megha is 1,00,000 and the market rate of
interest is 15%. The net profits for the last 3 years were Rs. 30,000; Rs. 36,000 and Rs. 42,000. Goodwill is to be
valued at 2 years' purchase of the last 3 years' super profits. Calculate the goodwill of the firm. (Delhi 2017 C)
[Ans.: Goodwill – Rs.42,000.]
Question 36. A partnership firm earned net profits during the past three years as follows:
Year ended 31st March, 2019 31st March, 2018 31st March 2017
Net Profit (Rs.) 2,30,000 2,00,000 1,70,000
Capital investment in the firm throughout the above-mentioned period has been 4,00,000. Having
regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of
the partners during this period is estimated to be Rs. 1,00,000 p.a.
Calculate value of goodwill on the basis of two years' purchase of average super profit earned during
the above-mentioned three years. [Ans.: Goodwill- Rs.80,000.]
Question 37. A business earned an average profit of Rs. 8,00,000 during the last few years. The normal rate of
profit in the similar type of business is 10%. The total value of assets and liabilities of the business were Rs.
22,00,000 and Rs. 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it
is valued at years' purchase of super profits. (Delhi 2014 C)

[Ans.: Net Assets = Rs. 22,00,000 – Rs. 5,60,000 = Rs. 16,40,000; Normal Profit = Rs.1,64,000; Super Profit =
Rs.6,36,000; Goodwill = Rs. 15,90,000.]
Question 38. Capital of the firm of Sharma and Verma is Rs. 2,00,000 and the market rate of interest is 15%.
Annual salary to partners is Rs. 12,000 each. The profits for the last three years were Rs. 60,000; Rs. 72,000 and
Rs. 84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit. Calculate
goodwill of the firm. (Delhi 2013 C) [Ans.: Goodwill- Rs.36,000.]
EVALUATION QUESTIONS: QUESTIONS WITH MISSING FIGURES
Question 39. Goodwill of the firm is valued at Rs. 5,00,000 at 2 years’ purchase of average profit.
Determine the missing value.
Total Profits = 2,50,000 + ...?.. + 3,00,000 – 1,00,000 + 3,50,000 = Rs…?..
Average Profit =
Goodwill = Rs. ….. x 2 = Rs. 5,00,000.
Question 40. The goodwill of a firm is valued at Rs. 1,35,000 at 3 years’ purchase of super profit.
Determine the missing values:
Average Profit =
Normal Profit = Rs. ….. x
= Rs. 1,20,000 – ..….. = Rs. ..……
Goodwill = Super Profit x No. of Years’ Purchase.
Solution:
Average Profit =
Rs. 75,000 (Normal Profit) = (Capital Employed) x 15/100
Capital Employed = Rs. 75,000 x 100/15 = Rs. 5,00,000
Goodwill = Super Profit x No. of Years’ Purchase
Rs. 1,35,000 = Super Profit x 3
Super Profit =
Normal Profit = Average Profit – Super Profit
= Rs. 1,20,000 – Rs. 45,000 = Rs. 75,000.

CHAPTER 4. CHANGE IN PROFIT SHARING RATIO AMONG EXISTING PARTNERS

“ Partnership is the relation between persons who have agreed to share the profits of a business carried on by
all or any of them acting all -Section 4 of the Indian Partnership Act, 192
Partnership agreement defines the relationship among the partners and whenever there is a change in
relationship, it result in reconstitution of the firm. In other words, any change in existing agreement of
partnership is reconstitution of the firm. As a result, existing agreement comes to an end and new agreement
comes into existence. But the firm continues. A firm is reconstituted, whenever there is a
(i) Change in the profit-sharing ratio among the existing partners.

(ii) Admission of a new partner.
(iii) Retirement of an existing partner.
(iv) Death of a partner.
(v) Amalgamation of two partnership firms.
Reconstitution of a firm always leads to change in profit-sharing ratio among the partners.
CHANGE IN THE PROFIT-SHARING RATIO AMONG THE EXISTING PARTNERS:--Change in the profit-sharing
ratio among the existing partners means it is reconstitution of the firm without admission of a new
partner(s) or retirement or death of a partner. A change in the profit-sharing ratio in a partnership firm
means, one (or more) partner(s) acquires share of profit in the business from another partner(s).
Therefore, the aggregate amount of gain by one (or more ) partner(s) is equal to the aggregate amount of
sacrifice made by the other partner(s). In other words, if share of profit of one or more partners increases
then share of profit of one or more partners decreases.
Adjustment for Change in Profit-sharing Ratio:- The issues that need to dealt with at the time of change
in the profit-sharing ratio are :
1. Determination of Sacrificing Ratio and Gaining Ratio,

2. Accounting Treatment of Goodwill,
3. Accounting of Reserve and Accumulated Profits or losses , and
4. Revaluation of Assets and Reassessment of Liabilities.
DETERMINATION OF SACRIFICING RATIO AND GAINING RATIO:- At the time of change in profit-sharing, firstly
new profit-sharing ratio is determined. If it is not given. Thereafter, Sacrificing Ratio for Partners whose
share in profit has decreased and Gaining Ratio for partners whose share in profit has increased are
determined. It is important to determine Sacrificing Ratio and Gaining Ratio because the gaining partner
compensates the sacrificing partner by paying goodwill.
Question 1. X, Y and Z are partners sharing profits in the ratio of 5 : 3 : 2. Calculate new profit-sharing ratio
and sacrificing ratio in each of the following cases :
Case 1. If Z acquires 1/5th share from X.

Case 2. If Z acquires 1/5th share equally from X and Y.
Case 3. If X, Y and Z decide to share the future profits and losses equally.
ACCOUNTING TREATMENT OF GOODWILL:- If the partners decide to change their profit-sharing ratio, gaining
partner (i.e., the partner whose share in profits has increased as a result of change ) should compensate the
sacrificing partner (i.e., the partner whose share in profit has decreased as a result of change ) by payment of
goodwill to him in the gaining ratio.

Question 2. A and B shared profits and losses in the ratio of 3 : 2. With effect from 1 st April, 2018, they
agreed to share profits equally. The goodwill of the firm was valued ₹ 30,000. Pass necessary Journal entry for
the accounting of goodwill.
Question 3. Sohan and Ram are partners sharing profits and losses in the ratio of 3 : 1. Their capitals were
60,000 and 40,000 respectively. As from 1st April, 2018, it was agreed to change the profits-sharing ratio to 3 :
2. According to the Partnership Deed, goodwill is to be valued at three years’ purchase of the average of five
years’ profits. The profits of the previous five years were :2013-14-₹ 30,000; 2014-15-₹ 40,000; 2015-16- ₹
50,000; 2016-17- ₹ 60,000 and 2017-18-₹ 70,000 respectively. Pass necessary Journal entry to give effect to
the above arrangement.
Question 4. Anita, Alka and Amrit are partners sharing profits in the ratio of 3 : 2: 1 respectively. From 1st
January, 2018 they decided to share profits in the ratio of 2 : 3: 1. The Partnership Deed provides that in the
event of any change in profit-sharing ratio, the goodwill should be valued at three years’ purchase of the
average of five years’ profits. The profits and losses of the preceding five years are : Profit : 2013- ₹ 1,20,000;
2014-₹ 3,00,000; 2015- ₹ 3,40,000; 2016- ₹ 3,80,000; 2017 Loss: ₹ 1,40,000. Showing the working clearly, give
the necessary Journal entry to record the above change.
Question 5. X, y and Z are partners sharing profits in the ratio of 3 : 2 : 1. As from April 2018, Y decided to
devote only part of time to the business and accepted to receive one half of his previous share of profits.
Sacrificed share of Y is taken equally by X and Z. For this purpose, goodwill of the firm was valued at ₹
3,00,000. Calculate new profit-sharing ratio and pass an adjustment entry for treatment of goodwill due to
change in the profit-sharing ratio.
Question 6. A, B and C at present share profits and losses in the ratio of 5 : 3 : 2. They decide to share future
profits and losses equally with effect from 1st April, 2019. Goodwill of the firm is valued at ₹ 90,000. Show
Journal entries under each of the following alternative cases:
Case 1. When no goodwill appears in the books.
Case 2. When goodwill appears in the books at ₹ 1,20,000.
ACCOUNTING TREATMENT OF RESERVES AND ACCUMULATED PROFITS OR LOSSES:-- If, at the time of change
in profit-sharing ratio, reserves and accumulated profits or losses appear in the books of the firm, they are
transferred to the Partners’ Capital Accounts (if capitals are fluctuating ) or the Current Accounts (if capitals are
fixed ) in their old profit-sharing ratio before the reconstitution of the fir m, Therefore, reserve and
accumulated profits or losses are transferred to the Partners’ Capital Accounts in their old profit-sharing ratio.
It Should be Kept in Mind that, Reserve, Accumulated Profit or Losses are distributed even if the question is silent.
Note:-Employees Provident Fund is a liability and therefore, is not distributed among the partners.
Question 7. A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. On 1.4.2018, they decided to share
the profits equally. On that date, there was a credit balance of ₹ 1,20,000 in their Profit and Loss Account and a
balance of ₹ 60,000 in the General Reserve. The partners decided to distribute the profits and the General
Reserve before the change in profit-sharing ratio. Pass necessary Journal entry in the books of the firm.
Question 8. X and Y are partners in a firm sharing profits in the ratio of 3 :2. They decided to share future
profits equally. On the date of change in the profit-sharing ratio, Profit and loss Account showed a debit
balance of ₹ 50,000. Pass journal entry for distribution of balance in Profit and Loss Account immediately
before change in the profit-sharing ratio.

Question 9. X, Y and Y are partners sharing profits and losses in the ratio of 5 : 3 : 2. They decided to share
st
future profits and losses in the ratio of 2 : 3 : 5 with effect from 1 April, 2018. Following items appears in the
Balance Sheet as at 31st March, 2018:
General Reserve ₹ 75,000 , Advertisement Suspense A/c (Dr.) ₹50,000
Contingencies reserve ₹ 12,500 Profit and Loss Account (Cr.) ₹37,500
Pass necessary Journal entries.
Adjustment of Accumulated Profit, Losses or Reserve through Capital Accounts only:-- Sometime the
partners may decide that existing balance of Profit and Loss Account or Reserve should continue to appear at
the same amount in the Balance Sheet of the reconstituted Firm. In such a situation, an adjustment is made
directly in the Partners Capital Accounts. The gain or the sacrifice of partner(s) is calculated and an adjusting
entry for the amount is passed. This is because at present, the partners are entitled to share such reserve and
profit in the old profit-sharing ratio whereas in future they will be entitled to share such reserve and profits in
the new profit-sharing ratio.
Question 10. A, B and C are partners in a firm sharing profits in the ratio of 3 : 3 : 2. They decided to share
profits equally w.e.f. 1st April, 2018. On that date, Profit and Loss Account showed credit balance of ₹ 72,000.
Instead of closing the Profits and Loss Account, it was decided to record an adjustment entry reflecting the
change in the profit-sharing ratio. Pass Journal entry to give effect to the same.
Question 11. D, E and F are sharing profits and losses in the ratio of 5 : 3 : 2. They decide to share profits and
losses in the ratio of 2 : 3 : 5 with effect from 1st April, 2018. They also decide to record the effect of the
following without affecting their book value, by passing an adjusting entry :
Book Value (₹)
General reserve 1,50,000
Contingency reserve 25,000
Profit and Loss A/c (Cr.) 75,000
Advertisement Suspense A/c (Dr.) 1,00,000
Workmen Compensation reserve : Workmen Compensation Reserve is a created out of firm’s profits to
meet likely to pay compensation to employees, if arises (say, for accident). It means , a claim may not arise. It
also means that claim may be higher than amount of reserve. At the time of change in profit-sharing ratio, it is
treated as follows :
Question 12. A, B and C sharing profits and losses in the ratio of 4:3:2,decided to share the future profits and
losses in the ratio of 2:3:4 with effect from 1.4.2018. An extract of their Balance Sheet as at 31.3.2018 is :
Workmen Compensation Reserve 90,000
Show the accounting treatment under the following alternative caese :
Case 1 . If there is no other information.

Case 2. If a claim on account of workmen compensation is estimated at ₹ 45,000.

Investment Fluctuation Reserve : Investment Fluctuation Reserve is a reserve created out of profits to
meet the fall in the market value of investment.
Question 13. A, B and C sharing profits and losses in the ratio of 4 :3 :2 decided to share future profits and
losses in the ratio of 2: 3: 4 with effect from 1st April, 2018. Extract of their Balance Sheet as at 31.3.2018 is :
Liabilities ₹ Assets ₹
Investment Fluctuation reserve 18,000 Investment (At cost ) 2,00,000
Question 14. X, Y and Z are partners in a firm sharing profit and losses in the ratio of 3 : 3: 2. Their Balance
Sheet as at 31st March, 2018 was :
Sundry Creditors 24,000 Cash at Bank 27,000
General Reserve 36,000 Sundry Debtors 50,000
Capital A/cs : Stock 1,20,000
X 2,00,000 Machinery 1,59,000
Y 2,00,000 Building 2,00,000
Z 1,00,000 5,00,000 Advertisement Expenditure 4,000
5,60,000 5,60,000
Partners decide that with effect from 1st April, 2018, they would share profits losses in the ratio of
4 : 3 : 2. It was agreed that :
(i) Stock is to be valued at ₹ 1,10,000.
(ii) Machinery is to be depreciated by 10%.
(iii) A Provision for Doubtful Debts is to be made on Debtors @ 5 %
(iv) Building to be appreciated by 20 %.
(v) A liability for ₹ 3,000 included in sundry Creditors is not likely to arise.
Partners agreed that revised values of assets and liabilities are not to be recorded in the books. They also
decided to retain the General Reserve in the books. Give necessary accounting entries.
Question 15. A, B and C are sharing profit and losses in the ratio 5 : 3 : 2. They decided to share future profits
and losses in the ratio of 2 : 3 : 5 with effect from 1st April, 2018. They also decide to record the effect of the
following revaluations without affecting the book value of the assets and liabilities by passing a Single
Adjustment Entry :
Book Figure Revised Figure

Land and Building 5,00,000 5,50,000
Plant and Machinery 2,50,000 2,40,000
Trade Creditors 60,000 55,000
Outstanding Expenses 60,000 75,000
Pass necessary Single Adjustment Entry.

Question 16. X,Y and Z are sharing profits 5 : 3 :2.They decide to share their future profit as 4 : 3 : 3 With
effect from 1st April, 2018, On this the following revaluation have taken place :
Book Value (₹) Revised Value(₹)
Investments 22,000 25,000
Plant and Machinery 25,000 20,000
Land and Building 40,000 50,000
Sundry Debtors 60,000 50,000
Trade Creditors 70,000 60,000
Pass necessary adjustment entry to be made because of the above changes in the value of assets and liabilities.
However, old values will continue in the books. [Ans.: Debit Z and Credit X by ₹ 760]
Question 17. X, Y and Z are Partners sharing profits and losses in the ratio of 7: 5: 4. Their Balance Sheet as at
31st March, 2018 stood as :
Capital A/cs: Sundry Assets 7,00,000
X 2,10,000
Y 1,50,000
Z 1,20,000_ 4,80,000
General Reserve 65,000
Profit and Loss A/c 25,000
Creditors 1,30,000
7,00,000 7,00,000
Partners decided that with effect from 1st April, 2018, they will share profits and losses in the ratio of 3 : 2 :1.
For this purpose, goodwill of the firm was values at ₹ 1,50,000. The partners neither want to record the
goodwill nor want to distribute the General Reserve and profits. Pass Journal entries to record the change and
prepare revised Balance Sheet.
Question 18. A and B are Partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet as at 31st
March, 2021 stood as :
Sundry Creditors 28,000 Cash 20,000

General Reserve 42,000 Sundry Debtors 1,20,000
Stock 1,40,000
Capital A/cs: Fixed Assets 1,50,000
A 2,40,000
B 1,20,000_ 3,60,000
4,30,000 4,30,000
They decided that with effect from 1st April, 2021. They will share profits and losses in the ratio of
2 :1. For this purpose they decided that :
(i) Fixed Assets are to be depreciated by 10%.
(ii) A Provision of 6% be made on Sundry Debtors for Doubtful Debts.
(iii) Stock be Valued at ₹ 1,90,000.
(iv) An amount of ₹ 3,700 included in Creditors is not likely to be claimed.
Partners decided to record the revised values in the books. You are required to pass Journal entries, prepare
Capital Accounts of Partners and the revised Balance Sheet.

Question 19. X, Y and Z are Partners in a firm sharing profits and losses as 5 : 4 : 3. Their Balance Sheet as at
st
31 March, 2018 was :

Outstanding Expenses 15,000 Sundry Debtors 2,10,000
General Reserve 75,000 Stock 3,00,000
Capital A/cs: Furniture 60,000
X 4,00,000 Plant and Machinery 4,20,000
Y 3,00,000
Z 2,00,000 9,00,000
10,30,000 10,30,000
st
From 1 April 2018, they agreed to alter their profit-sharing ratio as 4 : 3 : 2. It is also decided that :
(a) Furniture be taken at 80% of its value.

(b) Stock be appreciated by 20%.
(c) Plant and Machinery be valued at ₹ 4,00,000.
(d) Outstanding Expenses be increase by ₹ 13,000.
Partners agreed that altered values are to be recorded in the books and they do not want to distribute
the General Reserve. You are required to pass Journal entries to give effect to the above. Also, prepare
revised Balance Sheet. [Ans.: Gain (Profit) on Revaluation - ₹ 15,000.
Question 20. X, Y and Z are partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. Their Balance
Sheet as at 31st March, 2018 was :
BALANCE SHEET
Capital A/cs : Land 85,000
X 1,50,000 Building 50,000
Y 1,60,000 Plant and Machinery 1,00,000
Z 1,70,000_ 4,80,000 Stock 40,000
General Reserve 50,000 Debtors 1,25,000
Creditors 30,000 Cash in Hand 1,05,000
Bills Payable 1,20,000 Cash at bank 2,00,000
Outstanding Expenses 25,000
7,05,000 7,05,000
From 1.4.2018, the partners decided to share profits in the ratio of 1:2:3. For this purpose it was agreed that :
(i) The Goodwill of the firm should be valued at ₹ 60,000.
(ii) Land should be revalued at ₹ 1,00,000 and Building should be depreciated by 6 %
(iii) Creditors amounted to ₹ 3,000 were not to be paid.
(iv)
You are required to :

(a) Pass necessary journal entries to give effect to the above stated agreement.
(b) Prepare Capital Accounts of the Partners.
(c) Prepare Balance Sheet of the reconstituted

Question 21. (important question) A,B and C are partners sharing profits and losses in the ratio of 2 :1. They
decide with effect from 1st April, 2016, that they would share profits in the ratio of 3:2. But , this decision was
taken after the profit for the year 2016-17 amounted to ₹ 90,000 has been distributed in the old ratio.
Value of firm’s goodwill was estimated on the basis of aggregate of two years’ profit preceding the date
decision become effective. The profits for 2014-15 and 2015-16 were ₹ 60,000 and ₹ 75,000 respectively. It
was decided that no Goodwill Account will be opened in the books of the firm and necessary adjustment be
made through Capital Accounts which , on 31st March stood, at ₹ 1,50,000 fort A and ₹ 90,000 for B.
*Ans :. Value of Goodwill = ₹ 1,35,000; A’s sacrifice = 1/15 and B’s gain of share = 1/15;
Practice theory Question
1. What do you understand by Reconstitution of a Partnership Firm ?

2. State any two occasions on which a firm can be reconstituted.
3. What is Sacrificing Ratio ?
4. What is Gaining ratio ?
5. Why is the value of goodwill ascertained when a firm is reconstituted?
6. Explain the Revaluation Account.
7. Do you distribute Reserve at the time of Reconstitution of a firm? why ?.
8. Why is revaluation of assets on reconstitution of partnership necessary ?
9. State the ratio in which the partners share accumulated profits when there is a change in the profits-
sharing ratio among existing partners.
10. How will you deal with goodwill when there is a change in the profit-sharing ratio among the existing
partners? Explain with an example.
11. Is it necessary to revalue the assets and reassess the liabilities if there is a change in the profit-sharing
ratio of the existing partners? Give reasons.
12. How will you deal with reserve and accumulated profits at the time of change in the profit-sharing
ratio among the existing partners?
PRACTICE PRACTICAL QUESTIONS
1. A and B are sharing profits and losses equally . With effect from 1st April, 2019, they agree to share
Profits in the ratio 4 : 3. Calculate individual partner’s gain or sacrifice due to the change in ratio.
[Ans.: A gains and B sacrifices 1/14 th share. ]
st
2. X,Y and Z are sharing profits and losses in the ratio of 5 : 3 :2. With effect from 1 April, 2019, they
decide to share future profits and losses in the ratio of 5 : 3 : 2. Calculate each partner’s gain or
sacrifice due to the change in ratio.
[Ans :Z gains 1/10th share and Y sacrifices 1/10th share]
3. X,Y and Z are sharing profits and losses in the ratio of 5 : 3 :2. With effect from 1st April, 2019, they
decide to share future profits and losses equally. Calculate each partner’s gain or sacrifice due to
th th th
the change in ratio. [Ans :Y gains 1/30 , Z gains 4/30 and X sacrifices 5/30 share]
Accounting Treatment of Goodwill
4. A,B and C are shared profits and losses in the ratio of 3 : 3 :1 respectively. With effect from 1st April,
2019, they agreed to share profits and losses equally. The goodwill of the firm was valued at ₹
18,000. Pass necessary Journal entry.
*Ans.: Debit C’s Capital A/c and Credit A’s Capital A/c by -₹ 3,000.]
5. X,Y and Z are Partners sharing profits and losses in the ratio of 5 : 3 :2. from 1st April, 2019, they
decide to share profits and losses equally. The Partnership Deed provides that in the event of any

change in the profit-sharing ratio the goodwill should be value at two years’ purchase of the
average profit of the preceding five years. The profits and losses of the preceding years are :
Year 2014-15 2015-16 2016-17 2017-18 2018-19
Profit (₹) 70,000 85,000 45,000 35,000 10,000(Loss)
It is the practice of the firm not to show goodwill in the books.

You are required to calculate goodwill and pass Journal entry
[Ans.: Goodwill =₹ 90,000;Debit Y ₹ by -₹ by-₹ 12,000; Credit X by - ₹ 15,000+
6. X,Y and Z are shared profits and losses in the ratio of 3 :2. With effect from 1st April, 2019, they
decide to share profits and losses equally. On the date of change, the Profits and Loss Account
showed credit balance in the Profit and Loss Account immediately before the change in the profit-
sharing ratio. [Ans.;Dr. Profit and loss A/c by- ₹ 1,50,000; Cr. X’s Capital A/c by -₹ 90,000 and Y’s
Capital A/c by - ₹ 60,000+
7. X,Y and Z are sharing profits and losses in the ratio of 2 :3. With effect from 1st April, 2019, they
agreed to share profits in the ratio of 1 : 2. For this purpose, the goodwill of the firm is to be valued
at two years’ purchase of the average profit of last three years, which were ₹ 1,50,000; ₹ 1,60,000
and ₹ 2,00,000 respectively. The reserve appear in the books at ₹ 1,10,000. Partners neither want
to show the goodwill in the books nor want to show the goodwill in the books nor want to
distribute the reserve. You are required to give effect to the change by passing a single Journal
entry.
[Ans ;Debit Y and Credit X by - ₹ 30,000+

CHAPTER 5. ADMISSION OF A PARTNER
INTRODUCTION:-- Admission of a partner is one of the modes of reconstituting the firm because with the
admission of a partner, existing agreement comes to an end and new agreement among all the partners
(including incoming or new partner) comes into existence. Capital contribution by the new partner, his share of
profits and other conditions are agreed upon. The new partner on joining becomes liable for the liabilities of the
firm and entitled to assets and profits of the firm.
According to Section 31 of the Indian Partnership Act, 1932, new partner shall not be admitted in the firm
without the consent of all the existing partners, unless it is agreed otherwise by the partners in the Partnership
Deed. After admission, the new partner gets following two rights:
1. Right to share future profits of the firm and

2. Right to share in the assets of the firm.
At the same time, he becomes liable for any liability of the business incurred after admission and any loss
incurred by the firm.
The new or incoming partner receives share in future profits that is equal to the sacrifice of profit by an existing
partner or partners of the firm. New or incoming partner compensates the partner or partners who sacrifice their
share in profits in his or her favour. The amount he pays for their sacrifice is called Goodwill or Premium for
Goodwill. Besides the goodwill or premium for goodwill, new or incoming partner brings in capital to get right
in the assets of the firm.
Effects of Admission of a Partner:- The effects of admission of a new partner are:
1. Old partnership comes to an end and new partnership comes into existence but the firm continues.
2. New or incoming partner becomes entitled to share future profits of the firm and the
combined share of the old partners gets reduced.
3. New or incoming partner contributes an agreed amount of capital in the firm.
4. New partner acquires right on the assets and also becomes liable for the liabilities of the firm.
5. Adjustment is made in regard to accumulated profits and losses.
6. Assets are revalued and liabilities are reassessed. The net change is adjusted in existing
Old Partners' Capital Accounts in their old profit-sharing ratio.
7. Goodwill of the firm is valued to be paid to sacrificing partners for their sacrificed share
by the gaining partners through their Capital Accounts.
Adjustments required on the Admission of a Partner: The adjustments required are:
1. Determining new profit-sharing ratio.

2. Valuation and Adjustment of Goodwill.
3. Adjustment of profit/loss arising from revaluation of assets and reassessment of liabilities.
4. Adjustment of accumulated profits, reserves and losses.
5. Adjustment of capital.
NEW PROFIT-SHARING RATIO: New profit-sharing ratio is the ratio in which all partners, including new or
incoming partner, share future profits and losses of the firm.
SACRIFICING RATIO: Sacrificing Ratio is the ratio in which old or existing partners forego, i.e., sacrifice
their share of profit in favour of the new or incoming partner. Thus, Sacrificing Ratio can be defined as the
ratio in which the new partner is given share by the old partners. This share may be given to the new or
incoming partner by all the old partners equally or by all or some of the partners in agreed share. The purpose of
determining sacrificing ratio is to determine the amount of compensation that new partner should pay to the old
partners for the share of profits sacrificed by them.

Case 1: When new or incoming partner acquires his share from old or existing partners in their
old profit-sharing ratio.
Question 1. A and B are partners sharing profits in the ratio of 5 : 3. C is admitted for 1/4th share in the profits.
Calculate new profit-sharing ratio and sacrificing ratio of the partners.
Question 2. A, B and C were partners in a firm sharing profits in 3 : 2 : 1 ratio. They admitted D for 10%
profits. Calculate new profit-sharing and sacrificing ratio.
Case 2: When share of New Partner is given and new ratio of Old partners is given.
Question 3. A and B are equal partners. They admit C for 1/4th share. In future, profit-sharing ratio between A
and B would be 2 : 1. Calculate new profit-sharing and sacrificing ratio.
Case 3: When new partner acquires his share from old or existing partners in a particular ratio.
Question 4. A and B are in partnership sharing profits and losses in the ratio of 5 : 3. C is admitted as a partner
for 1/5th share which he takes 1/10th from A and 1/10th from B. Calculate new profit-sharing ratio and
sacrificing ratio of the partners.
Question 5. A and B are partners sharing profits in the ratio of 5:4. They admit C for 1/10th share of profits
which he acquires, in equal proportions from both. Find new ratio and sacrificing ratio. (Delhi 2011 C)
Case 4: When new partner acquires his share by surrender of particular fraction by the old partners.
Question 6. A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. A surrenders 1/5th of
his share, whereas B surrenders 2/5th of his share in favour of C, a new partner. Calculate new profit-sharing
ratio and sacrificing ratio.
Question 7. On 1st April, 2017, Sahil and Charu entered into partnership for sharing profits in the ratio of 4 : 3.
They admitted Tanu as a new partner on 1st April, 2019 for 1/5th share which she acquired equally from Sahil
and Charu. Sahil, Charu and Tanu earned profits at a higher rate than the normal rate of return for the year ended
31st March, 2020. Therefore, they decided to expand their business. To meet the requirements of additional
capital, they admitted Puneet as a new partner on 1st April, 2020 for 1/7th share in profits which he acquired
from Sahil and Charu in 7 : 3 ratio. Calculate:
(i) New profit-sharing ratio of Sahil, Charu and Tanu for the year 2019-20.
(ii) New profit-sharing ratio of Sahil, Charu, Tanu and Puneet on Puneet's admission. (Delhi 2015)
Question 8. A and B are partners sharing profits in the ratio of 5 : 3. C is admitted for 3/10th share. Half of
which was gifted by A and the remaining share was taken by C equally from A and B. Calculate new profit-
sharing ratio and sacrificing ratio.
Question 9. A and B are partners sharing profits in the ratio of 3 : 1. C is admitted into partnership for 1/8th
of the profits. Calculate sacrificing ratio and new profit-sharing ratio. Ans : (Sacrificing ratio 3 : 1)
Question 10. A and B are partners sharing profits in the ratio of 3 : 2. C is admitted into partnership. New
profit-sharing ratio among A, B and C is 5 : 3 : 2. Find the sacrificing ratio. Ans: sacrificing ratio 1:1
Question 11. X and Y are partners sharing profits and losses in the ratio of 7 : 5. They admit Z, a new partner,
who acquires 1/12th from X and 1/6th from Y as his share. Calculate new profit-sharing ratio and the sacrificing
ratio. Ans : new profit-sharing ratio 2:1:1, sacrificing ratio 1:2
Question 12. A, B and C are partners in a firm sharing profits and losses in the ratio of 6 : 3 : 1. They admit D
into partnership with effect from April 1, 2018. New profit-sharing ratio among A, B, C and D will be 3:3:3 :1.
Find the sacrificing ratio.

Solution: Calculation of sacrificing Ratio
Partners Old Ratio New Raito Sacrifice/Gain

A 6/10 3/10 6/10 – 3/10 = 3/10(Sacrifice)
B 3/10 3/10 3/10 – 3/10 = 0 (Nil)
C 1/10 3/10 1/10 – 3/10 = -2/10(Gain)
D ... 1/10 1/10(Gain)
Question 13. L and M are partners in a firm sharing profits in the ratio of 5 : 3. They admit N and decide that
the profit-sharing ratio between M and N shall be same as existing between L and M. Calculate new profit-
sharing ratio and the sacrificing ratio.
Difference between Sacrificing Ratio and New Profit-Sharing Ratio

Basis Sacrificing ratio New Profit – sharing Ratio
1. Meaning It is the ratio in which the old partners It is the ratio in which all partners
agree to sacrifice their shares in profits in including the incoming partner share the
favour of a new partner. future profits and losses.
2. Related It is related to the old partners only. It is related to all partners including the
Partners new partner.
3. Calculation Sacrificing Ratio New Profit-Sharing Ratio

= Old Ratio - New Ratio = Old Ratio - Sacrificing Ratio
2. TREATMENT OF GOODWILL :--Goodwill is an intangible asset which enables a firm to earn profit over and
above the normal profit (i.e., Super Profit) earned by other firm in the industry. It arises due to efforts made by
the existing partners in the past. Therefore, at the time of admission, new partner who acquires the share in
future profits from the existing partners should compensate sacrificing partners by paying them an amount,
termed as goodwill or premium for goodwill. Goodwill is a way for compensating the existing partners for the
sacrifice they make in favour of a new partner. From the accounting point of view, there may be different
situations related to treatment of goodwill and these are:
(i) Premium for Goodwill) paid Privately: When goodwill premium is paid privately (outside the business) by
the new or incoming partner to the old partners :-- Journal Entry is not recorded in the books of account.
(ii) Goodwill/Premium for Goodwill brought in Cash by the New or Incoming Partner and
Retained in the Business: When the new partner brings cash for his share of goodwill, it is transferred to
Capital Accounts of the sacrificing partners. In other words, the amount of goodwill brought in by the new
partner is shared by the sacrificing partners in their sacrificing ratio.
Question 14. A and B are partners in the firm sharing profit in the ratio of 3 : 2. A and B surrender 1/2 of their
respective shares in favour of C. C is to bring his share of premium for goodwill in cash and Rs 2,00,000 as his
capital. Goodwill of the firm is estimated at Rs 40,000. Pass necessary Journal entries for recording goodwill in
the above case. (CBSE, Foreign 2006)
Question 15. A and B are partners in a firm sharing profits in the ratio of 2 : 1. On 1st April, 2019, their capitals
are ₹4,00,000 and ₹2,00,000 respectively. On that date, they admitted C as a new partner for 1/5th share in
future profits. New profit-sharing ratio of A, B and C will be 3 : 1 : 1. C brought in ₹1,00,000 as his capital and
₹ 21,000 as his share of premium. Draft Journal entries and show the Capital Accounts of all the Partners.
Question 16. Ram and Shyam are partners sharing profits and losses in the ratio of 4 : 1. They agreed to admit
Mohan into the partnership on 1st April, 2019 for 1/3rd share in profits. It was agreed that Ram, Shyam and
Mohan would share profits equally in future. Mohan brought in ₹ 50,000 as goodwill (premium) for his 1/3rd
share in profits and Rs 6,00,000 as his capital. Record necessary Journal entries in the books of the firm.

Question 17. X and Y are partners in a firm sharing profits in the ratio of 4:3.On 1.4. 2019, they admitted Z as
new partner. Z brought in ₹ 1,00,000 for his capital and ₹ 21,000 for 1/3rd share of goodwill premium. On Z's
admission, goodwill appeared in the books of the firm at ₹ 28,000. Record Journal entries on Z's admission.
Solution:
Date Particulars L.F Dr.(₹) Cr.(₹)
2016
April 1 X's Capital A/c ...Dr. 16,000
Y's Capital A/c ..Dr. 12,000
To Goodwill A/c 28,000
(Being the existing goodwill written off prior to Z 's admission)
April 1 Bank A/c ...Dr. 1,21,000
To Z's Capital A/c 1,00,000
To Premium for Goodwill A/c 21,000
(Being Z brought in cash for his capital and his share of goodwill)
April 1 Premium for Goodwill A/c ...Dr. 21,000
To X's Capital A/c 12,000
To Y's Capital A/c 9,000
(Being the goodwill/premium for goodwill brought in by Z transferred to
the Capital Accounts of X and Y in their sacrificing ratio, which is 4 : 3)
Question 18. Following is the Balance Sheet as at 1st April, 2021 of Sushil and Satish who are in partnership
sharing profits and losses in the ratio of 5 : 2.
Sundry Creditors 1,30,000 Bank 10,000
Capital A/cs: Stock 20,000
Sushil 80,000 Debtors 30,500
Satish 70,000 1,50,00 Less: Provision for Doubtful Debts 500 30,000
Plant and Machinery 50,000
Building 1,70,000
2,80,000 2,80,000
On the above date, they admitted Samir as new partner on the following terms:
(i) That Samir will bring in ₹1,00,000 for his capital and the necessary amount of premium for goodwill for
3/8th share in the future profits.
(ii) Goodwill of the firm on Samir's admission was valued at ₹1,40,000.
(iii) That new profit-sharing ratio will be 2 : 3 : 3.
Pass necessary Journal entries to carry out these after Samir's admission as a partner.
(iii) Premium for Goodwill (Goodwill) brought in Kind: New or incoming partner may bring his share of
Premium for Goodwill in the form of assets. In this situation, the value of assets brought in is debited and
Premium for Goodwill Account is credited for his share of goodwill and also new Partner's Capital Account for
his capital. Thereafter, premium for goodwill (Share of Goodwill) is transferred to the Capital Accounts of the
sacrificing partners in their sacrificing ratio.
Question 19(Premium brought in Kind). X and Y are partners in a firm sharing profits in the ratio of 3 : 2. On
1st April, 2019, they admit Z as new partner for 3/13th share in the profits. New ratio will be 5 : 5 : 3. Z
contributed the following assets to his capital and his share for goodwill: Stock ₹80,000; Debtors ₹1,20,000;
Land ₹2,00,000; Plant and Machinery ₹1,20,000. On the date of admission of Z, goodwill of the firm was valued
at ₹10,40,000. Record necessary Journal entries in the books of the firm on Z's admission.
(iv) Goodwill/Premium for Goodwill is brought by New or Incoming Partner and is withdrawn by Old
Partners Fully or Partly: Premium brought by the new or incoming partner is shared by the old partners
in the sacrificing ratio. The sacrificing partners may withdraw the premium amount fully or partly.

Question 20. Strong and Weak are partners sharing profits and losses in the ratio of 2 : 3. On 1st April, 2019,
they admit Able into partnership for 1/4th share in profits. Able brought in ₹1,00,000 for his capital and ₹36,000
as premium for his 1/4th share in the profits. New profit-sharing ratio of Strong, Weak and Able is agreed to be
3 : 3 : 2. Strong and Weak withdraw the premium money from business. Pass necessary Journal entries.
Question 21. A and B were partners in a firm sharing profits in the ratio of 4 : 3. They admitted C as a new
partner for 3/7th share in the profits of the firm. New profit-sharing ratio will be 2 : 2 : 3. C brought ₹2,00,000
as his capital and ₹60,000 for his share of premium for goodwill, half of which was withdrawn by A and B from
the firm. Calculate sacrificing ratio and pass necessary Journal entries in the books of the firm for the above
transactions. (Al 2009 C)
(v) When Only a Part of the Goodwill/Premium for Goodwill is brought by a New or Incoming Partner in
Cash: New or incoming partner may not be able to bring the full amount of his share of goodwill/premium for
goodwill in cash, i.e., brings only a part in cash. In this case, the Premium for Goodwill Account is credited for
the amount of premium brought by him. At the time of recording the transfer entry, new or incoming Partner's
Current Account is debited with his unpaid share of premium besides debiting Premium for Goodwill Account
with the amount of premium paid by him. In this manner, incoming Partner's Current Account will show a debit
balance with the amount of goodwill not brought by him.
Question 22 (Incoming Partner brings in Only a Part of his Share of Goodwill). A and B are partners
sharing profits and losses in the ratio of 3 : 2. They admit C into the firm for 1/4th share in profits which he
takes 1/6th from A and 1/12th from B. C brings ₹18,000 as goodwill out of his share of ₹30,000 along with his
capital Rs 5,00,000. No Goodwill Account appears in the books of the firm. Pass necessary Journal entries to
record this arrangement.
Question 23. X and Y are partners sharing profits and losses in the ratio of 3: 2. They agree to admit Z as a
partner for 1/5th share. Z acquires his share from X and Y in the ratio of 2 : 3. Goodwill of the firm is valued at
₹50,000. Z brings in only 60% of his share of goodwill and ₹2,00,000 as his capital through cheque. Pass
necessary Journal entries assuming that the capitals are fixed under each of the following alternative cases:
Case 1. When goodwill is not appearing in the books.
Case 2. When goodwill appears in the books at 20,000.
(vi) When New or Incoming Partner is not able to bring his Share of Goodwill/Premium for Goodwill
in Cash: If new partner does not bring his share of goodwill in cash, New Partner's Capital Account is
debited for his share of goodwill and the sacrificing Partners' Capital Accounts are credited in their
sacrificing ratio. Following Journal entry is passed:
New Partner's Capital A/c (or Current A/c) ...Dr. [For his share of goodwill]
To Sacrificing Partners' Capital or Current A/cs [In sacrificing ratio]
Question 24. A and B who share profits in the ratio of 3 : 2 had capitals of ₹2,00,000 and ₹1,50,000
respectively. They agree to admit C into partnership from 1st April, 2019 on the following terms in return for
1/3rd share in future profits:
(i) That C should bring in ₹2,00,000 as capital.

(ii) That C is unable to bring in his share of goodwill, goodwill of the firm is valued at
₹1,50,000. Record necessary Journal entries in the books of the firm under fixed capital method.
Question 25. A, B and C are in partnership sharing profits and losses in the ratio of 5 : 4 : 1 respectively. Two
new partners D and E are admitted. Profits are now to be shared in the ratio of 3 : 4 : 2 : 2 : 1 respectively. D is

to pay ₹30,000 for his share of goodwill but E has insufficient cash to pay for goodwill. Both the new partners
introduced ₹40,000 each as their capital. Pass necessary Journal entries.
Question 26. A and B are partners in a firm sharing profits and losses in the proportion of 3/4th and 1/4th
respectively. On 1st April, 2021, they take C into partnership for 1/5th share of profits. C acquires his share from
A and B in the ratio of 2 : 1. Value of goodwill is determined at ₹24,000. At present, C is not in a position to
bring in any amount towards goodwill. Give necessary Journal entries under the following alternative cases:
Case 1. When the Goodwill Account appears at₹10,000 in the books of the firm.
Case 2. When Goodwill Account is not appearing in the books of the firm.
Hidden or Inferred Goodwill
Question 27. A and B are partners with capitals of ₹1,60,000 and ₹1,20,000 respectively. They admit C as a
partner on 1st April, 2019 for 1/4th share in the profits of the firm. C brings in ₹1,60,000 as his share of capital.
Give Journal entries on C's admission.
Question 28.Abhay and Beena are partners in a firm. They admit Chetan as a partner with 1/4th share in the
profits of the firm. Chetan brings ₹2,00,000 as his share of capital. Value of the total assets of the firm is
₹5,40,000 and outside liabilities are valued at ₹1,00,000 on that date. Give necessary entry to record goodwill at
the time of Chetan's admission. Also, show your working notes. (Delhi 2013)
Question 29. Balance Sheet of X and Y who share profits&losses in the ratio of 3:2 as at 31st March,2021 was:
Sundry Creditors 1,00,000 Cash at Bank 10,000
Reserve 60,000 Debtors 50,000
Profit and Loss A/c 25,000 Stock 70,000
X’s Capital 48,000 Furniture 20,000
Y’s Capital 32,000 Plant and Machinery 1,00,00
Advertisement Expenditure 15,000
2,65,000 2,65,000
They admit Z as a partner from 1st April, 2021 for 1/5th share in the profits of the firm. Z brings in ₹50,000 as
his capital. Give Journal entry for the adjustment of goodwill.
Solution: JOURNAL
Date Particulars L.F Dr.(₹) Cr.(₹)
2021
April 1 Z's Current A/c ( 50,000 x 1/5) ...Dr. 10,000
To X's Capital A/c (10,000 x 3/5) 6,000
To Y's Capital A/c (10,000 x 2/5) 4,000
(Being Z's share of goodwill adjusted through Capital Accounts by
crediting sacrificing partners in their sacrificing ratio)
Working Note:Calculation of Hidden Goodwill: ₹
Total capital of the new firm on the basis of capital brought in by Z (50,000 x 5/1) 2,50,000
Less:Net worth of the new firm (Adjusted Capitals of the Old Partners + Incoming Partner's Capital)
[(₹48,000 + ₹32,000 + ₹60,000 + ₹25,000 - ₹15,000 + ₹50,000] 2,00,000
Value of Goodwill 50,000

Question 30.Hemant and Nishant were partners in a firm sharing profits in the ratio of 3 : 2. Their capitals were
₹1,60,000 and ₹1,00,000 respectively. They admitted Somesh on 1st April, 2021 as a new partner for 1/5th share
in the future profits. Somesh brought ₹1,20,000 as his capital. Calculate the value of goodwill of the firm and
record necessary Journal entries for the above transactions on Somesh's admission. (AI 2014)
Solution: Based on Somesh's share, the total capital of the new firm will be =1,20,000 x 5/1 = 6,00,000
Less: Capital of Hemant 1,60,000

Capital of Nishant 1,00,000
Capital of Somesh 1,20,000
3,80,000
Value of Goodwill of the firm 2,20,000
Somesh's share of Goodwill = 2,20,000 x 1/5 = 44,000.
Question 31. A commenced his business with a capital of ₹5,00,000 on 1st April, 2011. During the five years
ended 31st March, 2016, the results of his business were:
Year Ended ₹
31st March, 2012 Loss 10,000
31st March, 2013 Profit 26,000
During this period, he withdrew ₹80,000 for his personal use. On 1st April, 2016, he admitted B into partnership
on the following terms:
(i) Goodwill is to be valued at 3 times the average profit of last five years.
(ii) B will have 1/2 share of the future profits.
(iii) He will bring in his share of goodwill in cash.
(iv) He will bring in capital in cash equal to that of A after his admission.
Calculate amount to be brought in by B and pass entries to record the transactions pertaining to admission.
(Foreign 1991, Modified)
3. REVALUATION OF ASSETS AND REASSESSMENT OF LIABILITIES

The value of assets may be different from its book value because with the time, value of some assets increases
while of some decreases. In the case of liabilities, it is possible that the amount payable is different from the
value recorded in the books. It is also possible that some assets or liabilities are not recorded in the books. The
value of assets and the liabilities payable need to be brought to their correct values so that the incoming partner
is not put to an advantage or a disadvantage. The value of assets and liabilities is adjusted through an account
titled as Revaluation Account or Profit and Loss Adjustment Account.
Increase or decrease in the value of all assets and liabilities are shown in the Revaluation Account. Gain
(Profit)/Loss arising there from is transferred to the Old Partners' Capital Accounts in their old profit-sharing
ratio.When assets and liabilities are revalued, these may:
1. appear in the books at the new values or

2. appear in the books at the old values.
1. When Assets and Liabilities Appear in the Books at the New Values:-
The adjustments in the value of assets and liabilities are effected through an account called Revaluation
Account or Profit and Loss Adjustment Account. It is debited by decrease in the value of assets and increase
in the amount of liabilities and credited by the increase in the value of assets or decrease in the amount of
liabilities.

Note: When the Revaluation Account or Profit and Loss Adjustment Account is prepared, assets and
liabilities appear in the Balance Sheet of the new firm at their Revised Figures.
Question 32. Pass entries in firm's Journal for the following on the admission of a partner:
(i) Unrecorded Investments worth ₹5,000.

(ii) Unrecorded liabilities towards suppliers for₹1,500.
(iii) An item of 600 included in S. Creditors is not likely to be claimed, hence should be written back.
(iv) There was unrecorded equipment costing Rs 40,000 now estimated at Rs 28,000.
Question 33.Rohit and Bal sharing profits in the ratio of 5:3, had following Balance Sheet as at 31st March 2018:
Capital A/cs: Goodwill 30,000
Rohit 80,000 Building 34,000
Bal 40,000 1,20,000 Plant 27,000
General Reserve 28,000 Furniture 4,000
Creditors 20,000 Debtors 32,500
Bills Payable 8,000 Bills Receivable 15,000
Stock 22,500
Bank 11000
1,76,000 1,76,000
On 1st April, 2018 they decided to admit Rahul into the partnership giving him 1/5th share. He brings in
₹50,000 as his share of capital and Rs 10,000 for his share in goodwill. The partners decided to revalue the
assets as follows:
Plant ₹25,000; Debtors ₹31,000; Stock ₹32,500; Building ₹40,000; Furniture ₹2,000; B/R ₹12,500. You are
required to show Journal entries and prepare Revaluation Account and revised balance sheet.
Question 34.A and B are carrying on business in partnership, sharing profits and losses in the ratio of 2 : 3
respectively. Their Balance Sheet as at 31st March, 2021 was:
Sundry Creditors 24,870 Cash in Hand 1,420
Capital A/cs: Cash at Bank 23,850
A 68,100 Sundry Debtors 11,000
B 68,100 1,36,200 Stock 36,000
Furniture 8,800
Building 80,000
1,61,070 1,61,070
They admit C into partnership with effect from 1st April, 2021 giving him 1/3rd share in future profits on the
following terms:
(i) Stock and Furniture are to be reduced in value by 12 ½ %.
(ii) Building is to be appreciated by ₹15,000.
(iii) A provision of 5% is to be created on Sundry Debtors for Doubtful Debts.
(iv) C is to bring in ₹60,000 as his capital and ₹40,000 as goodwill, which is to remain in
the business.
Draft Journal entries to record the above arrangement and show opening Balance Sheet of the new firm.

Question 35. Swadesh and Swaraj were partners sharing profits equally. Their Balance Sheet as at 31.3. 2019 was:
Creditors 50,000 Cash 12,000
Bills Payable 15,000 Cash at Bank 15,000
Outstanding Expenses 3,000 Debtors 20,000
Capital A/cs: Less: Provision for Doubtful Debts 500 19,500
Swadesh 60,000 Stock 20,000
Swaraj 40,000 1,00,000 Furniture 10,000
Machinery 18,000
Land and Building 73,500
1,68,000 1,68,000
st
Sambhav is admitted as a partner from 1 April, 2019 on the following terms:
(i) Sambhav will get 1/5th share in profits and he will bring in ₹20,000 as his capital and
₹5,000 as his share of goodwill.
(ii) Goodwill brought in by Sambhav will be withdrawn by Swadesh and Swaraj.

(iii) Provision for Doubtful Debts should be brought up to 5% on Debtors.
(iv) Machinery be depreciated by ₹2,000 and Furniture by 12.5%.
(v) Stock be valued at ₹23,000.
(vi) Land and Building be appreciated by 20%.
(vii) Investments of ₹2, 000 which did not appear in books should be recorded.
Record necessary Journal entries and prepare Balance Sheet of the new firm.
Question 36. Ram and Rahim are partners in a firm. They share profits and losses in the ratio of 3 : 2. Their
Balance Sheet as at 31st March, 2021 was:
Creditors 1,50,000 Cash at Bank 1,20,000
Bills Payable 80,000 Debtors 2,00,000
Outstanding Rent 20,000 Less: Provision for
Capital A/cs: Doubtful Debts 20,000 1,80,000
Ram 3,00,000 Stock 50,000
Rahim 1,50,000 4,50,000 Prepaid Expenses 10,000
Plant and Machinery 3,40,000
7,00,000 7,00,000
st
They admitted Prabhu as a new partner on 1 April, 2021 on the following terms:
(i) Prabhu will bring in ₹2,00,000 as capital and the necessary amount for goodwill.
(ii) The new profit-sharing ratio among Ram, Rahim and Prabhu will be 5 : 3 : 2.
(iii) The amount of goodwill is to be based on Prabhu's share in profits and capital contributed by him.
(iv) Stock to be depreciated by 10%.
(v) Provision for Doubtful Debts is to be only ₹5,000.
(vi) Plant and Machinery are to be depreciated by 5%.
Prepare Revaluation Account, Bank A/c, Partners' Capital Accounts and the Balance Sheet of the New Firm.
2. When Assets/ Liabilities are to Appear in the Book at the Old Values (Memorandum Revaluation A/C)
Difference between the Revaluation Account and the Memorandum Revaluation Account
Basis Revaluation Account Memorandum Revaluation Account

1. Purpose It is prepared to record the effect of It is prepared to record the effect of revaluation of
revaluation of assets and liabilities assets and liabilities when the assets and liabilities
whenthe assets and liabilities are to are to appear at their old figures.
appear at their revised figures.

2. Parts It is not divided into two parts. It is divided into two parts, viz., the first part to
record the changes in the value of assets and
liabilities and the second part to nullify the changes
recorded in the first part.
3. Transfer The balance of the Revaluation The balance of the first part (Profit or Loss) of this
of Account is transferred to the Old account is transferred to the Capital Accounts of the
Balance Partners' Capital Accounts in the old old partners in their old profit-sharing ratio. The
profit-sharing ratio. balance (Profit or Loss) of the second part is
transferred to the Capital Accounts of all the partners
including the new partner in the new profit- sharing
ratio in case of the admission of a partner and
continuing partner in the case of retirement of a
partner.
Question 37. Following was the Balance Sheet of A, B and C who were equal partners as at 31.3. 2019:
Bills Payable 3,300 Cash 600
A 16,800 Furniture 2,400
B 12,600 Building 19,500
C 6,000 35,400
44,700 44,700
They agreed to take D into partnership from 1.4.19 and give him 1/4th share in the profits on the
following terms:
(i) That D should bring in ₹9,000 for goodwill and ₹15,000 as capital.
(ii) That Stock and Furniture be depreciated by 10%.
(iii) That a Provision of 5% on Debtors be created for Doubtful Debts.
(iv) That a liability for ₹1,080 be created against bills discounted.
(v) That the value of the Building is undervalued by ₹8,500.
(vi) That the values of liabilities and assets other than cash are not to be altered.
Give necessary entries to give effect to the above stated arrangement and prepare Balance Sheet of the firm.
4. RESERVES AND ACCUMULATED (UNDISTRIBUTED) PROFITS/LOSSES
Question 38. A and B are partners in a firm sharing profits and losses in the ratio of 5 : 3. C was admitted for
1/3rd share in the profits. On the date of C's admission, the Balance Sheet of A and B showed a General
Reserve of ₹60,000 and a balance of ₹20,000 in the Profit and Loss Account on the assets side of the Balance
Sheet. Pass necessary Journal entries on the treatment of these items on C's admission.
Question 39. A,B and C were partners sharing profits and losses in the ratio of 3:1:1.On 1.4.2019, their Balance
Sheet stood as: BALANCE SHEET as at 1st April, 2019
Capital —A 1,00,000 Machinery 1,50,000
Capital --B 30,000 Building 50,000
Capital —C 20,000 Debtors 10,000
General Reserve 25,000 Investments 30,000
Profit and Loss A/c 35,000 Cash and bank 1,18,000
Investments Fluctuation Reserve 20,000 Stock 25,000
Workmen Compensation Reserve 23,000
Employees' Provident Fund 30,000
Creditors 1,00,000
3,83,000 3,83,000

They admitted D into partnership for 1/5th share of profits on the above date. A claim for workmen
compensation is estimated at ₹13,000 only. Give Journal entries to adjust the accumulated profits and losses.
QUESTION 40.A and B are partners sharing profits in the ratio of 3:2.On 31.3.19,their Balance Sheet was as follows:
Creditors 2,50,000 Cash in Hand 25,000
Bills Payable 1,00,000 Cash at Bank 5,75,000
General Reserve 1,50,000 Debtors 50,000
Capital A/cs: Stock 3,00,000
A 8,00,000 Building 5,00,000
B 4,00,000 12,00,000 Machinery 2,00,000
Goodwill 50,000
17,00,000 17,00,000
They agree to admit C as a partner with effect from 1st April, 2019 with 1/3rd share on the following terms:
(i) C will bring in ₹5,00,000 as capital and ₹2,00,000 as his share of goodwill but he actually contributed
only ₹1,20,000 towards goodwill.
(ii) Building and Machinery to be depreciated by 5%.
(iii) Stock to be revalued at ₹4,00,000.
(iv) There is an unrecorded asset worth ₹1,20,000.
(v) One month salary of ₹30,000 is outstanding.
Prepare Revaluation A/c, Bank A/C, Capital A/c of Partners and the Balance Sheet after the admission of C.
QUESTION 41.Usha and Asha are partners sharing profits in the ratio of 3:2. Their Balance Sheet as at 31.3.21
was as follow:
General Reserve 18,000 Debtors 48,000
Bill Payable 5,000 Less:Provision for Doubtful Debts 4,800 43,200
Capital A/cs Stock 30,000
Usha 40,000 Patents 7,400
Asha 35,000 75,000 Building 20,400
1,25,000 1,25,000
Neelam is admitted into the partnership giving her 1/5th share in the profits. Neelam is to bring in ₹30,000 as
her capital and her share of goodwill in cash subject to the following terms:
(i) Goodwill of the firm to be valued at ₹50,000.

(ii) Stock to be reduced by 10% and the Provision for Doubtful Debts be reduced by ₹2,400.
(iii) Patents to be valueless.
(iv) There was a claim against the firm for damages amounting to ₹2,000. The claim has now been accepted.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the new firm.
(Delhi, AI, Foreign 2004, Modified)
Solution: REVALUATION ACCOUNT
Particulars ₹ Particulars ₹
To Stock A/c 3,000 By Provision for Doubtful Debts A/c 2,400
To Patents A/c 7,400 By Loss on Revaluation transferred to:
To Claim for Damages A/c 2,000 Usha's Capital A/c 6,000
Asha's Capital A/c 4,000 10,000
12,400 12,400

PARTNERS’ CAPITAL ACCOUNTS

Particulars Usha Asha Neelam Particulars Usha Asha Neelam
₹ ₹ ₹ ₹ ₹ ₹
To Revaluation A/c 6,000 4,000 ... By Balance b/d 40,000 35,000 ...
Loss By General Reserve 10,800 7,200 ...
To Balance 50,800 42,200 30,000 By Cash A/c ... ... 30,000
By Premium for
GoodwilI A/c 6,000 4,000 ...
56,800 46,200 30,000 56,800 46,200 30,000
QUESTION 42. Murari and Vohra were partners in a firm with capital of ₹1,20,000 and ₹1,60,000 respectively.
On 1st April, 2010 they admitted Yadav as a partner for one-fourth share in profits on his payment of ₹ 2,00,000
as his capital and ₹90,000 for his one-fourth share of goodwill.
On that date the creditors of Murari and Vohra were ₹60,000 and Bank overdraft was ₹15,000. Their assets apart
from cash included Stock ₹10,000; Debtors ₹40,000; Plant and Machinery ₹80,000; Land and Building
₹2,00,000. It was agreed that Stock should be depreciated by ₹2,000; Plant and Machinery by 20%, ₹5,000
should be written off as Bad Debts and Land and Building should be appreciated by 25%. Prepare Revaluation
Account, Capital Accounts and the Balance Sheet of the new firm. (AI 2011)
QUESTION 43. Following is the Balance Sheet of Subash and Asha as at 31st March, 2019 sharing profits in
the ratio of 3 : 2:
Investment fluctuation fund 3,000 Debtors 22,000
Employees’ Provident Fund 15,000 Less: Provision for D. Debts 1,000 21,000
General Reserve 30,000 Stock 11,000
Workmen Compensation Reserve 15,000 Bank 21,000
Capital A/cs: Land and Building 18,000
Subash 15,000 investment 12,000
Asha 10,000 25,000 Advertisement Expenditure 5,000
88,000 88,000
They admit Tanya as a partner on 1st April, 2019 for 1/6th share in the profits. She has to bring Rs 40,000 as her
capital and Rs 15,000 for her share in goodwill. It was decided that:
(i) Value of Land and Building be increased by ₹3,000.

(ii) Value of Stock be increased by ₹2,500.
(iii) Provision for Doubtful Debts be increased by ₹1,500.
(iv) Market value of investment estimated at Rs 10,000. Prepare necessary accounts.
QUESTION 44. A and B are Partners in a firm. Their Balance Sheet as at 31st March, 2019 was:
Workmen Compensation Reserve 5,600 Cash 10,000
Outstanding Expenses 3,000 Sundry Debtors 80,000
Creditors 30,000 Less: Provision for Doubtful Debts 4,000 76,000
Capital A/cs: A 50,000 Stock 20,000
B 60,000 1,10,000 Machinery 38,600
1,48,600 1,48,600

On 1st April, 2019, they admitted C as a new partner on the following conditions:
(i) C brings in 40,000 as his share of capital but he is unable to bring any amount for goodwill. C's Share
of goodwill is adjusted by opening his Current Account.
(ii) The new profit-sharing ratio between A, B and C will be 3: 2:1.
(iii) Claim towards Workmen Compensation is ₹3,000.
(iv) Bad Debts amounting to * 6,000 are to be written off.
(v) Creditors are to be paid 2,000 more.
(vi) ₹2000 be provided for an unforeseen liability.
(vii) Outstanding Expenses be brought down to 1,200.
(viii) Shikha, an old customer whose account was written off as bad debts, has promised
to pay ₹ 2,500 in settlement of her dues.
ix) Goodwill is valued at 1.5 years' purchase of the average profit of last three years, less ₹12,000. The
profits of last three years amounted to ₹10,000; ₹ 20,000 and Rs 30,000 respectively. Prepare Revaluation
Account, Capital Accounts of Partners and the Opening Balance Sheet.
st
QUESTION 45. Following is the Balance Sheet of A and B at 31 March, 2019 who are partners in a firm
sharing profits and losses in the ratio of 3:2 respectively:
Creditors 75,000 Cash at Bank 25,000
Capital A/cs Less: Provision for D. Debts 4,000 96,000
A 3,00,000 Stock 74,000
B 1,50,000 4,50,000 Investments 40,000
Current A/cs : Fixed Assets (Tangible) 3,60,000
A 50,000 Goodwill 50,000
B 10,000 60,000
6,45,000 6,45,000
C is admitted as a new partner on 1st April, 2019 on the following terms:
(i) Provision for doubtful debts is to be maintained at 5% on Debtors.
(ii) An outstanding bill for repairs 25,000 will be brought into books.
(iii) An unaccounted Accrued Income of 7,500 be provided for.
(iv) A takes over the Investments at an agreed value of 30,000.
(v) Expenses on revaluation amounting to 5,000 are paid by A.
(vi) Stock is revalued at ₹ 79,000.
(vii) New profit-sharing ratio of partners will be 4 : 3 : 2.
(viii) C will bring in ₹ 1,00,000 as his capital.
(ix) C is to pay an amount equal to his share in firm's goodwill valued at twice the average profit of the
last three years which were 1,50,000, 1,30,000 and 1,25,000 respectively.
(x) Half of the amount of goodwill is to be withdrawn by A and B.
Prepare Revaluation Account, Partners' Capital and Current Accounts, and the Balance Sheet of new firm.

QUESTION 46. A and B are partners sharing Profits 1:1.Their Balance Sheet as at 31.3.2018 is given below:
Capital A/cs: Land and Building 3,00,000
A 3,00,000 Plant and Machinery 2,00,000
B 2,00,000 5,00,000 Furniture and Fittings 50,000
Current A/cs : Stock 1,50,000
A 80,000 Debtors 1,50,000
B 60,000 1,40,000 Less: Provision for Doubtful Debts 10,000 1,40,000
Bills Receivable 60,000
Creditors 2,60,000 Bank 1,00,000
Bills payable 1,00,000
10,00,000 10,00,000
C is admitted as a partner for 1/4th share on 1st April, 2018, under the following terms:
(i) C is to introduce Rs 2,50,000 as capital.
(ii) Goodwill is agreed to be nil.
(iii) It is found that the creditors included a sum of 15,000 which was not to be paid.
(iv) A liability for compensation to workmen amounting to 20,000.
(v) Provision for doubtful debts is to be created @ 10% on debtors.
(vi) It was decided to henceforth follow fluctuating capital method.
(vii) Bills accepted worth ₹ 40,000 issued by creditors were not recorded in the books.
(viii) A provides ₹ 1,00,000 loan to the business carrying interest @ 12% p.a.
Prepare Revaluation Account, Partners' Current Accounts, Partners' Capital Accounts and Balance Sheet
of the new firm.
5. ADJUSTMENT OF CAPITAL
QUESTION 47. X and Y are partners in a firm sharing profits in the ratio of 3 : 2. The remaining capitals of X
and Y after adjustments are ₹ 80,000 and ₹ 60,000 respectively. They admit Z as a partner on his contribution
of 35,000 as capital for 1/5th share of profits to be taken equally from both X and Y. The Capital Accounts of
the old partners are to be adjusted on the basis of the proportion of Z's Capital to his share in the business.
Calculate amount of actual cash to be paid off or brought in by the old partners for the purpose.
st
QUESTION 48 . Charu and Harsh are partners in a firm sharing profits in the ratio of 3 : 2. On 1 April, 2019,
their Balance was as follows:
Liabilities ₹ Asset ₹
Workmen Compensation Fund 9,000 Investments 20,000
Investment Fluctuation Fund 11,000 Plant 14,000
Provision for Bad Debts 2,000 Land and building 38,000
Capital A/cs: Charu 30,000
Harsh 20,000 50,000
93,000 93,000
On the above date Vaishali was admitted for 1/4th share in the profits of the firm on following terms:
(i) Vaishali will bring 20,000 for her capital and 4,000 for her share of goodwill premium.

(ii) All debtors were considered good.

(iii) The market value of investments was ₹15,000.
(iv) There was a liability of ₹ 6,000 for Workmen Compensation.
(v) Capital Accounts of Charu and Harsh are to be adjusted on the basis of Vaishali capital by opening
Current Accounts. Prepare Revaluation Account and Partners' Capital Accounts. (Delhi 2015)
QUESTION 49. On 31.3.2010, the Balance sheet of W and R who shared profits in 3 : 2 ratio was as follows:
Profit and Loss A/c 15,000 Sundry Debtors 20,000
Capital A/cs: Less: Provision 700 19,300
W 40,000 Stock 25,000
R 30,000 70,000 Plant and Machinery 35,000
Patents 20,700
1,05,000 1,05,000
On this date B was admitted as a partner on the following conditions:

(i) B will get 4/15th share of profits.
(ii) B had to bring 30,000 as his capital to which amount other partners' capitals shall have to be
adjusted.
(iii) He would pay cash for his share of goodwill which would be based on 2 1/2 years' purchase of
average profits of past 4 years.
(iv) The assets would be revalued as under: Sundry Debtors at book value less 5% Provision for Bad
Debts. Stock at ₹ 20,000, Plant and Machinery at ₹ 40,000.
(v) The profits of the firm for the years 2007, 2008 `and 2009 were 20,000;14,000 and 17,000 respectively.
Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet. (Delhi 2011)
QUESTION 50. A and B are in partnership sharing profits and losses in the ratio of 3-2. Their Balance Sheet as
on 31st March, 2018 is as under:
A’s Capital 88,000 Goodwill 5,000
B’s Capital 1,27,000 2,15,000 Land and Building 30,000
Workmen Compensation Reserve 10,000 Investments (Market Value ₹ 22,500) 25,000
Investments Fluctuation reserve 5,000 Debtors 50,000
Employee’s Provident Fund 5,000 Less : Provision for Doubtful Debt 5,000 45,000
C’s Loan 1,50,000 Stock 1,50,000
Bank Balance 1,25,000
Advertisement Suspense A/c 5,000
3,85,000 3,85,000
On 1st April, 2018, they agree to take C as a partner to increase the capital base of the firm, under the
following terms:
(i) A will sacrifice 1/3rd of his share while B sacrifices 1/10 from his share in favour of C.
(ii) C's loan will be converted into his capital.
(iii) C brings in 60% of his share of goodwill in cash.

(iv) Goodwill is to be valued at 2 years' purchase of super profit of last three completed years. Profits
for the last three years ended 31st March, are as follows: 2016- 2,40,000; 2017– 4,65,000; and
2018- 6,90,000.
The normal profit is Rs 3,15,000 with same amount of capital invested in similar industry.
(v) Land and Building was found undervalued by ₹ 25,000, Stock was found overvalued by ₹ 35,000
and Provision for Doubtful Debts is to be made equal to 5% of the debtors.
(vi) Claim on account of Workmen Compensation is 5,000. An unrecorded accrued income of Rs
5,000 be provided for. A debtor whose dues of Rs 25,000 were written off as bad debts, paid
20,000 in full settlement.
(vii) Capital Accounts of the partners to be readjusted on the basis of their profit-sharing ratio and any
excess or deficiency be adjusted by payment or receipt of amount.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet.
Question 51. (Adjustment of Capital when partners’ capital are fixed ). A, B and C are partners in a firm
sharing in the ratio of 3 : 2 : 1. On 1st April, 2019, their Balance Sheet is as follows :
BALANCE SHEET OF A, B AND C as at 1st April, 2019
Capital A/cs : B’s Current Account 14,000
A 3,50,000 Land and Building 3,50,000
B 3,00,000 Plant and Machinery 1,35,000
C 2,50,000 9,00,000 Furniture 1,60,000
Current A/cs : Investments 73,000
A 8,000 Bills Receivable 34,000
C 12,000 20,000 Sundry Debtors 87,000
Profit and loss Account 14,000 Bank 87,000
Creditors 1,60,000
Bills Payable 90,000
12,14,000 12,14,000
On the above date, D is admitted on the following terms :

(i) D will bring ₹ 1,00,000 as his capital and will get 1/6th share in profits.
(ii) He will bring necessary cash for his share of goodwill premium. The goodwill of the firm was
valued at ₹ 1,80,000.
(iii) The new profits-sharing ratio will be 2 : 2 : 1 : 1.
(iv) A bill Receivable of ₹ 14,008 discounted with Bank was dishonoured, which is to be recorded in
the books of account.
(v) The value of Stock, Furniture and Investment is reduced by 20 % whereas the value of Land and
Building and Plant and Machinery will be appreciated by 20 % and 10 % respectively.
(vi) The Capital Accounts of the partners will be adjusted on the basis of D’s capital through their
Current Accounts.
Prepare Revaluation Account, Partners’ Current Accounts, Capital Account and Balance Sheet.
Question 52 (Adjustment regarding Capital when the Current Accounts are opened). Following the Balance
Sheet of A and B, who had been sharing profits in proportion of 3/4th and 1/4 as at 31st March, 2019:

General Reserve 6,000 Bills Receivable 3,000
Capital A/cs : Debtors 16,000
A 28,500 Stock 20,000
B 15,000 44,000 Office Furniture 1,000
87,500 87,500
They agree to take C into partnership on 1st April, 2019 on the following terms:
(i) C pays 14,000 as his capital for 1/5th share in the future profits.
(ii) Goodwill Account be valued at 20,000. C is unable to bring cash for his share of goodwill.
(iii) Stock and Furniture be reduced by 10% and 5% Provision for Doubtful Debts be created on Debtors.
(iv) Land and Building be appreciated by 20%.
(v) Capital Accounts of the partners be readjusted on the basis of their profit-sharing arrangement
and any excess or deficiency is to be transferred to their Current Accounts. Prepare Revaluation
Account, Partners' Capital Accounts and the Balance Sheet of the new firm.
ADJUSTMENT OF INCOMING PARTNER ON THE BASIS OF OLD PARTNERS

QUESTION 53 (Calculation of Capital of the Incoming Partner on the Basis of the Capitals of other Partners).
X and Y are in partnership sharing profits and losses in the ratio of 3 : 2. The capitals of X and Y after
adjustment are 80,000 and 60,000 respectively. They admit Z as a third partner who is to contribute
proportionate capital to acquire a 1/5th share of total capital of the new firm. Calculate capital to be brought
in by Z. Also, calculate new profit-sharing ratio of the partners in the new firm.
QUESTION 54. Following is the Balance Sheet as at 31st March, 2018 of A and B, who share profits and losses
in the ratio of 3 : 2.
Capital A/cs: A 10,000 Plant and Machinery 10,000
B 10,000 20,000 Land and Building 8,000
Workmen Compensation Reserve 5,000 Less: Provision for Doubtful Debts 1,000 11,000
Creditors 10,000 Stock 12,000
Cash 9,000
50,000 50,000
On 1st April, 2018, they agreed to admit C into partnership on the following terms:
(i) Provision for Doubtful Debts would be increased by ₹2,000.
(ii) Value of Land and Building would be increased to ₹ 18,000.
(iii) The value of Stock would be increased by ₹ 4,000.
(iv) The liability against the Workmen Compensation Reserve is determined at ₹ 2,000
(v) C brought in as his share of goodwill ₹10,000 in cash.
(vi) C would bring in further cash as would make his capital equal to 20% of the total capital of the
new firm after the above revaluation and adjustments are carried out.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the firm after C's admission.

QUESTION 55. The Balance Sheet of Madan and Mohan who share profits and losses in the ratio of 3 : 2, as at
31st March, 2010 was as follows:
Workmen’s Compensation Reserve 12,000 Debtors 65,000
General Reserve 20,000 Less: Provision for Doubtful Debts 5,000 60,000
Madan 60,000 investments 50,000
Mahan 40,000 1,00,000 Cash 10,000
1,60,000 1,60,000
st
They decided to admit Gopal on 1 April, 2010 for 1/4th share on the following terms:
(i) Gopal shall bring ₹ 25,000 as his share of premium for goodwill.
(ii) That unaccounted Accrued Income of ₹ 500 be provided for.
(iii) The market value of Investments was ₹ 45,000.
(iv) A Debtor whose dues of ₹ 1,000 were written off as Bad Debts paid ₹ 800 in full settlement.
(v) A claim of 2,000 on account of Workmen Compensation to be provided for.
(vi) Patents are undervalued by 5,000.
(vii) Gopal to bring in capital equal to 1/4th of the total capital of the new firm after all adjustments.
Prepare Revaluation Account, Capital Accounts of Partners and Balance Sheet. (Delhi 2011 C)
Answer : profit on revaluation 1300, partner capital- Madan 93,780, Mahan 62,520,Gopal 52,100 Bank- 87900.
QUESTION 56. Sahaj and Nimish are partners in a firm. They share profits and losses in the ratio of their
capital. Since both of them are specially abled, sometimes they find it difficult to run the business on their
own. Gauri, a common friend decides to help them. Therefore, they admitted her into partnership for a 1/3rd
share. She brought 70% of her share in goodwill in cash and proportionate capital. At the time of Gauri's
admission, the Balance Sheet of Sahaj and Nimish was as under:
Capital A/cs : Machinery 1,20,000
Sahaj 1,20,000 Furniture 80,000
Nimish 80,000 2,00,000 Stock 50,000
Employees’ Provident Fund 80,000 investment 50,000
Investment fluctuation fund 10,000
3,50,000 3,50,000
It was decided to:
(i) Reduce the value of stock by 5,000.
(ii) Depreciate furniture by 10% and appreciate machinery by 5%.
(iii) ₹ 3,000 of the debtors proved bad. A provision of 5% was to be created on Sundry Debtors for
doubtful debts.
(iv) Goodwill of the firm was valued at 45,000.
(v) Market value of investment Rs 55,000
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.
Identify the values being conveyed in the question. (Delhi 2013)
NOTE: Values being conveyed in the question: 1. Friendship; 2. Sympathy; 3. Kindness.

QUESTION 57. A, B and C were partners in a firm sharing profits in the ratio of 3:2:1. On 31st March, 2015,
their Balance Sheet was as follows:
BALANCE SHEET OF A, B AND C as on 31st March, 2015
Creditors 84,000 Bank 17,000
Capital A/cs : Stock 1,10,000
A 60,000 Investments 30,000
B 40,000 Furniture and Fittings 10,000
C 20,000 1,20,000 Machinery 35,000
2,25,000 2,25,000
On the above date, D was admitted as a new partner and it was decided that:
(i) The new profit-sharing ratio between A, B, C and D will be 2: 2:1:1.
(ii) Goodwill of the firm was valued at 90,000 and D brought his share of goodwill premium in cash.
(iii) The market value of investments was 24,000.
(iv) Machinery will be reduced to Rs 29,000.
(v) A creditor of Rs 3,000 was not likely to claim the amount and hence to be written off.
(vi) D will bring proportionate capital so as to give him 1/6th share in the profits of the firm.
Prepare Revaluation Account, Partner's Capital Accounts and the Balance Sheet. (Delhi 2016)
Solution : REVALUATION ACCOUNT
To Investment A/c 6,000 By Creditors A/c 3,000
To Machinery A/c 6,000 By Loss transferred to :
A’s Capital A/c 4,500
B’s Capital A/c 3,000
C’s Capital A/c 1,500
12,000 12,000
PARTNERS’ CAPITAL
Particulars A (₹) B (₹) C (₹) D₹ Particulars A (₹) B (₹) C (₹) D₹
To Revalu. A/c 4,500 3,000 15,000 ... By Balance b/d 60,000 40,000 20,000 ...
To Balance c/d By General
29,400 Reserve A/c ...
81,000 44,000 22,000 10,500 7,000 3,500
By Premium for ....
Goodwill A/c 15,000 .. ...
By Bank ... ... ... 29,400
85,500 47,000 23,500 85,500 47,000 23,500 29,400
29,400
BALANCE SHEET OF RECONSTITUTED FIRM as at 31 st March, 2015

Creditors 81,000 Bank ₹ ( 17,000 + 15,000 + 29,400) 61,400
A 81,000 Stock 1,10,000
B 44,000 Investments 24,000
C 22,000 Furniture and Fittings 10,000
D 29,400 1,76,400 Machinery 29,000
2,57,400 2,57,400

QUESTION 58. X and Y are partners in a firm sharing profits and losses in the ratio of 3:2 with capitals of Rs
1,20,000 and 80,000 respectively. Interest on capital is allowed @ 10% p.a. They admit Z into the partnership
with effect from 1st January, 2018 on the following terms
(i) Z is to bring in 10,000 for his share of goodwill in cash.
(ii) Z is to contribute 1,25,000 as his share of capital.
(iii) Partners' capital will carry interest @ 12% p.a.
(iv) New profit-sharing ratio of X, Y and Z will be 9 : 6 : 5.
(v) X will be entitled to 5% commission on the net profit.
(vi) The profit for the year ended 31st March, 2018 before providing for X's commission and interest on
partners' capitals amounted to ₹ 80,000. Prepare Profit and Loss Appropriation Account and
partner’s capital account for the year ended 31st March, 2018.
st
Question 59. The Balance Sheet of Madhu and Vidhi who are sharing profits in the ratio of 2:3 as at 31
March, 2016 is given below:
Liabilities Rs Assets Rs
Madhu's Capital 5,20,000 Land and Building 3,00,000
Vidhi's Capital 3,00,000 Machinery 2,80,000
Bills Payable 1,50,000 Debtors 3,00,000
Less: Provision 10,000 2,90,000
Bank 50,000
10,00,000 10,00,000
Madhu and Vidhi decided to admit Gayatri as a new partner from 1st April, 2016 and their new profit-sharing
ratio will be 2:3:5. Gayatri brought Rs 4,00,000 as her capital and her share of goodwill premium in cash.
(a) Goodwill of the firm was valued at Rs 3,00,000.
(b) Land and Building was found undervalued by 26,000.
(c) Provision for doubtful debts was to be made equal to 5% of the debtors.
(d) There was a claim of 6,000 on account of workmen compensation.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.
(Delhi 2017)
[Ans.: Gain on Revaluation: 15,000; Capital: Madhu- 5,98,000; Vidhi-4,17,000 , Gayatri Rs 4,00,000; Total of
Balance Sheet: 15,71,000.]
Question 60. Shyamlal and Sanjay were in partnership business sharing profits and losses in the ratio of
2 : 3 respectively. Their Balance Sheet as at 31st March, 2021 was:
Sundry Creditors 12,435 Cash in Hand 710
Capital A/cs: Cash at Bank 11,925
Shyamlal 34,050 Sundry Debtors 5,500
Sanjay 34,050 68,100 Stock 18,000
Furniture 4,400
Building 40,000
80,535 80,535
st rd
On 1 April, 2021, they admitted Shanker into partnership for 1/3 share in the future profits on following
terms:

(a) Shanker is to bring in Rs 30,000 as his capital and Rs 20,000 as goodwill which is to remain in the business.
(b) Stock and Furniture are to be reduced in value by 10%.
(c) Building is to be appreciated by Rs 15,000.
(d) Provision of 5% is to be made on Sundry Debtors for Doubtful Debts.
(e) Unaccounted Accrued Income of Rs 2,400 to be provided for. A debtor, whose dues of 4,800 were
written off as bad debts, paid 50% in full settlement.
(f) Outstanding Rent amounted to Rs 4,800.
Show Profit and Loss Adjustment Account (Revaluation Account), Capital Accounts of Partners and opening
Balance Sheet of the new firm.
[Ans:Revaluation A/c- Gain 12,485;Capital A/c:Shyamlal-47,044; Sanjay-53,541; Shanker-30,000; Balnce Sheet 1,47,820.]
Question 61. A B and C are partners sharing profits and losses in the ratio of 3:2:1 respectively. Their Balance
st
Sheet as at 31 March, 2020 is as follows:
A 60,000 Plant and Machinery 40,000
B 60,000 Furniture 30,000
C 40,000 1,60,000 Stock 20,000
Bills Payable 10,000 Bills Receivable 20,000
Bank 10,000
2,00,000 2,00,000
D is admitted as a new partner on 1st April, 2020 for an equal share and is to pay 750,000 as capital. Following
are the adjustments required on D's admission:
(a) Out of the Creditors, a sum of 10,000 is due to D which will be transferred to his capital Account.
(b) Advertisement Expenses of 1,200 are to be carried forward to next year as Prepaid Expenses.
(c) Expenses debited in the Profit and Loss A/c includes a sum of 2,000 paid for B's personal expenses.
(d) A Bill of Exchange of 4,000, which was previously discounted with the banker, was dishonoured on
31st March, 2020 but no entry has been passed for that.
(e) A Provision for Doubtful Debts @ 5% is to be created against Debtors.
(f) Expenses on Revaluation amounted to Rs 2,100 is paid by A. Prepare necessary Ledger Accounts and
Balance Sheet after D's admission.
[Ans.: Loss on Revaluation-F 600; Partners' Capital A/cs: A—7 61,800; B–7 57,800; C-7 39,900; D—Rs 50,000;
Balance Sheet Total_Rs 2,39,500.]
[Hint: When a bill previously discounted, is dishonoured, Debtors A/c is debited and Bank A/c is credited,
i.e., Debtors balance is increased and Bank balance is decreased.]
Question 62. X and Y share profits in the ratio of 5 : 3. Their Balance Sheet as at 31st March, 2021 was:
Employees' Provident Fund 10,000 Sundry Debtors 20,000
Workmen Compensation Reserve 5,800 Less: Provision for Doubtful Debts 600 19,400
Capital A/cs : Stock 25,000
X 70,000 Fixed Assets 80,000
Y 31,000 1,01,000 Profit and Loss A/c 2,400
1,31,800 1,31,800

They admit Z into partnership with 1/8th share in profits on this date. Z brings 20,000 as his capital Rs 12,000
for goodwill in cash. Z acquires his share entirely from X. Following revaluations are also made :
(a) Employees' Provident Fund liability is to be increased by Rs 5,000.
(b) All Debtors are good. Therefore, no provision is required on Debtors.
(c) Stock includes 3,000 for obsolete items.
(d) Creditors are to be paid Rs 1,000 more.
(e) Fixed Assets are to be revalued at 70,000. Prepare Journal entries, necessary accounts and new
Balance Sheet. Also, calculate new profit-sharing ratio.
[Ans.: Loss on Revaluation-18,400; Capitals: X- 72,625 ,Y-25,375; Z-20,000; Balance Sheet Total Rs 1,45051, New
Profit-sharing Ratio- 4:3:1.] [Hint: Workmen Compensation Reserve will be distributed between the old partners.]
st
Question 63. Balance Sheet of Ram and Shyam who share profits in proportion to their capitals as at 31
March, 2021
Capital A/cs: Freehold Premises 20,000
Ram 30,000 Plant and Machinery 13,500
Shyam 25,000 55,000 Fixture and Fittings 1,750
Current A/cs: Vehicles 1,350
Ram 2,000 Stock 14,100
Shyam 1,800 3,800 Bills Receivable 13,060
Bills Payable 16,000 Bank 1,590
Cash 950
93,800 98,800
On 1st April, 2021, they admitted Arjun into partnership on the following terms:
(a) Arjun to bring in Rs. 20,000 as capital and 6,600 for goodwill, which is to be left in the business, he is
to receive 1/4th share of the profits.
(b) Provision for Doubtful Debts is to be 2% on Debtors.
(c) Value of Stock to be written down by 5%.
(d) Freehold Premises are to be taken at valuation of Rs. 22,400; Plant and Machinery Rs. 11,800;
Fixtures Fittings 1,540 and Vehicles Rs. 800.
You are required to make necessary adjustment entries and give Balance Sheet as at 1.4.21 and also give
the proportions in which the partners will share profits, there is no change in the share of Ram and Shyam
[Ans.: Loss on Revaluation–71,315; Partners' Capital A/cs: Ram-730,000; Shyam-Rs25000; Arjun—Rs 20,000;
Partners' Current A/cs: Ram–74,883; Shyam- 4,202;Balance Sheet Total–71,19,085; New Ratio–18:15:1
st
Question 64. X and Y are partners in a firm sharing profits in the ratio of 3 :2. Their Balance Sheet as at 31
March 2021 was as follows:
Outstanding Rent 13,000 Cash 10,000
Creditors 20,000 Sundry Debtors 80,000
Workmen Compensation Reserve 5,600 Less: Provision for Doubtful Debts 4,000 76,000
Capital A/cs: X 50,000 Stock 20,000
Y 60,000 1,10,000 Profit and Loss A/c 4,000
Machinery 38,600
1,48,600 1,48,600
st
On 1 April, 2021, they admitted Z as a partner for 1/6th share on the following terms:
i. Z brings in 40,000 as his share of Capital but he is unable to bring any amount for Goodwill.
ii. Claim on account of Workmen Compensation is Rs 3,000.

iii. To write off Bad Debts amounted to 6,000.

iv. Creditors are to be paid 2,000 more.
v. There being a claim against the firm for damages, liabilities to the extent of Rs 2,000 should be created.
vi. Outstanding rent be brought down to Rs 11,200.
vii. Goodwill is valued at 1/2 years' purchase of the average profits of last 3 years, less 12,000. Profits for the
last 3 years amounted to 10,000; Rs 20,000 and Rs 30,000. Pass Journal entries, prepare Capital Accounts
and opening Balance Sheet.
[Ans: Loss on Revaluation–74,200; Partners' Capital A/c: X– 48,440; Y-58,960, and Z–7 40,000; Z's Current A/c(For
Goodwill)-3,000. Total of B/S-1,85,600.]
Question 65. Following is the Balance Sheet of X and Y as at 31st March, 2018 who are partners in a firm
sharing profits and losses in the ratio of 3 : 2 respectively:
Capital A/cs: Less: Provision for Doubtful Debts 2,400 57,600
X 1,80,000 Patents 44,400
Y 90,000 2,70,000 Investments 24,000
Current A/cs : Fixed Assets 2,16,00
X 30,000 Goodwill 30,000
36,000
Y 6,000
3,87,000
3,87,000
Z is admitted as a new partner on 1st April, 2018 on the following terms:
(a) Provision for doubtful debts is to be maintained at 5% on Debtors.
(b) Outstanding rent amounted to Rs 15,000.
(c) An accrued income of 4,500 does not appear in the books of the firm. It is now to be recorded.
(d) X takes over the Investments at an agreed value of Rs 18,000.
(e) New Profit-sharing Ratio of partners will be 4 :3 : 2.
(f) Z will bring in Rs 60,000 as his capital by cheque.
(g) Z is to pay an amount equal to his share in firm's goodwill valued at twice the average profits of
the last three years which were Rs 90,000; Rs 78,000 and Rs 75,000 respectively.
(h) Half of the amount of goodwill is to be withdrawn by X and Y. You are required to pass entries,
prepare Revaluation Account, Partners' Accounts and the Balance Sheet.
[Ans.: Loss on Revaluation—Rs 17,100; Partners' Capital A/cs: X–Rs 1,80,000; Y—Rs 90,000
and Z- 60,000; Partners' Current A/cs: X- 17,940; Y—Rs 6,960; Balance Sheet – 4,14,900.]
Question 66. X and Y are partners sharing profits 1:1. Their Balance Sheet as on 31.3.2021 is given below:
X 1,50,000 Plant and Machinery 1,00,000
Y 1,00,000 2,50,000 Furniture and Fittings 25,000
Current A/cs : Stock 75,000
X 40,000 Debtors 75,000
Y 30,000 70,000 Less: Provision for Doubtful Debts 5,000 70, 000
Creditors 1,30,000 Bills Receivable 30,000
50,000 50,000
General Reserve Bank
5,00,000 5,00,000
Z is admitted as a new partner for 1/4th share under the following terms:
(a) Z is to introduce Rs 1,25,000 as capital.

(b) Goodwill of the firm was valued at nil.

(c) It is found that the creditors included a sum of 7,500 which was not to be paid. But it was also found
that there was a liability for Compensation to Workmen amounting to 10,000.
(d) Provision for doubtful debts is to be created @ 10% on debtors.
(e) In regard to the Partners' Capital Accounts, present fixed capital method is to be converted into
fluctuating capital method.
(f) Bills of 20,000 accepted from creditors were not recorded in the books.
(g) X provides Rs 50,000 loan to the business carrying interest @ 10% p.a.
You are required to prepare Revaluation Account, Partners' Capital Accounts, Bank Account and me
Balance Sheet of the new firm.
[Ans.: Loss on Revaluation-5,000; Partners' Capital A/cs: X–1,873, Y-71,27,500; Z-1,25,000; B/s Total-76,7251
Question 67. Rajesh and Ravi are partners sharing profits in the ratio of 3:2. Their B/S at 31.3.21 stood as :
Outstanding Rent 4,000 Stock 15,000
Capital A/CS : Prepaid Insurance 1,500
Rajesh 29,000 Debtors 9,400
Ravi 15,000 44,000 Less : Provision for Doubtful Debts 400 9,000
Machinery 19,000
Building 35,000
Furniture 5,000
86,500 86,500
Raman is admitted as a new partner introducing a capital of 16,000. The new profit-sharing ratio is decided as
5:3:2. Raman is unable to bring in any cash for goodwill. So, it is decided to value the goodwill come basis of
Raman's share in the profits and the capital contributed by him. Following revaluations are made :
(a) Stock to depreciate by 5%;
(b) Provision for Doubtful Debts is to be Rs 500;
(c) (c) Furniture to depreciation by 10%;
(d) Building is valued at 40,000.
Show necessary Ledger Accounts and Balance Sheet of new firm.
[Ans.:Gain on Revaluation-73,650; Capital A/cs: Rajesh, Ravi- 18,095; Raman 12,730.
Note: Alternatively, Raman's share of goodwill Rs 3,270 (unpaid amount of goodwill) can be debited to
Raman's Current Account. In that situation Balances of Capital A/cs will be: Rajesh— 32,825; Ravi—
18,095; Raman—Rs 16,000; Balance Sheet Total—Rs 1,09,420.
[Hints: (i) Calculation of Hidden Goodwill:
A. Total Capital of the firm on the basis of Raman's Rs
Capital = Rs 16,000 x 10/2 80,000
B. Whereas, Adjusted Capital of Rajesh (excluding goodwill)
= Rs 29,000 + Rs 2,190 (Gain (Profit) on Revaluation) 31,190
Adjusted Capital of Ravi (excluding goodwill)
= Rs 15,000 + Rs 1,460 (Gain (Profit) on Revaluation) 16,460
Raman's Capital 16,000
C. Value of Hidden Goodwill (A – B) = Rs 80,000 - 63,650 = Rs 16,350.

(ii) Raman will be debited by his share of goodwill, i.e., Rs 3,270 and Rajesh and Ravi will be credited in
their sacrificing ratio, i.e., equally.]
Question 68. A and B are partners in a firm sharing profits in the ratio of 3 : 2. They admit C as a partner on
st
1 April, 2018 on which date the Balance Sheet of the firm was:
Capital A/ cs : Building 50,000
B 40,000 1,00,000 Stock 20,000
Bank 10,000
1,20,000 1,20,000
You are required to prepare the Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new
firm after considering the following:
(a) C brings in Rs 30,000 as capital for 1/4th share. He also brings 10,000 for his share of goodwill.
(b) Part of the Stock which had been included at cost of Rs 2,000 had been badly damaged in storage
and could only expect to realise Rs 400.
(c) Bank charges had been overlooked and amounted to Rs 200 for the year 2017-18.
(d) Depreciation on Building of 3,000 had been omitted for the year 2017–18.
(e) A credit for goods for 800 had been omitted from both purchases and creditors although the goods
had been correctly included in Stock.
(f) An expense of 1,200 for insurance premium was debited in the Profit and Loss Account of 2017-18
st
but Rs 600 of this are related to the period after 31 March, 2018.
[Ans: Loss on Revaluation–75,000; Partners' Capital A/cs: A-63,000; B– 42,000; C-30,000;B/S-1,55,800.]
Question 69. A and B are partners in a firm. The net profit of the firm is divided as follows: 1/2 to A, 1/3 to B
and 1/6 carried to a Reserve. They admit C as a partner on 1.4.18 on which date Balance Sheet of the firm was:
Capital A/cs: Building 50,000
B 40,000 90,000 Stock 18,000
Reserve 10,000 Debtors 22,000
1,25,000 1,25,000
Following are the required adjustments on admission of C:
(a) C brings in Rs 25,000 towards his capital.
(b) C also brings in 5,000 for 1/5th share of goodwill.
(c) Stock is undervalued by 10%.
(d) Creditors include a contingent liability of 4,000, which has been decided by the court at Rs 3200.
(e) In regard to the Debtors, the following Debts proved Bad or Doubtful
Rs 2,000 due from X—bad to the full extent;
Rs 4,000 due from Y-insolvent, estate expected to pay only 50%.
You are required to prepare Revaluation Account, Partners' Capital Accounts and Balance Sheen, new firm.
[Ans.: Loss on Revaluation- 1,200; Partners' Capital A/s: A– Rs 58,280; B– 45,520; C—Rs 25,000;
Balance Sheet Total is [Hint: Value of Stock: 20,000 (i.e.,18,000 X 100/90); Debtors:18,000; Creditors 19,200]
Question 70. Following is the Balance Sheet of the firm, Ashirvad, owned by A, B and C who share profits and a
of the business in the ratio of 3 : 2 : 1:


A 1,20,000 Business Premises 2,05,000
B 1,20,000 Stock-in-Trade 40,000
C 1,20,000 3,60,000 Debtors 28,000
Outstanding Salaries and Wages 7,200 Cash in Hand 4,200
3,87,200 3,87,200
On 1st April, 2021, they admit D as a partner on the following conditions:
(a) D will bring in Rs 1,20,000 as his capital and also Rs 30,000 as goodwill premium for a quarter of the
share in the future profits/losses of the firm.
(b) The values of the fixed assets of the firm will be increased by 10% before the admission of D.
(c) Mohan, an old customer whose account was written off as bad debts, has promised to pay as
in full settlement of his dues.
(d) The future profits and losses of the firm will be shared equally by all the partners.
Pass the necessary Journal entries and prepare Revaluation Account, Partners' Capital Accounts
opening Balance Sheet of the new firm.
[Ans.: Gain (Profit) on Revaluation– 30,000; Capital A/cs: A– 1,65,000; B- 1,40,000, C- 1,15,000; D—Rs 1,20,000.
Note: There will be no entry for the promise made by Mohan, since it is an event and not a transaction.
There is another view, Rs 3,000 is to be considered as bad debts recovered. In this situation will be as follows:
Gain on Revaluation-36,000; Capital A/cs: A– 1,66,000; B-1,42,000; C-1,16,000; D's Capital— 1,20,000;
Balance Sheet Total— 5,72,000.
[Hint: Change in the profit-sharing ratio will result in loss of 6/24th to A and 2/24th to B; gain of 2/24th
to C and 1/4th to D. Hence, the entry for adjustment of goodwill premium will be:
C's Capital A/c ...Dr. Rs 10,000
Premium for Goodwill A/c ...Dr. Rs 30,000
To A's Capital A/C Rs 30,000
To B's Capital A/c Rs 10,000
Question 71. A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Following is their
st
Balance Sheet as at 31 March, 2021:
Capital A/c s : Building 35,000
A 50,000 Machinery 25,000
B 30,000 80,000 Stock 15,000
Investments 5,000
Bank 5,00
1,00,000 1,00,000
st
C is admitted as a partner on 1 April, 2021 on the following terms:
(a) C is to pay Rs 20,000 as capital for 1/4th share. He also pays 5,000 as premium for goodwill.
(b) Debtors amounted to Rs 3,000 is to be written off as bad and a Provision of 10% is created against
Doubtful Debts on the remaining amount.
(c) No entry has been passed in respect of a debt of 300 recovered by A from a customer, which was
previously written off as bad in previous year. The amount is to be paid by A.
(d) Investments are taken over by B at their market value of 4,900 against cash payment.
You are required to prepare Revaluation Account, Partners' Capital Accounts and new Balance Sheet.

[Ans.:Loss on Revalue–74,000;Partners' Capital: A–50,300; B-30,400; C-20,000; Balance Sheet 1,20,700.]

[Hint: Provision for Doubtful Debts = 10/100 (15,000 - 3,000 (Bad Debts)).]
Question 72. X and Y are partners sharing profits and losses in 3:1. Their Balance Sheet as at 31.3.2021 is:
Capital A/cs : Land and Building 1,25,000
X 1,50,000 Furniture 5,000
Y 80,000 2,30,000 Stock 1,00,000
Workmen Compensation Reserve 20,000 Sundry Debtors 80,000
Sundry Creditors 1,50,000 Bills Receivable 15,000
Bills Payable 37,500 Cash at Bank 1,00,000
Cash in Hand 12,500
4,37,500 4,37,500
They admit Z into partnership on 1st April, 2021 on the following terms:
a) Goodwill is to be valued at Rs 1,00,000.
b) Stock and Furniture to be reduced by 10%.
c) A Provision for Doubtful Debts is to be created @ 5% on Sundry Debtors.
d) The value of Land and Building is to be appreciated by 20%.
e) Z pays Rs 50,000 as his capital for 1/5th share in the future profits.
You are required to show Revaluation Account,Partners' Capital Accounts and Balance Sheet of new firm.
[Ans.: Gain on Revaluation-10,500; Partners' Capital: X- 1,87,875;Y-92,625; Z–730,000;Balance Sheet 4,98,000.]
Note: Z's Share of Goodwill Rs 20,000 (i.e., Rs 1,00,000 X 1/5) can be adjusted through Z's Current A/c.
In that situation, Partners' Capital A/cs: X—31,87,875; Y—Rs 92,625; Z—Rs 50,000; Z's Current A/c (Dr.) —Rs 20,000;
Balance Sheet Total— 5,18,000.
Question 73. Deepika and Rajshree are partners in a firm sharing profits and losses in the ratio of 3 : 2. On 31 st
March 2020 their Balance Sheet was:
Sundry Creditors 16,000 Cash in Hand 1,200
Public Deposits 61,000 Cash at Bank 2,800
Bank Overdraft 6,000 Stock 32,000
Outstanding Liabilities 2,000 Prepaid Insurance 1,000
Capital A/cs: Sundry Debtors 28,800
Deepika 48,000 Less:Provision for Doubtful Debts 800 28,000
Rajshree 40,000 88,000 Plant and Machinery 48,000
Furniture 10,000
1,73,000 1,73,000
On the above date, the partners decided to admit Anshu as a partner on the following terms:
a)The new profit-sharing ratio of Deepika, Rajshree and Anshu will be 5 :3 : 2 respectively.
b) Anshu shall bring in Rs 32,000 as his capital.
C) Anshu is unable to bring in any cash for his share of goodwill. Partners, therefore, decide to calculate the
goodwill on the basis of Anshu's share in the profits and the capital contribution made by her to the firm
(d) Plant and Machinery is to be valued at 60,000, Stock at 40,000 and the Provision for Doubtful Debts is to
be maintained at 4,000. Value of Land/Building has appreciated by 20%. Furniture has depreciated by 10%.
(e) There is an additional liability of 8,000 being outstanding salary payable to employees of the firm. liability is
not included in the outstanding liabilities, stated in the above Balance Sheet. Partners decided to show this
liability in the books of account of the reconstituted firm. Prepare Revaluation Account, Partners' Capital
Accounts and Balance Sheet of Deepika, Rajshree and Anshu.
[Ans.: Hidden Goodwill Rs22,200; Gain on Revaluation-Rs 17,500,Partners' Capital A/cs: Deepika-Rs 60,900;
Rajshree-Rs 49340;Anshu—Rs 27,560; Bank Balance—728,800; Balance Sheet Total— Rs 2,24,800

[Hint: Bank Balance: Rs 2,800 + Rs 32,000 - 36,000 (Bank Overdraft) = Rs 28,800.]

Adjustment of the Old Partners' Capitals on the Basis of New or Incoming Partner's Capital
Question 74. X and Y are partners sharing profits in the ratio of 2:1. Their Balance Sheet as at 31.3.21 was :
Sundry Creditors 25,000 Cash/Bank 5,000
X 75,000 Investments 8,000
Y 62,000 1,37,000 Typewriter 5,000
Fixed Assets 1,37,000
1,80,000 1,80,000
They admit Z into partnership on the same date on the following terms:
a) Z brings in 40,000 as his capital and he is given 1/4th share in profits.
b) Z brings in Rs 15,000 for goodwill, half of which is withdrawn by old partners.
c) Investments are valued at Rs 10,000. X takes over Investments at this value.
d) Typewriter is to be depreciated by 20% and Fixed Assets by 10%.
e) An unrecorded stock of Stationery on 31st March, 2021 is Rs 1,000.
f) By bringing in or withdrawing cash, the Capitals of X and Y are to be made proportionate to that of Z
on their profit-sharing basis. Pass Journal entries, prepare Revaluation Account, Capital Accounts and
new Balance Sheet of the firm.
[Ans.: Loss on Revaluation-11,700; Capital A/cs: X– 80,000; Y— 40,000; Z–7 40,000; Cash/Bank Balance—
731,700; Balance Sheet Total - Rs 1,85,000; X brings in—Rs5,800; Y withdraws—Rs 26,600.]
Question 75. A and B are in partnership sharing profits and losses in the proportion of 2/3rd and 1/3rd
respectively. Their Balance Sheet as at 31st March, 2018 was: Cash 1,000; Sundry Debtors 15,000; Stock Rs
22,000; Plant and Machinery 4,000; Sundry Creditors Rs 2,000; Bank Overdraft 15,000; A's Capital 15,000; B's
Capital Rs 10,000. On 1st April, 2018, they admitted C into partnership on the following terms:
a) C to purchase one-quarter of the goodwill for Rs 3,000 and provide Rs 10,000 as capital. C brings in
necessary cash for goodwill and capital.
b) Profits are to be shared in the proportion of one-half to A, one-quarter to B and one quarter to C.
c) Plant and Machinery is to be reduced by 10% and 500 are to be provided for estimated Bad Debts.
Stock is to be taken at a valuation of Rs 24,940.
d) By bringing in or withdrawing cash the capitals of A and B are to be made proportionate to that of C
on their profit-sharing basis. Prepare necessary Ledger Accounts in the books of the firm relating to
the above arrangement and submit the opening Balance Sheet of the new firm.
[Ans.: Gain - 2,040; Cash brought in by A-1,640; Cash withdrawn by B-1,680; B/S Total -57,000; Cash 13,960.]
Question 76. A and B were partners in a firm sharing profits in 3 :1 ratio. They admitted C as a partner for
1/4th share in the future profit. C was to bring Rs 60,000 for his capital. The Balance Sheet of A and B as at 1st
April, 2018, the date on which C was admitted, was:
Capital A/cs : Land and Building 40,000
B 80,000 1,30,000 Stock 30,000
Investments 26,000
Cash 10,000
2,10,000 2,10,000
The other terms agreed upon were:
a) Goodwill of the firm was valued at Rs 24,000.

b) Land and Building were valued at Rs 65,000 and Plant and Machinery at 60,000.
c) Provision for Doubtful Debts was found in excess by 400.
d) A liability of 1,200 included in Sundry Creditors was not likely to arise.
e) The capitals of the partners be adjusted on the basis of C's contribution of capital to the firm.
f) Excess or shortfall, if any, be transferred to Current Accounts. Prepare Revaluation Account, Partners'
Capital Accounts and Balance Sheet of the new firm.
[Ans.: Gain (Profit) on Revaluation: 16,600; New Ratio of A, B and C—9:3:4; Capital A/cs:
A-1,35,000; B—Rs 45,000 and C–7 60,000. Balance Sheet Total Rs 3,51,950.]
st
Question 77. The Balance Sheet of X, Y and Z who share profits and losses in the ratio of 3:2:1, as on 1 April,
2021 is as follows:
Capital A/cs: Y's Current Account 7,000
X 1,75,000 Land and Building 1,75,000
Y 1,50,000 Plant and Machinery 67,500
Z 1,25,000 4,50,000 Furniture 80,000
Current A/c s : Investment 36,500
X 4,000 Bills Receivable 17,000
Z 6,000 10,000 Sundry Debtors 43,500
Profit and Loss A/c 7,000 Bank 43,000
Creditors 80,000
Bills Payable 45,000
6,07,000 6,07,000
On the above date, W is admitted as a partner on the following terms:
a) W will bring 50,000 as his capital and get 1/6th share in the profits.
b) He will bring necessary amount for his share of goodwill. Goodwill of the firm is values at 90,000.
c) New profit-sharing ratio will be 2:2:1:1.
d) A liability of Rs 7,004 will be created against bills receivable discounted earlier but now dishonoured.
e) The value of stock, furniture and investments is reduced by 20%, whereas the value of Land and.
Building and Plant and Machinery will be appreciated by 20% and 10% respectively.
f) Capital Accounts of the partners will be adjusted on the basis of W's Capital through their Current
Account. Prepare Revaluation Account, Partners' Current Accounts and Capital Accounts.
[Ans.: Loss on Revaluation–7 8,950; Partners' Current A/cs: X–1,0055,Y-747,350 and Z-Rs 83,175; Partners'
Capital Arts, X–Rs 1,00,000; Y-71,00,000; Z—Rs 50,000 and W—Rs 50,000
Question 78. Shikhar and Rohit were partners in a firm sharing profits in the ratio of 7 : 3. On 1st April, 2013,
They admitted Kavi as a new partner for 1/4th share in profits of the firm. Kavi brought Rs 4,30,000 as capital
and Rs 25,000 for his share of goodwill premium. The Balance Sheet of Shikhar and Rohit as on 1st April, 2013
was as follows:
BALANCE SHEET OF SHIKHAR AND ROHIT as at 1st April, 2013
Shikhar 8,00,000 Machinery 4,50,000
Rohit 3,50,000 11,50,000 Debtors 2,20,000
General Reserve 1,00,000 Less: Provision 20,000 2,00,000
Workmen's Compensation Fund 1,00,000 Stock 3,50,000
Creditors 1,50,000 Cash 1,50,000
15,00,000 15,00,000
It was agreed that:

a) the value of Land and Building will be appreciated by 20%.

b) the value of Machinery will be depreciated by 10%.
c) the liabilities of Workmen's Compensation Fund were determined at 50,000.
d) capitals of Shikhar and Rohit will be adjusted on the basis of Kavi's capital and actual cash to be
brought in or to be paid off as the case may be.
Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new firm.(AI 2014)
[Ans.: Gain on Revaluation—Rs 25,000; Capital A/cs: Shikhar- 9,03,000; Rohit- 3,87,000;Kavi-4,30,000;
Shikhar will withdraw-Rs 37,000 and Rohit will withdraw Rs 23,000; Balance Sheet Total_Rs 19,20,000.]
st
Question 79. Baghu and Rishu are partners sharing profits in the ratio 3:2. Their Balance Sheet as at 31
March, 2009 was as follows:
BALANCE SHEET OF RAGHU AND RISHU as at 31st March, 2009
Creditors 86,000 Cash in Hand 77,000
Employees' Provident Fund 10,000 Debtors 42,000
Investment Fluctuation Reserve 4,000 Less : Provision for Doubtful Debts 7,000 35,000
Capital A/cs : Investments 21,000
Raghu 1,19,000 Buildings 98,000
Rishu 1,12,000 2,31,000 Plant and Machinery 1,00,000
3,31,000 3,31,000
Rishabh was admitted on that date for 1/4th share of profit on the following terms:
a) Rishabh will bring Rs 50,000 as his share of capital.
b) Goodwill of the firm is valued at Rs 42,000 and Rishabh will bring his share of goodwill in cash.
c) Buildings were appreciated by 20%.
d) All Debtors were good.
e) There was a liability of Rs 10,800 included in Creditors which was not likely to arise.
f) New profit-sharing ratio will be 2:1:1.
g) Capital of Raghu and Rishu will be adjusted on the basis of Rishabh's share of capital and any excess or
deficiency will be made by withdrawing or bringing in cash by the concerned partners as the case may
be.Prepare Revaluation Account,Partners' Capital Accounts and Balance Sheet of new firm.(Al 2012 C)
[Ans.: Gain (Profit) on Revaluation_Rs 37,400; Partners' Capital A/cs: Raghu—Rs 1,00,000; Rishu—
Rs 50,000; Rishabh-Rs 50,000; Balance Sheet Total_Rs 2,85,200; Cash in Hand-Rs 4,600;
Raghu will withdraw 48,040; Rishu will withdraw Rs 84,860.]
When the New Partner is required to bring Proportionate Capital
Question 80. Following is the Balance Sheet of Abha and Binay as at 31st March, 2014:
Employees' Provident Fund 8,000 Debtors
Workmen's Compensation Fund 15,000 Less: Provision for Doubtful Debts 21,000
Capital A/c s : Stock 10,000
Abha 55,000 Plant and Machinery 60,000
Binay 30,000 85,000 Goodwill 10,000
Profit and Loss 5,000
1,21,000 1,21,000
Chitra was admitted as a partner for 1/4th share in the profits of the firm. It was decided that:
a) Bad Debts amounted to 1,500 will be written off.

b) Stock worth Rs 8,000 was taken over by Abha and Binay at Book Value in their profit-sharing ratio.
The remaining stock was valued at Rs 2,500.
c) Plant and Machinery and Goodwill were valued at 32,000 and Rs 20,000 respectively.
d) Chitra brought her share of goodwill in cash. (e) Chitra will bring proportionate capital and the
capitals of Abha and Binay will be adjusted in their profit-sharing ratio by bringing in or paying off
cash as the case may be. Prepare Revaluation Account and Partners' Capital Accounts. (Delhi 2015 )
[Ans.: Loss on Revaluation-728,000; Partners' Capital A/c: Abha—27,000; Binay:27,000; Chitra-18,000.
Question 81. L, M and N were partners in a firm sharing profits in the ratio of 3 : 2 : 1. Their Balance Sheet on
Creditors 1,68,000 Bank 34,000
Capital A/cs: L 1,20,000 Stock 2,20,000
M 80,000 Investments 60,000
N 40,000 2,40,000 Furniture 20,000
Machinery 70,000
4,50,000 4,50,000
On the above date, O was admitted as a new partner and it was decided that:
i. The new profit-sharing ratio between L, M, N and O will be 2:2:1:1.
ii. Goodwill of the firm was valued at Rs 1,80,000 and O brought his share of goodwill premium in cash
iii. The market value of investments was 36,000.
iv. Machinery will be reduced to 58,000.
v. A creditor of 6,000 was not likely to claim the amount and hence was to be written off.
vi. O will bring proportionate capital so as to give him 1/6th share in the profits of the firm Prepare
Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the new firm.
[Ans.: Loss–730,000;Capital:L-1,56,000; M-84,000, N-42,000 and O-756,400; Balance Sheet Total— 5,00,400.
Question 82. A and B are partners in a firm sharing profits and losses in the ratio 3 : 1. They admit C for 1/4th
on 31st March, 2014 when their Balance Sheet was as follows:
Employees' Provident Fund 17,000 Cash 6,100
Workmen Compensation Reserve 6,000 Stock 15,000
Investment Fluctuation Reserve 4,100 Debtors 50,000
Capital A/cs: A 54,000 Less: Provision for Doubtful Debts 2,000 48,000
B 35,000 89,000 Investments 7,000
Goodwill 40,000
1,16,100 1,16,100
The following adjustments were agreed upon:
a) C brings in Rs 16,000 as goodwill and proportionate capital.
b) Bad debts amounted to Rs 3,000 and Market value of investment is 4,500.
c) Liability on account of workmen compensation reserve amounted to 2,000.
Prepare Revaluation A/c and Partners' Capital Accounts. (CBSE Sample)
[Ans.: Loss on Revaluation-71,000; Partners' Capital A/cs: A— 39,450; B-730,150 C-Rs 23,200
Question 83. Pradeep and Dhanraj were partners in a firm sharing profits in the ratio of 3 : 1. Their Balance
Sheet on 31st March, 2018 was:

Bills Payable 1,000 Debtors 50,000
Reserve Fund 16,000 Less: Provision for Doubtful Debts 5,000 45,000
Outstanding Salary 3,000 Stock 30,000
Capital A/c s: Bills Receivable 10,000
Pradeep 60,000 Patents 1,000
Dhanraj 20,000 80,000 Machinery 40,000
1,30,000 1,30,000
They admitted Leander as a new partner on this date. New profit-sharing ratio is agreed as 3:2:3. Leander
brings in proportionate capital after the following adjustments:
a) Leander brings Rs 16,000 as his share of goodwill.
b) Provision for Doubtful Debts is to be reduced by Rs 2,000.
c) There is an old Typewriter valued at Rs 2,400. It does not appear in the books of the firm. It is now to
be recorded.
d) Patents are valueless. Prepare Revaluation A/c, Capital A/c and opening Balance Sheet of new firm.
[Ans.: Gain on Revaluation–73,400; Partners' Capital A/cs: Pradeep,7 90,550; Dhanraj- 24,850; Leander–
69,240; Balance Sheet Total- 2,18,640; Cash brought by Leander- Rs 69,240 + 16,000 (Goodwill) = 85,240.]
[Hint: In this question only Pradeep will get goodwill because only he has sacrificed.]
Question 84. Mohan and Sohan are in partnership sharing profits in the proportion of 3/5th and 2/5th
respectively. Their Balance Sheet as at 31st March, 2018 was:
Mohan's Capital 2,000 Plant 650
Sohan's Capital 1,000 3,000 Cash 650
Creditors 400 Debtors 1,000
Less: Provision for Doubtful Debts 400 600
Stock 1,500
3400 3,400
They decide to admit Rohan to a 1/3rd share upon the terms that he is to pay into the business Rs 1,000 as
Goodwill and sufficient Capital to give him a 1/3rd share of the total capital of the new firm. It was agreed that
the Provision for Doubtful Debts be reduced to 100 and the Stock be revalued at 2,000 and that the Plant be
reduced to Rs 500. You are required to record the above in the Ledger of the firm and show Balance Sheet of
the new partnership.
[Ans.: Revaluation Gain- 650; Partners' Capital A/cs: Mohan— 2,990; Sohan- 1,660; Rohan-R 2,325; Balance
Sheet Total-77,375.]
Question 85. Following is the Balance Sheet of X and Y as at 31st March, 2018, Z is admitted as a partner on
that date when the position of X and Y was:
X's Capital 10,000 Cash in Hand 9,000
Y's Capital 8,000 18,000 Debtors 11,000
General Reserve 16,000 Building 8,000
Workmen Compensation Reserve 4,000 Machinery 10,000
50,000 50,000
X and Y share profits in the proportion of 3 : 2. The following terms of admission are agreed upon:
a) Revaluation of assets: Building 18,000; Stock Rs 16,000.
b) The liability on Workmen Compensation Reserve is determined at Rs 2,000.
c) Z brought in as his share of goodwill Rs 10,000 in cash.

d) Z was to bring in further cash as would make his capital equal to 20% of the combined capital of X
and Y after above revaluation and adjustments are carried out.
e) The future profit-sharing proportions were: X—2/5th, Y—2/5th and Z—1/5th. Prepare new Balance
Sheet of the firm and Capital Accounts of the Partners.
[Ans.: Revaluation Gain -14,000; Capital A/cs: X-39,200; Y-20,800,Z- 712,000; Balance Sheet- 86,000]
st
Question 86. Kalpana and Kanika were partners in a firm sharing profits in the ratio of 3 : 2. On 1 April, 2018,
the admitted Karuna as a new partner for 1/5th share in the profits of the firm. The Balance Sheet of Kalam
and Kanika as on 1st April, 2018 was as follows:
BALANCE SHEET OF KALPANA AND KANIKA as on 1st April, 2018
Kalpana 4,80,000 Plant 2,70,000
Kanika 2,10,000 6,90,000 Stock 2,10,000
Workmen's Compensation Fund 1,00,000 Less: Provision 12,000 1,20,000
Creditors 90,000 Cash 1,30,000
9,40,000 9,40,000
It was agreed that;
a) the value of Land and Building will be appreciated by 20%.
b) the value of plant be increased by Rs 60,000.
c) Karuna will bring Rs 80,000 for her share of goodwill premium.
d) the liabilities of Workmen's Compensation Fund were determined at 60,000.
e) Karuna will bring in cash as capital to the extent of 1/5th share of the total capital of the new firm.
Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new firm.
[Ans.: Gain on Revaluation–71,02,000; Partners' Capital: Kalpana- 6,49,200; Kanika-3,22,800; Karuna—
2,43,000; Cash Balance—Rs 4,53,000; Balance Sheet Total_Rs 13,65,000.]
Hints: 1. Excess Workmen Compensation Fund Credited to Kalpana—Rs 24,000 and Kanika—Rs 16,000.
Hints 2. Calculation of Karuna's Capital: Combined capital of Kalpana and Kanika (after all adjustments)
for 4/5 Share— 6,49,200 + 3,22,800 = 9,72,000. It means, Firm's Total Capital—79,72,000 X 5/4= 12,15,000;
Karuna's Share of Capital - 12,15,000 x 1/5=Rs 2,43,000.]
Question 87( practice question). Following is the balance sheet of A and B as on 31st March 2020.
Balance sheet as on 31.3.2020
Capital accounts: Bank 93,000
A 2,80,000 Bills receivable 50,000
B 2,20,000 5,00,000 Debtors 60,000
Capital reserve 60,000 Provision for D. Debts 3,000 57,000
General reserve 1,20,000 Stock 99,000
C’ loan A/c 1,00,000 Furniture 90,000
Investment fluctuation funds 4,000 Land and building 5,00,000
Creditors’ 30,000
Bills payable 10,000 Investment 30,000
12% Bank loan 1,00,000 Advertisement suspense A/c 5,000
9,24,000 9,24,000
On 1st April 2020, C is admitted as a new partner for share and partner were sharing profit and losses
in the ratio of 3:2. Following adjustments were carried out on admission of C.
1. A debtor whose dues of ₹1,000 were written off as bad debts, paid ₹800 in full settlement.
2. Stocks were overvalued by 10%.

3. Ram, a debtor, of ₹3000 became insolvent and ₹300 could be recovered as first and final
dividend.
4. Provision for doubtful debts should be maintained at same rate.
5. Market value of investments were estimated at Rs 29,000.

6. C is admitted as new partner for share in future profit. He has to bring ₹2,00,000 as his capital
and ₹24,000 for his share of goodwill.
7. C could bring only ₹20,000 for his share of goodwill .
8. Capital account of remaining partners to be in their new profit sharing ratio taking C’s capital as
base. Any difference will be adjusted through cash A/c
9. Furniture were found undervalued by 10%
10. Bills payable worth ₹12,000 issued to creditors were not recorded in the book.
11. ₹1900 paid to one of creditor of ₹2000 in full settlement were not recorded in the book.
12. Interest on bank loan outstanding for 6 month
13. Mr A provided loan of ₹20,000 to the firm @10% p.a on admission of C.
14. A Bill receivable of ₹10,000 which was previously discounted with banker, was dishonoured on
31.3.2020 and nothing could be recovered from such debtor.
15. Salary of Ram ( a manger) is fixed at ₹2,40,000 p.a. on his appointment. One month salary is due
on 31.3.2020.
Pass journal entries and prepare necessary accounts and Balance sheet on C’s admission.

CHAPTER 6. RETIREMENT AND DEATH OF A PARTNER

RETIREMENT OF A PARTNER: Retirement of a partner means retiring from the firm, i.e., ceasing to be a
partner of the firm. A partner may retire from the firm :
(i) If there is an agreement to that effect ;

(ii) If all the partners give consent to his retirement; or
(iii) If the partnership is at will, by giving written notice to the remaining partners of his decision to
retire.
Retirement of a partner is also reconstituting the firm under which old partnership comes to an end and new
partnership among the remaining partner, comes into existence. The firm, however, continues.
LIABILITY OF RETIRING PARTNER:-
Liability for the acts before Retirement : A retiring partner remains liable for all the acts of the firm up to the
date of his retirement. However, a retiring partner may be discharged from his liability by an agreement
between himself, third party and the continuing partners. [Section 32 (2)]
Liability for the Acts after Retirement : A retiring partner also continues to be liable to third parties for the
acts of the firm even after his retirement until a public notice of his retirement is given. [Section 32 (3) ]
Adjustments Required on Retirement of a Partner: The adjustments required to be made on retirement are :
1. Change in the Profit- sharing Ratio, i.e., determining New Profit-sharing Ratio and Gaining Ratio.
2. Accounting Treatment of Goodwill .
3. Revaluation of Assets and Reassessment of Liabilities.
4. Reserve and Undistributed Profits (Accumulated Profits )/ Losses.
5. Computation of Retiring Partner’s Interest and Payment to the Retiring Partner.
6. Adjustment of Capitals (if agreed).
CHANGE IN THE PROFIT-SHARING RATIO: Retirement or death of a partner leads to change in profit-sharing
ratio among the remaining or continuing partners as they acquire share of the retiring or deceased partner.
New profit- sharing ratio of the remaining or continuing partners and their gaining ratio is determined after
the retirement or death of a partner.
GAINING RATIO:--The ratio in which the continuing partners acquire the outgoing (retired or deceased
partner’s share is called the Gaining Ratio. This ratio is calculated by deducting old share in profits from the
new share in profits. Gaining Ratio = New Ratio –Old Ratio
Question 1.
(i) A, B and C were partners, sharing profit in the ratio of ½, 2/5 and 1/10. Find the new ratio and
gaining ratio of the remaining partners if : (a) A retires, (b) B retires and (c) C retires.
(ii) X,Y and Y are partners sharing profits in the ratio of 5/10 : 4/10 : 1/10. Find out the new ratio of
the remaining partners and gaining ratio if : (a) X retires , (b) Y retires and ( c) Z retires.
Question 2. A, B and C are sharing profits and losses in the ratio of 5 : 3 :2. B retires. His share is taken by A
and C in the ratio of 2 : 1 . Calculate new Profit-Sharing Ratio and gaining ratio.
Question 3. A, B and C are partners sharing profits in the ratio of 2:2 :1. B retires and his share is taken by C.
Calculate new profit-sharing ratio and gaining ratio.

Question 4. A , B and C are in partnership sharing profits and losses as ½, 3/10 and 1/5 respectively. B retires
and his share is taken by A and C in the ratio of 2 : 1. Then immediately, D is admitted for 1/4th share of
profit, half of which was given by A and the remaining share was taken equally from A and C . Calculate profit-
sharing ratio after D’s admission.
Question 5. A,B and C are partners sharing profits and losses in the ratio of ½ ,3/10 and 1/5. B retires from
the firm and A and C decide to share future profits and losses in the ratio of 3 : 2. Calculate gaining ratio.
Question 6. A, B and C are partners sharing profits and losses in the ratio of 2/5, 2/5 and 1/5 respectively. C
retires, A and B decide to share future profits and losses in the ratio of 2:1 respectively. Calculate the gaining ratio.
Question 7. A,B and C are partners with capitals of ₹ 1,00,000; ₹ 75,000 and ₹ 50,000 respectively. On C‘s
retirement, his share is acquired by A and B in the ratio of 6:4 respectively. Calculate gaining ratio and the new
profit-sharing ratio.
Question 8 X,Y and Z are partners sharing profits in the ratio of 3:2:1. X retires from the firm and it is decided that
profit-sharing ratio between Y and Z will be same as existing between X and Y. Calculate new ratio and gaining ratio.
Question 9. X, Y and Z are partners sharing profits and losses in the ratio of 4 : 3 : 2. Y retires and surrenders 1/9 th
of his share in favour of X and the remaining in favour of Z. Calculate new profit-sharing ratio and the gaining ratio.
Difference between Sacrificing Ratio and Gaining Ratio ( IMPORTANT FOR EXAM)
Basis Sacrificing Ratio Gaining Ratio

Meaning It is the ratio which the old partners have It is the ratio in which the remaining
agreed to sacrifice their shares in profits in partners acquire the outgoing (retired or
favour of the new or incoming partner. deceased ) partner’s share.
Objective It is calculated to determine the amount of It is calculated to determine the amount

compensation to be paid by the incoming of compensation to be paid by each of
partner to the sacrificing partners as the continuing partners to the outgoing
premium for goodwill or goodwill. partner as premium for goodwill or
goodwill.
When to It is calculated the time of admission of a It is calculated at time of retirement or
Calculate new partner and change in the profit- death of partner and change in the profit-
sharing ratio. sharing ratio.
Method of Sacrificing Ratio = Old Ratio –New Ratio Gaining =New Ratio-Old Ratio
Calculation
ACCOUNTING TREATMENT OF GOODWILL : At the time of retirement or death of a partner, adjustment is
necessary for goodwill. Value of goodwill is calculated as specified in the Partnership Deed. When a partner
retires ( or dies), his share in profits is taken by the continuing partners for which they should compensate the
retiring or deceased partner. The compensation paid is known as goodwill . In other words, the retiring or
deceased partner is entitled to his share of goodwill at the time of retirement/death because goodwill has
been earned by the firm at time when he was a partner.
For Accounting Treatment of Goodwill, Guidelines of Accounting Standard -26 (As-26) on Accounting for
Intangible Assets are followed.
Guideline of AS-26, ‘Intangible Assets’ Issued by ICAI

 Goodwill is to be recorded in the books only when consideration in money or money’s worth has
been paid for it. Therefore, only purchased goodwill is recorded in the books.
 In case of admission/ retirement /death of a partner or in case of change in profit-sharing ratio
among partners, goodwill is not raised in the books of the firm because no consideration in money
or money’s worth is paid for it. Goodwill may be adjusted through Capital Accounts of the partners
or Goodwill Account may be opened and immediately written off.

Question 10.(When all the Remaining Partners Gain). Surender, Ramesh , Naresh and Mohan are partners
in a firm sharing profit in 2 : 1 : 2 : 1 ratio. On the retirement of Naresh, goodwill was valued at ₹ 72,000.
Surender, Ramesh and Mohan decided to share future profits equally. You are required to make adjustment
entries for goodwill without opening Goodwill Account. Show your workings clearly.
Question 11. (When one of the remaining Partners also Sacrifices in Addition to the Retiring Partner). X,Y
and Z are partners sharing profits in the ratio of 3 : 2 : 1. Z retires and the new profit-sharing ratio between X
and Y was 1 : 2. On Z’s retirement, goodwill of the firm was valued at ₹ 30,000. Pass necessary Journal entries
for the treatment of goodwill of the firm Z’s retirement without opening the Goodwill Account.
Question12. Amit, Amrit and Akhil were partners in a firm sharing profits-sharing ratio of 3 : 2 : 1. Akhil
retired from the firm on 1st April, 2019 on which date goodwill of the firm was valued at ₹ 1,20,000. Pass the
necessary Journal entries giving effect to goodwill on Akhil’s retirement raising Goodwill at its current value.
Question 13.Virat ,Rohit and Shikhar are partners sharing profits in ratio of 3 : 2 : 1. Shikhar retired from the
st
firm on 1 April , 2021 on which date goodwill of the firm was valued at ₹ 2,40,000 . Virat and Rohit decided
to share future profits equally from that date. Pass the necessary Journal entries giving effect to goodwill on
Shikhar’s retirement (i) raising Goodwill at its current value,(ii) without raising goodwill in book of firm.
Question 14. Bhaskar, Ramesh and Suman were partners sharing profits in the ratio of 3 : 2 : 1. Suman retired
from the firm on 1st April, 2021 on which date goodwill of the firm was value at ₹ 2,40,000 . Bhaskar and
Ramesh decided to share future profits in the ratio of 2 : 3 from that date. Pass the necessary Journal entries
giving effect to goodwill on Suman’s retirement raising Goodwill at its current value.
Question 15. Karan, Charan and Raman were partners sharing profits in the ratio of 3 : 2 : 1. Raman retired
from the firm on 1st April, 2019 on which date goodwill of the firm was value at ₹ 1,20,000. Pass the
necessary Journal entries raising Goodwill at its current value.
Question 16. Daman, Dev and Som were partners sharing profits in the ratio of 3 : 2 : 1. Som retired from the firm
on 1st April, 2019 on which date goodwill of the firm was value at ₹ 2,40,000. Daman and Dev decided to share
future profits in the ratio of 2 : 3 from that date. Pass the necessary Journal entries without raising Goodwill.
Question 17. Farhan, Ashish and Samay were partners sharing profits in the ratio of 3 : 2 : 1. Samay retired from
the firm on 1st April, 2018 on which date goodwill of the firm was value at ₹ 2,40,000. Farhan and Ashish decided
to share future profits in the ratio of 2 : 3 from that date. Pass the necessary Journal entries raising Goodwill for
retiring partner’s share in current value of goodwill giving effect to it on Samay’s retirement.
Question 18 (When one of the Remaining Partners Gain and Goodwill Appears in the Books).X,Y and Z are
partners sharing in the ratio of 2 : 3 : 5. Goodwill is appearing in their books at a value of ₹ 50,000 . X retires
and on the day of X’s retirement, goodwill is valued at ₹ 45,000. Y and Z decided to share the future profits
equally. Pass necessary Journal entries.
Question 19 (When all the Remaining Partners Gain and Goodwill Appears in the Books). Arjun, Bhim and Nakul
are partners sharing profits and losses in the ratio of 14 : 5: 6 respectively. Bhim retires and surrenders 5/25th of his
share in favour of Arjun and remaining share in favour of Nakul. Goodwill of the firm is valued at 2 years’ purchase
of super profits based on average profits of last 3 years are ₹ 50,000, ₹ 55,000 and ₹ 60,000 respectively. Normal
profits for the similar firm are ₹ 30,000. Goodwill already appears in the books of the firm at ₹ 75,000. The profit for
the first year after Bhim’s retirement was ₹ 1,00,000. Give the necessary Journal entries to adjust Goodwill and
distribute profits showing your workings.
Question 20.(IMPORTANT) A, B and C are partners sharing profits and losses in the ratio of 4 : 3 : 1. B retires, selling
his share of profits to A and C for ₹ 8,100; ₹ 3,600 paid by A and ₹ 4,500 by C. The profit for the year after B’s
retirement was ₹ 10,500.

You are required (i) to give necessary Journal entries to record the transfer of B’s share to A and C; (ii) to calculate
new profit-sharing ratio and distribute the profits between A and C.
Hidden Goodwill: If a firm has agreed to settled the accounts of the retiring partner by paying him a lump
sum amount, then the amount paid to him in excess of his capital and share in the reserve or undistributed
profits and profits or losses due to revaluation of assets and liabilities, etc., is taken as his share of goodwill.
For example, A, B and C are partners. B retires. His Capital Account, after making adjustments for reserve and
profits on revaluation exists at 1,28,000. A and C have agreed to pay him 1,50,000. In full settlement of his
claim. It implies that 22,000 (1,50,000- 1,28,000) is B’s share in the goodwill of the firm. This will be treated by
debiting 22,000 in A’s and C’s Capital Accounts in their gaining ratio and crediting B’s Capital Account.
Question 21. A, B and C are partners sharing profits in the ratio of 1 : 2 : 3. C retires and his capital, after
making adjusting for reserve and profits on revaluation stands at ₹ 2,20,000. A and B agreed to pay him ₹
2,50,000 in full settlement of his claim. Record necessary Journal entry for the treatment of goodwill if the
new profit-sharing ratio is decided at 1 : 3.
REVALUATION Of ASSETS AND REASSEMENT OF LIABILITIES
Question 22. Balance Sheet of A, B and C sharing profits and losses in the ratio of 5 : 3 : 2 as at 31.3.2019 was
A 46,000 Less: Provision for Doubtful Debts _800 15,200
B 34,000 Stock 12,800
C 25,000 1,05,000 Plant and Machinery 35,000
1,20,000 1,20,000
B retires from the firm on 1st April, 2019. A and C decided to share future profit and losses in the ratio of 3:1
respectively. Following adjustments are agreed :
(i) An amount of ₹ 1,100 included in Debtors be written off as it is no longer receivable.

(ii) Provision for doubtful Debts be maintained at the existing rate.
(iii) Stock be written down by ₹ 1,055.
(iv) Land and Building be reduced to ₹ 11,000.
(v) Plant and Machinery be reduced to ₹ 34,000.
(vi) An amount of ₹ 700 included in Sundry Creditors be written back as no longer payable
(vii) A provision of ₹ 600 be made for repairs.
(viii) An old computer previously written off was sold for ₹ 2,000 as scarp.
(ix) Firm had to pay ₹ 5,000 to an employee injured in an accident.
(x) Goodwill of the firm valued at Rs 1,20,000
To give effect to the above adjustments, you are required to pass necessary Journal entries. Also, prepare the
Revaluation Account, partner’s capital account and new balance sheet.
Memorandum Revaluation Account: The partners may decide to give effect to revaluation of assets
and reassessment of liabilities without affecting their existing book values. In this case, Memorandum
Revaluation Account is prepared in the same manner as discussed in the chapter of ‘Admission of a Partner’.
It should be noted that the balance of the first part of this account is transferred to the Capital Accounts of all
the partners (including the retiring or deceased partner) in their old profit-sharing ratio whereas the balance

of second part is transferred to the Capital Accounts of the remaining partners (or continuing partners) in
their new profit-sharing ratio.
Question 23. Balance Sheet of M/s. AVS as at 31st March, 2021 of which Atul, Vikas and Sanjeev are
partners sharing profits and losses in the ratio of 5 : 3 : 2 was :
Capital A/cs : Plant and Machinery 60,000
Atul 46,000 Land and Building 70,000
Vikas 34,000 Stock 25,600
Sanjeev 25,000_ 2,10,000 Debtors 32,000
Sundry Creditors 25,000 Less: Provision for Doubtful Debts_1,600 30,400
Expenses Payable 5,000 Cash in Hand 5,500
Bank loan 1,05,000 Cash at Bank 48,500
2,40,000 2,40,000
On that day, Vikas retires from the firm and Atual and Sanjeev decide to share future profits and losses in the
ratio of 3 : 2 respectively. Following adjustments are agreed :
(i) An amount of ₹ 2,200 included in Sundry Debtors be written off, being not recoverable.
(ii) Provision for Doubtful Debts be maintained at existing rate.
(iii) Stock is valued at ₹ 23,500.
(iv) Land and Building are valued at ₹ 82,000 and Machinery at ₹ 68,000.
(v) Sundry Creditors be reduced by ₹ 1,400, being a liability not payable.
(vi) Goodwill of retiring partners valued at Rs 20,000.
(vii) Atul and Sanjeev also decided that assets and liabilities shall continue to be shown at existing
value. Prepare Memorandum Revaluation Account.
RESERVES AND ACCUMULATED (UNDISTRIBUTED) PROFITS/LOSSES --- Reserve, Accumulated Profits and
Losses are always distributed even if the question does not specify.
Question 24. X,Y and Y are partners in a firm sharing profits and losses in the ratio of 3:2:1. Z retires from the
firm on 1.4. 2019. On the date of Z’s retirement, following balances appeared in the books of the firm :
General Reserve ₹ 90,000; Profit and Loss Account (Dr.) ₹ 15,000; Employees’ Provident Fund ₹ 1,20,000.
Workmen Compensation Reserve ₹ 12,000 which was no more required. Pass journal entries for the
adjustment of these items on Z’s retirement.
Question 25. A,B and C are equal partners in a firm whose books are closed on 31st March every year. Give
Journal entry to distribute General Reserve of ₹ 1,00,000 at the time of retirement of B when 25 % of the
balance of General Reserve is to be transferred to Investments Fluctuation Reserve.
Question 26.
(a) Give the Journal entry to distribute ‘Workmen Compensation Reserve’ of ₹ 70,000 at the time of
retirement of Neeti, when there is a claim of ₹ 25,000 against it. The firm has three partners Raveena,
Neeti and Rajat.
(b) Give the Journal entry to distribute ‘Workmen Compensation Reserve’ of ₹ 60,000 at the time of
retirement of Sajjan, when there is no claim against it. The firm has three partners Rajat, Sajjan and
Kavita.
(c) Give the Journal entry to distribute ‘Investment Fluctuation Reserve’ of ₹ 4,000 at the time of
retirement of Z, when Investment (market value ₹ 19,000) appears at ₹ 20,000. The firm has three
partners X,Y,and Z.

COMPUTATION OF AMOUNT DUE TO RETIRING PARTNER
Question 27 (Ascertaining the Amount Due to Retiring Partner and Treated as Loan). A, B and C are partners in a
business, sharing profits and losses in the ratio of 3 : 2 : 1. Their Balance Sheet as at 31 st March, 2021 was :
General Reserve 6,000 Cash at Bank 1,000
Capital A/cs : Sundry Debtors 9,000
A 10,000 Stock in Hand 7,000
B 10,000 Machinery 6,000
C 10,000_ 30,000 Factory Building 14,000
37,600 37,600
C retires from business on 1st April, 2021. It was agreed that amount due to him will be treated as loan. It was
also agreed to adjust the value of assets as follows :
(i) Provident a reserve of 5% on Sundry Debtors for Doubtful Debts.

(ii) Reduce Stock by 5 % and Machinery by 10%.
(iii) Factory Building to be revalued at ₹ 15,100.
(iv) Goodwill of the firm is valued at ₹ 15,000.
(v) A and B will continue to carry on the business and shall share profits and losses equally in future.
Prepare Revaluation account, Partners’ Capital Accounts and Balance Sheet as at 1.4.2021.
Question 28 (MAST QUESTION) M,N and G were partners in a firm sharing profits and losses in the ratio of 5 :
3 : 2. On 31st March, 2016, their Balance Sheet was as under :
Sundry Creditors 55,000 Cash 90,000
Capital A/cs : Less : Provision _5,000 40,000
M 1,50,000 Stock 50,000
N 1,25,000 Machinery 1,50,000
G 75,000_ 3,50,000 Patents 30,000
Building 1,00,000
Bills payable 40,000 furniture 70000
Bank loan 80,000 Profit and Loss A/c 25,000
5,55,000 5,55,000
M retired on the above date and it was agreed that :
(i) Debtors of ₹ 2,000 will be written off as bad debts and a provision of 5 % on debtors for bad
doubtful debts will be maintained.
(ii) Patents will be completely written off.
(iii) Building was sold for Rs 92,000.
(iv) Stock was taken by bills payable in full settlement of his claim.
(v) Bank loan agreed to take over furniture in full settlement of his claim.
(vi) An unrecorded equipment costing Rs 20,000 sold for Rs 15,000.
(vii) An unrecorded machine costing Rs 29,000 was taken by unrecorded liability of Rs 34,000 in full
settlement of his claim.
(viii) Creditors of Rs 12,000 were paid at 10% discount. Further creditor of ₹ 10,000 will be taken into
account.
(ix) N and G will share the future profits in the ratio of 2 : 3.
(x) Goodwill of the firm on M’s retirement was valued at ₹ 3,00,000. Pass necessary Journal entries
for the above transactions in the books of the firm on M’s retirement.

Method of Payment of Amount Due to the Retiring Partner
Question 29 (When Annual Instalments are Payable at the end of the losses equally.) y retires from the firm
. After adjustments, his Capital Account shows a credit balance of ₹ 60,000 as on 1st April, 2018. The balance
due to ‘Y’ is to be paid in three equal instalments annually together with interest @ 5 % p.a. Prepare Y’s Loan
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Account until he is paid the entire amount due to him. The firm close its books on 31 March every year.
Question 30 (When Amount is to be paid in Semi-annual Instalments). P, Q and R were in partnership sharing
profits and losses in the ratio of 2:3:1.‘Q’ retires from the firm. After all the necessary adjustments, his Capital A/c
shows a net credit balance of 2,20,000 as on 1.4.18. ‘Q’ is to be paid ₹ 60,000 by cheque immediately and balance in
four equal semi-annual instalments together with interest @ 10 % p.a. on the unpaid amount. Prepare Q’s Loan
Account until he is paid the entire amount due to him . The firm closes its books on 31st March every year.
Question 31. On 31st March, 2019 the Balance Sheet of M/s. A, B and C, sharing profits and losses in
proportion to their capitals, stood as follows :
Creditors 1,08,000 Cash at Bank 80,000
Capital A/cs : Less : Provision for Doubtful Debts 2,000 98,000
A 4,50,000 Stock 90,000
B 3,00,000 Machinery 2,40,000
C 1,50,000 9,00,000 Land and Building 5,00,000
10,20,000 10,20,000
B retires from the firm on 1st April, 2019 and the remaining partners decide to carry on the partnership. Following
adjustment of assets and liabilities have been agreed upon before the ascertainment of the amount payable to B :
(i) That out of the Firm Insurance Premium paid during the year, ₹ 10,000 be carried forward as
unexpired.
(ii) Land and Building be appreciated by 10 %.
(iii) Provision for Doubtful Debts be brought up to 5 % of Debtors.
(iv) Machinery be decreased by 5 %.
(v) Provision of ₹ 15,000 be made for repairs.
(vi) Goodwill of the firm be fixed at 1,80,000 and B’s share of share of the same be adjusted in the
accounts of A and C who share the future profits in the proportion of 3/4 and 1/4 respectively.
(vii) B be paid ₹ 50,000 in cash and the balance be transferred to his Loan Account.Prepare Revaluation
Account, capital Accounts of Partners and the Balance sheet of the firm of A and C.
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Question 32. Following is the Balance Sheet as at 31 March, 2015 of M/s. Gopi, Krishan and Ram who share
profits in the ratio of : Gopi 4/7, Krishan 2/7 and Ram 1/7 :
Capital A/cs : Goodwill 7,000
Gopi 30,000 Land and Building 20,000
Krishan 20,000 Plant and Machinery 26,500
Ram 15,000 65,000 Motor Vehicle 13,000
Sundry Creditors 15,000 Sundry Debtors 11,000
Bills Payable 2,000
92,500 92,500
Gopi retires on 1st April, 2015 and following terms were agreed upon :
(i) Goodwill of firm is to be valued at ₹ 21,000.

(ii) The assets and liabilities are to be valued as under :
Stock ₹ 12,000; Sundry Debtors ₹ 10,500; Land and Building ₹ 22,600; Plant and Machinery ₹ 25,000
and Sundry Creditors ₹ 13,500.

(iii) Krishan and Ram were to introduce ₹ 20,000 and ₹ 5,000 respectively into the business and ₹ 16,200
were to be paid to Gopi. The balance due to Gopi was to be paid in three equal annual instalments
together with interest @ 9% p.a. Prepare Revaluation Account, Partners’ Capital Account, Balance
Sheet of the firm after Gopi’s retirement and Gopi’s Loan Account until it is paid.
Question 33. X,Y and Z were partners in a firm with profit-sharing ratio of ½, 1/3 and 1/6 respectively. The
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Balance Sheet of the firm as at 31 March, 2019 was as follows :
Trade Creditors 21,000 Cash at Bank 5,750
Workmen Compensation Reserve 12,000 Debtors 40,000
Employee’s Provident Fund 6,000 Less :Provision for Doubtful Debts 2,000 38,000
Investments Fluctuation reserve 6,000 Stock 37,650
Capital A/cs : Investments (Market value ₹ 17,600) 15,000
X 68,000 Patents 10,000
Y 32,000 Machinery 50,000
Z 21,000 1,21,000 Advertisement Expenditure 3,600
Goodwill 6,000
1,66,000
1,66,000
Z retired on 1st April, 2019 on the following terms :
(i) Goodwill of firm is to be valued at ₹ 30,000.

(ii) Value of Patents was to be reduced by 20 % and that of Machinery to 90%.
(iii) Provision for Doubtful Debts was to be raised to 6%.
(iv) Liability for Workmen Compensation to the extent of ₹ 6,000 is to be created.
(v) Z took over the Investments at market value.
(vi) Amount due to Z is to be settled on the following basis :
50% on retirement, 50% of the balance within one year and the balance by a bill of exchange (without
Interest) at 3 months. You are required to show entries for the treatment of Goodwill, Revaluation
Account, Partners’ Capital Accounts and the Balance Sheet of X and Y after Z’s retirement.
ADJUSTMENT OF CAPITALS
Question 34 ( Capitals to be Proportionate to Profit-sharing ). X, Y and Z were partners sharing profits and
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losses in the ratio of 4 : 3 : 2 respectively. Y retired on 1 April, 2019. On that date capitals of X,Y and Z after all
necessary adjustments stood at ₹ 19,500; ₹19,800 and ₹ 9,150 respectively. The total capital of the firm as
newly constituted is fixed at ₹ 28,000 between X and Z in the proportion of 5/8 : 3/8. Calculate amount to be
paid or to be brought by the continuing partners and pass necessary Journal entries.
Question 35 (Capital in Future Profit-sharing Ratio). X Y and Z were partners sharing profits and losses in the
ratio of 4 : 3 : 2 respectively. Y retired on 1st April, 2021 on which date the capitals of X, Y and Z after all the
necessary adjustments stood at ₹ 65,800; ₹ 57,225 and ₹ 33,800 respectively. Capital of the reconstituted firm
will be readjusted by bringing in or paying cash so that the future capitals of X and Z be in their future profit-
sharing ratio. Calculate the amount of cash to be paid or to be brought in by the continuing partners.
Question 36 (When Total Capital of New Firm is to be same as before the retirement). Following is the
Balance Sheet of Aruna, Karuna and Varuna as at 31st March, 2009, who have agreed to share profits and
losses in proportion of their capitals :

Aruna 2,00,000 Machinery 3,00,000
Karuna 3,00,000 Closing Stock 1,00,000
Varuna 2,00,000 7,00,000 Sundry Debtors 1,10,000
General Reserve 35,000 Less : Provision for Doubtful Debts 10,000 1,00,000
Workmen’s Compensation Fund 15,000 Cash at Bank 1,00,000
Sundry Creditors 50,000
8,00,000 8,00,000
On 31.3.2009,Aruna desired to retire from the firm and the remaining partners decided to carry on the
business. It was agreed to revalue the assets and reassess the liabilities on the following basis :
(i) Land and Building to be appreciated by 30 %.

(ii) Machinery be depreciated b y 20 %.
(iii) There were Bad Debts of ₹ 17,000.
(iv) The claim on account of Workmen’s Compensation was estimated at ₹ 8,000.
(v) Goodwill of the firm was valued at ₹ 1,40,000 and Aruna’s share of Goodwill be adjusted against
the Capital Accounts of the continuing partners Karuna and Varuna who have decided to share
future profits in the ratio of 4 : 3 respectively.
(vi) Capitals of the new firm in total will be the same as before the retirement of Aruna and will be in
the new profit-sharing ratio of the continuing partners.
(vii) Amount due to Aruna be settled by paying ₹ 50,000 in cash and the balance by transferring to her
Loan Account which will be paid later on. Prepare Revaluation Account,Capital Accounts and
Balance Sheet of the firm after Aruna retirement.
Question 37. Naresh, David Aslam are partners sharing profits in the ratio of 5 : 3 :7. On 1st April, 2019,
Naresh gave a notice to retire. David and Aslam decided to share future profits in the ratio 2 : 3. The adjusted
Capital Accounts of David and Aslam show a balance of ₹ 33,000 and ₹ 70,500 respectively . The total amount
to be paid to Naresh is ₹ 90,500. This amount is to be paid by David and Aslam in such way that their capitals
become proportionate to their new profit-sharing ratio. Pass necessary Journal entries for the above
transactions in the books of the firm. Show your working clearly. (NOTE: SELF PRACTICE QUESTION)
Question 38. X,Y and Z were partners sharing profits in the ratio of 5 :3 :2 respectively. Y retired on 31 March,
2018. On that date the capitals of X,Y and Z after all necessary adjustments stood at ₹ 43,000; ₹ 36,600 and ₹
11,200 respectively. The cash and bank balance appears in balance sheet at Rs 10,000. Amount payable to Y is
to be brought in by X and Z in such a way as to make their capitals proportionate to their new profit-sharing
ratio which was to be X 3/5 and Z 2/5 . Calculate amount of cash to be paid or to be brought in by the
continuing partners assuming that a minimum cash and bank balance of ₹ 3,000 as to be maintained.
Question 39. A,B and C were equal partners. Their Balance Sheet as at 31st March, 2021 was :
General Reserve 30,000 Furniture 28,000
Profit and Loss A/c 6,000 Debtors 45,000
Capital A/cs : Less :Provision for Doubtful Debts 5,000 40,000
A 60,000 Land and Building 1,20,000
B 40,000
C 32,000 1,32,000
2,28,000 2,28,000
B retired on 1st April, 2021. A and C decided to continue the business as equal partners on the following terms

(i) Goodwill of the firm was valued at ₹ 57,600.

(ii) The Provision for doubtful Debts to be maintained @ 10 % on Debtors.
(iii) Land and Building to be increased to ₹ 1,32,000.
(iv) Furniture to be reduced by ₹ 8,000.
(v) Rent Outstanding (not provided for as yet) was ₹ 1,500.
The remaining partners decided to bring in sufficient amount to pay B and to maintain a bank balance of ₹
24,800. They also decided to readjust their capitals as per their new profit-sharing ratio. Prepare the necessary
Ledger Accounts and the Balance Sheet.
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Question 40. L,M and N were partners in a firm sharing profits in the ratio of 2 : 1 : 1. On 1 April, 2013, their
Balance Sheet was as follows
Capital A/cs : Land 8,00,000
L 6,00,000 Building 6,00,000
M 4,80,000 Furniture 2,40,000
N 4,80,000 15,60,000 Debtors 4,00,000
General Reserve 4,40,000 Less :Provision 20,000 3,80,000
Workmen Compensation Fund 3,60,000 Stock 4,40,000
Creditors 2,40,000 Cash 1,40,000
26,00,000 26,00,000
On the above date N retired. The following was agreed :
(i) Goodwill of the firm was valued at ₹ 6,00,000

(ii) Land was to be appreciated by 40% and Building was to be depreciated by ₹ 1,00,000.
(iii) Furniture was to be depreciated by ₹ 30,000.
(iv) The liabilities for Workmen’s Compensation Fund were determined at ₹ 1,60,000.
(v) Amount payable to N was transferred to his Loan Account.
(vi) Capital of L and M were to be adjusted in their new profit-sharing ratio and for this purpose
Current Account of the partners will be opened. Prepare Revaluation Account, Partners’ Capital
Accounts and the Balance Sheet of the new firm (AI 2014)
Question 41. X,Y and Z were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On 31st March, 2015,
their Balance Sheet was as follows :
Creditors 21,000 Land and Building 62,000
Investments Fluctuation reserve 10,000 Motor Vans 20,000
Profit and Loss A/c 40,000 Investment 19,000
Capital A/cs : Machinery 12,000
X 50,000 Stock 15,000
Y 40,000 Debtors 40,000
Z 20,000 1,10,000 Less :Provision 3,000 37,000
Cash 16,000
1,81,000 1,81,000
On the above date, Y retired and X and Z agreed to continue the business on the following terms
(a) Goodwill of the firm was valued at ₹ 51,000.

(b) There was a claim of ₹ 4,000 for Workmen’s Compensation.
(c) Provision for bad debts was to be reduced by ₹ 1,000.

(d) Y will be paid ₹ 8,200 in cash and the balance will be transferred in his Loan Account which will be
paid in four equal yearly instalments together with interest @ 10 % p.a.
(e) The new profit-sharing ratio between X and Z will be 3 : 2 and their capitals will be in their new profit-
sharing ratio. The capital adjustments will be done by opening Current Accounts. Prepare Revaluation
Account, Partners’ Capital Accounts and the Balance Sheet of the reconstituted firm. (Delhi 2016)
Question 42. (Adjustment of Capital when total capital of the new firm is given ). Leena, Madan and Naresh
were partners in a firm sharing profits and losses in the ratio of 2 : 2 : 3. On 31st March, 2015, their Balance
Sheet was as follows :
Trade Creditors 1,60,000 Land and Building 10,00,000
Bank Overdraft 44,000 Machinery 5,00,000
Long-term debts 4,00,000 Furniture 7,00,000
Employee’s Provident Fund 76,000 Investments 2,00,000
Capital A/cs : Closing Stock 8,00,000
Leena 6,80,000 Sundry Debtors 4,00,000
Madan 3,20,000 Bank 80,000
Naresh 21,00,000 31,00,000 Deferred Advertisement Expenditure 1,00,000
37,80,000 37,80,000
On 31st March, 2015, Madan retired from the firm and the remaining partners decided to carry on the
business. It was decided to revalue assets and liabilities as under :
(i) Land and Building be appreciated by ₹ 2,40,000 and Machinery be depreciated by 10 %.

(ii) 50 % of Investments were taken over by the retiring partner at book value.
(iii) An old customer Mohit whose account was written off as bad debt had promised to pay ₹ 7,000
in settlement of his full debts of ₹ 10,000.
(iv) Provision for Doubtful Debts was to be made at 5 % on debtors.
(v) Closing Stock will be value at market price which is ₹ 1,00,000 less than the book value.
(vi) Goodwill of the firm be valued at ₹ 5,60,000 and Madan’s share of goodwill be adjusted
In the accounts of Leena and Naresh. Leena and Naresh decided to share future profits and
losses in the ratio of 3 : 2.
(vii) The total capital of the new firm will be ₹ 32,00,000 which will be in the proportion of the profit-
sharing ratio of Leena and Naresh.
(viii) Amount due to Madan was settled by accepting a Bill of Exchange in his favour payable after 4
months. Prepare Revaluation Account, Partners’ capital Accounts and Balance Sheet of the firm
after madan’s retirement.
Retirement during the Accounting Year
Question 43. Rajesh, Sudhir and Anil were partners sharing profits in the ratio of 5 : 3 : 2. Anil retired from
partnership on 1st August, 2019. Balance Sheet as at 31st March, 2019 was as follows :
Capital A/cs : Land 1,00,000
Rajesh 90,000 Building 50,000
Sudhir 80,000 Stock 75,000
Anil 80,000 2,50,000 Anil’s Loan 75,000
Workmen Compensation Fund 50,000 Cash in Hand 20,000
Sundry Creditors 1,00,000 Cash at Bank 80,000
Expenses Payable 10,000 Anil’drawing 10,000
4,10,000 4,10,000

Anil retired on the following terms :
(i) Building was to be valued at ₹ 40,000.

(ii) An unrecorded liability for outsider claim of ₹ 5,000 is to be recorded.
(iii) Anil’s share of profit or loss from the beginning to the date of retirement was to be determined
on the basis of last years’ profit or loss. The firm had incurred a loss of ₹ 60,000 in the last year.
(iv) Amount due to or receivable from Anil will be immediately transacted. Prepare Revaluation
Account and Anil’s Capital Account on his retirement.
Question 44. A,B and C are partners, sharing profits and losses in the ratio of 2 : 2 : 1. C retires on 30th June,
2019. The Balance Sheet of the firm as at 31st March, 2019 stood as follows :
A 6,30,000 Investments 1,25,000
B 6,00,000 Stock 2,50,000
C 3,80,000 16,30,000 Sundry Debtors 4,00,000
General Reserve 4,00,000 Cash in Hand 1,00,000
Sundry Creditors 1,00,000 Cash at Bank 2,25,000
C’Loan 20,000 A’drawings 30,000
21,30,000 21,30,000
In order to arrive at the balance due to C, it was mutually agreed that :

(i) Land and Building be valued at ₹ 12,00,000.
(ii) Investments to be valued at ₹ 1,00,000
(iii) Stock be taken at ₹ 3,00,000.
(iv) Goodwill be valued at two years’ purchase of the average profit of the past five years.
(v) C’s share of profits up to the date of retirement be calculated on the basis of average profit of
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the preceding three years. The profits of the preceding five years ended 31 March, were :
Year 2015 2016 2017 2018 2019

Profit (₹) 2,00,000 2,35,000 3,00,000 2,75,000 3,25,000
(vi) Amount payable to C to be transferred to his Loan Account carrying interest @ 10% p.a. You are
required to prepare Revaluation A/c, Partners’ Capital A/cs, and Balance Sheet as at 30th June, 2019.
Value Based Questions( practice questions)
Question 45. P , Q and R were partners sharing profits and losses in the ratio of 4 : 3 : 3. The Balance Sheet of
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the firm as at 31 March, 2020 stood as :
Creditors 10,000 Cash and Bank 15,000
Employee’s Provident fund 20,000 Debtors 15,000
Reserves 10,000 Stock 17,000
Workmen Compensation Reserve 10,000 Fixed Assets 52,000
Capital A/cs : P 30,000 Drawings : R 6,000
Q 15,000 Loan:
R 15,000 60,000 Q 4,000
R 1,000 5,000
1,10,000 1,10,000

R retired on the above date on the following terms and conditions:

(a) Fixed Assets are to be depreciated by 2,000 and 1,000. Provision for Bad Debts is to be created.
(b) A liability of ₹ 4,000 for Workmen Compensation is to be create.
(c) Goodwill of the firm is valued at ₹ 50,000 and R ‘s Share of the Goodwill be adjusted in the Capital
Accounts of P and Q who share the future profits and losses in the ratio of 2 : 1.
(d) Final balance payable to R is to be treated as loan carrying interest @ 10 % p.a.
(e) Final balance of R is to be settled in three equal annual instalments Plus interest and first
instalments is payable on 31st March, 2021.
(f) R decided that out of the due amount as per (e) above, first two instalments will be placed in
fixed deposit and the interest shall be used for educating a girl child from poor family.
st
Pass entries relating to R ‘s retirement. Also show Balance Sheet of P and Q as at 1 April, 2020 and and R’s
Loan Account for the years ending 31st March, 2021 , 2022 and 2023. Indicate the values communicated.
[Ans.: Loss on Revaluation - 3,000; R’s Loan - ₹ 27,9000; P’s Capital-₹ 21,867; Q’s Capital -₹ 17,233; Balance
Sheet Total -₹1,01,000; [Values: Valuing education, charity, duty towards nation and upliftment of poor]
Hints : Excess Balance of Workmen Compensation Reserve is transferred to all Partners’ Capital Accounts in
their old profits-sharing ratio]
Question 46. P, Q and are partners sharing profits and losses in the ratio of 3 : 2 : 1. Following is their Balance
Sheet as at 31st March, 2018 :
Capital A/cs : Plant and Machinery 20,000
P 2,00,000 Debtors 15,000
Q 1,50,000 Stock 17,000
R 1,00,000 4,50,000 Cash 52,000
Creditors 50,000 6,000
5,00,000 5,00,000
Q retires from the business on 1 st April, 2018. Following was agreed upon retirement of Q :
(a) Plant and Machinery has been revalued at ₹ 3,00,000.
(b) Stock has been revalued at ₹ 90,000.
(c) A sum of ₹ 15,000 is to be written off from Debtors.
(d) Goodwill of the firm is valued at ₹1,50,000. Q’s Share is to be adjusted in the account of P and R.
(e) P and R will continue to carry on the business and shall share profits and loss equally in future.
(f) Amount payable to Q shall be paid after three years and till that time it was remain in the
business as Loan bearing interest @ 10 % p.a.
(g) Q decided to donate interest to an Orphanage every year.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of P and R as on 1 st April,
2018. What values are conveyed by ‘Q’?
[Ans.: Gain (Profit) on Revaluation- ₹ 75,000; Partners’ Capital Accounts :P- ₹ 2,37,500; R- ₹ 62,500; Balance
Sheet Total = ₹ 5,75,000; Amount transferred to Q ‘s Loan = ₹ 2,25,000; Values: Sympathy, charity, concern
and responsibility towards society.]
[Hint: Gaining Ratio, i.e., P gains = 1/2- 3/6 =0, R gains = 1/2-1/6=1/3. Hence, only R gains.]

DEATH OF A PARTNER
NOTE:- Accounting procedures on the death of a partner are similar to that of retirement of a partner.
Computation of Amount Due to Deceased Partner:- When a partner dies, his heirs are entitled to the
amount due and the rights which a retiring partner has. The amount that becomes due to the heirs
determined as has been discussed under Retirement of a Partner, Unlike, retirements which can be
planned death may occur on any day, The heirs of the deceased partner also become entitled to the share
of profits earned from the beginning of the financial year to the date deceased Partner’s are entitled to
the following :
 Amount standing to the credit of the deceased Partner’s Capital Account and Current Account, if
Capital Accounts are maintained following Fixed Capital Account Method.
 His share in the goodwill of the firm.
 His share of profit earned from beginning of the financial year to the date of death.
 His share of gain (profit) on revaluation of assets and reassessment of liabilities
 His share of accumulated profits and reserves.
 Interest on capital up to the date of his death, if allowed by the Partnership Deed.
Following amounts are debited to his account :
 His share of loss on revaluation of the assets and reassessment of liabilities, if any.
 His share of accumulated losses.
 His drawings.
 Interest on drawings and his share of the loss that may have occurred till the date of his death from
the last Balance Sheet.
 Advance or loan taken by him from the firm , if any.
Question 47. Ram, Manohar and Joshi were partners in a firm. Joshi died on 28th February, 2018. His share of
profit from the closure of the last accounting year till the date of death was to be calculated on the basis of the
average of 3 completed years of profits before death. Profit for 2015 , 2016 and 2017 were ₹ 8,000; 9,000 and
10,000 respectively. Calculate joshi’s share of profit till his death and pass necessary Journal entry for the same
assuming:
(i) There is no change in profit-sharing ratio of remaining partners, and
(ii) There is change in profit-sharing ratio of remaining partners, new ratio being 3 : 2.
Question 48. A, B and C are partners sharing profit and losses in the ratio of 3 : 2 : 1 respectively. B died
on 30th June, 2018. The Profit from 1st April, 2018 to 30th June,2018 was estimated at ₹ 90,000. A and C
decided to share future profits in the ratio of 3 : 2 with effect from 1st July, 2018. Give the necessary
Journal entry to entry to record the B’s share of profit till the date of death.
Question 49. (Profit up to Death on the Basis of Turnover ). A,B and C are sharing profits in the ratio of 2 : 2 :
1. B died on 30th June , 2018. Accounts are closed on 31st March each year. Sales for the year ended 31st
March,2018 was ₹ 3,00,000. Sales of ₹ 1,00,000 amounted between the period from 1st April, 2018 to 30th
June, 2018. The profit for the year ended 31st March, 2018 was ₹ 30,000. Calculate deceased partner’s share in
the profit of the firm.

Treatment Of Goodwill :-Treatment of Goodwill is same as has been discussed under

Retirement of a Partner.
Question 50. P, R and S are partners, sharing profit in the ratio of 4 : 3 : 1. It is provided in the Partnership Deed that
, on the death of any partner, Deceased Partners’ share of goodwill will be valued at half of the profits credited to his
account during previous four completed years.
R died on 1st April, 2018. The firm’s profits/ losses for the last four years ended 31st March, 2015 are : ₹ 1,20,000;
2016: ₹ 60,000; 2017 : ₹ 20,000 (loss) : 2018 : ₹ 80,000.
(i) Determine the amount that should be credited to R in respect of his share of goodwill.
(ii) Pass Journal entry for adjustment of goodwill assuming that profit –sharing ratio between P and
S in Future will be 3 : 2, when :
(a) Goodwill Account is not opened : and
(b) Goodwill Account is opened.
Question 51. (Treatment of Goodwill and Revaluation of Assets). Sita, Reeta, Geeta are partners in a
firm a firm sharing profits and losses in the ratio of 4 : 3 : 1. As per the terms of Partnership Deed on the
death of any partner, Goodwill was to be valued at 50 % of the net profits credited to that Partner’s
Capital Account during the last three completed years before her death. Sita died on 28th February, 2012.
The profits for the last five years were : 2007 - ₹ 60,000; 2008 - ₹ 97,000; 2009 - ₹ 1,05,000; 2010 - ₹
30,000 and 2011 - ₹ 84,000. On the date of Site’s death, Building was found undervalued by ₹ 80,000,
which was to be considered. Calculate amount of Sita’s share of Goodwill in the firm and record the
adjustment Journal entries of Goodwill and revaluation of Building. The new profit-sharing ratio between
Reeta and Geeta will be equal.
Question 52. (Deceased Partner’s Share of Goodwill and Profit). Ram, Ghanshyam and Vrinda were
partners in a firm sharing profits –sharing in the ratio of 4 : 3 : 1. The firm closes its books on 31st March
every years. On 1st February,2017 Ghanshyam died and it was decided that the new profit-sharing ratio
between Ram and Vrinda will be equal. The Partnership Deed provided for the following on the death of a
partner :
(a) His share of goodwill be calculated on the basis of half of the profits credited to his account during the
previous four completed years.The firm’s profits for the last four years were :
2012-13 ₹ 1,20,000, 2013 -14-₹ 80,000, 2014-15-₹40,000, and 2015-16-₹ 80,000.
(b) His share of profit in the year of his death was to be computed on the basis of average profits of past two
years.Pass necessary Journal entries relating to goodwill and profit to be transferred to Ghanshyam’s
Capital Account. Also show your working clearly.
Question 53. X , Y and Z are partners in a business sharing profits as ¾, 1/8 and 1/8 respectively and their
st
Balance Sheet as at 31 March, 2018 was :
Capital A/cs Plant 5,00,000
X 5,00,000 Debtors 3,50,000
Y 3,00,000 Stock 2,00,000
Z 2,50,000 10,50,000 Bank 2,50,000
Creditors 2,50,000
13,00,000 13,00,000
Z died on 31st December, 2018 and the Partnership Deed Provided the following :

(i) The deceased partner will be entitled to his share of profits up the date of death, calculated on
the basis of previous year’s profits.
(ii) He will be entitled to his share of goodwill of the firm, calculated on the basis of three years’
purchase of the average profits of the last four years. The net profit for the last four years ended
31st March were 2015 : ₹ 8,00,000; 2016 ₹ 6,00,000 ; 2017 : ₹ 4,00,000 and 2018 : ₹ 2,00,000.
(iii) His drawings up to the date of death was ₹ 18,000. Interest on capital was to be allowed and on
drawings to be charged @ 5 % p.a. respectively (in case of drawings on the total amount).
Ascertain the amount payable to the legal representatives of the deceased partner.
Question 54. (Deficiency of Deceased Partner met by his Executors ). A, B and C were partners sharing
profits and losses in the ratio of 5 : 3 : 2. On 31st March, 2018 their Balance Sheet was as follows :
Capital A/cs Goodwill 5,000
A 67,500 Patents 26,000
B 47,500 Investment 31,200
C 37,000 1,52,000 Machinery 3,000
Investment Fluctuation Reserve 3,500 Sundry Debtors 10,000
Workmen Compensation Reserve 3,500 Stock 12,000
Sundry Creditors 51,000 Loan to C 41,000
Cash at Bank 5,800
Advertisement Expenditure 1,000
Profit and Loss A/c (2017- 18) 75,000
2,10,000 2,10,000
C died on 1st August, 2018. C had withdrawn ₹ 5,000 during 2018-19. It was agreed between his executors and
remaining partners that :
(i) Goodwill will be valued at 2 ½ years’ purchase of average of four completed years’
Profit which were :
Year 2014-15 2015-16 2016-17
Profit (₹) 1,01,000 14,000 16,000
(ii) C’s share of profit from the beginning of the accounting years till the date of death be calculated
on the basis of the average of three completed years’ profit before death.
(iii) Patents were undervalued by ₹ 17,000; Machinery was overvalued by ₹ 3,200.
(iv) Market value of Investment on 1st August was ₹ 4,200. Prepare C’s Capital Account and C’s
Executors’ Account.
st
Question 55. X,Y and Z were partners in a firm sharing profits in the ratio of 2 : 2: 1. On 31 March, 2018,
their Balance Sheet was as follows :
Bill Payable 40,000 Stock 70,000
Capital A/cs Land and Building 5,00,000
X 3,00,000 Profit and Loss A/c 1,60,000
Y 3,00,000 (Loss for the year ended 31st March, 2018)
Z 1,30,000 7,30,000
8,60,000 8,60,000
Y died on June, 2018. The Partnership Deed provided for the following on the death of a partner:
(i) Goodwill of the business was to be calculated on the basis of 2 times the average profits of the
past 5 years. The profits for the years ended 31st March, 2017, 31st March, 2016 31st March,
2015 and 31st march, 2014 were ₹ 50,000 ; ₹ 80,000; ₹ 1,10,000 and ₹ 2,20,000 respectively.

(ii) Y’s share of profit or loss from 1st April, 2018 till his death was to be calculated on the basis of
the profit or loss for the year ended 31st March, 2018. You are required to calculate the following
(a) Goodwill of the firm and Y’s share of goodwill at the time of his death.
(b) Y’s share in the profit or loss of the firm till the date of his death.
(c) Prepare Y’s Capital Account at the time of his death to be presented to his executors.
Question 56. A, B and C were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2 respectively .
A died on 28th February, 2021. The Balance Sheet at that date was :
Capital A/cs Machinery 35,000
X 12,000 Furniture 6,000
Y 16,000 Stock 15,000
Z 12,000 40,000 Debtors 15,000
General Reserve 22,000
74,000 74,000
The Partnership Deed provide that on death of a partner the assets and liabilities are to be revalued . Assets
and Liabilities were revalued as follows on A’s death :
(i) Machinery ₹ 45,000 and Furniture ₹ 7,000.
(ii) A Provision of 10% was created for Doubtful Debts.
(iii) A Provision of ₹ 15,000 was made for tax .
(iv) The goodwill of the firm was valued at ₹ 15,000 on A’s death. The amount payable to A was
transferred to his Executors Account. You are required to prepare Revaluation Account, Capitals
of Partners and the Balance Sheet of B and C.
Question 57 (Value Based ) The Balance Sheet of Joy, Julie and Saraha who were sharing profits in the ratio of
4 : 3 : 3 as on 31st March, 2013 was as follows :
General Reserve 15,000 Cash 48,000
Bills Payable 30,000 Stock 1,32,000
Loan 36,000 Investment 1,41,000
Capital A/cs Land and Building 1,80,000
Joy 1,80,000 Joy’s Loan 30,000
Juili 1,50,000
Saraha 1,20,000 4,50,000
5,31,000 5,31,000
Joy died on 31.5 2013. The Partnership Deed provided for the following on the death of a partner :
(i) Goodwill of the firm was to be valued at 1 years’ purchase of average profits for the last three
years which were ₹ 1,20,000.
(ii) Joy’s share of profit till the date of his death was to be calculated on the basis last year’s profit.
Sales for the year ended 31.3.13 amounted to ₹ 12,00,000 and from 1st April to 31st May, 2013 ₹
4,50,000. Profit for the year ended 31.3.2013 was ₹ 3,00,000.
(iii) Interest on capital was to be provided @ 6 % p.a.
(iv) According to Joy’s will , the executor should donate his share to ‘Roshan’ a Not-for-Profit
organisation for blinds. Prepare Joy’s Capital Account to be rendered to executor. Also identify
the value being highlighted in the question. (Foreign 2013)
HINT: Values highlighted (i) symphathy, ii) emphathy, iii) charity.
Question 58. Following is the Balance Sheet of Ram, Mohan and Sohan as at 31st March, 2014:

Sundry Creditors 10,000 Tools 4,13,000
Workmen Compensation Reserve 7,500 Furniture 18,000
Ram 1,80,000 Debtors 12,000
Mohan 1,50,000 Cash at Bank 8,000
Sohan 1,20,000 450,000 Cash at Hand 500
4,67,500 4,67,500
Ram ,Mohan and Sohan shared profits and Losses in the ratio of 2 : 2 : 1. Sohan died on 30th June, 2014. Under
the partnership agreement, the executors of Sohan were entitled to :
(i) Amount standing to the credit of his Capital Account.

(ii) Interest on capital which amounted to ₹ 150.
(iii) His share of goodwill ₹ 5,000.
(iv) His share of profits the closing of last financial year to the date amounted to ₹ 750.
Sohan ‘s executors were paid ₹ 1,400 on 1st July, 2014 and the balance in four equal yearly
instalments from 30th June, 2015 with interest @ 6 % p.a. Pass necessary Journal entries and
draw up Sohan‘s Account to be rendered to his executors and Sohan’s Executors’ Account till it is
finally paid. (Delhi 2000, Modified)
Question 59. X,Y and Z are in partnership sharing profits equally. Z died on 30 th June, 2018. The Balance Sheet
of firm as at 31st March, 2018 stood as follows :
Contingency Reserve 9,000 Bank 10,000
Investment Fluctuation Reserve 3,000 Debtors 25,000
Capital A/cs Less : Provision For Doubtful Debts 2,000 23,000
X 75,000 Stock 25,000
Y 50,000 Investments (At cost) 12,500
Z 50,000 1,75,000 Land and Building 1,00,00
Goodwill 47,250
2,20,250 2,20,250
In order to arrive at the balance due to Z, it was mutually agreed that :
(i) Land and Building be valued at ₹ 1,25,000.

(ii) Investments Fluctuation Reserve be brought to ₹ 1,350.
(iii) All Debtors were good, no provision is required.
(iv) Stock is valued at ₹ 23,500.
(v) Goodwill be valued at one year’s purchase of the average profits of the past five years.
(vi) Z’s share of profits to the date of death be calculated on the basis of average profit of the
preceding three years. The profits of the preceding five years ended 31st March were : 2014 : ₹
28,750 ; 2015 : ₹ 35,000; 2016 : ₹ 22,500; 2017 : ₹ 20,000 and 2018 : ₹ 25,000. You are required
to show Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the new firm
as at 1st July, 2018.
Question 60. Manav, Nath and Narayan were partners in a firm sharing profits in the ratio of 1:2:1. The
firm closes its books on 31st March every year. On 30th September, 2015 Nath died, On that date his
Capital Account showed a debit balance of ₹ 5,000. There was a debit 3,80,000. Nath’s share of profit in
the year of his death was to be calculated on the basis of average profit of last 5 years,which was 90,000.
Pass Journal entries in the books of the firm on Nath’s death. (AI 2016) SELF PRACTICE QUESTION

Question 61. Sharma, Verma and Goyal are partners in a firm. On 1st April, 2012 the balances in their
Capital Accounts were as follows :
Sharma ₹ 4,00,000; Verma ₹ 4,20,000 and Goyal ₹ 3,70,000. Firm closed its accounts every year on 31 st
March. Verma died on 30th September, 2012. In the event of death of any partner following are the
provisions in the Partnership Deed:
(i) Interest on Capital will be calculated at the rate of 10% p.a.
(ii) The deceased partner’s legal representative will be paid ₹ 35,000 for his share of goodwill.
(iii) Firm had a Reserve Fund of ₹ 2,10,000. The deceased partner will be paid his share in the reserve.
(iv) His share of profit till the date of death will be calculated on the basis of sales. It is also specified
st
that sales during the year 2011-12 were ₹ 15,00,000. The sales from 1 April, 2012 to 30th
September, 2012 were ₹ 3,00,000. The profit of the firm for the year ending 31st March, 2012 was
₹ 3,00,000. Prepare Verma’s Capital Account to be presented to his representative.(AI 2013 C)
Question 62 (Value Based ). The Balance Sheet of Sadhu, Raju and Karan who were sharing profits in hte
st
ratio of 4 : 2 : 4 as on 31 March, 2012 was as follows :
General Reserve 10,000 Cash 26,000
Bill Payable 20,000 Stock 64,000
Loan , 22,000 Investments 85,000
Capital A/cs Land and Building 97,000
Sadhu 80,000 Sadhu’s loan 20,000
Raju 60,000
Karan 1,00,000 2,40,000
2,92,000
2,92,000
Sadhu died on 31st July, 2012. The Partnership Deed provided for the following on the death of a partner :
(i) Goodwill of the firm be valued at two years’ purchase of average profits for the last three years.
(ii) Sadhu’s share of profit or loss till the date of his death was to be calculated on the basis of sales.
Sales for the year ended 31st March, 2012 amounted to 4,50,000 and that from 1st April to 31st
July 2012 to 2,70,000. The profit for the year ended 31st March, 2012 was calculated as 1,25,000.
(iii) Interest on capital was to be provided @ 5 % p.a.
(iv) The average profits of the last three years were ₹ 55,000.
(v) According to Sadhu’s will the executors should donate his share to “ Matri Chhaya – An
Orphanage for Girl “. Prepare Sadhu’s Capital Account to be rendered to his executor. Also
identify the value being highlighted in the question.(Delhi 2013)SELF PRACTICE QUESTION
Question 63 (Value Based ). Ram, Rahim and Robert partners sharing profit in 2 : 3 : 1 ratio respectively.
The Partnership Deed provided that in case of death of a partner the deceased partner’s share of capital
will be donated for the construction of a hospital in the trible area. Due to till heath Robert died on 30th
September, 2013. The Balance Sheet of Ram, Rahim and Robert on 31st March, 2013 was as follows :
Capital A/cs Cash 14,000
Ram 1,00,000 Bank 2,96,000
Rahim 2,00,000 Stock 80,000
Robert 3,00,000 6,00,000 Debtors 3,00,000
Creditors 3,60,000 Investments 50,000
Workmen Compensation Fund 20,000 Land 2,50,000
Provision for Doubtful Debts 10,000
9,90,000 9,90,000
On the date of Robert’s death , i.e., 30th September, 2013, the following was agreed upon :

(i) Goodwill is to be valued at two years purchase of average profits of last three completed years,
i.e., 2010-2011-₹45,000; 2011-2012 -₹ 90,000 and 2012-2013-₹1,35,000.
(ii) Robert’s share of profits till the date of his death will be calculated on the basis of average profits
of last three years.
(iii) Land was undervalued by ₹ 25,000 and Stock overvalued by ₹ 8,000.
(iv) Provision for doubtful debts is to be made at 5 % of Debtors.
(v) Claim of workmen compensation estimate at ₹ 5,000. Prepare Robert’s Capital Account to be
presented to his executors. Also identify a value that Ram, Rahim and Robert wanted to
communicate to the society. (SELF PRACTICE QUESTION)
Question 64. On 1st April, 2014 the Balance Sheet of Anant, Sampta and Gunvant was as follows :
Sundry Creditors 9,000 Bank 15,600
General reserve 9600 Bills Receivable 18,000
Anant 30,000 Tools 3,000
Sampat 15,000 Furniture 24,000
Gunvant 15,000 60,000
9,90,000 9,90,000
Gunvant Died on 30th September. 2014. Under the term of Partnership Deed, the executors of the deceased
partner were entitled to :
(i) Amount standing to the credit of Partner’s Capital Account.
(ii) Interest on Capital @ 12 % per annum.
(iii) Share of Goodwill on the basis of twice the average of past three years profits.
(iv) Share of Profit from closing of last financial year to the date of death on the basis of last year’s
profit. The profits of the last three years were as follows :
Year 2011-12 2012-13 2013-14

Profit (₹) 18,000 21,000 24,000
The firm closes its books on 31st March every year. Partners share profits in the ratio of their capital. Prepare
Gunvant’s Capital Account to be presented to his executors. (AI 2015) SELF PRACTICE QUESTION
Question 65. On 31st March, 2014 the Balance Sheet of Pooja, Qureshi and Ross in a firm was as under :
Sundry Creditors 2,50,000 Building 2,60,000
Reserve Fund 2,00,000 Investment 1,10,000
Capital A/cs Qureshi’s Loan 1,00,000
Pooja 1,50,000 Debtors 1,50,000
Qureshi 1,00,000 Stock 1,20,000
Ross 1,00,000 3,50,000 Cash 60,000
8,00,000 8,00,000
Qureshi died on 1st July, 2014, The profit-sharing ratio of the partners was 2 : 1 : 1. On the death of a partner,
the partnership deed provided for the following :
(i) His share in the profits of the firm till the date of his death will be calculated on the basis of
average profits of last three completed on the basis of total profit of last two years.
(ii) Interest on loan given by the firm to a partner will be charged at the rate of 5 % p.a. or ₹ 4,000,
whichever is more.
(iii) Profits for the last three years were ₹ 45,000; ₹ 48,000 and ₹ 33,000.
Prepare Qureshi’s Capital to be rendered to his executors. (Delhi 2015 C) SELF PRACTICE QUESTION

Question 66. A, B and C are partners in a firm. Their Balance Sheet as at 31st March, 2018 is given below :
Creditors 10,000 Plant and Machinery 20,000
General Reserve 10,000 Furniture and Fixtures 2,500
A’s Capital 10,000 Stock 10,500
B’s Capital 15,000 Debtors 15,000
C’s Capital 5,000 40,000 Investments 12,000
60,000 60,000
B died on 30th September, 2018. The Partnership Deed provides that the representatives of the deceased
partner shall be entitled to :
(i) Deceased Parnter’s Capital as appearing in last Balance Sheet.

(ii) Interest on Capital @ 6 % p.a. to the date of death.
(iii) His share of profit up to the date of death on the average of last three years’ profit.
(iv) His share of any undistributed profits and losses as per last Balance Sheet.
(v) Interest on his Drawings up to the date of date of death will be charged @ 10 % p.a.
Profits for the last three years were ₹ 65,000; ₹ 64,000 and ₹ 69,000. B’s drawings up to the date of death
amounting to ₹ 10,000. Ascertain the amount payable to the legal representative of B (Goodwill excluded).
SELF PRACTICE QUESTION
Section 37 of the Indian Partnership Act, 1932:- As per Section 37 of the Indian Partnership Act,
1932, if full or part amount of outgoing partner still remains to be paid then :
(a) He will be entitled to interest or share in profit or nothing as has been mutually agreed among
partners.
(b) If nothing is agreed among the partners, then outgoing partner or his representative have the choice
to get either of the following till final settlement :
(i) Interest @ 6 % p.a. on the balance amount.
(ii) Share in the profit earned proportionate to his amount outstanding to total capital.
Question 67. A, B and C were partners sharing profits and losses in the ratio of 4 : 3 : 2. C retired on 1st July, 2013
on which date the capitals of A, B and C after all necessary adjustment stood at ₹ 75,000; ₹ 65,000 and ₹ 45,000
respectively. A and B continued to carry on the business for 6 months without settling the account of C. During the
period of 6 months ended 31st December, 2013, a profit of ₹ 50,000 is earned by the firm. State which of the two
optioned available with C under Section 37 of the Indian Partnership Act,1932 should be exercised ?
Short theoretical Questions
1. What is meant by retirement of a partner?

2. How can a partner retiree form the firm?
3. Is a retiring partner liable for firm’s acts before his retirement?
4. Is a retiring liable for firm’s acts after his retirement?
5. On the retirement of a partner, how is the profit sharing ratio of remaining partners decided ? (AI 2013 C)
6. Defined gaining ratio.

7. Give any one distinction between sacrificing ratio and gaining ratio. (Al 2012)
8. State the ratio o=in which the partners at the time of retirement of a partner share the accumulated profits
and losses.
9. At the time of retirement, how will you deal with the goodwill when goodwill appears at its proper value /
10. Why the value of goodwill need to be determined on retirement or death of a partner ?
11. For which share of goodwill a partner is entitled at the time of retirement. (Delhi 2012,2015)
12. Why heir of retiring / deceased partner are entitled to share of goodwill of the firm ? (Delhi 2014)
13. State the ratio in which the partners share gain or loss form revaluation of assets and liabilities.
14. How is the amount due to an outgoing partner dealt with in case is not paid immediately ?
15. How two circumstance in which the gaining ratio may be applied.
16. Name two adjustments to be made at time of retirement or death of a partner.
17. Do the remaining partners gain at the time of retirement partner ?
18. If the new profit-sharing ratio of remaining partners is not given, how is the share of the outgoing partner
distributed ?
19. Why the revaluation of assets and reassessment of liabilities are required at the time of retirement or death of a
partner ?
20. In case amount due to outgoing partner is taken as loan, is the outgoing partner entitled to interest / If yes, at
what rate ?
21. What are the methods in e=which payment can be made to an outgoing partner?
22. Name the account which is opened to credit the share of profits of the deceased partner, till the time of his
death to his Capital Account. (Delhi 2012 C, 2013)
23. Give the Journal entry to distribute ‘Workmen Compensation Reserve’ of ₹ 60,000 at the time of retirement
of Sajjan , when there is no claim against it. The firm has three partner Rajat, Sajjan and Kavita.
(Delhi 2012)
24. State any two deductions that may have to be made from the amount payable to a retiring partner.
(Delhi 2009 C)
25. How is share in profit of outgoing partner calculated when he retires during the accounting year?
26. State any two deductions that may have to be remaining unpaid to the executor of deceased partner.
(Delhi and AI 2009 C)
27. At what rate is interest payable on the amount remaining unpaid to the executor of deceased partner.
(AI 2013)

CHAPTER 7. DISSOLUTION OF PARTNERSHIP FIRM

MEANING:- Dissolution of partnership means change in relationship among the partners but the firm continues.
On the other hand, dissolution of firm means business of the firm is discontinued, i.e., closed and the firm is
wound up, i.e., dissolved. According to Section 39 of the Indian Partnership Act, 1932, "Dissolution of the firm
means dissolution of partnership among all the partners in the firm." In such an event, all assets of the firm are
realised, i.e., sold and liabilities are paid. The Balance, if any, is paid to the partners in settlement of their
accounts. If there is shortfall in meeting outside liabilities, it is met by the partners from their private assets.
Difference between Dissolution of A Firm and Dissolution of A Partnership
Basis Dissolution of Firm Dissolution of Partnership

1. Meaning It means closure of the firm and end of It means change in business relationship
business relationship among all the among the partners. The firm continues its
partners. business.
2. Court’s It can be either voluntarily by the It is always voluntary.

Intervention partners or compulsorily by order of
court.
3. Business Business of the firm comes to an end. Business of the firm continues.
Continuation
4. Books of Account Books of account of the firm are closed. Books of account of the firm need not be
closed.
5. Settlement of Assets of the firm are realised and Assets of the firm are revalued and
Account liabilities are settled. The balance liabilities are reassessed. The gain or loss
amount, if any, is distributed among all due to it, is distributed among all the
the partners. partners in their old profit- sharing ratio.
6. Effect Dissolution of firm also means Dissoiution of partnership may or may not
dissolution of partnership. involve dissolution of the firm.
MODES OF DISSOLUTION OF A FIRM ARE

1. By Mutual Agreement: A firm may be dissolved when all the partners agree for its dissolution. A
partnership firm is set up by an agreement, similarly, it can be dissolved by an agreement.
2. Compulsory Dissolution: A firm may be compulsorily dissolved:

(a) when all the partners or all the partners except one become insolvent.
(b) when business of the firm becomes unlawful.
3. By Notice: In case Partnership is at Will, the firm may be dissolved by any partner giving notice in writing
to all the other partners of his intention to dissolve the firm. [Section 43]
4. On Happening of an Event: A firm may be dissolved in any of the following events, if the Partnership
Deed provides:
(a) on expiry of the term for which the firm was constituted.
(b) on completion of the venture.
(c) on death of a partner.
(d) on adjudication of a partner as insolvent.
5. Dissolution by Court: Court may pass order for the dissolution of the firm when
(a) a partner becomes a person of unsound mind.
(b) a partner is permanently incapacitated.
(c) a partner is found guilty of misconduct.
(d) partnership agreement is breached persistently by some partner.
(e) court finds dissolution of the firm justified.

Settlement of Accounts [Section 48]: Section 48 of the Indian Partnership Act, 1932 deals with the
settlement of accounts at the time of dissolution of firm. It is discussed below:
Application of Assets: Assets of the firm, including amount contributed by the partners to make up deficiency
of capital, is applied in the following order:
(a) in paying firm's debts to the third parties;
(b) in paying to each partner rateably what is due to him on account of advances(loan);
(c) in paying to each partner rateably what is due to him on account of capital and
(d) the residue, if any, is distributed among the partners in their profit-sharing ratio. [Section 48 (b)]
Question 1. The firm of X, Y and Z was dissolved on 31st March, 2019. Y demands that his loan of ₹25,000
should be paid before payment of capitals of the partners. But X and Z demand that capital should be paid before
the payment of Y's loan. Who is correct?
Solution:Y is correct. According to Section 48 of the Indian Partnership Act, 1932, partner's loan is paid before
payment of partners' capital.
Question 2. All the partners decide to dissolve the firm on 31st March, 2019. Y, a partner, demands that his loan
of 80,000 should be paid before payment of Mrs. X's loan of ₹ 20,000. But X, another partner, demands that
Mrs. X's loan should be paid before payment of Y's loan. Who is correct?
Solution: X is correct. According to Section 48 of the Indian Partnership Act, 1932, third party's debts are paid
before payment of partner's loan.
Question 3. A and B are partners in a firm sharing profits in the ratio of 3 : 2. Mrs. A has given a loan of ₹
20,000 to the firm and the firm also taken a loan of ₹ 10,000 from B. The firm was dissolved and its assets were
realised for ₹ 25,000. State the order of payment of Mrs. A's loan and B's loan with reason, if there were no
other creditors of the firm. (Delhi 2010 C)
Solution: According to the Section 48 of the Indian Partnership Act, 1932, Mrs. A's loan of ₹20,000 will be
paid before payment of B's loan. B will be paid up to the available cash, i.e., ₹ 5,000.
2. Payment of Firm's Debts and Private Debts [Section 49]:-- Debts which the firm owes to outsiders are
known as firm's debts, whereas the debts which a partner owes in his personal capacity are known as private
debts. Following provisions apply in case of firm's debts and partner's private debts:
1. Firm's property is applied first towards payment of firm's debts then the surplus, if any, is applied towards
payment of partner's private debts to the extent the concerned partner is entitled to share in the surplus.
2. Private property of each partner is applied first towards the payment of his private debts
and surplus, if any, is applied towards payment of firm's debts.
Difference between Firm's Debts and Private Debts
Basis Firm’s Debts Private Debts

1. Meaning Firm's debt means the debt owed by Private debt means debt owed by a
the firm to outsiders. partner in his personal capacity to any
other person.
2. Liability All the partners are liable jointly and Concerned partner is liable personally
severally for firm's debt. for his private debt.
3. Application of Firm’s Firm's property is applied first for Share of the concerned partner in
Property settling firm's debts. excess of firm's property over firm's
debts can be applied for private debts.
4. Application of Private Excess of partner's private property Private property is applied first for
Property over his private debts can be applied private debts.
for firm's debts.

Treatment of Workmen Compensation Reserve
Question 4. X and Y were partners sharing profits in the ratio of 3 : 2. Give Journal entries under following
situation at the time of dissolution of firm:
(i) Workmen Compensation Reserve stood at ₹ 75,000 in the Balance Sheet and there was no
liability towards Workmen Compensation.
(ii) Workmen Compensation Reserve stood at ₹ 60,000 and liability for it was ascertained at ₹ 35,000.
(iii) Workmen Compensation Reserve stood at ₹ 60,000 and liability in respect of it was ascertained at
₹ 75,000.
(iv) Workmen Compensation Reserve stood at ₹ 60,000 and liability in respect of it was ascertained at
₹ 60,000.
(v) There was no Workmen Compensation Reserve and firm had to pay ₹ 15,000 as compensation to
the workers.
Question 5. Pass Journal entries for the following transactions:

(i) Realisation expenses amounted to ₹ 10,000.
(ii) Realisation expenses amounted to ₹ 5,000 were paid by a partner.
(iii) Realisation expenses amounted to ₹ 5,000 were paid by the firm on behalf of a partner.
(iv) A partner was paid remuneration (including expenses) of ₹ 7,500 to carry out dissolution of the firm.
Actual expenses were ₹ 10,000.
(v) Dissolution expenses were ₹ 8,000. Out of the said expenses, ₹ 3,000 were to be borne by
the firm and the balance by a partner. ₹ 8,000 are paid by the firm.
(vi) Dissolution expenses were ₹ 8,000; ₹ 3,000 were to be borne by the firm and the balance
by a partner. The expenses were paid by a partner.
(vii) Realisation expenses of ₹5,000 were to be borne and paid by a partner.
(viii) X, the partner, is paid remuneration of ₹5,000 for dissolution of the firm. Realisation
expenses of ₹ 8,000 are met by the firm.
(ix) Realisation expenses of ₹ 5,000 were to be borne by X, a partner. However, it was paid by Y.
Solution:
Date Particulars L.F. Dr. Cr.
₹ ₹
(i) Realisation A/c ..Dr. 10,000
To Cash/Bank A/c 10,000
(Being the dissolution expenses paid)
Explanation: The expenses of dissolution are borne and paid by the firm,
since the question does not specify who is to bear the dissolution expenses.
Therefore, the expenses are treated to be expenses of the firm.
Realisation A/c ...Dr.
To Partner's Capital A/c 5,000
(ii) (Being the dissolution expenses paid by the partner credited 5,000
to his Capital Account)
Explanation: The expenses of dissolution are borne by the firm but paid
by the partner on behalf of the firm. Therefore, Partner's Capital Account
is credited.
Partner's Capital A/c ...Dr.
(iii) (Being the dissolution expenses paid by the firm on behalf of the partner 5,000
debited to his Capital Account)
Explanation: The expenses of dissolution are borne by the partner but are
paid by the firm. Therefore, Partner's Capital Account is debited. Since the
amount is paid by
the firm, Cash/Bank Account is credited.
Realisation A/c ...Dr. 7,500

(Being the remuneration to partner credited to his Capital Account)

Explanation: Partner is paid ₹ 7,500 towards his remuneration and
expenses of dissolution. The excess expenses, i.e., ₹ 2,500 (₹ 10,000 - ₹
7,500) will be borne by the partner and not by the firm.
Realisation A/c ..Dr. 3,000
Partner's Capital ...Dr. 5,000
(Being the dissolution expenses paid by the firm, firm's share of expenses
debited to Realisation Account and balance to Partner's Capital Account)
Explanation: Total expenses of dissolution are ₹ 8,000. Out of this, ₹ 3,000
is to be borne by the firm and balance ₹ 5,000 by the partner. Therefore, ₹
3,000 is debited to Realisation Account. Balance ₹ 5,000 is debited to
Partner's Capital Account. Cash/Bank Account is credited because the
expenses are paid by the firm.
Realisation A/c ...Dr.
(Being the realisation expenses paid by the partner credited 3,000
to his Capital Account)
Explanation: Total expenses of dissolution ₹ 8,000 are paid by the partner.
Out of these expenses, firm is to bear ₹ 3,000. Since the partner has paid the
dissolution expenses on behalf of the firm, Realisation Account is debited
and partner's Capital Account is credited with ₹ 3,000. Entry is not passed
for ₹ 5,000, it being
borne and also paid by the partner.
No entry is to be passed.
Explanation: Entry for expenses of dissolution will not be passed because
the expenses ₹ 5,000) are borne and also paid by the partner.
(a) Realisation A/c ...Dr. 5,000
(Being the remuneration payable to X for dissolution of the firm)
(b) Realisation A/c ...Dr. 8,000
(Being the Realisation expenses paid)
Explanation: X, the partner, is paid ₹ 5,000 as remuneration for dissolution
of the firm. However, the expenses of dissolution are met by the firm.
Therefore, X's Capital A/c is credited with ₹ 5,000 (remuneration) and ₹
8,000 being expenses met by the firm is debited to Realisation Account and
credited to Cash/Bank A/c.
X’s Capital A/c ...Dr. 5,000

(Being realisation expenses to be borne by X, paid by Y)
(vi) For Closing Realisation Account: Realisation Account at this stage shows either gain (profit) (if the total
of the credit side is more than the total of debit side, i.e., if it has a credit balance) or loss (if the total of the debit
side is more than the total of credit side, i.e., if it has a debit balance). The gain (profit) or loss is transferred to
the Capital Accounts of the Partners in their profit-sharing ratio.
Difference between Revaluation Account and Realisation Account

Basis Revaluation Account Realisation Account
1. Meaning It records the effect of revaluation of It records the realisation of assets and
assets and reassessement of liabilities. settlement of liabilities.
2. Purpose It is prepared to make necessary It is prepared for determining net
adjustments in the value of assets and profit/Loss on realisation of assets and
liabilities. settlement of liabilities.
3. Time It is prepared at the time of admission, It is prepared at the time of dissolution of
retirement or death of a partner. a firm.

4. Contents In this account, only changes in assets In the account, all assets and liabilities are
and liabilities are recorded. recorded.
5. Preparation of This account may be prepared at a This account is prepared only once during
Account number of occasions during the life of the life of a firm.
a firm.
Question 6. Shanti and Satya were partners in a firm sharing profits in the ratio of 4 : 1. On 3st March, 2019,
their Balance Sheet was as follows: BALANCE SHEET OF SHANTI AND SATYA as at 31st March, 2019
Workmen Compensation Fund 40,000 Debtors 60,000
Satya's Current Account 65,000 Stock 85,000
Capital A/cs: Furniture 1,00,000
Shanti 2,00,000 Machinery 1,30,000
Satya 1,00,000 Shanti's Current Account 20,000
4,50,000 4,50,000
On the above date the firm was dissolved:
(i) Shanti took over 40% of the stock at 10% less than its book value and the remaining
stock was sold for ₹ 40,000. Furniture realised ₹ 80,000.
(ii) An unrecorded investment was sold for ₹ 20,000. Machinery was sold at a loss of ₹ 60,000.
(iii) Debtors realised ₹ 55,000.
(iv) There was an outstanding bill for repairs for which ₹ 19,000 was paid.
Prepare Realisation Account. (Delhi 2014)
Question 7. Hanif and Jubed were partners in a firm sharing profits in the ratio of their capitals. On 31st March,
2013, their Balance Sheet was as follows:
BALANCE SHEET OF HANIF AND JUBED as at 31st March, 2013
Creditors 1,50,000 Bank 2,00,000
Workmen Compensation Reserve 3,00,000 Debtors 3,40,000
Hanif's Current Account 25,000 Furniture 4,60,000
Capital A/cs: Machinery 8,20,000
Hanif 10,00,000 Jubed's Current Account 80,000
Jubed 5,00,000 15,00,000
20,50,000 20,50,000
On the above date the firm was dissolved:
(i) Debtors were realised at a discount of 5%. 50% of the stock was taken over by Hanif at
10% less than the book value. Remaining stock was sold for ₹ 65,000.
(ii) Furniture was taken over by Jubed for ₹ 1,35,000. Machinery was sold as scrap for ₹ 74,000.
(iii) Creditors were paid in full.
(iv) Expenses on realisation 8,000 were paid by Hanif. Prepare Realisation Account. (AI 2014)
Question 8 What Journal entries will be passed in the books of A and B sharing profits and losses in the ratio of
3 : 1, for the following transactions on dissolution of the firm?
(i) An unrecorded asset realised ₹ 25,000.

(ii) Stock of ₹ 20,000 was taken by partner A.
(iii) Creditors were paid ₹ 30,000.
(iv) B to bear realisation expenses for which he will get ₹ 1,900. The actual expenses paid by B were 1,500.

(v) There was a balance of ₹ 10,000 in the General Reserve Account on the date of dissolution.
(vi) Gain on Realisation of ₹ 40,000 is to be distributed between partners A and B in the ratio of 3 : 1.
Question 9. Pass necessary Journal entries for the following transactions at the time of dissolution of the firm:
(i)
Realisation expenses ₹ 3,000 paid.
(ii)
Realisation expenses amounting to ₹ 2,000 paid by Mr. X, a partner, who was to bear these expenses.
(iii)
Y, a partner, took a machine for ₹ 20,000.
(iv)
Z, a partner, agreed to take a creditor of ₹ 30,000 for ₹ 20,000.
(v)
A, a partner, has given loan to the firm of ₹ 10,000. It was paid back to him at the time of dissolution.
Question 10. Pass Journal entries for the following transactions at the time of dissolution of the firm:
(i) Loan of ₹ 10,000 advanced by a partner to the firm was refunded.

(ii) X, a partner, takes over an unrecorded asset (Typewriter) at ₹ 300.
(iii) Undistributed balance (Debit) of Profit and Loss Account 30,000.The firm has three partners X,Yand Z.
(iv) Assets of the firm realised ₹ 1,25,000.
(v) Y who undertakes to carry out the dissolution proceedings is paid ₹ 2,000 for the same.
(vi) Creditors paid ₹ 28,000 in full settlement of their account of ₹ 30,000. (Delhi, AI, Foreign 2004)
Solution
Date Particulars L.F. Dr.(₹) Cr.(₹)

(i) Partner's Loan A/c ...Dr. 10,000
To Bank A/c 10,000
(Being the partner's loan discharged)
(ii) X's Capital A/c ...Dr. 300
To Realisation A/c 300
(Being the unrecorded typewriter taken by X)
(iii) X's Capital A/c ...Dr. 10,000
Y's Capital A/c ...Dr. 10,000
Z's Capital A/c ...Dr. 10,000
To Profit and Loss A/c 30,000
(Being the debit balance of Profit and Loss Account
transferred to Partners' Capital Accounts)

(iv) Bank A/c ...Dr. 1,25,000
To Realisation A/c 1,25,000
(Being the assets of the firm realised)
(v) Realisation A/c ...Dr. 2,000
(Being the remuneration due to Y)
(iv) Realisation A/c ...Dr. 28,000
To Bank A/c 28,000
(Being the creditors paid 28,000 in full settlement of their account
of t 30,000)
Question 11. Pass Journal entries for the following transactions on the dissolution of the firm of T and P after
various assets (other than cash) and outside liabilities have been transferred to Realisation Account:
(i) Bank Loan ₹ 34,000 was paid.
(ii) Furniture worth ₹ 70,000 was taken by partner T at ₹ 43,000.
(iii) Partner P agreed to pay a creditor ₹ 7,500.
(iv) A computer previously written off fully, realised ₹ 3,900.
(v) Expenses of realisation ₹ 3,200 were paid by partner T.
(vi) Profit on realisation ₹ 4,800 was distributed between T and P in 5 : 3 ratio. (Delhi 2011)

Question 12. Parul, Payal and Priyanka are partners. They decided to dissolve their firm. Pass necessary Journal
entries for the following after various assets (other than Cash and Bank) and the third party liabilities have been
transferred to Realisation Account:
(i) There were total Debtors of ₹ 76,000. A Provision for Doubtful Debts also stood in the
books at ₹ 6,000. ₹ 12,000 Debtors proved bad and rest paid the amount due.
(ii) Parul agreed to pay off her husband's loan of ₹ 7,000 at a discount of 5%.
(iii) A machine which was not recorded in the books was taken over by Payal at
₹ 3,000, whereas its expected value was ₹ 5,000.
(iv) A contingent liability (not provided for) of ₹4,000 was also discharged.
(v) The firm had a debit balance of ₹27,000 in the Profit and Loss Account on the date of dissolution.
(vi) Priyanka paid realisation expenses of ₹ 15,000 out of her pocket and she was to get a
remuneration of ₹ 18,000 for completing the dissolution process. (AI 2012 C)
Question 13. Balance Sheet of a firm as at 31st March, 2021 was:
X‘s Capital 5,00,000 Freehold Property 8,00,000
Y’s Capital 4,00,000 Investments 2,00,000
Z’s Capital 3,00,000 12,00,000 Sundry Debtors 1,00,000
Sundry Creditors 2,00,000 Stock 1,50,000
Profit and Loss A/c 1,50,000 Cash at Bank 3,00,000
15,50,000 15,50,000
The partnership was dissolved on the above date. X took over the Investments at a value of ₹ 1,90,000. Cash
realised was: Freehold Property ₹9,00,000; Sundry Debtors ₹ 90,000 and Stock ₹ 1,40,000. Creditors were paid
at a discount of 5%. Expenses of realisation came to₹ 20,000. Pass Journal entries and prepare necessary Ledger
Accounts to close the books.
Solution:
2021 Realisation A/c ...Dr. 12,50,000
March 31 To Freehold Property A/c 8,00,000
To Investments A/c 2,00,000
To Sundry Debtors A/c 1,00,000
To Stock A/c 1,50,000
(Being the various assets except cash at bank transferred to
Realisation Account at book value)
Sundry Creditors A/c ...Dr. 2,00,000
March 31 To Realisation A/c 2,00,000
(Being the Creditors Account transferred to Realisation
Account at book value)
Bank A/c ...Dr. 11,30,000
March 31 To Realisation A/c 11,30,000
(Being the amount realised from assets:
Freehold Property 9,00,000
Sundry Debtors 90,000
Stock 1,40,000
11,30,000
X's Capital A/c ...Dr. 1,90,000
To Realisation A/c 1,90,000
March 31 Realisation A/c ...Dr.
To Bank A/c 1,90,000
(Being the payment to creditors @ 5% less than the book 1,90,000
value)
March 31


To Bank A/c 20,000
March31 (Being the payment of expenses of realisation)
March 31 To Y's Capital A/c 20,000
To Z's Capital A/c 20,000
(Being the Gain (Profit) on realisation transferred to Partners'
Capital Account equally since profit-sharing ratio is not given)
March 31 Profit and Loss A/c ...Dr. 1,50,000

To Z's Capital A/c 50,000
(Being the Profit and Loss Account balance transferred to
Capital Accounts)
March 31 X's Capital A/c ...Dr. 3,80,000
Y's Capital A/c ...Dr. 4,70,000
Z's Capital A/c ...Dr. 3,70,000
To Bank A/c 12,20,000
(Being the final payment to the partners of the sums due to
them)
REVALUATION ACCOUNT
Date Particulars ₹ Date Particulars ₹
2016 2016
March 31 To Sundry Assets Transfer: March 31 By Sundry Creditors 2,00,000
Freehold Property 8,00,000 March 31 By Bank A/c—Assets Realised:
Investments 2,00,000 Freehold Property 9,00,000
Sundry Debtors 1,00,000 Sundry Debtors 90,000
Stock 1,50,000 12,50,000 Stock 1,40,000 11,30,000
To Bank A/c (Creditors) 1,90,000 By X's Capital A/c—Investments 1,90,000
To Bank A/c( Expenses)
To Gain (Profit) transferred to: 20,000
X's Capital A/c 20,000
Y's Capital A/c 20,000
Z's Capital A/c 20,000 60,000
15,20,000 15,20,000
PARTNERS’ CAPITAL ACCOUNT
Date Particulars X Y Z Date Particulars X Y Z

₹ ₹ ₹ ₹ ₹ ₹
2016 2016
March 31 To Realisation 1,90,000 March 31 By Balanceb/d 5,00,000 4,00,000 3,00,000
... ... March 31 By Profit and
Loss A/c 50,000 50,000 50,000
March 31 To Bank A/c 3,80,000 4,70,000 3,70,000 March 31 By Realisation
- Gain(Profit) 20,000 20,000 20,000
5,70,000 4,70,000 3,70,000 5,70,000 4,70,000 3,70,000

BANK ACCOUNT
Date Particulars ₹ Date Particulars ₹

2021 2021
March To Balance b/d 3,00,000 March By Realisation A/c 20,000
31 To Realisation A/c 11,30,000 31 - Realisation Expenses
- Assets Realised By Realisation A/c—Creditors Paid 1,90,000
By X's Capital A/c—Final Payment 3,80,000
By Y's Capital A/c—Final Payment 4,70,000
By Z's Capital A/c—Final Payment 3,70,000
14,30,000 14,30,000
Question 14.Mohan, Sohan and Rohan were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 28th
February, 2004, their firm was dissolved. The Balance Sheet of the firm at the date of dissolution was:
Mohan's Capital 75,000 Sundry Assets 1,30,000
Sohan's Capital 5,000 Rohan's Capital 23,000
1,60,000 1,60,000
Sundry Assets were taken over by Rohan for ₹ 65,000 and Mohan took over the Creditors for ₹ 75,000.Expenses
of dissolution paid by Sohan ₹5,000. Prepare Realisation Account, Partners' Capital Accounts and Cash
Account.(CBSE 2004 C)
Solution: REALISATION ACCOUNT Cr.
To Sundry Assets A/c 1,30,000 By Creditors 80,000
To Mohan's Capital A/c 75,000 By Rohan's Capital A/c 65,000
(Creditors) (Sundry Assets)
To Sohan's Capital A/c 5,000 By Loss transferred to:
(Expenses) Mohan's Capital A/c 26,000
Sohan's Capital A/c 26,000
Rohan's Capital A/c 13,000
65,000
2,10,000 2,10,000
Question 15. A, B and C are partners in a firm sharing profits in the ratio of 2 : 1 : 1. Their Balance Sheet as at
Creditors 50,000 Goodwill 30,000
B 80,000 Car 54,000
C 60,000 2,20,000 Debtors 48,000
Cash 2,000
2,70,000 2,70,000
The firm was dissolved on that date. Assets realised: Goodwill ₹ 20,000; Land and Building ₹ 1,00,000; Plant
and Machinery ₹ 50,000; Car ₹ 28,000 and Debtors 50% of the book value. Realisation Expenses were ₹ 2,000.
Prepare Realisation Account, Capital Accounts of Partners and Cash Account to close the books of the firm.
(Delhi, AI, Foreign 2004, Modified)

Solution: REALISATION ACCOUNT Cr.
To Sundry Assets Transfer: By Creditors 50,000
Goodwill 30,000 By Cash A/c-Assets Realised:
Land and Building 80,000 Goodwill 20,000
Plant and Machinery 56,000 Land and Building 1,00,000
Car 54,000 Plant and Machinery 50,000
Debtors 48,000 2,68,000 Car 28,000
To Cash A/c (Creditors Paid) 50,000 Debtors 24,000 2,22,000
To Cash A/c (Expenses) 2,000 By Loss on Realisation
transferred to:
A's Capital A/c 24,000
B's Capital A/c 12,000
C's Capital A/c 12,000 48,000
3,20,000 3,20,000
Question 16.Parth and Shivika were partners in a firm sharing profits in the ratio of 3 : 2. The Balance Sheet of
the firm on 31st March, 2021 was as follows:
Sundry Creditors 80,000 Bank 1,72,000
Shivika's Sister's Loan 20,000 Debtors 27,000
Parth 1,75,000 Furniture 2,20,000
Shivika. 1,94,000 369,000
4,69,000 4,69,000
On the above date, the firm was dissolved. The assets were realised and the liabilities were paid off as follows:
(i) 50% of the furniture was taken over by Parth at 20% less than book value. The remaining furniture was sold for
1,05,000.
(ii) Debtors realised ₹ 26,000.
(iii) Stock was taken over by Shivika for ₹ 29,000.
(iv) Shivika's sister's loan was paid off along with interest of ₹2,000.
(v) Expenses on realisation amounted to ₹ 5,000.
Prepare Realisation Account, Partners' Capital Accounts and Bank Account. (Delhi 2015 C)
Solution: REVALUATION ACCOUNT Cr.

To Debtors A/c 27,000 By Sundry Creditors A/c 80,000
To Stock A/c 50,000 By Shivika's Sister's Loan A/c 20,000
To Furniture A/c 2,20,000 By Parth's Capital A/c (Furniture) 88,000
To Bank A/c (Sundry Creditors) 80,000 (t 1,10,000 - 22,000)
To Bank A/c (t 20,000 + 2,000) 22,000 By Bank A/c (Assets Realised):
(Shivika's Sister's Loan) Furniture 1,05,000
To Bank A/c (Expenses) 5,000 Debtors 26,000 1,31,000
By Shivika's Capital A/c (Stock) 29,000
By Loss transferred to:
Parth's Capital A/c 33,600
Shivika's Capital A/c 22,400 56,000
4,04,000 4,04,000

Question 17.Following is the Balance Sheet of A and B as at 31st March, 2019:

₹ Assets ₹
Bills Payable 8,000 Cash at Bank 8,000
Mrs. A's Loan 5,000 Stock-in-Trade 5,000
Mrs. B's Loan 10,000 Investments 10,000
Investments Fluctuation Reserve 1,000 Less: Provision for Doubtful Debts 18,000
A's Capital 10,000 2,000 20,000
B's Capital 10,000 Plant and Machinery 15,000
Building 4,000
Goodwill 3,500
Profit and Loss A/c
84,000 84,000
The firm was dissolved on 31.3.19 and following was agreed: (i) A promised to pay Mrs. A's Loan and took Stock-in-
Trade at ₹ 4,000. (ii) B took half the Investments @ 10% discount. (iii) Debtors realised ₹ 19,000. (iv) Creditors and
Bills Payable were due on an average basis of one month after 31st March but they were paid immediately on 31st
March @ 6% discount per annum. (v) Plant realised ₹ 25,000; Building ₹ 40,000; Goodwill ₹ 6,000 and remaining
Investments at ₹ 4,500. (vi) There was an old typewriter in the firm which had been written off completely from the
books. It is now estimated to realise ₹ 300. It was taken away by B at this estimated price. (vii) Realisation expenses
were ₹ 1,000. Show Realisation A/c, Bank A/c and Partners' Capital A/cs in the books of the firm.
Question 18. X, Y and Z carrying on business as a partnership firm decided to dissolve the firm on 31.3.21 when
Creditors 14000 Cash 25,000
Capital A/cs: Debtors 62,000
X 1,20,000 Stock 37,000
Y 90,000 Tools 8,000
Z 80,000 2,90,000 Car 12,000
Machinery 60,000
Building 1,00,000
3,04,000 3,04,000
The Partnership Deed provided that profits will be divided in the ratio of 3:2:1 respectively among X, Y
and Z. Assets realised are:Tools ₹ 5,000; Machinery 82,000; Building 84,000; Car 25,000; Goodwill 60,000;
Debtors ₹ 59,000. Creditors agreed to take Stock in settlement of their dues. There was an unrecorded
asset valued at ₹ 3,000, which was taken by X for ₹ 2,000. Prepare Realisation a/c, Partners' Capital A/c
and Cash A/c.
Solution: REALISATION ACCOUNT
To Sundry Assets – Transfer: By Creditors 14,000
Debtors 62,000 By Cash A/c – Assets Realisation:
Stock 37,000 Machinery 82,000
Tools 8,000 Car 25,000
Car 12,000 Debtors 59,000
Machinery 60,000 Tools 5,000
Building 1,00,000 2,79,000 Building 84,000
To Gain (Profit) on Realisation Goodwill 60,000 3,15,000
transferred to:
X’s Capital A/c 26,000 By X’s Capital A/c – Unrecorded Assets 2,000
Y’s Capital A/c 17,333
Z’s Capital A/c 8,667 52,000
3,31,000 3,31,000

Question 19 (Value Based). Prashant and Rajesh were partners in a firm sharing profits in the ratio of 3 : 2. In
spite of repeated reminders by the authorities, they kept dumping hazardous material into a nearby river. The
court ordered for the dissolution of their partnership firm on 31st March, 2012. Prashant was deputed to realise
the assets and to pay the liabilities. He was paid 1,000 as commission for his services. The financial position of
the firm on 31st March, 2012 was as follows:

Creditors 80,000 Building 1,20,000
Mrs. Prashant’s Loan 40,000 Investment 30,600
Rajesh’s Loan 24,000 Debtors 34,000
Investments Fluctuation Fund 8,000 Less: Provision for Doubtful debts 4,000 30,000
Capital A/cs: Bills Receivable 37,400
Parshant 42,000 Cash 6,000
Rajesh 42,000 84,000 Profit and Loss A/c 8,000
Goodwill 4,000
2,36,000 2,36,000
Followings were agreed upon:

(i) Prashant agreed to pay off his wife's loan.
(ii) Debtors realised ₹ 24,000.
(iii) Rajesh took all investments at ₹ 27,000.
(iv) Building realised ₹ 1,52,000.
(v) Creditors were payable after 2 months. They were paid immediately at 10% discount.
(vi) Bills Receivable were settled at a loss of ₹ 1,400.
(vii) Realisation expenses amounted to ₹ 2,500.
Prepare Realisation Account, Partners' Capital Accounts and Cash Account to close the books of the firm.
Identify the value being conveyed in the question. (AI 2013)

₹ Particulars ₹
To Building 1,20,000 By Provision for Doubtful Debts 4,000
To Investments 30,600 By Creditors 80,000
To Debtors 34,000 By Mrs. Prashant's Loan 40,000
To Bills Receivable 37,400 By Investments Fluctuation Fund 8,000
To Goodwill 4,000 By Cash A/c (Assets Realised):
To Prashant's Capital A/c (Wife's loan) 40,000 Debtors 24,000
To Cash A/c: Building 1,52,000
Creditors 72,000 Bills Receivable 36,000 2,12,000
Realisation Expenses 2,500 74,500 By Rajesh's Capital A/c 27,000
To Prashant's Capital A/c 1,000 (Investments)
(Commission paid)
To Gain (Profit) transferred to:
Prashant's Capital A/c 17,700
Rajesh's Capital A/c 11,800 29,500
3,71,000 3,71,000
Question 20. A, B and C are three partners sharing profits in the ratio of 3 : 1 : 1. On 31st March, 2016, they
decided to dissolve their firm. On that date their Balance Sheet was:

Creditors 6,000 Cash 3.200
Loan 1,500 Debtors 24,200
Capital A/cs: Less : Provision for bad Debts 1,200 23,000
A 27,500 Stock – in – Trade 7,800
B 10,000 Furniture 1,000
C 7,000 44,500 Sundry Assets 17,000
52,000 52,000
It is agreed that:
(i) A is to take over Furniture at ₹ 800 and Debtors amounting to ₹ 20,000 at ₹ 17,200; the Creditors of ₹
6,000 to be paid by him at this amount.
(ii) B is to take over all Stock-in-Trade at 7,000 and some of S.Assets at 7,200(being 10% less than book value).
(iii) C is to take over remaining Sundry Assets at 90% of the book value,less 100 as discount and assume
responsibility for discharge of Loan together with accrued interest of 30 which has not been recorded in the
books.
(iv) The expenses of dissolution were ₹270. The remaining Debtors were sold to a debt collecting agency
for 50% of the book value. Prepare necessary Ledger Accounts to close the books of the firm.
Question 21. A and B sharing profits and losses in the ratio of 3 : 2 agreed upon the dissolution of the firm on
31st March, 2019 at which date their Balance Sheet was as follows:
Trade Creditors 80,000 Cash 6,000
Loan from Mrs. B 15,000 Stock 80,000
Reserve 24,000 Sundry Debtors 66,000
Profit and Loss A/c 11,000 Less: Provision for Doubtful Debts 6,000 60,000
Capital A/cs: Plant and Machinery 30,000
A 90,000 Land and Building 33,000
B 30,000 1,20,000 Furniture 10,000
Goodwill 15,000
Prepaid Insurance 1,000
Deferred Revenue Advertisement
Expenditure 10,000
2,75,000 2,75,000
The firm was dissolved on the given date and following transactions took place:
(i) B undertook to pay Mrs. B's Loan.

(ii) A took 50% of the Stock at a discount of 20%.
(iii) Remaining Stock was sold at a profit of 30% on cost.
(iv) ₹ 12,000 of the Book Debts proved bad.
(v) Land and Building realised ₹ 1,40,000.
(vi) Half of the Trade Creditors accepted Plant and Machinery at 10% less than the book value and Cash
of ₹5,000 in full settlement of their claims.
(vii) Remaining Trade Creditors were paid out at a discount of 10%.
(viii) Bills Payable were paid in full.
(ix) Realisation expenses were ₹5,000.
(x) Z, an old customer, whose account was written off as bad in the previous year, paid
₹500 which is not included in the above stated Book Debts.
(xi) A contingent liability (not provided for) of ₹1,000 was also discharged.
(xii) Furniture was sold for ₹ 10,000. Prepare Realisation Account, Partners' Capital A/c and Bank A/c.

Question 22. Following was the Balance Sheet of D, T and G as at 28th February, 2019:
Bills Payable 10,000 Debtors 30,000
G’s Loan 8,000 Stock 20,000
R’s Loan 12,000 Furniture 15,000
General Reserve 20,000 Land and Building 2,45,000
Capital A/cs: G’s Capital 20,000
D 1,00,000
T 1,50,000 2,50,000
3,50,000 3,50,000
The firm was dissolved on the above date on the following terms:
(i) Debtors realised ₹ 28,000; Creditors and Bills Payable were paid at a discount of 10%.
(ii) Stock was taken by T for t ₹ 15,000 and Furniture was sold to N for ₹ 12,000.
(iii) Land and Building was sold for ₹2,80,000.
(iv) R's Loan was paid by a cheque for the same amount.
(v) An unrecorded asset estimated at ₹1,20,000 was sold for ₹ 1,00,000.
Prepare Realisation Account, Capital Accounts of D, T and G and Bank Account.
Question 23. A,B and C are partners sharing profits in the ratio 5:3:2.They decided to dissolve the firm whose
Balance Sheet as on 31st march 2021 is as follows:
A’s Capital 2,00,000 Bank 70,000
B’s Capital 1,50,000 Debtors 50,000
C’s Capital 1,50,000 Stock 60,000
A’s Current A/c 30,000 Furniture 25,000
B’s Current A/c 20,000 Patents 35,000
Profit and Loss A/c 50,000 Machinery 1,00,000
Trade Creditors 70,000 Building 3,20,000
C’s Current A/c 10,000
6,70,000 6,70,000
Following transactions took place at the time of dissolution:
(i) Realisation expenses were to be borne by A for which he is to get a credit of ₹10,000. Actual
realisation expenses paid out of firm's Bank Account amounted to ₹ 12,000.
(ii) B took stock for ₹ 55,000 and C took over Building for ₹ 4,00,000.
(iii) Other assets realised: Debtors ₹ 48,000; Furniture ₹17,000 and Machinery ₹ 80,000.
(iv) Trade Creditors were settled in full by paying them ₹ 65,000.
Prepare Realisation Account, Partners' Current Accounts, Capital Accounts and Bank Account.
Question 24. Following is the Balance Sheet of A and B as at 31.3.2021 who share profits in the ratio of 3 : 2:
Bills Payable 30,000 Stock 25,000
Mrs. A’s Loan 25,000 Debtors 40,500
Workmen Compensation Reserve 8,000 Less: Provision for bad Debts 1000 39,500
Bank Loan 50,000 Bills Receivable 15,000
General Reserve 27,000 Investment 60,000
Capital A/cs: Plant and Machinery 80,000
A 30,000 Building 61,000
B 40,000 70,000
2,85,000 2,85,000

On the above date, the firm was dissolved and the following arrangements were made:
(i) A promised to pay Mrs. A's Loan and took half of the Investments @ 10% discount.
(ii) Stock and remaining Investments were sold @ 10% discount.
(iii) Goodwill was taken by B for ₹ 40,000. He also agreed to pay Bills Payable at a discount of 10%.
(iv) Debtors realised 35,000;B/R 13,500; Plant and Machinery 38,900 and Building 1,20,000.
(v) There was a car in the firm, which was completely written off from the books. It was
taken over by A for ₹ 23,400.
(vi) Creditors were paid 90% in full and final settlement of their dues.
(vii) Expenses of dissolution amounted to ₹ 1,700. Prepare Realisation Account, Capital Accounts of
Partners and Bank Account in the books of the firm. (Delhi 2002 C, Modified
To Sundry Assets Transfer: By Provision for Doubtful Debts 1,000
Stock 25,000 By Sundry Creditors 75,000
Debtors 40,500 By Bills Payable 30,000
Bills Receivable 15,000 By Mrs A's Loan 25,000
Investments 60,000 By Bank Loan 50,000
Plant and Machinery 80,000 By A's Capital A/c – Investments 27,000
Building 61,000 2,81,500 (30,000 - 3,000)
To A's Capital A/c (Mrs. A's Loan) 25,000 By Bank A/c Assets Realised:
To B's Capital A/c (Bills Payable) 27,000 Stock 22,500
To Bank A/c (Sundry Creditors) 67,500 (: 25,000 - 2,500)
To Bank A/c (Bank Loan) 50,000 Investments 27,000
To Bank A/c (Expenses) 1,700 (! 30,000 - 3,000)
To Gain (Profit) on Realisation transferred Debtors 35,000
to: Bills Receivable 13,500
A's Capital A/c 45,360 75,600 Plant and Machinery 38,900
B's Capital A/c 30,240 Building 1,20,000 2,56,900
By B's Capital A/c – Goodwill 40,000
By A's Capital A/c – Car 23,4000
5,28,300 5,28,300
Particulars A(₹) B(₹) Particulars A(₹) B(₹)
To Realisation A/c – 27,000 40,000 By Balance b/d 30,000 40,000
Assets 23,000 ... By Realisation A/c 45,360 30,240
To Realisation A/c – Car 70,960 71,240 (Gain(Profit)) 25,000 27,000
To Payment A/c – Final By Realisation A/c – 16,200 10,8000
Payment Liabilities
By General Reserve A/c 4,800 3,200
By Workmen Compensation
1,21,360 1,11,240 Reserve A/c 1,21,360 1,11,240
*Since no liability exists against Workmen Compensation Reserve, the amount of Workmen Compensation
Reserve is transferred to Partners' Capital Accounts.
BANK ACCOUNT
To Balance b/d 4,500 By Realisation A/c – Creditors 67,500
To Realisation A/c – Assets Realised 2,56,900 By Realisation A/c – Bank Loan 50,000
By Realisation A/c – Expenses 1,700
By A’s Capital A/c – Final Payment 70,960
By B’s Capital A/c – Final Payment 71,240
2,61,400 2,61,400

Question 25. X, Y and Z were partners sharing profits in the ratio of 2 : 2 : 1. The Balance Sheet as at 31st
March, 2019, when they dissolved the firm was as follows:
X’s Capital 1,27,500 Other Sundry Assets 1,17,000
Y’s Capital 1,10,000 Furniture 11,000
Z’s Capital 17,000 Debtors
Loan 11,500 1,24,200 1,23,000
Stock 13,200
Cash
2,82,000 2,82,000
It was agreed that:
(i) X to take over furniture at ₹ 8,000 and debtors amounted to ₹ 1,20,000 at ₹ 1,17,200 and the creditors
of 16,000 were to be paid by him at this figure.
(ii) Y is to take over all stock for ₹ 17,000 and some sundry assets at ₹ 72,000 (being 10% less than the
book value).
(iii) Z to take over remaining sundry assets at 80% of the book value and assume the responsibility of
discharge of loan together with accrued interest of ₹ 2,300.
(iv) The expenses of realisation were ₹ 2,700. The remaining debtors were sold to a debt collecting agency
at 50% of the value. Prepare necessary accounts to close the books of the firm. (Delhi 2011 C, Modified)
To Other Sundry Assets 1,17,000 By Provision for Doubtful Debts 1,200
To Furniture 11,000 By Loan 11,500
To Debtors 1,24,200 By Creditors 16,000
To Stock 17,800 By X's Capital A/c:
To X's Capital A/c-Creditors 16,000 Furniture 8,000
To Z's Capital A/c-Loan with Interest 13,800 Debtors 117,200 125,200
To Cash A/c Expenses 2,700 By Y's Capital A/c:
Stock 17,000
Sundry Assets 72,000 89,000
By Z's Capital A/c:
Sundry Assets 29,600
80/100 (! 1,17,000 - 80,000)
By Cash A/c-Debtors 2,100
50/100 (t 1,24,200 - t 1,20,000)
X's Capital A/c 11,160
Y's Capital A/c 11,160
Z's Capital A/c 5,580 27,900
3,02,500 3,02,500
Question 26. X and Y are partners sharing their profits and losses in the ratio of 3 : 1. They decide to dissolve
their firm on 31st March, 2016. Their Balance Sheet as at the above date was:
Bank Overdraft 30,000 Leasehold Property 40,000
Creditors 44,000 Machinery 35,000
X 54,000 Investments 10,000
Y 27,000 81,000 Stock 35,000
Debtors 24,000
Commission Receivable 3,000
Cash at Bank 1,000
1,55,000 1,55,000

Leasehold Property, Machinery and Furniture were divided among themselves and valuations were agreed at ₹
60,000 and ₹ 40,000 respectively for X and Y. X agreed to pay Creditors and Y agreed to meet the Bank
Overdraft. Commission Receivable was realised. Realisation expenses were ₹3,000. Stock is worth 80% of
book value. Investments are worth ₹ 18,000. Stock and other assets except those stated above are divided
equally. The accounts are settled by cash payment. Show the Ledger Accounts.
Ascertaining Sundry Assets by Preparing Memorandum Balance Sheet:--Sometimes, the

partners' capitals and other liabilities are given but the total of sundry assets is not given. However, the value
realised from the assets is given. In such a case, sundry assets have to be ascertained. It is ascertained by
preparing Memorandum Balance Sheet. The amounts of capitals and other liabilities are added. The sum total is
the total amount of assets.
Question 27 (Value of Assets not Given). Ram, Mohan and Sohan are partners sharing their profits and losses
in the ratio of 5 : 3 : 2. On 31st March, 2016, Ram's Capital and Mohan's Capital were₹ 90,000 and ₹ 60,000
respectively. But Sohan owed ₹ 15,000 to the firm. The Creditors were of ₹60,000. The assets realised ₹
1,50,000. Prepare Realisation Account, Partners' Capital Accounts and Bank Account.

To Sundry assets A/c (WN) 1,95,000 By Creditors 60,000
To Bank A/c – Creditors 60,000 By Bank A/c – Assets Realised 1,50,000
By Loss transferred to :
Ram’s Capital A/c 22,500
Mohan’s Capital A/c 13,500
Sohan’s Capital A/c 9,000 45,000
2,55,000 2,55,000
Particulars Ram Mohan Sohan Particulars Ram Moahn Sohan

₹ ₹ ₹ ₹ ₹ ₹
To Balance b/d ... ... 15,000 By Balance b/d 90,000 60,000 ...
To Realisation A/c (Loss) 22,500 13,500 9,000 By Bank A/c ... ... 24,000
To Bank A/c (Amt. Paid) 67,500 46,500 ... (Amount Received)
90,000 60,000 24,000 90,000 60,000 24,000
BANK ACCOUNT
To Realisation A/c – Assets Realised 1,50,000 By Realisation A/c – Creditors 60,000
To Sohan’s Capital A/c – Amount 24,000 By Ram’s Capital A/c – Amount Paid 67,500
Received By Mohan’s Capital A/c – Amount Paid 46,500
1,74,000 1,74,000
Working Note: MEMORANDUM BALANCE SHEET as at 31st March, 2016
Creditors 60,000 Sohan’s Capital 15,000
Capital A/cs: Sundry Assets (Balancing Figure) 1,95,000
Ram 90,000
Mohan 60,000 1,50,000
2,10,000 2,10,000
Question 28. A and B, who were partners sharing profits and losses in the proportion of 4/7 and 3/7
respectively, decided to dissolve the partnership firm as at 31st March, 2019. At the date of the dissolution A's

Capital was ₹ 1,25,030 and B's Capital was ₹ 2,070. Creditors amounted to 23,150 and Cash ₹ 4,520. Remaining
assets realised ₹ 1,24,910 and the expenses of dissolution were ₹ 1,860. Both A and B were solvent. Prepare
Balance Sheet of the firm as at the date of dissolution and also necessary accounts to close the books of the firm,
showing final adjustment of cash between the partners.
Question 29. X and Y, who were sharing profits and losses in the ratio of 3 : 1 respectively, decided to dissolve
the firm on 31st March, 2019 at which date some of the balances were: X's Capital --₹ 1,00,000; Y's Capital --₹
10,000 (Debit Balance);
Profit and Loss A/c --₹ 8,000 (Debit Balance); Creditors -- ₹ 30,000; Loan from Mrs. X-- ₹ 10,000; Cash at
Bank ₹ 2,000. Assets (other than cash at bank) realised ₹ 1,10,000 and liabilities were paid at 5% discount.
Realisation expenses amounted to ₹ 1,000. Prepare Realisation Account, Capital Accounts of the Partners and
Bank Account assuming that both the partners are solvent.
Question 30. A and B were partners from 1st April, 2010 with capitals of ₹ 60,000 and ₹ 40,000 respectively.
They shared profits in the ratio of 3 : 2. They carried on business for two years. In the first year ended 31st
March, 2011, they earned a profit of ₹ 50,000 but in the second year ended 31st March, 2012, a loss of ₹ 20,000
was incurred. As the business was no longer profitable, they dissolved the firm on 31st March, 2012. Creditors
on that date were ₹ 20,000. The partners withdrew for personal use ₹ 8,000 per partner per year. The assets
realised ₹ 1,00,000. The expenses of realisation were ₹ 3,000. Prepare Realisation Account, Partners' Capital
Accounts and Cash Account. (AI, Foreign 2004, Adapted)
Question 31. P, Q and R commenced business on 1.1. 2005 with capitals of: P ₹ 2,00,000; Q ₹ 2,00,000 and R
1,00,000. Profits are shared in the ratio of 4 : 3 : 3. Capital carried interest @ 5% p.a. During the year 2005, the
firm suffered a loss of ₹ 1,50,000 before allowing interest on capital. Drawings of each partner during the year
were ₹ 20,000. On 31st December, 2005, the partners agreed to dissolve the firm as it was no longer profitable.
The creditors on that date were ₹ 40,000. The assets realised a net value of ₹3,20,000 and the expenses of
realisation were ₹ 7,000. Prepare Realisation Account, Partners' Capital Accounts and Cash Account along with
necessary working to close the books of the firm. (Foreign 2005)

To Sundry Assets A/c (WN 3) 3,30,000 By Creditors 40,000
To Cash A/c (Expenses) 7,000 By Cash A/c (Assets Realised) 3,20,000
To Cash A/c (Creditors) 40,000 By Loss on Realisation transferred to:
P’s Capital A/c (4/10) 6,800
Q’s Capital A/c (3/10) 5,100
R’s Capital A/c (3/10)5,100 17,000
3,77,000 3,77,000
PARTNERS' CAPITAL ACCOUNTS (AFTER DISSOLUTION)

Particulars P Q R Particulars P Q R
₹ ₹ ₹ ₹ ₹ ₹
To Realisation A/c 6,8000 5,100 5,100 By Balance b/d 1,20,000 1,35,000 35,000
(Loss) 1,13,200 1,29,900 29,900 (WN 1)
To Cash A/c
(Balancing Figure)
1,20,000 1,35,000 35,000 1,20,000 1,35,000 35,000

CASH ACCOUNT
To Realisation A/c (Assets Realised) 3,20,000 By Realisation A/c (Expenses) 7,000
By Realisation A/c (Creditors) 40,000
By P’s Capital A/c (Final Payment) 1,13,200
By Q’s Capital A/c (Final Payment) 1,29,900
By R’s Capital A/c (Final Payment) 29,900
3,20,000 3,20,000
Working Notes: 1. Calculation of Partners' Capitals as on 31st December, 2005, i.e., date of dissolution.
PARTNERS' CAPITAL ACCOUNTS (Before Dissolution)
Particulars P Q R Particulars P Q R
To Profit and Loss A/c 60,000 45,000 45,000 By Balance b/d 2,00,000 2,00,000 1,00,000
(Loss) (1.1.2005)
To Drawing A/c 20,000 20,000 20,000
To Balance c/d 1,20,000 1,35,000 35,000
(31.12.2005)
2,00,000 2,00,000 1,00,000 2,00,000 2,00,000 1,00,000
2. In case of loss, interest on capital will not be allowed.
3. Calculation of Sundry Assets as on 31st December, 2005:
MEMORANDUM BALANCE SHEET
Creditors 40,000 Sundry Assets 3,30,000
Capital A/cs: (Balancing Figure)
P 1,20,000
Q 1,35,000
R 35,000 2,90,000
3,30,000 3,30,000
Question 32. X, Y and Z commenced business on 1st April, 2013 with capitals of ₹ 5,00,000; ₹ 4,00,000 and ₹
3,00,000 respectively. Profits and losses were shared in the ratio of 4 : 3 : 3. Interest on Capitals was paid at 5%
p.a. During 2013-14 and 2014-15 they earned profit of ₹ 2,00,000 and ₹ 2,50,000 (before allowing interest on
capital). Drawings of each partner were ₹ 50,000 per year. On 31st March, 2015 the firm was dissolved.
Creditors on that date were ₹ 1,20,000. The assets realised ₹ 13,00,000 net. Give necessary accounts to close the
books of the firm.
Solution: Balance Sheet on the date of dissolution is not given. Further, partners' capitals and book value of
assets on the date of dissolution are also not given. Hence, first of all balances of partners' capital is ascertained.
After that, Balance Sheet on the date of dissolution, i.e., 31st March, 2015, will be prepared to ascertain the
value of assets. PARTNERS' CAPITAL ACCOUNTS
Date Particulars X(₹) Y(₹) Z(₹) Date Particulars X(₹) Y(₹) Z(₹)
2014 2013
March 31 To Bank A/c: April 1 By Bank A/c 5,00,000 4,00,000 3,00,000
Drawings 50,000 50,000 50,000 2014
To Balance c/d 5,31,000 4,12,000 3,07,000 March 31 By Interest on
Capital A/c 25,000 20,000 15,000
By Profit and
Loss App. A/c 56,000 42,000 42,000
(Net Profit)*
(2,00,000-60,000)
5,81,000 4,62,000 3,57,000 5,81,000 4,62,000 3,57,000

2014
2015 April By Balance b/d 5,31,000 4,12,000 3,07,000
March 31 To Bank A/c: 50,000 50,000 50,000 1
Drawings 2015 By Interest on
To Balance c/d 5,82,550 4,38,850 3,28,600 March 31 Capital A/c 26,550 20,600 15,350
By Profit and
Loss App.A/c 75,000 56,250 56,250
(2,50,000 - 62,000
6,32,550 4,88,850 3,78,600 6,32,550 4,88,850 3,78,600
MEMORANDUM BALANCE SHEET as at 31st March, 2015

Creditors 1,20,000 Sundry Assets 14,70,000
Capital A/cs: X 5,82,550 (Balancing Figure)
Y 4,38,850
Z 3,28,600 13,50,000
14,70,000 14,70,000
REALISATION ACCOUNT
To Sundry Assets A/c 14,70,000 By Creditors A/c 1,20,000
To Bank A/c (Creditors Paid) 1,20,000 By Bank A/c (Sundry Assets Realised) 13,00,000
X’s Capital 68,000
Y’s Capital 51,000
Z’s Capital 51,000 1,70,000
15,90,000 15,90,000
PARTNERS’ CAPITAL ACCOUNTS (AFTER REALISATION)
Particulars X(₹) Y(₹) Z(₹) Particulars X(₹) Y(₹) Z(₹)

To Realisation A/c 68,000 51,000 51,000 By Bal b/d 5,82,550 4,38,850 3,28,600
(Loss)
To Bank A/c
(Balancing Figure) 5,14,550 3,87,850 2,77,600
5,82,550 4,38,850 3,28,600 5,82,550 4,38,850 3,28,600
BANK ACCOUNT
To Realisation A/c (Sundry Assets 13,00,000 By Realisation A/c (Creditors Paid) 1,20,000
Realised) By X’s Capital A/c 5,14,550
By Y’s Capital A/c 3,87,850
By Z’s Capital A/c 2,77,600
13,00,000 13,00,000

SELF PRACTICE QUESTIONS

1. Select the Correct Alternative:
(i) At the time of dissolution of the firm, if goodwill appears in the Balance Sheet, it is transferred to
(a) Realisation Account. (b) Partners' Capital Accounts. (c) Revaluation Account.
(ii) At the time of dissolution of the firm, the assets and liabilities appearing in the Balance Sheet are transferred to
(a) Revaluation Account. (b) Revaluation Account. (c) Partners' Capital Accounts.
(iii) At the time of dissolution of the firm, loan from partner is:
(a) transferred to Realisation Account (b) not transferred to Realisation A/c (c) transferred to the Partner's Capital Account.
(iv) At the time of dissolution of the firm, loan from partner's relative is
(a) transferred to Realisation Account.
(b) not transferred to Realisation Account.
(c) transferred to the Partner's Capital Account.
(v) Where it is agreed that a partner will be paid a lump sum amount for dissolution, if the payment is made by the firm,
the payment is debited to:
(a) Realisation Account. (b) Concerned Partner's Capital Account. (c) all the Partners' Capital Accounts.
(vi) Unrecorded asset when realised is credited to
(a) Realisation Account. (b) Partners' Capital Accounts. (c) None of the above.
(vii) Unrecorded liabilities when paid are debited to
(a) Realisation Account. (b) Partners' Capital Accounts. (c) None of the above.
[Ans.: (i) (a); (ii) (b); (iii) (b); (iv) (a); (v) (b); (vi) (a); (vii) (a)]
Very Short Answer Type Questions
1. What is dissolution of a firm?

2. Distinguish between Dissolution of Partnership and Dissolution of Partnership Firm on the basis of closure of
books. (Delhi 2014)
3. Distinguish between 'Dissolution of Partnership' and 'Dissolution of Partnership Firm' on the basis of
Court's intervention. (Al2014)
4. Give any one difference between reconstitution of a firm and dissolution of a firm.(Foreign 2011)
5. In case of dissolution of a firm which liabilities are to be paid first? (Delhi 2011 C)
6. All the partners want to dissolve the firm. Y, a partner, demands that his loan of ₹ 2,00,000 be paid
beforepayment of capitals of the partners. But X, another partner, demands that capitals be paid
beforepayment of Y's loan. Who is correct? [Ans.: Y, as per Section 48]
7. A and B are partners in a firm sharing profits in the ratio of 3 : 2. Mrs. A has given a loan of ₹ 20,000 to
thefirm and the firm also obtained a loan of ₹ 10,000 from B. The firm was dissolved and its assets
wererealised for ₹ 25,000. State the order of payment of Mrs. A's loan and B's loan with reason, if there were
nocreditors of the firm. (Delhi 2010 C)
[Ans.: First Mrs. A's loan of ₹ 20,000, then ₹ 5,000 for B's loan as per Section 48]
9. What is Realisation Account?
10. Give any two objects of preparing Realisation Account in the dissolution of a firm.
11. State the ratio in which the partners share gain (profit) or loss on realisation of various assets and payment of
various liabilities.
12. List any two grounds on which a court may dissolve a firm.
13. What Journal entry is passed when an asset is given to any of the firm's creditors towards partial paymentof dues?
14. What Journal entry is passed when a partner agrees to pay the realisation expenses on behalf of the firm?

15. What Journal entry is passed when the firm pays realisation expenses on behalf of a partner who has tobear
the expenses?
16. If a loan from a partner appears on the liabilities side of the Balance Sheet of the firm and the Capital
Account of such partner shows a debit balance, how is loan dealt with?
17. Does the loan from an outsider have priority as to repayment over the loan from a partner.
Short Answer Type Questions:
1. Explain the provisions of Section 48 of Partnership Act dealing with the settlement of accounts at the time of
dissolution of firm.
2. Distinguish between dissolution of partnership and dissolution of partnership firm.
3. Distinguish between firm's debts and private debts.
4. Give two points of distinction between Revaluation Account and Realisation Account.
5. State any six situations in which the court may order to dissolve a partnership firm. (Al2013 C)
6. Explain dissolution of a firm by (i) Agreement and (ii) Notice. (Delhi 2013 C)

CHAPTER 8. FINANCIAL STATEMENTS OF NON FOR PROFIT ORGANISATIONS
Meaning and Concept:- Not-For-Profit organisation, also known as Non-Profit Organisation, is an

organisation set-up to promote cultural, educational, religious, professional or public services objectives. Its
aim is not to earn profit. However, it does not mean that it cannot earn profit. The main characteristic which
differentiates not-for-profit organisation from others is that it does not distribute profit to its members.
The funds required to start operations are provided by its members, trustees or others as membership fees
and/or donations without expecting its repayment. It may also receive grants from government or private
institutions. It is a separate legal entity not owned by any individual or an enterprise. Examples of such
organisations are: schools, colleges, public hospital, literary societies, societies for promotion of sports, arts
and culture, clubs, etc.
Characteristics or features of Not-for-profit Organisation

1.Entity: Not-for-profit Organisation is a separate legal entity promoted by individuals or enterprises.
2. Purpose: their purpose is to promote cultural, educational, religious, professional objectives and rendering
services to people at large.
3. Form: It is set-up as charitable society or trust.
4. No Profit Motive : Not-for-profit organisation does not function with the objective of earning profit. The
surplus is used for the objects for which it is set-up. Thus, surplus of the organisation is not distributed among
its members.
5. Management: NPO is managed by a group of individuals often called Trustees or managing committee.
6. Funding: The funds required to start the operation are given by its members and donors as membership fee
and/or donations. It is supplemented by surplus from operations. Besides, it collects donations from outsiders
to meet its fund’s requirement for projects undertaken and its operational cost.
7. Account: It prepares final accounts every year comprising of Receipts and payments Account, Income and
Expenditure Account and the balance sheet.
Difference between Not-for-profit Organisation and profit earning Organisation are as follows:
basis Not-for-profit organisation Profit Earning organisation (Business firm)

1.Purpose for It is set-up with a purpose to further cultural, Purpose is to earn profit.
which set-up educational, religious,professional or public
services.
2.funds They are raised by way of membership fee, They are raised as capital by the proprietor,
Donations and surplus from operations. In the partners (in the case of partnership firms) and
balance sheet, it is shown as general fund or share capital, in the case of companies. Profits
capital fund or corpus fund. not distributed to partners and shareholders are
shown as reserves.
3.Financial Financial statements prepared are Receipts and Financial statements prepared are trading
statements Payments Account, Income and Expenditure Account, Profit and Loss account and Balance
Account and Balance sheet. sheet.
4.Surplus/Profit Balance of the Income and Expenditure Account Balance of the Profit and Loss Account is either
is either surplus or deficit. Net Profit or Net Loss.
Financial statements of Not-for-profit Organisation :- NPO prepares annual or final accounts showing the
financial transactions of the organisation for its members and to comply with statutory requirements. Final
accounts of a Not-for-profit Organisation include:
1. Receipts and payments Account,

2. Income and Expenditure Account, and
3. Balance sheet.
Receipts and payments Account:--Receipts and payments Account is a Summary of cash (including
bank) receipts and payments during an accounting period, receipts and payments being shown under

appropriate heads of accounts. It begins with cash and bank opening balances and ends with cash and bank
balances at the end of the accounting period. Receipts are shown on the debit side and payments are shown
on the credit side of the account. It being Receipts and
Payments Account, receipts and payments of every nature are shown in this account, i.e., whether it is capital
or revenue in nature or whether it relates to the current year, previous year or next year
Features of Receipts and Payments Account

1. Nature: It is an asset account since it is a summary of cash receipts and cash payments including
bank balance .
2. Basis of preparing: it is prepared on cash basis, i.e., transactions and events which have been
received or paid in cash are shown in the account.
3. Capital and Revenue: It records all receipts and payment,whetherthey are of revenue nature or
capital nature.
4. Period:It records cash and bank transaction without distinguishing among current, previous or
succeeding (next) accounting periods.
5. Opening and closing balances:Opening balance of this account shows cash in hand and/or at
bank in the beginning of the accounting period and closing balance shows cash in hand and/or at
bank at the end of the accounting period.
6. Adjustments: Adjustment for outstanding expenses, prepaid expenses, accrued income or
income received in advance, and depreciation are not made in this account as it is maintained on
cash basis of accounting.
7. Purpose: The purpose is to show amount received and paid under various heads during the
accounting year. A fair idea can be formed from this account about the cash position of an
organisation.
Limitations of Receipts and Payments Account

1. It does not show expenses and incomes on accrual basis.
2. It does not show whether the Not-for-Profit Organisation is able to meet its day-to-day expenses out of its
income or not.
Difference between Receipts and Payments Account and Cash Book

Basis Receipts and Payment Account Cash Book
1.Basis It is a summary of Cash Book and is prepared It records each transaction of receipts and
from the Cash Book. payment separately.
2. Period Receipts and Payments Account is prepared at the Cash Book is written on daily basis.
end of accounting year.
3.Date Transactions under this are not written datewise. Transactions are recorded datewise in the
Cash Book.
4.Institutions It is prepared by the Not-for-Profit organisation. It is prepared by all organisations be it Not-
for-Profit Organisation or a commercial
establishment.
5.Side Under it, there are receipts and payments sides Cash Book is divided into debit and credit
instead of debit and credit sides. sides.
6. Ledger There is no column of Ledger Folio. Cash Book has a separate column for Ledger
Folio Folio.
2. INCOME AND EXPENDITURE ACCOUNT:- Income and Expenditure Account is like Profit and Loss Account of
an enterprise (business firm). Since, Not-for-Profit Organisations are not established for the purpose of earning
profit, they do not prepare Profit and Loss Account. Instead, they prepare Income and Expenditure account at
the end of the accounting period to determine the result, i.e., whether it has surplus or deficit. Incomes and
gains are shown on the credit side and expenses and losses on the debit side. The difference between the two
sides is either surplus or deficit. The surplus/deficit, as the case may be, is added to or deducted from Capital
Fund in the Balance Sheet.

Income and Expenditure Account is prepared at the end of the accounting period matching revenue expenses
with revenue receipts (income) to determine surplus or deficit. It is prepared following accrual basis of
accounting, therefore,
1. Revenue Expenses for the accounting period are taken, whether they have been paid or not.
2. Revenue Incomes for the accounting period are taken, whether they have been received or not.
3. Non-Cash Expenses such as Depreciation are accounted.
4. Capital Expenditures, e.g., purchase of Land, are not considered because they are shown in the
Balance Sheet.
5. Capital Incomes or Receipts, e.g., donation for specific purpose are not considered.
IMPORTANT TERMS:-
1. Capital Expenditure: Capital expenditure is an expenditure the benefit of which does not expire in one
accounting period but is spread over more than one accounting period. It results in the acquisition of
assets which in the case of Not-for-Profit organisation, are used for the furtherance of its activities.
Example: The cost of land and building and any addition thereto,
2.Revenue Expenditure: Revenue expenditure is that expenditure benefit of Which expires within the
accounting period. In the context of Not-for-Profit Organisations, revenue expenditure means expenditure
incurred for social or charitable activities for which it is set up but excluding the capital expenditure.
Examples: Salaries to staff,rent, educational grants,honorariums paid,sports material used, insurance, etc.
3.Capital Receipts: Capital Receipts are the receipts which are not revenue receipts or are receipts for the
purpose specified by the donor. Examples: Life Membership Fee, Corpus Donations, Building Fund,
Receipts from sale of Fixed Assets, etc.
4.Revenue Receipts: Revenue receipts are the receipts which are received as an income by the
organisation in carrying out the activities. Examples: Subscription for the year from members, General
Donations, Rent Received, Sale of Old Newspapers, etc.
Features of Income and Expenditure Account

1. Nature:It is a nominal A/c. Hence it is debited with expenses and losses and credited with incomes and gains.
2. Basis of Recording: It records incomes, expenses and losses of revenue nature on accrual basis of accounting.
3. Period: It records only those incomes/expenses which relate to the current period, whether paid or not.
4. Opening and Closing Balances: It does not have an opening balance. Its balance at the end is either surplus or
deficit. It is transferred to Capital Fund in the Balance Sheet.
5. Adjustments: This account is prepared on accrual basis of accounting and thus all adjustments relating to
prepaid or outstanding expenses and incomes, provision for depreciation or doubtful debts are made.
Difference between Income and Expenditure Account and Profit and Loss Account
Basis Income and Expenditure Account Profit and Loss Account
1.Object Main object of Income and Expenditure Account Main object of Profit and Loss Account is to
is to determine surplus or deficit. determine net profit or net loss.
2.Prepared by It is prepared by Not-for-Profit Organisations. It is prepared by business enterprises.
3.Method It is prepared from the Trial Balance, where It is prepare from the Trial Balance and other
complete set of books of account are maintained information.
or from the receipts and Payments Account and
other information, where complete set of books
of account are not maintained.
4.Balance The balance in the account is termed as surplus The balance in the account is termed as net
or deficit. profit or net loss.

Difference between Receipts and Payment Account and Income and Expenditure Account
Basis Receipts and Payments Account Income and Expenditure Account

1.Purpose Purpose of the account is to show difference Purpose of the account is to show net result of
between two sides showing Cash/Bank balance at activities undertaken during the year resulting in
the end. surplus or deficit.
2.Nature It is a classified summary of cash transactions It is like a Profit and Loss Account (Nominal
showing receipts and payments under different Account).
heads for the period (Real Account).
3.Form Debit side of this account records receipts and Debit side of this account records expenses and
credit side records payment. losses and credit side records incomes and gains.
4.Balance Balance in the beginning means cash in hand and There is no balance in the beginning. Balance at
bank balance in the beginning and balance at the the end is either surplus or deficit.
end means cash and bank balance at the end.
5.Capital and It records receipts and payments during the year of It records income and expenditure of only revenue
Revenue items both capital and revenue nature. nature relating to the accounting period.
6.Contents It shows receipts and payments during the year It shows incomes and expenditures of the current
whether they relate to past, current or succeeding year alone.
(next) year.
7.Adjustments It is based on cash system of accounting. Hence, It is based on accrual system of accounting,
no adjustments are made. adjustments are made for prepaid expenses,
outstanding expenses and accrued income.
8.Depreciation It does not record non-cash items, e.g., It records non-cash items, e.g., depreciation.
depreciation.
BALANCE SHEET:- Balance Sheet shows the financial position of an organisation or enterprise as at a particular date.
The method of preparing the Balance Sheet of a Not-for-Profit organisation is similar to that of an enterprise. It is
prepared after having prepared the Income and Expenditure Account. Surplus or deficit of the Income and
Expenditure Account is transferred the Capital Fund. The Balance Sheet shows assets, liabilities and Capital Fund.
Funds Based Accounting:-- Fund means amount received or set aside by a Not-for-Profit Organisation for a specific
purpose. The fund amount along with the income earned on the fund cannot be used for purposes other than those
for which it is received or set aside.
Donations received or funds set aside for specific purposes are credited to a separate fund Account and are shown
on the liabilities side of the Balance Sheet. The incomes from donations for these funds are credited to the
respective Fund Account. On the other hand, expenses or payments out of these funds are debited. Accounting
when done on this basis known as Fund Based Accounting.
Thus, Not-for-Profit Organisation maintains a separate Bank Account for each fund, donation received towards that
fund are credited to the Fund Account along with the income (e.g., interest) while expenses are debited to it.
Thus, Fund Based Accounting means the accounting whereby receipts of donations and income relating to a
particular fund are credited to that particular fund and payments and expenses are debited to it. Examples of such
funds are: Building Fund, Library Fund, Sports Fund, Prize Fund, etc
Categories of Funds: In the case of Not-for-Profit Organisation, funds may be classified under following two heads:
(i) Unrestricted fund: Unrestricted Fund does not carry any restriction with respect to its use. In
other words, management can use the amounts in the fund as it deems appropriate, but to carry
out the purpose for which the organisation exists. This fund is known as the General Fund or the
Capital Fund to which the surplus for the year is added and in case of deficit, deducted.
(ii) Restricted Fund: Restricted Fund is the fund, the use of which is restricted either by the
management or by the donor for a specific purpose. Examples of such funds are: Endowment
Fund, Annuity Fund, Loan Fund, Prize Fund, Sports Fund, etc.

(a) Government Grant: Grant received from Government for specific purpose is restricted to be
used for the purpose it is granted. It is accounted in the books following Fund Based
Accounting. For example, Grant received from Government for 'Polio Eradication
Programme' is credited to 'Polio Eradication Fund' and income (interest) earned relating to
the fund is credited to the fund while expenses are debited.
(b) Endowment Fund: "It is a fund usually of a non-profit institution, arising from gift, the
income of which is devoted to a specified purpose. Endowment Fund, thus, is a donation
with a condition by the donor to use only the income earned from the investment of such
funds for the specified purpose so that the original donated amount remains intact.
(c) Annuity Fund: An annuity fund is established when a Not-for-Profit Organisation receives
assets from a donor with a condition to pay specified amount periodically to designated
beneficiary or beneficiaries. Annuity is a fixed annual (normally) payment and usually,
continue only during the lifetime of the named beneficiary or for the period specified by the
donor. Annuity Fund Donation, thereafter, becomes the property of the organisation.
(d) Loan Fund: Loan Fund is set-up to grant loans for specific purposes say loan to pursue higher
studies.
(e) Fixed Assets Fund: Fixed Assets Fund is a fund earmarked for investment in fixed assets or
already invested in fixed assets. Example of Fixed Assets Fund is 'Building Fund'. Amount
invested in fixed assets during the year is transferred to Capital Fund.
(f) Prize Fund: Prize Fund is a fund set-up to use for distribution as prizes say for achievements,
or contribution to the welfare of the society.
Accounting Treatment of Important Items of Income and Expenditure Account
1. Entrance Fee/Admission Fee:-- Entrance Fee or Admission Fee is the amount paid by a person at the time
of becoming a member of a Not-for-Project Organisation. Entrance Fee or Admission Fee is a revenue
receipt and therefore, is accounted as an income and credited to Income and Expenditure Account.
2. Life Membership Fee:-- Life Membership Fee is accounted as a Capital Receipt and added to Capital Fund
on the liabilities side of the Balance Sheet. It is not accounted as income because a life member makes one
time payment and avails services all through his life.
3. Special Receipts:-- Special Receipts means receipts of amount for special occasions. For example,
contributions received for annual dinner. Such contributions are credited to separate account (Annual
Dinner Account in this case) and expenses against these receipts are debited to it. The balance is
transferred to the Income and Expenditure Account.
4. Donations:-- A charitable institution often receives donations. The donations received may be a general
donation or a specific donation.
(i) General Donation: General Donation is the donation in which the donor does not specify any condition
for its use. The amount of general donation is accounted as an income and credited to Income and
Expenditure Account.
(ii) Specific Donation: In case the donor specifies the purpose for which the donation can be used, it is a
Specific Donation. For example, a donor donates Rs 10,00,000 for a library. It means the donation
received can be used only for library, i.e., it is a specific donation. Specific donation is capitalised and is
shown on the liabilities side of the Balance Sheet.
Question 1. How are following items accounted in a Not-for-Profit Organisation?
(i) Tournament Fund Rs 2,00,000; Tournament Expenses Rs 60,000; Receipts from

Tournament Rs 80,000.
(ii) Billiard Match Expenses Rs 25,000.
(iii) Prize Fund 1,00,000; Interest on Prize Fund Investments Rs 10,000; Prizes paid Rs
20,000; Prize Fund Investments Rs 80,000.
(iv) Receipts from Cinema Show Tickets Rs 50,000; Expenses on Cinema Show 15,000.
(v) Expenditure on construction of Pavilion during the year was 6,00,000. The
construction work is in progress and not yet completed. Pavilion Fund as on 31st
March, 2017 Rs 8,00,000. Donation for Pavilion received on 15th September, 2017
Rs 10,00,000; Capital Fund as at 31st March, 2017 Rs 20,00,000.

Question 2. Following is the information given in respect of certain items of a sports club. Show them in the
income and Expenditure Account and the Balance Sheet of the club as at 31st March, 2018.
Sports Fund as at 1st April, 2017 10,00,000

Sports Fund Investments 10,00,000
Interest on Sports Fund Investments 1,00,000
Donation for Sports Fund 4,00,000
Sports Prizes Awarded 3,00,000
Expenses on Sports Events 1,00,000
General Fund 20,00,000
General Fund Investments 20,00,000
Interest on General Fund Investments 2,00,000
Question 3.Calculatethe amount of subscriptions to be shown in 1999 in Income & expenditure A/c.
Subscription received in 1999 as: Rs.
1998 5,000
1999 45,000
2000 4,000 Rs. 54,000
Subscriptions outstanding in 1998 Rs. 7,500
Subscriptions outstanding in 1999 Rs. 7,500
Subscriptions Received in Advance in 1998:
For 1999 Rs. 6,500

For 2000 Rs 2,000
Life membership subscriptions received in 1999 Rs. 5,000 [Answer. Rs. 56,500]
Question 4.From the following information of a club show the amounts of Match expenses and
match Fund in the Financial Statements of the Club for the years ended on 31st March,2017 and 31stMarch, 2018:
Particulars Rs
Match Expenses paid during the year ended 31st March, 2018 3,00,000
Match Fund as on 31st March, 2017 1,70,000
Donation for Match Fund received during the year ended 31st March, 2018 90,000
Proceeds from the sale of match tickets received during the year ended 31.3.18 30,000
Question 5.Gavaskar Cricket Club gives you the following receipts and Payments Account for the year ended 31.3.17;
Receipts Rs Payments Rs.
To Balance of Cash on By Salaries and Wages 12,000
1st April 2016: By Sports Equipment 46,785
At Office 150 By Stationery and Printing 1,220
At Bank 14,200 14,350 By Maintenance of Ground 6,000
To Subscriptions 61,100 By Prizes 1,060
To Admission Fees 350 By Balance of Cash on
To Interest on Investments @ 9% 3 1st March, 2017:
per annum for full year 9,000 At Office 380
At Bank 17,355 17,735
84,800 84,800
The Following additional information is provided to you:

On 1st April 2016 On 31st March 2017
Subscriptions Due 480 560
Subscriptions Received in Advance 80 40
Sports Equipment 21,800 29,700
Land & Buildings (cost less depreciation) 80,000 76,000

Prepare Income and expenditure A/c for the year ended 31st March, 2017 and Balance Sheet
as at that date: [Answer:surplus- 7405, opening B/S = 2,16,630, Closing B/s = 2,23,995]
Question 6.Shanti Library Society showed the following position on 31.12.2015.Balance Sheet as at 31.12.2015

Capital Fund 79,300 Electrical Fittings 15,000
Expenses Due 700 Furniture 5,000
Books 40,000
Investments in Securities 15,000
Cash in Bank 2,500
Cash on Hand 2,500
80,000 80,000
The Receipt and Payments A/c for the Year ending on 31st December 2016 is given below:
Receipts Rs. Payments Rs.
To Balance b/d By Electric charges 720
Cash at Bank 2,500 By Postage & Stationery 500
Cash on hand 2,500 5,000 By Telephone charges 500
To Entrance fees 3,000 By Books Purchased
To membership subscription 20,000 (on 1-1-16) 6,000
To sale proceeds of old papers 150 By Outstanding expenses paid 700
To hire of lecture Hall 2,000 By Rent A/c 8,800
To Interest on securities 800 By Investment in securities 4,000
By Salaries A/c 6,600
By Balance c/d
Cash at Bank 2,000
Cash on Hand 1,130
30,950 30,950
You are required to prepare an Income & Expenditure Account for the year ending 31-12-16 and Balance Sheet
as on that date after making the following adjustments:
1. Membership subscription included Rs. 1,000 received in advance.

2. Provide for outstanding Rent Rs. 400 and Salaries Rs. 300.
3. Books to be depreciated @ 10% including additions. Electrical fittings and furniture are also to be
depreciated at the same rate.
4. 75% of the entrance fees are to be capitalised.
5. Interest on securities is to be calculated @ 5% p.a. including purchases of investments made on
1-7-2016 for Rs. 4000.[ANS: Deficit = 1,670, closing B/S = 81,580 ]
Question 7. Following is the extract from the Receipts and Payments Account of a sports club. You are
required to show different items in the Income and Expenditure Account and Balance Sheet of the club for the
year ended 31st March, 2018 after considering the additional information given below:
RECEIPTS AND PAYMENTS ACCOUNTFor the year ended 31st March, 2018
Receipts Rs Payments Rs
To Donation for Pavilion 10,00,000 By Governor’s Party Expenses 2,40,000
To Contribution for Governor’s Party 2,00,000
To Donations 5,000
Additional Information:
(i) Amount spent on Pavilion Rs 20,00,000. The construction work is in progress and has not
yet completed.
(ii) Outstanding subscriptions for Governor’s Party Rs 30,000.
(iii) Capital Fund as at 31st March, 2017 Rs 10,00,000
(iv) Pavilion Fund as at 31st March, 2017 Rs 40,00,000
Question 8. Prepare Furniture Account for the year ended 31st March, 2018 in the books of a social club under
the following alternative case:

Case 1. Furniture as on 1st April, 2017- Rs 2,20,000; Furniture (having a book value as on 1st April, 2017-Rs
20,000) sold at a gain (profit) of 20% on 31st December, 2017.Furniture purchased on 1st October, 2017 for Rs
1,00,000: charge depreciation @ 10% p.a. on furniture.
st st
Case 2. Furniture as on 31 March, 2017-Rs 4,40,000: Furniture (having a book value as on 1 April, 2017-Rs
40,000) sold at a loss of 20% on 31st December, 2017. Furniture is to be depreciated @ 10% p.a. Furniture
st
costing Rs 3,00,000 was also purchased on 1 October, 2017.
Question 9. From the following extract of Receipts and Payments Account and additional information, compute
income from subscriptions for the year ended 31st March, 2018 and show it in the Final Account of the club:
RECEIPTS AND PAYMENTS ACCOUNTfor the year ended 31st March, 2018
To Subscriptions 1,00,000
Additional inform. As at 31st march 2017 As at 31st march 2018

Subscription outstanding 20,000 40,000
Subscription received in advance 30,000 20,000
Question 10. In the year ended 31st March, 2018, subscriptions received were Rs 21,00,000. These subscriptions
include Rs 30,000 for the year ended 31stMarch, 2017 and Rs 40,000 for the year ending 31st March, 2019. On 31st
March, 2018, subscriptions due but not received were Rs 50,000. The corresponding amount on 1st April, 2017 was
Rs 60,000. Determine the amount that should be credited to Income and Expenditure Account as subscriptions for
the year ended 31st March, 2018. Answer: 20,50,000
Question:11. From the following receipts and Payments A/c of Mumbai Club, Prepare Income and Expenditure
A/c for the year ended 31.12.1996 and its balance Sheet as on that date:

Cash In Hand 4,000 Salary 2,000
Cash at Bank 10,000 Repair Expenses 500
Donations 5,000 Purchase of Furniture 6,000
Subscriptions 12,000 Misc. Expenses 500
Entrance fees 1,000 Purchase of Investments 6,000
Interest on Investments 100 Insurance Premium 200
Interest Received from Bank 400 Billiard Table 8,000
Sale of Old Newspaper 150 Paper, Ink. Etc. 150
Sale of Drama tickets 1,050 Drama Expenses 500
Cash in Hand (Closing) 2,650
Cash at Bank (Closing) 7,200
33,700 33,700
1. Subscriptions in arrear for 1996, Rs. 900 and subscriptions in advance for 1997, Rs. 350.
2. Insurance premium Outstanding Rs. 40.
3. Misc. Expenses Prepaid Rs. 90.
4. 50% of donation is to be capitalised.
5. Entrance fees are to be treated as revenue income.
6. 8% interest has accrued on investment for five months.
7. Billiard Table costing Rs.30,000 was purchased during the last year and Rs. 22,000 were paid for it.
[Nov-97 foundation-20 marks] [ Answer: Surplus 14,150, Balance Sheet: 53,040]
Question: 12 The following information were obtained from the books of Delhi Club as on 31.3.1998, at the end
of the first year of the Club. You are required to prepare Receipts and Payments Account, Income and
Expenditure Account for the year ended 31.3.1998 and a Balance Sheet as at 31.3.1998 on mercantile basis:
1. Donations received for Building and Library Room Rs. 2,00,000

2. Other revenue income and actual receipts: Revenue Actual

(Income Rs.) Receipts (Rs.)
Entrance Fees 17,000 17,000
Subscription 20,000 19,000
Locker Rent 600 600
Sundry Income 1,600 1,060
Refreshment Account --- 16,000
3. Other Revenue Expenditure and actual Payments:

Revenue Actual
Expenditure Payments
Land (Cost Rs. 10,000) ----- 10,000
Furniture (cost Rs. 1,46,000) ----- 1,30,000
Salaries 5,000 4,800
Maintenance of Playgrounds 2,000 1,000
Rent 8,000 8,000
Refreshment Account ----- 8,000
Donations to the extent of Rs. 25,000 were utilized for the purchase of Library Books. Balance was still unutilized. In
order to keep it safe, 9% govt. Bonds of Rs. 1,60,000 were purchased on 31-3-1998. Remaining amount was put in
the Bank on 31-3-98 under the term deposit. Depreciation at 10% p.a. was to be provided for the whole year on
Furniture and Library Books. [CA INTER -Nov. 98, 20 mark [Ans:Overdraft; 1,08,140; Surplus 15,100, B/S 3,40,440]
Question 13. From the following, determine the amount of subscriptions to be credited to Income and Expenditure
Account for the year ended 31st March, 2018. Subscriptions received during the year were as follows:
For the year ended 31st March, 2017 Rs 20,000

For the year ended 31stMarch, 2018 Rs 3,00,000
For the year ended 31st March, 2019 Rs 30,000
Subscriptions Outstanding as at 31st March, 2017 were Rs 35,000 out of which Rs 5,000 were not
recoverable. On the same date, subscriptions received in advance for the year ended 31st March, 2018
were Rs 20,000. Subscriptions still outstanding as at 31st March, 2018 amounted to Rs 60,000.
Question: 14. prepare the Income and Expenditure Account and the Balance Sheet from the following information:
Receipts and Payment Account of Zee club, Delhi For the year ending on 31st December 2012
To Balance b/d (cash) 1,025 By Upkeep of fields 220
To Subscriptions: By Salaries 600
2011 40 By Drama Expenses 450
2012 2,050 By Newspapers 150
2013 60 2,150 By Books 100
To Admission Fees 40 By Municipal Taxes 40
To Life Membership Subscription 100 By Charity 350
To Donations (on 1.8.2012) 500 By 12% General Investments 500
To Subscription for Tournament 1,500 (on 1.8.2012)
(on 1.8.2012) By 12% Tournament Fund
To sales of old newspapers 45 Investments (on 1.8.2012) 1,500
To sale of old bats etc. 50 By Tournament Expenses 1,200
To Proceeds of drama tickets 950 By Bats, Balls etc. 700
To Sale of old furniture 60 By Printing and Stationery 100
(costing Rs. 100) By Furniture 250
To Interest on 12% general Invest. 12.50 By Balance c/d (cash) 3,760
To Interest on 12% Tournament
Fund Investments 37.50
To Subs.for Governor's Party 3,450
9,920 9,920

Additional Information
a. There are 500 members each paying annual subscription of Rs.5. Rs.50 are still in arrear for the year2011
b. Municipal taxes amounting to Rs.40 per year have been paid upto 31.3.13 and Rs.50 are outstanding for salaries.
c. On 1.1.2012 the club owned building valued at Rs.5,000, Stock of Bats and Balls Rs. 1,500, Printing and Stationery
Rs.200, Cash at Bank Rs.3,000, Books Rs.500 and Furniture Rs,600.
d. Write 50% off Bats and Balls (without considering sale), 25% off printing and stationery.
e. Special subscription for governor's party outstanding Rs.550.
f. Admission fees to be treated as of revenue nature but Life Membership is to be treated as of Capital nature.
[Ans. Surplus Rs. 1,035; Closing Balance Sheet Total Rs. 17,545]
QUESTION 15. Punya Trust runs a charitable hospital. How will be the following items dealt while preparing Income
and Expenditure Account for the year ended 31st March, 2018 and Balance Sheet as at that date?
Particulars 1.4.17 31.3.18
Stock of Medicines 30,000 5,000
Creditors for Medicines 20,000 13,000
Advance paid for Medicines on 31st March, 2018 13,000
Advance paid for Medicines carried from the year ended 31st March, 2017 2,000
Amount paid for Medicines during the year 1,08,000
Question:16. Prepare Income and Expenditure Account and Balance Sheet of Bhagat Singh College Sports Club
Receipts and Payments Account for the year ended on 31st March 2003.
To Balance b/d Cash 500 By Rent 9,750
Bank 4,000 By miscellaneous Expenses 28,800
Stamps 300 By Postage Expenses 1,200
To Subscription By Furniture 8,000
4,650 By Creditors for Sports Material 12,200
67,200 By cost of prizes (to be awarded) 4,150
2,600 74,450 By Cash Purchase of Sports
To Entrance Fees 8,000 Materials 2,000
To general donations 4,050 By Match Expenses 7,030
To Donations for Prize Fund 2,800 By Balance c/d
To Sale of old Sports Materials 5,200 Cash 545
To Interest on Prize Fund Investments 300 Bank 26,000
To Miscellaneous Receipts 225 Stamps 150
99,825 99,825
Information
Particulars 1.4.2002 31.3.2003
Sports Materials 4,000 5000
Furniture 40,000 ?
5% Prize Fund Investment (Face Value Rs. 12,000) 11,700 ?
Creditors for Sports Materials 1,400 2,950
Subscription in arrears 4,750 ?
Subscription in advance 1,400 ?
Prize Fund 12,000 ?
Rent paid in advance -- 750
Outstanding rent 750 ?
Outstanding Miscellaneous Expenses 2,280 4,020
Miscellaneous Expenses paid in advance 750 850
Book Value of Sports Materials sold was Rs.4,000. Depreciation on furniture is to be provided @10%. Half of
entrance fees to be capitalised. There are 720 members, each paying an annual subscription of Rs. 100
[Answer, Surplus Rs.19,005 Closing Balance Sheet Total. Rs.91,995

12th Class DOUBLE ENTRY BOOK KEEPING CA/CMA SANTOSH KUMAR
Question: 17 The following is the Receipts and Payments Account of Apollo Club in respect of the year to 31
March 2003.
To Balance b/d By Salaries 3,000
Cash in hand 2,000 By Stationery 1,000
To Subscriptions: By Rates and Taxes 300
2001-2002 3,000 By Telephone Charges 1,500
2002-2003 4,000 By 8% Securities at par 5,000
2003-2004 1,000 8,000 By Sundry Expenses 200
To Profit on sports 3,000 By Balance c/d
To Interest on 8% Securities 1,000 Cash in hand 3,000
The following additional facts are ascertained:

a. There are 500 members, each paying an annual subscription of Rs.10; Rs.3,500 being in arrears for 2001-
2002 at the beginning of 2002-2003. During 2001-2002, subscriptions were paid in advance by 30 members
for 2002-2003.
b. Stock of stationery at 31 March 2002 was Rs.400 and at 31 March 2003, Rs.500.
c. At 31.3.03, the rates and taxes were prepaid to the following 31st January. The yearly charge being Rs.300.
d. A quarter's charge for telephone is outstanding, the amount accrued being Rs.300. The charge for each
quarter is same for both 2001 -2002 and 2002-2003.
e. Sundry Expenses accruing at 31 March 2002 were Rs.50 and at 31 March 2003 Rs.60.
f. At 31.3.2002 Building stood in the books at Rs.30,000 and it is required to write off depreciation at 10% p.a.
g. Face Value of 8% Securities at 31.3.02 was Rs. 15,000 which was purchased at that date for 10,000.
Additional Securities worth Rs.5,000 are purchased at par on 31 March 2003. You are required to prepare:
i.) An Income and Expenditure Account for the year ended 31 March 2003, and
ii.) A Balance Sheet at that date.
[Ans. Surplus Rs.590; Closing Balance Sheet TotalRs. 52,150]
Question 18. How are the Following items dealt in preparing Income and expenditure Account for the year ended 31st
March, 2018 and Balance Sheet as at that date?
As at 1st April, 2017(₹) As at 31st March, 2018(₹)

Sundry Expenses Outstanding 5,000 9,000
Sundry Expenses paid in Advance 8,000 7,000
Sundry Expenses paid during the year ended 31st March, 2018 ₹ 40,000
Question 19. From the following items of Receipts and Payments Account of the Young Club, prepare Income
st
and Expenditure Account for the year ended 31 March, 2018:
Salaries Paid 5,00,000

Electricity expense 50,000
Printing and Stationery (including 5,000 for the previous year) 35,000
Subscriptions received (including 20,000 received in advance
and 50,000, for the previous year) 4,00,000
Net proceeds of Refreshment Room 4,50,000
Miscellaneous expenses 1,60,000
Interest paid on Loan for half year 12,000
Rent and rates (including 10,000 prepaid) 75,000
Lockers rent received 45,000
Additional Information: Subscriptions in arrears on 31st March, 2018 were 80,000 and Half years interest on
loan was also outstanding.
Question 20. From the following Receipts and Payments Account of Accountant Club, prepare Income and Expenditure
st
Account for the ended 31 March, 2019.
139 CONCEPTONLINECLASSES.COM PH. NO. 0120-4225003/4/5, 9999631597

st
RECEIPTS AND PAYMENTS ACCOUNT for the year ended 31 March, 2019
Receipts ₹ Payments ₹
To Cash in Hand (Opening) 45,000 By Salaries 4,95,000
To Cash at Bank (Opening) 12,60,000 By Stationery 89,700
To Subscriptions 15,24,000 By Billiard Table 5,80,500
To Donations 7,20,000 By Investment 6,19,800
To Interest on Investments 18,000 By Miscellaneous Expenses 75,000
To Entrance Fees 1,80,000 By Furniture 12,30,000
To Interest Received from Bank 63,000 By Insurance Premium 27,000
To Sales of Old Newspapers 9,000 By Cash in Hand (Closing) 33,000
By Cash at Bank (Closing) 6,69,000
i. Subscription in arrears for the year ended 31st March, 2019 ₹1,35,000 and Subscriptions received in advance during the
year ended 31st March, 2019Rs 39,000.
ii. Insurance Premium prepaid is 3,000.
iii. The detail with respect to Stationery of Accountants Club is as follow:
31.3.19 1.4.2018
Stock of Stationery 30,000 5,000
Creditors for Stationery 40,000 26,000
Advance for Stationery paid in 2018-19 7,000 …
Advance paid for Stationery carried from 2017-18 5,000 …
Question 21. From the following Receipts and Payments Account of Friends Club for the year ended 31st March, 2019, prepare
Income and Expenditure Account for the year ended 31st March, 2019 and Balance Sheet as at that date:
RECEIPTS AND PAYMENTS ACCOUNT for the year ended 31st March, 2019
To Balance b/d (Cash in Hand) 1,41,300 By Rent and Taxes 86,100
To Entrance Fees 55,200 By Salaries 1,09,000
To Subscriptions 2,20,000 By Electricity Charges 6,200
To Donations 1,06,100 By General Expenses 12,500
To Interest 4,100 By Books 31,200
To Surplus from Cultural Programme 8,200 By Office Expenses 45,000
By Investments 1,40,000
By Balance c/d:
Cash at Bank 61,900
Cash in Hand 43,000
i. In the beginning of the year, the club had Book of ₹3,00,000 and Furniture of ₹ 58,000.
ii. Subscriptions in Arrears on 1st April, 2018 were ₹6000 and ₹7000 on31st March, 2019.
iii. ₹18,000 was due by way of Rent in the beginning as well as at the end of the year.
iv. Write off ₹5,000 from Furniture and ₹30,000 from Books.

Question 22. From the following Receipts and Payments Account of Defence Club and from the information supplied,
prepare Income and Expenditure Account for the year ended 31st, 2018 and Balance Sheet as at that date:
To Balance as at 1st April, 2017 3,50,000 By Salaries 14,00,000
To Subscriptions: By General Expenses 3,00,000
2016-17 2,50,000 By Electricity 2,00,000
2017-18 10,00,000 By Books 5,00,000
2018-19 2,00,000 14,50,000 By Newspaper 4,00,000
To Rent (From the use of Hall) 7,00,000 By Balance at 31st March, 2018 2,00,000
To Surplus From Entertainment 4,00,000
To Sale of Old Newspaper 1,00,000
i. The club has 50 members each paying annual subscription of ₹25,000. Subscription Outstanding on 31st March,
2017 were to the extent of ₹3,00,000.
ii. On 31.3.18, Salaries Outstanding amounted to ₹1,00,000. Salaries paid in 2017-18 included ₹3,00,000 for the
year 2016-17.
iii. On 1.4.17, the cub owned Building valued at ₹1,00,00,000, Furniture worth 10,00,000 and Books ₹10,00,000.
Question 23. Following is the Receipts and Payments Account of Indian Youth Association for the year ended 31st
March, 2019: RECEIPTS AND PAYMENTS ACCOUNT for the year ended 31st March, 2019
To Balance b/d: By Salaries 3,00,000
In Hand 25,000 By Rent 60,000
At Bank 2,45,000 2,70,000 By Printing and Stationery 15,000
To Subscriptions 4,00,000 By Postage 4,000
To Bank Interest 2,000 By Typewriter 40,000
To Sale of Old Car 40,000 By Investments 80,000
By Balance c/d:
In Hand 13,000
At Bank 2,00,000 2,13,000
Investments were made on 1st October, 2018 and yielded interest @ 5% p.a. Subscriptions included ₹80,000 for the
year ended 31st March, 2018 and 40,000 for the year ending 31st March, 2020. Subscriptions for the year ended 31st
March, 2019 80,000 were still in arrears. Rent for the March , 2019, 5,000 is still unpaid. 3,000 are payable against
a bill for stationery. The book value of the car was 55,000. Prepare Income and Expenditure Account for the year
ended 31st March, 2019 and Balance Sheet as at that date.

Question 24. The Treasure of Royal Tennis Club presented following Receipts and Payments Account for the year ended 31.3.19:
Receipts ₹ Payment ₹
To Balance b/d (Cash at Bank) 1,02,000 By Purchases of Balls 40,000
To Subscriptions 2,40,000 By Creditors for Tennis Equipment 2,20,000
To Sale of Tennis Equipment 3,05,000 By Making and repairing of tennis courts 38,000
To Court Hire 27,000 By Construction of new court 2,50,000
To Sale of Balls 37,000 By sundry expenses 31,000
By balance c/d 1,32,000
He also provides the following additional information:

i. The Club’s Tennis Courts were valued at 10,00,000 on 1st April, 2018.
ii.
Particulars 1.4.18 31.3.19
Tennis Balls in Hand (At cost) 4,000 9,000
Creditors for Tennis Equipment 40,000 30,000
Subscriptions Outstanding 20,000 35,000
Prepare Income and Expenditure Account for the year ended 31st March, 2019 and show Balance Sheet.
Question 25. Following is the Receipts and Payments Account of Era Charitable Trust:
To Balance b/d: By Rent 60,000
Cash in Hand 1,40,000 By Salary 1,20,000
Cash at Bank 6,00,000 7,40,000 By Postage 3,000
To Subscriptions: By Electricity Charges 60,000
2016-17 50,000 By Furniture 2,00,000
2017-18 8,30,000 By Books 30,000
2018-19 30,000 9,10,000 By Defence Bonds 15,00,000
To Sale of Investment 9,00,000 By Help to Needy Students 2,20,000
To Interest on Investment 20,000 By Balance c/d:
To Sale of Furniture (Book value 30,000) 32,000 Cash in Hand 1,09,000
Cash at Bank 3,00,000 4,09,000
Prepare Income and Expenditure Account for the year ended 31st March, 2018 and Balance Sheet as on
that date after the following adjustments:
st
A. Subscriptions for the year ended 31 March, 2018 still due were 70,000. Interest due on Defence
Bonds was 70,000. Rent outstanding was 10,000.
B. Book value of investment sold was 8,00,000, 3,00,000 of the investments were still in hand.
C. Subscriptions received in the year ended 31st March, 2018 included 4,000 from a life member.
D. Total furniture on 1st April, 2017 was worth 1,20,000. Salary paid for the year ended 31st March, 2019
is Rs 20,000

Question 26. Following is the Receipts and Payments Account of Mumbai Club for the year ended 31.3. 2018
st
RECEIPTS AND PAYMENTS ACCOUNT for the year ended 31 March, 2018
To Balance b/d 30,000 By Rent 5,20,000
To Entrance Fees 55,000 By Stationery Expenses 3,06,800
To Subscriptions: By Wages 5,33,000
2016-17 20,000 By Billiards Table 3,90,000
2017-18 16,90,000 By Repairs and Renewals 80,600
2018-19 30,000 17,40,000 By Interest 1,50,000
To Locker Rent 50,000 By Balance b/d 2,39,600
To Subscriptions for Governor’s Party 3,45,000
st
i. Stationery Expenses 31,200 related to the year ended 31 March, 2017, and outstanding for the year ended
31st march, 2018 was 36,400.
st
ii. Subscriptions unpaid for the year ended 31 March, 2018 Rs 86,000; Subscriptions for Governer’s Party
st
outstanding for the year ended 31 March, 2018 Rs 55,000. Governer’s party is to be held in April, 2018.
iii. The Club owned Sports Materials of the value 16,00,000 on 1st April, 2017. This was valued at 13,50,000 on 31st
March, 2018. Stock includes Sports Materials of 50,000, which is to be written off being not useable. The Club
took a loan of Rs 20,00,000 in the year ended 31st March, 2017.
Prepare Income and Expenditure Account for the year ended 31st March, 2018 and Balance Sheet as on that date.
Question 27. Following is the Receipts and Payments Account of the Indian Sports Club, prepare Income and Expenditure
Account and Balance Sheet as on 31st March, 2019:
To Balance b/d (Cash in Hand) 8,900 By Salary 1,10,000
To Balance b/d (Cash at Bank) 70,000 By Electricity Charges 55,000
To Subscriptions 5,20,000 By Billiard Table 1,75,000
To Life Membership Fee 22,000 By Office Expenses 41,000
To Entrance Fee 32,000 By Printing and Stationery 23,000
To Tournament Fund 2,60,000 By Tournament Expenses 1,85,000
To Locker Rent 12,500 By Repair of Ground 20,000
To Sale of Old Sports Equipments 25,000 By Furniture (Purchased) 77,000
(Costing 22,000) By Sports Equipments 1,20,000
To Sale of Old Newspapers 7,500 By Balance c/d:
To Legacy 3,75,000 Cash in Hand 1,26,900
Cash at Bank 1,00,000
10% Fixed Deposit (On 1st January, 3,00,000
2019)
Other information: Subscription outstanding was on 31st March, 2018 Rs 12,000 and 32,000 on 31st March, 2019. Locker
rent outstanding on 31st March, 2019 Rs 2,500. Salary outstanding on 31st March, 2019 Rs 10,000.
st
On 1 April, 2018, club has Building Rs 3,60,000 furniture 1,20,000, sports equipment 1,75,000. Depreciation charged on
these items @ 10% (including purchase)

Question 28. From the following Receipts and Payments Account, prepare final accounts of Roshanara Club for the
year ended 31st March, 2018: RECEIPTS AND PAYMENTS ACCOUNT for the year ended 31st March, 2018
To Balance b/d 1,50,000 By Furniture 1,80,000
To Sale of Old Furniture (Costing 40,000 By Library Books 1,00,000
60,000) By Salaries 7,20,000
To Subscriptions: By General Expenses 1,80,000
2016-17 1,80,000 By Electricity Charges 1,20,000
2017-18 6,00,000 9,00,000 By Newspapers 3,38,000
2018-19 1,20,000 1,08,000 By Postage 30,000
To Sale of Old Newspapers 4,40,000 By Stationery 4,00,000
To profit From Entertainment Event 8,40,000 By Audit Fee 80,000
To Rent By Balance c/d 3,30,000
i. The Club had 500 members each paying an annual subscription of ₹1,500.
ii. On 31.3.18, salaries outstanding amounted to 12,000 and salaries paid included 60,000 for the year 16-17.
iii. Provide 5% depreciation on Land and Building.
Question 29. Summary of Receipts and Payments of Medical Aid Society for the year 31st March, 2019 is given below:
To Balance b/d (Cash in Hand) 20,000 By Medicine 2,50,000
To Balance b/d (Cash at Bank) 50,000 By Medicines (Polio) 50,000
To Subscriptions 5,00,000 By Honorarium 1,00,000
To Donations (General) 45,000 By Salaries 2,75,000
To Donations (Medical Camps) 1,00,000 By Sundry Expenses 5,000
To Interest on Investments @ 7% p.a. 70,000 By Equipments 1,50,000
To Charity Show Proceeds 30,000 By Charity Show Expenses 10,000
To Government Grant (Polio 70,000 By Balance c/d (Cash in Hand) 15,000
Eradication) By Balance c/d (Cash at Bank) 30,000
1st April, 31st March, 1st April, 31st March,
2018(₹) 2019(₹) 2018(₹) 2019(₹)
Subscriptions Due 5,000 10,000 Amount Due to Medicine Suppliers 80,000 1,20,000
Subscriptions Received in 10,000 5,000 Equipment 2,10,000 3,00,000
Advance
Stock of Medicines 1,00,000 1,50,000 Building 4,00,000 3,80,000
st
Prepare Income and Expenditure Account for the year ended 31 March, 2019 and Balance Sheet as on that date.
Question 30. Subscriptions received during the year ended 31st March, 2017 are.
For the year ended 31st March, 2016 4,000
For the year ended 31st March, 2017 2,11,000
For the year ended 31st March, 2018 8,000 2,23,000
There are 450 members, each paying an annual subscription of Rs 500. Rs 4,500 were in arrears for the year
ended 31st March, 2016 in the beginning of the year ended 31st March, 2017. Calculate subscriptions to be
shown in Income and Expenditure Account for the year ended 31st March, 2017 and also show treatment of
subscriptions in the Income and Expenditure Account and Balance Sheet.

st
Hints: subscription in income and expenditure account Rs 2,25,000. Subscription outstanding as on 31
march 2017 Rs 14,500. Advance subscription on 31.3.2017 Rs 8,000.
Question 31. From the following extract of the Receipts and Payments Account and the additional information,
st
you are required to compute income from subscriptions for the year ended 31 March, 2018 and show it in the
Final Account of the club.
To Subscriptions:
2016-17 18,000
2017-18 1,00,000
2018-19 25,000
st
(i) Subscriptions outstanding as at 31 March, 2017: Rs 20,000.
st
(ii) Subscriptions outstanding as at 31 March, 2018: Rs 30,000.
st
(iii) Subscriptions received in advance as at 31 March, 2017: Rs 20,000
Question 32. From the following information, determine the amount to be debited to Stationery account
in Income and Expenditure Account for the year ended 31st March, 2019:
Stock of stationery on 1st April, 2018 30,000
Creditors for stationery on 1st April, 2018 20,000
Amount paid for stationery during the year ended 31st March, 2019 1,08,000
Stock of stationery on 31st March, 2019 5,000
Creditors for stationery on 31st March, 2019 13,000
Also, show the above items in the Income and Expenditure Account for the year ended 31st March,
2019 and in the Balance Sheet as at that date.
Question 33. From the following information, calculate the amount that will be shown against
Stationery Account in Income and Expenditure Account for the year ended 31st March, 2018:
1.4.2017 31.3.2018
Creditors for stationary 4,600 11,800
Stock of stationary 15,000 30,400
During the year ended 31.3.18, payment made to creditors amounted to 56,800.
Stationery purchased in cash during the year was 20% of the total purchase of stationery.
Question 34.From the information given below, prepare Receipts and Payments Account of Friends Club,
Delhi, for the year ended 31st March, 2018:
Cash on 1st April, 2017 Rs 44,000; Subscriptions Rs 3,76,000; Donations Rs 80,000; Entrance Fees Rs 43,000; Rent
Realised from Club Hall Rs 52,500; Electricity charge Rs 34,400;Taxes Rs 5,000; Salaries and wages Rs 2,15,000;
Honorarium to Secretary Rs 25,000; Interest Received on Investment Rs 29,500; Printing and Stationery Rs 3,500;
Petty Expenses Rs 9,000; Insurance premium paid Rs 3,100. Hints: closing cash balance 3,30,000

Question 35. From the following information, prepare Income and Expenditure Account:
Particulars Rs
(i)Fees collected, including Rs 80,000 for the previous year 3,80,000
(ii)Fees outstanding for the year 10,000
(iii)Salary paid, including Rs 3,000 for the previous year 28,000
(iv)Salary outstanding at the end of the year 1,000
(v)Entertainment Expenses 3,000
(vi)Tournament expenses 12,000
(vii)Meeting Expenses 18,000
(viii)travelling Expenses 6,000
(xi)Purchase of Books and Periodicals, including Rs 19,000 for Purchase of Books 29,000
(x)Rent 10,000
(xi)Postage and Telephones 15,000
(xii)Printing and Stationery 4,000
(xiii)Donations Received 20,000
Hints: surplus Rs 2,26,000

CHAPTER 9. ACCOUNTING FOR SHARE CAPITAL

IMPORTANT THEORY
 The word ‘company’ is derived from the Latin word ‘com’ i.e. with or together and ‘panis’ i.e.
bread.
 According to Justice Marshal “ A corporation is an artificial being invisible, intangible and existing
only in the contemplation of law”
 According to Prof. Hanay a company is “an artificial person created by law with a perpetual
succession and a common seal”
 Under the company act 2013, the term company is defined in section 2(20) as “ company means a
company incorporated under this act or any previous company law”.
SALIENT FEATURES/characteristics OF A COMPANY :-
1. Incorporated association— A company comes into operation after its registration under
Companies Act. Without such registration no company can come into existence.
2. Separate legal entity – A company has a separate legal entity and is not affected by changes in
its membership. Therefore, being a separate business entity, a company can contract, sue and be
sued in its incorporated name and capacity.
3. perpetual existence – Since company has existence independent of its members, it continues to
be in existence despite the death, insolvency or change of members.
4. common seal—Company is not a natural person, therefore, it can not sign the document in the
manner as a natural person would do. In order to enable the company to sign its documents it is
provided with legal tool called ‘common seal’.
5. Limited liability--- The liability of every shareholder of a company is limited to the amount he
has agreed to pay to the company on the shares allotted to him.
6. Distinction between ownership and management:-- Since the number of shareholders is very
large and may be distributed at different geographical locations, it becomes difficult for them to
carry on the operational management of the company on day to day basis. This gives rise to the
need of separation of the management and ownership.
7. Not a citizen—A company is not a citizen in the same sense as a natural person is.
8. Transferability of shares:- The capital is contributed by the shareholders through the
subscription of shares. Such shares are transferable by its members except in case of a private
limited company, which may have certain restrictions on such transferability.
9. Maintenance of books--- A limited company is required by law to keep a prescribed set of
account books and any failure in this regard attract penalty.
10. Periodic audit --- a company has to get its accounts periodically audited through the chartered
accountant appointed by the shareholders in their Annual General Meeting on the
recommendation of Board of Directors.
11. Right of access to information:-- The right of the shareholders of a company to inspect its
books of accounts is governed by article of association.
Difference between partnership and a Company (Joint stock company)
Basis Partnership Company (Joint Stock Company)
1.Mode Of Formation It is set up by agreement among the It is set up by registration under the Companies
partners. Registration is not Act, 2013 or under any previous Companies Acts.
compulsory under the Indian
Partnership Act, 1932.
2. Regulation Act The Indian Partnership Act, 1932 The companies Act, 2013 applies.
applies.

3. No. of members Minimum number is 2 and maximum In the case of public company, minimum number
50 ( As section 464 of the companies is 7 without any maximum limit. A private
(Miscellaneous) Rules, 2014) company must have at least 2 members but
more than 200 excluding its present or past
employee members. One Person company has
only one member.
4. Liability Liability of the partners is unlimited Liability of the members is limited to the amount
of shares held by them.
5. Distribution of Profits are distributed as per the terms It depends on the Articles of Association or the
Profits of the partnership Deed or equally if Directors as to what share of profits, i.e.,
there is no agreement. dividend will be distributed to the shareholders.
6. Audit Audit of books of account is not Audit of books of account is mandatory.

mandatory.
7. Management Business may be managed by all the Business is managed by the directors who are
partners or any of them acting for all. elected by the shareholders.
8. Transfer of shares A partner cannot transfer his share to Except in case of private company, normally
any other person without the consent transfer of shares is not restricted.
of other partners. A company can carry on only that business which
9. Business A partner can carry on any business, if is permitted by the objects Clause of the
all the partners agree. Memorandum of association.
10. Winding up A partnership may be wound up by an A company can be wound up only by carrying out
agreement or by an order of the court the process prescribe in the companies Act 2013.
in case the firm is unable to pay its
debts, the Insolvency Act will apply.
11. Stability It is affected by death, retirement or Shareholders death, insolvency or transfer of

insolvency of partners. shares do not affect the continuity of the
company.
TYPES OF COMPANIES
LIMITED LIABILITY COMPANY
(a) LIMITED BY SHARES:--According to Section 2(22) of The Companies Act, 2013 " A company in
which the liability of shareholders is restricted to the amount of unpaid calls on shares is known as
limited company.
(b) LIMITED BY GUARANTEE:--According to Section 2(21) of The Companies Act, 2013 " A
company in which the liability of shareholders is restricted to the amount of Guarantee given is called
limited by guarantee.
UNLIMITED LIABILITY COMPANY:- According to Section 2(92) of The Companies Act, 2013 A
company in which the liability of shareholders is not restricted only to the value unpaid of shares is
known as unlimited company
PUBLIC COMPANY :- According to Section 2(71) of the Act, 'public company' means a company which
(a) is not a private company; (b) has a minimum paid-up capital as may be prescribed; and (c) is a private
company which is a subsidiary of a company which is not a private company.

A public company must have at least 7 members. There is no restriction on maximum number of shares. A
public company should have at least 3 directors and not more than maximum 15 directors.
The name of public company ends with the words “limited.” Public companies invite the public at large to
participate and subscribe for the shares in, or debentures of, the company and there are no restrictions on
transfer of shares.
PRIVATE COMPANY:- According to Section 2(68), a private company means a company which has a
minimum paid-up capital as may be prescribed, and by its articles:
(a) Restricts the rights to transfer its shares.

(b) Except in one person company, limits the number of its member to 200 excluding its
present or past employees.
(c) Prohibits any invitation to the public to subscribe to any shares in, or debentures of,
the company.
Private company should have at least 2 directors but not more than 15 directors. The name of private
company ends with the words’ private limited’
One person company -- According to Section 2(62) of The Companies Act, 2013, a company which
has only one person as member is called one person company.Rule 3 of companies(incorporation) Rule
2014 further prescribes that:
(a) Only a natural person being an Indian citizen and resident in India can form one person
company(OPC)
(b) It can not be formed for charitable purposes.
(c) It can not carry out non-banking financial investment activities.
(d) Its paid up share capital is not more than Rs 50 lakhs.
(e) Its average annual turnover of three years should not exceed Rs 2 crores.
(f) It should have at least 1 director but not more than 15 directors.
Difference Among One Person Company, private company and public company
Basis One person company Private company Public company

1. Number of Members Minimum and maximum Minimum number of Minimum number of members is
number of member members is 2 and the 7 and there is no limit as to the
(share holders) is 1 (one) maximum 200 excluding its maximum numbers.
present or past employee
member, under the
Companies Act 2013.
2. Transfer of Shares Not Applicable Articles of Association Transfer of shares is usually

restricts the transfer of without any restriction.
shares
3.Prospectus
Not Applicable Prospectus need not be Prospectus must be issued to
issued invite public to subscribe for
shares if not a statement in lieu of
4. Subscription of Prospectus is filed with the

shares Shares cannot be offered Shares cannot be offered to Registrar of companies
to public public Shares can be offered to public.

5.Articles of Special Articles of Special Articles of Association Table F given in the companies Act
Association Association are necessary are necessary 2013 may be adopted
Alternatively it can have it can
have it Articles of association
having clauses different from
those different from those given
Table F of the companies Act 2013
which will override table F
6.Number of Directors It must have at least 1 It must have at least 2 It must have at least 3 Directors
Director but not more Directors but not more than but not more than 15
than 15 15
Shares can be allotted only if

7. Allotment of shares Not Applicable Shares may be allotted as the Minimum subscription has been
Directors decide received
8. Public Deposits It cannot invited and It cannot invited and accept It can invited and accept deposits
accept deposits from deposits from public from public
public
9.Name The word ‘OPC’ is used as The words ‘Private Limited’ The word Limited is used as part
part of the name are used as part of the name of the name.
INCORPORATION OF A COMPANY :The process for incorporating a company can be divided into 4 principal stages:
1. Promotion;
2. Incorporation or Registration of a Company;
3. Capital Subscription; and
4. Commencement of Business.
1. Promotion: It is the first stage of the company's incorporation. A person or a group of persons agree
to start business in the form of a company. These persons are called Promoters.
2. Incorporation or Registration of a Company:- A company is incorporated following the procedure
prescribed in the Companies Act, 2013. The promoters after getting the name of the proposed
company approved from the Registrar of Companies submit Memorandum of Association, Articles of
Association, consent of first directors to act as directors and a declaration that the requirements of
the Companies Act have been complied with.
The Registrar of Companies, thereafter, issues Certificate of Incorporation, if he is satisfied that the
requirements of the Companies Act, 2013 have been complied with. The Company, thereafter, comes into
existence.
3. Capital Subscription and Commencement of Business:-- A company cannot commence its business or
exercise borrowing powers unless:
(i) a declaration is filed by a director with the Registrar of Companies to the effect that every subscriber to the
Memorandum of Association has paid the value of the shares, if any, agreed to be taken by him.
(ii) the company has filed with the Registrar of Companies a verification of its registered office.
Prospectus:- A public company issues a document called 'Prospectus' in which terms and conditions of the
issue are stated along with the purpose for which the proceeds of the issue of securities shall be used.
“Prospectus” means any document described or issued as a prospectus and includes a red herring prospectus
or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for
the subscription or purchase of any securities of a body corporate. [Section 2(70) of the Companies Act, 2013]

Minimum Subscription [Section 39(1) of the Companies Act, 2013]and Provisions of SEBI (Securities and
Exchange Board of India)
Minimum subscription is the amount stated in the prospectus that must be subscribed and the amount
payable on application for the amount stated as minimum subscription have been paid to and received by the
company by cheque or other instrument.
SEBI (Securities and Exchange Board of India), the regulatory authority for listed companies prescribes that a
company must receive minimum subscription of 90 per cent of the shares issued for subscription before it
allots the shares.
Thus, in effect, unless 90% of the sum payable on application for shares issued to the public for subscription is
received by the company, shares cannot be allotted.
In case, minimum amount is not subscribed and the amount payable on application is not received within the
specified period, then the application money shall have to be refunded within fifteen days from the closure of
the issue.
Preliminary Expenses:- Preliminary Expenses are the expenses incurred for incorporating the company, such
as registration fee paid to the Registrar of Companies, legal expenses, public issue expenses, etc. These
expenses may be written off from Securities Premium Reserve (permitted by Section 52(2) of the Companies
Act, 2013) or from the Statement of Profit and Loss in the year they are incurred.
SHARE CAPITAL OF A COMPANY:- Share Capital means the amount that a company receives towards Share
Capital from issue of shares, both Equity Shares and Preference Shares.
The Capital of a company is divided into units of smaller denominations (say ₹ 5, ₹10, or ₹100) and each such
unit is called a Share. For example, in a company total capital of Rs 50,00,000 is divided into 5,00,000 units of
10 each, then each unit of 10 is called a share of 10 each. Thus, in the above case the company will be said to
have 5,00,000 shares of 10 each. 10 is known as the nominal (face) value of the share.
KINDS OR CLASSES OF SHARES:- Section 43 of the Companies Act, 2013 prescribes that Share Capital of a
company broadly can be of two types or classes:
1. Preference Shares; and
2. Equity Shares.
1. Preference Shares [Section 43(b) of the Companies Act, 2013]
Preference Shares are the shares which carry the following two preferential rights:
1. Preferential right to receive dividend, to be paid as fixed amount before it is paid to Equity
Shareholders, and
2. Return of capital on the winding up of the company before that of equity shares.
Classes of Preference Shares:- Preference Shares can be broadly classified as follows:
 With Reference to Dividend;
 With Reference to Participation in Surplus Profit;
 With Reference to Convertibility; and
 With Reference to Redemption
With Reference to Dividend-:Cumulative Preference Shares and Non-Cumulative Preference Shares.
Cumulative Preference Shares:- Cumulative Preference Shares are those Preference Shares which carry the
right to receive arrears of dividend before dividend is paid to the Equity Shareholders. For example, a company
has 10,000; 7% Preference Shares of 100 each and dividend for the years ended 31st March, 2017 and 2018
has not been paid. The company earns adequate profits for the year ended 31st March, 2019. In this case, the

company shall pay 2,10,000 as dividend for three years to the Preference Shareholders before dividend is paid
to the Equity Shareholders.
Non-Cumulative Preference Shares:- Non-Cumulative Preference Shares are those Preference Shares which do
not carry the right to receive arrears of dividend.
With Reference to Participation in Surplus Profit :- Participating Preference Shares and Non-Participating
Preference Shares.
Participating Preference Shares : The Articles of Association of a company may provide that after dividend has
been paid to the Equity Shareholders, the holders of Preference Shares will also have a right to participate in
the remaining profits. The Preference Shares carrying this right are called Participating Preference Shares.
Non-Participating Preference Shares: Preference Shares which do not carry the right to participate in the
profits remaining after Equity Shareholders have been paid dividend are Non-Participating Preference Shares.
With Reference to Convertibility : Convertible Preference Shares and Non-Convertible Preference Shares.
Convertible Preference Shares :- Convertible Preference Shares are those Preference Shares which carry a
right to be converted into Equity Shares.
Non-Convertible Preference Shares :- Non-Convertible Preference Shares are those Preference Shares which
do not carry a right to be converted into Equity Shares.
With Reference to Redemption: Redeemable Preference Shares and Irredeemable Preference Shares.
Redeemable Preference Shares:- Redeemable Preference Shares are those Preference Shares which are
redeemed by the company at the time specified (not exceeding 20 years from the date of issue) for their
repayment or earlier. The repayment of amount is termed as Redemption.
Irredeemable Preference Shares: Irredeemable Preference Shares are those Preference Shares the amount
of which can be returned by the company to the holders of such shares when the company is wound up. The
Companies Act, 2013 does not permit issue of Irredeemable Preference Shares.
2. Equity Shares [Section 43(1) of the Companies Act, 2013]
Equity Shares are those shares which are not Preference Shares. Equity Shares are the most
commonly issued class of shares and carry the maximum ‘risks and rewards' of the business the risks
being losing part or all of the value of shares if the business incurs losses; the rewards being payment
of higher dividends and appreciation in the market value.
Difference between Preference Shares and Equity Shares
Basis Preference Shares Equity Share
1. Right to Dividend Dividend is paid on Preference Shares before Dividend is paid on Equity Shares after it is
it is paid on Equity Shares. paid on Preference Shares.
2. Rate of Dividend Rate of Dividend may be fixed. Rate of dividend is proposed by the Board of
Directors every year.
3. Arrears of Dividend If Preference Shares are Cumulative Dividend is declared every year. In case,
Preference share, arrear of dividend is paid dividend is not declared during the year, it is
before dividend is paid on Equity Share not accumulated to be paid in the coming
years.
4. Convertibility Preference Shares may be converted to Equity Shares are not convertible.
Equity
5. Redemption Preference Shares are redeemed on the due A company may buy-back its Equity Share
date.
6. Voting Rights Preference shareholders have voting rights Equity Shareholders have voting rights in all
only in special circumstances. the circumstances.

7. Refund of Capital On winding up, the Preference Share Capital On winding up, Equity Share Capital is repaid
is repaid before the Equity Share Capital is after the Preference Share Capital is paid.
paid.
8. Right to Participate Preference shareholders do not have a right Equity shareholders have a right to participate
in Management to Participate in the management of the in the management of the company.
company
Classification of Share Capital (from Accounting Point of View):-Balance Sheet of a company is

prepared in the form prescribed in Part I of Schedule III of the Companies Act, 2013. It requires a Company to
show
(i) Authorised Capital;

(ii) Issued Capital; and
(iii) Subscribed Capital for each class of Share Capital.
(i) Authorised or Nominal Capital:- 'Authorised Capital' or 'Nominal Capital' means such capital as is
authorized by the Memorandum of a company to be the maximum amount of share capital of a company.
(Section 2(8) of the Companies Act, 2013) ‘Authorised Capital or ‘Nominal Capital' is stated in the
Memorandum of Association and is the maximum amount that a company can raise as share capital.
(ii) Issued Capital:- 'Issued Capital means such capital as the company issues from time to time for
subscription. (Section 2(50) of the Companies Act, 2013). It should be kept in mind that Issued Capital cannot
exceed the company's Authorised Share Capital.
(iii) Subscribed Capital:- 'Subscribed Capital' means such part of the capital which is for the time being
subscribed by the members of a company. (Section 2(86) of the Companies Act, 2013)
Subscribed Capital is a part of Issued Capital which the company has issued for cash or for consideration other
than cash. Subscribed Capital is classified or shown under the following two heads:
(a) Subscribed and fully paid-up; and be
(b) Subscribed but not fully paid-up.
(a) Subscribed and fully paid-up
Shares are classified as 'Subscribed and fully paid-up' when:
(i) the company has called-up the total nominal (face) value of the share, and
(ii) has also received it.
(b) Subscribed but not fully paid-up
Shares are classified as 'Subscribed but not fully paid-up' when:
(i) the company has called-up the total nominal (face) value of the share but has not received it, or
(ii) the company has not called-up the total nominal (face) value of the share.
Calls-in-Arrears:- Calls-in-Arrears means the amount not received by the company, i.e., not paid by
shareholder(s) against the amount called towards share capital
Calls-in-Advance:- company, if its Articles of Association permits, may receive amount against calls yet
be made. The amount so received is called Calls-in-Advance. It is classified, i.e., shown in the Balance Sheet as
'Other Current Liabilities' under the main head 'Current Liabilities'.
Reserve Capital:-Reserve Capital is a part of Subscribed Capital remaining uncalled that a company resolves,by
a Special Resolution, not to call except in the event of winding up of the company.Where a company has
passed a resolution for Reserve Capital,these shares are shown as Subscribed but not fully Paid-up'.
The Companies Act, 2013 (Section 65) provides that if an Unlimited Liability Company having share capital
converts itself to a Limited Liability Company, it must have Reserve Capital.

Important note: Reserve Capital and Capital Reserve are two different terms.
Reserve Capital is part of Share Capital that a company resolves not to call except in the event of it being
wound up. Capital Reserve is a reserve, which is created out of capital profits and is not free for distribution as
dividend.
Difference between Reserve Capital and Capital Reserve
Basis Reserve Capital Capital Reserve
1. Meaning It is that part of the uncalled capital which It is that part of the reserves which is not free
cannot be called-up except in the event of for distribution as dividend
winding up.
2. Creation It is an uncalled capital. It is created out of capital profits.

3.Optional/Mandatory It is not mandatory to have reserve capital. It is appropriate to transfer capital profits
to capital reserve.
4. Special Resolution Special resolution is required for reserve Special resolution is not required for capital
capital. reserve.
5. Time when it can It can be called at the time of winding up. It can be used during the life of the company.
Be used
6. Writing off Capital It cannot be used to write off capital losses. It can be used to write off capital losses.
Losses
7. Disclosure It is not shown in the company's Balance It is shown in the Note to Accounts on
Sheet. Shareholders' Funds under head 'Reserves
and Surplus'.
Difference between Authorised or Nominal Capital and Issued Capital

Basis Authorised or Nominal Capital Issued Capital
1. Meaning It is the amount stated in the Memorandum It is that part of Authorised Share Capital
of Association which a company can raise as which is issued for subscription.
share capital of the company.
2. Disclosure in The amount is stated in Memorandum of It is not stated in the Memorandum
Memorandum of Association. Association
Association
3. Whether one can It is equal to or more than the Issued Share It is equal to or less than the Authorized
exceed the other Capital. Capital.
Important points:-( study only after finishing all video classes)
1. According to Section 39(2) of the Companies Act, 2013, minimum application money should be 5% of the nominal
(face) value of the share or such other percentage or amount as may be prescribed by Securities and Exchange
Board of India (SEBI). SEBI prescribes that application money should not be less than 25% of the issue price.
2. Application and Calls when Shares are Issued to Public for Subscription:-- When shares are issued to public for
subscription, it is important to follow the following:
1. Calls are made as provided in the Articles of Association of the company.
2. If the company does not have its own Articles of Association or the Articles of Association does not have a clause
to this effect, Table F of the Companies Act, 2013 will apply.

Table F has the following provisions:

(i) Period of one month must elapse between two calls.
(ii) The amount of one call should not be less than 25% of the face value of the share.
(iii) Notice of 14 days period should be given to the shareholders to pay the amount.
Calls should be made on uniform basis on all shares within the same class.
2. Terms of Issue of Shares :- A company may issue shares:

1. At Par, (i.e., at the nominal or face value), or
2. At Premium (i.e., above the nominal or face value).
Section 53 of the Companies Act, 2013 does not allow issue of shares at discount. However, Section 54 allows
issue of shares at a discount, when they are issued as Sweat Equity Shares.
3. Securities Premium Account Vs. Securities Premium Reserve Account

Section 52(1) of the Companies Act, 2013 requires that the amount of premium received on securities to
be credited to 'Securities Premium Account'. Schedule III (Form of Balance Sheet) of the Companies Act,
2013 has given the head 'Securities Premium Reserve'. A student may use either of the two terms while
passing the Journal entry.
4. Utilisation of Securities Premium Reserve:-- Section 52(2) of the Companies Act, 2013 restricts
the use of the amounts received as premium on securities for the following purposes:
(i) Issuing fully paid bonus shares to the members;
(ii) Writing off preliminary expenses of the company;
(iii) Writing off the expenses of, or the commission paid or discount allowed on any issue of
securities or debentures of the company;
(iv) Providing for the premium payable on the redemption of any redeemable Preference Shares
or of any debentures of the company;
(iv) In purchasing its own shares (buy-back).
5. OVERSUBSCRIPTION OF SHARES:- Shares are said to be oversubscribed when the number of shares
applied for is more than the number of shares offered for subscription. In the case of
oversubscription, shares can be allotted by the company by any of the following three alternatives:
i. First Alternative :- Some applications are accepted in full and excess applications are rejected and
their application money is refunded. This is known as Rejection of Applications. For example, against
the issue of 60,000 shares, applications received are for 70,000 shares. Applications for shares in
excess of 60,000 shares, i.e., 10,000 shares are not accepted and their application money is refunded.
ii. Second Alternative :- All applicants are allotted shares in proportion. This is called Partial or Pro rata
Allotment For example, considering the above example, shares are allotted to all the applicants in the
ratio of 6 shares for every 7 shares applied.
iii. Third Alternative:- A combination of the above two alternatives may be adopted. Some applications
are accepted in full, some applications are rejected and proportionate allotment is made to the
remaining.
7. Treatment of Surplus Application Money on Pro rata Allotment
 If the question is silent or states that 'excess application money received is to be adjusted
against allotment', surplus application money is adjusted against allotment money due and
excess application money is refunded.
 If the question requires that surplus application money is to be refunded after adjustment
Allotment Money and Call Money, then the amount is transferred to Shares Allotment
Account and Calls-in-Advance Account. The balance, if still left, is refunded.

8. UNDERSUBSCRIPTION OF SHARES: Share are said to be undersubscribed if the number of shares

applied are less than the number med for subscription.
Minimum Subscription: According to SEBI Guidelines, if a company does not receive minimum
subscription, i.e., it se subscription for at least 90% of the shares issued, it cannot allot the shares. As a
result, it will have to refund the application money to the subscribers.
9. Difference between Oversubscription and Undersubscription of Shares
Basis Oversubscription of Shares Undersubscription of Shares
1. Shares Applied Number of shares applied is more than Number of shares applied is less than the
the shares offered for subscription. shares offered for subscription
2. Acceptance All applications are not accepted. Some all the applications are accepted,
are all the applications for shares are
i.e., full allotment is made.
accepted, rejected. Alternatively,
shares are allotted on pro rata basis.
3. Refund Excess application money is refunded As all the application are accepted, there is
or As there is adjusted towards no excess money to be refunded.
allotment and calls.
4. Minimum A company does not face such a A company may face the problem of
Subscription problem. ‘Minimum Subscription'.
10. Preferential Allotment: Preferential Allotment means allotment of shares at a predetermined price to
the pre-identified people who are interested in taking a strategic stake in the company such as
promoters, venture capitalists, financial institutions, buyers of company's products or its suppliers.
The company is required to pass special resolution in the meeting of shareholders before proceeding
with preferential allotment.
11. Concept of Private Placement of Shares: According to Section 42 of the Companies Act, 2013, Private
placement means any offer of securities or invitation to subscribe securities to a selected group of
persons by a company (other than by way of public offer) through issue of private placement offer
letter and which satisfies the conditions specified in this section. In a layman's language, securities
offered to the selective group of persons by issuing private placement offer is known as the Private
placement of shares. The conditions are:
(i) Offer of securities or invitation to subscribe securities shall be made in a financial year to persons not
exceeding 50 in number or such higher number as may be prescribed. The maximum number of
persons to whom offer of Private Placement can be made is prescribed as 200.
(ii) Fresh offer or invitation shall not be made unless the allotments with respect to any offer or
invitation made earlier have been completed or that offer or invitation has been withdrawn or
abandoned by the company.
(iii) The amount of subscription should not be less than 20,000.
(iv) All monies payable towards subscription of securities shall be paid through cheque or bank draft or
any other banking instrument but not by cash.
(v) The company shall allot its securities within 60 days from the date of receipt of application money. If
the company is unable to allot securities within 60 days, it shall refund the application money within
15 days from the day of completion of 60 days. And if the company is unable to refund the
application money within 15 days from the day of completion of 60 days, it shall pay interest @ 12%
p.a. from the expiry of sixtieth day.
(vi) Money received on application shall be kept in a separate Bank Account and shall be utilised: (a) for
adjustment against allotment of securities; or (b) for the repayment of money against which the
company is unable to allot securities.
(vii) Offers shall be made only to such persons whose names are recorded by the company prior to the
invitation to subscribe.

(viii) Complete information of the offer shall be filed with the Registrar of Companies within 30 days of
the circulation of offer for private placement.
(ix) The company shall not issue any public advertisement or use any media Marketing or distribution
channels or agents to inform the public large about the offer. The monies receivable by the company
may be received in lump sum or instalments.
12. Concept of Employees Stock Option Plan (ESOP)

Employees Stock Option Plan (ESOP) means option granted by the company to its employee, and employee
directors to subscribe the shares at a price that is lower than the market price, i.e., fair value. It is an option or
a right granted by the company but it is not an obligation or the employee to subscribe it. The employees may
or may not exercise the option. Employees Stock Option Plan is a category of Sweat Equity. Sweat Equity is a
wider term than ESOP and includes issue of shares to promoters as remuneration for incorporating the
company , for their other services.
A company may issue stock (shares) options fulfilling the following conditions:
(a) these shares are of the same class of shares already issued;
(b) it is authorised by a special resolution passed by the company;
(c) the resolution specifies the number of shares, the current market price, consideration, ii any, and the class
or classes of directors or employees to whom such equity shares are to be issued;
(d) not less than one year has, at the date of issue, elapsed since the date on which the company had
commenced business; and
(e) these shares are issued in accordance with SEBI regulations, if the shares are listed.
CONCEPT BASED QUESTIONS
Question1. X ltd issued 20,000 shares of Rs 10 each payable as follow:
On application Rs 2
On allotment Rs 3
On first call Rs 4
On final call Rs 1
Public applied for 20,000 shares ( Mr A for 12,000 shares and Mr B for 8,000 shares). Money dues on
various calls were received except Mr A who failed to pay both calls money. Thereafter his shares were
forfeited. These shares were reissued at Rs 7 as fully paid up. Make entries.
Question 2. COC ltd issued 25,000 shares of Rs 10 each payable as follow:
On application Rs 2
On allotment Rs 4
On first call Rs 3
On final call Rs 1
Public applied for 30,000 shares (Mr A for 18,000 and Mr B for 12,000 shares) and allotment was made
pro-rata to both applicants. Money dues on various calls were received except Mr A who failed to pay
both calls money. His shares were forfeited and reissued at Rs 9 as fully paid up. Make entries.
Question 3. Tata ltd. issued 40,000 shares of Rs 10 each payable as follow:
On application Rs 2
On allotment Rs 3
On first call Rs 2
On final call Rs 3
Public applied for 50,000 shares and allotment was made to all applicants on pro-rata basis. Money dues
on various calls were received except Mr Ramesh to whom 2000 shares were allotted failed to pay
allotment and first call money. Subsequently his shares were forfeited. Thereafter final call was made and

Mr Rajan to whom 1000 shares were allotted failed to pay final call money. His shares were also forfeited.
All these forfeited shares were reissued at Rs 8 as fully paid up. Make journal entries.
Question 4. Hudco ltd. issued 25,000 shares of Rs 10 each at a premium of Rs 2 per share payable as follows:
On application Rs 2
On allotment Rs 5 (including premium)
On first call Rs 4
On final call Rs 1
Public applied for 32,000 shares and allotment was made to applicants for 30,000shares on pro rata
basis. Remaining applications were rejected.
Money dues on various calls were received except Mr karan to whom 2400 shares were allotted failed to
pay allotment and first call money. Subsequently his shares were forfeited. Thereafter final call was made
and Mr B to whom 1200 shares were allotted failed to pay final calls money. His shares were also
forfeited. These shares were re-issued at Rs 8 as fully paid up. Make entries.
Question 5. Maruti ltd issued 40,000 shares of Rs 10 each at a premium of 20% payable as follow:
Application Rs 3 (including premium Re 1)
Allotment Rs 4 ( including premium Re 1)
First call Rs 3
Final call Rs 2
Public applied for 50,000 shares and allotment was made on pro-rata basis to all applicants. Mr Raju
to whom 4,000 shares were allotted failed to pay allotment and first call money. Subsequently his shares
were forfeited. Mr Kaju to whom 6,000 shares were allotted failed to pay both calls money. His shares
were also forfeited after the final call. Out of forfeited shares 7,000 shares were re-issued at Rs 8 as fully
paid. It includes all the shares of Mr Kaju. Make journal entries.
QUESTION 6. Umesh Ltd. issued 2,00,000 equity shares of Rs. 10 each at a premium of Re. 1 per share (to be
adjusted on allotment) payable as follows (i) Rs.2 on application; (ii) Rs. 3 on allotment and (iii) Rs. 4 on first
call. Subscription list was closed on 1 January 2004 by which date applications for 4,50,000 shares had been
received. Allotment was made as under :
List A : Applicants for 50,000 shares were allotted in full.
List B : Applicants for 1,00,000 shares were allotted 50,000 shares on pro-rata basis
List C : Applicants for 3,00,000 shares were allotted 1,00,000 shares on pro-rata basis. Excess application
money was adjusted towards allotment and calls authorised by articles of association.
All the shareholders paid the amounts due on allotment and call except Aashima who was allotted 4,000
shares under List B and Swati who was allotted 2,000 shares under List C. These shares were duly forfeited. Of
these, 5,000 shares (including 4,000 shares of Aashima) were reissued @ Rs. 7 per share. Journalize the
transactions including the cash and show the balance sheet with relevant information only.
QUESTION 7. (Issue of shares to vendors and promoters) Doaba limited company has an authorised capital
of Rs. 2,50,000 divided into 25,000 shares of Rs. 10 each. Of these 4,000 shares were issued to the vendors as
fully paid for purchase of building 8,000 shares were subscribed for by the public and during the first year, Rs.
2 per share were paid on application, Rs. 2 per share on allotment and Re. 1 per share on call. 2,000 shares
were issued as fully paid to promoters. Of the 8,000 shares subscribed for by the public, these had been paid
at the end of the first year as under:
On 6,000 shares the full amount called up.

On 750 shares Rs. 4 per share (application and allotment money)
On 1,250 shares Rs. 2 share (application money only)
Company forfeited those shares on which less than 4 have been received.
You are required to submit journal and cash book recording the share capital transactions of the company.

st
Question 8. On 1 April, 2015, X Ltd. issued 30,000 Equity Shares of 10 each at a premium of Rs 4 per share,
payable as follows:
Rs 6 on application (including Re1 premium),

Rs 2 on allotment (including Re 1 premium),
Rs 3 on first call (including Re 1 premium), and
Rs 3 on second and final call (including Re 1 premium).
Applications were received for 45,000 shares, of which applications for 9,000 shares were rejected and their
money was refunded. Rest of the applicants were issued shares on pro rata basis and their excess money was
adjusted towards allotment. Hari, to whom 600 shares were allotted, failed to pay the allotment money and
his shares were forfeited after allotment. Mohan, who applied for 1,080 shares failed to pay the two calls and
on his such failure, his shares were forfeited. 1,200 forfeited shares were reissued as fully paid-up on receipt
of 9 per share, the whole of Mohan's shares being included. Prepare Cash Book and pass necessary Journal entries.
QUESTION9. (Share application and allotment account) Parul Construction Ltd. made an issue of 30,000
shares of Rs. 10 each payable Rs. 3 on application, Rs. 5 on allotment and Rs. 2 on call. 93,200 shares were
applied for and owing to this heavy over-subscription, allotments were made as follows:
(i) Applicants for 21,500 shares (in respect of applications for 2,000 or more) received 10,200 shares,
(ii) Applicants for 50,600 shares (in respect of applications for 1,000 or more but less than 2,000) received
12,600 shares, (iii) Applicants for 21,100 shares (in respect of applications for less than, 1,000) received 7,200
shares. Cash then received after satisfying amount due on applications was applied towards allotment and call
money and any balance then was returned. All moneys due on allotment and call were realized.
Give journal entries including that of cash and write up the cash account and ledger accounts relating to this
issue of shares in the books of company.
QUESTION 10 (Issue of securities at premium) Kavita Garments Ltd. with an authorised capital of Rs.
30,00,000 invited applications for 20,000 shares of Rs. 100 each payable Rs. 30 on application, Rs. 40 on
allotment (including premium) and Rs. 40 on final call. The issue was oversubscribed and applications were
received for 36,000 shares. The basis of allotment was as follows:
(i) To applicants for 15,000 shares 15,000 shares
(ii) To applicants for 2,500 shares Nil
(iii) To applicants for 18,500 share 5,000 shares
Excess application money was adjusted against the sums due on allotment and call in compliance with the
provisions of the Companies Act 2013. All the moneys were duly received except the final call on 1,050 shares
from the applicants belonging to full allotment category. Underwriting commission, amounted to Rs. 30,000.
Give journal entries to record above transactions and show the company's balance sheet with relevant
information only.
Solution: Kavita Garments Ltd. Journal Entries
Date Particulars Debit Credit

Rs. Rs.
(i) Bank Account Dr. 10,80,000
To Share Application Account 10,80,000
(Application moneys received on 36,000
shares @ Rs. 30 each)
(ii) Share Application Account Dr. 10,80,000
To Equity Share Capital Account 6,00,000

To Share Allotment Account 2,00,000

To Calls-in-Advance Account 2,00,000
To Bank Account 80,000
(Share application money transferred to equity share capital account,
share allotment account, calls-in-advance account and the balance amount
refunded)
(iii) Share Allotment Account Dr.
To Securities Premium Account
(Allotment money due on 20,000 shares @ Rs. 40 6,00,000
each including premium @ Rs. 10 per share) 2,00,000
(iv) Bank Account Dr.
(Allotment moneys received on all the 20,000 shares) 6,00,000
(v) Share First and Final Call Account Dr. 8,00,000

(First and final call due on 20,000 shares @ Rs. 40 per share)
(vi) Bank Account Dr. 5,58,000
Calls-in-Advance Account Dr. 2,00,000
To Share First and Final Call Account 7,58,000
(vii) (First and finalCommission
Underwriting call received on 18,950 shares) Dr.
To Bank Account 30,000
(Payment of underwriting commission) 30,000
QUESTION 11. (Profit on reissue transferred to capital reserve) Nivedita Limited issued 1,00,000 shares of Rs.
10, each payable as under :
On Application : Rs. 1
On Allotment Rs. 2
On First Call : Rs. 3
On Final Call : Rs. 4
All moneys payable on application, allotment and calls has been received with the following exceptions: Patel
who holds 1,000 shares has not paid the money due on allotment and calls. Asha who holds 500 shares has
not paid the money due on the first and final calls. Kumar who holds 300 shares has not paid the due on the
final call. The shares of Patel, Asha and Kumar were, therefore, forfeited. These shares were subsequently
reissued for cash at a discount of 5 per cent Pass journal entries recording the above transactions from the
stage of receipt of application money till the reissue of forfeited shares.
Solution:
Rs. Rs.
(i) Bank Account Dr. 1,00,000
To Share Application Account 1,00,000
Receipt of application money on 1,00,000 shares @ Re. 1 per share)
(ii) Share Application Account Dr. 1,00,000

Share Allotment Account Dr. 2,00,000
(Application money @ Re. 1 received and allotment money @ Rs. 2 due on
1,00,000 shares transferred to share capital account as per resolution
no....dated...)
(iii) Bank Account Dr. 1,98,000
(Allotment money @ Rs. 2 received on 99,000 shares)

(iv) Share First Call Account Dr.

(First call money @ Rs. 3 due on 1,00,000 shares vide resolution no....dated,.) 3,00,000
Bank account Dr. 2,95,500

(v) To share first call account 2,95,500
(First call money received on 98,500 shares @ Rs. 3 per share)
Share second and Final call A/c Dr. 4,00,000
4,00,000
(vi) To equity share capital account 4,00,000
4,00,000
(Second cal due on 1,00,000 shares @ Rs. 4 per share vide resolution 3,92,800
no…dated)
Bank Account Dr. 3,92,800
(vii) To share second and final Call account 18,000 3,92,800
(Final call money @ Rs. 4 per share received on 98,200 shares)
18,000
Share capital account (1,800 x Rs. 10) Dr.
(viii) 4,300
To share forfeited Account
(1,000 + x Re. 1) + (500 x Rs. 3) + (300 Rs. 6)
2,000
To share allotment account ( 1,000 x Rs. 2)
4,500
To share first call account ( 1,500 x Rs. 3)
7,200
To share second and final call Account ( 1,800 x Rs. 4)
( forfeited of shares for non-payment of instalments)
Bank account ( 1,800 x Rs. 9.50 ) Dr.
(ix) 17,100
Share forfeited Account ( 1,800 x Re. 0.50) Dr.
900
To equity share capital account
18,000
(Reissue of forfeited shares at Rs. 9.50 per share)
(x) Share forfeited Account Dr. 3,400

To capital Reserve Account 3,400
( transfer of the credit balance in the share forfeited account to the capital
reserve account, being the profit on reissue)
QUESTION12. Malik Limited has a subscribed capital of 2,000 equity shares of Rs. 25 each, Rs. 20 per share
called up. The directors forfeited 200 equity shares held by a shareholder who had failed to pay the first call
made @Rs. 10 per share. Later the directors reissued these forfeited shares at Rs. 20per share paid up at Rs.
15 per share. Pass the journal entries for forfeiture and reissue of shares.
Solution:
Date Particulars Debit Credit
(i) Rs. Rs.
Equity Share Capital Account Dr. 4,000
To Share Forfeited Account 2,000
To Calls-in-Arrears Account 2,000
(Forfeiture of 200 equity shares, Rs. 20 per share called up for non-
payment of first call @ Rs*.10 per share)
(ii) Bank Account Dr. 3,000
Share Forfeited Account Dr. 1,000
To Equity Share Capital Account 4,000
(Reissue of 200 equity shares as
Rs. 20 per share paid up @ Rs. 15 per share)
(iii) Share Forfeited Account Dr.
1,000
To Capital Reserve Account
1,000
(Transfer of balance of share forfeited account to capital reserve account)

QUESTION13. Give journal entries to record the forfeiture of shares and their reissue:
1. The directors of A Ltd. forfeited 500 shares of Rs. 50 each, Rs. 40 being called up, on which Radha,
a shareholder paid application and allotment moneys of Rs. 25 per share but did not pay first call
money of Rs. 15 per share. Of these forfeited shares, the company subsequently reissued 350
shares as fully paid up for Rs. 40 per share.
2. B Ltd. forfeited 100 shares of Rs. 50 each, Rs. 35 per share called up on which Rs. 25 per share has
been paid by Rakesh; the amount of first call of Rs. 10 per share being unpaid. The directors
reissued the forfeited shares to Baldeo crediting Rs. 35 per share paid for a payment of Rs. 25 per
share.
3. The directors of D Ltd. forfeited 100 shares of Rs. 100 each called up for nonpayment of final call
money of Rs. 50 per share. Half of these shares were subsequently reissued at Rs. 120 per share
as fully paid.
4. E Ltd. forfeited 200 shares of Rs. 100 each (issued at a premium of 10%) for non-payment of first
call of Rs. 25 and final call of Rs. 15. Of these 150 shares were reissued for Rs. 90 per share.
QUESTION14 (Forfeiture after first call) Bhavna Ltd. offered 10,000 equity shares of Rs. 100 each for
subscription at a premium of Rs. 20 per share payable as follows:
On Application Rs. 10
On Allotment Rs. 40 (including premium)
On First Call Rs. 20
On Second Call Rs. 30
and balance on Final Call.
The company received applications for 12,000 shares and 10,000 shares were allotted pro-rata.
Holders of 400 shares failed to pay the first call and after due notice, their shares were forfeited. The amounts
payable on second call were paid in full except that a holder of 200 shares failed to pay. His shares were also
forfeited after second call.
250 of the 400 shares forfeited were reissued, credited Rs. 80 paid for Rs. 50 per share. There after final call
was made and full money received. Journalize the transactions including cash transactions in the books of the
company.
Question 15 The Kerala Coir Mills Ltd., with a registered capital of 5,00,000 Equity Shares of 10 each, issued
2,00,000 Equity Shares, payable 3 on application, 2 on allotment, 3 on first call and Rs 2 on second and final
call. The amount due on allotment was duly received. On the first call being made, one shareholder holding
6,000 Equity Shares paid second and final call along with the first call while five shareholders with a total
holding of 10,000 Equity Shares failed to pay the first call on their Equity Shares. Company did not demand the
final call. Pass Journal entries to record the transactions and draw up the company's Balance Sheet.
Question 16 . The directors of Mamta Ltd. invited applications for 2,00,000 equity shares of Rs. 10 each to be
issued at 20 per cent premium. The amount payable per share is as under :
On Application : Rs. 5
On Allotment : Rs. 4 (including premium of Rs. 2)
On First Call : Rs. 2
On Final Call : the balance.
Applications were received for 2,40,000 shares and allotment was made as follows :
(a) To applicants for 1,00,000 shares - in full.

(b) To applicants for 80,000 shares - 60,000 shares
(c) To applicants for 60,000 shares - 40,000 shares
Applicants for 1,000 shares falling in category (a) and applicants for 1,200 shares railing in category (b) failed
to pay allotment money. These shares were forfeited on failure to pay first call.

Holders of 1,200 shares falling in category (c) failed to pay first call and final call and these shares were
forfeited after final call.
1300 shares [1,000 of category (a) and 300 of category (b)] were reissued at Rs. 8 per share as fully paid.
Journalize the above transactions. Show Cash Book and prepare Balance Sheet.
Question 17. A & B Ltd. offered to public on 1st April, 2017; 1,00,000 Equity Shares and 50,000 Preference
Shares of 10 each payable as under:
Equity Shares 1 (₹) Preference Shares(₹)

On application 3 3
On allotment (1st May) 3 4
On first and final call (1st September) 4 3
Subscription was received for 1,20,000 Equity Shares and 45,000 Preference Shares. Application for
Preference Shares were accepted in full. Out of applications for Equity Shares, application for 10,000
shares were rejected; applications for 85,000 shares accepted in full and 15,000 share were allotted to
the remaining applicants.
All amounts were received except the amount due on call on 1,000 Equity Share 500 Preference Shares.
Pass entries in the Cash Book and Journal.
Question 18. Hospitality Ltd. invited applications for 1,00,000 equity shares of 50 each payable as under :
On Application ₹ 10 per share;

On Allotment ₹ 15 per share;
On First Call (due two months after allotment) ₹ 15 per share;
On Second and Final Call (due two months after First Call) ₹10 per share.
Applications were received for 4,00,000 shares on 1st January,2018 and allotment was made on 1st February, 2018.
Pass Journal entries for issue of shares under each of the following circumstances:
(a) Allotted 1,00,000 shares in full to selected applicants and the applications for the remaining 3,00,000
shares were rejected.
(b) Pro rata allotment of 25 per cent of the shares applied to every applicant; to apply the balance of
application money towards amount due on allotment; and to refund the balance amount.
(c) Reject applications for 2,00,000 shares, accept full applications for 80,000 shares and make a pro rata
allotment of 20,000 shares to remaining applicants. Excess application money to be adjusted towards
allotment and calls.
Solution : In the Books of Hospitality Ltd.
Date Particulars L.F. Dr. (₹) Cr. (₹)
2018
Jan 1 Bank A/C ...Dr. 40,00,000
To Equity Shares Application A/c 40,00,000
(Being the application money received for 4,00,000 shares @ 10 per
Feb. 1 share)
Equity Shares Application A/c ...Dr. 40,00,000
To Equity Share Capital A/C 10,00,000
To Bank A/C 30,00,000
(Being the application money on 1,00,000 shares transferred to Equity
Share Capital Account and amount refunded on rejected applications)
Equity Shares Allotment A/c …Dr. 15,00,000

(Being the allotment money due on 1,00,000 shares @ 15 per share)
Bank A/C ...Dr.

To Equity Shares Allotment A/c 15,00,000

(Being the allotment money received) 15,00,000
Equity Shares First Call A/C …Dr.
(Being the first call money due on 1,00,000 shares @ 15 per share) 15,00,000
Bank A/C ...Dr. 15,00,000

To Equity Shares First Call A/c 15,00,000
(Being the First call money received)
Equity Shares Second and Final Call A/c 10,00,000
(Being the second and final call money due on 1,00,000 shares @₹10
per share)
Bank A/C 10,00,000
To Equity Shares Second and Final Call A/C 10,00,000
(Being the second and final call money received)

2018 Bank A/C 40,00,000
Jan 1 To Equity Shares Application A/c 40,00,000
(Being the application money received for 4,00,000 shares
@ 10 per share)
Feb 1
Equity Shares Application A/c ...Dr. 40,00,000
To Equity Share Capital A/C (1,00,000 x 10) 10,00,000
To Equity Shares Allotment A/c (1,00,000 x 15) 15,00,000
To Bank A/C (40,00,000 - 25,00,000) 15,00,000
(Being the application and allotment money adjusted and surplus
refunded)
Feb. 1
Equity Shares Allotment A/c ...Dr. 15,00,000
Note: The entries regarding the two calls would be the same as given in (a).
(C) JOURNAL
2018 Bank A/C 40,00,000
Jan 1 To Equity Shares Application A/c 40,00,000
(Being the application money received on 4,00,000 shares
@ ₹ 10 per share)
Feb 1 Equity Shares Application A/c ...Dr. 40,00,000
To Equity Share Capital A/C(1,00,000 x 710) 10,00,000
To Equity Shares Allotment A/c (20,000 x 15) 3,00,000
To Calls-in-Advance A/c (20,000 x 25) 5,00,000
To Bank A/c (WN) 22,00,000
(Being the application money adjusted and surplus refunded)
Feb. 1 Equity Shares Allotment A/c 15,00,000
To Equity Share Capital A/c 15,00,000
Bank A/c ...Dr. 12,00,000
(Being the Allotment money received)
Equity Shares First Call A/C 15,00,000

April 1 To Equity Share Capital A/C 15,00,000

(Being the first call money due on 1,00,000 shares @ 15 per share)
Bank A/c ...Dr. 12,00,000
Calls-in-Advance A/C …Dr. 3,00,000
To Equity Shares First Call A/C 15,00,000
(Being the Calls-in-Advance adjusted and the balance money received)
Equity Share Second and Final Call A/C ...Dr. 10,00,000
June. 1 (Being the final call money due on 1,00,000 shares @ 10 per share)
Bank A/c ...Dr. 8,00,000
Calls-in-Advance A/C ...Dr 2,00,000
To Equity Shares Second and Final Call A/c 10,00,000
(Being the Calls-in-Advance adjusted and the balance money received)
Working Note: Excess application money as a result of pro rata allotment is adequate to meet the allotment
money and the two calls. Besides, it leaves amount to be refunded along with that on the rejected
applications.
Excess Application Money
[(4,00,000 * 10 = 40,00,000) – (1,00,000 ×10) = ₹ 10,00,000)] 30,00,000
Less: Transfer on Share Allotment (20,000 x 15) 3,00,000
Transfer on calls (20,000 x 25) 5,00,000 8,00,000
Total Amount Refunded 22,00,000
Question 19. To provide employment to the youth and to develop Baramula district of Jammu and Kashmir
COC Power Ltd. decided to set up a power plant. For raising funds the company decided to issue 8,50,000
equity shares of 10 each at a premium of 3 per share. The whole amount payable on application. Applications
for 20,00,000 shares were received. Applications for 3,00,000 shares were rejected and shares were allotted to
the remaining applicants on pro rata basis. Pass necessary Journal entries for the above transactions in the
books of the company a identify any two values which the company wants to propagate. (OD 2016)
Solution: In the Books of COC Power Ltd

Bank A/c 2,60,00,000
To Equity Shares Application and Allotment A/c 2,60,00,000
(Being the application and allotment money received on 20,00,000
equity shares of 10 each @ 13 per share)
2,60,00,000
Equity Shares Application and Allotment A/C
To Equity Share Capital A/c (8,50,000 x 10) 85,00,000
To Securities Premium Reserve A/c (8,50,000 x 30) 25,50,00
To Bank A/c (11,50,000 x 13) 1,49,50,000
(Being the shares application and allotment money adjusted for

8,50,000 equity shares and the balance refunded)
Two Values which the company wants to propagate: 1. Providing employment opportunities to the youth in
backward areas. 2. Promoting peace and harmony in the society.

Question 20 Master Ltd. issued 40,000 shares of 10 each payable as 2 per share on application, ₹4 per share
on allotment and the balance in two equal instalments. Applications were received for 80,000 shares and the
allotment was made as follows:
(a) Applicants of 50,000 shares were allotted 30,000 shares.

(b) Applicants of 30,000 shares were allotted 10,000 shares.
Neeraj, to whom 600 shares were allotted from Category (a), failed to pay the allotment money. Pass
necessary Journal entries up to allotment only. (Delhi, AI 2009)
Solution: In the Books of Master Ltd.
Bank A/C 1,60,000
To Shares Application A/C
1,60,000
(Being the application money received on 80,000 shares)
Shares Application A/C
1,60,000
To Share Capital A/
To Shares Allotment A/c (Being the application money adjusted) 80,000
Shares Allotment A/C 80,000

1,60,000
To Share Capital A/C
(Being the allotment money due on 40,000 shares @ 4 per share) 1,60,000
Bank A/C 78,400
To Shares Allotment A/C
78,400
(Being the allotment money received except on 600 shares) (WN 2)
Working Notes: 1. Amount due but not paid by Neeraj on Allotment:

a. Number of shares applied by Neeraj = 50,000/30,000 x 600 = 1,000.
b. Application money received from Neeraj = 1,000 x 2 = * 2,000.
c. Application money required as per shares allotted to Neeraj = 600 x 2 = 1,200.
d. Surplus application money ( 2,000 - 1,200) to be adjusted on allotment = * 800.
e. Allotment money due from Neeraj = 600 x 4 = 2,400.
f. Allotment Amount not paid by Neeraj = * 2,400 - 800 = 1,600
. 2. Net Amount Received on Allotment: ₹
Total amount due to allotment 1,60,000
Less: Excess application money adjusted 80,000
80,000
Less: Allotment Money not paid by Neeraj (WN 1) 1,600
Amount Received on Allotment 78,400
Question 21. A company invited applications for 50,000 Equity Shares of 10 each payable as follows: On
application Rs 3; on allotment Rs 3; on first and final call Rs 4. Applications were received for 1,10,000 shares.
It was decided

i. to refuse allotment to the applicants for 10,000 shares,

ii. to allot 50% to Mr. X who has applied for 20,000 shares,
iii. to allot in full to Mr. Y who has applied for 10,000 shares,
iv. to allot balance of the available shares on pro rata basis among the other applicants, and
v. to utilise excess application money in part payment of allotment and final call.
Pass Journal entries till the stage of allotment assuming that the total amount due on allotment is received.
Solution: JOURNAL
Bank A/C ...Dr. 3,30,000
To Equity Shares Application A/c 3,30,000
(Being the receipt of application money @ 3 per share on 1,10,000 shares)
Equity Shares Application A/C ...Dr. 3,30,000
To Calls-in-Advance A/c 30,000
To Bank A/C 30,000
(Being the application money transferred to Equity Share Capital and
excess application money transferred to Equity Shares Allotment Account
and Calls-in-Advance Account, balance refunded)
Equity Shares Allotment A/c ... Dr. 1,50,000
(Being the allotment money due on 50,000 equity shares @ *3 per share)
30,000
Bank A/c ...Dr.
30,000
To Equity Shares Allotment A/c
(Being the receipt of allotment money @ 3 per share on 10,000 equity
shares of Mr. Y who was allotted in full)
Question 22. Jaya Ltd. issued 60,000 shares of 10 each at a premium of Rs 2 per share payable as Rs 3
application, Rs 5 (including premium) on allotment and the balance on first and final call. Applications
were received for 82,000 shares. The Directors resolved to allot as follows:
(a) Applicants of 30,000 shares 20,000 shares,
(b) Applicants of 50,000 shares 40,000 shares,

(C) Applicants of 2,000 shares Nil.
Ramesh, who had applied for 900 shares in Category (a) and Suresh, who was alloted 600 shares in
Category (b) failed to pay the allotment money. Calculate amount received allotment (Delhi 2009)
Solution: Calculation of Amount Received on Allotment:
Amount due on allotment (60,000 × ₹5) 3,00,000
Less: Excess application money adjusted towards allotment:
₹30,000 *Category (a)+ + ₹30,000 *Category (b)] 60,000
2,40,000
2,100
Less: Amount unpaid by Ramesh (WN 1) 2,37,900
Less: Amount unpaid by Suresh (WN 2) 2,500
Amount Received on Allotment 2,35,350

Working Notes 1. Category (a) :

Shares applied = 30,000, Shares allotted = 20,000
Excess application money received = 10,000 x 3 = 30,000
Shares allotted to Ramesh = 20,000/30,000 x 900 = 600 shares
Therefore, shares applied = 900, Shares allotted = 600
Excess application money received adjusted towards allotment = 300 x 3 = 900
Amount due on allotment = 600 x 5= 3,000
Amount unpaid = 3,000 - 900 = 2,100.
2. Category (b):
Shares applied = 50,000, Shares allotted = 40,000
Excess application money received = 10,000 x 3 = * 30,000
Suresh applied for shares = 50,000/40,000 x 600 = 750 shares
Therefore, shares applied = 750, Shares allotted = 600
Excess application money received adjusted towards allotment = 150 x 3 = ₹ 450
Amount due on allotment = 600 x 5= 3,000 Amount unpaid = 3,000 - 450 = ₹ 2,550.
Question 23. XYZ Ltd. Invited applications for 40,000 Equity Shares of 10 each. The amount was payable
on application 3 per share; on allotment 4 per share and on first and final call ₹ 3 per share. Applications
were received for 37,500 shares and allotment was made to all. Ashok to Whom 1,000 shares were
allotted failed to pay the allotment money and also first and final call. Sohan who had applied for 500
shares failed to pay the first and final call. Pass Journal entries to record the above transactions.
Solution : In the Books of XYZ Ltd

Bank A/c …Dr. 1,12,500
To Equity Share Application A/c 1,12,500
(Being the application money received on 37,500 Equity Shares @ per share )
Equity Share Application A/c

(Being the application money on 37,500 Equity Shares transferred to 1,12,500
Equity Share Capital Account)
Equity Share Allotment …Dr.
To Equity Shares capital A/C 1,50,000
(Being the allotment money due on 37,500 Equity Share @ ₹ 4 per share) 1,50,000
Bank A/c 1,46,000

Calls in arrear 4000
To Equity Share Allotment A/c (WN 1) 1,50,000
(Being the allotment money received )
Equity Share First and Final Call A/c …Dr. 1,12,500
(Being final call money due on 37,500 Equity Share @ 3 per share )
Bank A/c
Calls in arrear 1,08,000
To Equity Share First and Final Call A/c …Dr. 4500
1,12,500

Working Notes: ₹
1. Amount due on allotment 1,50,000
Less: Allotment money not paid by Ashok (1,000 x4) 4,000
Amount received on allotment 1,46,000
2. Amount due on first and final call 1,12,500
Less: First call money not paid by Ashok and Sohan on 1,500 shares
(1,000 + 500) @ ₹ 3 per share 4,500
Amount received on first and final call 1,08,000
Question 24. The authorised capital of Suhas Ltd. is 50,00,000 divided into 25,000 shares of ₹ 200 each. Out of
these, the company issued 12,000 shares of Rs 200 each at a premium of 10%. The amount share was payable
as follows:
₹60 on application,
₹60 on allotment (including premium),
₹30 on first call, and balance on final call.
Public applied for 11,000 shares. All the money was duly received. Prepare an extract of Balance Sheet of
Suhas Ltd. as per Schedule III, Part I of the Company Act, 2013 showing share capital.(Al 2013, Modified)
Solution : BALANCE SHEET OF SUHAS LTD. (An Extract) as at ...
Particulars Note No. ₹
I. EQUITY AND LIABILITIES

Shareholders' Funds
Share Capital 1 22,00,000
Note to Accounts
Particulars ₹
1. Share Capital
Authorised Capital
25,000 Equity Shares of 200 each 50,00,000
Issued Capital
Subscribed Capital
Subscribed and fully paid-up
Question 25 . X Ltd. issued 50,000 Equity Shares of Rs 10 each at a premium of Rs 2 per share payable as
follows: Rs 3 on application, Rs 4 on allotment (including premium), Rs 2 on first call and Rs 3 on final call.
Applications were received for 65,000 Equity Shares. Applications for 40,000 Equity Shares were accepted in
full; 10,000 Equity Shares were allotted to applicants of 20,000 Equity Shares and applications for 5,000 Equity
Shares were rejected. The amounts due were duly received except the first call on 1,000 Equity Shares and
final call on 1,500 Equity Shares. Pass entries in the Cash Book and Journal of the Company. Also, show Share
Capital in the Balance Sheet. Hints: application money received Rs 1,95,000, allotment received Rs 1,70,000,
first call Rs 98,000 final call received Rs 1,45,500
Question 26. On 1st January, 2018, A Ltd. issued 10,000 Equity Shares of 10 each payable as: on application Rs
3, on allotment 3, on first and final call 4 (three months after allotment). Applications were received for 13,000
shares and Directors made allotment in full to the applicants demanding five or more shares and returned
money to the applicants for 3,000 shares. One shareholder, who was allotted 200 shares, paid first and final
call with allotment money and another shareholder did not pay allotment money on his 300 shares and paid it

with first and final call. Journalise the transactions in the books of A Ltd. including cash transactions. The
company maintains Calls-in-Arrears Account.
Question 27. X Ltd. purchased the business of Ram Bros. for 1,80,000 payable in fully paid Equity Share of 10
each. What entries will be passed in the books of X Ltd. if the issue is: (i) at par an (ii) at a premium of 20%?
Question 28. Rajan Ltd. purchased a running business from Vikas Ltd. for a sum of 2,50,000 payable as
2,20,000 in fully paid equity shares of 10 each and balance by a bank draft. The assets and liabilities consisted
of the following: Plant and Machinery 90,000; Building 90,000; Sundry Debtors 30,000; Stock 50,000; Cash
20,000; Sundry Creditors 20,000. Journalize the above transactions. (Delhi 2004)
Question 29. X Ltd. issued 2,500 shares of 10 each credited as fully paid to the promoters for the services
rendered to incorporate the company and also issued 2,000 shares of 10 each credited as fully paid to the
underwriters for their underwriting services. Journalise these transactions.
Question 30. Pass necessary journal entries for the following transactions in the books of Copal Ltd.:
(i) Purchased furniture for Rs 2,50,000 from M/S. Furniture Mart. The payment to M/S. Furniture mart
was made by issuing equity shares of 10 each at a premium of 25%.
(ii) Purchased a running business from Aman Ltd. for a sum or of Rs 15,00,000. The payment of
12,00,000 was made by issue of fully paid equity shares of 10 each and balance by a bank draft. The
assets and liabilities consisted of the following : Plant Rs 3,50,000 stock Rs 4,50,000: Land and
Building Rs 6,00,000: Sundry Creditors 1,00,000.
Question 31. K Ltd. took over the assets of 15,00,000 and liabilities of 5,00,000 of P Ltd. for a purchase
consideration of 13,68,500. 25,500 were paid by issuing a promissory note in favour of P Ltd. payable after two
months and the balance was paid by issue of equity shares of Rs 100 each at a premium of 25%. Pass necessary
Journal entries for the above transactions in the books of K Ltd.
Question 32. Samprag Ltd. has an authorised capital of Rs 20,00,000 divided into equity shares of 10 each. The
company invited applications for issuing 60,000 shares. Applications for 58,000 shares were received. All calls were
made and were duly received except the final call of 3 per share on 2,000 shares. These shares were forfeited.
(a) Present the share capital in the Balance Sheet as per Schedule III of the Companies Act, 2013.
(b) Also prepare 'Note to Accounts' for the same.
Question 33. On 1st April, 2012, Vishwas Ltd. was formed with an authorised capital of 10,00,000 divided into
1,00,000 equity shares of 10 each. The company issued prospectus inviting application for 90,000 equity shares. The
company received applications for 85,000 equity shares. During the first year, 8 per share were called. Ram holding
1,000 shares and Sham holding 2,000 shares did not pay the first call of 2 per share. Shyam's shares were forfeited
after the first call and later on 1,500 of the forfeited shares were reissued at 6 per share, 8 called-up. Show the
following: (a) Share capital in the Balance Sheet of the company as per Schedule Ill, Part 1 of the Companies Act,
2013. Also prepare 'Note to Accounts' for the same. (OD 2014, Modified)
Question 34. Sargam Ltd. invited applications for issuing 80,000 equity shares of 100 each at a premium of Rs
20, The amount was payable as follows:
On Application-Rs 20 per share;
On Allotment- Rs 60 (including premium) per share;
On First and Final Call-Rs 40 per share.

Applications for 1,20,000 shares were received. Allotment was made on pro rata basis to all applicants. Excess
money received on applications was adjusted on sums due on allotment. Sitaram, who had applied for 6,000
shares, failed to pay the allotment money and Harnam did not pay first and final call on 800 shares allotted to
him. The shares of Sitaram and Harnam were forfeited. 4,200 of these shares were reissued for 100 per share
as fully paid-up. reissued shares included all the forfeited shares of Harnam. Pass necessary Journal entries for
the above transactions in the books of Sargam Ltd. (delhi 2016 C)
Hints: application money received Rs 24,00,000, allotment received Rs 38,00,000, first call Rs 30,08,000.
Amount forfeited Rs 1,68,000. Amount transfer to capital reserve Rs 1,50,000
Question 35. XL Ltd. invited applications for issuing 1.00,000 equity shares of 10 each at par. The amount was
payable as follows:
On Application— Rs3 per share;
On Allotment—Rs 4 per share; and
On First and Final Call—Rs 3 per share.
The issue was oversubscribed by three times. Applications for 20% shares were rejected and the money
refunded. Allotment was made to the remaining applicants as follows:
Category No. of Shares Applied No. of Shares Allotted
I 1,60,000 80,000
II 80,000 20,000
Excess money received with applications was adjusted towards sums due on allotment and first and final call. All
calls were made and were duly received except the final call by a shareholder belonging to Category I who has
applied for 320 shares. His shares were forfeited. The forfeited shares were reissued at 15 per share fully paid-up.
Pass necessary Journal entries for the above transactions in the book of XL Ltd. Open Calls-in-Arrears and Calls-
in-Advance Account whenever required.
Question 36. Nay Lakshmi Ltd. forfeited 500 shares of Rs 10 each for non-payment of first call of Rs 3 per
share. The final call of 2 per share is yet to be made. All the forfeited shares were reissued. Pass the necessary
Journal entries in the following cases:
Case 1: If the shares are reissued for Rs 5 per share.

Case II: If the shares are reissued for Rs 9 per share, Rs 8 called-up.
Case III: If the shares are reissued for Rs 8 per share; fully paid-up.
Case IV: if the shares are reissued for Rs 12 per share; fully called-up.
Hints: amount forfeited Rs 2500, case 1- capital reserve Rs 1000, case 2- capital reserve Rs 2500, case 3-
capital reserve Rs 1500, case 4- capital reserve Rs 2500
Question 37. AXN Ltd. invited applications for issuing 1,00,000 equity shares of 10 each at a premium of Rs 6
per share. The amount was payable as follows:
On Application — Rs 4 per share (Including Rs 2 premium);

On Allotment - Rs 5 per share (Including Rs 2 premium);
On First Call - Rs 4 per share (Including Rs 2 premium); and
On Second and Final Call—Balance Amount.

The issue was fully subscribed. Kumar, the holder of 400 shares, did not pay the allotment money and Ravi, the
holder of 1,000 shares, paid his entire share money along with allotment money. Kumar's shares were
forfeited immediately after allotment. Afterwards first call was made. Gupta a holder of 300 shares, failed to
pay the first call money and Gopal, a holder of 600 shares, paid the second call money also along with first call.
Gupta's shares were forfeited immediately after the first call. Second and final call was made afterwards. The
whole amount due on second call was received. All the forfeited shares were reissued at Rs 9 per share fully
paid-up. Pass necessary Journal entries for the above transactions in the books of the company.
Hints: application money received Rs 4,00,000, allotment received Rs 505,000, calls in arrear on allotment Rs
2000, calls in advance Rs 7000, amount forfeited on 400 shares Rs 800. Amount received on first call Rs
3,95,000. Amount forfeited on 300 shares Rs 1500. Amount received on final call Rs 2,93,100. Amount trf to
capital reserve Rs 1600
Question 38. Alok Ltd. forfeited 300 Equity Shares of Rs 10 each, fully called-up held by Ram for non-payment
of allotment money of Rs3 per equity, share arid first and final call money of Rs 4 per equity share. Out of
these, 250 shares were reissued to shyam for a total payment of Rs 2,000. Pass Journal entries for forfeiture
and reissue.
Hints: forfeited amount Rs 900, transfer to capital reserve Rs 250
Question 39. XYZ Ltd. forfeited 500 Equity Shares of 100 each issued at 10% premium on which allotment
money of Rs 30 per equity share (including premium) and first call of Rs 30 per share were not received, the
second and final call of Rs 20 per equity share was not yet called. Pass Journal entries regarding forfeiture and
reissue of shares in each of the following cases:
Case 1. If 200 of these shares were reissued as Rs 80 paid-up for Rs 90 per share.
Case 4. If 200 of these shares were reissued as Rs80 paid-up for Rs 50 per share.
Case 5. If 200 of these shares were reissued at Rs 170 per share as fully paid-up.
Hints: amount forfeited Rs 15,000, Case 1- capital reserve Rs 6000, case 2- capital reserve Rs 6000, case 3-
capital reserve Rs 4000, case 4- capital reserve Rs NIL, Case 5- capital reserve nil.
Question 40. X Ltd. issued 40,000 Equity Shares of 10 each at a premium of 2.50 per share. The amount was
payable as follows:
On application — Rs 2 per share,

On allotment — Rs 4.50 per share (including premium), and
On call — Rs 6 per share.
Owing to heavy subscription the allotment was made on pro rata basis as follows:
(i) Applicants for 20,000 shares were allotted 10,000 shares.

(ii) Applicants for 56,000 shares were allotted 14,000 shares.
(iii) Applicants for 48,000 shares were allotted 16,000 shares.
It was decided that excess amount received on applications would be utilised on allotment and the surplus
would be refunded. Ram, to whom 1,000 shares were allotted, who belongs to category (i), failed to pay
allotment money. His shares were forfeited after the call. Pass necessary Journal entries in the books of X Ltd.
for the above transactions.

Question 41. SK Ltd invited applications for issuing 3,20,000 equity shares of Rs 10 each at a premium of Rs 5
per share. The amount was payable as follows:
On application —Rs 3 per share (including premium Rs 1 per share),
On allotment -Rs 5 per share (including premium Rs 2 per share),
On First and Final Call—Balance.
Applications for 4,00,000 shares were received. Applications for 40,000 shares were rejected and application
money refunded. Shares were allotted on pro rata basis to the remaining applicants. Excess money received
with applications was adjusted towards sums due on allotment. Jeevan holding 800 shares failed to pay the
allotment money and his shares were immediately forfeited. Afterwards, final call was made. Ganesh who had
applied for 2,700 shares failed to pay the final call. His shares were also forfeited. Out of the forfeited shares,
1,500 shares were reissued at Rs 8 per share fully paid-up. The reissued shares included all the forfeited
shares of Jeevan. Pass necessary Journal entries for the above transactions in the books of the company.
Hints: application money received Rs 12,00,000, allotment received Rs 14,76,300, calls in arrear on allotment
Rs 3700, amount forfeited on 800 shares Rs 1900. Amount received on first call Rs 22,17,600.calls in arrear
on first call Rs 16,800. Amount forfeited on 2400 shares Rs 12,000. Amount transfer to capital reserve 2400
Question 42. A company issued 1,00,000 Equity Shares of Rs 10 each on the following terms: 3 payable on
application, 4 on allotment, the balance as and when required. Applications were received for 1,40,000 Equity
Shares. Allotment was made as under:
80,000 applications were given 80,000 Equity Shares,
50,000 applications were given 20,000 Equity Shares, and
10,000 applications were not allotted any share.
A shareholder who applied for 1,000 Equity Shares and was given 1,000 shares failed to pay the allotment
money. His shares were forfeited. Pass Journal entries to record the above transactions.

CHAPTER 10. ISSUE OF DEBENTURES

MEANING OF DEBENTURE: Debenture is a written instrument or document issued by the company
acknowledging a debt. It contains terms of repayment of principal and also payment of interest at a rate
specified at the time of its issue.
"Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt,
whether constituting a charge on the assets of the company or not." (section 2(30) of companies Act 2013.
A Debenture called Debenture Certificate is an acknowledgement of debt by the company. It is an agreement

between the company and the debenture holders for repayment of principal amount on the specified date and
payment of interest at the specified rate until the principal amount is repaid. The persons to whom debentures
are issued are called 'Debenture holders' and are lenders to the company.
Characteristics or Features of a Debenture
1. Debenture is a written document or certificate acknowledging debt by the company.
2. Mode and period of repayment of principal and interest is fixed.
3. Rate of interest on the debenture is specified. It is a practice to prefix 'Debentures' with the rate of interest.
For example, if the rate of interest is 9%, the title of the debentures will be '9% Debentures'
4. It is considered as an external equity or long-term borrowings of the company.
5. It is normally secured by way of charge on the assets of the company.
6. Interest on Debentures is a charge against profit.
Bond:- Bond, like debenture, is an acknowledgement of debt issued by the company and signed by an
authorized signatory. The expression 'Bond' has become synonymous with the debt instrument where the rate
of interest is not predetermined. Examples of bonds are Deep Discount Bond and Zero CouponBond.
Difference between Debenture and Share

Basis Debenture Share
1.Ownership Debenture means debt taken by the company. Share means capital. Hence, a shareholder is
Therefore, a debenture holder is a lender. the owner.
2.Return Debenture holder gets interest at the stated rate whether A shareholder gets dividend on investment.
the company earns profit or not.
3.Repayment Debentures are issued for a specified period. Hence, the Normally, the amount of share is not repaid
amount of debentures is repaid on the due date. during the lifetime of the company.
However, preference shares have a specified
life and are redeemed on due date.
4.Issue at Debentures can be issued at discount. Shares cannot be issued at discount except
Discount sweat Equity shares.
5.Security Debentures may or may not be secured by a charge on Shares are not secured.
the assets of the company.
6.Convertibility Debentures can be converted into shares. Shares cannot be converted into any other
kind of security.
7.Voting Right Debenture holders do not have voting right. Shareholders (Equity) have a right to attend
and vote in the general meetings.
8.Risk Debenture holders are relatively safe. Secured Shareholders are at a greater risk. They can
debentures are almost risk free. even lose the amount invested in shares.

9.Priority as to Payment of debentures is made before the payment of Payment of share capital is made after
repayment of share capital. repayment of debentures.
principal during
winding-up
Difference between Shareholder and Debenture holder

Basis Shareholder Debenture holder
1.Status Shareholder is the owner of the company. Debenture holder is the lender of the company.
2.Return A shareholder gets dividend. A debenture holder gets interest at the specified
rate whether the company earns profit or not.
3.Control A shareholder has a right of control over the working A debenture holder has no such right to control.
of the company by attending and voting in the
General Meeting.
4.Risk Shareholders are at a greater risk. They can even lose Debenture holders are relatively safe. Secured
the amount invested in shares. debenture holders have almost no risk.
TYPES OF DEBENTURES :- A company may issue different kinds of debentures which can be classified as under:
1. From Security Point of View
(i) Secured Debentures: Secured Debentures are those debentures which are secured by either a fixed charge
or a floating charge on the assets of the company. A charge on the assets of the company is registered with the
Registrar of Companies.
(ii) Unsecured Debentures: Unsecured Debentures are those debentures which are not secured by any
charge on assets of the company.
Charge:- The expression 'charge' means securing the loan by mortgaging specific assets towards the loan. It
means, if the company fails to meet its obligation, the lender can secure his payment from the assets
mortgaged or in case of winding-up of the company from the official liquidator. A charge may be either fixed
or floating.
A charge created on definite assets of a permanent nature, such as land, building, machinery, etc., is known as
Fixed Charge.
A charge is a Floating Charge when no specific asset but all assets (except those charged by way of fixed
charge) is charged as security. A Floating Charge holder has a preference over an unsecured creditor for
settling his claims, in the event of winding-up of the company.
2. From Redemption Point of View
(i) Redeemable Debentures: Redeemable Debentures are those debentures that are repayable by the
company at the end of a specified period or by installments during the existence of the company.
(ii) Irredeemable Debentures: Irredeemable Debentures are those debentures that are not repayable
during the lifetime of the company and hence are repaid only when the company is liquidated.
3. From Records Point of View
(i) Registered Debentures: Registered Debentures are the debentures that are registered in the company's
records in the name of the holder. Principal and interest of such debentures is payable to the registered
debenture holders. The transfer of debentures in this case requires the execution of a transfer deed.

(ii) Bearer Debentures: Bearer debentures are the debentures that are not registered in the record of the
company in the name of the holder. These debentures are transferable by mere delivery. Interest is paid to the
person who produces coupons attached to the debenture.
4. From Priority Point of View
(i) First Debentures: The debentures which have to be repaid before the other debentures known as first
debentures.
(ii) Second Debentures: The debentures, which will be repaid after the first debentures are redeemed, are
known as second debentures.
5. From the Point of View of Coupon Rate
(i) Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest, called the
coupon rate. For example, 10% Debentures. The specified rate may either be fixed or floating. The floating
interest rate is usually linked with the bank rate.
(ii) Zero Coupon Rate Debentures (Bonds): These debentures do not carry a specific rate of interest. In order
to compensate the investors such debentures are issued at a substantial discount. The difference between the
face value and the issue price is the total amount of interest related to the duration of debentures.
6. From Convertibility Point of View
(i) Convertible Debentures: Convertible Debentures are the debentures that are convertible into shares. lf a
part of the debenture amount is convertible into Equity Shares, they are known as Partly Convertible
Debentures. If full amount of debentures is convertible into Equity Shares, they are known as Fully Convertible
Debentures.
(ii) Non-convertible Debentures: Non-convertible Debentures are the debentures that are not convertible into
shares.
Debentures Trust Deed :- Company issuing debentures to public is required to appoint trustees and execute a
Trust Deed. The trustees are duty bound to protect the interest of the debenture holdersthrough the powers
granted by the Trust Deed.
ISSUE OF DEBENTURES :- The company issues prospectus inviting public to subscribe debentures of the
company. The company can also make private placement of debentures following the prescribed procedure.
The company may call the amount for debentures to be paid in lump sum or in installments. If debentures are
issued, amount being payable whether in lump sum or in installments procedure followed is same as is in the
case of shares.
Minimum Subscription:-- According to Section 39(1) of the Companies Act, 2013, a company cannot allot
securities unless minimum subscription stated in the prospectus is received. Thus, the Act does not specify the
minimum subscription but has to be decided by the company. However, SEBI has prescribed that 75% of the
issue should be subscribed before a company allots debentures. Debentures may be issued:
(i) For Cash;

(ii) For consideration other than Cash;
(iii) As Collateral Security.
Debentures, whether issued for cash or for consideration other than cash, may be issued:
(i) At par;
(ii) At premium; or
(iii) At discount.

Issue of Debentures for Cash:-- Debentures issued for cash may be issued at par, atpremium or at discount.
(i) Issue of Debentures at Par: Debentures are said to have been issued at par when the issue price of a
debenture is equal to its nominal (face) value. For example, if a debenture of Rs 100 is issued for Rs 100, it will
be known as Issue of Debentures at Par.
st
Question 1. Y Ltd. issued 20,000; 9% Debentures of Rs 100 each at par payable on application by 1 April,
2021. Applications were received for 20,000 debentures. Debentures were allotted on 5th April, 2021. Pass
necessary Journal entries in the books of the company.
Question 2. A Company issued 4,000; 10% Debentures of Rs 100 each, payable Rs 20 on application and
balance amount on allotment. The debentures are redeemable after 5 years. Applications were received for
the issued debentures and allotment was made to all the applicants. The amount was received on due dates.
Pass the Journal entries and prepare the Balance Sheet.
(ii) Issue of Debentures at Premium:-- Debentures are said to have been issued at premium when the issue
price of a debenture is more than the nominal (face) value of a debenture. For example, a debenture of Rs 100
is issued for Rs 110, Rs 10 is premium. Premium on Issue of Debentures is a capital receipt and is credited to
Securities Premium Reserve Account.
Note 1:-. If the question does not specify when the premium is called to be paid, it is assumed to have been
called along with the allotment money.
Note2. Utilization of Securities Premium:-- The amount of Securities Premium Reserve Account is utilized for
the purposes specified in Section 52(2) of the Companies Act, 2013. The purposes for which Securities
Premium Reserve can be used are:
(a) For issuing fully paid bonus shares;
(b) For writing off preliminary expenses;
(c) For writing off expenses of, or commission paid or discount allowed on debentures of the company;
(d) For providing premium payable on the redemption of redeemable preference shares or debentures of the
company;
(e) For purchase of own shares or securities of the company.
Question 3 (Issue of Debentures at Premium, Payment in Lump sum). Intex Ltd. issued 10,000, 10%
Debentures of Rs 100 each at a premium of 10%, payable along with application. Applications were received
for all the debentures issued and allotment was made. Pass the Journal entries.
Question 4.Lemon Tree Ltd. issued 5,000; 9% Debentures of 100 each at a premium of 20% payable as follows:
On Application – Rs 50,
On Allotment — Balance.
Applications were received for the debentures issued and also the amount due on allotment, Pass the Journal
entries for the above and prepare balance sheet(extract)
(iii) Issue of Debentures at Discount: Debentures are said to have been issued at discount when the issue price
is less than its nominal (face) value. For example, if a debenture of Rs 100 is issued for Rs 95, it means
debentures are issued at discount of Rs 5. The amount of discount debited to an account titled Discou nt on
Issue of Debentures Account.
Note: The amount demanded on allotment should be taken as net of discount unless stated otherwise.

st
Question 5. Exe Ltd. issued 20,000; 9% Debentures of Rs 100 each at a discount of 4% on 1 April, 2021,
payable Rs 30 on application and the balance on allotment. The debentures are redeemable after 5 years. Pass
Journal entries for the issue of debentures.
Over subscription of Debentures:-- Oversubscription of Debentures means that the company has
received applications for more number of debentures than it has issued. In such a situation, the company may
make allotment, by any of the following three options or combination:
First Alternative—Rejecting Excess Applications.
Second Alternative—Partial or Pro rata Allotment.
Third Alternative—A Combination of the Above Two Alternatives.
Question 6.Nav Lakshmi Ltd. invited applications for 3,000; 12% Debentures of Rs 100 each at a premium of Rs
50 per debenture. Full amount was payable on application. Applications were received for 4,000 debentures.
Applications for 1,000 debentures were rejected and application money was refunded. Debentures were
allotted to the remaining applicants. Pass necessary Journal entries for the above transactions in the books of
Nav Lakshmi Ltd.
Question 7. Exe Ltd. issued 10,000, 9% Debentures of Rs 100 each at a premium of 10% payable Rs 25 on
application, Rs 35 on allotment (including premium) and the balance on first and final call, Applications were
received for 15,000 debentures. Allotment was made on pro rata basis excess application money being applied
towards amount due on allotment. All sums due were received by the company on due dates.
Journalize the above transactions in the books of Exe Ltd. and prepare extract of the Balance Sheet showing
Securities Premium Reserve and Debentures.
Question 8 (Pro rata Allotment and Rejection)X Ltd. invited applications for 4,000 Debentures of Rs 100 each
issued at a premium of 20%. Applications were received for 6,000 debentures and it was decided to deal with
the same as follows:
(i) To refuse allotment to applicants for 1,200 debentures.

(ii) To give full allotment to applicants for 400 debentures.
(iii) To allot the remaining debentures on Pro rata basis among other applicants.
(iv) To utilize excess application money in part payment of allotment money.
Journalize the above transactions (including cash transactions) assuming that (i) the total amount is payable
along with the application, and (ii) when the amount is payable in installments—on applications Rs 20, on
allotment Rs 50 (including premium), and balance as first and final call.
Solution: JOURNAL OF X LTD.
Date Particulars L.F Dr. (Rs) Cr. (Rs)

(a) If total amount is payable along with the application:
Bank A/c …Dr. 7,20,000
To Debentures Application and allotment A/c 7,20,000
(Being the application money received)
Debentures Application and Allotment A/c …Dr. 7,20,000
To Debentures A/c 4,00,000
To Securities Premium Reserve A/c 80,000
To Bank A/c 2,40,000
(Being the application money adjusted and surplus refunded)

(b) If the amount is payable in installments:

Bank A/c …Dr. 1,20,000
To Debentures Application A/c
(Being the application money received) 1,20,000
Debentures Application A/c ...Dr.
ToDebenture A/c 1,20,000
To debentures Allotment A/c 80,000
To Bank A/c 16,000
(Being the application money adjusted and surplus refunded) 24,000
Debentures Allotment A/c …Dr.
2,00,000
To …% Debentures A/c
1,20,000
To Securities Premium Reserve A/c
80,000
(Being the allotment money due)
Bank A/c …Dr.
1,84,000
To Debentures Allotment A/c
1,84,000
(Being the allotment money received)
Debentures First and Final Call A/c …Dr.
To …% Debentures A/c 2,00,000
(Being the call money due) 2,00,000
Bank A/c …Dr.
To Debentures First and Final Call A/c 2,00,000
(Being the call money received) 2,00,000
Under subscription of Debentures:- Under subscription of Debentures means that applications have
been received for lesser number of debentures than offered for subscription. For example, the company
issued 10,000, 9% Debentures of Rs 100 each for subscription and it received applications for 9,000, 9%
Debentures. It is a case of under subscription.
In the case of under subscription, allotment is made to all the applicants. Since allotment is made to all the
subscribers of the debentures, Journal entries are passed for the number of debentures subscribed.
Question 9. Citizen Watches Ltd. issued 7,500, 8% Debentures of Rs 100 each at par for subscription payable
along with application. Subscription was received for 7,000 debentures. The debentures were duly allotted.
Pass the necessary Journal entries.
Question 10. Elegant Ltd. issued for subscription 10,000, 11% Debentures of Rs 100 at a premium of 10%,
payable along with application. Subscription was received for 9,000 debentures and all the applicants were
allotted the debentures.Pass the Journal entries for the above.
Solution: In the Books of Elegant LTD
Date Particulars L.F. DR. (Rs) Cr. (Rs)

Bank A/c …Dr. 9,90,000
To Debentures Application and Allotment A/c 9,90,000
(Being the application received for 9,000; 11% Debentures
@ Rs 110 per debenture)
Debentures Application and Allotment A/c …Dr. 9,90,000
To 11% Debentures A/c 9,00,000
(Being 9,000; 11% Debentures allotted at 10% premium)

Question 11. Honey Ltd. issued 10,000, 9% Debentures of Rs 100 each for subscription, payable Rs 60 on
application and balance on allotment. Subscription was received for 9,000 debentures. Allotment was made to
all the applicants and due amount was received.Pass the Journal entries for issue and allotment of debentures.
Solution: In the Books of Honey Ltd.
Date Particulars L.F. Dr. (Rs) Cr.(Rs)

Bank A/c …Dr. 5,40,000
To Debentures Application A/c 5,40,000
(Being the applications received for 9,000; 9% Debentures
@ Rs 60 per debenture)
Debentures Application A/c …Dr. 5,40,000

(Being 9,000; 9% Debentures allotted)
Debentures Allotment A/c …Dr.
(Being the allotment money due) 3,60,000
Bank A/c …Dr. 3,60,000

To Debentures Allotment A/c 3,60,000
Issue of Debentures for Consideration other than Cash:-- Issue of Debentures for consideration
other than cash means that the company has not received amount (in cash or by cheque) against the
debentures issued. Debentures may be issued for consideration other than cash under the following
circumstances:
(i) Issue of Debentures to Promoters: A company may allot debentures to the promoter for rendering their
services for incorporating the company. The entry is:
Incorporation Expenses A/c Dr
To ...% Debentures A/c (Being the debentures allotted to promoters)
(ii) Issue of Debentures to Vendors: Debentures may also be issued to vendors against purchase of assets or
business for pre-determined purchase consideration.
Note :- Purchase Consideration is the amount agreed to be paid for taking over the business from another
enterprise. Purchase consideration may be given in the question; otherwise it will be equal to Net Assets (i.e.,
Agreed value of Assets taken — Agreed amount of Liabilities assumed).
Question 12. A company purchased assets of 9,90,000 from another firm. it was agreed that the purchase
consideration will be paid by issuing 11% Debentures of 100 each. Pass Journal entries when debentures have
been issued: (i) at par, (ii) at a premium of 10% and (iii) at a discount of 10%.
Question 13. Exe Ltd. took over assets of 7,00,000 and liabilities of 60,000 of Wye Ltd. for the purchase
consideration of 6,60,000. Exe Ltd. paid the purchase consideration by issuing 9% Debentures of 100 each at
10% premium. Pass Journal entries in the books of Exe Ltd.
Question 14.Z Ltd. purchased building for 22,00,000. Half the payment was made by cheque and the balance
half by issue of 9% Debentures of 100 each at a premium of 10%. Pass necessary Journal entries.
Question 15. Lemon Tree Ltd. purchased a piece of land from JSS Ltd. and paid the consideration as follows:

(i) Issued a cheque for 10,00,000;

(ii) Issued a Bill of Exchange for 3 months for 5,00,000;
(iii) Issued 5,000; 9% Debentures of 100 each at par redeemable at 10% premium after 5 years. Pass
the Journal entry.
Question 16.Exe Ltd, purchased assets of 8,40,000 and took over liabilities of 80,000 of Whe Ltd. at an agreed
value of 7,20,000. Exe Ltd. issued 10% Debentures of 100 each at 10% discount in full satisfaction of the price.
Pass Journal entries in the books of Exe Ltd.
Question 17.Pass Journal entries for the following transactions:
Z Ltd. purchased plant and machinery for 2,00,000payable as 65,000 immediately in cash/cheque and balance
by issue of 6% Debentures of Rs 100 each at a discount of 10%.
3. Debentures issued as a collateral security:-a collateral security may be defined as additional

security in addition to some principal security. When a limited company obtains a loan from bank or any other
financial institutions, it may mortgage some assets as a security against the said loan. But the lending
institution may insist on some more assets as collateral security(additional security) so that the amount of loan
can be realized in full with the help of collateral security. In such case company may issue its debentures as
collateral security. Debentures are issued as collateral security when the borrower is not in a position to give
any other asset as a collateral security. The collateral security will not be used or realized as long as company
fulfills its obligation regarding payment of interest when due and repayment of loan on the maturity date. In
case of default of payment by company, firstly principal security will be sold. If the amount realized from sale
of principal security falls short of the loan money, then loan of lending institution converted into debentures of
the company and lending institution claims all the right of being a debenture holders. Debentures issued as
collateral security will be realized by the lender only in case the loan/interest is not repaid on the due date.
Question 18. X Ltd. obtained loan of Rs 8,00,000 from State Bank of India and issued 10,000; 9% Debentures of
Rs 100 each as collateral security. How will issue of debentures be shown in the Balance Sheet?
Question 19.A Ltd. issued 5,000; 9% Debentures of Rs 100 each at par and also raised a loan of 80,000 from
bank, collaterally secured by 1,00,000; 9% Debentures. How will be the Debentures shown in the Balance
Sheet of the company assuming that the company has passed Journal entry for issue of Debentures as
collateral security in the books?
Question 20. Zee Ltd. issued 10,000, 10% Debentures of Rs 100 each as collateral security for a loan of Rs
8,00,000 from Dena Bank. The company was unable to repay the loan on which interest payable was Rs
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2,00,000 as on 31 March, 2018.
Dena Bank, on 31st March, 2018, exercised the right vested in it by way of debentures being issued as collateral
Security.Pass Journal entries in the books of Zee Ltd on 31st March, 2018.
Various Cases Of Issue Of Debentures From The Point Of View Of Redemption
Debentures issued at par, at premium or at discount may be redeemed either at par or at premium. If the
debentures are redeemed at premium, premium payable at the time of redemption is provided in the books of
account at the time of issue following the Prudence Concept of accounting.
The term Redeemable at par means debentures are redeemable at their nominal (face) value. For example, a
debenture has a nominal (face) value of Rs 100 and is to be redeemed by paying Rs 100, it is a case of
redemption of debentures at par.

The term Redeemable at Premium means debentures are redeemable at a value that is higher than their
nominal (face) value. For example, a debenture has a nominal (face) value of Rs 100, and is to be redeemed by
paying Rs 110, it is a case of redemption of debentures at premium. Depending on the terms of issue and
redemption of debentures, there may be six cases redemption as follows:
Case Conditions of Issue Conditions of Redemption

1. Issued at par Redeemable at par
2. Issued at discount Redeemable at par
3. Issued at premium Redeemable at par
4. Issued at par Redeemable at premium
5. Issued at discount Redeemable at premium
6. Issued at premium Redeemable at premium
Difference between Premium on Issue of Debentures and Premium on Redemption of Debentures
Basis Premium on issue of Debentures Premium on Redemption of Debentures

1. Capital Profit/Loss It is a capital loss.
It is a capital profit and is used for the
purposes specified in Section S2(2) of the
Companies Act, 2013.
2. Nature It is a reserve. It is a liability.

3. outflow of cash It does not involve outflow of cash. It is paid when the debentures are redeemed.
4. how shown in sheet The Balance is shown in the Equity and It is shown in the Equity and Liabilities part of the
Liabilities as part of the Balance Sheet under Balance Sheet under the main-head 'Non-current
main-head Shareholders' Funds and sub-head Liabilities' and sub-head other Long-term
Reserves and Surplus. Liabilities'.
Question 21.Chand Ltd. issued 50,000; 8% Debentures of Rs 100 each payable on application and redeemable
at par after 6 years. Pass necessary entries for issue of debentures in the books of Chand Ltd.
Solution:
Date Particulars L.F. Dr. (Rs) Cr. (Rs)
Bank A/c …Dr. 50,00,000
(Being the application money received @ Rs 100 each on 50,000
debentures)
50,00,000
Debentures Application and Allotment A/c …Dr.
50,00,000
To 8% Debentures A/c
, (Being the application money transferred to 8% Debentures
Account)
Question 22. Anushree Ltd. issued 10,000; 9% Debentures of Rs 50 each at a discount of 8% redeemable at
par after 7 years. Pass necessary entries in the books of Anushree Ltd.
Solution:
Bank A/c 4,60,000
(Being the application money received on 10,000; 9% Debentures)
4,60,000
Debentures Application and Allotment A/c 40,000
Discount on Issue of Debentures A/c 5,00,000
(Being 10,000; 9% Debentures issued at 8% discount redeemable at
par)

Question 23. (Debentures are issued at premium and are redeemable at par).Green Ltd. issued Rs. 8,00,000;
9% Debentures of Rs 100 each at a premium of 5% redeemable at par. Give journal entries.
Solution:
Date Particulars L. Dr. (Rs) Cr. (Rs)
F.
Bank A/c …Dr. 8,40,000
To debentures Application and allotment A/C 8,40,000
(Being the debentures application money received)
8,40,000
Debentures Application and Allotment A/c
(Being 8,000; 9% Debentures issued at 5% premium and redeemable at par)
Points to be kept in Mind:
1. Loss on Issue of Debentures is debited at the time of issue of debentures following the Prudence Concept of
accounting. The concept requires to provide all possible losses and expenses. Since, it is certain that premium
will be paid at the time of redemption, it is provided for.
2. Loss on Issue of Debentures is written off from Capital Reserve and/or from Securities Premium Reserve
and/or from Statement of Profit and Loss.
3. 'Loss on Issue of Debentures Account' is an Expense Account and 'Premium on Redemption of Debentures
Account' is a Liability Account.
4. 'Premium on Redemption of Debentures Account' is debited at the time of payment, i.e., redemption of
debentures.
Question 24. (Debentures are issued at Par and are Redeemable at Premium). Blue Ltd. issued Rs 8,00,000;
9% Debentures of 100 each at par and redeemable at 10% premium at the end of sixth year. Pass Journal
entries.
Solution: JOURNAL OF BLUE LTD.

Bank A/c 8,00,000
(Being the debentures application money received)
8,00,000
80,000
Loss on Issue of Debentures A/c
8,00,000
80,000
To Premium on Redemption of Debentures A/c
(Being 8,000; 9% Debentures issued at par and redeemable at 10%
Premium)
Question 25. (Issue of Debentures at Par and Redeemable at Premium — Amount Payable in Installments)
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Adarsh Cosmetics Ltd. issued 5,000; 9% Debentures of Rs 100 each on 1 April, 2021 redeemable at a
premium of 8% after 10 years. According to the terms of prospectus Rs 40 is payable on application and
balance on allotment of debentures. Pass the necessary entries regarding issue of debentures.

Solution: JOURNAL OF ADARSH COSMETICS LTD.
Date Dr. (Rs) Cr. (Rs)

2021 Bank A/c 2,00,000
April 1 To Debentures Application 2,00,000
(application money received on 5,000 @ Rs 40 per debenture)
April 1 2,00,000
Debentures Application A/c 2,00,000
(Being the application money transferred to 9% Debentures Account)
April 1 3,00,000
Debentures Allotment A/c 40,000
Loss on Issue of Debentures A/c 3,00,000
To 9% Debentures A/c 40,000
(Being allotment of 9% Debentures at par and redeemable
At 8% premium) 3,00,000
Bank A/c 3,00,000
To Debentures Allotment A/c
Imp Note:- Debentures when issued at premium or discount and amount is payable in instalments, it is presumed
that premium,is received or discount is allowed alongwith allotment,unless specified otherwise in the question.
Question 26. KTR Ltd., issued 365, 9% Debentures of 1,000 each on 4th March, 2016. Pass necessary Journal
entries for the issue of debentures in the following situations:
(i) When debentures were issued at par, redeemable at a premium of 10%.

(ii) When debentures were issued at 6% discount, redeemable at 5% premium. (DELHI 2016)
Solution: (i)
Date Particulars Dr. (Rs) Cr. (Rs)
2016
March 4 Bank A/c 3,65,000
(Being the application and allotment money received on
365; 9% Debentures @ Rs 1,000 each)
March 4
Debentures Application and Allotment A/c 3,65,000
Loss on Issue of Debentures A/c 36,500
To Premium on Redemption of Debentures A/c 36,500
(Being 365; 9% Debentures allotted and premium payable on
Redemption @ 10% provided)
(ii)
2016
March 4 Bank A/c 3,43,100
(Being the application and allotment money received on
365; 9% Debentures @ Rs 1,000 per debenture less 6% Discount)
March 4 3,43,100
Debentures Application and Allotment A/c 40,150
Loss on Issue of Debentures A/c 3,65,000
To 9% Debentures A/c 18,250
(Being 365; 9% Debentures allotted at 6% Discount and premium
payable on redemption of debentures @ 5% provided)

Important Note:--
1. Debentures Account is always credited with the nominal (face) value of the debentures.
2. Premium on Redemption of Debentures Account is a personal account (under the traditional classification)
and a liability account (under the modern classification) because it is a liability of the company to pay in future,
that is, at the time of redemption. This account is shown in the Equity and Liabilities part of the Balance Sheet
under the head 'Non-current Liabilities' and sub-head 'Other Long-term Liabilities'.
3. The amount of loss on issue of debentures is debited to a separate account called Loss on Issue of
Debentures Account. It is a capital loss and is written off from Capital Reserve, if it has a balance. If Capital
Reserve does not exist, it is written off either from Securities Premium Reserve or from the Statement of Profit
and Loss but not later than the life (tenure) of the debentures.
Question 27. F Ltd. issues Rs 7,00,000; 10% Debentures of Rs 100 each at a premium of 5% redeemable at
110% after 5 years. Journalise.
Solution: JOURNAL OF F LTD.

Bank A/c 7,35,000
(Being the debentures application money received
7,35,000
70,000
Loss on Issue of Debentures A/c
7,00,000
35,000
To Securities Premium Reserve A/c
70,000
(Being the issue of 7,000; 10% Debentures of Rs 100 each
At a premium of 5% and redeemable at a premium of 10%)
Question 28. Pass Journal entries for issue of debentures in each of the following alternative cases:
(i) 10% Debenture of Rs 100 each issued at Rs 100, repayable at Rs 100.

(ii) 10% Debenture of Rs 100 each issued at Rs 95, repayable at Rs 100.
(iii) 10% Debenture of Rs 100 each issued at Rs 105, repayable at Rs 100.
(iv) 10% Debenture of Rs 100 each issued at Rs 100, repayable at Rs 105.
(v) 10% Debenture of Rs 100 each issued at Rs 95, repayable at Rs 105.
(vi) 10% Debenture of Rs 100 each issued at Rs 105, repayable at Rs 110.
Question 29. Pass Journal entries to record the following transactions:
(1) B Ltd. issues 30,000; 10% Debentures of Rs 100 each at a discount of 5 % to be repaid at par at the end of
5 years.
(2) C Ltd. issues 10% Debentures of Rs 100 each for the total nominal (face) value of Rs 40,00,000 at a
premium of 5% to be redeemed at par at the end of 5 years.
(3) D Ltd. issues Rs 50,00,000; 12% Debentures of Rs 100 each at par but redeemable at the end of 10 years
at 105%.
(4) E Ltd. issues Rs 60,00,000; 12% Debentures of Rs 100 each at a discount of 5% repayable at a premium of
10% at the end of 5 years.
(5) F Ltd. issues Rs 70,00,000; 12% Debentures of Rs 100 each at a premium of 5% redeemable at 110% at
the end of 10 years.

ACCOUNTING OF INTEREST ON DEBENTURES
IMPORTANT POINTS:
1. Interest on debentures is a Charge against profit of the company and is payable whether company
earns profit or incurs loss.
2. Interest on debentures is calculated at a fixed rate of interest on the nominal (face) value.
3. Interest is not payable on debentures issued as collateral security.
4. Interest rate payable on debentures is prefixed on debentures. For example, if the rate of interest is
10% p.a. then debentures will be titled '10% Debentures'.
5. The balance in Debentures' Interest Account is transferred to Statement of Profit and Loss (Finance
Cost) at the end of the year.
6. If the amount of interest accrued and due is not paid, it is known as Interest Accrued and Due or
Interest Outstanding.
7. If the date of payment of interest and accounting date are different, Interest Accrued and Not Due
Account is credited at the end of the year to maintain accounting records on accrual basis.
8. Interest Accrued (whether due or not) on Debentures is shown under the head 'Current Liabilities'
and sub-head 'Other Current Liabilities'.
Question 30. Times Sports Ltd. issued 15,000; 10% Debentures of Rs 100 each on 1st April, 2018. The issue was
fully subscribed. According to the terms of issue, interest is payable on half-yearly basil Pass Journal entries for
Interest on Debentures for the year ended 31st March, 2019 (Ignore TDS).
Question 31. On 1st April, 2015, K. K. Ltd. issued 500, 9% Debentures of Rs 500 each at a discount of 4%
redeemable at a premium of 5% after three years.
Pass necessary Journal entries for the issue of debentures and debenture interest for the year ended 31st
March, 2016 assuming that interest is payable on 30th September and 31st March and the rate of tax
deducted at source is 10%. The company closes its books on 31st March every year. (DELHI 2017)
Question 32. BG Ltd. issued 2,000, 12% Debentures of Rs 100 each on 1st April, 2012. The issue was fully
subscribed. According to the terms of issue, Interest on the debenture is payable half-yearly on 30th
September and 31st March and the tax deducted at source is 10%. Pass necessary Journal entries related to
the debenture interest for the half-yearly ending 31st March, 2013 and transfer of Interest on debentures of
the year to the Statement of Profit and Loss.
Writing off Discount or Loss on Issue of Debentures
Discount or Loss on Issue of Debentures is a capital loss for the company, which should be written off at the
earliest but within the tenure of the debentures, i.e., it should be written off within the period the debentures
are to be redeemed. The company thus, may write off discount or loss on issue of debentures at any time
before the debentures are due for redemption.
Discount or Loss on Issue of Debentures written off is a part of Finance cost in Statement of Profit and Loss.
Discount or Loss on Issue of Debentures may be written off following any of the following options:
(i) It may be written off in the first year itself; or

(ii) It may be written off over the tenure (life) of the debentures.
(i) Discount or Loss may be written off from Capital Reserve and/or from Securities Premium Reserve
and/or from Statement of Profit and Loss.
Question 33. On 1st April, 2018, Amro Ltd. issued 10,000, 9% Debentures of Rs 100 each at a discount of 10%
redeemable after 5 years. The issue price is payable along with application. The debentures were subscribed.

It has a balance of Rs 1,75,000 in Capital Reserve. It decided to write off discount in year ended 31st March,
2019 from Capital Reserve.
Pass the Journal entries for issue of debentures and writing off the discount and prepare Discount on Issue of
Debentures Account.
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Question 34. On 1 May, 2018, Solar Energy Ltd. issued 10,000, 9% Debentures of Rs 100 each at a discount of
10% redeemable at par after five years. All the debentures were subscribed. It has a balance of Rs 60,000 in
Capital Reserve and Rs 1,00,000 in Securities Premium Reserve which the company decided to use for writing
off the loss. It decided to write off the discount in the first year itself. Pass the Journal entries for writing off
the discount. Also prepare Discount on Issue of Debentures Account.
Question 35. Solar Power Ltd. on 1st April, 2018 issued 40,000, 8% Debentures of Rs 100 each at a discount of
5% redeemable at a premium of 5% after 5years payable along with application. The debentures were fully
subscribed. It had balance of 1,00,000 in Capital Reserve and 1,00,000 in Securities Premium Reserve. It
decided to write off discount in the first year. Pass the Journal entries for issue of debentures and writing off
the loss.
Question 36. (Fixed Installment Method).A Limited Company issued 20,000 debentures of Rs 100 each at a
discount of 5%, redeemable at the end of 5 years. Show the Discount on Issue of Debentures Account in the
ledger for the period.
Question 37. (Fluctuating Instalment Method). Moon Ltd. issued 9% Debentures of the nominal (face) value of
20,00,000 at a discount of 6%. The debentures were repayable by annual drawings of Rs 4,00,000 starting from
the end of first year of issue. Prepare Discount on Issue of Debentures Account.
Question.38 (Writing off Loss equally over life of the debentures).On 1st June, 2014, Goodluck Ltd. issued
50,000, 10% Debentures of Rs 100 each at par redeemable after five years at a premium of 10%. It was
decided to write off Loss on Issue of Debentures in five years equally beginning 31st March, 2015.
Pass the Journal entries for issue of debentures and writing off the loss and prepare Loss on Issue of
Debentures Account till it is completely written off.
Question 39. X Ltd. issued 20,000, 10% Debentures of Rs 100 each at 8% discount redeemable a Debentures
are redeemable by drawings method in the following manner:
Year end Face Value (Rs)

2 2,00,000
3 4,00,000
4 6,00,000
5 8,00,000
Prepare Discount on Issue Of Debentures Account.
Question 40.On 1st October, 2015, Nimrat Ltd. issued 20,000, 10% Debentures of Rs 100 at Rs 71 each
redeemable at par as follows:
On 31st March, 2017 3,000 Debentures;
On 31st March, 2020 8,000 Debentures.

How much discount will be written off each year by the company?
Question 41. (Debentures Discount, when First Redemption Due in Next Accounting Period). X Ltd. issued
10,000, 10% Debentures of Rs 100 each at a discount of 6% on 1st July, 2015 repayable by five equal annual
instalments of Rs 2,00,000 each.
The company closes its accounts on 31st March, every year. Determine the amount of discount to be written
off in every accounting year if the debentures are to be redeemed equally every year beginning from 30th
June, 2016. Also prepare Discount on Issue of Debentures Account.
Question 42. On 1st April, 2017, Relaxo Ltd. purchased assets of Rs 50,00,000 and took over liabilities of Rs
9,00,000 of Greg Ltd. at an agreed value of Rs 38,00,000. It issued to the vendor, 10% Debentures of Rs 100
each at 5% discount, redeemable at par after 5 years, in full satisfaction of the purchase price.
On the same date, the company issued 5,000, 11% Debentures of Rs 100 each as a collateral security to a bank
who had advanced a loan of Rs 4,50,000 to it for a period of 3 years and also issued 50,000, 12% Debentures of
Rs 100 each at par, redeemable after 3 years at 5% premium.
Additional Information: Interest on debentures is paid half-yearly on 30th September and 31st March each
year. Tax deducted at source @ 20%. The Company had Rs 12,00,000 in its Securities Premium Reserve
Account at the end of the year. It was decided by the company to write off Loss on Issue of Debentures in the
first year itself. (Ignore interest on bank loan). You are required to pass Journal entries in the books of Relaxo
Ltd. for the year d 31st March, 2018.
Question 43. On 1st April, 2020, Infosys Ltd. issued 10,00,000, 10% Debentures of Rs 100 each at 8% discount
payable:
Rs 40 on application, and the balance on allotment.

These debentures were to be redeemed at a premium of 5% after five years. All the debentures were
subscribed. Interest on debentures was to be paid half-yearly which was duly paid by the company.
You are required to:

(i) Pass Journal entries in the first year of debenture issue (including entries for debenture interest).
(ii) Prepare 10% Debentures Account for the year ending 31st March, 2021.
(iii) Prepare Loss on Issue of Debentures Account for the year ended 31st March, 2021.
(iv) Prepare the Extract of Balance Sheet as at 31St March, 2021 showing Loss on Issue of Debentures.
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Question 44. On 1 April, 2020, GSC Infotech Ltd. took over assets of Rs 4,50,000 and liabilities of Rs 60,000
of GSMS Ltd. for the purchase consideration of Rs 4,40,000. It paid the purchase consideration by issuing 8%
Debentures of Rs 100 each at 10% premium. On the same date, it issued another 30,000, 8% Debentures of Rs
100 each at a discount of 10%, redeemable at a premium of 5% after 5 years. According to the terms of the
issue Rs 30 is payable on application and the balance on the allotment of debentures. You are required to:
(i) Pass Journal entries in the books of GSC Infotech Ltd. to record the above transactions and writing off
Loss on Issue of Debentures for two years. (Ignore interest on Debentures).
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(ii) Prepare Loss on Issue of Debentures Account for the years ended 31 March, 2017 and 31 March,
2021.
Question 45. Pilot Pens Ltd. issued 5,000, 6% Debentures of Rs 100 each at a discount of 20%. It had balance
in Securities Premium Reserve of Rs 60 000. It decided to write off discount in the first year itself using
Securities Premium Reserve to the extent possible. Prepare Note to Accounts to show how Discount on Issue
of Debentures will be shown.

CHAPTER 11. REDEMPTION OF DEBENTURES
MEANING:- Redemption of Debentures means discharging the liability on account of debentures issued by a
company by making repayment to the debenture holders. Debentures are normally redeemed on the due date or earlier as
per the terms of issue. Debentures may be redeemed in installments, i.e., by draw of lots or by purchase from the open
market for cancellation or by conversion into shares or new debentures.
At the time of redemption, following should be kept in mind:
1. Time of Redemption of Debentures: Debentures are normally redeemed on the due date. A company may, if
authorised by the terms of issue, redeem the debentures before the due date in instalments, i.e., by draw of lots and if
authorised by its Articles of Association or by purchase from open market for cancellation.
2. Amount of Redemption of Debentures: if the debentures are redeemed on maturity by payment of whole
amount or by draw of lots, the amount payable is as per the terms of issue, i.e., at par or at premium.
3. Sources of Redemption of Debentures: The sources of redemption of debentures may be any of the following:
(a) Out of Capital: It means redemption of debentures without transfer of any profit from Surplus(statement of profit
and loss). Redemption only out of capital is not possible under the present law because the Companies Act, 2013
prescribes companies( other than those exempted from creating Debentures Redemption Reserve) to transfer amount of
profits available for distribution as dividend as specified in Rule 18(7) (b) of the Companies (Share Capital and Debentures)
Rules, 2014.
(b) Out of Profit: It means redemption of debentures only out of profits. In this case companies transfer 100 per cent of
nominal (face) value of total redeemable debentures to Debentures Redemption Reserve out of the surplus available for
payment as dividend to the shareholders.
(c) Out of Profit and Capital: It means redemption of debentures partially out of profit and partially out of capital.
Where the company does not transfer 100 per cent of nominal (face) value of outstanding debentures to Debentures
Redemption Reserve out of the surplus available for payment as dividend to the shareholders, it is known as
redemption out of profit and capital.
DEBENTURES REDEMPTION RESERVE (DRR) AND DEBENTURES REDEMPTION INVESTMENT (DRI)
Debentures Redemption Reserve (DRR):-- Debentures Redemption Reserve (DRR) is a reserve set aside out of
profits available for distribution as dividend for the purpose of redemption of debentures. The amount is transferred to
Debentures Redemption Reserve (DRR) before the process of redemption of debentures begins. The process of
redemption begins with setting aside (creating) Debentures Redemption Reserve (DRR) out of profits available for
distribution as dividend. Besides the transfer of amount to DRR, Rule 18(7)(c) of the Companies (Share Capital and
Debentures) Rules, 2014 prescribes that the company required to create DRR shall invest amount in securities specified.
However, few kinds of companies (discussed later) are exempt from transferring amount to DRR.
Need for Debentures Redemption Reserve (DRR):-- The Companies-Act, 2013 [Section 71(4)] prescribes that
(i) Every company issuing debentures shall create Debentures Redemption Reserve (DRR);
(ii) Out of its profits available for distribution as dividend; and
(iii) The amount credited to DRR shall not be utilised by the company except for redemption of debentures.
Rule 18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014 prescribes that a company shall transfer
at least 25 per cent of the nominal (face) value of the outstanding debentures to DRR.
Debentures Redemption Reserve is a specific reserve. A company can utilise DRR only for redemption of debentures.

Exemption from Transferring Amount to DRR :-- The Companies Act, 2013 together with Rule 18(7)(b) of
the Companies (Share Capital and Debentures) Rules, 2014 exempts following class or kinds of companies from
creating DRR:
(i) All India Financial Institutions (AIFIs) regulated by the Reserve Bank of India; and
(ii) Banking Companies.
(iii) Besides the exemption to above class or kinds of companies, DRR is not required to be created on fully
convertible debentures. And where the debentures are partly convertible, DRR is created only on the non-
convertible part of debentures. [Rule 18(7)(d) of the Companies (Share Capital and Debentures) Rules, 2014]
Transfer of DRR to General Reserve:-- Debentures having been redeemed, DRR is transferred to General
Reserve. Rule 18(7)(b) prescribes that a company shall transfer at least 25 per cent of nominal (face) outstanding
debentures to Debentures Redemption Reserve. Thus, a company has two options for transfer of Debentures
Redemption Reserve to General Reserve as follows:
(a) Transfer proportionate amount after every redemption from Debentures Reserve to General Reserve; or
(b) Transfer DRR to General Reserve after all the debentures have been redeemed.
Alternatively, if the company decides to transfer amount of DRR to General Reserve after all the debentures are
redeemed, DRR is transferred to General Reserve after redemption of all the debentures.
Disclosure of Debentures Redemption Reserve (DRR) in Balance Sheet:-- Debentures Redemption

Reserve is shown in the Equity and Liabilities part of the Balance Sheet under the main-head 'Shareholders' Funds' and
sub-head 'Reserves and Surplus'.
Debentures Redemption Investment (DRI):--Another condition of the Companies Act, 2013 is prescribed in
Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules, 2014 for redemption of debentures as follows:
"The company shall invest an amount at least equal to 15 per cent of the nominal (face) value of debentures that
shall be redeemed by the company by 31st March of next year and the amount should be invested on or before 30th
April of the current year."
It means that at least 15% of the nominal (face) value of the debentures to be redeemed during the financial year (1st
April to 31st March) should be invested by the company in any of the specified securities on or before 30th April of
that financial year.
The amount invested or deposited should not at any time fall below 15% of the amount of debentures maturing by
31st March of the financial year.
It should be kept in mind that investment is to be made by those companies who are required to create DRR. Thus,
the exempted companies, i.e., AIFIs regulated by RBI and Banking Companies, are not required to invest in specified
securities. Also, investment is not required to be made in specified securities, if the debentures are fully convertible. If
the debentures are partly convertible, investment is made of an amount that is at least equal to 15% of the non-
convertible part of the debentures. The amount invested or deposited shall not be used for any purpose other than
for redemption of debentures.
METHODS OF REDEMPTION OF DEBENTURES:-- Debentures may be redeemed:
I. in lump sum on maturity,

2. in instalments by draw of lots,
3. by purchase from open market, or
4. by Conversion.
Note: Please note that the Redemption by Purchase from Open Market and Conversion of Debentures are not in
Syllabus. Hence, they have not been discussed.
Each of the above methods of redemption is discussed below.

1. Redemption of Debentures in Lump Sum on Maturity

Under this method, all the debentures are redeemed on the redemption date specified in the terms of issue, i.e.,
on their maturity. The debentures may be redeemed at par or at premium.
Question 1. X Ltd. had issued on 1st April, 2015, 20,000, 9% Debentures of Z-100 each 1" lots as under:
(1) During the year ending on 31st March, 2017-15%

(5) During the year ending on 31st March, 2021-20%.
What is the minimum investment or deposit that should be made by X Ltd. as per the Companies Act, 2013 before
redemption of debentures and When?
Question2. Y Ltd. issued 50,000; 10% Debentures of 10 each on 1st April, 2017 redeemable at par on 30th June, 2018.
The company received applications for 50,000 debentures and remaining applications were rejected. The debentures were
redeemed on due date. Assume that required investment was made on 1st April of the financial year in which redemption
is due. Pass Journal entries for issue and redemption of debentures, DRR and investment, ignoring interest on debentures.
Question 3. Bank of India Ltd, has outstanding 1,00,000; 10% Debenture of Rs 10 each issued in 2005 due for
redemption on 30th June, 2019. How much amount of Debentures Redemption Reserve should be created before the
redemption of debentures begins and also how much amount should it invest in specified securities? Pass Journal entries
at the time of redemption of debentures.
Question 4. Export-Import Bank of India, an All India Financial Institution, has outstanding Rs 5,00,000; 10% Debentures
st
of Rs100 each issued in 2015, due for redemption on 31 March, 2018. State the amount of Debentures Redemption
Reserve to be created before the redemption of debentures begins. Also, pass Journal entries for redemption of
debentures.
Question 5. SRCC Ltd. has 20,000; 9% Debentures of 100 each outstanding as on 31st March, 2018. These debentures
are due for redemption on 31st March, 2019 at a premium of 10%. The company had a credit balance of Rs 22,00,000 in its
Surplus, i.e., Balance in Statement of Profit and Loss. Instead of declaring a dividend it decided to redeem the debentures.
Pass the necessary Journal entries in the books of the company for the redemption of debentures.
Question 6. X Ltd. has 40,000; 9% Debentures of 100 each outstanding as on 31st March, 2018. These debentures are
due for redemption on 31st March, 2019. Debentures Redemption Reserve has a balance of Rs 5,00,000 on 31st March,
2018. Pass Journal entries at the time of redemption of debentures.
Question7.Grand Hotels Ltd. had 10,000, 12% Debentures of Rs 100 each outstanding as at 31st March 2018. These
debentures were due for redemption on 30th June, 2019. The company decided to transfer Rs 5,00,000 to Debentures
Redemption Reserve on 31st March, 2019 and invest in fixed deposits with Canara Bank 1,50,000 on 1st April, 2019. Pass
Journal entries for Debentures Redemption Reserve, Debentures Redemption Investment and redemption of debentures.
Question8. Pass necessary Journal entries for the issue and redemption of Debentures in the following cases:
(i) 15,000; 10% Debentures of 100 each issued at 10% premium, repayable at par.
(ii) 60,000; 12% Debentures of 100 each issued at 5% premium, repayable at 10% premium.(CBSE 2011)
Question9. XYZ Ltd. issued 10,00,00, 9% Debentures of Rs 50 each at a premium of 10% on 30th June, 2017 redeemable
on 31st March, 2019. The issue was fully subscribed. The company decided to transfer amount to DRR on 31 st March, 2018
and invest in Fixed Deposit earning interest @ 10% p.a. on 1st April, 2018 to meet the legal requirement. Tax was deducted
at source (TDS) by bank @ 10%.Pass Journal entries for issue and redemption of debentures along with interest on
investment.

Question 10. X Ltd has a balance of Rs 4,00,000 in surplus, i.e., Balance in Statement of Profit and Loss. The company
decided not to pay dividend and instead redeem 3,50,000; 12% Debentures on 30th September, 2017 at a premium of
10% in accordance with the terms of issue. Debentures' interest is payable annually on 31st March every year when the
accounts are closed. The company also has a balance of Rs 2,00,000 in the Debentures Redemption Reserve.
Tax was deduced @ 10% on interest on debentures and deposited in Government Account. The required investment was
made by the company in Government Securities on 30th April, 2017. journalisethe transactions.
Question 11. Casco Infrastructure Ltd. issued 21,000; 7% Debentures of Rs 100 each on 31st March, 2013 redeemable
at a Premium of 8% on 30th June, 2018. The Company decided to transfer the required amount to Debentures Redemption
Reserve in three equal annual instalments starting from 31st March 2016. The company invested the funds as required by
st
law in fixed deposit in a bank on 1 April 2018 earning interest @ 10% p.a. Tax was deducted on interest earned @ 10%
by the bank. Pass Journal entries regarding issue and redemption of debentures, ignoring interest on debentures.
Question 12. Manish Ltd. issued Rs 38,00,000; 8% Debentures of 100 each on 1st April, 2016. The terms of issue stated
that the debentures were to be redeemed at a premium of 5% on 30th June, 2018. The Company decided to transfer out of
profits Rs 5,00,000 to Debentures Redemption Reserve on 31st March, 2017 and Rs 4,50,000 on 31st March, 2018.
Investment at the rate specified in law was made in fixed deposit of a bank on 1st April, 2018.
Pass necessary Journal entries regarding the issue and redemption of debentures, without providing for either the interest
or loss on issue of debentures. Also ignore interest on fixed deposit. (AI 2011 C, Modified)
REDEMPTION OF DEBENTURES IN INSTALMENTS BY DRAW OF LOTS: under this method, the company
may redeem its debentures by payment each year a part of debentures being selected by draw. The
debentures may be redeemed at par or at premium according to the terms of issue. The process is called
redemption of debentures by draw of lots
Question 13. ABC Ltd. issued 2,000; 10% Debentures of 1,000 each at par on 1st April, 2015 redeemable in equal annual
drawings by draw of lots in 2 years on 31st March, 2017 and 31st March, 2018. The company decided to transfer to
Debentures Redemption Reserve amount as prescribed it law on 31st March, 2016, Investment was made in specified
securities on 1st April, 2016 and 2017 respectively.
Pass Journal entries for DRR, DRI and redemption of debenture assuming the investment was realised each time the
debentures were redeemed. (Ignore Interest)
Question 14. RC Ltd. issued 15,000; 10% Debentures of Rs 100 each at par on 1st April, 2015 redeemable at 5%
premium in three Yearly instalments by draw of lots as follows:
On 31st March, 2017 3,000Debentures,
On 31st March, 2018 6,000Debenture,
On 31st March, 2019 6,000Debentures,
The company complied with the legal requirements with respect to Debentures Redemption Reserve and investment
(made in Government Securities on 1st April each year).
Pass Journal entries for Issue and Redemption of Debentures. Prepare relevant Ledge Accounts in the books of the
company. Ignore 'Writing off Loss on Issue of Debentures, interest paid and received.
Question15. XYZ Ltd. issued 1,500; 12% Debentures of 100 each at par on 1st April, 2016 redeemable at 6% premium in
three equal yearly instalments by draw of lots, the first redemption being on 31st March, 2018. The company complied
with the legal requirements with respect to Debentures Redemption Reserve and investment (made in Government
Securities on 1st April each year starting from 1.4.2017.

The company decided to transfer proportionate amount from DRR to General Reserve on each redemption and realise
investment (DRI) at the time of last redemption. Pass Journal entries for Issue of Debentures till their redemption. Ignore
interest paid and received.
Question 16.On 1st April 2016, Base Ltd. issued Rs 40,00,000, 10% in Debentures of Rs 100 each at the premium of 5%
and redeemable at a premium of 10% in equal annual drawings by draw of lots in 2 years starting from 31st March, 2017.
Base Ltd. writes off Loss on Issue of Debentures from Securities Premium reserve, to the extent available and balance from
Statement of Profit and Loss. It also decided to transfer amount of DRR to General Reserve after Redemption of all the
debentures, at the end of that Financial Year. Pass the necessary Journal entries during the years of Issue and Redemption
of Debenture. Ignore interest paid on Debentures and interest received on Debentures Redemption Investment.
( AI 2011 C, Modified)
Question 17. Bharat Ltd. had an authorized capital of Rs 20,00,000 divided into 2,00,000 equity shares of Rs10 each.
The company issued 1,00,000 shares and the dividend paid per share was Rs 2 for the year ended 31st March, 2008. The
management of the company decided to export its products to the neighbouring countries Nepal, Bhutan, Sri Lanka and
Bangladesh. To meet the requirement of additional funds, the financial manager of the company put up the following three
alternatives before its Board of Directors:
(i) Issue 54,000 equity shares.

(ii) Obtain a loan from Import and Export Bank of India. The loan was available at 12% per annum interest.
(iii) To issue 9% Debentures at a discount of 10%.
After comparing the available alternatives the company decided on 1st April, 2008 to issue 6,000; 9% Debentures of Rs
100 each at a discount of 10%. These debentures were redeemable in four instalments starting from the end of third year.
The amount of debentures to be redeemed at the end of third, fourth, fifth and sixth year was as follows:
Years profits
3 1,00,000
4 1,00,000
5 2,00,000
6 2,00,000
Prepare 9% debentures account for the years 2008-09 to 2013-14. (DELHI 2015)

CHAPTER 12.FINANCIAL STATEMENTS OF A COMPANY

MEANING OF FINANCIAL STATEMENTS :- Financial Statements are summarised statements of accounting data
prepared at the end of an accounting process, i.e., after preparing Trial Balance by an enterprise. It is a
medium of communicating accounting information to the internal and external users. A set of financial
statements as per Section 2(40) of the Companies Act, 2013 include:
1. Balance Sheet: It is a statement of Assets and Liabilities, i.e., financial position of an enterprise at a given
date. It is also known as Position Statement.
2. Statement of Profit and Loss: It shows the financial performance, i.e., result of business operations during
an accounting period. It is also known as Income Statement.
3. Notes to Accounts: Balance Sheet and Statement of Profit and Loss are supported by the notes giving details
of items in the Balance Sheet and Statement of Profit and Loss.
4. Cash Flow Statement: It is a statement prepared in accordance with AS-3 to show inflow and outflow of
Cash and Cash Equivalents.
Section 129 of the Companies Act, 2013 requires the company to prepare its financial statements every year
in the prescribed form, i.e., Schedule III of the Companies Act, 2013.
CHARACTERISTICS AND NATURE OF FINANCIAL STATEMENTS
Characteristics of Balance Sheet:
1. It shows the financial position of a company at a specific point of time.

2. It is prepared by taking the year-end balances of assets, liabilities and shareholders' funds.
3. The accounts in the Balance Sheet may have an opening balance, transactions during the year and
closing balance.
Characteristics of Statement of Profit and Loss:
1. It shows the financial performance of a company, i.e., revenues, expenses and profit or loss for the period.
2. The transactions are expressed in terms of money.
3. It is prepared for a past period and thus, is a historical document.
4. It is for a specific accounting period.
Nature of Financial Statements:- The information in the Financial Statements is the result of combination of:
(i) Recorded facts: The term 'recorded facts mean': recording of transactions based on evidences in
the books of account. For example, amounts of cash in hand, cash at bank, debtors, sales,
purchase, etc. are recorded facts.
(ii) Conventions: Accounting conventions are followed while preparing financial statements. For
example, because of convention of 'conservatism, provision is made for expected losses but
expected profits are ignored. It mean that real financial performance and financial position of the
business may be better than what is shown by the financial statements. The use of accounting
conventions makes financial statements reliable, understandable and comparable.
(iii) Accounting Concepts: Financial Statements are prepared by following the accounting concepts.
For example, under the Going Concern Concept, it is assumed that the business shall continue for
a foreseeable future. The use of accounting concepts also makes the financial statements
reliable, understandable and comparable.
(iv) Personal Judgments: Personal judgments also have an important bearing on financial
statements. For example, the choice of selecting a method of depreciation or selection of the
inventory valuation method also depends on the personal judgment of the management.
(v) Source of Financial Information: Financial Statements are the source of financial information on the
basis of which conclusions are drawn about the profitability and the financial position of a company.

OBJECTIVES OF FINANCIAL STATEMENTS : The Objectives of Financial Statements are:
1. To provide financial data on economic resources and obligations of an enterprise.
2. To show implications of operating profit on the financial position of an enterprise.
3. To provide sufficient and reliable information to various parties interested in financial statements. 4.
Topresent a true and fair view of the business.
4. To serve as the basis of future operations.
ESSENTIALS OF FINANCIAL STATEMENTS
(i) Factual Information: Financial Statements should disclose the factual information about the financial
position of the company'.
(ii) Understandability: Financial Statements should be prepared following the accepted accounting principles
for better understanding of the users.
(iii) Comparable: Financial Statements should disclose the information in a manner that the user can compare
the information of the same entity over years (intra-firm comparison) and also compare the reporting
company's financial information with that of others (inter-firm comparison).
(iv) Verifiable: Information disclosed by the Financial statements should be verifiable from records of the company.
(v) Relevant: Information disclosed by the Financial Statements should be in accordance with legal requirements. It
is so because they are considered relevant to the user' having been set after thorough public debate.
(vi) Timeliness: Financial Statements should be prepared and presented within a reasonable period after the
accounting period is over. Financial Statements may lose their relevance because of undue delay caused in the
release of such information.
PARTIES INTERESTED IN FINANCIAL STATEMENTS OR USERS OF FINANCIAL STATEMENTS :--Users of Financial

Statements may be categorised into (1) Internal Users and (2) External Users.
1. Internal Users:- (i) Shareholders: Shareholders contribute capital in the business and thus are always
exposed to risk. In view of the risk involved, they are always interested in knowing the profitability, financial
strength and cash position of the company.
(ii) Management: Management has the responsibility to not only safeguard the investment but also to
increase its value by managing the business efficiently and maximising profit. The management makes
extensive use of accounting information to arrive at informed decisions such as determination of selling price,
cost controls and reduction, investment into new projects, etc.
(iii) Employees: Employees are entitled to bonus at the end of the year besides the salary and wages taken
every month. Bonus is linked to the profit earned by an enterprise. Thus, the employees are interested in
financial statements.
2. External Users:
(i) Banks and Financial Institutions: Banks and Financial Institutions provide loans to the businesses. It is
natural that the Banks and Financial Institutions will watch the performance of the business to know whether
it is making progress as projected to ensure the safety and recovery of the loan advanced. Cash Flow
Statement and Segment Reports enable them to assess cash position and whether the business segments are
making progress as planned and projected.

(ii) Investors and Potential Investors: Investment involves risk and the investors do not have direct control
over business affairs. Therefore, they rely on the available accounting information and seek answers to
questions such as: What is the earning capacity of the enterprise and how safe is its investment?
(iii) Creditors: Creditors are the parties who supply goods or services on credit. Before granting credit,
creditors satisfy themselves about the creditworthiness of the business. The financial statements help them
immensely in making such an assessment.
(iv) Government and its Authorities: The government makes use of financial statements to compute national
income accounts and other information. The information so available enables it to take policy decisions.
Government authorities assess the correct tax dues from an analysis of financial statements.
(v) Securities and Exchange Board of India (SEBI): SEBI and other agencies like to study the financial
statements to see whether a company is within its limit and the interest of the investors is well protected.
LIMITATIONS OF FINANCIAL STATEMENTS
(i) Historical Records: Shareholders, investors and lenders, etc., are more interested in knowing the likely
position of business enterprises in the future. The Financial Statements are not of much help as the
information given in these statements is historical in nature.
(ii} Affected by Estimates: Financial Statements are the outcome of accounting concepts and conventions
combined with estimates. Stock valuation, provision for depreciation, etc., are based on estimates. Therefore,
financial statements are not free from bias.
(iii) Different Accounting Practices: The Financial Statements can be drawn up on the basis of different
accounting practices. For example, depreciation can be provided either on straight-line basis or on written-
down value basis. Profit earned or loss incurred will be different when different practices are followed.
(iv) Qualitative Elements are Ignored: Financial Statements portray the position in monetary terms. The profit
or loss position or the financial position excludes things which cannot be expressed or recorded in monetary
terms. Financial statements ignore the qualitative elements such as quality of management, quality of staff,
public relations, etc.
(v) Price Level Changes are Ignored: Different assets are shown at historical cost. Financial Statements,
therefore, ignore the price level changes or present value of the assets.
(vi) Cannot Meet the Purpose of all Parties: The number of parties interested in the Financial Statements are large
and their interests vary. Financial Statements, therefore, cannot meet the purpose of all interested parties.
CONTENTS OF ANNUAL REPORT : The annual report of a company, as per law, should disclose the prescribed
information to enable the users to make informed judgments and decisions. The information is disclosed in the
Financial Statements, Board Report and by a separate statement being part of the annual report. A set of annual
report of a company has:
1. A Report by the Board of Directors.

2. Auditors' Report to the Shareholders.
3. Financial Statements:
(i) Balance sheet as at the end of the financial year;
(ii) Statement of profit and loss for the year ended; and
(iii) Cash flow statement.
4. Notes to Accounts:
(i) Accounting Policies followed by the company;

(ii) Notes to Accounts giving details of line items in Balance Sheet and Statement Profit and Loss;
(iii) Explanatory notes explaining significant transactions and events; and
(iv) Additional information required to be disclosed as per Schedule III of the Companies Act, 2013.
Let’s start detail discussion on Format of FINANCIAL STATEMENTS:
BALANCE SHEET:- is a financial statement that summarises company's Equity (Shareholders' Funds), Liabilities and
Assets at a specific point of time. These three Balance Sheet segments show what the company owns and what it
owes. Balance Sheet of a company is prepared following the same principles as are followed in preparation of
Balance Sheet of a sole proprietorship or partnership firm. However, it differs from them in presentation. Balance
Sheet of a company is prepared in the prescribed format, i.e., Schedule III, Part I, of the Companies Act, 2013.
FORMAT OF BALANCE SHEET:

Particulars Note Figures as at the end Figures as at the end
No. current reporting of previous
period reporting period
A. Equity and Liabilities
1. Shareholder’s fund ------- -------
(a) Share capital 1 ------- -------
(b) Reserves and surplus 2 ------- -------
(c) Money received against share warrants 3
(2) Share application money pending allotment 4 ------ -------

(3) Non-current liabilities
(a) Long-term borrowings 5 ------- -------
(b) Deferred tax liabilities (Net) 6 ------- -------
(c) Other long term liabilities 7 ------- -------
(d) Long-term provisions 8 ------- -------
(4) Current liabilities

(a) Short-term borrowings 9
(b) Trade payables 10
(c) Other current liabilities 11
(d) Short-term provisions 12
Total (A) ------- -------
B. Assets
(1) Non-current assets
(a) Property, plant and equipments
(i) Tangible assets 13 ------- -------
(ii) Intangible assets 14 ------- -------
(iii) Capital work-in progress 15 ------- -------
(iv) Intangible assets under development 16 ------- -------
(b) Non-current investments 17 ------- -------
(c) Deferred tax assets (net) 18 ------- -------
(d) Long-term loans and advances 19 ------- -------
(e) Other non-current assets 20 ------- -------
(2) Current assets
(a) Current investments 21 ------- -------
(b) Inventories 22 ------- -------
(c) Trade receivable 23 ------- -------
(d) Cash and cash equivalent 24 ------- -------
(e) Short-term loans and advances 25 ------- -------
(f) Other current assets 26 ------- -------
Total (B) ------- -------

MEANING OF KEY TERMS USED IN BALANCE SHEET

1. Shareholders' Funds: Shareholders' Funds are the funds belonging to the shareholders of the company.
They consist of Share Capital; Reserves and Surplus and Money received against Share Warrants.
(a) Share Capital; It is the amount received by the company as capital. It includes both Equity Share Capital
and Preference Share Capital.
(b) Reserves and Surplus:
Reserves: It is the amount set aside out of Surplus, i.e., Balance in Statement of Profit and Loss or amount
received as Securities Premium. A reserve may be free reserve or non free reserve. Examples of reserves are
security premium reserve, capital reserve, revaluation reserve, tax reserve, shares option outstanding account(
also called ESOP) etc.
Surplus is the amount of accumulated profit which may be appropriated towards reserve or for payment ofdividend.
(c) Money Received against Share Warrants. It is the amount received against Share Warrants. Share
Warrants are the financial instruments which give the holder the right to acquire Equity Shares in the company
at a specified date and at a specified rate.
2. Share Application Money Pending Allotment ; It is the amount received as share application and against
which the company will make allotment.
3. Non-Current Liabilities ; Non-current Liabilities are defined in Schedule III of the Companies Act, 2013 as
those liabilities which are not current liabilities. These are sub-classified into: Long-term Borrowings; Deferred
Tax Liabilities (Net); Other Long-term Liabilities; and Long-term Provisions.
(a) Long-term Borrowings ; . Long-term borrowings are the borrowings which as on the date of borrowing are
repayable after more than 12 months from the date of Balance Sheet or after the period of Operating Cycle. For e.g.
Debentures,long term loan, secured loan,Bonds,unsecured loan,mortgage loan, public deposits,term loan,bonds etc.
(b) Deterred Tax Liabilities (Net); It is the amount of tax on the temporary difference between the accounting
income and taxable income. It is only a book entry and not an actual liability. It arises when accounting income
is more than the taxable income.( detail discussion is not in your syllabus)
(c) Other Long-term Liabilities: They are the Long-term Liabilities other than Long-term Borrowings of the
company.e.g premium payable on redemption of debentures.
(d) Long-term Provisions:- These are the provisions for liabilities that will be payable after 12 months from the
date of Balance Sheet or after the period of Operating Cycle. Provident fund, employees profit sharing fund,
gratuity fund, Provision for Earned Leave and Provision for Warranty etc.
4. Current Liabilities: current liabilities are those liabilities which are:
(a) expected to be settled in company's normal Operating Cycle; or
(b) due to be settled within 12 months after the reporting date. (Reporting date is the date on which financial
statements are prepared); or
(c) held primarily for the purpose of being traded; or
(d) there is no unconditional right to defer settlement for at least 12 months after the reporting date.
Note: Operating Cycle: It is the time between the acquisition of assets for processing and their realisation into
Cash and Cash Equivalents. Where the Operating Cycle cannot be identified, it is assumed to be a period of 12

months. Operating Cycle can be different for different businesses. Current Liabilities are classified into Short-
term Borrowings; Trade Payables; Other Current Liabilities; and Short-term Provisions.
(a) Short-term Borrowings; These are the borrowings that are repayable within 12 months from the date of
Balance Sheet or within the period of Operating Cycle. For e. g. Bank overdraft, cash credit, loans repayable
within 12 months, Loans repayable on demand etc.
(b) Trade Payables:- These are the amounts payable within theperiod of 12 months from the date of Balance
Sheet or within the period of Operating Cycle for goods purchased or services taken in the ordinary course of
business. It includes Bills Payable and Sundry Creditors.
(c) Other Current Liabilities; These are short-term liabilities, other than short-term borrowings, trade payables
and short-term provisions. E.g. outstanding expenses, advance income, unpaid dividend, income tax payable,
interest accrued and due, interest accrued but not due, Share Application money received by the company and
which is to be refunded to the applicants, i.e., against which shares will not be allotted to the applicants,
Current Maturities of Long-term Debts, Unpaid matured deposits and interest accrued thereon, Unpaid
matured debentures and interest accrued thereon, Calls -in-Advance, Provident Fund Payable, ESI Payable,
Central Sales Tax Payable, and VAT Payable, etc.
(d) Short-term Provisions; These are provisions for liabilities that will be payable within 12 months from the
date of Balance Sheet or within the of Operating Cycle. E.g. provision for tax, proposed dividend etc.
5. Non-current assets: Non-current assets are those assets which are not current assets. These are sub-
classified into: Fixed Assets; Non-current Investments; Deferred Tax Assets (Net); Long-term Loans and
Advances; and Other Non-current Assets.
(a) Fixed Assets: they can further be divided into following parts:
(i) Tangible Assets: These are the assets which have physical existence, i.e., can be seen and touched.
Examples are: land, building, machinery and computers, etc.
(ii) Intangible Assets:These are the assets which do not have physical existence, i.e., cannot be seen and
touched. Examples are: Goodwill, Brands/Trademarks, Computer Software, Mastheads and Publishing Titles,
Mining Rights, Copyrights, Patents and other Intellectual Property Rights, Services and Operating Rights,
Recipes, Formulae, Models and Designs, Licence and Franchise, etc.
(iii) Capital Work-in-Progress:Capital Work-in-Progress means expenditure incurred on construction or

development of tangible assets not yet complete.
(iv) Intangible Assets Under Development:Intangible Assets Under Development means expenditure
incurred on development of intangible assets not yet complete.
(b) Non-current Investments. Non-current Investments are those investments that are invested to be
held for a period of more than 12 months from the date of Balance Sheet or for a period that is more
than the period of Operating Cycle.
(c) Deferred Tax Assets (net);It is the amount of tax on the temporary difference between the
accounting income and taxable income. It is only a b ok entry and not an actual asset. It arises when
accounting income is less than the taxable income. ( detail discussion is not in your syllabus)
(d) Long-term Loans and Advances; Long-term Loans and Advances are loans and advances given by the
company that are repayable or adjustable after 12 months from the date of Balance Sheet or after the period
of Operating Cycle e.g. Capital Advances for acquiring fixed assets, security deposit for electricity and
telephone, long-term loans to employees and long-term advances to suppliersetc.

(e) Other Non-Current Assets; All non-current assets that are not shown or classified under the above
heads are Other Non-current Assets. E.g discount on issue of debentures to be written off after 12 months,
Long-term Trade Receivables etc.
(6) Current assets; Current assets are those assets which are:
(a) expected to be realised in or intended for sale or consumption in normal Operating Cycle of the company;
or (b) held primarily for the purposes of trading; or (c) expected to be realised within 12 months from the
reporting date or closing date; or (d) Cash and Cash Equivalent unless it is restricted from being exchanged or
used to settle a liability for at least 12 months after the reporting date.
Current Assets are classified into:
(a) Current Investments; Current Investments are those investments that are invested to be held for a
period of less than 12 months from the date of Balance Sheet or within the period of Operating Cycle.
(b) Inventories: Inventories (stock) is a tangible asset held: (i) for the purpose of sale in the normal
course of (ii) for the purpose of using it in the production of goods meant for sale or service to be
rendered.In case of trading company, it comprises of stock of goods traded in.
In case of a manufacturing company, it comprises of raw materials, work-in-progress and finished
goods. Inventories are valued at lower of cost or net realisable value, i.e., market price.
(c) Trade Receivables: Trade receivables are the amounts receivable within 12 month from the
reporting date or within the period of Operating Cycle for sale of goods or services rendered in the
normal course of business. It includes Bills Receivable and Sundry Debtors.
(d) Cash and Cash Equivalents: It includes cash in hand and balance with bank, Cheques drafts on hand,
Earmarked balance with banks (e.g. Unpaid Dividend), Bank Deposits with more than 12 month maturity.
(e) Short-term Loans and Advances; Short-term Loans and Advances are loans and advances given by the
company that are receivable or adjustable within 12 months from the date of Balance Sheet or within the
period of Operating Cycle.
(f) Other Current Assets; All other current assets that are not shown or classified under the above heads are
shown as Other Current Assets. E.g. prepaid expenses, accrued income etc
FORMAT OF STATEMENT OF PROFIT AND LOSS.

Particulars Note Figures for Figures for
No. the current the previous
reporting reporting
period period
Revenue from operations ------ ------
Other income ------ ------
Total revenue (I+II) ------ ------
Expenses:
Cost of materials consumed ------ ------
Purchases of Stock-in-Trade ------ ------
Changes in investments of finished goods, work-in- ------ ------
progress and Stock-in-Trade
Employee benefits expense
Finance costs
Depreciations and amortization expenses
Other expenses
Total expenses ------ ------
Profit before tax ------ ------
Less:Tax expense ------ ……
Profit or loss for the period …… …..

DISCUSSION OF IMPORTANT TERMS USED:
(i) Revenue from Operations :- It is the revenue earned by the company from its operating activities, i.e.,
business activities carried on by the company to earn profit.(net sales(sales – sales return), for a manufacturing
company, fees earned by a service company, interest and dividend earned by a financial company etc)
(ii) Other Income; It is the revenue earned by the company from the sources other than its operating activities.
E.g. discount received, profit on sale of fixed assets, commission received, bad debts recovered, interest
earned on fixed deposits etc.
(iii) Cost of Materials Consumed; It is the aggregate of cost of raw materials and other materials used in
manufacture of goods.
Cost of material consumed= opening stock of raw material + purchase of raw materials – closing stock of raw
materials.
(iv) Purchase of Stock-in-Trade; It means purchases of goods for resale, i.e., goods purchased on which no
further process is carried before sale.
(v) Change in Inventories of Finished Goods, WIP and Stock-in-Trade; . It is the difference between the
opening inventories and closing inventories of Finished Goods, WIP and Stock-in-Trade. It is shown separately
in the Notes to Accounts and one single amount on the face of the Statement of Profit and Loss.
(vi) Employees Benefit Expenses; These are the expenses incurred for the benefit of employees.
Examples are: wages, salaries, bonus, staff welfare and medical reimbursement, etc.
(vii) Finance Costs; These are the cost incurred by the company on the borrowing, i.e., loans taken by it. E.g
interest paid on loans, loan processing fees, discount/loss on issue of debenturesetc.
Note: bank charges are not shown under finance cost. It is shown under “other expenses” because they are
paid for services availed from bank.
(viii) Depreciation and Amortisation; Depreciation is allocation of cost of fixed asset over its useful life.
Amortisation is the term associated with writing off intangible assets.
(ix) Other Expenses; Expenses that do not fall in the above classifications are shown as Other Expenses. e.g
Administration Expenses, Selling and Distribution Expenses and General Expenses, carriage inward, carriage
outward, Audit fees etc.
IMPORTANT NOTE: Schedule III of the Companies Act, 2013 requires that details of entries, i.e., line items in
the Balance Sheet and Statement of Profit and Loss be given in the Notes to Accounts which should be cross
referenced with the line item in the financial statement. For example, Share Capital shall be shown as one
amount in the Balance Sheet and details thereof (Equity Share Capital and Preference Share Capital,
authorised capital, issued capital and subscribed capital) shall be given in the Notes to Accounts.
Question 1. Sony Ltd. has an opening debit balance of 1,00,000 in Surplus, i.e., Balance in Statement of Profit
and Loss. During the year ended 31st March, 2019, it earned a profit of 3,00,000. Prepare Note to Accounts on
Reserves and Surplus showing the amount to be carried to Balance Sheet.
Question 2. HP Computers Ltd. has an opening credit balance of Securities Premium Reserve and Surplus, i.e.,
Balance in Statement of Profit and Loss of 2,00,000 and 1,00,000 respectively. During the year, it incurred a
loss of 1,50,000. How will it be shown in Note to Accounts on Reserves and Surplus?

Question 3. Casio Machines Ltd. has an opening credit balance of₹ 5,00,000 in Securities premium Reserves
and also debit balance of ₹ 10,00,000 in Surplus, i.e., Balance in Statement of Profit and Loss in Reserves and
Surplus. During the year ended 31st March loss of ₹ 15,00,000 was incurred. How will it be shown in Note to
Accounts on Reserves and Surplus?
Solution: Note to Accounts

Particulars ₹
Reserves and Surplus
(a)Securities Premium Reserve 5,00,000
(b) Surplus, i.e., Balance in Statement of Profit and Loss 10,00,000
Opening Balance 15,00,000
Add: Profit (Loss) for the year Balance 25,00,000
Total (a + b) 20,00,000
Question 4. Samsung One Ltd. has opening credit balance of 5,00,000 in Surplus, i.e., Balance in Statement of Profit
and Loss. Debenture Redemption Reserve has opening balance of 1,25,000. It earned a profit of Rs 2,00,000 for the
year ended 31st March, 2019. It was decided to transfer 50,000 to Debenture Redemption Reserve and also
proposed a final dividend of 1,00,000 on its Equity Shares. Show the appropriations by preparing Note to Accounts
on Reserves and Surplus. How will be Proposed Dividend shown in the Note to Accounts?
Question 5. COC Ltd. has opening credit balance of 5,00,000 in Surplus, i.e., Balance in Statement of Profit and Loss.
Debenture Redemption Reserve has opening balance of 1,25,000. It earned a profit of Rs 2,00,000 for the year
ended 31.3.19. It was decided to transfer 50,000 to Debenture Redemption Reserve and also proposed a final
dividend of Rs 1,00,000 on its Equity Shares against last year proposed dividend of Rs 90,000. Show the
appropriations by preparing Note to Accounts on Reserves and Surplus. How will be Proposed Dividend shown in the
Note to Accounts?
Question 6. Premium Stores Ltd. has the following balances in Reserves and Surplus: Debenture Redemption
Reserve 5,00,000 Securities Premium Reserve 6,00,000 Surplus, i.e., Balance in Statement of Profit and Loss
(1,50,000) During the year ended 31st March, 2019, it earned a profit after tax of 5,00,000. It decided to appropriate
1,00,000 towards Debenture Redemption Reserve, 1,25,000 towards General Reserve and declare a final dividend of
75,000. Show how it will be shown in the Note to Accounts on Reserves and Surplus? Also, show how will Proposed
Dividend be shown in the Balance Sheet?
Question 7. Classify the liabilities given below as Non-current Liabilities and Current Liabilities giving reasons for
such classification:
Particulars Operating Cycle Expected period of

(in month) payment (in month)
(i) Trade Payables 10 8
(ii) Trade Payables 10 12
(iii)Trade Payables 10 15
(iv) Trade Payables 18 15
(v) Trade Payables 18 24
Solution:
(i) It is a current liability because expected settlement time is 8 months which is less than the higher of 12
months or the period of operating cycle, i.e., 10 months.
(ii) It is a current liability because expected settlement time is 12 months which is equal to the higher of 12
(iii) It is a non- current liability because expected settlement time is 15 months which is more than the higher
of 12 months or the period of operating cycle, i.e., 10 months.

(iv) It is a current liability because expected settlement time is 15 months which is less than the higher of 12
(v) It is a non-current liability because expected settlement time is 24 months which is more than the higher of
12 months and the period of operating cycle, i.e., 18 months.
Question 8. Axis Consultants Ltd. issued 10,000; 9% Debentures of 100 each on 1st October, 2013 to be
redeemed on 30th September, 2020. How will it be classified or shown in the Balance Sheet as at 31st March,
2020. Give reason.
A part of long-term borrowing may become due for repayment within 12 months of the date of Balance Sheet
or within the period of Operating Cycle. In such a case, part of the borrowing that becomes due for repayment
is shown under major head 'Current Liabilities' and sub-head 'Other Current Liabilities' as 'Current Maturities of
Long-term Debts'.
Question 9. COC Consultants Ltd. issued 10,000; 9% Debentures of 100 each on 1st October, 2013. Out of
st
it Rs 2,00,000 to be redeemed on 30th September, 2019 and remaining on 31 March 2026. How will it be
classified or shown in the Balance Sheet as at 31st March, 2019. Give reason.
Difference between Current Maturities of Long-term Debts and Short-term Borrowings.
Current Maturities of Long-term Debts is that part of long-term borrowings which is due for payment
within 12 months of the date of Balance Sheet or within the period of Operating Cycle. For example,
Debentures issued on 1st April, 2015 forRs 5,00,000 redeemable in five equal yearly instalments starting
from 1st April 2016. 1,00,000 redeemable within 12 months of the date of Balance Sheet i.e., as at 31st
March, 2016 (assuming Operating Cycle is of 12 months or less; will be shown as 'Current Maturity of
Long-term Debts and balance 4,00,000 will be shown as 'Long-term Borrowings'. Short-term Borrowings
are the borrowings of the company that are due for ,payment within 12 months or within the period of
Operating Cycle from the date of loan. For example, debentures issued to be redeemed in 10 months
from the date of issue is Short-term Borrowing.
Interest Accrued but not Due an Borrowings: Interest accrued but not due means interest is provided in
the books of account but it has not become due for payment. For example, interest is payable half-yearly
in June and December. If the company closes its books on 31st March, it will provide interest for the
quarter January to March following the accrual concept of accounting. But the interest will become due
for payment on 30th June along with the interest for the quarter April to June. The interest for the
quarter January to March will be classified as 'Interest accrued but not due'.
(iii) Interest Accrued and Due on Borrowings: Interest accrued and due means interest is provided in the
books of account and is due for payment. In the above example, interest for half-year June to December
is provided in the books of account but has not been paid. It is 'Interest accrued and due' and shown as
Other Current Liability. Remember: Interest Accrued and Due and Interest Accrued but not Due on
borrowings are shown as Other Current Liabilities.
Liability and Provision :The two terms 'Liability' and 'Provision' differ from each other as follows:
Liability: The term 'Liability' is used where the amount of the liability is known. For example, salary for
March, 2016 amounting to 1,00,000 is payable. It is classified or shown as outstanding liability because
the liability and the amount is known,
Provision: The term 'Provision' is used where the liability is known to exist but the amount is not known.
It is estimated with substantial accuracy. Provision is a charge against profit, i.e., is debited to Statement
of Profit and Loss. Examples of Provision: Provision for Doubtful Debts, Provision for Discount on Debtors

Provision for Depreciation, Provision for Warranties, Provision for Repairs, Provision for Expenses (say
Electricity), Provision for Tax.
Difference between Provision and Reserve

Basis Provision Reserve
1. Nature It is a liability or diminution of value of It is shareholders money
It is shareholders' money. assets or
estimated loss.
2. Purpose Provision is created for some specific Reserve may be created for specific
Reserve may be created for a specific purpose like Debenture Redemption
purpose say depreciation, expenses, Reserve and it may not be created for
etc. a specific purpose like general
reserve.
3. Charge Vs. Provision is a charge against the profit Reserve is an appropriation of profit.
Appropriation Reserve is an appropriation of profit. It is made only when there is profit.
4. Disclosure in It is shown under Expenses in the It is shown in balance sheet under
Income Statement Statement of Profit and Loss. Shares holder Fund.
5. Disclosure in Provisions are shown under Long-term Reserve is shown as a separate item
Balance Sheet as a Provisions or Short-term under ‘Reserve and Surplus’ in the
Provisions or as deduction from the Equity and Liabilities part of the
value of concerned assets in the assets balance sheet.
part of Sheet. the Balance Sheet.
6. Investment Amount of provision cannot be Reserve can be invested outside the

Outside Business invested It always remains in the outside business but in that case it is
business. known as fund.
7.Legal Requirement Provision is made to comply with Creating a reserve is a matter of
accrual concept, prudence concept and financial prudence.
because of legal requirement.
Question 10. State the major heads under Equity and Liabilities part of the company's Balance Sheet.
Question11. Name the sub-heads under the head 'Shareholders' Funds'.
Question12. Name the sub-heads under the head 'Non-current Liabilities' in the Equity and Liabilities part of
the Balance Sheet under Schedule III of the Companies Act, 2013
Question 13. Name the sub-heads under the head 'Current Liabilities' in the Equity and Liabilities part of the
Balance Sheet.
Question 14. Name any five items that are shown under Reserves and Surplus.
Question15. Name any four items that are shown under Long-term Borrowings.
Question16. Name any five items that are shown under ‘Other Current Liabilities’.
Question17. Under which heads are the following items shown in the Balance Sheet of a company as per
Schedule III?
(i) Forfeited Shares Account, (ii) Proposed Dividend, (iii) Unclaimed Dividend, and (iv) Arrears of Fixed
Cumulative Dividend.
Solution:
(i) Forfeited Shares Account is added to the 'Subscribed Share Capital' under the sub-head Share Capital
of the major head Shareholders' Funds in the Equity and Liabilities part of the balance sheet.
(ii) Proposed Dividend is shown in notes to accounts.
(iii) Unclaimed Dividend is shown as Other Current Liability under the head Current Liabilities in the Equity
and Liabilities part of the Balance Sheet.

(iv) Arrears of Fixed Cumulative Dividend is shown as Contingent Liability in the Note to Accounts.
Question 18. Under which main head and sub-head of Equity and Liabilities are the following items
shown in a company's Balance Sheet as per Schedule III?
(i) Debentures (ii) Public Deposits (iii) Securities Premium Account (vi) Interest Accrued Reserve
(v) Forfeited Shares and due on Debentures (iv) Capital Reserve (vii) Bills Payable
(viii) Advances Received from Customers (ix) Sundry Creditors
Solution:
S. No. Main Head Sub-Head

(i) Debentures Non-current Liabilities Long- terms Borrowings
(ii) Public Deposits Non-current Liabilities Long- terms Borrowings
(iii) Securities Premium Reserve Shareholder funds Reserve and surplus
(iv) Capital Reserve Shareholder funds Reserve and surplus
(v) Forfeited Shares Account Shareholder funds Subscribe Capital (shown by way
of addition)
(vi) Interest Accrued and due on Current Liabilities Other Current Liabilities
Debentures
(vii) Bills Payable Current Liabilities Trade payables
(viii) Advances Received from Current Liabilities Other Current Liabilities
customers
(ix) Sundry Creditors Current Liabilities Trade payables
Question 19. Under which main heads and sub-heads of Equity and Liabilities are the following items shown in
the Balance Sheet of a company as per Schedule III?
(i) Unclaimed Dividend, (ii) Calls-in-Arrears, (iii) Calls-in-Advance, (iv) Interest Accrued but not due on
Debentures, and (v) Arrears of Fixed Cumulative Preference Dividends.
Solution:
S. Items Main Head Sub-head

No.
1. Unclaimed Dividend Current Liabilities Other Current
Liabilities
2. Calls-in-Arrears Shareholders' Funds Subscribed Capital
(shown by way of
deduction)
3. Calls-in-Advance, Current Liabilities Other Current
Liabilities
4. Interest Accrued but not due on Current Liabilities Other Current
Debentures, and Liabilities
5. Arrears of Fixed Cumulative Preference As a footnote as …
Dividends. Contingent Liability
Question 20. Under which main heads and sub-heads of Equity and Liabilities part of the Balance Slim as per
Schedule III of a company are the following items shown?
(i) Interest Accrued and due on Secured Loans,

(ii) Interest Accrued but not due on Unsecured Loans,
(iii) Debentures Redemption Reserve,
(iv) Capital Redemption Reserve,
(v) Advances from Customers (long-term).

Solution:
S. No. Items Main head Sub head

1. Interest Accrued and due on Secured Current Liabilities Other current Liabilities
Loans
2. Interest Accrued but not due on Unsecured Current Liabilities Other current Liabilities
Loans
3. Debentures Redemption Reserve Shareholders' Funds Reserve and surplus
4. Capital Redemption Reserve Shareholders' Funds Reserve and surplus
5. Advances from Customers (Long-term) Non-current Liabilities Other long terms
liabilities.
Question 21. Give major heads under which the following items will be shown in a company's Balance Sheet as
per Schedule III, Part I of the Companies Act, 2013:
(i) Trade Payables, (ii) Provision for Tax, (iii) Surplus, i.e., Balance in Statement of Profit and Loss (Dr.)
(iv) Surplus, i.e., Balance in Statement of Profit and Loss.(Cr)

st
Question 22. How are the following two items shown in a company's Balance Sheet as at 31 March, 2019 as
per the requirements of Schedule III?
General Reserve (since 31st March, 2018) 3,00,000; Surplus, i.e., Balance in Statement of Profit and Loss
(Debit) for 2018-19 Rs 2,00,000.
Solution: BALANCE SHEET as at 31st March, 2019
Particulars Note no. ₹

EQUITY AND LIABILITIES
Shareholders' Funds
Reserves and Surplus 1 1,00,000
Particulars ₹
Reserves and surplus
General reserve (Opening) 3,00,000
Surplus i.e., Balance in statement of profit and loss ( Dr. Balance) 2,00,000
1,00,000
Question 23. Classify the following into non-current assets and current assets and give reasons for such
classification:
(i) A company has an operating cycle of 11 months and the expected period of realisation of trade receivables is 10
months.
(ii) A company has an operating cycle of 11 months and the expected period of realisation of Tarde receivables is 12
months.
(iii) A company has an operating cycle of 11 months and the expected period of realisation of trade receivables is 15
months.
(iv) A company has an operating cycle of 20 months and the expected period of realisation of trade receivables is 15
months.
(v) A company has an operating cycle of 20 months and the expected period of realisation of trade receivables is 24
months.

Solution:
(i) Trade Receivables will be Classified as Current Asset because the operating cycle is 11 months and expected
period of realisation is 10 month which is less than the higher of period of operating cycle and 12 months.
(ii) Trade Receivables will be classified as Current Asset because the period of operating cycle is 11 months and
expected period of realisation is 12 months which is equal to higher of operating cycle and 12 months.
(iii) Trade Receivables will be classified as Non-current Asset because the period of operating cycle is 11 months and
expected period of realisation is 15 months which is more than higher of operating cycle and 12 months.
(iv) Trade Receivables will be classified as Current Asset because the period of operating cycle is 20 months and
expected period of realisation is 15 months which is less than the higher of period of operating cycle and the period
of 12 months.
(v) Trade Receivables will be classified as Non-current Asset because the period of operating cycle is 20 months and
expected period of realisation is 24 months which is more than the higher of operating cycle and also the period of
12 months.
3. Contingent Liabilities and Commitments
(a) Contingent Liabilities are those liabilities which may or may not arise because they are dependent on a
happening in future. For example, a claim is filed against the company in a consumer court by a customer. The
court may hold the company at fault and may impose penalty. It may happen otherwise also. Whether the
company has a liability or not is dependent on court order. Thus, it is contingent liability. Contingent liability is
not recorded in the books of account but is disclosed in the Notes to Accounts for the information of the users.
It is to be classified into:
(i) Claims against the company not acknowledged as debts;
(ii) Guarantees given against third party; and
(iii) bill discounted with bank.
(b) Commitments mean financial commitments due to activities agreed to by the company to be undertaken
by it in future. They are to be classified into:
(i) Estimated amounts of contracts remaining to be executed on Capital Account and not provided for;
(ii) Uncalled liability on shares and other investments partly paid; and
(iii) Other commitments (Nature to be specified). Example of other commitments: If the company has issued
say 10% Cumulative Preference Shares but could not pay the dividend because of losses. Unpaid dividend shall
he classified as Commitments'.
Question 24. State the major heads under which the items appearing in the Assets part of the company's
Balance Sheet are classified.
Solution: The major heads on Assets part are:

(i) Non-current Assets, and (ii) Current Assets.
Question25. Name the sub-heads under the head 'Non-current Assets in the Assets part of the Balance Sheet
as per Schedule III.Solution:
(i) Fixed Assets, (ii) Non-current Investments, (iii) Deferred Tax Asset (Net),
(iv) Long-term Loans and Advances, and (v) Other Non-current Assets.

Question 26. Name the sub-heads under the head 'Fixed Assets' of the Balance Sheet as per Schedule III.
Solution: (i) Tangible Assets, (ii) Intangible Assets,
(iii) Capital Work-in-Progress, and (iv) Intangible Assets under Development.
Question 27. Name the sub-heads under the head 'Current Assets' of the Balance Sheet as per Schedule III.
Question 28. Name any five items of Tangible Assets.
Question 29. Name any five items of Intangible Assets.
Solution:
(i) Goodwill, (ii) Brand/Trademark,
(iii) Computer Software, (iv) Mining Rights, and (v) Licences and Franchise.
Question 30. List five items which are included under the head Non-current Investment'.
Solution:
(i) Investment in Property, (ii) Investment in Equity Instruments,
(iii) Investment in Preference Shares, (iv) Investment in Debentures or Bonds, and
(vi) Investment in Mutual Funds.
Question 31. List five items that are included under Inventories.
Solution: (i) Raw Materials,(ii) Work-in-Progress, (iii) Finished Goods, (iv) Stock-in-Trade, and (v) Loose Tools.
Question 32. List five items that are included under Current Investments.
Solution: (i) Investment in Equity Instruments, (ii) Investment in Preference Shares, (iii) Investment in
Government or Trust Securities, (iv) Investment in Debentures (v) Investment in Mutual Funds.
Question 33. Rearrange the following items under assets according to Schedule III:
(i) Office Equipment, (ii) Trademarks, (iii) land, (iv) Stores and Spare Parts
(v) Deposit with Electricity Supply Company. (vi) Loose tools (vii) Goodwill
(viii) Bills Receivable (ix) Debtors (x) Building (xi) Furniture (xii) Vehicles
(xiii) Advance to subsidiaries (xiv) Cash to bank (xv) Cash in hand (xvi) Work in progress (Machinery)
(xvii) Stock- in-trade (xviii) Plant (xix) Interest Accrued on Investment and
Solution;
(i) Fixed Assets (Tangible): Office Equipment, Land, Building, Furniture, Vehicles, Plant.
(ii) Fixed Assets (Intangible): Goodwill, Trademarks.
(iii) Capital Work-in-Progress: Work-in-Progress (Machinery).
(iv) Long-term Loans and Advances: Advance to Subsidiaries, Deposits with Electricity Supply Company.
(v) Inventories: Loose Tools, Stock-in-Trade, Stores and Spare Parts.
(vi) Trade Receivables: Bills Receivable, Debtors.
(vii) Cash and Cash Equivalents: Cash at Bank, Cash in Hand.
(viii) Other Current Assets: Interest Accrued at Investments.

Question 34. Give the heads under which following items are shown in a company's Balance Sheet as per
Schedule III, Part I of the Companies Act, 2013: (i) Mortgage Loan (ii) Patents (iii) Investments (iv)General
Reserve (v) Bills Receivable (vi) 10% Debentures
Solution;
S.no. Items Main head Sub head (if any)
1 Mortgage Loan Non-current liabilities Long-term Borrowings
2 Patents Non-current Assets Fixed Assets—Intangible
3 Investments Non-current Assets Non-current Investments
4 General Reserve Shareholders' Funds Reserves and Surplus
5 Bills Receivable Current Assets Trade Receivables
6 10% Debentures Non-current Liabilities Long-term Borrowings
Question 35. Under what heads and sub-heads will the following items appear in the Balance Sheet of a
company as per Schedule III, Part I of the Companies Act, 2013: (i) Debentures, (ii) Loose Tools, (iii)
Calls-in-Advance
Solution:
S. no. Items Main head Sub head
1 Debentures Non-current Liabilities Long-term Borrowings
2 Loose Tools Current Assets Inventories
3 Calls-in-Advance Current Liabilities Other Current Liabilities
Question 36.. Under what heads and sub-heads the following items will appear in the Balance Sheet of a
company as per Schedule Ill of the Companies Act, 2013:
(i) Premium on Redemption of Debentures; (ii) Loose Tools; (iii) Balances with Banks.
Solution:
S. No. Items Main Head Sub-head
1 Premium on Redemption of Non-current Liabilities Other Long-term
Debentures Liabilities
2 Loose Tools Current Assets Inventories
3 Balances with Banks Current Assets Cash and Cash
Equivalents
Question 37. Under what heads and sub-heads the following items will appear in the Balance Sheet of a
company as per Schedule III, Part I of the Companies Act, 2013
(i) Tax Reserve; (ii) outstanding Interest on Calls-in-Advance; (iii) Stores and Spares.
Solution:
1 Tax Reserve Shareholders' Funds Reserves and Surplus
2 Interest on Calls-in-Advance Current Liabilities Other Current Liabilities

3 Stores and Spares Current Assets Inventories
Question 38. Under what heads and sub-heads the following items will appear in the Balance Sheet of a
company as per Schedule III, Part I of the Companies Act, 2013: (i) Mining Rights (ii) Encashment of
Employees Earned Leave Payable on Retirement; (iii) Vehicles.
Solution:
1 Mining Rights Non-current Assets Fixed Assets—
Intangible Assets
2 Encashment of Employees Earned Leave Non-current Liabilities Long-term Provisions
Payable on Retirement
3 Vehicles Non-current Assets Non-current Assets Fixed Assets—Tangible
Assets

Question 39. Under which heads and sub-heads will the following items appear in the Balance Sheet of a
company as per Schedule III, Part I of the Companies Act, 2013:
(i) Subsidy Reserve; (ii) Mining Rights; (iii) Provision for Doubtful Debts.
S. No. Items Main head Sub head
1 Subsidy Reserve; Shareholders funds Reserves and Surplus
2 Mining Rights Non- current assets Fixed Assets—Intangible
Assets
3 Provision for Doubtful Debts Current assets Deduction from trade
receivables
Question 40. Under which major sub heading the following items will be placed in the balance sheet of a
company as per Schedule III part I of the company Act 2013.
(i) Accrued incomes (ii) loose Tools (iii) Provision for employees benefits
(iv) Unpaid Dividend (v) Short-terms-Loans (vi) Long-term Loans
Solution:
Particulars Major head Sub head

1 Accrued incomes Current Assets Other Current Assets
2 loose Tools Current Assets Inventories
3 Provision for employees benefits Non-Current Liabilities Long-term Provisions
4 Unpaid Dividend Current Liabilities Other Current liability
Short-terms-Loans Current Liabilities Short-term Borrowings
6 Long-term Loans Non-Current Liabilities Long-term Borrowings
Question 41.under which sub-heads will the following items be placed in the Balance Sheet of a company as
per Schedule III. Part I of the Companies Act, 2013;
(i) Capital Reserve (ii) loans repayable on Demand (iii) Goodwill

(iv) Bonds (v) Vehicles (vi) Loose Tools
Solution;
Particulars Sub head

(1) Capital Reserve Reserves and Surplus
(2) Bonds Long-term Borrowings
(3) loans repayable on Demand Short-term Borrowings
(4) Vehicles Fixed Assets—Tangible
(5) Goodwill Fixed Assets—Intangible
(6) Loose Tools Inventories
Question 42. Under which sub-headings will the following items be shown in the Balance sheet of a company
as per Schedule III of the Companies Act, 2013:
(i) Stores and Spares (iii) Short-term Borrowings (v) Long-term Investments
(ii) Trademarks (iv) Provision for Employees Benefit (vi) Accrued Incomes
Solution: Sub-Headings:
(i) Inventories; (iii) Current Liabilities/Short-term Borrowings; (v) Non-Current Investments;
(ii) Fixed Assets-Intangible; (iv) Long-term Provisions; (vi) Other Current Assets.
Question 43. State under which major headings the following items will be presented in the Balance Sheet of a
company asper Schedule III of Companies Act, 2013:
(1) Trademarks (ii) Capital Redemption Reserve (iii) Income received in advance

(iv) Stores and Spares (vi) Current Investments (v) Office Equipment
Solution: Major Headings:

(i) Non-Current Assets; (iii) Current Liabilities; (v) Non-Current Assets;
(ii) Shareholders' Funds; (iv) Current Assets; (vi) Current Assets.
Question 44. Under what main heads and sub-heads of Assets part are the following items classified or shown
in the Balance Sheet of a company as per Schedule III:
(i) Bills Receivable, (ii) Sundry Debtors, (iii) Long-term Investments,
(iv) Shares in listed companies (v) Prepaid Insurance,
(vi) Deposit with Customs Authorities, and (vii) Building.
Solution:
S. no. Items Main head Sub head
1 Bills Receivable, Current Assets Trade Receivables
2 Sundry Debtors Current Assets Trade Receivables
3 Long-term Investments, Non-current Assets Non-current Investments
4 Shares in listed companies Non-current Assets Non-current Investments
5 Prepaid Insurance Current Assets Other Current Assets

6 Deposit with Customs Authorities, Non-current Assets Long-term Loans and
Advances
7 Building. Non-current Assets Fixed Assets-Tangible
Assets
*Considering it to be deposited for long-term.
Question 45. Under which major headings the following items will be presented in the Balance Sheet of a
company as per Schedule III, Part I of the Companies Act, 2013:
(i) Loans provided repayable on demand (ii) Copyrights (iii) Cheques (iv) Stock of finished goods
(v) 9% Debentures repayable after three years (vi) Goodwill (vii) Loose tools (vi) General Reserve
Solution;
S. no. Items Major head
I Loans provided repayable on demand Current Asset
II Goodwill Non-current Assets
III Copyrights Non-current Assets
IV Loose tools Current Asset
V Cheques Current Assets
VI General Reserve Shareholders' Funds
VII Stock of finished goods Current Assets
VIII 9% Debentures repayable after three years Non-current Liabilities
Question 46. Under major headings and sub-headings will the following items be shown in the Balance Sheet
of a company as perSchedule III, Part I of the Companies Act, 2013?
(1) Net loss as shown by Statement of Profit and Loss (ii) Capital Redemption Reserve
(iii) Bonds (iv) Loans repayable on demand (v) Unpaid dividend vi) Buildings
(vii) Trademarks (viii) Raw materials

Solution
S.no. Items Major head Sub head
1 Net loss as shown by Statement of Shareholders' Funds Reserves and Surplus (As
Profit and Loss negative amount)
2 Capital Redemption Reserve Shareholders' Funds Reserves and Surplus
3 Bonds Non-current Liabilities Long-term Borrowings
4 Loans repayable on demand Current Liabilities Short-term Borrowings
5 Unpaid dividend Current Liabilities Other Current Liabilities
6 Buildings Non-current Assets Fixed Assets—Tangible
7 Trademarks Non-current Assets Fixed Assets—Intangible
8 Raw materials Current Assets Inventories
Question 47. Under which major headings and sub-headings the following items will be shown in the Balance
Sheet of a company as per Schedule III of the Companies Act, 2013?
(i) Bank Overdraft (ii) Cheques in Hand (iii) Loose Tools (iv) Long-term Provisions
Solution;
S.no. Items Major head Sub head
1. Bank Overdraft Current liabilities Short-term Borrowings
2. Cheques in Hand Current assets Cash and cash equivalents
3. Loose Tools Current assets Inventories
4. Long-term Provisions Non- Current liabilities Long terms provision
Question 48. Under which of major heading and sub heading the following items will be shown in the Balance
sheet of a company as per schedule III of the companies Act 2013?
(i) Long-term Loans (ii) Tarde marks (iii) Loose tools (iv) Drafts in Hand
Solution:
S. no. Items Major head Sub head
1. Long-term Loans Non-current liabilities Long terms borrowings
2. Loose Tools Current assets Inventories
3. Trademarks Non—current assets Fixed assets; Intangible
assets
4. Drafts in Hand Current assets Cash and cash equivalents
Question 49. Following balance have been extracted from books of Rama Ltd. on 31st March, 2019: Equity
Share Capital (1,00,000 Equity Shares of 10 each) ₹ 10,00,000; Securities Premium Reserve ₹2,00,000; 12%
Debentures₹ 4,00,000; Creditors ₹ 2,00,000; Dividend payable ₹50,000; Surplus, i.e., Balance in Statement of
Profit and Loss (Debit) 50,000; Land and Building 9,00,000; Government Bonds ₹5,00,000; Capital Work-in-
Progress (Building) ₹3,50,000 and Cash at Bank ₹50,000. Debentures were issued on 1st April, 2017
redeemable after 5 years, i.e., on 31st March, 2022. prepare Balance Sheet of the company as per Schedule III,
Part I of the Companies Act, 2013.
Solution:
Particulars Note no. Current year
I. EQUITY LIABILITIES
1. Shareholders' Funds
(a) Share Capital 1. 10,00,000
(b) Reserves and Surplus 2. 1,50,000
2. Non-Current Liabilities
Long-term Borrowings 3. 4,00,000
3. Current Liabilities
(a) Trade Payables 4. 2,00,000
(b) Short-term Provisions 5. 50,000
Total 18,00,000

II Assets
1. Non-current assets
(a) Fixed assets;
(i) Tangible assets 6. 9,00,000
(ii) Capital work-in-progress 7. 3,50,000
(b) Non-current investment 8. 5,00,000
2. Current assets
Cash and cash equivalents 9. 50,000
Total 18,00,000
Notes to Account
Particulars ₹
1. Share Capital
Authorised Capital.
Equity Shares of 10 each
issued Capital:
Equity Shares of 10 each
Subscribed Capital:
Subscribed and fully paid-up
1,00,000 Equity Shares of t 10 each 10,00,000
2. Reserves and Surplus
(a) Securities Premium Reserve 2,00,000
(b) Surplus, i.e., Balance in Statement of Profit and Loss 50,000
1,50,000
3. Long-term Borrowings
12% Debentures 4,00,000
4. Trade Payables
Creditors 2,00,000
5. other current liability
Dividend payable
6. Fixed Assets—Tangible Assets 9,00,000

Land and Building .
7.Fixed Assets—Capital Work-in-Progress 3,50,000
Building under Construction
8.Non-Current Investments 5,00,000
Government Bonds
9.Cash and Cash Equivalents
Cash at Bank 50,000
Question 50. (a) Beti Sports Ltd. is a manufacturer of cricket equipment. It sold waste from wood used for
manufacturing cricket bats for 1,00,000. Is the sale of waste Revenue from Operations? Give reasons.
(b) Beta Finance Ltd., a financial company, had invested its surplus funds of 10,00,000 in 10% Deposit with Tata
Housing Ltd. Is the interest received on the deposit Revenue from Operations or Other Income? Give reasons.
Question 51. Under which head following revenue items of a non-financial company will be shown?
(i) Sales; (ii) Sale of Scrap; (iii) Interest Earned; and (iv) Dividend received.
Solution: Revenue from Operations: Sales and Sale of Scrap. Other Income: Interest Earned and Dividend.
Question 52. Under which head following revenue items of a financial company will be shown?
(i) Interest Earned; (ii) Dividend; (iii) Profit on Sale of Asset; and (iv) Refund of Income Tax.
Solution: Revenue from Operations: Interest Earned and Dividend. Other Income: Profit on Sale of Asset and
Refund of Income Tax.

Question 53. Calculate Revenue from Operations, Other Income and Total Revenue for a non-financial
company from the following information: Sales 12,00,000; Sales Return Rs 2,00,000; Sale of Scrap 25,000;
Interest on Fixed Deposits 30,000; Dividend Earned 10,000.
Solution:
Particular ₹ ₹
I. Revenue from Operations
Sales 12,00,000
Less: Sales Return 2,00,000 10,00,000
Sale of Scrap 25,000
10,25,000
II. Other Income 30,000
Interest on Fixed Deposits 10,000
Dividend 40,000
Total Revenue (I + II) 10,65,000
Question 54. Calculate Revenue from Operations, Other Income and Total Revenue for a financial company from
the following information:
Miscellaneous Income 5,000; Interest on Loans 8,00,000; Dividend 1,00,000; Gain on Sale of Building 15,00,000.
Solution:
Particulars ₹ ₹
Interest on Loans 8,00,000
Dividend 1,00,000 9,00,000
II. Other Income
Gain (Profit) on Sale of Building 15,00,000
Miscellaneous Income 5,000 15,05,000
Total Revenue (I + II) 24,05,000
Question 55.(a) Hind Electricals Ltd., manufacturer of lamps, has surplus funds of 5,00,000, which it has
invested in fixed deposit with a bank. The deposit earned an interest of 30,000. How will it be shown in the
Statement of Profit and Loss?
(b) Business Ltd. sold its car at a gain (profit) of 10,000. How will it be shown in the SPL
Question 56. Compute Cost of Materials Consumed from the following: Opening Inventory of Materials ₹
2,50,000; Materials Purchased ₹ 20,00,000; and Closing Inventory of Materials ₹ 3,00,000.
Solution: Cost of Materials Consumed = Opening inventory + Purchases - Closing Inventory
₹ 2 50 000 + 200000 - 3,00,000 = 19,50,000
Question 57. Compute Cost of Materials Consumed from the following:
Opening Inventory : Materials 5,50,000

: Finished Goods 2,50,000
Materials Purchased 22,50,000
Closing Inventory
: Materials 4,50,000
: Finished Goods 1,50,000
Solution:
Cost of Materials Consumed = Opening Inventory of Materials + Purchases of Materials - Closing Inventory of
Materials = ₹5,50,000 + ₹22,50,000 - ₹4,50,000 = ₹23,50,000

Note: Opening Inventory of Finished Goods, i.e., ₹ 2,50,000 and Closing Inventory of Finished Goods, i.e.,₹
1,50,000 will not be considered to compute Cost of Materials Consumed as these are shown under Change in
Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade.
Question 58.. Compute Cost of Materials Consumed from the following: Opening Inventory of Materials
1,50,000; Opening Work-in-Progress 2,00,000; Materials Purchased 15,00,000; Closing Inventory of Materials
2,50,000 and Closing Inventory of Work-in-Progress 1,50,000.
Solution: Cost of Materials Consumed = Opening Inventory of Materials + Purchases of Materials - Closing
Inventory of Materials = ₹1,50,000 + ₹15,00,000 - ₹2,50,000 = ₹14,00,000
Note: Opening Inventory of Work-in-Progress, i.e., ₹ 2,00,000 and Closing Inventory of Work-in-Progress, i.e., t
1,50,000 will not be considered to compute Cost of Materials Consumed as these are shown under Change in
Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade.
Question 59. Compute Cost of Materials Consumed from the following: Opening Inventory of Materials ₹
7,50,000; Opening Inventory of Stock-in-Trade ₹ 2,00,000; Materials Purchased ₹ 25,00,000; Purchases of
Stock-in-Trade₹ 15,00,000; Closing Inventory of Materials ₹ 2,50,000 and Closing Inventory of Stock-in-Trade₹
1,50,000.
Solution: Cost of Materials Consumed = Opening Inventory of Materials + Purchases of Materials Closing
Inventory of Materials =₹ 7,50,000 +₹ 25,00,000 -₹ 2,50,000 =₹ 30,00,000
Question 60. Prepare Note to Accounts for Change in Inventories of Bakers Ltd. for the year ended 31st March,
2019 from the following information and determine the amount that will be shown in the Statement of Profit
and Loss against Change in Inventories of Finished Goods, WlP and Stock-in-Trade.
Particulars Opening Inventory Closing Inventory

(₹) (₹)
Finished Goods 2,00,000 2,00,000
Work-in-Progress 4,50,000 5,00,000
Stock-in-Trade 7,50,000 7,00,000
Solution: Note to Account
Particulars (₹) Year ended 31st

march 2016
Change in Inventories of Finished Goods, WIP and Stock-in-
Trade
(a) Finished Goods
Opening Inventory 2,50,000
Less: Closing Inventory 2,00,000
Sub-Total 50,000
Work-in-Progress
Less: Closing Inventory 5,00,000 (50,000)
Sub-Total
(C) Stock-in-Trade
Less: Closing Inventory 7,00,000 50,000
Sub total
Total (a + b + c) 50,000
Question 61. Out of the following, identify the items that are shown in the Note to Accounts on Employees
Benefit Expenses:
(i) Wages; (ii) Salaries; (iii) Entertainment Expenses; (iv) Bonus;(v) Gratuity Paid and (vi) Conveyance Expenses.

Solution: Items to be shown in Note on Employees Benefit Expenses are:
(i) Wages; (ii) Salaries; (iii) Entertainment Expenses; (iv) Bonus and (v) Gratuity Paid.
Question 62. From the following information for the year ended 31st March, 2019, prepare Note to Accounts
on Employees Benefit Expenses:
(i) Wages 2,40,000; (ii) Salaries 3,60,000; (iii) Entertainment Expenses 15,000; (iv) Bonus 50,000; (v) Gratuity
Paid 1,20,000; (vi) Conveyance Expenses 25,000 and (vii) Medical Expenses 40,000. Solution:
Note to Accounts
Particulars Year ended 31st march 2016
Employees Benefit Expenses
Wages 2,40,000
Salaries 3,60,000
Bonus 50,000
Gratuity Paid 1,20,000
Medical Expenses 40,000
Amount to be shown in the Statement of Profit and Loss 8,10,000
Question 63. Out of the following, identify the items that are shown in the Notes to Accounts on Finance Costs:
(i) Interest paid on Term Loan; (ii) Interest paid on Bank Overdraft; (iii) Discount on Issue of Debentures
Written off; (iv) Interest Received on Fixed Deposits and (v) Bank Charges.
Solution: Items that will be shown in the Notes to Accounts on Finance Costs are: (i) Interest Paid on Term
Loan; (ii) Interest Paid on Bank Overdraft and (iii) Discount on Issue of Debentures Written off.
Question 64. From the following information of Abbu Ltd. for the year ended 31st March, 2019, prepare Note to
Accounts on Finance Costs:
(i) Interest paid on Term Loan ₹ 2,50,000; (ii) Interest paid on Bank Overdraft ₹ 35,000; (iii) Discount on Issue of
Debentures Written off ₹ 10,000; (iv) Interest Received on Fixed Deposits₹ 25,000; (v) Bank Charges 9,500 and (vi)
Interest paid on Deposits ₹ 75,000.
Solution:Note to Accounts
Particulars Year Ended 31st
March, 2016
Finance Costs
Interest paid on Term Loan 2,50,000
Interest paid on Bank Overdraft 35,000
Interest paid on Deposits 75,000
Discount on Issue of Debentures Written off 10,000
Amount to be shown in the Statement of Profit and Loss 3,70,000
Question 65. Identify which of the following items will be shown in the Note to Accounts on Other Expenses: (i)
Wages; (ii) Courier Expenses; (iii) Internet Expenses; (iv) Rent for factory; (v) Carriage Outwards; (vi) Depreciation on
furniture; (vii) Rent for warehouse; (viii) Rent for office (ix) Audit fee and (x) Staff Welfare Expenses.
Solution: Items that will be shown in the Note to Accounts on Other Expenses are: (ii) Courier Expenses; (iii) Internet
Expenses; (iv) Rent for factory; (v) Carriage Outwards (vii) Rent for warehouse; (viii) Rent for office and (ix) Audit fee.
Question 66. Deleted from syllabus. Be happy. Do not study even available in video classes.
QUESTION 67. Prepare the Balance Sheet of Payal Textiles Ltd. as required under Schedule III of the Companies Act,
2013, as on 31 March 2019. Following balances are given:

Accounts Dr. Cr.

Secured Term Loans — 10,00,000
Creditors — 11,45,000
6% Debentures Account — 27,00,000
Provision for Tax — 1,70,000
Security Premium Account — 4,75,000
General Reserves — 20,50,000
Loans from Debtors — 2,00,000
Provision for (Doubtful) Debts — 20,200
Provision for Depreciation — 5,00,000
Equity Share Capital (30,000 x 10) — 3,00,000
8% Preference Share Capital (10,000 x 100) — 10,00,000
Advances given to employee(Long term) 3,72,000 —
0
Advances to staff(short term) 55,000 —
Cash and Bank 2,75,000 —
Loose Tools 50,000 —
Investments 2,25,000 —
Profit and Loss Account (Losses) 3,00,000 —
Debtors 12,25,000 —
Discount on debentures( 10,000 to be written off within a year) 58,000 —
Stores Items 4,00,000 —
Tangible Fixed Assets 56,50,000 —
Capital Work-in-Progress 2,00,000 —
Finished Goods Stock 7,50,200 —
95,60,200 95,60,200
QUESTION 68.From the following particulars furnished by Sultan ltd., prepare the Balance Sheet as at 31 March, 2019 as
required by Part I, Schedule III of the Companies Act. Give notes at the foot of the Balance Sheet as may be found necessary:
Debit Credit
Equity Capital (Face value of Rs. 100) 10,00,000
Calls in Arrear 1,000 —
Land 2,00,000 .—
Building 3,50,000 —
Plant and Machinery 5,25,000 —
Furniture 50,000 —
General Reserve — 2,10,000
Loan from State Financial Corporation — 1,50,000
Stock:
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000 —
68,000
Provision for Taxation ---
Sundry Debtors 2,00,000 —

Advances for purchase of machine 42,700 —
Proposed dividend — 60,000
Profit and Loss Account(surplus) — 1,00,000
Cash Balance 30,000 —
Cash at Bank 2,47,000 —
Franchise fees and software 13,300 —
Loans (Unsecured) — 1,21,000
Sundry Creditors (For Goods) — 2,00,000
19,09,000 19,09,000

Question 69. From the following particulars furnished by Bukhari Ltd., show the headings and sub-headings of
following items in balance sheet.
Particulars Head Sub-head

Equity share capital of Rs 10 each, 8 called up
(2,00,000 shares)
Calls in arrears
Share forfeited account
Calls in advance
General reserve
Security premium reserve
Provision for tax
Income tax payable
Tax reserve
Advance tax
Revaluation reserve
Debenture redemption reserve
Debentures
Bonds
Long term loan from bank
Public deposits
Short term loan
Bank overdraft
Cash credits
Current maturities of long term loans
Interest accrued but not due on borrowings
Proposed dividend
Unpaid/unclaimed dividend
Bills payable
Creditors
Advances from customers( short term)
Interest accrued and due on debentures
Surplus(credit)
Premium payable on redemption of debentures
Employees stock option outstanding(ESOP)
Non- current assets
Current assets
Question 70. From the following particulars furnished by Ram khilawan Ltd., Under which major headings and
sub-headings will the following items be shown in the Balance Sheet of a company as per Schedule III, Part I of
the Companies Act, 2013?
Particulars Main head Sub-head

Equity share capital
Preference share capital
Share application money received to be refunded
Surplus( debit)
Debentures (to be refunded within one year)
Revaluation reserve
Subsidy reserve
Deferred tax liability(net)
Provision for expenses
Provident fund
Provident fund payable
Gratuity fund

Loan repayable on demand

Advance income
Outstanding expenses
Money received against share warrant
Advance from customers( long term)
Outstanding interest on calls in advance
Provision for employees benefits
Tangible fixed assets
Intangible assets
Capital work in progress
Intangible assets under development
Non-current investments
Deferred tax assets(net)
Long term loans and advances given
Other non-current assets
Current investments
Inventories
Trade receivables
Cash and cash equivalents
Short term loans and advances
Other current assets
Question 71. From the following particulars furnished by COC Ltd., Under which major headings and sub-headings will the
following items be shown in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013?
Particulars Head Sub head
Share capital
Money received against share warrant
Share application pending allotments
Non-current liabilities
Current liabilities
Land
Building
Machinery
Provision for depreciation on machinery
Vehicles
Goodwill
Patents
Copyright
Capital work in progress
Investment in property
Stock of raw materials
Stock of stock in trade
Stock of finished goods
Loose tools
Stores and Spare parts
Stock of work in progress
Advances to subsidiaries
Deposits with electric supply company
Bills receivables
Debtors
Provision for doubtful debts
Work in progress( machinery)
Cash in hand
Cash at bank

Cheques in hand
10% Fixed deposits( for 5 years)
Mining rights
Accrued incomes
Shares in listed companies
Prepaid insurance
Question 72. From the following particulars furnished by COC Ltd., state under which major headings and sub-
headings will the following items be shown in the Balance Sheet of a company as per Schedule III, Part I of the
Companies Act, 2013?
Head Sub-head
Investment in shares(short term)
Deferred tax assets(net)
Capital advances( e.g. advances for building)
Long term loan to employees
Short term loan to suppliers
Earmarked balances with bank
Prepaid expenses
Advance tax
Tax deducted at source
Dividend receivable on investment
Computer software
Vehicles
Drafts in hand
Cash in transit
Live stock
Debenture redemption reserve
Debenture redemption investment
10% Debentures
Outstanding interest on debentures
Computers
Cash and bank
Office equipment
Fixtures and furniture
Accumulated depreciation
Accrued income
Discount on issue of debentures
Share capital
Secured loan
Unsecured loan
Loan from directors
Public deposits
Current liabilities
Investment in partnership firm
Licenses and franchise
Brand/trade mark
Question 73. From the following information of COC ltd, prepare statement of profit and loss and balance
st
sheet as on 31 march 2019.

Particulars Dr Cr
Sales 10,00,000
Sale of scrap( by-product) 8,000
Interest received on investment 4,000
Dividend received on investment 7,000
Profit on sale of assets 3,000
Loss on sale of investment 4,000
Opening stock of raw material 12,000
Opening stock of work in progress 8,000
Opening stock of finished goods 7,000
Purchase of raw materials 4,00,000
Carriage inward 12,000
Freight outward 8,000
Salary 40,000
Wages 25,000
Bonus 35,000
Refund of income tax 7,000
Interest on debentures 40,000
Interest on loan 30,000
Bank charges 6,000
Discount on debentures written off 10,000
Conveyance expense 3,500
Medical expense 4,500
Share capital 3,00,000
General reserve 2,00,000
Non-current liabilities 4,00,000
Current liabilities 1,00,000
Non-current assets 9,64,000
Other Current assets 4,20,000
20,29,000 20,29,000
1. closing stock of raw material Rs 40,000
Work in progress Rs 6,000
Finished goods Rs 2,000

CHAPTER 13. ANALYSIS OF FINANCIAL STATEMENT
NOTE:- THIS CHAPTER HAS BEEN DISCUSSED IN VIDEO LECTURES OF CHAPTER

14. SO, AFTER STUDYING CHAPTER 14, GO THROUGH THE THEORIES OF THIS
CHAPTER.
MEANING OF FINANCIAL STATEMENT ANALYSIS :--Financial Statement Analysis is the process of analysing
financial statements, i.e. Balance Sheet, Statement of Profit and Loss and cash flow statement of an enterprise.
Analysis of Financial Statements is a systematic process of analysing the financial information in the financial
statements to understand and make decisions regarding the operations of the enterprise.
The Analysis of Financial Statements is a study of relationships among various financial figures as set out in the
financial statements, i.e., Balance Sheet, Statement of Profit and Loss and cash flow statement. The complex
data given in these financial statements is divided into simple and valuable elements and relationships are
established between the elements of the same statement or different financial statements. This process of
division, establishing relationships and interpretation thereof to understand the working and financial position
of a business is known as Analysis of Financial Statements.
Note- We can say that Financial Statement Analysis is a post-mortem of the business transactions.
TOOLS OR TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS:-- Financial statements have information about
asset, liabilities, equity, revenues, expenses and profit or loss of an enterprise in absolute amounts. They are
not readily understandable to the external users of financial statements. They are not of much use and
meaning when analysed in isolation. They are analysed with the financial statements of the same enterprise
for earlier years or with that of another enterprise of similar nature and size operating in a similar business
environment. They may be compared with the industry standards. Commonly used tools for financial
statement analysis are:
1. Comparative Statements:- Comparative Statements (or Comparative Financial Statements) mean a

comparative study of individual items or components of financial statements, i.e., Balance Sheet and
Statement of Profit and Loss of two or more years of the enterprise itself. In Comparative Statements,
amounts of two or more years are placed side by side along with change in amounts in absolute and
percentage terms to facilitate comparison. Both Statement of Profit and Loss and Balance Sheet are
prepared in the form of Comparative Statement or Comparative Financial Statements.
2. Common-size Statements:- Common-size Statements or Common-size Financial Statements mean
statements in which individual items of financial statements of two or more years are placed side by
side and thereafter converted into percentage taking a common base. Common base normally taken
is total of assets or equity and liabilities, in the case of Common-size Balance Sheet and Revenue from
Operations, in the case of Common-size Statement of Profit and Loss. In the Balance Sheet, the total
of assets or equity and liabilities is taken as 100 and all the figures are expressed as percentage of
total. Similarly, in the Statement of Profit and Loss, Revenue from Operations, i.e., Net Sales is taken
as 100 and all amounts are expressed as a percentage of Revenue from Operations, i.e., Net Sales.
3. Ratio Analysis:- Ratio is an arithmetical expression of relationship between two related or
interdependent components of financial statements of an accounting period. Ratio analysis is an
important technique for analysing financial statements, i.e., Balance Sheet and Statement of Profit
and Loss.
4. Cash Flow Statement:- Cash Flow Statement is a statement showing flow of Cash and Cash
Equivalents during the accounting period, classified under Operating Activities, Investing Activities
and Financing Activities. It shows the sources from which cash is received (generated) and the

purposes for which it is utilised (used). It also shows the changes in cash position from one period to
another.
Besides, Funds Flow Statement and Trend Percentages are also tools of Financial Statement Analysis. Since
they are not in Syllabus, they have not been discussed.
TYPES OF FINANCIAL STATEMENT ANALYSIS :- Financial Statement Analysis can be classified into four
categories:
1. External Analysis :- External Analysis is conducted by those who do not have access to the detailed
records of an enterprise and,therefore, have to depend on published accounts, i.e., Statement of
Profit and Loss, Balance Sheet, Directors' and Auditor's Reports. Such type of analysis is made by
investors, credit agencies, government agencies and research scholars.
2. Internal Analysis:- Internal analysis is conducted by the management to know the financial position
and operation efficiency of the organisation. The important feature of such analysis is thatthe
management has access to all information of the enterprise and, therefore, the analysis is more
detailed, extensive and accurate.
Note :- Internal analysis is meant for management. External analysis is carried out by outsiders such as
creditor, bankers, debenture holders and government agencies.
3. Horizontal (or Dynamic) Analysis:- This analysis is made to review and analyse financial statements
for a number of years. It is a time series analysis. It shows comparison of financial data for several
years against a chosen base year. It is useful for long-term trend analysis and planning. Comparative
Statement or Comparative Financial Statements are an example of horizontal analysis.
4. Vertical (or Static) Analysis:- This analysis is made to review and analyse the financial statements of
one year only. Ratio analysis of the financial statement relating to a particular accounting year is an
example of this type of analysis. Such an analysis is useful in comparing the performance of several
companies of the same type or divisions or departments in one enterprise.
Note :-Dynamic or Horizontal Analysis is a time series analysis. Static or Vertical Analysis is carried out at
one particular point of time, generally when the accounts are closed.
Distinction between Horizontal Analysis and Vertical Analysis
Basis Horizontal Analysis Vertical Analysis

1.Period It requires comparative financial It requires a statement of one period.
statements of two or more accounting
periods.
2.Components It deals with same item of different It deals with different items of same period.
Or Item periods.
3.Information It provides information in absolute or It provides information in percentage terms.
percentage terms.
4.Usefulness It is generally used for time series It is generally used for cross-sectional
analysis. analysis.
5.Comparison It is a part of comparison. It is a step towards comparison.
Infra-firm Analysis and Inter-firm Analysis
Intra-firm Analysis: A comparison of financial variables of an enterprise over a period of time is known as
Intra-firm Comparison. It is also called Time Series Analysis or Trend Analysis. It analyses the performance of a
business over a number of years and shows trend financial factors.
Inter-firm Analysis: A comparison of two or more enterprises or firms is known as Inter-firm Analysis. It
analysis and compares financial variables of two or more enterprises or of two firms to determine their

competitive position. When single set of statements of two firms is compared, it is known as Cross-sectional
Analysis.
PROCESS OF FINANCIAL STATEMENT ANALYSIS:- It gives the structural relationships of various items in the
financial statements. The main functions which are used in the process of analysis and interpretation are:
1. Rearrangement of Financial Statements:- For analysis, it is necessary to reclassify the complex data
contained in the financial statements into purposive classes so that maximum desired information
from every data for analysis can be obtained. Reclassification and rearrangement of different data
depends upon the purpose of analysis.
2. Comparison:- After the classification of data of financial statements into different categories, it is
necessary to obtain comparative data of the same enterprise of the past periods if it is a time series
analysis. In case of cross-sectional analysis, it is necessary to obtain comparative data of the same
accounting period of similar or comparable enterprises. For this, a comparative study is necessary.
3. Analysis :- Comparative financial data are then analysed with reference to financial characteristics
like profitability, solvency and liquidity.
4. Interpretation:- The concluding part of financial statement analysis is interpretation of financial
information generated in the process of financial statement analysis. The interpretation should be
precise and directed towards indicating the movement of various financial characteristics.
PURPOSES (OBJECTIVES) AND SIGNIFICANCE OF FINANCIAL ANALYSIS
Financial statements are used by various interested groups for various purposes. Financial analysis serves the
following purposes and brings out the significance of such analysis:
i. Assessing the Earning Capacity or Profitability:- On the basis of financial analysis, the earning capacity of an
enterprise can be assessed. In addition, the earning capacity of the enterprise, in coming years, may also be
Forecast. All the external users of financial statements, especially investors, are interested in earning capacity
and forecast.
ii. Assessing the Managerial Efficiency:- The financial statement analysis helps to identify the areas where the
managers have been efficient and the areas where they have been inefficient. For example, by using financial
ratios, it is possible to analyse relative proportion of production, administrative and marketing expenses. Any
favourable or unfavourable variation can be identified and reasons thereof can be ascertained to pinpoint
managerial efficiency or inefficiency.
iii. Assessing the Short-term and Long-term Solvency of the Enterprise:- Long-term and short-term solvency
of an enterprise can be assessed on the basis of financial statement analysis. Creditors or suppliers are
interested to know the short-term solvency or liquidity of the enterprise, i.e., its ability to meet short-term
liabilities. Debenture holders and lenders are interested to know the long-term solvency of the enterprise to
assess the ability of the company to repay the principal amount and interest thereon.
iv. Inter-firm Comparison:- Inter-firm comparison becomes easy with the help of financial analysis. It helps in
assessing their own performance as well as that of others, if mergers and acquisitions are to be considered.
v. Forecasting and Preparing Budgets:- Past financial statement analysis helps in assessing developments in
future, especially in the next year. For example, given a certain investment, it may be possible to forecast the
next year's profit on the basis of earning capacity shown in the past. An analysis thus helps in forecasting and
preparing the budgets.
vi. Explainable and Understandable:- Financial analysis helps the users of the financial statements to
understand the complicated matter in a simplified manner. Financial data can be made more comprehensive
by charts and diagrams, which can be easily explained and understood.

USES OF FINANCIAL ANALYSIS:= On the basis of financial analysis we can take a variety of decisions in various
areas such assecurity analysis, credit analysis, debt analysis, dividend decision and general business analysis.
These are discussed below:
a. Security Analysis :- It is a process by which the investor comes to know whether the firm is fulfilling his
expectations with regard to payment of dividend, capital appreciation and security of money. Such analysis is
done by a security analyst who is interested in cash-generating ability, dividend payout policy and the
behaviour of share prices.
b. Credit Analysis:- Such analysis is useful when a firm offers credit to a new customer or a dealer. The
manager of the firm would like to know whether to extend credit to them or not. Such analysis is also useful
for a bank before granting loan.
c. Debt Analysis :- Such analysis is done by the firm to know its borrowing capacity.
d. Dividend Decision:- Financial analysis helps the firm in deciding about the rate of dividend: The
management would have to decide about how much portion of the earnings to distribute and how much to
retain. Such decisions indicate the profitability of the firm and hence, to some extent affect the behaviour of
share prices.
e. General Business Analysis :- Financial analysis can be used to identify the key profit drivers and business
risks in order to assess the profit potential of the firm. It helps in future growth scenarios for the firm.
PARTIES INTERESTED IN FINANCIAL ANALYSIS :- The parties interested in the analysis of financial statements
are:
a. Management:- Financial analysis helps the management to ascertain overall as well as segment-wise
efficiency of the business. Besides, it helps them in decision-making, controlling and self-evaluation.
b. Employees and Trade Unions :Employees are interested in better emoluments, bonus, better working
conditions and security of their jobs. So, they are always interested in profitability, operating sustainability and
financial strength of the business. Trade Unions are also interested in financial analysis because the degree of
profitability helps them in negotiating and entering into wage agreements with the employers.
c. Shareholders or Owners or Investors:- Owners invest their savings in the enterprise. Therefore, they are
interested in profitability and safety of their investments. They would like to know whether the business is
profitable, has growth potential and its progress is on expected lines. Growth potential of business helps in
appreciation of their investment.
D. Potential Investors :-They are interested to know the present profitability (i.e., earning) and financial
position as well as future prospects to determine whether they should invest in a particular company.
e. Suppliers or Creditors:- They are interested to know the short-term solvency position of a firm, i.e., the
ability meet its short-term liabilities. Short-term solvency of a firm can be determined with the help of financial
statement analysis. On the basis of analysis, they decide whether they should allow credit to the enterprise or
not.
f. Bankers and Lenders:- Bankers and Lenders are interested in servicing of the loans granted to an enterprise,
regular payment. of interest and repayment of principal amount on due dates. In other words, they are
interested in long-term and short-term solvency of a firm, i.e., ability to (, pay interest on loans and debts and
its repayment.

g. Researchers:- Researchers may like to analyse profitability, growth, financial position and future prospects
of a business or industry. They may be interested in analysing the data of different aspects of a business like
purchases, sales, operating cost, particular type of expenditure, etc.
h. Tax Authorities:- Tax authorities are interested in ensuring proper assessment of tax liabilities of the
enterprise as per the laws in force from time to time.
i. Customers:-Customers have an interest in information about the continuance of an enterprise, especially

when they have a long-term involvement with, or are dependent on, the enterprise.
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS :-- Analysis of Financial Statements helps the interested
parties in ascertaining the strengths and weaknesses of an enterprise, but at the same time it suffers from
certain limitations. These limitations must always be kept in mind while undertaking the analysis of financial
statements.The limitations of financial statements analysis are:
Historical Analysis:- Financial statement analysis is a historical analysis. It analyses what has happened till
date. It does not reflect the future. Persons like shareholders, investors, etc., are more interested in knowing
the likely position in future.
Ignores Price Level Changes :- Price level changes and purchasing power of money are inversely related. A
change in the price level makes analysis of financial statements of different accounting years invalid because
accounting records ignore change in value of money.
Qualitative Aspect Ignored:- Since the financial statements are confined to monetary matters alone, the
qualitative aspects like quality of management, quality of staff, public relations are ignored while carrying out
the analysis of financial statements.
Suffers from the Limitations of Financial Statements:- Analysis of financial statements is based on the
information given in the financial statements. Hence, this analysis suffers from all such limitations from which
the financial statements suffer. Therefore, unless the basic data given in the financial statements is reliable,
the conclusions derived on the basis of the analysis of this data cannot be reliable.
Not Free from Bias:- In many situations, the accountant has to make a choice out of alternatives available,
e.g., choice in the method of inventory valuation or choice in the method of depreciation (straight line or
written down value, etc.). Since the subjectivity is inherent in personal judgment, the financial statements are
therefore, not free from bias.
Variation in Accounting Practices:- For inter-firm comparison,it is necessary that accounting practices followed
by the firms do not vary significantly.As there may be variations in accounting practices followed by different
firms,a meaningful comparison of their financial statements is not possible.
Window Dressing:- Window dressing refers to the presentation of a better financial position than what it
actually is by manipulating the books of account. On account of such a situation, financial analysis may give
false information to the users.
Identifies Symptoms :- Financial analysis identifies symptoms of the problems but does not offer its diagnosis.
The management has to look for the remedy to rectify the problems.

CHAPTER 14. TOOLS OF FINANCIAL STATEMENT ANALYSIS- COMPARATIVE

STATEMENTS AND COMMON SIZE STATEMENTS
The financial statements show absolute amounts for assets, liabilities, incomes, expenses and profit earned or
loss incurred. The financial statements do not convey information on earning capacity, capital utilisation,
trend, etc. Therefore, the financial statements are analysed by using tools for analysis.
TOOLS FOR ANALYSIS OF FINANCIAL STATEMENTS : Financial statements when analysed in isolation are not of
much meaning and use. They are, thus, analysed by comparing with the financial statements of previous years
or with that of other enterprises of similar nature and size operating in similar business environment or with
the industry standards. The tools used for financial analysis are:
1. Comparative Statements: Comparative Statements or Comparative Financial Statements mean a

comparative study of individual components or elements or items of Balance Sheet and Statement of Profit
and Loss of two or more years.
2. Common-size Statements: Common-size Statements or Common-size Financial Statements are statements

in which individual components or elements or items of financial statements of two or more years are placed
and then converted into percentages taking a common base.
3. Ratio Analysis: Ratio is an arithmetical expression of relationship between two related and interdependent
items. Accounting ratio, thus, is an arithmetical relationship between two accounting variables.
4. Cash Flow statement: Cash Flow Statement is a statement showing flow of Cash and Cash Equivalents
during an accounting period classified under appropriate heads. It is prepared following Accounting Standard-3
(Revised).
5. Fund Flow Statement is also a tool of analysis but since it is not prescribed in the Syllabi, it is not discussed.
COMPARATIVE STATEMENTS (DETAIL DISCUSSION)
Meaning: Comparative Statements or Comparative Financial Statements mean a comparative study of

components or items of Balance Sheet and Statement of Profit and Loss for two or more years. As a first step,
the value of each component or element or item of two or more financial years is placed alongside each other.
Thereafter, difference between the two amounts is determined. And lastly, the percentage change in the
amount from the base year is ascertained. The statement so prepared is known as Comparative Statement.
Intra-firm Comparison: When comparative statement of the firm's financial statements of two or more years
is prepared, it is known as Intra-firm Comparison. It is comparison of values of one period with those of
another period for the same firm.
Inter-firm Comparison: When comparative statement of the firm's financial statements is prepared with that
of another firm or with industry data or with the budget, it is known as Inter-firm Comparison.
Comparative Statement is a tool of financial analysis that shows change in each item from the base year in
absolute amount and in percentage, taking the amounts for the preceding, i.e., previous accounting period as
the base.
Comparative values show the trend and direction of financialposition and operating results. This analysis is
also known as Horizontal Analysis.

The data and information compared is presented in a manner that there is no dissimilarity between them since
a comparison between dissimilar data makes the analysis meaningless. Comparative Statement is prepared to
show:
(i) Absolute Data—Amount only.

(ii) Increase or decrease in absolute amounts.
(iii) Increase or decrease in absolute data in terms of percentage.
(iv) Comparison expressed in ratios.
(v) Percentages of totals.
Objectives or Purposes of Comparative Financial Statements
(i) Data Presentation becomes Simple and Comparable: ComparativeStatement or Comparative Financial
Statement is a statement with data for two or more years in a tabular form. Thus, it is a simple presentation,
understandable and Comparable. It helps in drawing conclusions easily.
(ii) Indicates Trend: Comparative statement or Comparative Financial Statement gives information about the
changes affecting financial position and performance of an enterprise. It is an indicator of trend and, thus,
helps in forecasting.
(iii) Indicates Strengths and Weaknesses: Comparative Statement indicates strengths and weaknesses of the
enterprise with respect to liquidity, profitability and solvency.
(iv) Comparison with other Firms and Industry Performance (i.e., inter-firm Comparison): Comparative
Statement helps in comparison of an enterprise's performance with that of other enterprises or with that of
the industry.
(v) Forecasting and Planning: Analysing changes and trend in the financial data of previous years helps the
management in forecasting and planning.
Importance of Comparative Financial Statements :-- The Comparative Financial Statement is important for
different reasons:
(i) Shareholders: Shareholders are the owners of the company.They may have to take decisions whether they
should continue holding the shares of the company or sell them. The comparative financial statement is
important as it provides meaningful information to the shareholders for taking decisions.
(ii) Decisions and Plans: The management of the company is responsible for decision making and formulating
plans and policies. They, therefore, always need to evaluate its past performance and effectiveness of their
past actions to realise the company's goal. For that purpose, comparative financial statements are important
to the company's management:
(iii) Lenders:The lenders provide loan to the company. Therefore they may have to take decisions as to
whether the loan is safe, whether they should extend more loan to the company or charge interest at higher
rate. The comparative financial statementsprovide important information to them for their purpose.
(iv) Investment Decision: The prospective investors often have to decide whether to invest in the company's
share. The comparative financial statements are important to them because they can obtain useful
information for their investment decision making purpose.
Limitations of Comparative Statements: Limitations of financial statements are:
(i) Historical Records: It is an analysis of historical records, i.e., analysis of past financial statements. It, at the
most, indicates the trend of the happenings in the past. It is not reflective of future, which is more relevant.

(ii) Affected by Personal Judgment: Financial statements are prepared on the basis of accounting concepts
and conventions along with estimates, examples being depreciation, provision for doubtful debts, etc. If the
estimates are incorrect, the projections based on comparative statements will not be reliable.
(iii) Qualitative Elements are ignored: Financial statements when prepared do not consider qualitative
elements of the business such as manpower quality. It considers only those items which can be measured in
terms of money. Since a Comparative Statement is based on financial statements, it also ignores qualitative
elements of the business which have a significant impact on it.
(iv) Price Level Changes are Ignored: Comparative Financial Statements do not show price level changes
because all the items in the financial statements are recorded at cost and value of money in the latest year is
not same as it was in the previous year.
(v) Variation in Accounting Policies: If two firms follow different accounting policies, then a meaningful
comparison of their financial statements is not possible.
Tools (Techniques) for Comparison of Financial Statements :-- Comparison and analysis of Financial
Statements may be carried out using the following tools:
1. Comparative Balance Sheet,

2. Comparative Statement of Profit and Loss (Income Statement),
3. Common-size Statement of Profit and Loss (Income Statement), and
4. Common-size Balance Sheet.
COMPARATIVE BALANCE SHEET : “Comparative Balance Sheet analysis is the study of the trend of the same
items, group of items and computed items in two or more Balance Sheets of the same business enterprise on
different dates."
Comparative Balance Sheet of an enterprise as on two or more dates is used for comparing assets, liabilities
and capital and ascertaining increase anddecrease in those items. It is horizontal analysis of Balance Sheet in
which each item of assets, equity and liabilities is analysed horizontally for two or more accounting periods.
Such analysis often yields considerable information which is of value in forming the opinion regarding the
progress of an enterprise.
Advantages of Comparative Balance Sheet
1 More Realistic Approach: A Balance Sheet shows the balances of accounts after closing the books at a
certain date, whereas a Comparative Balance Sheet shows not only the balances of accounts as at different
dates but also the extent of their increase or decrease between these dates.
2 Emphasis on Changes: In a Balance Sheet, the emphasis is on status, whereas in a Comparative Balance
Sheet the emphasis is on change.
3. Reflects Trend: Comparative Balance Sheet is more useful in comparison to single year's balance sheet
because it enables studying the nature, size, and direction of change in various items of Balance Sheet.
4. Link between Balance Sheet and Statement of Profit and Loss: It shows the effects of business operations
on its assets, liabilities and capital. It is a link between the Balance Sheet and the Statement of Profit and Loss.
5. Facilitates Planning: Comparative Balance Sheet helps determining trends of assets, liabilities and capital
which in turn helps in planning.
Preparation of Comparative Balance Sheet:- A Comparative Balance Sheet has six columns as follows:
First Column: In this column, the components or elements or items of Balance Sheet are written.

Second Column: In this column, the Note No. given against the line item in Balance Sheet is written.
Third Column: In this column, amounts of previous year are written.
Fourth Column: In this column, amounts of current year are written.
Fifth column:In this column, differences (increase or decrease) in amounts between the current year and the
previous year are shown.
Sixth Column: In this column, the difference of amount in column 5 (increase or decrease) is expressed as
percentage, taking column 3 (previous year's amount) as the base.
Percentage Change= Absolute change X100=…%
Amount of Previous Year
FORMAT OF COMPARATIVE BALANCE SHEET

Particulars Note Previous Current Absolute Percentage
No. Year (Rs) Year change change
(Rs) (increase/Decre (increase/Decre
ase) ase)
1. EQUITY AND LIABILITIES

1. Shareholders’ Funds
(a) Share Capital:
(i) Equity share capital
(ii)Preference share capital
(b) Reserves and Surplus
(a) Long-term Borrowings
(b) Long-term Borrowings
(a) Short-term Borrowings
(b) Trade Payables
(c) Other Current Liabilities
(d) Short-term Provisions
Total
II. Assets
1. Non-Current Assets
(a) Fixed Assets:
(i) Tangible Assets
(ii) Intangible Assets
(b) Non-current Investments
(c) Long-term Loans and Advances
2. Current Assets
(a) Current Investment
(b) Inventories
(c) Trade Receivables
(d) Cash and cash Equivalents
(e) Short-term Loans and Advances
(f) Other Current Assets
Total
Note: If current year's value has decreased, show the Absolute change and Percentage change in brackets to
reflect negative item.
IMPORTANT NOTE:- Accounting treatment of Money Received against Share Warrants, Share Application
Money Pending Allotment, Deferred Tax Liabilities (Net), Other Long-term Liabilities, Intangible Assets

(Masthead and Publishing Rights, Copyrights and Patents and Other Intellectual Property Rights, Servicing and
Operating Rights), Capital Work-in-Progress, Intangible Assets under Development, Deferred Tax Assets (Net),
Other Non-Current Assets, Cash and Cash Equivalents (Earmarked Balances with Banks, Balances with Banks
held as Margin Money or Security against Borrowings, Guarantees and Commitments and Bank Deposit with
more than 12 months maturity, Other Current Assets (except Prepaid Expenses, Accrued Incomes and Advance
Tax) is not to be evaluated. Hence, the chapters, illustrations and questions do not include the above.
Question 1. From the following Balance Sheet of X ltd as at March,2019, prepare Comparative Balance Sheet:
Particulars Note 31st March, 31st March,

No. 2019 (Rs) 2018 (Rs)
Equity Share Capital 18,00,000 12,00,000
Long-term Borrowings: 8% Debentures (Secured) 6,00,000 6,00,000
Trade Payables 6,00,000 3,00,000
30,00,000 21,00,000
Total
II Assets
Fixed Assets: Tangible Assets 18,00,000 15,00,000
2. Current Assets
(a) Trade Receivables 10,00,000 5,00,000
(b) Cash and Cash Equivalents 2,00,000 1,00,000
Total 30,00,000 21,00,000
Question 2. Prepare Comparative Balance Sheet of XY Ltd. from the following Balance Sheet:

No. 2019 (Rs) 2018 (Rs)
1. Shareholders Funds
(a) Share Capital:
(b) Reserves and Surplus 1,50,000 1,20,000
Long-term Borrowing 2,55,000 1,70,000
Total 8,85,000 7,40,000
II. Assets
1. Non-current Assets
Fixed Assets: 6,50,000 5,00,000
(i) Tangible Assets 1,00,000 1,00,000
2. Current Assets
(a) Trade Receivables 1,25,000 1,20,000
(b) Cash and Cash Equivalents 10,000 20,000
Total 8,85,000 7,40,000

Question 3. From the following Balance Sheet, prepare Comparative Balance Sheet for Grow More Ltd., and
give a brief report of the inferences you draw:

No. 2019 (Rs) 2018 (Rs)
(a) share capital 3,00,000 2,00,000
(b) Reserves and surplus 2,00,000 2,00,000
2. Non-current Liabilities
Long-term Borrowings 1,60,000 40,000
Trade Payables (Creditors) 1,00,000 60,000
Total 7,60,000 5,00,000
II. Assets
(a) Fixed Assets 5,60,000 3,60,000
(b) Non-current Investments 40,000 40,000
2. Current Assets
(a) Trade Receivables 1,20,000 80,000
Total 7,60,000 5,00,000
Question 4. From the following summarised Balance Sheet of Green Ltd. as at 31st March, 2019, prepare
Comparative Balance Sheet:

No. 2019 (Rs) 2018 (Rs)
(a) Share Capital:
(i) Equity Share Capital 60.00 60.00
(ii) Preference Share Capital 15.00 15.00
(b) Reserves and Surplus 18.00 15.00
(a) Long-term Borrowings 1 45.00 45.00
(b) Long-term Provisions 2.30 2.00
Trade Payable (Creditors) 14.20 13.00
154.50 150.00
Total
II. Assets
Fixed Assets (Tangible) 123.00 105.00
2. Current Assets
(a) Trade Receivables 29.50 40.00
(b) Cash and Cash Equivalents Total 2.00 5.00
Total 154.50 150.00
COMPARATIVE STATEMENT OF PROFIT AND LOSS (INCOME STATEMENT) :- Statement of Profit and Loss or
Income Statement shows profit earned or loss incurred during the year. Comparative Statement of Profit and
Loss or Comparative Income Statement is the horizontal analysis of Income Statement which shows the
operating results for more than one accounting period so that changes in absolute amounts and percentages
from one period to another are known.

Objectives of Comparative Statement of Profit and Loss (income Statement) :- The objectives of Comparative
Income Statement are:
1. To analyse each item of Revenue and Expense of two or more years.

2. To analyse increase or decrease in each item of Revenue and Expense in terms of rupees as well as
percentage and thus, determine the trend of each item.
3. It compares data of more than one year. Hence, it shows the overall trend of profit.
4. To analyse and determine the reasons for change in financial performance.
Preparation of Comparative Statement of Profit and Loss (Income Statement): Comparative
statement of Profit and Loss (Income Statement), like Comparative Balance Sheet, is prepared having six
columns as follows:
First Column: In this column, the items of Statement of Profit and Loss, i.e., revenue and expenses are written.
Revenue includes Revenue from Operations and Other Income. Expenses, i.e., Cost of Materials Consumed,
Purchases of Stock-in-Trade, Changes in Inventories of Finished Goods, WIP and Stock-in-Trade, Employees
Benefit Expenses, Finance Costs, Depreciation and Amortisation Expenses and Other Expenses are written.
2nd Column: In this column, Note Number given against the item in the Statement of Profit and Loss is written.
Third Column: In this column, the amounts of previous year are written.
Fourth Column: In this column, the amounts of current year are written.
Fifth Column: In this column, differences (increase or decrease) in amounts between the current accounting
period and previous accounting period are recorded.
Sixth Column: In this column, the above difference in column 5 (increase or decrease) is expressed as a
percentage of column 3 (previous year's amount).
Percentage Change=
Absolute Change x 100 = ...%
Amount of Previous Year
FORMAT OF COMPARATIVE STATEMENT OF PROFIT AND LOSS
Particulars Note Figures Figures Absolute change Percentage

No. for the for the (Increase or change
Previous current Decrease) (Rs) (Increase or
Years Year Decrease)
(Rs) (Rs) (%)
II. Other Income
III. Total Revenue (I + II)
IV. Expenses
(a) Cost of Materials Consumed
(b)Purchases of Stock-in-Trade
(c) Changes in Inventories of Finished
Goods, Work-in-Progress and Stock-in-
Trade
(d) Employees Benefit Expenses
(e) Finance Costs
(f) Depreciation and Amortisation
Expenses
(g) Other Expenses
Total Expenses
V. Profit before Tax (III - IV)
VI. Less: Income Tax
viii. Profit after Tax (V-VI)

Note: If current year’s value has decreased, show the Absolute change and percentage change in brackets so
as to reflect negative item.
Question 5. Prepare Comparative Statement of Profit and Loss from the following:
No. 2012 (Rs) 2011 (Rs)
Revenue from Operations 15,00,000 10,00,000
Expenses 10,50,000 6,00,000
Other Income 1,80,000 2,00,000
Question 6. From the following Statement of Profit and Loss of Star Ltd. for the years ended 31 st March, 2020
and 2021, prepare Comparative Statement of Profit and Loss:

No. 2021 (Rs) 2020 (Rs)
Employees Benefit Expenses 10,00,000 8,00,000
Other Expenses 1,00,000 2,00,000
Question 7. From the following Statement of Profit and Loss for theyear ended 31st March, 2021, prepare
Comparative Statement of Profit and Loss of Good Services Ltd.:
Particulars Note 2020-21 2019-20

No. (Rs) (Rs)
Other Income 10,00,000 4,00,000
Expenses 21,00,000 15,00,000
Rate of Income Tax was 50%.( Delhi 2014)
Question 8. Following information in extracted from the statement of Profit and Loss of Gold Star Ltd. For the
years ended 31st March, 2019 and 2018. Prepare Comparative Statement of Profit and Loss.
No. 2019 2018
Revenue from Operations Rs 40,00,000 Rs 32,00,000
Employees Benefits Expenses Rs 20,00,000 Rs 16,00,000
Depreciation and Amortisation Expenses Rs 50,000 Rs 40,000
Other Expenses Rs 1,50,000 Rs 3,60,000
Tax Rate 30% 30%
Question 9. Prepare Comparative Statement of Profit and Loss from the following:
Particulars 31st March, 31st March,

2018 2017
Revenue from Operations (Net Sales) Rs 8,00,000 Rs 4,20,000
Purchases of Stock-in-Trade Rs 4,50,000 Rs 2,50,000
Change in Inventories of Stock-in-Trade Rs 50,000 Rs 50,000
Other Expenses (% of Cost of Revenue from Operations or Cost of 8% 10%
Goods Sold)
Tax 30% 30%
Question 10. Following is the Statement of Profit and Loss of Sun India Ltd. for the year ended 31.3. 2015:
Particulars Note 31st March, 2015 31st March, 2014

No.
Other Income Rs 1,00,000 Rs 5,00,000
Employee BenefitExpenses 60% of Total Revenue 50% of Total Revenue
Other Expenses 10% of Employee 20% of Employee
Benefit Expenses Benefit Expenses
Tax Rate 50% 40%

The motto of Sun India Ltd. is to produce and supply green energy in the rural areas of India. It has also taken up a
project of constructing a road that will pass through five villages, so that these villages could be connected to the
nearby town. It will use the local resources and employ local people for construction of the road.
You are required to prepare a Comparative Statement of Profit and Loss of Sun India Ltd. from the given Statement
of Profit and Loss. Also identify any two values that the company wishes to convey to the society. (DELHI 2016)
Question 11. From the following Statement of Profit and Loss of Suntrack Ltd. for the years ended 31st March,
2011 and 2012, prepare Comparative Statement of Profit and Loss:
Particulars Note 2011-12 (Rs) 2010-11 (Rs)

No.
Other Income 12,00,000 9,00,000
Expenses 13,00,000 10,00,000
(DELHI 2013)
Question 12. Prepare Comparative Statement of Profit and Loss from the following
No. 2013 2012
other Income (% of Revenue from Operations) 15% 20%
Expenses (% of Operating Revenue) 60% 50%
Question 13. Prepare Comparative Statement of Profit and Loss from the following details:
Particulars 31st march, 2018 31st March, 2017

Other Income (% of Revenue from Operations) 15% 20%
Expenses (% of Operating Revenue) 60% 50%
Tax Rate 30% 30%
Question 14. Rearrange the following in the form of a Comparative Statement of Profit and Loss:
Particulars 31st March, 2018 (Rs) 31st March, 2017 (Rs)

Revenue from Operations (Net Sales) 9,60,000 8,00,000
Purchases of Stock-in-Trade 5,50,000 4,50,000
Change in Inventories of Stock-in-Trade 30,000 50,000
COMMON-SIZE STATEMENTS :- Common-size Financial Statement is vertical analysis of Financial

Statements in which amounts of individual items of Balance Sheet or Statement of Profit and Loss (or Income
Statement) are written. These amounts are further converted into percentages to a common base. Common
base is Revenue from Operations, i.e., Net Sales for Statement of Profit and Loss and total of assets or total of
equity and liabilities for the Balance Sheet. The percentage so calculated can be compared with the
corresponding percentages in other periods and meaningful conclusions can be drawn.
Common-size Statement may be prepared for intra-firm and inter-firm comparison.
Common-size Statements may be prepared for Balance Sheet as well as Income Statement.
COMMON-SIZE STATEMENT OF PROFIT AND LOSS (INCOME STATEMENT) :-In the Common-size Statement of
Profit and Loss, Revenue from Operations (Net Sales) is taken as 100 and expenses are expressed as
percentage of Revenue from Operations (Net Sales). Common-size Statement of Profit and Loss may be
prepared for different periods of the firm or for same period of two firms. It shows the relative efficiency in
operating the business.

Objectives of Common-size Statement of Profit and Loss (Income Statement)
1. To analyse change in individual items of Income Statement.

2. To study the trend in different items of Incomes and Expenses.
3. To assess the efficiency.
Preparation of Common-size Statement of Profit and Loss (Income Statement):-- Common-size Statement of
Profit and Loss (Income Statement) is prepared having six columns as follows:
First Column: In this column, the items of Statement of Profit and Loss, i.e., revenue and expenses are written.
Revenue includes Revenue from Operations and Other Income. Expenses, i.e., Cost of Materials Consumed,
Purchases of Stock-in-Trade, Changes in inventories of finished Goods, WIP and Stock-in-Trade, Employees
Benefit Expenses, Finance Costs, Depreciation and Amortisation Expenses and Other Expenses are written.
Second Column: In this column, Note Number given against the item in the Statement of Profit and Loss is written.
Third Column: In this column, amounts of previous year are written if the statement is prepared for different
periods of the same firm. And, if the statement is prepared for two firms, amounts relating to the first firm
(say, Firm X) are written.
Fourth Column: In this column, amounts of current year are written if the statement is prepared for different
periods of the same firm. And, if the statement is prepared for two firms, amounts relating to the other firm
(say, Firm Y) are written.
Fifth Column: In this column, percentage of different items of Statement of Profit and Loss of the previous
year to Revenue from Operations, i.e., Net Sales (taken as 100) is written. And, if the statement is prepared for
two firms, percentages relating to the first firm are written.
Sixth Column: In this column, percentage relation of different items of Statement of Profit and Loss of the
Current Year to Revenue from Operations, i.e., Net Sales, (taken as 100) is written. And, if the statement is
prepared for two firms, percentages relating to the other firm are written.
Question 15. From the following Statement of Profit and Loss of Star Ltd. for the years ended 31st March,
2012 and 2011, prepare Common-size Statement of Profit and Loss:
Particulars 31st March, 2012 (Rs) 31st March, 2011 (Rs)

Employees Benefit Expenses 10,00,000 8,00,000
Question 16. From the following Statement of Profit and Loss, prepare Common-size Statement of Profit and
Loss and give comments:
Particulars 31st March, 2019 (Rs) 31st March, 2018(Rs)
I. Income
Revenue from Operations (Net Sales) 12,50,000 10,00,000
II. Expenses
Change in Inventories of Stock-in-Trade (20,000) 30,000
Depreciation and Amortisation Expenses 30,000 20,000
Other Expenses 50,000 30,000
Total 9,30,000 8,00,000
III. Profit before Tax (I - II) 3,20,000 2,00,000
IV. Less: Income Tax 96,000 60,000
V. Profit after Tax (III - IV) 2,24,000 1,40,000

Question 17. Prepare Common-size Statement of Profit and Loss from the following information:
Particulars 31st March, 2018 31st March, 2017

Other Income 1,00,000 75,000
Change in Inventories of Stock-in-Trade (50,000) 10,000
Other Expenses 10,000 7,500
Rate of Income Tax 50% 50%
COMMON-SIZE BALANCE SHEET :--Common-size Balance Sheet shows the percentage relation of each
asset/liability to total assets/total liabilities including capital (i.e., equity and liabilities). In Common-size
Balance Sheet, total assets or total equity and liabilities are taken as 100 and all the figures are expressed as
percentage of the total. Comparative Common-size Balance Sheet for different periods helps to highlight the
trends in different items. If it is prepared for different firm in an industry, it facilitates to assess the relative
financial soundness and helps in understanding their financial strategy.
Objectives of Common-size Balance Sheet
1. To analyse the changes in individualitemsof Balance Sheet.

2. To see the trend Of different items of assets, equity and liabilities.
3. To assess the financial soundness and understand financial strategy.
Preparation of Common-size Balance Sheet :- Common-size Balance Sheet is prepared by taking the following steps:
First Column: In this column, items of Balance Sheet are written.
Second Column: In this column, Note number given against the line item is written.
Third Column: In this column, amounts 01 different items (assets/liabilities) of previous year are written.
Fourth Column: In this column, amounts of different items (assets/liabilities) of current year are written.
Fifth Column: In this column, percentage relation of different items of previous year's Balance Sheet to total of
Equity and Liabilities/Total Assets (taken as 100) are written.
Sixth Column: In this column, percentage relation of different items of current year's Balance Sheet to total of
Equity and Liabilities/Total Assets (taken as 100) are written.

FORMATE OF COMMON-SIZE BALANCE SHEET
Particulars Note Absolute Amounts Percentage of

No. Balance Sheet Total
Figures as Figures as Previous Current
at the end at the end Year Year
of Previous of Current (%) (%)
Year (Rs) Year (Rs)
1.EQUITY AND LIABILITIES
(a) Shareholders’ Capital:
(i) Equity Share Capital
(ii) Preference Share Capital
(b) Reserves and Surplus
(a) Long-term Borrowings
(b) Long-term Provisions
(a) Short-term Borrowings
(b) Trade Payable
(c) Other Current Liabilities
(d) short-term Provisions
Total
II. ASSETS
1. Non-Current Assets … … 100 100
(a)Fixed assets:
(i) Tangible assets
(b) Non-Current investments
(c) Long-term Loans and Advances
2. Current Assets
(a) Current Investments
(b) Inventories
(c) Trade Receivables
(d) Cash and Cash Equivalents
(e) Short-term Loans and Advances
(f) Other Current Assets
Total
… … 100 100
Note: It does not include line items of Balance Sheet, accounting treatment of which are not to be evaluated.
Question 18. From the following Balance Sheet of XZ Ltd as at 31.3.2018, prepare Common size Balance Sheet:

No. 2019 (Rs) 2018 (Rs)
(a) Share Capital 10,00,000 5,00,000
(b) Reserve and Surplus 2,00,000 3,00,000
Long-term Borrowings 8,00,000 5,00,000
Trade Payable 4,00,000 2,00,000
Total
24,00,000 15,00,000

II. ASSETS
1.Non-Current Assets
Fixed Assets-Tangible Assets 15,00,000 10,00,000
2. Current Assets
Cash and Cash Equivalents 9,00,000 5,00,000
Total
24,00,000 15,00,000
Question 19. From the following Balance Sheet of Sun Ltd. as at 31.3.19, prepare Common-size balance Sheet:

No. 2019 (Rs) 2018 (Rs)
(a) Share Capital 80,00,000 60,00,000
Short-term Borrowings 4,00,000 12,00,000
Total
1,20,00,000 1,00,00,000
II. ASSETS
Fixed Assets:
(i)Tangible Assets
80,00,000 60,00,000
4,00,000 12,00,000
2. Current Assets
(a) Inventories
(b) Cash and Cash Equivalents
24,00,000 20,00,000
Total
12,00,000 8,00,000
1,20,00,000 1,00,00,000
Question 20. Following is Balance Sheet of Star Paints Limited:

No. 2018 (Rs) 2017 (Rs)

(a) Share Capital 2,74,000 2,74,000
(b) Reserves and Surplus 70,000 1,52,000
Long-term Borrowings 1 4,38,000 6,96,000
(a) Short-term Borrowing (Secured Bank Overdraft) 50,000 1,25,000
(b) Trade Payable 20,000 1,00,000
(c) Other Current Liabilities 3,000 50,000
(d) Short-term Provision 5,000 23,000
Total
8,60,000 14,20,000

II. ASSETS
(a) Fixed Assets-Tangible Assets (Net) 4,30,000 5,68,000
2. Current Assets
(a) Inventories
(b) Trade Receivables 2,16,000 4,26,000
(c) Cash and Cash Equivalents 2 1,40,000 3,30,000
(d) Other Current Assets 65,000 80,000
Total 5,000 10,000
8,60,000 14,20,000
Notes to account:
1. Long term borrowings 31.3.2019 31.3.2018

Bank loan 2,32,000 1,00,000
9% debentures 206,000 5,96,000
2. Other current assets

Prepaid expenses 5,000 10,000
Prepare common size balance sheet for star paints limited as at 31st march 2018 and 2019.

CHAPTER 15. ACCOUNTING RATIOS

IMPORTANT NOTE:-- According to the Guidelines issued by CBSE, accounting treatment of following
will not be evaluated:
(i) Reserves and Surplus: (Revaluation Reserve, Share Options Outstanding and Other
Reserves are not to be evaluated. However, G eneral Reserve can be evaluated; Money Rec ei ved
a ga i nst Sha re Wa rra nts;
(i ii) Share Applicati on Money Pendi ng Allotment;
(i v) Deferred Tax Liabilities (Net);
(v) Other Long -term Liabi liti es ;
(vi) Intangible Assets: (Masthead and Publishing Titles, Copyrights and Patents and Other
Intellectual Property Rights, Services and Operating Rights and Licenses and
Franchises are not to be evaluated);
(vii) Capital Work-in-Progress;
Intangible Assets Under Development;
(ix) Deferred Tax Assets (Net);

(x) Other Non-current Assets;
(xi) Cash and Cash Equivalents: (Earmarked Balance with Banks, Balances with Banks held as
Margin Money or Security against borrowings, guarantees, other commitments and
Bank Deposits with more than 12 months ma turity are not to be evaluated); and
(xii) Treatment of Unamortized Expenses.
Also note: Accounting Treatment of Other Current Assets is restricted to Prepaid Expenses,
Accrued Incomes and Advance Tax only.
The expression 'Not to be evaluated' used in the guide lines, means that a student will not be
examined for the above items in the examination in the topics of Comparative Statements, Common-
size Statements, Accounting Ratios and Cash Flow Statement. In simple words, questions on
Comparative Statements, Common-size Statements, Accounting Ratios and Cash Flow
Statement will not have entries or items from above heads.
Meaning of ratio analysis :--
Meaning of ratio-- Ratio' is an arithmetical expression of relationship between two interdependent

or related items. Ratios, when calculated on the basis of accounting information, are called Accounting
Ratios. Accounting ratio may be expressed as an arithmetical relationship between two accounting
variables.
EXPRESSION OF RATIOS :- Accounting Ratios can be expressed in any of the following forms:
(a) Pure: It is expressed as a quotient. For example, Current Ratio which expresses the relationship
between Current Assets and Current Liabilities is (say) 2.
Current Ratio = = =2
Alternatively, it may also be expressed as 2 : 1.
(b ) Percentage: It is expressed in percentage. For example, Net Profit Ratio which relates Net Profit to
Revenue from Operations, i.e., Net Sales
Net Profit Ratio= X100= (say) 25%.

(a) Times: It is expressed in number of times. For example, Trade Payables Turnover Ratio, which
shows relationship between Net Credit Purchases and Average Trade Payable s, is (say) 4
Times.
(b) Fraction: It is expressed in fraction. For example, ratio of fixed assets t o share capital is (say)
3/4 (i.e. 0.75).
MEANING OF RATIOS ANALYSIS:- Ratio Analysis is a technique of Financial Statements Analysis.

It is the most widely used tool to interpret quantitative relationship between two variables of the
financial statements. An Analysis of financial statements with the help of 'accounting ratio' is termed as
'Ratio Analysis'.
Ratio analysis is a process of determining and interpreting relationships between the items of
financial statements to provide a meaningful understanding of the performance and financial position
of an enterprise. Thus, it is a technique of analysing the financial statements by computing ratios.
OBJECTIVE OF RATIO ANALYSIS:-- Ratio analysis serves the purpose of various users who
are interested in the financial statements. It simplifies, summarises and systematises the
figures in the financial statements. The objectives of ratio analysis are:
1. To simplify the accounting information.

2. To determine liquidity (Short-term solvency and Long-term solvency of the business.
3. To assess the operating efficiency of the business.
4. To analyse the profitability of the business.
5. To help in comparative analysis, i.e., inter-firm and intra-firm comparisons.
ADVANTAGES OF RATIO ANALYSIS:- The advantages of ratio analysis are as follows:
1. Useful Tool for Analysis of Financial Statements: Accounting ratios are useful for
understanding the financial position of an enterprise. Bankers, investors, creditors, etc.,
all analyse Balance Sheet and Statement of Profit and Loss using ratios.
2. Simplifies Accounting Data: Accounting ratio simplifies, summarises and systematises
accounting data to make it understandable. Its main contribution lies in communicating
precisely the interrelationships which exist between various elements of financial
statements.
3. Useful in Assessing the Operating Efficiency of Business: Accounting ratios are useful for
assessing the financial health and performance of an enterprise. It is assessed by
evaluating liquidity, solvency, profitability, etc.
4. Useful for Forecasting: Ratios are helpful in business planning and forecasting. The trend
of ratios is analysed and used as a guide for future planning. What should be the course of
action in the future is decided, many a times on the basis of ratio analysis.
5. Useful in Locating the Weak Areas: Accounting ratios assist in locating the weak areas of
the business even though the overall performance may be good. The management can
then pay attention to the weaknesses and take remedial action.
6. Useful in Inter-firm and Intra-firm Comparison: A firm may compare its performance with
that of other firms or with the industry standards in general. The comparison is called
Inter-firm Comparison or Cross-sectional Analysis. If the performance of different units
belonging to the same firm is to be compared, it is called Intra -firm Comparison or Time-
series Analysis. Accounting ratios make the comparison simple.
LIMITATIONS OF RATIO ANALYSIS:--Ratio analysis is a powerful tool in assessing the strengths
and weaknesses of an enterprise. It also has certain limitations which are discussed below:

1. False Result: Ratios are calculated from the financial statements, so the reliability of ratio and its
analysis is dependent upon the correctness of the financial statements. If the financial statements
are not true and fair, the analysis will give a false picture of the affairs.
2. Qualitative Factors are Ignored: Ratio analysis is a technique of quantitative analysis and thus,
ignores qualitative factors, which may be important in decision-making.
3. Lack of Standard Ratio: There is no single standard ratio against which the ratio can be
compared.
4. May not be Comparable: Ratios may not be comparable if different firms follow different accounting
policies and procedures. For example, one firm may follow Straight Line Method of
Depreciation while another may follow Diminishing Balance Method.
5. Price Level Changes are not considered: Change in price level affects the comparability of the
ratios. But price level changes are not considered in accounting variables from which ratios
are computed. This handicaps the utility of accounting ratios.
6. Window Dressing: Ratios may be affected by window dressing. Manipulation of accounts is a
way to conceal vital facts and present the financial position better than what it actually is.
On account of such a situation, presence of particular ratio may not be a definite indicator of
good or bad management.
7. Personal Bias: Personal judgments play an important role in preparing financial statements and,
therefore, the accounting ratios are also not free from this limitation. The ratios have to be
interpreted but different people may interpret the same ratio in different ways.
Classification of types of ratio:- Ratios may be classified into following four categories:
1. Liquidity Ratios: These ratios show the ability of the enterprise to meet its short-term
financial obligations. Important Liquidity Ratios are: (i) Current Ratio, and (ii) Quick Ratio.
2. Solvency Ratios: These ratios are calculated to assess the long -term financial
position of the enterprise. Solvency means ability of the enterprise to meet its long-term
financial obligations. Important Solvency Ratios are: (i) Debt to Equity Rati o, (ii)
Total Assets to Debt Ratio, (iii) Proprietary Ratio, and (iv) Interest Coverage Ratio.
3. Activity Ratios or Turnover Ratios: These ratios show how efficiently a company is
using its resources. Important Activity Ratios are: (i) Inventory Turnover Ratio, (ii) Trade Receivables
Turnover Ratio, (iii) Trade Payables Turnover Ratio, and (iv) Working Capital Turnover Ratio.
4. Profitability Ratios: Profitability of a firm can be measured by its profitability ratios.
Important Profitability Ratios are: (i) Gross Profit Ratio, (ii) Operating Ratio, (iii) Operating Profit
Ratio, (iv) Net Profit Ratio, and (v) Return on Investment (ROI).
1. LIQUIDITY RATIOS (SHORT-TERM SOLVENCY):-- 'Liquidity of Business' refers to the firm's ability to meet
its current obligations, i.e., short-term liabilities. Liquidity ratios are those ratios which are computed to
evaluate the capability of the entity to meet its short-term liabilities. Commonly used liquidity
ratios are:
(i) Current Ratio; and (ii) Liquid Ratio or Quick Ratio.
1. Current Ratio :-- Current Ratio is a liquidity ratio that measures ability of the enterprise to pay its
short-term financial obligations, i.e., current liabilities. It is a relationship of current assets and current liabilities.
Current Ratio indicates whether the enterprise will be able to meet its short-term financial
obligations when they become due for payment. Thus, Current Ratio is a measurement of
financial health of the enterprise in a short-term.
The formula for calculating the Current Ratio is:
Current Ratio =
It is expressed as a 'Pure Ratio' say, 2 : 1.

Current Assets :-- Current Assets are the assets that are either in the form of Cash and Cash
Equivalents or can be converted into Cash and Cash Equivalents within 12 months from the date of
Balance Sheet or within the period of operating cycle, whichever is more. They are shown under the
head 'Current Assets' in the Balance Sheet. They include:

 Current I nvestments,
 Inventories (Excluding Loose Tools and Stores and Spares),
 Trade Receivables (bills receivable and sundry
debtors less provision for doubtful debts),
 Cash and Cash Equivalents (cash in hand, cash at bank, cheques /drafts in hand, etc.),
 Short-term Loans and Advances, and
 Other Current Assets (prepaid expenses, interest receivable, etc.).
Current Liabilities :-- 'Current Liabilities' are the liabilities repayable within 12 months from the date of
Balance Sheet or within the period of operating cycle, whichever is higher. They are shown under
the head 'Current Liabilities' in the Balance Sheet.They include:
 Short-term Borrowings,
 Trade Payables (bills payable and sundry creditors),
 Other Current Liabilities (current maturities of long-term debts, interest accrued but not due on
borrowings, interest accrued and due on borrowings, outstanding expenses, unclaimed
dividend, calls-in-advance, etc.), and
 Short-term Provisions.
NOTE:-As per CBSE Guidelines ‘ Other Current Assets’ except prepaid expenses , accrued incomes
and advance tax, are not to be evaluated. Therefore, the illustrations and questions do not
include ‘Other Current Assets’ other than prepaid expenses, accrued incomes and advance tax.
Ideal Ratio: The acceptable Current Ratio differs from industry to industry depending on the risk
involved. However, generally accepted standard of Current Ratio is 2 : 1, i.e., current assets should be
twice the current liabilities.
If the Current Ratio is 2 or more, it means the firm is adequately liquid and shall be able to meet its
current obligations but if the Current Ratio is less than 2, it means the firm may face difficulty in
meeting its current obligations.
High Current Ratio means better liquidity position. But a very high Current Ratio means poor
operational efficiency. It may be because of following reasons:
(a) stock may be increasing due to poor sales;

(b) large amount is invested in trade receivables due to poor collection or extended credit period; and
(c) cash and bank balances are lying idle because of poor cash management.
Low Current Ratio may be due to inadequate investment in current assets which may result in low
liquidity and may threaten the solvency of the enterprise. Current Ratio should be reasonable. It should
neither be too high nor too low. Both the situations are disadvantageous
Objective and Significance: The objective of calculating Current Ratio is to assess the ability c: the enterprise to
meet its short-term financial obligations, i.e., current liabilities. It is a ratio compute,: to assess short-term
solvency of the enterprise as on the date when Current Ratio computed. It shows the number
of times current assets are of current liabilities.
Question 1. From the following information, compute Current Ratio:
Trade Receivables (Sundry

1,00,000 Bills Payable 20,000
Debtors)
Prepaid Expenses 10,000 Sundry Creditors 40,000
Cash and Cash Equivalents 30,000 Debentures 2,00,000
Short-term Investments 20,000 Inventories 40,000

Machinery 7,000 Expenses Payable 40,000
Solution: Current Ratio = = =2:1
Question 2. From the following Balance Sheet of COC Ltd. as at 31.3.2020, calculate Current Ratio:
Particulars
 EQUITY AND LIABILITIES

(a)
Share Capital 7,50,000
(b)
Reserves and Surplus 2,50,000
Long-term Borrowings 6,00,000
(a) Short-term Borrowing 3,50,000

(b) Trade Payables 50,000
(c) Short-term Provisions 50,000
Total 20,50,000
 . ASSETS
Fixed Assets:
Tangible Assets 10,00,000
2. Current Assets
(a) Inventories 4,00,000
(b) Trade Receivables 3,00,000
(c) Cash and Cash Equivalents 2,75,000
(d) Other Current Assets 75,000
Total 20,50,000
1. Inventories include Loose Tools of Rs 1,50,000.
2. Other Current Assets: Prepaid Expenses 25,000; and Advance Tax 50,000.
Question3. Current Ratio is 2.5; Working Capital is Rs. 60,000. Calculate the amount of Current Assets
and Current Liabilities.
Solution: Current Ratio = =2.5
Current Assets = 2.5 x Current Liabilities
Working Capital = Rs 60,000 (Given)
Let Current Liabilities be x; Current Assets = 2.5x

Working Capital = Current Assets - Current Liabilities
2.5x - x = Rs 60,000
x = Rs 60,000/1.5 = 40,000 [Current Liabilities].

Current Assets = Rs. 40,000 x 2.5 = 1,00,000.
Question 4. Working Capital is Rs. 7,20,000; Trade Payables Rs. 40,000; Other Current
Liabilities Rs. 2,00,000; calculate Current Ratio.
Current Liabilities = Trade Payables + Other Current Liabilities

=Rs 40,000+Rs2,00,000 = Rs 2,40,000.
Working Capital = Current Assets = Working Capital + Current Liabilities
= 7,20,000+2,40,000 = Rs. 9,60,000
Question 5. Current Assets are Rs 4,00,000: Inventories Rs 2,00,000; Working Capital Rs 2,40,000,
Calculate Current Ratio.
Solution:
Current Ration = = =2.5:1
Working Capital = Current Assets – Current Liabilities
Current Liabilities = Currents Assets – Working Capital
= Rs 4,00,000 – Rs 2,40,000 =Rs 1,60,000
Note: Inventories are already included in Current Assets. Hence will not be added to Current Assets.
Question 6. Current Assets are Rs 5,25,000; Inventories Rs 2,00,000 (includes Loose Tools Rs
75,000); Working Capital Rs 2,25,000, Calculate Current Ratio.
Solution:
Current Ratio = = =1.5:1.
Current Liabilities = Current Assets – Working Capital
=Rs. 5,25,000- Rs 2,25,000 = Rs 3,00,000
* Current Assets = Current Assets – Loose Tools
= Rs 5,25,000- Rs 75,000 = Rs 4,50,000.
Note: Loose Tools are excluded from Current Assets to compute current Ratio.
Question 7. A company had current Assets of Rs 3,00,000 and Current Liabilities of Rs 1,40,000.
After wards it purchased goods for Rs 20,000 on credit. Calculate current Ratio after the purchase.
Solution:
Current Ratio= = =2:1.
Purchased of goods of Rs 20,000 on credit results into increase in stock (i.e., Current Assets) and
creditors (i.e., Current Liabilities) by Rs 20,000.
Question 8. Current Liabilities of a company were Rs 1,00,000 and its current ratio was 2.5 :1. It paid
Rs 25,000 to a creditor. Calculate Current ratio after the payment.
Solution:
Current Ratio = = = 3:1
Working Note:
As, Current Liabilities are Rs 1,00,000 and Current Ratio is 2.5:1;
Current Assets= Rs 1,00,000 x 2.5 = Rs 2,50,000
After payment of Rs 25,000 to a creditor, Cash (i.e., Current Asset) and Creditors (i.e., Current
Liability ) both will reduce by Rs 25,000 each. Th us,

Current Assets = Rs 2,50,000 - Rs 25,000 =Rs 2,25,000.

Current Liabilities= Rs 1,00,000 - Rs 25,000 = Rs 75,000.
Question 9. Ratio of Current Assets (Rs 6,00,000) to Current Liabilities ( Rs 4,00,000) is 1.5:1. The
accountant of the firm is interested in maintaining a Current Ratio of 2:1, by paying Part of the
Current liabilities. Compute amount of Current Liabilities that should be paid, so that Current Ratio
at the level of 2:1 may be maintained. (Delhi 2004)
Current Ratio = = =
Let the amount paid towards Current Liabilities be x
After the payment of a part of Current Liabilities, Cash (i.e., Current Asset) and Current Liabil ities
both will reduce by x. Thus,
Rs 8,00,000 - 2x = Rs 6,00,000 – x
Rs 8,00,000 – Rs 6,00,000 = 2x - x
Rs 2,00,000 = x
Current Liabilities that should be paid Rs 2,00,000.
Question 10. Ratio of Current Assets (Rs 10,00,000) to Current Liabilities (Rs 4,00,00) is 2.5:1. The
accountant of the firm is interested in maintaining a Current Ratio of 2:1, by acquiring some current
assets on credit. You are required to suggest him the amount a of current assets that should be
acquired.
Solution: Let the amount of Current Assets acquired on credit be x.
After the acquisition of Currents Assets on credit, both Current Assets and Current Liabilities will
increase by x. Thus,
Current Ratio = = =2
Rs 8,00,000+2x=Rs 10,00,000+x
2x-x=Rs 10,00,000 – Rs 8,00,000
X= Rs 2,00,000
Current Assets that should be acquired = Rs 2,00,000.
Question 11. A firm had Current assets of Rs 3,00,000. It paid Current Liabilities of Rs 60,000. After
the payment, Current Ratio was 2:1. Determine current Liabilities and working Capital after and
before the payment was made.
Solution:
Let the Current Liabilities after payment of Rs 60,000 be X, which reduces cash (i.e., Current Assets)
by the same amount. Thus,
( )
Current Ratio =
( )
2x = Rs 2,40,000
Current Liabilities after payment = Rs 2,40,000/2 =Rs 1,20,000
Current Liabilities before payment= Rs 1,20,000+ Rs 60,000= Rs 1,80,000
Working capital after payment = Rs 2,40,000(CA) – Rs 1,20,000(CL) = Rs 1,20,000.
Working Capital before payment = Current Assets – Current Liabilities before payment
= Rs. 3,00,000 – Rs 1,80,000 = Rs 1,20,000.
Question 12. Current Ratio of a company is 2:1. State giving reasons, which of the following
would improve, reduce or not change in the ratio:
(I) Repayment of a current liability.

(II) Purchase of goods for cash.
(III) Sale of office equipment for Rs 4,000 ( book value Rs 5,000).
(IV) Purchase of Stock-in-trade on credit.

(V) Sale of goods Rs 11,000 (Cost Rs 10,000).

(VI) Payment of dividend.
Solution: In such questions it is better to assume accounts of current assets (CA) and current liabilities (CL). It
then becomes easy to determine effect of the transaction on the ratio.
Current Ratio (Given) is 2:1, let us assume CA = Rs 20,000 and CL = Rs 10,000.
(i) Repayment of current liabili ty will improve Current ratio because fall in current
asset will be less than twice the fall in current liability.
(Suppose Rs 5,000 are paid for current liability, balance would be CA=Rs 15,000 and
CL = Rs 5,000 ; Ratio will improve to 3:1.)
(ii) Purchase of goods on cash will not change the Current Ratio, neither the total
current assets nor the total current liabilities are affected since there is only a
conversion of one current asset (Cash) into other current asset (Goods).
(iii) Sale of office equipment will improve the Current Ratio because current asset (
Cash ) will increase without any change in current liability.
(iv) Both the Total Current Assets and Total Current Liabilities are increased by the
same amount Therefore, the current ratio will reduce.
(v) Sale of goods for Rs 11,000; cost being Rs 10,000 will improve the Current Ratio
because current asset (Cash or Trade Receivables) will increase by Rs 1,000.
(vi) Payment of dividend will reduce the total of current assets and total of current
liabilities by the same amount. Therefore, the Current Ratio will improve.
Question 13. Current Ratio of a company is 2:1. State giving reasons, which of the following
will improve, reduce or not change the ratio:
(i) Redemption of Debentures.

(ii) Purchase of goods against cheque.
(iii) Purchase of Loose Tools against cash.
(iv) Sale of fixed asset against cheque.
(v) Receipt of cheque from debtor.
Solution:
(i) Redemption of Debentures will improve the current ratio as both Current
Assets and Current Liabilities have decreased by the same amount, if
redemption of debentures takes place in the current year where outstanding
debentures are considered as Current Liability .
(ii) Purchase of goods against cheque will not change the Current Ratio as one
current asset (Goods) replaces another current asset (Bank).
(iii) Purchase of Loose Tools against cash will reduce the Current Ratio as current
asset (Cash) declines while Loose Tools are not included in current asset at the
time of calculating Current Ratio.
(iv) Sale of fixed asset against cash will improve the Current Ratio since current
asset (Bank) increases while in current liabilities there is no change.
(v) Cheque received from a debtor will not change the Current Ratio since on
current asset (Debtor) is replaced by another current asset (Bank).
Question 15. The Current Ratio of a company is 2.1 : 1.2. State with reasons, which of the
following transactions will increase, decrease or not change the ratio:
(i) Redeemed 9% Debentures of Rs 1,00,000 at a premium of 10%.

(ii) Received from debtors Rs 17,000.
(iii) Issued Rs 2,00,000 Equity sh ares to the vendors of machinery.
(iv) Accepted bills of exchange drawn be the creditors Rs 7,000.

Solutions :
S. Transactions Effects on Reasons
No. Current Ratio
(i) Redeemed 9% Debentures of Increase If redemption of debe ntures takes place

Rs 1,00,000 at a premium of in the current year where outstanding
10% debentures are considered as Current
Liability, in such a case current ratio
will increase because both Current
Assets and Current Liabilities have
decreased by the same amount
(ii) Received from de btors Rs No Change It will increase cash and decrease
17,000 debtors with the same amount. Hence,
both Current Assets and Current
Liabilities remain unchanged.
(iii) Issued Rs 2,00,000 Equity No Change Both Current Asset s and Current
shares to the vendors of Liabilities are no affected.
Machinery
(iv) Accepted Bills of Exchange No Change No change in Current Assets and

drawn by the creditors Rs Current Liabilities. Because increase in
7,000 one current Liability results in decrease
in another Current Liability with the
same amount.
Question 16. Current Ratio of X Ltd. Is 2;1. State with reason, which of the following transactions would (i)
increase (ii) decrease; (iii) not change the ratio:
(i) Included in the Trade Payables was a bill payable of Rs 9,000 which was met on maturity.
(ii) Company issued 1,00,000 Equity Shares of Rs 10 each to the Vendors of Machinery purchased.
Solution :
Change Reason
(i) Increase Including a Bill payable met on maturity would decrease both Current Assets
(cash) and Current Liabilities ( Bills payable) by the same amount.
(iii) No Change Payment to Vendors of machinery by way of issuing Equity Shares would
neither change Current Assets nor Current Liabilities .
Question 17. The Current Ratio of X Ltd. Is 1:1. State with reason, which of the following transactions would
(i) increase or (ii) decrease or (iii) not change the ratio :
Included in the Trade Payables was a bill payable of Rs 20,000 which was met on maturity.
Company issued 50,000 Equity Shares of Rs 10 each to the vendors of Machinery purchased.
Solution:
Transactions Effect on Current Reason
Ratio
(i) No Change Current Assets and also Current Liabilities have decreased by
equal amount. Therefore, the ratio will not change.
(ii) No Change Neither Current Assets nor Current Liabilities are affected.
Question 18. The Current Ratio Y Ltd. Is 2:1. State with reason, which of the following transactions would (i)
increase, (ii) decreases or (iii) not change the ratio:
(i) Trade Receivables include Debtors or Rs 40,000 which were received.
(ii) Company purchased furniture of Rs 45,000. The vendor was paid by issue of equity shares of Rs
10 each at par. (Delhi 2014)

Solution:
Transactions Effect on Current Reasons
Ratio
(i) No Change One Current Asset (Bill Receivable) is replaced by another Current
Asser (cash OR Bank).
(ii) No Change Current Liability and also Current Assets do not change.
Question 19. State giving reason, whether the Current Ratio of a company will improve or decline or not
change in each of the following transactions if Current Ratio is (i) 1:1, and (ii) 0.8:1:
(a) Cash paid to creditors.

(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Goods purchased on credit.
(e) Purchased goods for cash.
(f) Bills receivable endorsed to a creditor dishonoured.
(g) Payment of dividend payable.
(h) Sale of goods for Rs 15,000 (Cost Rs 10,000).
(i) Sale of old furniture for Rs 12,000 (Book value Rs 15,000).
Solution:
(1) Statement showing the Effect of Various Transactions on Current Ratio of 1:1
Transactions Effect on Current Reason

Ratio
(a) No Change Both the Total Current assets and Total Current Liabilities will
decrease by the same amount
(b) No Change Both the Total Current Assets and Total Current Liabilities will
decrease by the same amount.
(c) No Change Both the Total Current Assets and Total Current Liabilities will
(d) No Change Both the Total Current Assets and Total Current Liabilities will
increase by the same amount
(e) No Change Neither the Total Current Assets nor the Total Current Liabilities are
affected since it is a conversion of one Current Asset (cash) into
another Current Asset (Goods).
(f) No Change Both the Total Current Assets and Total Current Liabilities will
increase by the same amount.
(g) No Change Both the Total Current Assets and Total Current Liabilities will
decrease by the same amount .
(h) Improve Total Current Assets will increase by Rs 5,000 (profit) but Total
Current Liabilities will remain unchanged.
(i) Improve Total Current Assets will increase by Rs 12,000 (Cash or Bank) but
Total Current Liabilities will remain unchanged .
(2) Statement Showing the Effect of Various Transactions on Current Ratio of 0.8:1
Transactions Effect on Current Ratio Reason
(a) Decrease Both Total Current Assets and Total Current Liabilities will
(b) Decrease Both Total Current Assets and Total Current Liabilities will
(c) Decrease Both Total Current Assets and Total Current Liabilities will
(d) Improve Both Total Current Assets and Total Current Liabilities will
increase by the same amount.
(e) No Change Neither Total Current Assets nor Total Current Liabilities are
affected since there is only a conversion of one Current Asset
into another Current Asset.
(f) Improve Both Total Current Assets and Total Current Liabilities are

increased by the same amount.

(g) Decrease Both Total Current Assets and Total Current Liabilities are
decreased by the same amount
(h) Improve Total Current Assets are increased by Rs 5,000 (profit) but Total
Current Liabilities remain unchanged.
(i) Improve Total Current Assets are increased by Rs 12,000 (Cash or Bank)
but Total Current liabilities remain unchanged.
(II) Liquid Ratio or Quick Ratio or Acid Test Ratio:- Liquid Ratio or Quick Ratio or Acid Test Ratio is a liquidity
ratio which measures the ability of the enterprise to meet its short-term financial obligations, i.e., Current
Liabilities. It is a relationship of liquid assets with current liabilities.
The liquid/Quick Ratio is calculated as follows: Liquid/Quick Ratio =

It is expressed as a ‘Pure Ratio’ say, 1:1.
Liquid/Quick Assets Current Liabilities
‘Liquid Assets’ are the assets that are either in the ‘Current Liabilities’ are the liabilities repayable within
form of Cash and Cash Equivalents or can be 12 months from the date of Balance Sheet or within
converted into Cash and Cash Equivalents in a very the period of operating cycle, whichever is higher.
short time i.e., are the most liquid assets. They are They are shown under the head ‘Current Liabilities’ in
shown under the head ‘Current Assets” in the Balance the Balance Sheet.
Sheet and include: They include:
 Current Investments,  Short-term Borrowings,
 Trade Receivables ( Bills Receivable,  Trade Payables (bills Payable and sundry
Debtors – Provision for Doubtful Debts), creditors),
 Other Current Liabilities (current Maturities
 Cash and Cash Equivalents, of long-term debts, interest accrued and due
 Short-term Loans and Advances, and on borrowings, outstanding expenses
unclaimed dividend, calls-in-advance, etc.),
 *Other Current Assets except Prepaid and
Expenses.  Short term Provisions
*As per CBSE Guidelines ,accounting treatment of ‘Other Current Assets’ is restricted to Prepaid Expenses,
Accrued Incomes and Advance Tax only.
Liquid or quick assets are the assets which are either in the form of Cash and Cash Equivalents or can be
converted into cash within a very short period, i.e., are the most liquid assets.
Thus, they exclude inventories and prepaid expenses. Inventories and Prepaid expenses are excluded from it
because these are expenses paid in advance hence cannot be converted into Cash and Cash Equivalents.
Ideal ratio :--Quick Ratio of 1:1 is an accepted standard, since for every rupee of current liabilities, there is a
rupee of quick assets.
In case, Liquid Ratio is less than 1, it means that current liabilities are more than its liquid or quick assets. As a
result, the enterprise may not be able to meet its short-term financial obligations, i.e., current liabilities, if they
fall due for payment on that date.
Objective and Significance: The objective of computing Liquid Ratio/Quick Ratio is to assess whether the
enterprise would be able to met its short-term financial obligations, i.e., Current Liabilities, if they arise on the
date when liquid ratio is computed. A part of the current assets is not readily realizable or convertible into
cash. Therefore the Current Ratio does not indicate adequately the ability of the enterprise to meet its current
liabilities as and when they fall due.
Liquid Ratio is an indicator of short-term debt paying capacity of an enterprise and thus, it is a better indicator
of liquidity. This ratio is very important for banks and financial institutions. The comparison of Current Ratio
with Liquid Ratio would indicate the degree of inventory held. A high Liquid Ratio compared to current Ratio
may indicate under stocking while a low Liquid Ratio indicates overstocking.

Difference between Current Ratio and Liquid/Quick Ratio
Basis Current Ratio Liquid/Quick Ratio

1. Relationship It establishes between Current It establishes relationship between
Assets and Current Liabilities . Liquid Assets and Current
Liabilities.
2. Assessment It assesses the ability to meet It assesses the ability to meet
current liabilities within 12 current liabilities immediately.
months from the date of Balance
sheet or with in the period of
operating Cycle
3. Ideal Ratio 2:1 is considered to be an ideal 1:1 is considered to be an ideal
ratio ratio
4. Measure It is not considered to be better It is considered to be better than
than Liquid/Quick Ratio to Current Ratio to measure short-
measure short-team financial term financial position.
position
Question 20. Wye Ltd. Has furnished following information regarding its Current Assets and Current
Liabilities:
Current Assets: Rs. Current Liabilities: Rs.
Cash and Cash Equivalents 5,000 Sundry Creditors 25,000
Debtors 29,000 Bills Payable 16,000
Bills Receivable 5,000 Outstanding Expenses 8,000
Marketable Securities 15,000 Provision for Expenses
5,000
Inventories 54,000 54,000
1,08,000
Solution:-
(1) Current Ratio = = 2:1.
(2) Liquid Ratio = = 1:1.
Liquid Assets = Total Current Assets – Inventories

= Rs. 1,08,000 + Rs. 54,000 = Rs. 54,000.
Question 21. Calculate Liquid Ratio from the following information :
Current Liabilities 50,000 Prepaid Expenses 5,000

Current Assets 80,000 Trade Receivables 30,000
Inventories 25,000
Solution:
Liquid Ratio = = = 1:1
Liquid Assets = Current Assets – Inventories – Prepaid Expenses

= Rs 80,000 – Rs. 25,000 – Rs. 5,000 = Rs. 50,000
Question 22: Inventories are Rs. 80,000; Working Capital Rs. 2,40,000; Current Assets Rs. 4,00,000;
Calculate Liquid/Quick Ratio.
Solution :
Liquid/Quick Ratio = = = 2:1

Current Liabilities = Current Assets – Working Capital
= Rs. 4,00,000 – Rs. 2,40,000 = Rs. 1,60,000.
Liquid/Quick Assets = Current Assets – Inventories
= Rs. 40,00,000 – Rs. 80,000 = Rs. 3,20,000.
Question 23: Calculate Liquid Ratio/Quick Ratio/Acid Test Ratio from the following: Working Capital Rs. 1,80,000;
Total Debts, i.e., Outside Liabilities Rs. 3,90,000; Long-term Debts Rs. 3,00,000; Inventories Rs. 90,000.
Solution :
Liquid /Quick Ratio = = = 2:1.
Current liabilities = Total Debts, i.e., Outside Liabilities – Long-term Debts
= Rs. 3,90,000 – Rs. 3,00,000 = Rs. 90,000.
Current Assets = Working Capital + Current Liabilities
= Rs. 1,80,000 + Rs. 90,000 = Rs. 2,70,000
Liquid/Quick Assets = Current Assets – Inventories
= Rs. 2,70,000 – Rs. 90,000 = Rs. 1,80,000.
Question 24: Current Liabilities of a company are Rs. 3,00,000. Its Current Ratio is 3 and Liquid Ratio is 1.
Calculate value of Inventories.
Solution:
Current Liabilities = Rs. 3,00,000
Liquid Ratio = ;
1=
Liquid Assets= Current Raito x Current Liabilities
= 3 x Rs. 3,00,000 = Rs. 9,00,000
Inventories = Current Assets – Liquid Assets
= Rs. 9,00,000 – Rs. 3,00,000 = Rs. 6,00,000
Question 25: Current Ratio of A Ltd. Is 4.5 : 1 and Liquid Ratio is 3:1. If its Inventories are Rs. 3,00,000, find
out its Current Liabilities; Current Assets and Quick Assets.
Solution: Let Current Liabilities be X

Current Ratio is 4.5 :1; Current Assets – Inventories
Liquid Assets = Current Assets – Inventories
Or 3x = 4.5x – Rs. 3,00,000
1.5x = Rs. 3,00,000
X=
Current Liabilities = Rs. 2,00,000.
Current Assets = Rs. 2,00,000 x 4.5 = Rs. 9,00,000.
Quick Assets = Current Assets – Inventories
= 9,00,000 – Rs. 3,00,000 = Rs. 6,00,000
Or
= Rs. 2,00,000 (Current Liabilities) x 3 = Rs. 6,00,000
Question 26. Quick Ratio 1.5; Current Assets Rs. 1,00,000; Current Liabilities Rs. 40,000. Calculate value of
Inventories (Stock).
Solution :
Quick Ratio = =
Quick Assets= Rs. 40,000 x 1.5 = Rs. 60,000.
Calculation of Inventories ( Stock):

Inventories = Current Assets – Quick Assets

= Rs. 1,00,000 – Rs. 60,000 = Rs. 40,000
Question 27: A firm has Current Ratio of 4:1 and Quick Ratio of 2.5:1. Assuming Inventories are Rs. 22,500;
find out total Current Assets and total Current Liabilities.
Solution:
Calculation of Current Assets and Current Liabilities:
Let Current Liabilities ( CL ) be x
Current Ratio is 4:1, hence Liquid Assets or Quick Assets = 2.5x
Quick Assets + Inventories = Current Assets
Or 2.5 x + Rs. 22,500 = 4x
Or 1.5 x= Rs. 22,500
X=
Thus, Current Liabilities = Rs. 15,000.
Current Assets = Rs. 15,000 x 4 = Rs. 60,000.
Question 28. Working Capital of a company is Rs. 6,00,000. Its Current Ratio is 2.5:1. Calculate value of (i)
Current Liabilities (ii) Current Assets, and (iii) Liquid Ratio/ Quick Ratio/Acid Test Ratio, assuming Inventories of
Rs. 4,00,000.
Solution :
Current Raito = 2.5:1 ( Given)
Let current Liabilities = x
then Current Assets= 2.5x
Rs. 6,00,000= 2.5 – x
Rs. 6,00,000= 1.5x
Therefore,
(1) Current Liabilities (x) =
(2) Current Assets = Rs. 4,00,000 x 2.5 = Rs. 10,00,000.
(3) Liquid Ratio/Acid Test Ratio =
Quick Assets= Current Assets – Inventories
= Rs. 10,00,000 – Rs. 4,00,000 = Rs. 6,00,000.
Question 29. Current Assets of a company are Rs. 17,00,000. Its Current Ratio is 2.50 and Liquid Ratio is 0.95.
Calculate Current Liabilities, Liquid Assets and inventory.
Solution:
Current Ratio =
Current Liabilities =
Liquid Ratio =
Liquid Assets = Rs. 6,80,000 x 0.95 = Rs. 6,46,000.
Inventory = Current Assets – Liquid Assets
= Rs. 17,00,000 – Rs 6,46,000 = Rs. 10,54,000.
Question 30. From the following, calculate Quick Ratio and Current Ratio:
Total Debt 12,00,000 Long-term Borrowings 4,00,000
Total Assets 16,00,000 Long-term Provisions 4,00,000
Fixed Assets 6,00,000 Inventories 1,90,000
Non-current Investment 1,00,000 Prepaid Expenses 10,000
Long-term Loans and Advances (Debt) 1,00,000
Solution: Current Assets = Total Assets – Non-current Assets

= Rs 16,00,000 –[ Rs. 6,00,000 ( Fixed Assets ) + 1,00,000 (Non-current Investments) + Rs. 1,00,000(Long-term Loans
and Advances) = Rs. 8,00,000.
Quick Assets = Current Assets – Non-current Inventories – Prepaid Expenses
= Rs 8,00,000 – Rs . 1,90,000 – Rs. 10,000 = Rs. 6,00,000.
Current Liabilities= Total Debt – Non-current Liabilities
= Rs. 12,00,000 – [ Rs. 4,00,000 (Long-term Borrowings) + Rs. 4,00,000 (Long-term Provisions)]
= Rs. 12,00,000 – Rs. 8,00,000 = Rs. 4,00,000.
Quick Ratio =
Current Ratio = = 2:1.
Question 31. Quick Ratio of a company is 1.7:1. State, giving reasons, which of the following would improve,
reduce or not change the ratio :
(1) Purchase of Inventory for cash; (2) Cash collected from debtors; (3) Sale of goods (costing Rs 10,000)
for Rs. 60,000; (4) Sale of an office furniture (Book value Rs 10,000) for Rs. 7,500; and
(5) Payment of Dividend.
Solution :
(I) Goods purchased for cash will reduce the total of quick assets. Therefore, the Quick Ratio will
reduce.
(II) Cash collected from debtors will not change the total of quick assets because one quick asset will
be replaced by another. Therefore, the Quick Ratio will not change.
(III) Sale of goods for cash will increase the total of the quick assets. Therefore, the Quick Ratio will
improve.
(IV) Sale of Furniture Rs. 7,500 will increase the total of quick assets. Therefore, the Quick Ratio will improve.
(V) Payment of Dividend will reduce the quick assets as well as current liabilities by the same amount.
Therefore, the Quick Ratio will improve.
Question 32. The Quick Ratio of Z Ltd. is 1:1. State with reason which of the following transactions would (i) increase,
(ii) decrease or (iii) not change the ratio :
(i) Included in the trade payables was bills payable of Rs. 3,000 which was met on maturity.
(ii) Debentures of Rs. 50,000 were converted into equity shares (Delhi 2014)
Solution:
Transactions Effect on Quick Ratio Reason
(i) No Change Quick Assets and Current Liabilities have reduced by Rs. 3,000 and
also the ratio is 1:1. Therefore, there will be no change.
(ii) No Change Neither Quick Assets not Current Liabilities are affected.
Question 33. The Quick Ratio of the company is 1.5:1. State with reason which of the following transactions would
(i) Increase, (ii) decrease or (iii) not change the ratio:
(I) Paid rent Rs. 3,000 in advance.

(II) Trade Receivables included a debtor Shri Ashok who paid his entire amount due Rs. 9,700.
Solution:
Transactions Effect on Quick Ratio Reason

(i) Decrease Quick Assets have decreased by Rs. 3,000 but Current Liabilities
have not changed. Therefore, Quick Ratio will decrease.
(ii) No Change One Current Asset (Debtors) is replaced by another Current Asset
(cash or bank)

st
Question 34. From the following Balance Sheet of XYZ Limited as at 31 March,2019:
Particulars Rs.
(1) Share holders’ Funds
(a) Share Capital 2,40,000
(b) Reserves and Surplus 60,000
(2) Non-Current Liabilities
Long-term Borrowings: 10% Debentures 1,50,000
(3) Current Liabilities
(a) Trade Payables
2,34,000
(b) Short-term Provisions
6,000
Total 6,90,000
II. ASSETS
(1) Non-Current Assets
Fixed Assets:
Tangible Assets 4,50,000
(2) Current Assets
(b) Trade Receivables 90,000
(c) Cash and Cash Equivalents 22,800
(d) Other Current Assets :
Prepaid Expenses 7,200
Total 6,90,000
Calculate :
(I.) Current Ratio, and (II.) Liquid Ratio

What conclusions do you draw about the company on the basis of these ratios?
Solution:
(I). Current Ratio =
CONCLUSIONS:-- Normally, current assets should be twice the current liabilities. In this case, current assets are equal to
the current liabilities. Hence short-term financial position of the company is not satisfactory. It may not be able to meet
its current liabilities promptly.
(II). Liquid Ratio =

= 0.47:1
CONCLUSIONS:- If, Liquid Ratio is 1:1, only then the position can be said to be satisfactory. In this case, it is less than half
hence liquidity position of the company is not satisfactory.
Note: Analysis and comments are not in syllabus. These have been given for understanding and being helpful in
preparation of projects.
Question 36. From the following data, calculate Current Ratio:
Liquid Assets Rs. 37,500; Inventories Rs. 10,000; Prepaid Expenses Rs. 2500; Working Capital Rs. 30,000.

Solution Current Ratio =
Question 37. Current Liabilities of A Ltd. are Rs. 5,00,000 and Acid Test Ratio (Quick / Liquid Ratio ) is 3:1.
Inventories are Rs. 2,50,000. Find Current Assets and Current Ratio.
Solution: Current Ratio =
Current Liabilities= Rs. 5,00,000
Quick /Liquid Assets are 3 times the Current Liabilities = 3 x Rs 5,00,000 = Rs. 15,00,000.
Current Assets = Quick Assets + Inventories
= Rs 15,00,000 + 2,50,000 = Rs 17,50,000.
Question 38. X Ltd. has Liquid (Acid Test) Ratio 2:1. If its Inventories (Stock) are Rs. 20,000 and its total Current Liabilities
are Rs. 50,000, find its Current Ratio. ( Foreign 2002)
Solution Current Ratio =
Liquid Ratio = Liquid Assets : Current Liabilities
= 2;1 (Given)
If Current Liabilities are Rs. 50,000, then Liquid Assets would be Rs. 1,00,000.
And Current Assets = Liquid Assets + Inventories
Current Assets = Rs 1,00,000 + Rs. 20, 000 = Rs. 1,20,000.
SOLVENCY RATIOS (LONG-TERM SOLVENCY RATIOS):-- Solvency of a business means that the business is in a position to
meet its long-term financial obligations as and when they become due.
‘Solvency Ratios’ are the ratios which show whether the enterprise will be able to meet its long-term financial obligations,
i.e., long-term liabilities. Important solvency ratios are :
(A) Debt to Equity Ratio;

(B) Total Assets to Debt Ratio;
(C) Proprietary Ratio ; and
(D) Interest Coverage Ratio.
(A) Debt to Equity Ratio :
Debt Equity Ratio is computed to assess long-term financial soundness of the enterprise. The ratio expresses the
relationship between long-term debts and equities (i.e., Shareholders’ Funds) of the enterprise.
Long term debts are the liabilities of the enterprises payable to outsiders. They include long-term borrowings and long-
term provisions. They are shown as non-current liabilities in the Equity and Liabilities part of the Balance Sheet.
Note :--As per CBSE Guidelines, accounting treatment of Other Long-term Liabilities is not to be evaluated. Therefore, it
is not discussed and also not included in the questions.
Provision is made to meet a liability amount of which is not determined but is provided by making best estimate. Since,
long-term provisions are in the nature of long-term liability. They are included in external equities, i.e., external debts in
spite of the fact that the amount may be different at the time of settlement of liability.
The Debt to Equity Ratio is computed as follow: Debt to Equity Ratio =

( )
Debt to Equity Ratio is expressed as ‘Pure Ratio’ say 2:1.

Debt=Long-term Borrowings + Long-term Provisions

Or
= Total Debt – Current Liabilities
Or
= Capital Employed – share holder’fund
Note: Capital Employed = Debt + Equity
Or
= Non-Current Assets + Working Capital – Fictitious Assets
Equity/Shareholders’ Funds= Share Capital + Reserves and Surplus- fictitious assets
Or
= Non-current Assets ( Tangible Assets+ Intangible Assets + Non-current Trade Investments + Long-term Loans
and Advances) + Working Capital - Non-current Liabilities ( Long-term Borrowings + Long-term Provisions)
Or
= Total Assets – Total Debt
*Working Capital = Current Assets – Current Liabilities
Note: If Surplus, i.e., Balance in Statement of Profit and Loss has debit balance, it is deducted to compute
Equity/Shareholders’ Funds.
As per CBSE Guidelines, accounting treatment of Other Non-Current Assets is not to be evaluated. Hence,
other Non-current Assets have not been included in questions.
A high Debt to Equity Ratio means that the enterprise is depending more on borrowings or debts as compared
to shareholders’ funds. In effect, lenders are at higher risks and have lower safety. On the other hand, low
Debt to Equity Ratio means that the enterprise is depending more on shareholders’ funds than external
equities. In effect, lenders are at a lower risk and have higher safety. Normally, Debt to Equity Ratio of 2:1 is
considered as an appropriate ratio.
Objective and Significance: The objective of Debt to Equity Ratio is to measure the proportions of external
funds and shareholders’ funds invested in the company. This ratio assesses long-term financial position and
soundness of long-term financial policies of the enterprise. It also indicates the extent to which the enterprise
depends on borrowed funds for its business.
Question 39. From the following information, calculate Debt to Equity Ratio
Share Capital: 10,000 Equity Shares of Debentures 75,000

Rs. 10 each 1,00,000
General Reserve 45,000 Long-term Provisions 25,000
Surplus 30,000 Outstanding Expenses 10,000
Solution: Debt to Equity Ratio = ( )
Question 40. Calculate Debt to Equity Ratio from the following information:
(1) Total Assets 1,25,000
(2) Total Debts, i.e., external debts 1,00,000
(3) Current Liabilities 50,000.
Solution: Debt to Equity Ratio = ( )
Question 41. From the following information, compute Debt to Equity Ratio:

Shareholders’ Funds: Long-term Borrowings:

Equity Share Capital 2,00,000 10% Debentures 3,50,000
Reserves and Surplus 1,50,000 Current Liabilities 1,00,000
Solution:
Debt to Equity Ratio =
(
Long-term Borrowings 5,00,000 Equity Share Capital 2,00,000

Long-term Provision 1,00,000 General Reserve 2,00,000
Current Liabilities 50,000 surplus (debit balance) 1,00,000
Solution:
Debt to Equity Ratio= ( )
Rs. Rs.
Long-term Borrowings 2,00,000 non current assets 3,60,000
Long-term Provisions 1,00,000 current assets 90,000
Current Liabilities 50,000 (Delhi 2014)
Solution:
Debt to Equity Ratio= ( )
Question 44. Assuming that Debt to Equity Ratio is 2:1. State giving reasons, whether this ratio will increase or
decrease or will have no change in each one of the following cases:
(1). Purchase of a Fixed Asset by taking long-term loan.
(2). Sale of Fixed Asset (Book value Rs. 40,000) at a loss of Rs. 5,000.
(3). Sale of Fixed Asset (Book value Rs. 40,000) for Rs. 50,000.
(4). Issue of New Shares for Cash.
(5). Issue of Bonus Shares.
(6). Redemption of Debentures for Cash.
(7). Conversion of Debentures into Equity Shares.
(8). Declaration of Final Dividend.
Transactions Effect on Debt to Reason

Equity Ratio
(1) Increase Total Long-term Debts are increased but total Shareholders’ Funds remain
unchanged. Therefore, Debt to Equity Ratio will increase
(2) Increase Total Shareholders’ Funds are decreased by the amount of loss but total
Long-term Debts remain unchanged. Therefore, Debt to Equity Ratio will
increase.
(3) Decrease Total Shareholders’ Funds are increased by the amount of profit but total
Long-term Debts remain unchanged. Therefore, Debt to Equity Ratio will
decrease
(4) Decrease Total Shareholders’ Funds are increased by the amount of cash received
but total Long-term Debts remain unchanged. Therefore, Debt to Equity
Ratio will decrease
(5) No Change Neither the total Long-term Debts nor the total Shareholders’ Funds are
affected since it is a conversion of accumulated profit into share capital.
(6) Decrease Total Long-term Debts have decreased but total Shareholders’ Funds have
increased by the same amount. Therefore, Debt to Equity Ratio will
decrease.
(7) Decrease Total Long-term Debts have decreased and total Shareholders’ Funds have
increased by the same amount. Therefore, Debt to Equity Ratio will
decrease.
(8) Increase Total shareholders’ Funds have decreased by the amount of profits
appropriated for dividend but Long-term Debts remain unchanged.

Note: Upon the deceleration of dividend by the company the profits to the
extent of dividend declared become a current debt and hence Shareholders’
Funds are decreased and Current Liabilities are increased by the amount of
dividend declared.
Question 45. Calculate Debt to Equity Ratio from the following information:
Rs. Rs.
Fixed Assets (Gross) 6,00,000 Current Assets 2,50,000
Accumulated Depreciation 1,00,000 Current Liabilities 2,00,000
Non-Current Investments 30,000 Long-term Borrowings 3,00,000
Long-term Loans and Advances 20,000 Long-term Provisions 1,00,000
Solution
Date to Equity Ratio ( )
Notes:
1.Debt = Long-term Borrowings + Long-term provision
= Rs. 3,00,000 + Rs. 1,00,000 = Rs. 4,00,000
2. Equity= Non-Current Assets + Current Assets – Current Liabilities – Non-current Liabilities
= Rs. 5,50,000 + Rs. 2,50,000-Rs.2,00,0000- Rs. 4,00,000 = Rs. 2,00,000.
Question 46. From the following Balance Sheet of Defence Brokers Ltd. , compute Debt to Equity Ratio:
ST
BALANCE SHEET AS AT 31 MARCH, 2019
Particulars Note No. Rs.
(b) Reserves and surplus (Surplus, i.e., Balance in
Statement of Profit and Loss) (2,30,000)
(a) Long-term Borrowings 15,00,000
(b) Long-term Provisions 2,85,000
3. Current liabilities
(a) Short-term Borrowings 55,000
(b) Trade Payables 1,15,000
(c) Other Current Liabilities 25,000
Total 32,50,000
II. ASSETS
(a) Fixed Assets:
(i) Tangible Assets 11,00,000
(ii) Intangible Assets 1,30,000
(b) Non-Current Investments 1 2,60,000
2. Current Assets
(a) Current Investments 2 1,90,000
(b) Inventories 7,50,000
(c) Trade Receivables 3,00,000
(d) Cash and Cash Equivalent 5,20,000
Total 32,50,000
Notes to Accounts
Particulars Rs.
1. Non-Current Investments
Trade Investments 2,60,000
2. Current Investments
Government Securities 50,000
Other Investments (Trade) 1,40,000
1,90,000

Solution:
Debt to Equity Ratio = ( )
Debt = Long-term Borrowings + Long-term Provisions
= 15,00,000 + Rs. 2,85,000 = Rs. 17,85,000.
Equity or Shareholders’ Funds = Share Capital + Reserves and Surplus
= 15,00,000 – Rs. 2,30,000 = 12,70,000.
*RS. 2,30,000, being negative amount of surplus, i.e., Balance in Statement of Profit and Loss shown under
Reserves and Surplus is deducted.
(ii.) Total Assets to Debt Ratio

Total Assets to Debt Ratio shows relationship between total assets and long-term debts of the enterprise.
Total Assets to Debt Ratio is computed as follows:

Total Assets to Debt Ratio ( )
.It is expressed as ‘Pure Ratio’ say 1:1.
The two components of this ratio, i.e., total assets and debt are computed as follow:
Total Assets Debt
Total Assets include: Debt means Long-term Debts and includes:
 Non-current Assets* [ Fixed Assets (Tangible  Long-term Borrowings* and
and Intangible Assets) + Non-Current
Investments + Long-term Loans and  Long term Provisions.
Advances)
 Current Assets [Current Investments +
Inventories (Including Spare Parts and Loose
Tools) + Trade Receivables + Cash and Cash
Equivalents + Short-term Loans and
Advances + Other Assets
*As per CBSE Guidelines, accounting treatment of Deferred Tax Assets (Net), Other Non-Current Assets and
other Long-term Liabilities is not to evaluated.
Objective and Significance: The objective of computing this ratio is to establish relationship between total
assets and long-term debts of the enterprise. It measures the ‘Safety Margin’ available to the lenders of long-
term debts. In other words, it measures the extent to which debt (Long-term) is covered by the assets.
A high ratio means higher safety for leaders to the business. On the other hand, a low ratio means lower safety
for lenders as the business depends largely on outside loans for its existence. In other words, investment by
the proprietor is low.
Question 47. Calculate Total Assets to Debt Ratio from the following information:
Long-term Debts Rs. 16,00,000; Total Assets Rs. 24,00,000.
Solution: Total Assets to Debt Ratio
Question 48. Shareholders’ Funds Rs. 14,00,000; Total Debts (Liabilities) Rs 18,00,000; Current Liabilities Rs
2,00,000. Calculate Total Assets to Debt Ratio.
Solution: Total Assets to Debt Ratio =
Long-term Debts = Total Debts ( Liabilities) – Current Liabilities
= Rs. 18,00,000 – Rs. 2,00,000 = Rs. 16,00,000.
Total Assets = Shareholders’ Funds + Total Debts (Liabilities)
= Rs. 14,00,000 = Rs. 18,00,000 = Rs. 32,00,000.
Question 49. From the following information, calculate Total Assets to Debt Ratio:
Capital Employed 22,20,000 Equity Share Capital 10,50,000
Current Liabilities 1,80,000 8% Debentures 3,00,000
Fixed Assets (Gross) 15,00,000 Capital Reserves 2,40,000

Accumulated Depreciation 2,00,000 Surplus,i.e.Balance in Statement

Noon-current Investment 7,00,000 of Profit and Loss (Dr.) 30,000
Trade Receivables 2,50,000 Cash and Cash Equivalent 1,50,000
( )
Solution: Total Assets to Debt Ratio = ( )
Working Notes:
1. Total Assets = Non-Current Assets* + Current Assets**
= Rs. 20,00,000+ Rs. 4,00,000+ Rs. 24,00,000.
*Non-current Assets=Fixed Assets (Gross)- Accumulated Depreciation + Non-current Investment
= Rs. 15,00,000 – Rs. 2,00,000 + Rs. 7,00,000 = Rs. 20,00,000.
*Current Assets= Trade Receivables + Cash and Cash Equivalents
= Rs. 2,50,000 + Rs. 1,50,000= Rs. 4,00,000..
2. Capital Employed = Shareholders’ Funds* + Long-term Debts**
Rs. 22,20,000 = Rs. 12,60,000 + Long-term Debts
Long-term Debts = Rs. 22,20,000 – Rs. 12,60,000 = Rs. 9,60,000.
*Shareholders’ Funds= Equity share Capital + Capital Reserve + Surplus
= 10,50,000 + Rs. 2,40,000- Rs. 30,000 = Rs. 12,60,000.
**Debt or Long-term Debts = Long-term Borrowings + Long-term Provisions
Question 50. Compute Total Assets to Debt Ratio from the following information:
Total Assets 7,50,000 Bills Payable 30,000

Total Debts 8,00,000 Bank Overdraft 37,500
Creditors 75,000 Outstanding Expenses 17,500
Solution:
Total Assets to Debt Ratio
Debt = Total Debts – Creditors- Bills Payable- Bank Overdraft- Outstanding Expenses
= Rs. 8,00,000- Rs. 75,000 – Rs. 30,000 – Rs, 17,500 = Rs. 6,40,000.
Note : Creditors, Bills Payable, Bank Overdraft and Outstanding Expenses are Current Liabilities . Hence, these
are deducted.
Question 51. Compute Total Assets to Debt Ratio from the following information:
Share Capital Rs. 12,00,000: Reserves and Surplus Rs. 8,00,000; Long-term Borrowings Rs. 25,00,000: Long
term Provisions Rs. 5,00,000; Current Liabilities Rs. 10,00,000.
Solution Total Assets to Debt Ratio

Total Assets = Share Capital + Reserves and Surplus + Long-term Borrowing + Long-term Provisions + Current
Liabilities
= Rs. 12,00,000+ Rs. 8,00,000 + Rs. 25,00,000 + Rs. 5,00,000 + Rs. 10,00,000 = Rs. 60,00,000.
Debt = Long-term Borrowings + Long-term Provisions.

= Rs. 25,00,000 + Rs. 5,00,000 = Rs. 30,00,000.
Rs. Rs.
Capital Employed 25,00,000 Equity Share Capital 14,30,000
Investment 2,10,000 8% Debentures 4,00,000
Land 8,50,000 Capital Reserve 2,75,000
Trade Receivables 2,70,000 Surplus i.e., Balance
Cash and Equivalents 1,50,000 in SPL 1,50,000
(OD 2015C)
Solution:
Total Assets to Debt Ratio =

Working Note:
Total Assets = Investment + Land + Trade Receivables + Cash and Cash Equivalents
= Rs. 2,10,000 +Rs. 8,50,000+ Rs. 1,50,000 = Rs. 14,85,000.
Debt = Capital Employed – Equity*
= Rs. 25,00,000 – Rs. 18,55,000 = Rs. 6,45,000.
*Equity=Equity Share Capital + Capital Reserve + Surplus
= Rs. 14,30,000 + Rs. 2,75,000 + Rs. 1,50,000 = Rs. 18,55,000.
Question 53. Calculate Total Assets to Debt Ratio from the following information : Total Debt Rs. 48,00,000;
Shareholders’ Funds Rs. 8,00,000: Reserves and Surplus Rs. 2,00,000; Current Assets Rs. 20,00,000; Working
Capital Rs. 4,00,000.
Solution :
Total Assets to Debt Ratio
Notes:
1. Current Liabilities = Current Assets – Working Capital
= Rs. 20,00,000 – Rs. 4,00,000 = Rs. 16,00,000
Debt = Total Debt-Current Liabilities = Rs. 48,00,000 – Rs. 16,00,000 = Rs. 32,00,000.
2. Total Assets = Shareholders’ Funds + Total Debt
= Rs. 8,00,000 + Rs. 48,00,000 = Rs. 56,00,000.
3. Reserves and Surplus are already included in Share holders’ Funds.
Question 54. Shareholders’ Funds Rs. 8,00,000: Total Borrowings Rs. 18,00,000: Short-term Borrowing Rs.
2,00,000; Other Current Liabilities Rs. 6,00,000. Calculate Total Assets to Debt Ratio.
Solution: Total Assets to Debt Ratio =
Notes: 1. Long-term Borrowings or Debt = Total Borrowings – Short-term Borrowings
= Rs. 18,00,000 – Rs. 2,00,000 = Rs. 16,00,000.
2.Total Assets =Shareholders’Funds +Long term Borrowings +Short-term Borrowings +Other Current Liabilities
= Rs. 8,00,000 + Rs. 16,00,000 + Rs. 2,00,000+ Rs 6,00,000
= Rs. 32,00,000.
Question 55. Fixed Assets (Gross) Rs. 10,00,000; Accumulated Depreciation Rs. 5,00,000; Non-Current
Investments Rs. 50,000; Long-term Loans and Advances Rs. 2,00,000; Current Assets Rs. 2,50,000; Current
Liabilities Rs. 10,00,000; Long-term Borrowings Rs. 3,25,000; Long-term Provisions Rs. 2,75,000. Calculate Total
Assets to Debt Ratio.
Solution
Total Assets to Debt Ratio =
Notes:
1. Debt = Long-term Borrowing + Long-term Provisions
= Rs. 3,25,000 + Rs. 2,75,000 = Rs. 6,00,000.
2. Total Assets = Non-Current Assets + Current Assets
= [Fixed Assets (Net)+ Non-Current Investments +Long-term Loans and Advances]+Current Assets
= (Rs. 10,00,000-Rs. 5,00,000)+ Rs. 50,000+ Rs. 2,00,000+2,50,000=Rs. 10,00,000.
Total Debt 4,50,000 Short-term Bank Loan 50,000

Sundry Creditors 75,000 Total Assets 5,50,000
Expense Payable 25,000 Surplus i.e., Balance i.e.,
Bills Payable 25,000 Balance in SPL (Debit) 20,000
Solution:-
Total Assets to Debt Ratio=
Note: Debt = Total Debt- Short-term Bank Loan-Trade Payables (Sundry Creditors + Bills Payable)
– Other Current Liabilities (Expenses Payable).
= Rs. 4,50,000 – Rs. 50,000 –(Rs. 75,000 + Rs. 25,000) – Rs. 25,000=Rs. 2,75,000

Question 57. From the following Balance Sheet of Y Ltd.,calculate Total Assets to Debt Ratio:
Particulars Rs.
Share Capital 20,00,000
Trade Payables 5,00,000
Total 35,00,000
II. Assets
Fixed Assets: Tangible Assets 22,00,000
2. Current Assets
(d) Short-term Loans and Advances 50,000
Total 35,00,000
Solution:- Total Assets to Debt Ratio = =
(iii) Proprietary Ratio: Proprietary Ratio establishes the relationship between proprietors’ funds and total
assets.
Computation: Proprietary Ratio is computed as follow:
Expression of Proprietary Ratio:- Proprietary Ratio may be expressed either as ‘Pure Ratio’ or as
‘Percentage’ . Suppose Proprietors’ Funds of a company Rs.12,00,000 against total assets of Rs.
16,00,000, then Proprietary Ratio may be expressed as :
Proprietary Ratio (Pure Ratio) =
Or
Proprietary Ratio (Percentage) = .
Proprietors’ Funds can be computed by following either Liabilities Approach or Assets Approach:
(a) Liabilities Approach: Share Capital (Equity + Preference) + Reserves and Surplus- Fictitious
assets( e.g discount on issue of debentures).
(b) Assets Approach: Non-current Assets + Working Capital (i.e., Current Assets – Current Liabilities)
– Non-Current Liabilities.
(c) It should be kept in mind that the result under both the approaches will be same.
Non-Current Assets= Tangible Fixed Assets + Intangible Fixed Assets + Non-current Investments
+ Long-term Loans and Advances
Current Assets = Current Investments + Inventories + Trade Receivables + Cash and Cash
Equivalents + Short-term Loans and Advances + Other Current Assets
(e.g., Prepaid expenses, accrued income).
Current Liabilities= Short-term Borrowings + Trade Payables + Other Current Liabilities +
Short term Provisions.
Non-current Liabilities = Long-term Borrowings + Long-term Provisions.
Total Assets = Non-current Assets (Tangible Fixed Assets + Intangible Fixed Assets + Non-current Investments +
Long-term Loans and Advances) + Current Assets [ Current Investments + Inventories (including Spare parts
and Loose Tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Others
Current Assets]

NOTE
In the question sometimes, information is given and not the Balance Sheet and student asked to compute
Proprietors Funds. Students should not that in such questions, Proprietors’ Funds computed by the two methods
may not be same. In such situations, students will have to use one of the two methods to compute Proprietors’
Funds.
Objective and Significance: The objective of computing this ratio is to measure the proportion of total assets
financed by Proprietors’ Funds. The ratio is important for creditors as they can ascertain the portion of
shareholders’ funds in the total assets employed in the firm and thus safety margin available to them.
Besides, it shows financial strength of the enterprise.
A high ratio means adequate safety for lenders and creditors.
A low ratio , on the other hand, means lower or inadequate safety for the creditors. It may lead to
unwillingness of creditors to extend credit to the enterprise. It is so because in case of liquidation creditors
being unsecured are likely to lose their money.
Question 58. From the following information, calculate Proprietary Ratio:

Rs. Rs.
Share Capital 5,00,000 Reserves and Surplus 3,00,000
Non- Current Assets 22,00,000 Current Assets 10,00,000
Solution:
Notes:
1. Shareholders’ Funds = Share Capital + Reserves and Surplus
= Rs. 5,00,000 + Rs. 3,00,000 = Rs. 8,00,000.
2. Total Assets= Non-current Assets + Current Assets
= 22,00,000 + Rs. 10,00,000 = Rs. 32,00,000.
Question 59. From the following Balance Sheet, calculate Proprietary Ratio:
Shareholders’ Funds Rs. Non-Current Assets Rs.
Equity Share Capital 1,00,000 Fixed Assets ( Tangible) 1,25,000
Preference Share Capital 50,000 Current Assets
Reserves and Surplus 25,000 Current Investments 75,000
Non-Current Liabilities Cash and Cash Equivalents 40,000
Debentures 60,000 Other Current Assets 10,000
Current Liabilities (Prepaid Expenses)
Trade Payables 15,000
2,50,000
2,50,000
( )
Solution:- Proprietary Ratio =
Note: Calculation of Shareholders’ Funds or Equity or Proprietors’ Funds:
Liabilities Approach Rs Assets Approach Rs.
Equity Share Capital 1,00,000 Fixed Assets 1,25,000
Add: Reserves and Surplus 25,000 Add: Working Capital* 1,10,000
Equity Shareholders’ Funds 1,25,000 2,35,000
Add: Preference Share Capital 50,000 Less: Long-term Borrowings (Debentures) 60,000
Shareholders’ Funds 1,75,000 Shareholders’ Funds 1,75,000
*Working Capital = Current Assets (Current Investments + Cash and Cash Equivalents + Other Current Assets)
– Current Liabilities (Trade Payables)
= Rs. 75,000 + Rs. 40,000 + Rs. 10,000 – Rs 15,000 = Rs, 1,10,000.

Question 60. From the Following information, Calculate Debt to Equity Ratio, Proprietary Ratio and Total
Assets to Debt Ratio :
Rs. Rs.
Equity Share Capital 2,00,000 12% Debentures 16,00,000
10% Preference Share Capital 3,00,000 Current Liabilities 6,80,000
Reserves: Fixed Assets (Tangible) 21,00,000
General Reserve 2,25,000 Long-termTrade Investments 2,00,000
Surplus, i.e., Balance in statement
Of Profit and Loss 1,50,000 Current Assets 8,80,000
Solution:
Debt to Equity Ratio =
( )
Proprietary Ratio =
( )
Total Assets to Debt Ratio = ( )
Working Notes:
1. Calculation of Shareholders’ Funds or Equity:
Liabilities Approach Rs Assets Approach Rs.
Equity Share Capital 2,00,000 Fixed Assets (Tangible) 21,00,000
Add: Reserves and Surplus 25,000 Long-term Trade Investments 2,00,000
(Rs. 2,50,000 + Rs. 1,50,000) Add: Working Capital (WN)2 2,00, 000
Equity Shareholders’ Funds 6,00,000 25,00,000
Add: Preference Share Capital 3,00,000 Less: Long-term Borrowings (12%Debentures) 16,00,000
Shareholders’ Funds 9,00,000 Shareholders’ Funds 9,00,000
2. Working Capital = Capital Assets – Current Liabilities = Rs. 8,80,000 – Rs. 6,00,000 = Rs. 2,00,000.
3. Total Assets = Fixed Assets (Tangible) + Long-term Trade Investments + Current Assets
= Rs. 21,00,000 + Rs. 2,00,000 + Rs. 8,80,000 = Rs. 31,80,000.
4. Debt = 12% Debentures = Rs. 16,00,000.
Question 61. The Proprietary Ratio of M. Ltd. is 0.80 : 1. State with reasons whether the following transactions
will increase, decrease or not change the Proprietary Ratio:
(i). Obtained a loan from rank Rs. 2,00,000 payable after five years.
(ii). Purchased machinery for cash Rs. 75,000.
(iii). Redeemed 5% redeemable preference shares Rs. 1,00,000.
(iv). Issued equity shares to the vendors of machinery purchased for Rs. 4,00,000.
(AI2017).
Solution:
Transactions Effect on Reason

Proprietary Ratio
(i). Decrease No change in Shareholders’ Funds but Total Assets will increase by Rs.
2,00,000.
(ii). No Change No change in Total Assets and Shareholders’ Funds.
(iii). Decrease Both Shareholders’ Funds and Total Assets are decreased by the same
amount.
(iv). Increase Shareholders’ Funds and Total Assets are increased by the Same amount
(iv). Interest Coverage Ratio :-- The ratio establishes the relationship between Net Profit before Interest and
Tax and Interest on long-term debts. Interest is a charge on profit therefore, net profit before interest and tax
is taken to calculate the ratio. It is calculated as follows:

Objective and Significance: The ratio is very meaningful to debentureholders and lenders of long-term funds.
The objective of calculating this ratio is to ascertain the amount of profit available to cover interest on long-
term debt. A high ratio is considered better for the lenders as it means higher margin to meet interest cost.
Question 62: Prakash Ltd. has a term-loan of Rs. 10,00,000. Interest on the loan for the years is Rs. 1,25,000
and its Profit before Interest and Tax is Rs. 5,00,000. Calculate Interest Coverage Ratio.
Solution: Interest Coverage Ratio=
Question 63. From the following details obtained from J Ltd., Calculate Interest Coverage Ratio:
Net Profit after Tax Rs. 1,20,000

12% Long-term Debt Rs 20,00,000
Tax Rate 40%.
(Delhi 2016)
Solution :
Interest Coverage Ratio= =
Interest on Long-term Debts= 12% of Rs. 20,00,000 =Rs. 2,40,000.
Calculation of Net Profit before Interest and Tax:

Net Profit after Tax = Rs. 1,20,000
Let, Net Profit before Tax = Rs. 100; Tax = Rs. 40; Net Profit after Tax = Rs. 60
Net Profit before Tax= Rs. 1,20,000x Rs. 2,00,000.
Net Profit before Interest and Tax = Net Profit before Tax + Interest on Long-term Debts
= Rs. 2,00,000+ Rs. 2,40,000 = Rs. 4,40,000.
(3) ACTIVITY RATIOS: Activity Ratios, also termed as Performance or Turnover Ratios, measure how well the
resources have been used by the enterprise. In other words, these ratios measure the effectiveness with which
the enterprise uses its available resources. The result is expressed in number of times. These ratios are
calculated on the basis of Cost of Revenue from Operations, i.e., Cost of Goods Sold or Revenue from
Operations, i.e., Net Sales. Higher turnover ratio means, better use of capital or resources, which in turn,
means better profitability ratio. The activity ratios are:
(i.) Inventory Turnover Ratio;
(ii.) Trade Receivables Turnover Ratio;
(iii.) Trade Payables Turnover Ratio; and
(iv.) Working Capital Turnover Ratio.
Let us discuss them in detail.
(I) Inventory Turnover Ratio :--Inventory Turnover Ratio establishes relationship between Cost of
Revenue from Operations, i.e., Cost of Goods Sold and average inventory carried during that
period. Inventory Turnover Ratio is an activity as well as efficiency ratio and it measures the
number of times and enterprise sells and replaces its inventory, i.e., the number of times
inventory was converted into sales during this period.
Inventory Turnover Ratio is computed as follows:

( )
Inventory Turnover Ratio = .
Cost of Revenue from Operations ( Cost of Goods Sold) = Revenue from Operations – Gross Profit
Or
= Revenue from Operations + Gross loss
Or
= Opening Inventory + Net Purchases+Direct
Expenses - Closing Inventory

Average Inventory =
NOTE :- In case, amount of Cost of Revenue from Operations is not given but instead amount of Revenue from
Operations is given, amount of Revenue from Operations is used for calculating the Ratio.
Objective and Significance: The objective of computing Inventory Turnover Ratio is to ascertain whether
investment in stock has been judicious or not, i.e., only the required amount is invested in stock. It measures
the efficiency of inventory management.
A High Ratio shows that more Sales are being produced by a rupee of investment in inventories. A very high
Inventory Turnover Ratio shows overtrading and it may result in working capital shortage.
A low Inventory Turnover Ratio means inefficient use of investment in inventory, Turnover Ratio ensures
adequate working capital and also enables the enterprise to earn reasonable margin of profits.
Question 64. From the following information, calculate Inventory Turnover Ratio:
Cost of Revenues from Operations (Cost of Goods Sold) 4,50,000.

Inventories in the beginning of the year 1,00,000.
Inventories at the end of the year 1,25,000.
Solution: Inventory Turnover Ratio
Question 65. From the following information, calculate Inventory Turnover Ratio:
Revenue from Operations 5,00,000
Inventory; Opening 75,000
Closing 1,25,000
hints: Inventory Turnover Ratio =
Question 66. From the following data, calculate Inventory Turnover Ratio:
Cost of Revenue from Operations ( Cost of Goods Sold) Rs. 3,00.000; Purchases Rs. 3,30,000; Opening
Inventory Rs. 60,000.
Solution
Inventory Turnover Ratio =
Cost of Revenue from Operations (Cost of Goods Sold)
= Opening Inventory + Purchases + Direct Expenses – Closing Inventory
Closing Inventory = Opening Inventory + Purchases – Cost of Revenue from Operations
(Cost of Goods Sold)
= Rs. 60,000 + Rs. 3,30,000 – Rs. 3,00,000 = Rs. 90,000.
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2
( Rs. 60,000 + Rs. 90,000) ÷ 2 = Rs. 75,000.
Question 67. Opening Inventory is Rs. 29.000; Purchases Rs. 2,42,000 ; Revenue from Operations i.e., Net
Sales Rs. 3,20,000; Gross Profit 25% on Sales. Calculate Inventory Turnover Ratio.
Solution:
Inventory Turnover Ratio = .
Cost of Revenue from Operations (Cost of Goods sold)
= Revenue from Operations – Gross Profit
= Rs. 3,20,000 + Rs. 2,42,000 - Rs. 2,40,000 = Rs. 31,000. Average
Inventory=
Question 68. Opening Inventory Rs. 29,000: Closing Inventory Rs. 31,000; Revenue from Operations (Net Sales)
Rs. 3,00,000; Gross Profit 25% on Cost. Calculate Inventory Turnover Ratio.
hints:
Question 69. From the following information, Calculate Inventory Turnover Ratio:

Net Sales Rs. 4,00,000: Average Inventory Rs. 55,000; Gross Loss on Sales is 10%.
hints:
Working Note:
Net Sales = Rs. 4,00,000
Gross Loss= 10% of Rs. 4,00,000 = Rs. 40,000.
Cost of Revenue from Operations = Net Sales + Gross Loss
= Rs. 4,00,000 + Rs. 4,40,000.
Question 70. From the following information, calculate Inventory Turnover Ratio: Total Sales Rs. 2,20,000;
Sales Return Rs. 20,000; Gross Profit Rs. 50,000; Closing Inventory Rs. 60,000; Excess of Closing Inventory over
Opening Inventory Rs. 20,000.
hints:
Working Notes:
1. Calculation of Average Inventory :
Opening Inventory = Closing Inventory – Excess of Closing Inventory over Opening
Inventory
= Rs. 60,000 – Rs. 20,000 = Rs. 40,000.
Average Inventory = (Opening Inventory + Closing Inventory ) ÷2
= (Rs. 40,000 + Rs. 60,000)÷2 = Rs. 50,000.
2. Cost of Revenue from Operations = Net Sales – Gross Profit
= Rs. 2,00,000 – Rs.50,000 = Rs. 1,50,000.
IMPORTANT NOTE:-- Be Careful abut the languages:

There is difference between the statement ‘ Closing Inventory was 2 times that of the Opening Inventory’ and
‘Closing Inventory was 2 times more than that of in the beginning’. The former means that if Opening
Inventory is x, then Closing Inventory will be 2x, and the latter means that if Opening Inventory is x, then
Closing Inventor will be 3x (i.e., x+2x).
Question 71. Rs. 2,00,000 is Cost of Revenue from Operations ( Cost of Goods Sold); Inventory Turnover Ratio
8 times; Inventory in the beginning is 1.5 times more than the Inventory at the end. Calculate values of
Opening and Closing Inventory. (Delhi 2004, Modified)
( )
Solution: Inventory Turnover Ratio =
8 =
Average Inventory = Rs. 25,000
Average Inventory = (Opening Inventory + Closing Inventory)/2
Let the Closing Inventory be x; So, Opening Inventory = x+ 1.5x
Hence,
3.5x= Rs. 50,000
X= ( )
Thus, Opening Inventory = Rs. 14,286 + 1.5 Times of Rs. 14,286
= Rs 35,715 (i.e., Rs. 14,286 x 2.5).
Question 72. Cash Revenue from Operations Rs. 50,000, Credit Revenue from Operations Rs. 1,50,000. Gross
Profit 25% on cost. Closing Inventory was 3 times the Opening Inventory. Opening Inventory was 10% of Cost
of Revenue from Operations. Calculate Inventory Turnover Ratio.
Solution:
Working Notes:
1. Calculation of Cost of Revenue from Operations:
Let Cost of Revenue from Operations be Rs. 100; = Rs. 25 = Rs. 125

If Revenue from Operations is Rs. 125, then cost is Rs. 100

If Revenue from Operations is Rs. 125, then cost is = Rs. 100.
If Revenue from Operations is Rs. 2,00,000, then cost = Rs. 2,00,000 x Rs. 100/Rs. 125 = Rs. 1,60,000.
2. Opening Inventory = 10% of Cost of Revenue from Operations = Rs. 1,60,000 x 10/100 = Rs. 16,000.
3. Closing Inventory=3 (Opening Inventory)=Rs. 16,000x3=Rs. 48,000.
( ) ( )
4. Average Inventory
Question 73. Calculate Inventory Turnover Ratio from the following information;
Opening Inventory Rs. 20,000; Purchases Rs. 1,60,000 and Closing Inventory Rs. 60,000.
State giving reason, which of the following transactions would (i) increase, (ii) decrease, (iii) no change.
(a) Sale of goods for Rs. 30,000 (Cost Rs. 16,000).
(b) Increase in the value of Closing Inventory by Rs. 20,000.
(c) Gods purchased from Rs. 40,000.
(d) Purchases return Rs. 10,000.
(e) Goods costing Rs. 5,000 withdrawn for personal use.
(f) Goods costing Rs. 10,000 distributed as free samples.
Solution: Inventory Turnover Ratio =

Notes:
1. Cost of Revenue from Operations = Opening Inventory + Purchases-Closing Inventory
= Rs. 20,000 + Rs.1,6,000 – Rs. 60,000=Rs. 1,20,000.
2. Average Inventory =
Statement Showing the Effect of Different Transactions on Inventory Turnover Ratio

Effect Reason
(a) Increase Cost of Revenue from Operations (Cost of Goods Sold) will increase because of decrease in
Closing Inventory by Rs. 16,000. Hence, Cost of Revenue form Operations will be: Opening
Inventory Rs. 20,000 + Purchases Rs. 1,60,000 – Closing Inventory Rs. 44,000 = Rs.
1,30,000.
Average Inventory will decrease due to decrease in Closing Inventory.
Average Inventory will be
Hence, Inventory Turnover Ratio will be:
(b) Decrease Cost of Revenue from Operations ( Cost of Goods Sold ) will decrease because of increase
in Closing Inventory. Hence, Cost of Revenue from Operations (Cost of Goods Sold) will
be: Opening Inventory Rs. 20,000 + Purchase Rs. 1,60,000 – Closing Inventory Rs. 80,000 =
Rs. 1,00,000.
Average Inventory will be
Hence , Inventory Ratio will be
(c) Decrease Cost of Revenue from Operations (Cost of Goods Sold) will remain unchanged because of
increase in Purchases and increase in Closing Inventory by the same amount. Hence, Cost of
Revenue from Operations (Cost of Goods Sold) will be: Opening Inventory Rs. 20,000 +
Purchases Rs. 2,00,000 – Closing Inventory Rs. 1,00,000 = Rs. 1,20,000.
Average Inventory will increase due to increase in Closing inventory.
Average Inventory will be:
Hence, Inventory Turnover Ratio will be
(d) Increase Cost of Revenue from Operations ( Cost of Goods Sold) will not change because of
decrease in purchases and decrease in Closing Inventory by the same amount i.e., Rs.
10,000.
Average Inventory will decrease due to decrease in Closing Inventory.
Average Inventory will be:
Hence, Inventory Turnover Ration will be:
(e) Increase The reason being the same as given in (d).
(f) Increase The reason being the same as given in (d).

Question 74. Cash Revenue from Operations Rs. 1,00,000: Credit Revenue from Operations Rs. 3,00,000; Gross
Profit 30% on Revenue from Operations; Inventory Turnover Ratio = 2 Times.
Calculate Opening inventory and Closing Inventory in each of the following cases:
Case 1: If Opening Inventory is 1/3rd of the inventory at the end.
Case 2: If Closing Inventory is 25% less than the inventory at the end.
Case3: If Opening Inventory is 75% of Closing Inventory and Closing Inventory is 30% of Revenue from
Operations.
Solution:
Revenue from Operations = Cash Revenue from Operations +Credit Revenue from Operations
= Rs. 1,00,000 + Rs. 3,00,00 = Rs. 4,00,000.
Cost of Revenue from Operations = Revenue from Operations – Gross Profit
= (Rs. 4,00,000 - )
= Rs. 4,00,000 – Rs. 1,20,000 = Rs. 2,80,000.
Inventory Turnover Ratio=

2 =
Average Inventory =
rd
Case 1. If Opening Inventory is 1/3 of the Inventory at the end.
Let Closing Inventory be x
Opening Inventory =
Average Inventory =
Rs. 1,40,000 =
Rs. 1,40,000 x 2 =
Rs. 2,80,000 =
4x= Rs. 2,80,000 x 3 = Rs. 8,40,000
X= ( )
Opening Inventory=
Case 2. If closing Inventory is 25% less than the Inventory in the beginning.
Let Opening Inventory be x
Closing Inventory = x – 0.25 = 0.75+x
Average Inventory=
Rs. 1,40,000=
Rs. 2,80,000= 1.75x
X= ( )
Closing Inventory = 0.75 x Rs. 1,60,000 = Rs. 1,20,000.
Case3: If Opening Inventory is 75% of Closing Inventory and Closing Inventory is 30% of Revenue from
Operations.
Closing Inventory = 30% of Revenue from Operations
= 30% of Rs. 4,00,000 = Rs. 1,20,000.
Opening Inventory= 75% of Rs. 1,20,000 = Rs. 90,000.

Question 75. Following is the Statement of Profit and Loss of Exe Ltd., calculate Inventory Turnover Ratios:
STATEMENT OF PROFIT AND LOSS for the year ended 31st March,2019
I. Revenue from Operations 2,00,000
II. Expenses:
Purchases of Stock-in-Trade 1,20,000
Change in Inventory of Stock-in-Trade 12 20,000
Other Expenses 30,000
Total Expenses
III. Profit before Tax (I-II) 1,70,000
IV. TAX 30,000
V. Profit after Tax (III-IV) 5,000
25,000
Notes to Accounts
Particulars Rs.
I. Change in Inventory of Stock-in-Trade
Opening Inventory 40,000
Less: Closing Inventory 20,000
II. Other Expenses 20,000

Carriage Inwards
Carriage Outwards 10,000
Miscellaneous Expenses 12,500
7,500
30,000
Solution:
( )
Cost of Revenue from Operations (Cost of Goods Sold) = Purchases of Stock-in-Trade + Change in Inventory of
Stock-in-Trade + Direct Expenses
= Rs, 1,20,000 + Rs. 20,000 + Rs. 10,000*=Rs.1,50,000.
*Direct Expenses are Carriage Inwards taken from Note to Accounts on Other Expenses.
Average Inventory =
=
Question 76. From the following Statement of Profit and Loss Reynold Ltd., calculate Inventory Turnover Ratio:
Statement of Profit and Loss for the years ended 31st March, 2019
Particulars Rs.
I. Revenue from Operations 15,00,000

III. Total Revenue (I+II) 15,15000
IV. Expenses:
Cost of Materials Consumed 1 5,25,000
Changes in Inventories of Finished Goods and Work-in-Progress 2 (25,000)
Employees Benefit Expenses 2,50,000
Depreciation and Amortisation 15,000
Other Expenses 2,10,000
Total Expenses 9,75,000

V. Profit before Tax(III – IV) 5,40,000

Notes to Accounts
Particulars Rs.
1. Cost of Materials Consumed
Opening Inventory of Materials 2,00,000
Add: Purchases of Materials 4,25,000
6,25,000
Less: Closing Inventory 1,00,000
5,25,000
2. Changes in Inventories of Finished Goods and WIP,:
Opening Inventory 50,000
Less: Closing Inventory 75,000
(25,000)
Solution :
Inventory Turnover Ratio
Cost of Revenue form Operations (Cost of Goods Sold ) = Cost of Materials Consumed + Changes in
Inventories of Finished Goods and WIP
= Rs. 5,25,000 – Rs. 25,000 = Rs. 5,00,000.
Average Inventory = Opening Inventory ( Materials, Finished Goods and WIP)
( )
+
=
Notes:
1. Direct Expenses are not given. Hence, they are assumed to nil.
2. Inventories are included in Cost of Materials Consumed and Changes in Inventories of Finished Goods
and WIP.
(Ii) Trade Receivables Turnover Ratio: Trade Receivables is the amount receivable against goods sold or
services rendered in the normal course of business by the enterprise. In other words, amount remaining
outstanding against sale of goods and/or services rendered are trade receivables. Trade Receivables include
Debtors and Bills Receivable.
Trade Receivables Turnover Ratio establishes the relationship between Credit Revenue from Operations, i.e.,
Net Credit Sales and Average Trade Receivables of the year.
Trade receivables Turnover Ratio is computed as follows:
( )
Trade Receivables Turnover Ratio = ( )
.
NOTE:- When Trade Receivables Turnover Ratio is computed, it should be kept in mind that provision for
doubtful debts is not deducted from trade receivables since the purpose is to calculate the number of days for
which sales are tied up in trade receivables and not to ascertain realizable value of the debtors.
Objective and Significance: This ratio indicates the number of times trade receivables are turned over in a year
in relation to credit sales. It shows how quickly trade receivables are converted into Cash and Cash Equivalents.
It shows the efficiency in collection of amounts due against trade receivables. A high ratio is better since it
shows that debts are collected more promptly.
A lower ratio shows inefficiency in collection or increased credit period and more investment in debtors than
required.
Debt collection Period or Average Collection Period: It provides and approximation of the average time that it
takes to collect debtors. It is computed by dividing 365(Days) or 12 (Months) by the Trade Receivables
Turnover Ratio. It is calculated as follows:
Debt collection Period =
Or

Question 77. Calculate Trade Receivables Turnover Ratio and Average Collection period.
Credit Revenue from the Operations (Net Credit Sales) for the year is Rs. 6,00,000 and Debtors and Bills
Receivable at the year end were R. 60,000 and Rs. 40,000 respectively.
Solution :
( )
Trade Receivables Turnover Ratio = ( )
=
Average Collection Period (Months)= .
Average Collection Period (Days) =
Note: Opening balances of debtors and bills receivable are not given. Hence, they are presumed to be nil.
Question 78. Calculate Trade Receivables Turnover Ratios from the following :
Total Net Sales for 2018-19 2,00,000

Net Cash Sales for 2018-19 40,000
Debtors as at 1st April, 2018 35,000
Debtors as at 31st March, 2019 55,000
Solution:
( )
Trade Receivables Turnover Ratio=
Question 79. Calculate Trade Receivables turnover Ratio from the following;
Closing Debtors Rs. 40,000; Net Credit Sales being 25% of Net Cash Sales; Excess of Closing Debtors over
Opening Debtors over Opening Debtors R. 20,000; Total Net Sales Rs. 1,50,000.
( )
Solution: Trade Receivables Turnover Ratio =
Working Note:
Credit Revenue from Operations = Total Net Sales – Net Cash Sales
= Rs. 1,50,000 – Rs. 1,20,000 = Rs. 30,000.
Opening Debtors= Closing Debtors – Excess of Closing Debtors over Opening Debtors
= Rs. 40,000 – Rs. 20,000 = Rs. 20,000.
Average Debtors = =
*Let Net Cash Sales be x, Net Credit Sales = 25% of x or Total Net Sales = x+
X (Net Cash Sales) = Rs. 1,50,000 x 4/5 = Rs. 1,20,000.
Net Cash Sales = Rs. 1,20,000 x 25/100 = Rs. 30,000.

Question 80. From the following details, calculate Trade Receivables Turnover Ratio :
Total Sales for the year (Net) 1,75,000

Cash Sales (Net) 20 % of Total Net Sales
Sales Return-Out of Credit Sales 10,000
Sundry Debtors:
Opening balance 8,000
Closing balance 12,000
Solution:
( )
Trade Receivables Turnover Ratio =
Question 81. Calculate Opening and Closing Trade Receivables from the following information;
Cash Revenue from Operations = 1/3rd of Credit Revenue from Operations
Cash of Revenue from Operations = Rs. 3,60,000
Gross Profit = 25% of Revenue from Operations
Trade Receivables at the end were 3 times that of in the beginning
Trade Receivables Turnover Ratio 3 Times.
Solution: Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit
= 3,60,000 + (Rs. 3,60,000 x 1/3) = Rs. 4,80,000.
Credit Revenue from Operations = Rs. 3,60,000
Trade Receivables Turn over Ratio =
3 =
Average Trade Receivables =
Calculation of Opening and Closing Trade Receivables:
Let Opening Trade Receivables = x
Closing Trade Receivables = 3x
Rs. 1,20,000=
Rs. 2,40,000=4x
X= ( )

Closing Trade Receivables = 3x = Rs. 60,000 x 3 = R.s 1,80,000.
Notes:
1. Let Sales (Revenue from Operations) =Rs. 100

Less: Gross Profit (25% of Rs. 100) =Rs.25
Therefore, Cost of Revenue from Operations = Rs. 75
Gross Profit on Cost of Revenue from Operations =
2. Calculation of Credit Revenue from Operations:

Let Credit Revenue from Operations = x
It means Cash Revenue from Operations =
Total Revenue from Operations = Credit Revenue from Operations + Cash Revenue from Operations
X+ ( )
3x+x = Rs. 14,40,000; 4x = Rs.14,40,000
X = ( ).
IMPORATNT NOTE:- Be careful about the language:

There is difference between the statements ‘ Trade Receivables at the end were 3 times that of in the
beginning ‘ and ‘Trade receivables at the end were 3 times more than that of in the beginning’. The former
means that if Opening Trade Receivables are X, then Closing Trade Receivables will be 2x, and the latter means
that if Opening Trade Receivables are x, then Closing Trade Receivables will be x + 3x, i.e., 4x.
Question 83. Calculate Opening and Closing Trade Receivables from the following information if Trade
Receivables Turnover Ratios is 3 Times;
(I.) Cash Revenue from Operations is 1/3rd of Credit Revenue from Operations.
(II.) Cost of Revenue from operations Rs. 2,40,000.
(III.) Gross Profit 25% on Cost of Revenue from Operations.
(IV.) Trade Receivables at the end were 3 times more than that of in the beginning.
Solution:
Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit
+ Rs. 2,40,000 + 25% of Rs. 2,40,000 = Rs. 3,00,000.
Calculation of Credit Revenue from Operations:
Let Credit Revenue from Operations = x
Cash Revenue from Operations =
x+
3x + x = Rs. 9,00,000.
X= ( ).

3=
` Average Trade Receivables =
Calculation of Opening and Closing Trade Receivables :
Let Opening Trade Receivables = x, Closing Trade Receivables = x+3x = 4x
Rs. 75,000 =
X+4x = Rs. 1,50,000; x= Rs. 30,000 x 4 = Rs. 1,20,000.
Question 84. Calculate amount of Opening Trade Receivables and Closing Trade Receivables from the
following figures:
Trade Receivables Turnover Ratio 4 times

Cost of Revenue from Operations (Cost of Goods Sold) Rs. 6,40,000
Gross Profit Ratio 20%
Closing Trade Receivables were Rs. 20,000 more than in the beginning.
Cash Sales being 33 of Credit Sales.
Solution:
Sales = Cost of Revenue from Operations (Cost of Goods Sold) + Profit
Let Sales = Rs. 100; Gross Profit Rs. 20
Cost of Revenue from Operations (Cost of Goods Sold ) Rs. 80, then Sales = Rs. 100.
If the Cost of Revenue from Operations from Operations is Rs. 80, then Sales = Rs. 100.
If the Cost of Revenue from Operations (Cost of Goods Sold) is Rs. 6,40,000, then
Sales =
Total Sales = Cash Sales + Credit Sales
Let the Credit Sales be x; Cash Sales =
Rs. 8,00,000=
Average trade Receivables= (Opening Trade Receivables + Closing Trade)/2
Let Opening Trade Receivables be y, Closing Trade Receivables = y = Rs. 20,000
4(Given) =
4y+4y + Rs. 80,000 = Rs. 12,00,000
8y= Rs. 11,20,000
Y= Rs. 1,40,000( Opening Trade Receivables).

Closing Trade Receivables = Opening Trade Receivable + Rs. 20,000
= Rs. 1,40,000 + Rs. 20,000 = Rs. 1,60,000.
Question 85. From the following information, calculate Trade Receivables Turnover Ratio:
Cost of Revenue from operations (Cost of Goods Sold)- Rs. 3,00,000

Opening Debtors – Rs. 50,000
Gross Profit on Cost-25%
Closing Debtors Rs. 1,00,000
Cash Sales – 205 of Total Sales
Solutions: Trade Receivables Turnover Ratio =
Notes: 1 Revenue from Operations = Cost of Revenue from Operation + Gross Profit
= Rs. 3,00,000 + 25 % of Rs. 3,00,000.
= Rs. 3,00,000 + Rs. 75,000 = Rs. 3,75,000.
Question 86. From the following Balance Sheet of AMC Ltd. as at 31st March,2020 and additional information,
calculate Trade Receivables Turnover Ratio and Debt Collection Period (in Months)
Balance Sheet as at 31st March, 2019.
Particulars Rs.
(b) Reserves and Surplus 2,00,000
2,00,000
(a) Trade Payables
10,000
(b) Short-term Provisions
Total
II. ASSETS 11,60,000
Fixed Assets (Tangible Assets)
7,00,000
2. Current Assets
(c) Cash and Cash Equivalents 10,000
Total 11,60,000
1. Revenue from Operations being Credit Sales Rs. 15,00,000 and Cash Sales Rs. 2,50,000.
2. Trade Receivables in the beginning of the year were Rs. 4,50,000.
HINTS:
( )
Average Collection Period =

(III) TRADE PAYABLES TURNOVER Ratio :- Trade Payables means amount payable for purchase of goods or
services taken by the enterprise in the ordinary course of business. It includes creditors and bills payable.
Trade Payables Turnover Ratio shows the relationship between net credit purchases and total payables or
average payables, whereas average payment period or creditors velocity show the credit period enjoyed
by the enterprise in paying creditors.
Computation: Trade Payables Turnover Ratio is calculated as follows:
Trade payables Turnover Ratio =
Average Trade Payables =
or
Average Payment Period or Average Age of Payables
( )
= ( )
Objective and Significance: The objective of calculating Trade Payables Turnover Ratio is to establish the
number of times the creditors are tuned over in relation to credit purchased.
High turn over not shorter payment period shows the availability of less credit period or early payments.
This boosts up the credit worthiness of the enterprise. A low ratio or longer payment period indicates that
creditors are not paid in time or increased credit period.
Question 87. Opening Sundry Creditors Rs. 80,000; Opening Bills Payables Rs. 3,000; Closing Sundry Creditors
Rs. 1,00,000; Closing Bills Payable Rs. 17,000; Purchases Rs. 14,00,000; Cash Purchases Rs. 5,00,000; Purchases
Return Rs. 1,00,000. Calculate Trade Payables Turnover Ratio.
HINTS: Trade payables Turnover Ratio =
(iv) Working Capital Turnover Ratios :- Working Capital Turnover Ratio shows the relationship between
working capital and Revenue from Operations. It shows the number of times a unit of Rupee invested
in working capital produces sales.
Revenue from Operations means Revenue earned by the company from its Operating Activities, i.e.,
revenue producing activities. It includes net sales and commission, etc., for non-finance company and
interest earned, dividend , profit on sale of securities, etc. in the case of finance companies.
If the amount of Revenue from Operations is not given, It may be calculated on the basis of Cost of
Revenue from Operations ( Cost of Goods Sold).
Computation: Working Capital Turnover Ratio is computed as follows:
Working Capital Turnover Ratio =
Working Capital = Current Assets – Current Liabilities.
Objective and Significance: the objective of computing the ratio is to ascertain whether or not working
capital has been effectively used in generating revenue. Assessment of effective utilization can be made

by comparing with the past data or with comparable enterprise or with the industry standards. Higher the
ratio, better it is. But , a very high ratio indicates overtrading – the working capital being inadequate for
the scale of operations.
Working Capital Turnover Ratio is considered to be a better measure than the Inventory Turnover Ratio,
since it shows the efficiency or inefficiency in the use of the working capital and not merely a part of it,
viz., the capital invested in inventory. it is the total working capital that leads to sales.
Question 88. Current Assets Rs. 12,00,000; Current Liabilities Rs. 2,40,000; Sales: Credit Rs. 24,00,000 and
Cash Rs. 5,20,000; Sales Return Rs. 40,000: calculate Working Capital Turnover Ratio from the above
information.
Hints:Working Capital Turnover Ratio =
Question 89. Calculate Working Capital Turnover Ratio from the following :
Cost of Revenues From Operations 1,50,000
Current Assets 1,00,000
Current Liabilities 75,000
Hints: Working Capital Turnover Ratio = =
Note: If amount of sales is not given, ratio can be calculated on the basis of Cost of Revenue from Operations
(Cost of Goods Sold).
Question 90. Working Capital Rs. 2,50,000; Cost of Revenue from Operations (Cost of Goods Sold) Rs.
10,00,000: Gross Profit on Sales 20%. Calculate Working Capital Turnover Ratio from the above information.
Hints: Profit 1/5 on Sales = ¼ on cost
( )
Working Capital Turnover Ratio =
Question 91. Calculate working Capital Turnover Ratio from the following information: Revenue from
Operations Rs. 12,00,000; Current Assets Rs. 5,00,000; Total Assets Rs. 8,00,000; Non-current Liabilities s.
4,00,000; and Shareholders’ funds Rs. 2,00,000.
Solution: Working Capital Turnover Ratio = ( )
Note : Working Capital = Current Assets – Current Liabilities = Rs. 5,00,000 – Rs. 2,00,000* = Rs. 3,00,000.
*Current Liabilities = Total Asserts – Non-Current Liabilities – Shareholders’ Funds
= Rs. 8,00,000 – Rs. 4,00,000 – Rs. 2,00,000 = Rs. 2,00,000.
(4). PROFITABLITY RATIOS:- Efficiency in business is measured by profitability. “Profitability’ refers to financial
performance of the business. Accounting Ratios measuring the profitability are known as Profitability Ratios.
Important Ratios are:
(I) Gross Profit Ratio;

(II) Operating Ratio;
(III) Operating Profit Ratio;
(IV) Net Profit Ratio; and
(V) Return on Investment (ROI) or Return on Capital Employed Ratio.
Let us discuss them in details.

(I) Gross Profit Ratio

Gross Profit Ratio establishes the relationship of Gross Profit and Revenue from Operations, i.e., Net Sales of
an enterprise. The ratio is calculated and shown in percentage.
Computation: Gross Profit Ratio is computed as follows:
Gross Profit Ratio
Revenue from Operations means revenue earned by the enterprise from its operating activities. It includes net
sales (i.e., sales – sales return) and commission, etc. , in the case of non-finance companies and interest
earned, dividend, profit on sale of securities , etc., in the case of finance companies.
Reasons for increase in Gross Profit Ratio:-- Gross Profit Ratio may increase due to the following reasons:
(I.) Higher selling price with constant Cost of Revenue from Operations (Cost of Goods Sold).
(II.) Lower Cost of Revenue from Operations (Cost of Goods Sold) with constant selling price.
(III.) A combinations of Aforesaid two reasons.
Objective and Significance: The main objective of computing Gross Profit ratio is to determine the efficiency
with which productions and or/purchase operations and selling operations are carried on.
Gross Profit Ratio is a reliable guide for fixing selling prices and efficiency of trading activities. The ratio may be
compared with ratio of earlier years of with that of other firms to compare and assess the efficiency of the
business of other firms. Higher Gross Profit ratio is better as it leaves higher margin to meet operating
expenses and creations of reserves.
Question 92. Compute Gross Profit Ratio from the following information:
Revenue from Operations Rs. 6,00,000; Gross Profit 25% on Cost. (AI 2004, Modified)
Hints: Gross Profit Ratio =
Question 93. Calculate Gross Profit Ratio from the following information:
Cash Sales are 25% of Total Sales; Purchases Rs. 6,90,000; Credit Sales Rs. 6,00,000; Excess of Closing Inventory
Rs. 50,000.
Solution:. Gross Profit Ratio
Working Note: Calculation of Revenue from Operations, i.e., Net Sales = Credit Sales + Cash Sales
Let Revenue from Operations, i.e., Net Sales be x.
Credit Sales (Given) = Rs. 6,00,000
Cash Sales = 25% of x or
X= ( )
4x= x + Rs. 24,00,000
X= Rs. 8,00,000 ( Revenue from Operations, i.e., Net Sales)
Cash Sales = Revenue from Operations, i.e., Net Sales – Cost of Goods Sold

= Rs. 8,00,000 – Rs. 6,40,000 = Rs. 1,60,000.
*Change in Inventories = Opening Inventories – Closing Inventories. Excess of Closing Inventory over Opening
Inventory means negative change. Hence, it is deducted.
st
Question 94. Following information is available for the year ended 31 March, 2019, calculate Gross Profit
Ratio:
Cash Sales Rs. 25,000 Decrease in Inventory Rs. 10,000
Purchase: Cash Rs. 15,000 Returns Outward Rs. 2,000
Credit Rs. 60,000 Wages Rs. 5,000
Carriage Inwards Rs. 2,000 Ratio of Cash Sales and Credit Sales 1:3
Solution: Gross Profit Ratios = = =10%.
Revenue from Operations, i.e., Net Sales = Cash Sales + Credit Sales
= Rs.25,000 + Rs.25,000 x 3/1 =Rs.25,000 + Rs.75,000 = Rs. 1,00,000
Net Purchases = Cash Purchases + Credit Purchases – Returns Outwards
= Rs 15,000 + Rs. 60,000 – Rs. 2,000 = Rs. 73,000.
Cost of Revenue from Operations (Cost of Goods Sold) = Purchases + Opening Inventory + Direct Expenses
(Carriage Inwards + Wages)
= Rs. 73,000 Rs. 10,000 + Rs. 7,000 (i.e., Rs. 2,000 + Rs. 5,000) = Rs. 90,000.
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 1,00,000 – Rs. 10,000.
Note Decrease in Inventory means Opening Inventory is more than the Closing Inventory.
Question 95. Calculate Gross Profit Ratio from the following data:
Average Inventory Rs. 1,60,00; Inventory Turnover Ratios 8 Times; Average Trade Receivables Rs. 2,00,000;
Trade Receivables Turnover Ratio 6 Times ; Cash sales 25% of Net Sales.
Solution:
Gross Profit Ratio =
Cost of Revenue from Operation = Average Inventory x Inventory Turnover Ratio
= 1,60,000 x 8 = Rs.12,80,000.
Credit Sales = Average Trade Receivables x Trade Receivables Turnover Ratio
= Rs. 2,00,000 x 6 = Rs. 12,00,000 (being 75% of net Sales).
Revenue from Operation (Net Sales) = Credit sales x 100/75

= Rs. 12,00,000 x 100/75 = Rs. 16,00,000.
Gross Profit = revenue from Operation (Net Sales)
- Cost of Revenue from Operation (Cost of Goods Sold)
= Rs. 16,00,000 – Rs. 12,80,000 =Rs. 3,20,000.
Question 96. The Gross Profit Ratio of a company is 25%. State giving reason, which of the following
transactions will (a) increase; (b) decrease (c) not change the Gross Profit Ratio:
(I.) Purchases of Stock-in-trade Rs. 50,000.
(II.) Purchases Return Rs. 15,00.
(III.) Revenue from Operations on sale of Stock-in-Trade Rs. 85,000.
(IV.) Stock in-Trade Costing Rs. 20,000 withdrawn from personal use.
(V.) Stock-in-Trade costing Rs. 10,000 distributed as free samples.

Solution :
Statement Showing Effect of the Transactions on Gross Profit Ratio
Transactions Effect on Gross Reasons
Profit Ratio
(I) No Change Both Purchases and Closing Inventory will increase by the same amount,
therefore, Cost of Revenue from operations will remain unchanged.
(II) No Change Both Purchases and Closing Inventory will decrease by the same amount,
therefore Cost of Revenue from Operations will remain unchanged.
(III) No Change Revenue from Operations will increase but Closing Inventory will
decrease the same percentage (Not by same amount). As a result, Cost of
Revenue from Operations will increase by the same percentage as the
Revenue from Operations increase.
(IV) No Change Both Purchases and Closing Inventory will decrease by the same amount,
therefore, Cost of Revenue from Operations will not change.
(V) No Change Cost of Revenue from Operations increases as well as decreases by the
same amount.
(II) Operating Ratio

Operating Ratio establishes the relationship between Operating Costs (i.e., Cost of Revenue from
Operations + Operating Expenses) and Revenue from Operations. Ir shows the proportions of Cost of
Revenue from Operations and Operating Expenses to Revenue from Operations.
Operating costs are those costs which are incurred for operating activities of the business.
Computation: Operating Ratio is computed as follow:

Operating Ratio =
Or
= = …%.
Cost of Revenue from Operations = Opening Inventory (Excluding Spare Pars and Loose Tools)+ Net Purchases
+ Direct Expenses – Closing Inventory (Excluding Spare Parts and Loose Tools)
Objective and Significance: The objective of computing Operating Ratio is to assess the operational efficiency
of the business. It show the percentage of Revenue from Operations that is absorbed by the Cost of Revenue
from Operations (Cost of Goods Sold) and Operating Expenses. Lower Operating Ratio is better because it
leaves higher profit margin to meet no-operating expenses, to pay dividend, etc. A rise in the Operating Ratio
indicates decline in efficiency.
Question 97. From the following information, calculate Operating Ratio:
Revenue from Operations Rs. 6,80,000; Rate of Gross Profit on Cost 25%; Selling Expenses Rs. 1,44,000;
Administrative Expenses Rs. 73,000. (Delhi 2016)
Solution: Operating Ratio =
Question 98. Revenue from Operations Rs. 9,00,000, Gross Profit 25% on Cost, Operating Expenses Rs. 90,000.
Calculate Operating Ratio.
Hints :
Operating Ratio
= =

Question 99. Operating Cost Rs. 6,80,000; Operating Expenses Rs. 80,000; Gross Profit Ratio 25%. Calculate
Operating Ratio.
Hints: Operating Ratio
= = 85%.
st
Question 100. Following is the Statement of Profit and Loss of Uniball Ltd. For the year ended 31 March,
2019, calculate Operating Ratio.
STATEMENT OF PROFIT AND LOSS for the years ended 31st March, 2020
I. Revenue from Operations (Net Sales) 40,00,000
III. Total Revenue (I+II) 4,10,000
IV. Expenses:
Purchase of Stock-in-Trade 2,25,000
Change in Inventories of Stock-in-Trade (15,000)
Employees Benefit Expenses 6,000
Other Expenses 1 34,000
Total Expenses. 2,50,000
V. Profit (III-IV) 1,60,000
Note to Accounts.
Particulars Rs.
(I) Other Expenses 10,000
Administrative Expenses 14,000
Selling and Distribution Expenses 10,000
Loss on Sales of Fixed Assets 30,000
Solution: Operating Ratio = x 100
Notes
(I.) Cost of Revenue from Operations

= Purchases of Stock-in-Trade + Change in Inventories + Employees Benefit Expenses
= Rs. 2,25,000 - Rs. 15,000 + Rs. 6,000 = Rs. 2,16,000.
(II.) Operating Expenses = Administrative Expenses + Selling and Distribution Expenses
= Rs. 10,000 + Rs/ 14,000 = Rs. 24,000.
(II) Loss on Sale of Fixed asset is not an operating Expense.
Question 101. Following is the Statement of Profit and Loss of SKJ Ltd. For the years ended 31st March, 2019;
Particulars Rs.
II. Expenses
Cost of Materials Consumed 11,25,000.
Changes in Inventories of Finished Goods
and WIP 50,000
Employees Benefit Expenses 30,000
Finance Costs 25,0000
Other Expenses 1,70,000
Total Expense 1,40,000
III. Profit from Operations 6,00,000

You are required to compute Operating Ratio.

Solution:
Operating Ratio= ( )
=
Cost of revenue from Operations = Cost of Materials Consumed + Changes in Inventories of finished Goods
and WIP
= 11,25,000 + Rs, 50,000 = Rs, 11,75,000.
Operating Expenses = Employees Benefit Expenses + Other Expenses
= Rs. 11,25,000 + Rs. 50,000 = Rs. 11,75,000.
Operating Expenses = Employees Benefit Expenses + Other Expenses
= Rs. 30,000 + Rs. 1,70,000 = Rs. 2,00,000.
Note: Since information of non-operating expenses is not given, all expenses (other than finance costs) are
taken as operating expenses.
(III) Operating Profit Raito:- Operating Profit Ratio measures the relationship between Operating
Profit and Revenue from Operations. i.e., Net Sales.
Operating Profit Ratio is computed by dividing operating Profit by Revenue from operations (Net Sales) and is
expressed as percentage. In the form of a formula, Operating Profit Ratios is expressed as follow:
Operating Profit Ratio = = .. %
( )
Operating Profit=Gross Profit + Other Operating Income – Other Operating Expenses
Or
= Net Profit (Before Tax) + Non-Operating Expenses/Losses – Non-operating Incomes
Or
=Revenue from Operations – Operating Cost
Question 102. Calculate Operating Profit Ratio in the following cases:

Case 1: Revenue from Operations (Net Sales) Rs. 5,00,000, Operating Profit Rs. 75,000.
Case 2: Revenue from Operations (Net Sales) Rs. 6,00,000, Operating Cost Rs. 5,20,000.
Case 3: Revenue from Operations (Net Sales) Rs. 7,20,000, Gross Profit 20% on Sales, Operating Expenses Rs.
36,000.
Solution : Operating Profit Ratio =

Case 1. Operating Profit Ratio = = 15%.
Case 2. Operating Profit Ratio =
Note: Operating Profit = Revenue from Operations – Operating Cost = Rs. 6,00,000 – Rs. 5,20,000 =Rs. 80,000.
Case 3. Operating Profit Ratio =
Note: Operating Profit = Gross Profit – Operating Expense = 20% of Rs. 7,20,000 – Rs. 36,000 =Rs. 1,08,0000.
Question 103. Calculate Operating Profit Ratio from the following information:
Rs.
Opening Inventory 50,000 Selling Expenses 60,000
Purchases 5,00,000 Dividend on Shares 15,000
Sales (Gross) 7,50,000 Loss by Theft 10,000
Closing Inventory 75,000 Sales Return 15,000
Administrative Expenses 25,000
hints: Operating Profit Ratio =
Question 104. Revenue from Operations Rs. 4,50,000. Gross Profit 25% on Cost, Operating Expenses Rs.
22,500. Calculate Operating Profit Ratio.
Solution:

Operating Profit Ratio= ( )

=
Notes:
(I) Calculation of Cost of Revenue from Operations:
Let Cost of Revenue from Operations = Rs. 100; Gross Profit = Rs. 25
Revenue from Operations= Rs. 100 +Rs. 25 = Rs. 125.
When Revenue from Operations is Rs. 4,50,000,
(II) Operating profit = Revenue from operations – Operating Cost*
= *Rs. 4,50,000 – Rs. 3,60,000 – Rs. 22,500 = Rs. 67,500.
*Operating Cost = Cost of Revenue from Operations + Operating Expenses.
(IV) Net Profit Ratio :-- Net Profit Ratio establishes the relationship between Net Profit and Revenue from
Operations, i.e., Net Sales. It shows the percentage of Net Profit earned on Revenue from Operations.
Computation: Net Profit ratio is computed as follows:

Net Profit Ratio =
Net Profit = Revenue from Operations – Cost of Revenue from Operations

– Operating Expenses – Non-operating Expenses + Non-operating Income-Tax.
Objective and Significance: Net Profit Ratio is an indicator of overall efficiency of the business. Higher the Net
Profit Ratio, better the business. This ratio helps in determining the operational efficiency of the business. An
increase in the ratio over the previous period shows improvement in the operational efficiency and decline
means otherwise. A comparison with the industry standard is also an indicator of the efficiency of the
business.
Question 105. Gross Profit Ratio of a company was 25%. Its Cash sales were Rs. 2,00,000 and credit sales were
Rs. 2,00,000 and credit sales were 90% of the total sales. If the indirect expenses of the company were Rs.
20,000, calculate Net Profit Ratio.
Solution:
Net Profit Ratio = ( )
Total Revenue from Operations = Cash Sales + Credit Sales
= Rs. 2,00,000 + Rs. 18,00,000 = Rs. 20,00,000
Question 106. From the following information, calculate Net Profit Ratio:
Revenue from Operations Rs. 5,00,000 Advertisement Expenses Rs. 10,000
Gross Profit Rs. 2,00,000 Interest Rs. 5,000
Salaries and Wages Rs. 45,000 Rent (Income) Rs. 60,000
Solution:
Net Profit Ratio = ( )
( )
= = 40%.
Working Notes:
Net Profit = Gross Profit – Indirect Expenses and Losses + Other Income
Income Expenses = Salaries and Wages + Advertisement Expenses + Interest
= Rs. 45,000 + Rs. 10,000 + Rs. 5,000 = Rs. 60,000.
Other Income (Rent) = Rs. 60,000.
Question 107. Revenue from Operations Rs. 8,00,000; Gross Profit Ratio 25%; Operating Ratio 90%; Non-
Operating Expenses Rs. 4,000; Non-operating Income Rs. 44,000. Calculate Net Profit Ratio.
Solution:
Net Profit Ratio = 15%.

Working Notes:
(I.) Operating Profit Ratio = 100 – Operating Ratio = 100 – 90 = 10%.
(II.) Operating Profit = Rs. 8,00,000 x 10/1000 = Rs. 80,000.
(III.) Net Profit = Operating Profit + Non-operating Incomes – Non-operating Expenses
= Rs. 80,000 + Rs. 44,000 – Rs. 4,000 = Rs. 1,20,000.
Question 108. Calculate Net Profit Ratio from the following Statement of Profit and Loss of New Delhi Sales
Ltd. For the year ended 31st March, 2019:
II. Expenses:.
Purchases of Stock-in-Trade 8,70,000
Change in Inventories of Stock-in-Trade 27,000
Employees Benefit Expenses 1,20,000
Finance Costs 5,000
Depreciation and Amortisation Expenses 1 8,000
Other Expenses. 44,000
Total Expenses
10,20,000
III. Net Profit (I-II) 2,30,000
Note to Accounts
Particulars Rs.
I. Other Expenses 5,000
Carriage 10,000
Administrative and General Expenses 29,000
Provision for Tax 44,000
Solution: Net Profit Ratio = ( )
(V) Return on Investment (ROI) or Return on Capital Employed

Return on Investment or Return on Capital Employed shows the relationship of profit (profit before
interest and tax) with Capital Employed. The net result of operations of a business is either profit of loss. The
sources, i.e., funds used in the business to earn this (profit or loss) are Proprietors (Shareholders) funds and
loans.
Computation: This ratio is computed by dividing Net Profit before Interest, Tax and Dividend by Capital
Employed. In the form of formula, this ratio may be expressed as:
ROI =
The ratio is expressed as a percentage.
Question 109: With the help of the following information, calculate Return on Investment: Net profit after
Interest and Tax Rs. 6,00,000; 10% Debentures Rs. 10,00,000; Tax @ 40%; Capital Employed Rs. 80,00,000.
Solution:
Return on Investment=
( )
X100=13.75%.
Working Notes: calculation of Net before interest an Tax = Rs. 40.
Let Net Profit after Interest and Tax = Rs. 100 – Rs 40 = Rs 60.
Net Profit before Tax = Rs. 6,00,000 X
Net Profit before interest and Tax = Rs. 10,00,000 + ( )

Question 110. From the following information, calculate Return on Capital Employed (or investment):
Net Profit after Interest and Tax 1,20,000 Equity Share Capital 50,000
Tax 1,20,000 10% Preference Share Capital 50,000
Net Fixed Assets 5,00,000 Reserves and Surplus 1,00,000
Long Term Trade Investments (Trade) 50,000 Current Liabilities 1,70,000
Current Assets 2,20,000 12% Debentures 4,00,000
Hints :
Return on Capital Employed(or Investment)=
=
Question 111. From the following information, calculate Return on Investment:
Net Profit (before Tax) Ratio 24% Non-Current Trade Investment 45,000
Tax Rate 50% Current Assets 90,000
Revenue from Operations 9,00,000 Total Debts 4,05,000
Net Fixed Assets 4,50,000 15% Long-term Borrowings 3,60,000
Accumulate Depreciation 1,12,500
Solution: Return on Investment =
Net Profit before Tax = Rs.9,00,000 X
Net Profit before Interest and Tax= Net Profit before Tax + Interest on Long-term Borrowings
= Rs. 2,16,000 + Rs. 54,000 = Rs. 2,70,000.
Current Liabilities = Total Debt – Non-current Liabilities
= Rs. 4,05,000 – Rs. 3,60,000 = Rs. 45,000.
Capital Employed=Fixed Assets + Trade Investments + Working Capital (i.e., C.A – C.L)
= Rs. 4,50,000 + Rs. 45,000 + Rs. 45,000 (i.e., Rs. 90,000 – Rs. 45,000) = Rs. 5,40,000.
Note: Accumulated Depreciation is already adjusted in Net Fixed Assets.
Question 112. From the following Balance Sheet of Times Ltd. as at 31st March, 2020, compute Return on
Capital Employed or Return on Investment:
(I*) Shareholders’ Funds
(b) Reserves and Surplus (2,50,000)
(II*) Non-Current Liabilities
(III*) Current Liabilities
(a) Trade Payables 1,00,000
(b) Other Current Liabilities 70,000
30,000
(c) Short-term Provisions
17,50,000
Total

II. Assets
(I*) Non-Current Assets 11,20,000
(a) Fixed Assets 2,00,000
(b) Non-current Investments (Trade)
(II*) Current Assets
(b) Trade Receivables 140,000
Total 17,50,000
Note: Net Profit for the year before interest and tax is Rs. 4,65,000.
Solution: Return on Capital Employed = =
Capital Employed:
1. Liabilities Approach = Share Capital + Reserves and Surplus + Long-term Borrowings.

= Rs. 13,00,000 – Rs. 2,50,000 + Rs. 5,00,000 = Rs. 15,50,000.
2. Assets Approach = Fixed Assets + Non-current Investments (Trade) + Working Capital

(i.e., Current Assets – Current Liabilities)
= Rs. 11,20,000 + Rs. 2,00,000 + (Rs. 1,70,000 + Rs. 1,40,000 + Rs. 1,20,000 – Rs.1,00,000 – Rs. 70,000 – Rs.
30,000 ) = Rs. 15,50,000.
Question 113. State with reason whether the following transactions will increase, decrease or not change the
‘Return on Investment’ Ratio:
(i.) Purchases of machinery of Rs. 5,00,000 by issue of equity shares.

(ii.) Charging depreciation of Rs. 12,500 on machinery.
(iii.) Redemption of debentures by cheque Rs. 2,00,000.
(iv.) Converting Rs. 1,00,000, 9% Debentures into equity shares.
Solution: Return on Investment
(i.) Purchases of machinery of Rs. 5,00,000 by issue of equity shares results in increases in capital
employed without any change in profit. Hence, Return on Investment will decreases.
(ii.) Charging Depreciation of Rs. 12,500 on machinery results in decrease in both profit and capital
employed. Hence, Return on Investment will decrease.
(iii.) Redemption of debentures by cheque Rs. 2,00,000 results in decrease in capital employed
without any change in profit. Hence, Return on Investment will increases.
(iv.) Converting Rs. 1,00,000, 9% Debentures into equity shares does not have any effect on either of
two components of the ‘Return on Investment’. Since there is no change in net profit and capital
employed , there will be no change in Return on Investmen.
Question 114. Calculate Current Assets of a company from the following information:
(i.) Inventory Turnover Ratio: 4 Times.

(ii.) Inventory at the end is Rs. 20,000 more than inventory in the beginning .
(iii.) Revenue from Operations, i.e., Net Sales Rs. 3,00,000.
(iv.) Gross Profit Ratio 25%.
(v.) Current Liabilities Rs. 40,000.
(vi.) Quick ratio 0.75.

Question 115. From the following information, calculate:
(i.) Gross Profit Ratio :

(ii.) Inventory Turnover Ratio;
(iii.) Current Ratio;
(iv.) Liquid Ratio;
(v.) Net Profit Ratio, and
(vi.) Working Capital Turnover Ratio.
Revenue from Operations 25,20,000 Average Inventory 8,00,000
Net Profit 3,60,000 Current Assets (Other than inventory) 7,60,000
Cost of Revenue from Operation 19,20,000 Fixed Assets 14,40,000
Long-term Debts 9,00,000 Current Liabilities 6,00,000
Trade Payables 2,00,000 Net Profit before Interest and Tax 8,00,000
(NCERT, Modified)
Solution:
(I.) Gross Profit Ratio =

(II.) Inventory Turnover Ratio = =
(III.) Current Ratio =
(IV.) Net Profit ratio = =

(V.) Working Capital Turnover Ratio=Current Assets – Current Liabilities.
= Rs. 15,60,000 – Rs. 6,00,000 = Rs. 9,60,000.
Question 116. Calculate ‘Return on Investment’ and Debt to Equity Ratio’ from the following information:
Net Profit after Interest and Tax Rs. 3,00,000
10% Debentures Rs. 5,00,000
Tax Rate 40%
Capital Employed Rs. 40,00,000 (Delhi 2012 C)
Solution: (i) Return on Investment = =
(II.) Debt to Equity Ratio =
Question 117. On the basis of information given below, calculate:
(I). Gross Profit Ratio , (II) Inventory Turnover Ratio, (iii) Debt to Equity Ratio and
(iv) Working Capital Turnover Ratio.
Information: Revenue from Operations Rs. 7,87,500; Cost of Revenue from Operations (Cost of Goods Sold) Rs.
3,95,600; Current Liabilities Rs. 2,37,000; Long-term Loan Rs. 87,000;Current Assets Rs. 3,99,000; Equity Share
Capital Rs. 3,75,000: 8% Debentures Rs. 1,25,000 and Average Inventory Rs. 1,97,800.

Solution:
(i.) Gross profit Ratio = =49.76%.

Note: Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 7,87,500 – Rs. 3,95,000 = Rs. 3,91,000.
(ii.) Inventory Turnover Ratio =
(iii.) Debt to Equity Ratio =
( )
(iv.) Working Capital Turnover Ratio =
=
Working Capital = Current Assets – Current Liabilities.
Question 118. From the following information, calculate:
(i.) Operating Ratio, (ii). Quick Ratio and (iii) Working Capital Turnover Ratio.
Information: Equity Share Capital Rs. 1,00,000; 12% Preference Share Capital Rs. 80,000; 12% Debentures
Rs. 60,000; General Reserve Rs. 40,000; Revenue from Operations Rs. 3,00,000; Opening Inventory Rs.
10,000; Purchases Rs. 1,20,000; Wages Rs. 30,000; Closing Inventory Rs. 30,000; Selling and Distribution
Expenses Rs. 10,000; Quick Assets Rs. 2,00,000 and Current Liabilities Rs. 1,20,000.
Solution:
( )
(i.) Operating Ratio = ( )
=
=
Cost of Revenue from Operations (Cost of Goods Sold)
= Opening Inventory + Purchases +Wages – Closing Inventory
= Rs. 10,000 + Rs. 1,20,000 + Rs. 30,000 – Rs. 30,000 = Rs. 1,30,000.
Operating Expenses = Selling and Distribution Expenses = Rs. 10,000.
(ii.) Quick Ratio =

(iii.) Working Capital Turnover Ratio =
Question 119. From the information given below, calculate (i) Current Ratio and (ii) Debt to Equity Ratio:
Information: Net profit of the year Rs. 80,000; Fixed Assets Rs. 2,00,000; Closing Inventory Rs. 10,000; Other
Current Assets Rs. 1,00,000; Current Liabilities Rs. 30,000; Equity Share Capital Rs. 1,00,000; 10% Preference
Share Capital Rs. 70,000; 12% Debentures Rs. 60,000 and Revenue from Operations, i.e., Net Sales during the
year Rs. 5,00,000.
Solution:
(i.) Current Ratio =
Current Assets = Closing Inventory + Other Current Assets
= Rs. 10,000 + Rs. 1,00,000 = Rs. 1,10,000.
(ii.) Debt to Equity Ratio = (
Note Equity = Equity Share Capital + Preference Share Capital + Reserves and Surplus.

Question 120. Operating Ratio of a company is 80%. State Giving reason, which of the following transactions will
increase, decrease or not alter the Operating Ratio:
1. Purchases of Stock-in-Trade Rs. 7,000; (2.) Purchases Return Rs. 200; (3) Goods costing Rs. 2,000
drawn for personal use; (4) Office Expenses paid Rs. 5,000 and Goods Costing Rs. 2,000 distributed as
free samples (5.) Payment to Creditors Rs. 100; (6) Building sold for Rs. 5,00,000 and (7) Income Tax
Paid Rs. 7,000.
Solution : Statement Showing the Effect on Operating Ratio
Transactions Effect on Operating Reason

Ratio
1. No Change Both Purchases and Closing Stock will increase and hence
Cost of Goods Sold will remain unchanged.
2. No Change Both Purchases and Closing Stock will decrease and hence
Cost of Goods Sold will remain unchanged.
3. No Change Both Purchases and closing Stock will decrease and hence
Cost of Goods Sold will remain unchanged
4. Increase Operating Cost increases By Rs. 7,000.
5,6 and 7 No Change Neither Cost nor sales will change.

CHAPTER 16. CASH FLOW STATEMENT(AS 3 Revised)

MEANING OF CASH FLOW AND CASH FLOW STATEMENT:-Balance Sheet (or Position Statement) and
Statement of Profit and Loss (or Income Statement) of a company do not give information about inflows and
outflows of cash during an accounting period. It is Cash Flow Statement which gives information of Cash Flow
of an enterprise.
Cash Flow Statement is a statement that shows the flow of Cash and Cash Equivalents during the period Under
report. Cash Flows are inflows (i.e., receipts) and outflows (i.e., payments) of Cash and Cash Equivalents.
Transactions that increase Cash and Cash Equivalents are inflows of Cash and Cash Equivalents and
transactions that decrease Cash and Cash Equivalents are outflows of Cash and Cash Equivalents. Cash and
Cash Equivalents include Cash, Bank Balance, Marketable Securities, etc. Unless specified otherwise, Current
Investments are considered as Marketable Securities. Hence, are included in Cash and Cash Equivalents.
Examples of Cash Flows :
Cash Inflows Cash Outflows

 Cash Sales  Cash Purchases
 Cash Received against Trade Receivables  Cash Paid against Trade Payables
 Cash Received for Commission and Royalty  Operating Expenses paid (e.g.,
 Insurance Claim Received Administration Expenses, Selling and
Distribution Expenses)
 Cash Received from Sale of Investment  Cash Purchase of Investment
(Other than Marketable Securities) (Other than Marketable Securities)
 Cash Received from Sale of Fixed Assets  Cash Purchase of Fixed Assets
 Cash Received from Sale of Securities  Loans and Advances Given
 Loans and Advances Received  Payment for Buy-back of Equity Shares
 Proceeds from Issue of Equity Shares  Payment for Redemption of Preference
 Proceeds from Issue of Preference Shares Shares
 Proceeds from Issue of Debentures  Payment for Redemption of Debentures
Cash Flow Statement is prepared according to the Accounting Standard-3 (Revised). The accounting standard
prescribes that Cash Flow Statement be prepared showing cash flow under three heads, namely:
1. Cash Flow from Operating Activities;
2. Cash Flow from Investing Activities; and
3. Cash Flow from Financing Activities.
OBJECTIVES OF CASH FLOW STATEMENT :- The objectives of Cash Flow Statement are:
• To determine the sources (receipts) of Cash and Cash Equivalents under operating, investing and financing
activities of the enterprise.
• To determine applications (payments) of Cash and Cash Equivalents under operating, investing and financing
activities of the enterprise.
• To determine net change in Cash and Cash Equivalents being the difference between sources (receipts) and
applications (payments) under operating, investing and financing activities between the dates of two Balance
Sheets.

IMPORTANCE OR USES OF CASH FLOW STATEMENT

(i) Short-term Planning: Cash Flow Statement gives information about sources and applications of
Cash and Cash Equivalents for a specific period. It helps in planning investments and assessing the
financial requirements of the enterprise.
(ii) Cash Flow Helps in Assessing Liquidity and Solvency: Solvency is the ability of the enterprise to
meet its liabilities on time. Cash Flow Statement helps to assess liquidity.
(iii) Efficient Cash Management: Cash Flow Statement gives information relating to surplus or deficit
of cash. An enterprise, therefore, can decide about the Short-term Investments of the surplus
and can arrange the Short-term Credit in case of deficit.
(iv) Comparative Study: A comparison of the actual cash flows with the budgeted cash flows of the year
shows the extent to which Cash and Cash Equivalents were generated and applied as per the plan.
(v) Reasons for Cash Position: Cash Flow Statement shows the reasons for lower and higher cash
balances with the enterprise. Sometimes, an enterprise has lower cash balance in spite of higher
profits or has higher cash balance in spite of lower profits. Reasons for such situations can be
analysed with the help of Cash Flow Statement.
(vi) Evaluate Management Decisions: Cash Flow Statement, by providing information relating to
company's investing and financing activities, gives the investors and creditors information about
cash flow which helps them to evaluate management decisions.
(vii) Dividend Decision: Dividend payable is deposited in a separate Bank Account upon it being
declared (i.e., interim dividend) or approved (i.e., final dividend). Cash Flow Statement helps in
deciding how much dividend should be paid.
LIMITATIONS OF CASH FLOW STATEMENT :-The limitations of Cash Flow Statement are:
(1) Non-cash Transactions are not Shown: Cash Flow Statement shows only inflows and outflows of cash.
It does not show non-cash transactions like the purchase of building by issue of shares or debentures
to the vendors or issue of bonus shares.
(2) Not a Substitute for an Income Statement: Income Statement shows net income of the enterprise
based on accrual basis of accounting whereas Cash Flow Statement shows only cash inflows or
outflows which does not represent net profit earned or loss incurred by the enterprise.
(3) Not a Substitute for Balance Sheet: It is not a substitute for Balance Sheet (Position Statement)
because it does not show the financial position (i.e., Equity, Liabilities and Assets).
(4) Historical in Nature: It rearranges available information in the Income statement (Statement of Profit
and Loss) and the Balance Sheet. Thus, it is historical in nature.
(5) Assessment of Liquidity: Liquidity of the enterprise cannot be determined from Cash Flow Statement
alone because it depends on other factors also like current assets and current liabilities. Cash and
Cash Equivalents is one of the components of current assets.
(6) Accuracy of cash Flow Statement: It is prepared from the financial statements. If financial
statements are prepared incorrectly, Cash Flow Statement will also be incorrect.
KEY TERMS USED IN CASH FLOW STATEMENT
Meaning of cash :- Cash comprises of Cash on Hand and demand deposits with banks.
Meaning of cash equivalents: Cash Equivalents are short-term, highly liquid investments that are readily
convertible into the known amount of cash and which are subject to an insignificant change in value. An
investment normally qualifies as cash equivalent only when it has a short maturity of say, three months or less
from the date of acquisition
Note:- Current Investments, unless specified otherwise, are taken as Marketable Securities and included in
Cash and Cash Equivalents.
Examples of Cash Equivalents are Current Investments, Treasury Bills, Commercial Papers and these have
insignificant risk of change in its value, etc.

Cash and Cash Equivalents is calculated as:

Cash on Hand
Add: Cash at Bank
Add: Cheques and Drafts on Hand
Add: Short-term Investments (Marketable Securities)
Add: Short-term Deposits in Banks
Classification of Cash Flows :- Accounting Standard-3 (Revised) requires that the changes resulting in inflows
and outflows of Cash and Cash Equivalents be classified into three activities, i.e., Operating, Investing and
Financing. These are discussed below:
(i) Operating Activities :- Operating Activities are the principal revenue producing activities of the
enterprise and other activities that are not Investing or Financing Activities. Cash Flow from
operating Activities being principal revenue producing activity of enterprise, generally results from
the business transactions and events that determine net profit or loss.Examples of Cash Flow from
Operating Activities are:
For Non-financial Companies

(a) Receipts from sale of goods and/or rendering of services;
(b) Receipts from royalties, fees and commission, etc.;
(c) Receipts from Trade Receivables (i.e., Debtors and Bills Receivable);
(d) Payment for purchase of goods and/or services;
(e) Payment to Trade Payables (i.e., Creditors and Bills Payable);
(f) Payment of wages, salaries and other payments to employees;
(g) Receipts of premium and payment of claims (for an Insurance Company);
(h) Payment of and refund of income tax unless these are identified with investing or financing activities.
For Financial Companies:

(a) Payment for purchase of securities;
(b) Payment of interest on loans;
(c) Receipts from sale of securities;
(d) Dividend received on securities;
(e) Interest received on loans granted;
(f) Payment of salaries, bonus, etc. to employees;
(g) Payment of and refund of income tax unless these are identified with investing or financing activities.
The net effect of Cash Flow from Operating Activities is shown in Cash Flow Statement as Cash Flow from (or
Used in) Operating Activities.
Meaning of Principal Revenue Producing Activities:- Principal revenue producing activities mean
business activities being carried out by the enterprise to earn profit. For example:
(i)For a computer manufacturing company, manufacturing and selling of computers is its principal revenue
producing activity.
(ii)For a trading company, purchase and sale of goods is its principal revenue producing activity.
(iii)For a finance company, giving and taking loans, dealing in securities is its principal revenue producing
activity.
(iv)For an insurance company, receipt of premiums and payment of claims, annuities, etc., is its principal
revenue producing activity.
(ii) Investing Activities are the acquisition and disposal of the Long-term Assets and Other Investments, not
included in cash equivalents. These activities include transactions involving purchase and sale of the Long-
term Assets, which are not held for resale such as machinery, land and building, investments, etc. Investments
include investments that are not included in Cash and Cash Equivalents such as current investments other
than marketable securities. Investments include investment made in long-term investments and other
investments by the enterprise with a purpose to generate income and thus, cash flow.
Examples of Cash Flow from Investing Activities are:

(a) Payments for purchase of fixed assets (including intangible assets).
(b) Receipts from disposal of fixed assets (including intangible assets).

(c) Payments to purchase (acquire) securities, i.e., shares, warrants, debentures, bonds or debt instruments of
other enterprises. (In the case of Non-financial companies).
(d) Receipts from sale (disposal) of securities, i.e., shares, warrants, debentures, bonds or debt instruments of
other enterprises. (In the case of Non-financial Companies).
(e) Advances and loans made to third parties (other than advances and loans made by a financial enterprise).
(f) Receipts from repayments of advances and loans made to third parties (other than advances and loans
made by financial enterprise).
(iii) Financing Activities :- Financing Activities are the activities which result in change in size and
composition of owner's capital (including Preference Share Capital in the case of a company) and
borrowings of the enterprise from other sources. Thus, increase in share capital (both equity and
preference), redemption of preference shares, issue of debentures, increase in borrowings (short-term and
long-term), repayment of borrowings (short-term and long-term) and redemption of debentures, etc., are
shown under Financing Activity. Examples of Cash Flow from Financing Activities are:
(a) Proceeds from the issue of shares or other similar instruments.

(b) Proceeds from the Issue of Debentures, Loans, Bonds and other Short-term Borrowings.
(c) Payment for Buy-back of Equity Shares.
(d) Repayments of the amounts borrowed including redemption of debentures.
(e) Payments of dividends both on Equity and Preference Shares.
(f) Payments for Interest on Debentures and Loans (Short-term and Long-term).
(g) Increase or decrease in Bank Overdraft and Cash Credit.
Question 1.From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow Statement:
31.3.2002 31.3.2001
Liabilities:
Share Capital 10,00,000 9,00,000
Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 2,00,000
Provision for taxation 1,00,000 70,000
Sundry Creditors 9,00,000 8,20,000
25,00,000 20,00,000
Assets:
Land/Building 6,00,000 4,00,000
Investments 1,00,000
Sundry Debtors 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash on hand/bank 2,00,000 2,00,000
25,00,000 20,00,000
Adjustment:- Dividend proposed during last year and current year Rs 1,00,000 and Rs 1,20,000 respectively.

Question 2. Identify which of the following transactions are classified or shown as Operating, investing or
financing Activity:
(i) Cash received against sale of goods. (ii) Cash paid for purchases of goods.
(iii) Payment of salaries and wages. (iv) Payment of interest on loan.
(v) Repayment of loan. (vi)Purchase of machinery against payment.
(vii) Sale of car in cash. (viii) Dividend paid.
(ix) Commission received. (x) Cash received from trade receivables.
(xi)Cash proceeds from sale of fixed asset.
(xii) Cash paid for purchase of Stock-in-Trade. (xii) Debentures purchased.
(xiii) Loan advanced. (xvi) Purchase of Patents.
Question3. State a transaction that is always classified or shown as an Operating Activity.
Solution: Payments of Employees' Salaries, bonus, gratuity, etc., are always shown as Operating Activity.
Question 4. Identify out of the following transactions that are classified or shown as Investing Activity:
(i) Cash proceeds from sale of fixed asset.(ii) Debentures purchased.

(iii) Loan advanced. (vi) Purchase of Patents.
Question 5. Identify out of the following transactions that are shown as Financing Activity:
(i) Repayment of Loan taken.

(ii) Proceeds from Issue of Shares.
(iii) Debentures issued by the company.
(iv) Redemption of Preference Shares.
(v) Interest paid.
(vi) Dividend paid.
(vii) Increase in Bank Overdraft or Cash Credit.
(viii) Issue of bonus shares.
Question 6. State a transaction that is always classified as a Financing Activity along with the reason for such
classification.
Solution: Payment of dividends is always classified as a Financing Activity because it is a payment relating to
share capital, which is a Financing Activity.
Question7. Give a transaction, a part of which is shown as an Investing Activity and another part as a Financing
Activity.
Solution: Payment of instalments under Hire-purchase System. The instalment has two components, Principal
and interest. Principal is shown as an Investing Activity and interest as a Financing Activity.

Transactions not regarded as Cash Flow :-- Transactions that are movement in between the items of Cash
and Cash Equivalents are not regarded as Cash Flow because the balance (Opening and Closing) of Cash and
Cash Equivalents is the net result of Cash Flow under Operating, Investing and Financing Activities. For
example, cash deposited into bank is not Cash Flow because Cash-in-Hand is reduced on deposit into bank but
bank balance is increased. Both Cash and Bank are items of Cash and Cash Equivalents. Other examples are
cash withdrawn from bank and purchase and sale of marketable securities.
Non-cash Transactions :- Non-cash Transactions are those transactions in which flow (inflow or outflow) of
Cash and Cash Equivalent does not take place. For example, Depreciation and Amortization Expenses, Issue of
Bonus Shares and Issue of Equity Shares or Debentures for consideration other than cash (say, for purchase of
assets), etc. Non-cash transactions are not considered while preparing Cash Flow Statement.
Question 8. Identify the following transactions belonging to (1) Operating Activities, (2) Investing Activities, (3)
Financing Activities, and (4) Cash and Cash equivalent:
1. Cash Sales; 2. Cash Purchase, 3. Rent Paid; 4. Cash-in-Hand; 5. Income Tax Paid; 6. Office Expenses;
7. Balance at Bank; 8. Sale of Machines by a dealer of Machines 9. Issue of Debentures; 10. Dividend Paid;
11. Cash Paid against Trade Payables; 12. Purchase of Machines; 13. Income Tax Refund Received;
14. Issue of Share Capital; 15. Sale of Patents; 16. Purchase of Marketable Securities;
17. Purchase of Goodwill; 18. Short-term Deposits in Banks
19. Purchase of Securities (Non-marketable); 20. Cash Received from Debtors.
Question 9. Identify which of the following transactions are (i) Operating Activities (ii) Investing Activities, (iii)
Financing Activities, and (iv) Cash and Cash Equivalents:
1. Marketing Expenses; 2. Purchase of Investments, 3. Cash Received from Trade Receivables;
4. Buy-back of Equity Shares; 5. Repayment of a Long-term Loan; 6. Commission Received
7. Selling and Distribution Expenses; 8. Redemption of Debentures;
9. Sale of Marketable Securities; 10. Bank Overdraft/Cash Credit.
Question 10. Identify which of the following transactions are (i) Operating Activities, (ii) Investing Activities (iii)
Financing Activities, and (iv) Cash and Cash Equivalents:
1. Sale of Investments; 2. Dividend received on Shares; 3. Interest received on Investments;
4. Rent received by a Real Estate Company; 5. Rent received by a Company whose main Business is
Manufacturing 6. Interest paid on Debentures or long-term loan; 7. Marketable Securities; 8. Proceeds from
Shares issued; and 9. Interest paid on Bank Overdraft.
Question 11. Classify the following transactions as Operating Activities for (i) Financial Enterprise, and (ii) Non-
financial Enterprise:
(a) Purchase of securities of a company;

(b) Brokerage paid for the above purchases;
(c) Sale of securities of a company;
(d) Dividend and interest received on securities;
(e) Dividend paid to shareholders;

(f) Interest paid on borrowings;

(g) Loans and advances made; and
(h) Receipt of loans and advances made.
Give reasons for your answer.
Solution: (i) Financial Enterprise: All the transactions except (e), i.e., Dividend paid to shareholders shall be
classified or shown as Operating Activities. It is so because Purchase and Sale of Securities and also Borrowings
and Advancing Loans are the principal revenue producing activities of a financial enterprise.
Dividend paid to shareholders shall be classified as Financing Activity because it is related to the transactions
that change the size and composition of owners' capital.
(ii) Non financial Enterprise: All the transactions except (e) and (f) (i.e., Dividend paid to shareholders and
Interest paid on borrowings respectively) shall be classified as Investing Activities because these are not the
principal revenue producing activities of the enterprise.
Transactions (e) and (f) shall be classified as Financing Activities because these are related to activities that
change the size and composition of the owners' capital and borrowings.
Question 12. State which of the following would result in inflow/outflow/no flow of Cash and Cash
Equivalents:
(i) Sale of fixed assets (Book value Rs 50,000) at a loss of Rs 5,000;

(ii) Purchase of Stock-in-Trade for cash;
(iii) Purchase of fixed assets by issue of shares;
(iv) Cash received from debtors Rs 10,000;
(v) Cash deposited into Bank;
(vi) Cash withdrawn from Bank;
(vii) Issue of fully paid bonus shares;
(viii) Sale of marketable securities for cash at par;
(ix) Declaration of final dividend Rs 25,000;
(x) Writing off bad debts against the provision for doubtful debts;
(xi) Declaration of Interim Dividend;
(xii) Sale of Current Investments;
(xiii) Increase in Bank Overdraft; and
(xiv) Decrease in Cash Credit.
Solution: STATEMENT SHOWING THE EFFECT OF TRANSACTIONS ON CASH AND CASH EQUIVALENTS
Transaction Effect on Cash and Cash Reason

Equivalents
(i) Inflow Cash is increased by the amount of Rs 45,000.
(ii) Outflow Cash is decreased by the amount of Stock-in-Trade.
(iii) No Flow Cash is not transacted.
(iv) Inflow Cash is increased by Rs 10,000.
(v) No Flow It is a movement between two components of Cash and
Cash Equivalents.
(vi) No Flow It is a movement between two components of Cash and
Cash Equivalents.
(vii) No Flow Cash is not affected. It is capitalization of profits.
(viii) No Flow Cash which includes marketable securities also is not
affected.
(ix) No Flow Cash is not affected because final dividend declared
will be paid in the next year, if approved by
shareholders.
(x) No Flow Cash is not affected.
(xi) Outflow Interim dividend declared is paid within 7 days of

declaration.
(xii) No Flow Current Investments are part of Cash and Cash
Equivalents.
(xiii) Inflow Short-term Borrowing has increased.
(xiv) Outflow Short-term Borrowing has decreased.
NOTE:- Extraordinary Items: Extraordinary items are incomes and expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not
expected to recur frequently or regularly. Examples of Extraordinary items are:
a. Operating Activities: Compensation paid to employees under Voluntary Retirement Scheme.

b. Investing Activities: Claim received against damage of fixed assets say because of earthquake.
c. Financing Activities: Payment for buy-back of Shares
ACCOUNTING OF PROPOSED DIVIDUND:- AS 4, Contingencies and Events Occurring After the Balance Sheet
Date prescribes that Proposed Dividend should by accounted as liability after it has been declared, i.e.,
approved by the shareholders. However, it should he disclosed in the Notes to Accounts ants attached to the
financial statements.
Therefore, Proposed Dividend is not shown as Short-term Provision in the Balance Sheet but is disclosed in the
Notes to Accounts. After it is approved by the shareholders in their meeting which is held after closure of
accounting year, i.e., in the next year, it is accounted as a liability and is paid. The effect of this on Cash Flow
Statement is as follows:
(I) Proposed Dividend for previous year is shown as outflow of cash assuming that the shareholders
have approved the proposed dividend as was recommended.
(II) No effect is given to Proposed Dividend for the current year as it is not provided. When such dividend
is declared (approved) in the AGM, entry is passed debiting 'Surplus, i.e., Balance in Statement of
Profit and Loss Account' and Crediting 'Dividend Payable Account' and thereafter such declared
dividend is paid. Net Dividend paid (i.e., Proposed and Approved Dividend less Dividend still payable)
is shown as Cash Used in Financing Activity.
Note: Unless otherwise stated, it is presumed that the dividend proposed for the previous year has been
declared at the AGM in the Current Year at the proposed amount and has also been paid during Current Year.
Question13. Following is the extract from the Balance Sheets of KBC Ltd.:
Equity and Liabilities 31st March, 31st March,
2019 (Rs) 2018 (Rs)
Surplus, i.e., Balance in Statement of Profit and Loss 8,00,000 5,00,000
Dividend Payable 30,000 …
Dividend Proposed for the year ended 31st March, 2018 was Rs 3,00,000 and for the current year Rs
3,50,000.Prepare the Note to show Net Profit before Tax and Extraordinary Items.
Question14. Following is the extract from the Balance Sheets of Z Ltd.:

Liabilities 31st March, 31st March,
2018 (Rs) 2017 (Rs)
10% Redeemable Preference Share Capital 5,00,000 5,00,000

(a) Proposed equity dividends for the years ended 31st March, 2017 and 2018 were Rs 1,50,000 and Rs
1,00,000 respectively.
(b) An Interim Dividend of Rs 50,000 on Equity Shares was paid on 31st December, 2017. Show Net Profit
before Tax and Extraordinary Items.
Question15. From the following information relating to year ended 31st March, 2019 calculate Net Profit
before Tax and Extraordinary Activities:
Particulars Rs
surplus, i.e., Balance in Statement of Profit and Loss (Opening) 2,00,000
Surplus, i.e., Balance in Statement of Profit and Loss (Closing) 6,72,000
Transfer to Debentures Redemption Reserve 2,00,000
Proposed Dividend for the Previous Year ended 31st March, 2018 1,80,000
Interim Dividend paid during the year 1,44,000
Provision for Tax made during the Current Year 2,00,000
Income Tax Paid 2,16,000
Question16. From the following information for the year ended 31st March, 2017, calculate Net Profit before
Tax and Extraordinary Activities:
Particulars Rs
Surplus, i.e., Balance in Statement of Profit and Loss (Opening) (2,00,000)
Surplus, i.e., Balance in Statement of Profit and Loss (Closing) 5,40,000
Proposed Dividend for the year ended 31st March, 2017 3,15,000
Proposed Dividend for the year ended 31st March, 2016 2,10,000
Transfer to Workmen Compensation Reserve 1,50,000
Provision for Tax made during the Current Year 2,30,000
Question17.Prepare cash flow statement from the following Balance Sheet of Mamma Ltd. as at 31.3.2019:
Particulars Note No. 31st March, 31st March,
2019 (Rs) 2018 (Rs)
1. Shareholder’s Funds
(a) Shares capital 1 8,00,000 8,00,000
(b) Reserves and surplus 2 6,95,000 5,20,000
Long-term Borrowing 5,00,000 5,00,000
(a) Trade payables 60,000 50,000

1,00,000 75,000
(b) Other Current liabilities
3 1,50,000 1,00,000
(c) Short-term provisions
Total
1. ASSETS 23,05,000 20,45,000
1. Non-current Assets
(a) Fixed Assets
(b) Non-current investments 18,40,000 15,55,000
2 Current Assets 3,00,000 3,00,000
Total 1,65,000 1,90,000
23,05,000 20,45,000

Notes to Accounts
Particulars 31st march,2018 31st march,2018

(Rs) (Rs)
1. Share Capital
Equity shares Capital 5,00,000 5,00,000
Preference share Capital 3,00,000 3,00,000
8,00,000 8,00,000
2. Reserves and surplus

General Reserve 2,75,000 2,10,000
Workmen Compensation Reserve 2,50,000 2,00,000
3. Short-term Provisions 6,95,000 5,20,000

Provision for Tax
1,50,000 1,00,000
Note; proposed Dividend for the years ended 31st March, 2019 and 2018 are Rs.1,60,000 and Rs.80,000
respectively.
Question 18. Calculate Net Profit before Tax and Extraordinary Items from the following Balance Sheet of COC Ltd.
Surplus (opening balance) Rs 50,000

Surplus (closing balance) Rs 1,18,000
Dividend paid( proposed dividend for the previous year) Rs 36,000
Interim dividend paid during the year Rs 45,000
Transfer to reserve Rs 50,000
Provision for tax made during the current year Rs 75,000
Refund of tax Rs 1500
Loss of inventory due to fire Rs 1,00,000
Insurance claim received for above loss Rs 50,000
Question19 . Calculate Net Profit before Tax and Extraordinary Items from the following Balance Sheet of COC Ltd.
Surplus (opening balance) Rs (100,000)

Surplus (closing balance) Rs 3,36,000
Dividend paid( proposed dividend for the previous year) Rs 72,000
Interim dividend paid during the year Rs 90,000
Transfer to reserve Rs 100,000
Provision for tax made during the current year Rs 1,50,000
Refund of tax Rs 3000
Loss of inventory due to fire Rs 2,00,000
Insurance claim received for above loss Rs 100,000
Question 20.from the following information, calculate operating profit before working capital changes:
Net profit before tax and extraordinary items Rs 2,23,500
Depreciation Rs 42,000
Interest on borrowings Rs 8,400
Goodwill amortised Rs 9,300
Loss on sale of machinery Rs 9,000
Premium on redemption of debentures Rs 3,000
Interest and dividend received on investments Rs 13,800
Profit on sale of investments Rs 6000

Question 21. Calculate Cash Flow from Operating Activities from the following details:
Particulars 31st March 31st March
2019 (Rs) 2018 (Rs)
Bills Receivable 1,80,000 1,40,000
Accumulated Depreciation 3,20,000 3,00,000
Outstanding Rent 40,000 16,000
Prepaid Insurance 12,000 14,000
Goodwill 1,60,000 2,00,000
Inventories (Stock) 1,80,000 1,40,000
Question 22. Compute Cash Flow from Operating Activities from the following information:
2018 (Rs) 2017 (Rs)
Trade Receivables 50,000 62,000
Outstanding Rent 24,000 42,000
Goodwill 80,000 76,000
Trade Payables 26,000 38,000
Solution: CASH FLOW FROM OPERATING ACTIVITIES
Particulars Rs
Net Loss (As per Working Note 1) (10,000)
Add: Decrease in Current Assets:
Trade Receivables 12,000
Less: Increase in Current Assets and Decrease in Current Liabilities: 2,000

Prepaid Insurance 4,000
Outstanding Rent 18,000
Trade Payables 12,000 (34,000)
CASH USED IN OPERATING ACTIVITIES (32,000)
Question 23. Compute Cash Flow from Operating Activities from the following Information:
Particulars Rs
Net Profit after Provision for Tax and Proposed Dividend 1,10,000
Provision for Tax 50,000
Proposed Dividend (Last Year) approved by shareholders in AGM 50,000
Depreciation 20,000
Loss on Sale of Plant 10,000
Goodwill Amortised 40,000
Gain on Sale of Land 40,000
Income Tax Paid 50,000
Question 24. Calculate Cash Flow from Operating Activities from the following: (i) Profit for the year before tax and
after considering the following items is Rs 2,50,000.
Particulars Rs
Depreciation on Fixed Assets 1,00,000
Amortization of Goodwill 50,000
Transfer General Reserve 70,000
Gain (Profit) on Sale of Land 30,000
(ii) Following is the position of current assets and current liabilities:
Particulars Closing Opening

Balance Balance
Trade Receivables 2,30,000 2,20,000
Prepaid Expenses 40,000 60,000

Question 25. Sunshine Ltd. reported Net Profit after Tax of Rs 3,40,000 for the year ended 31st March, 2018.
The extracts from Balance Sheets for 31st March, 2018 and 2017 are:
Particulars 31st March, 31st March

2018 (Rs) 2017 (Rs)
Inventories 69,000 72,000
Trade Receivable 94,000 61,000
Prepaid Expenses 14,000 3,000
Provision for Tax 13,000 19,000
Depreciation charged on plant and machinery Rs 49,000, insurance claim received Rs 20,000 and gain on sale
of investments of Rs 8,000 appeared in the Statement of Profit and Loss for the year ended 31st March, 2018.
Calculate Cash Flow from Operating Activities.
Question 26. X Ltd. earned profit of Rs 5,00,000 after charging Depreciation of Rs 1,00,000 on assets and a
transfer to General Reserve of Rs 1,50,000. Goodwill amortised was Rs 35,000 and gain on sale of Machinery
was Rs 15,000.
Additional Information: At the end of the year, Debtors showed an increase of Rs 30,000; creditors an
increase of Rs 50,000; Prepaid Expenses an increase of Rs 1,000; Bills Receivable a decrease of Rs 15,000; Bills
Payable a decrease of Rs 20,000 and outstanding expenses a decrease of Rs 10,000. Determine the Cash Flow
from Operating Activities.
Solution: CASH FLOW FROM OPERATING ACTIVITIES

Particulars (Rs)
Net Profit before Tax 6,50,000

Add: Non-cash Expenses:
Depreciation 1,00,000
Goodwill Amortised 35,000 1,35,000
7,85,000
Less: Gain on Sale of Machinery 15,000
Operating Profit before Working Capital Changes 7,70,000
Add: Decrease in Current Assets and Increase in Current Liabilities:
Bills Receivable 15,000
Creditors 50,000 65,000
Less: Increase in Current Assets and Decrease in Current Liabilities: 8,35,000
Debtors 30,000
Prepaid Expenses 1,000
Bills Payable 20,000 61,000
Cash Flow from Operating Activities 7,74,000
Question 27. The following is the Statement of Profit and Loss of Yamuna Ltd.:
STATEMENT OF PROFIT AND LOSS OF YAMUNA LTD. for the year ended 31st March, 2019
Particulars (Rs)
I.Revenue from Operations 10,00,000
II.Expenses:
(a) Cost of Materials Consumed 50,000
(b) Purchase of Stock-in-Trade 5,00,000
(c) Other Expenses 3,00,000
III.Profit before Tax (I-II) 1,50,000

1. Trade Receivables decrease by 30,000 during the year.
2. Prepaid expenses increase by 5,000 during the year.
3. Trade Payables increase by 15,000 during the year.
4. Outstanding Expenses increased by 3,000 during the year.
5. Other expenses included depreciation of 25,000.
Compute Cash Flow from Operating Activities for the year ended 31st March, 2019. (NCERT, Modified)
Question 28. From the following information. Calculate Cash Flow from Operating Activities:
Statement of Profit and loss for the year ended 31st march 2019
Particular Note No Rs
l Revenue from Operation (Net Sales) 19,20,000
ll. Other Income 1 28,800
lll. Total Revenue (1+II) 19,48,000
lV. Expenses:
(a) Purchase of Stock-in-Trade 11,90,400
(b) Change in Inventories of Stock-in-Trade 49,600
(c) Depreciation and Amortization Expenses 48,000
(d) Other Expenses 2 4,75,200
V. Profit before Tax (lll-IV) 1,85,600
VI. Less: Tax 57,600
VII. Profit after Tax 1,28,000
Notes to Accounts
Particular Rs.
1. Other Income
(l) Gain on sale of furniture 24,000
(ll) Interest 4,800
28,800
2. Other expenses
(l) Selling and Distribution Expenses 1,04,000
(ll) Office Expenses 2,40,000
(lll) Loss on Sale of Machinery 1,31,200
4,75,200
Particular 31st March,2019 (Rs) 31st March, 2018 (Rs)
Inventories 1,34,400 1,84,000
Question 29. From the following particulars calculate Cash Flow Operating Activities
Particulars 31st March 2019 (Rs) 31st March 2018 (Rs)
Surplus i.e. balance in statement of profit and loss 70,000 (60,000)
10% Debentures 3,10,000 2,10,000
Trade Payables 11,75,000 75,000
Cash and Cash Equivalents 1,30,000 90,000
Goodwill 80,000 1,00,000
Machinery 4,60,000 5,00,000
10% Non-current Investments 1,60,000 60,000
Inventories 2,45,000 60,000
Provision for Doubtful debts 1,50,000 1,00,000
Discount of Issue of Debentures ---- 10,000

Question 30.Calculate Cash Flow from Operating Activities from the following information:
Particulars Opening Balance Closing Balance

Rs Rs
Surplus, i.e., Balance in Statement of Profit and Loss 30,000 35,000
General Reserve 10,000 15,000
Provision for Depreciation on Plant 30,000 35,000
Goodwill 20,000 10,000
Trade Receivables (Sundry Debtors) 40,000 35,000
An item of plant costing Rs 20,000 having book value of Rs 14,000 was sold for Rs 18,000 during the year.
Question 31. From the following information, calculate Cash Flow from Operating Activities:
STATEMENT OF PROFIT AND LOSS for the year ended 31st March, 2018
Particulars Note No. Rs
II. Expenses:
(a) Purchase of Stock-in-Trade 15,00,000
(b) Change in Inventories of Stock-in-Trade 1 (25,000)
(c) Employees Benefit Expenses 1,50,000
(d) Depreciation and Amortisation Expenses 1,00,000
(e) Other Expenses 40,000
17,65,000
Total Expenses
(1,65,000)
III. Net Profit before tax (I – Il)
(50,000)
IV. Less: Provision for Tax
(2,15,000)
V. Profit after Tax (III - IV)
Note to Accounts
Particulars Rs
1. Change in Inventories of Stock-In-Trade
Opening Inventories 1,10,000
Less: Closing Inventories 1 35,000
(25000)
Particulars 31st March 2018 31st March 2017
Bills Receivable 30,000 40,000
Sundry Creditors 75,000 85,000
Salaries Outstanding 15,000 10,000
Question 32. X Ltd. has Machinery written down value of which on 1st April, 2018 was 8,60,000 and on 31st
March, 2019 was 9,50,000. Depreciation for the year was 40,000, In the beginning of the year, a part of
machinery was sold for Rs 25,000 which had a written down value of 20,000. Calculate Cash Flow from
Investing Activities.
Question 33. From the following information, calculate Cash Flow from Investing Activities:
Particulars Closing Opening
Balances Balances
Machinery (At cost) 4,20,000 4,00,000
Patents 1,60,000 2,80,000

Additional Information
1. During the year, a machine costing Rs 40,000 with its accumulated depreciation of Rs 24,000 was sold for 20,000.
2. Patents written off were Rs 40,000 and some patents were sold at a profit of Rs 20,000.
Question 34. From the following information, determine Cash Flow from Investing Activities of X Ltd.:
Particulars 31st March, 2019 31st March,

2018
1. Investments 5,00,000 2,50,000
2. Fixed Assets 11,90,000 8,75,000
I. Half of the investments held in the beginning of the year were sold at 10% gain (profit).
II. Depreciation on Fixed Assets was Rs 1,00,000 for the year.
III. Interest received on investments Rs 35,000.
IV. Dividend received on investments Rs 25,000.
Question 35. From the following particulars, determine Cash Flow from Investing Activities:
Purchases (Rs) Sales (Rs)
Investments 1,80,000 1,00,000
Goodwill 2,00,000 …
Machinery 4,40,000 1,50,000
Patents … 1,00,000
A. Interest received on Debentures held as an investment Rs 16,000.

B. Dividend received on Shares held as an investment Rs 20,000.
C. A plot of land was purchased out of surplus funds for investment purposes and was let out for commercial
use. Rent received was Rs 80,000.
Question36. A company had the following balances: -
Particulars Rs
Investments in the beginning of the period 34,000
Investments at the end of the period 28,000
During the year, the company sold 40% of its investments held in the beginning of period at a profit of Rs
8,400 Determine Cash Flow from Investing Activities .
Question 37. From the following information, determine Cash Flow from Investing Activities:
Liabilities 31stMarch 31stMarch Assets 31stMarch 31stMarch

2018 2017 2018 2017
Provision for Goodwill 1,00,000 1,20,000
Depreciation 30,000 10,000 Patents 1,20,000 1,00,000
on Furniture Land 1,80,000 2,00,000
(Net)
Furniture (Gross) 2,55,000 25,000
10% Investments 1,80,000 2,00,000
Accrued Interest on
10% Investments 10,000 …
1. during the year, some land was sold at profit of Rs 10,000.

2. during the year, a part of furniture costing Rs 24,000( book value Rs 13,000) sold for Rs 6,000.
3. total depreciation charged on plant and machinery during the year Rs 50,000.
4. a part of machine costing Rs 70,000( book value Rs 39,000) sold at loss of Rs 9,000.
5. Investments were sold at profit of 10% on 1st April 2017.
Question 38. From the following Balance Sheet G. Ltd as at 31st march 2019 and the additional information,
prepare Cash Flow statement:
Particulars Note no 31st march 31st march 2018

2019
Equity and liabilities
(a) Share Capital 6,00,000 5,00,000
(b) Reserves and Surplus 1 8,50,000 7,00,000
2. Current Liabilities 4,10,000 3,55,000
Total 18,60,000 15,55,000
II. ASSETS
(0) Fixed Assets—Tangible Assets 2 15,00,000 13,00,000
(b) Non-current Investments 1,00,000 50,000
2. Current Assets
( a) Trade Receivables 3 2,00,000 1,80,000
Total 18,60,000 15,55,000
Notes to Accounts
Particulars 31st march 31st march 2018

2019
1. Reserve and surplus

Surplus 2,50,000 2,00,000
General reserve 6,00,000 5,00,000
8,50,000 7,00,000
2. Fixed Assets—Tangible
Plant and Machinery (Net) 8,00,000 6,00,000
Land and Building (Net) 7,00,000 7,00,000
15,00,000 13,00,000
3. Trade Receivables
Bills Receivable 80,000 70,000
2,00,000 1,80,000
AdditionalInformation: During the year, the company sold machinery at book value for 2,00,000.
Question 39 From the following information, determine Cash Flow from Financing Activities:
Particulars 31st March, 2019 31st March, 2018

10% Debentures 1,00,000 1,50,000
Securities Premium Reserve 50,000 40,000
Bank Overdraft 2,00,000 1,50,000
Interest on Bank Overdraft 15,000 10,000
Additional Information: Interest paid on debentures 10,000.

Question 40. XYZ Ltd. provides the following information. Determine Cash Flow from Financing Activities:

10% Debentures … 1,00,000
8% Debentures 2,00,000 ----
1. Interest paid on Debentures Rs 10,000.
2. Dividend paid Rs 50,000.
3. During the year 2017-18, XYZ Ltd. issued bonus shares in the ratio of 2 : 1 by capitalising reserve.
st
Question 41. Following is the extract from Balance Sheets as at 31 March, 2019 of a company.
Current Year (Rs) Previous Year(Rs)
12% Preference Share Capital 3,00,000 5,50,000
Securities Premium Reserve 1,40,000 1,00,000
12% Debentures 4,00,000 3,00,000
1. Interim dividend on Equity Shares at the end of current year was paid @ 15%.
2. Dividend on Preference Shares was paid.
3. Preference Shares were redeemed at a premiums of 5% on 31st March, 2019.
4. Fresh shares and debentures were issued on the last date of current year.
Determine Cash Flow from Financing Activities.
Question 42. From the following information, determine Cash Flow from Investing Activities and Financing Activities:
Particulars Opening Closing

Balances Balances
Furniture (At cost) 20,000 28,000
Accumulated Depreciation on Furniture 6,000 9,000
Share Capital 1,00,000 1,40,000 15,000
Loan from Bank 25,000
Additional information: During the year, furniture costing Rs 4,000 was sold at a gain (profit) of Rs 3,000.
Depreciation on furniture charged during the year amounted to Rs 5,000.
Solution: CASH FLOW FROM FINANCING ACTIVITIES
Particulars Rs
Proceeds from Issue of Share Capital (Given) (Rs 1,40,000 -Rs 1,00,000) 40,000
Repayment of Bank Loan (Given) (Rs15,000 -Rs 25,000) (10,000)
Cash Flow from Financing Activities 30,000
CASH FLOW FROM INVESTING ACTIVITIES
Particulars Rs
Proceeds from Sale of Furniture (WN 3) 5,000
Payment for Purchase of Furniture (WN 1) 12,000
Cash Used in Investing Activities (WN 4) 7,000

Working Note: FURNITURE ACCOUNT
Particulars Rs Particulars Rs
To Balance b/d 20,000 By Bank A/c (WN 3) 5,000
To Gain (Profit) on Sale of 3,000 By Accumulated Depreciation
Furniture A/c (Statement of A/c 2,000
Profit and Loss) By Balance c/d 28,000
To Bank A/c (Balancing Figure)
(Furniture Purchased) 12,000
35,000 35,000
ACCUMULATED DEPRECIATION ACCOUNT
To Furniture A/c (Balancing 2,000 By Balance b/d 6,000
Figure) By Depreciation A/c 5,000
(Accumulated depreciation
on furniture sold)
To Balance c/d 9,000
11,000 11,000
NOTE:- Share Issue Expenses and Underwriting Commission Paid:Share Issue Expenses: Share Issue Expenses
are shown as outflow under Financing Activity, it being related to Share Capital.
Underwriting Commission: Underwriting is an agreement where by the underwriters undertake to subscribe

unsubscribed shares and/or debentures offered to the public. For undertaking to subscribe the unsubscribed
shares and/or debenture, the underwriters charge commission usually calculated on the issue price of
debentures of underwriting commission is shown as an Outflow of Cash under Financing Activities.
Question 43. From the following information, calculate Cash Flow from Financing Activities.
Particulars 31st March 2019 31st march 2018
(Rs) (Rs)
12% Preference Share Capital … 5,00,000
14% Debentures 2,50,000 …
(i) Equity Shares were issued at a premium of 20%.
(ii) 12% Preference Shares were redeemed at par.
(iii) 14% Debentures were issued at a discount of 10%
(iv) Interim dividend paid on Equity Shares 1,50,000.
(v) Interest paid on 14% Debentures 35,000.
(vi) Underwriting Commission on Equity Shares Rs 20,000
(vii) Dividend paid on Preference Shares 60,000.
Preparation of cash flow statement without adjustments

Question 44. From the following information, prepare Cash Flow Statement for the year ended 31st March, 2018:
Particulars Rs
Opening Cash Balance 10,000
Closing Cash Balance 12,000
Decrease in Trade Receivables 5,000
Increase in Trade Payables 7,000
Sale of Fixed Assets 20,000
Redemption of Debentures 50,000
Net Profit for the year before Tax 20,000

Solution: CASH FLOW STATEMENT for the year ended 31st March, 2018
Particulars Rs
(A) Cash Flow from Operating Activities
Net Profit for the year before Tax 20,000
Add: Increase in Trade Payables 7,000
Decrease in Trade Receivables 5,000 12,000
Cash Flow from Operating Activities 32,000
(B) Cash Flow from Investing Activities
Proceeds from Sale of Fixed Assets 20,000
Cash Flow from Investing Activities 20,000
(C) Cash Flow from Financing Activities
Redemption of Debentures (50,000)
Cash Used in Financing Activities ( 50,000
(D) Net Increase in Cash and Cash Equivalents (A + B + C) 2,000
Add: Cash and Cash Equivalents in the beginning of the year 10,000
(E) Cash and Cash Equivalents at the end of the year 12,000
Question 45. Following is the Balance Sheet of X Ltd. as at 31st March, 2018:
Particulars Note no 31st march 31st march

2018 2017
I EQUITY AND LIABILITIES
(a) Share Capital 25,00,000 20,00,000
Total 31,00,000 28,00,000
II. ASSETS
Fixed Assets—Tangible Assets (Land) 6,60,000 5,00,000
2. Current Assets
(a) Inventories 9,00,000 8,00,000
(c) Cash and Cash Equivalents 4,70,000 3,00,000
Total 31,80,000 28,00,000
Note to Accounts:

Prepare Cash Flow Statement.
Question 46. Prepare Cash Flow Statement from the Balance Sheet of Nirmal Baba Ltd. as at 31.3.2018:

No 2018 2017
(a) Share Capital 2,10,000 1,80,000
(b) Reserves and Surplus 1 1,32,000 24,000
Total 5,67,000 3,81,000
IL ASSETS

(a) Fixed Assets:
Tangible Assets 2,94,000 2,52,000
(b) Non-Current Investments 48,000 18,000
2. Current Assets
(a) Current-Investments (Marketable) 54,000 60,000
(b) Inventories 1,07,000 24,000
(c) Trade Receivables 40,000 17,500
(d) Cash and Cash Equivalents 24,000 9,500
Total 5,67,000 3,81,000
Note to Accounts

2018 2017
Surplus, I.e., Balance In Statement of Profit and Loss 1,32,000 24,000
Preparation of Cash Flow Statement with Adjustments
Question 47. Balance Sheet of ABC Ltd. as at 31st March, 2018 is as follows:
Particulars Note No 31st March, 31st March,

2018 2017
EQUITY AND LIABILITIES
(a) Share Capital 2,00,000 2,00,000
(b) Reserves and Surplus:
Long-term Borrowings 1 90,000 60,000
Total 4,70,000 4,28,000
II ASSETS
Fixed Assets (Tangible) 2 3,42,000 3,00,000
2. Current Assets
(a) Inventories 44,000 50,000
(b) Trade Receivables 76,800 70,000
(c) Cash and Cash Equivalents 7,200 8,000
Total 4,70,000 4,28,000
Notes to Accounts:

2018 2017
Long-term Borrowings
Loan from Z Ltd. 40,000 ---
Loan from Bank 50,000 60,000
90,000 60,000
2, Fixed Assets (Tangible)
(i) Land 60,000 40,000
(ii) Building 1,10,000 1,00,000
(iii) Machinery 2,44,000 2,14,000
Less: Accumulated Depreciation 72,000 54,000 1,72,000 1,60,000
3,42,000 1,00,000
Add. information:During the year Rs 52,000 were paid as interim dividend. Prepare Cash Flow Statement.

Question 48. From the following information, calculate Cash Flow from Operating Activities and Investing
Activities:

2017 2018
Current Assets (Trade Receivables and Inventories) 11,50,000 13,00,000
Fixed Assets (Tangible) 21,25,000 23,30,000
(i) A machine having book value of Rs 1,00,000 (Depreciation provided thereon Rs 1,62,500) was sold at
a loss of Rs20,000.
(ii) Tax paid during the year Rs 75,000.
Question 49. You are required to prepare a Cash Flow Statement (as per AS-3) for the year ended 31st March,
2019 from the following Balance Sheet as at 31st March, 2019: ABC Ltd.
BALANCE SHEET as or 31st March, 2019

No 2019 2018
I, EQUITY AND LIABILITIES
(a) Share Capital (Equity Share Capital) 6,00,000 4,00,000
(b) Reserves Surplus (Statement of Profit and Loss) 2,00,000 1,00,000
(a) Short-term Borrowings (Bank Loan) ... 10,000
(b) Trade Payables (Creditors) 45,000 60,000
(c) Short-term Provisions 1 70,000 40,000
Total 10,15,000 8,10,000
II ASSETS
(a) Fixed Assets:
(I) Tangible (Building) 6,00,000 6,00,000
(ii) Intangible (Patents) 45,000 50,000
(b) Non-current Investments 75,000 ...
2. Current Assets
(b) Trade Receivables (Debtors) 1,95,000 1,20,000
(C) Cash and Cash Equivalents (Cash) 85,000 30,000
Total 10,15,000 8,10,000
Note to Accounts

2019 2018
1.
Short-term Provisions
Provision for Taxation 70,000 40,000
Note: Dividend proposed for the year 2017-18 and 2018-19 are 60,000 and 80,000 respectively.
Additional Information: During the year 2018-19:
(i) Building costing 75,000 was purchased.

(ii) An old building, the book value of which was Rs 63,000, was sold at a loss of Rs 5,000.
(iii) Tax provided during the year was Rs 80,000.

st
Question 50. Following is the Balance Sheet of Wisben Ltd. As at 31 March 2012
Particulars Note 31st March 31stMarch

no. 2012 2011
(a) Share Capital 7,00,000 6,00,000
(Surplus, Le ., Balance in Statement of Profit and Loss)
Total 12,30,000 9,35,000
II, ASSETS
1. Non-Current Assets 11,00,000 8,00,000
Fixed Assets:
Tangible Assets 70,000 60,000
2. Current Assets 32,000 40,000
(C) Cash and Cash Equivalents
Total
Additional Information: During the year a piece of machinery of the book value of 80,000 was sold for 65,000.
Depreciation provided on tangible assets during the year amounted to Rs 2,00,000. Prepare the Cash Flow
Statement. (DELHI 2013)
Question 51. Following is the Balance Sheet of K.K. Ltd. as at 31st March, 2015:
BALANCE SHEET as on 31st March,2015
Particulars Note No. 31st March, 31st March,
2015 2014
I. EQUITY AND LIABIUTIES
(a) Share Capital 10,00,000 8,00,000
(b) Reserves and Surplus 1 4,00,000 (1,00,000)
(a) Short-term Borrowings 3 3,00,000 1,00,000
(b) Short-term Provisions 4 1,40,000 1,80,000
Total 27,40,000 19,80,000
II ASSETS
(a) Fixed Assets:
(I) Tangible Assets 5 20,06,000 14,40,000
(II) Intangible Assets 6 40,000 60,000
(b) Non-current Investments 2,00,000 1,50,000
2. Current Assets
(a) Current investments 1,00,000 1,20,000
(b) Inventories 7 2,14,000 90,000
Total 27,40,000 19,80,000

Notes to Accounts:
Particulars 31st March 31st march

2015 2014
12% Debentures 9,00,000 10,00,000
3. Short-term Borrowings
Bank Overdraft 3,00,000 1,00,000
4. Short-term Provisions
Provision for Tax 1,40,000 1,80,000
5. Tangible Assets
Machinery 24,06,000 16,42,000
Less: Accumulated Depreciation 4,00,000 2,02,000
20,06,000 14,40,000
6. Intangible Assets
Goodwill 40,000 60,000
7. Inventories
2,14,000 90,000
Stock in Trade
(i) 12% Debentures were redeemed on 31st March, 2015.
(ii) Tax 1,40,000 was paid during the year. Prepare Cash Flow Statement.
Solution: CASH FLOW STATEMENT for the ended 31st March, 2015
Particulars Rs Rs
I. Cash Flow from Operating Activities
Closing Balance as per Surplus, i.e., Balance in Statement of Profit and
Loss 4,00,000
Less: Opening Balance as per Statement of Profit and Loss (Loss) 1,00,000
5,00,000
Add: Provision for Tax (WN 1) 1,00,000
Net Profit before Tax and Extraordinary Items 6,00,000
Add: Non-cash and Non-operating Expenses:
Depreciation 1,98,000
Interest on 12% Debentures 1,20,000
Goodwill written off 20,000 3,38,000
Operating Profit before Working Capital changes 9,38,000
Less: Increase in Current Assets:
Inventories 1,24,000
Cash Profit before Tax and Extraordinary Items 8,14,000
Less: Payment of Tax 1,14,000
II. Cash Flow from Investing Activities
Payment for purchase of Machinery 7,64,000
Purchase of Non-current Investments 50,000
Cash Used in investing Activities 8,14,000
III. Cash Flow from Financing Activities
Proceeds from Issue of Share Capital 2,00,000
Repayment of Long-term Borrowings (12 % Debentures) 1,00,000
Payment of Interest on 12% Debentures 1,20,000
Increase in Bank Overdraft 2,00,000
Cash Flow from Financing Activities 1,80,000
IV. Net Increase In Cash and Cash Equivalents(I + II +III) 40,000
Add: Opening Balance of Cash and Cash Equivalents 2,40,000
(Cash and Cash Equivalents + Current Investments)
V. Closing Balance of Cash and Cash Equivalents 2,80,000
(Cash and Cash Equivalents + Current Invests)

Working Note:PROVISION FOR TAX ACCOUNT
To Bank A/c (Tax Paid) 1,40,000 By Balance b/d 1,80,000
To Balance c/d 1,40,000 By Statement of Profit and Loss 1,00,000
(Provision made) (Balancing Figure)
2,80,000 2,80,000
Question 52. Following is the Balance Sheet of R.S. Ltd. as at 31st March, 2016:

Particulars Note 31st March 31st March
No. 2016 2015
(a) Share Capital 9,00,000 7,00,000
(a) Short-term Borrowings 1,50,000 75,000
(b) Short-term Provisions 2,00,000 1,25,000
Total 19,50,000 13,50,000
II. ASSETS
(a) Fixed Assets:
(i) Tangible 14,65,000 9,15,000
(ii) Intangible 1,00,000 1,50,000
(b) Non-current Investments 1,50,000 1,00,000
2. Current Assets
(a)Current Investments 40,000 70,000
(b) Inventories 1,22,000 72,000
(c) Cash and Cash Equivalents 73,000 43,000
Total 19,50,000 13,50,000
Notes to Accounts

2016 2015
12% Debentures 4,50,000 3,50,000
3. Short-term Borrowings
Bank Overdraft 1,50,000 75,000
Provision for Tax 2,00,000 1,25,000
5. Tangible Assets
Machinery 16,75,000 10,55,000
Accumulated Depreciation . 2,10,000 1,40,000
14,65,000 9,15,000
Goodwill 1,00,000 1,50,000
7. Inventories
Stock-in-Trade 1,22,000 72,000
(i) Rs 1,00,000, 12% Debentures were issued on 31st March, 2016.

(ii) During the year a piece of machinery costing Rs 80,000 on which accumulated depreciation was
Rs 40,000 was sold at a loss of Rs 10,000. Prepare a Cash Flow Statement. (delhi 2017, modified)

Solution: CASH FLOW STATEMENT for the year ended 31st March, 2016
Particulars Rs Rs
I. Cash Flow from Operating Activities
Net Profit before Tax and Extraordinary Items (WN 1) 3,50,000
Add: Non-cash and Non-operating Charges:
Goodwill amortised 50,000
Depreciation on Machinery 1,10,000
Interest on Debentures (3,50,000 x 12/100) 42,000
Loss on Sale of Machinery 10,000
Operating Profit before Working Capital Changes 5,62,000
Less: Increase in Current Assets:
Inventories 50,000
Cash Generated from Operations 5,12,000
Less: Income Tax Paid 1,25,000
II. Cash Flow from Investing Activities
Purchase of Machinery (WN 2) 7,00,000
Sale of Machinery 30,000
Purchase of Non-current Investments 50,000
Cash Used in Investing Activities 7,20,000
III. Cash Flow from Financing Activities
Proceeds from Issue of Shares 2,00,000
Proceeds from Issue of 12% Debentures 1,00,000
Interest on Debentures Paid 42,000
Bank overdraft (Raised) 75,000
Cash Flow from Financing Activities 3,33,000
IV. Net Increase in Cash and Cash Equivalents (I +II+ III)
Add: Opening Balance of Cash and Cash Equivalents:
Current Investments 70,000
Cash and Cash Equivalents 41,000 1,13,000
VI. Closing Balance of Cash and Cash Equivalents:
Current Investments 40,000
Cash and Cash Equivalents 71,000 1,13,000
Working Notes:
1. Calculation of Net Profit before Tax and Extraordinary items: 2,50,000

Closing Balance of Surplus, i.e., Balance in Statement of Profit and Loss 1,00,000
Less: Opening Balance of Surplus, i.e., Balance in Statement of Profit and Loss 1,50,000
Add: Provision for Tax 2,00,000
Net Profit before Tax and Extraordinary Items 3,50,000
MACHINERY ACCOUNT
To Balance b/d 10,55,000 By Bank A/c 30,000
To Bank A/c (Purchase)—Balancing 7,00,000 By Loss on Sale of Machinery A/c 10,000
Figure (Statement of Profit and Loss)
By Accumulated Depreciation A/c By 40,000
Balance c/d 16,75,000
17,55,000 17,55,000
ACCUMULATED DEPRECIATION ACCOUNT
To Machinery A/c 40,000 By Balance b/d 1,40,000
To Balance c/d 2,10,000 By Statement of Profit and Loss 1,10,000
(Depreciation)—Balancing Figure
2,50,000 2,50,000

Question 53. From the following Balance Sheet of I Ltd. as at 31st March, 2018, prepare Cash Flow Statement:
Particulars Note No 31st march 31st march

2018 2017
I. EQUITY ANDLIABILITIES
1. Shareholders ‘Funds
(a) Share Capital 1 4,50,000 4,50,000
(b) Reserves and Surplus 2 1,86,000 (12,000)
Long-term Borrowings (8% Debentures) 1,56,000 90,000
(a) Short-term Borrowings (8% Bank Loan) 24,000 30,000
(b) Trade Payables 72,000 66,000
(c) Short-term Provisions 3 30,000 24,000
Total 9,18,000 6,48,000
II. ASSETS
1.Non-Current Assets 5,16,000 3,72,000
(a) Fixed Assets: 9,000 24,000
(I) Tangible Assets (Net) 75,000 48,000
(II) Intangible Assets (Goodwill)
2. Current Assets 1,17,000 60,000
(a) Current Investments 1,20,000 1,20,000
(b) Inventories 78,000 15,000
(c) Trade Receivables 9,18,000 6,48,000
(d) Cash and Cash Equivalents
Total
Notes to Accounts
Particulars 31st march 31st march

2018 2017
1. Share Capital
Preference Share Capital 1,20,000 1,80,000
4,50,000 4,50,000
Securities Premium Reserve 6,000 ...
90,000 (84,000)
Surplus, i.e., Balance in Statement of Profit and Loss
1,86,000 12,000
3.
Short-term Provisions 30,000 24,000
Provision for Tax
(i) During the year a piece of machinery costing 36,000 on which depreciation charged was 12,000 was
sold for Rs 12,000. Depredation provided on Tangible Assets Rs 36,000.
(ii) Income Tax Rs 27,000 was provided.
(iii) Additional Debentures were issued at par on 1st October, 2017 and Bank Loan was repaid on the
same date.
(iv) The shareholders approved the redemption of 10% Preference Shares of Rs 60,000 at a premium of
5% at their Annual General Meeting held on 20th September, 2017, although the terms of issue did
not provide for redemption at a premium. Accordingly, the shares were redeemed.

Question 54. From the flowing Balance Sheet and information of XYZ Ltd , prepare Cash Flow Statement;
Particulars Note no 31st March 31st March

2018 2017
I.EQUITY AND LIABILITIES
Shareholders' Funds
(a) Share Capital 1 4,50,000 5,00,000
Long-term Borrowings: 10% Debentures 2,00,000 1,00,000
(a) Trade Payables 1,33,000 46,000
(b) Other Current Liabilities 3 5,000 10,000
(c) Short-term Provisions (Provision for Tax) 12,000 24,000
Total 10,55,000 7,80,000
II. ASSETS
(a) Fixed Assets (Tangible) 4 6,20,000 5,10,000
(b) 10% Investments 80,000 30,000
2. Current Assets
(a) Current Investments 10,000 8,000
(b) Inventories 90,000 1,00,000
(C) Trade Receivables 1,85,000 90,000
(d) Cash and Cash Equivalents 70,000 42,000
Total 10,55,000 7,80,000
Notes to Accounts

2018 2017
1. Share Capital
12% Preference Share Capital 1,00.000 2,00,000
4,50,000 5,00,000
Securities Premium Reserve 5,000 ...
Surplus, Le., Balance in Statement of Profit and Loss 2,50,000 1,00,000
2,55,000 1,00,000
3. Other Current Liabilities
Premium on Redemption of Preference Shares 5,000 10,000
Less: Provision for Doubtful Debts 15,000 10,000
1,85,000 90,000
You are informed that during the year:
i. A machine with a book value of Rs 40,000 was sold for Rs 25,000
ii. Depreciation charged during the year was Rs 70,000.

st
iii. Preference shares were redeemed on 31 December 2017 at a premium of 5%.
st
Iv. An interim dividend @15% was paid on equity shares on 31 January 2018.
st
v. Dividend @ 12% was proposed on preference shares for the year ended on 31 March 2018 on Rs 1,00,000
and for the year ended on 31st march 2017 on Rs 2,00,000.
st
vi. Fresh equity shares were issued at a premium of 10% on 31 March 2018.

Question 55. Balance Sheet of XYZ Ltd. as at 31st March, 2019 is:

2019 2018
(a) Share Capital 4,50,000 4,50,000
Long-term Borrowings: Mortgage Loan 2,70,000 …
(a) Trade Payables 1,34,000 1,68,000
(b) Short-term Provisions: Provision for Tax 10,000 75,000
Total 12,42,000 10,49,000
II. ASSETS
(a) Fixed Assets (Tangible) 3,20,000 4,00,000
2. Current Assets
(a) Current Investments 17,000 19,000
(b) Inventories 2,10,000 2,40,000
(d) Cash and Cash Equivalents 1,80,000 1,30,000
Total 12,42,000 10,49,000
Notes to Account
Particulars 31st march 2019 31st march 2018

3,78,000 3,56,000
1. Investments costing 8,000 were sold during the year for 8,500
2. Provision for tax made during the year was 9,000
3. During the year part of the fixed assets costing 10,000 was sold for 12,000 and the gain (profit) was
included in the statement profit and loss.
4. Interim Dividend paid during the year amounted to 40,000.
Prepare Cash Flow Statement.
Question 56. Following is the BALANCE SHEET OF THERMAL POWER LTD, as at 31st March,2014

2014 2013
(a) Share Capital 12,00,000 11,00,000
(a) Trade Payables 1,79,000 2,04,000
(b) Short-term Provisions 50,000 77,000
Total 19,69,000 17,51,000
II. ASSETS
Fixed Assets:
(i) Tangible Assets 2 10,70,000 8,50,000

(ii) Intangible Assets 3 40,000 1,12,000

2. Current Assets
(a) Current Investments 2,40,000 1,50,000
(b) Inventories 1,29,000 1,21,000
(d) Cash and Cash Equivalents 3,20,000 3,75,000
Total 19,69,000 17,51,000
Notes to Accounts

2014 2013
2. Tangible Assets
Machinery 12,70,000 10,00,000
Less: Accumulated Depreciation (2,00,000) (1,50,000)
10,70,000 8,50,000
Goodwill 40,000 1,12,000
Additional Information;
1. During the year a piece of machinery, costing 24,000 on which accumulated depreciation was Rs 16,000 was
sold for 6,000. Prepare cash flow statement (DELHI 2015)
Question 57. From the following Balance Sheet of X Ltd. as at 31st March, 2018, prepare Cash Flow Statement.
Particulars Note 31st march 31st march

no 2018 2017
1, EQUITY AND LIABILITIES
(a) Share Capital 3,60,000 3,00,000
(Surplus, i.e., Balance In Statement of Profit and Loss)
(a) Trade Payables 2 28,000 28,000
(b) Other Current Liabilities (Outstanding Expenses) 2,000 6,000
Total 9,68,000 7,56,000
II. ASSETS
Fixed Assets:
(ii) Intangible Assets: Goodwill 10,000 20,000
2. Current Assets
(b) Trade Receivables 4 1,68,000 1,36,000
(c) Cash and Cash Equivalents:
Cash at Bank 1,16,000 1,00,000
Total 9,68,000 7,56,000
Notes to Accounts
Particulars 31st March, 2018 31st March,2017

12% Debentures 1,38,000 1,02,000
12% Public Deposits 2,40,000 1,60,000
3,78,000 2,62,000
2. Trade Payables
20,000 16,000

Creditors 8,000 12,000

Bills Payable 28,000 28,000
3. Fixed Assets—Tangible 4,40,000 3,00,000

Building 2,00,000 1,60,000
Plant 6,40,000 4,60,000
1,50,000 1,20,000
Debtors
18,000 16,000
Bills Receivable 1,68,000 1,36,000
1. Depreciation charged on Building 20,000 and Plant t 10,000.

2. Debentures of 36,000 were issued on 1st October,2017
3. Public Deposits of 80,000 were taken on 31st March, 2018.
Question 58. From following 13alance Sheet of Star Ltd. as at 31st March, 2019, prepare cash flow statement.
Particulars Note no 31st 31st March

March2019 2018
(a) Share Capital 3,50,000 3,00,000
(b) Reserves and Surplus 1 70,000 50,000
Long-term Borrowings (12% Debentures) 80,000 1,00,000
(a) Short-term Borrowings (Bank Loan) 15,000 25,000
(b) Trade Payables 1,65,000 60,000
Total 6,80,000 5,35,000
II. ASSETS
(a) Fixed Assets (Tangible) 2 4,10,000 3,00,000
(b) Non-Current Investments 40,000 50,000
2. Current Assets
(b) Trade Receivables 60,000 40,000
Total 6,80,000 5,35,000
Notes to Accounts
Particulars 31st march 2019 31st march 2018

Capital Reserve 2,000 ...
Surplus, i.e., Balance in Statement of Profit and loss 35,000 30,000
70,000 50,000
2. Fixed Assets—Tangible
Machinery (Cost) 4,70,000 3,50,000
Less: Accumulated Depreciation 60,000 50,000
4,10,000 3,00,000
Additional Information;
(1) During the Year, Machinery costing 20,000 (accumulated depreciation of 15,000) was sold for 12,000.
(2) During the year, Non-current Investments were sold at a profit of 20%, which transferred to Capital
Reserve.
(3) Debentures were redeemed at par on 1st April, 2018.
(4) Tax of 15,000 was paid during the year.

(5) Interim Dividend said during the year amount to 25,000.
Question 59. From the following Balance Sheet Himmat Ltd prepare cash flow statement.

2018 2017
L EQUITY ANDLIABILITIES
1. Shareholders Funds
(a) Share Capital 15,00,000 10,00,000
(Surplus, i.e., Balance in Statement of Profit and loss)
(a) Trade Payables 2 1,00,000 1,10,000
(b) Short-term Provisions 95,000 80,000
Total 25,45,000 19,00,000
II ASSETS
(a) Fixed Assets:
(ii) Intangible Assets: Goodwill 1,80,000 2,00,000
(b) Non-current Investment 6,00,000 ...
2. Current Assets
(a) Inventories 1,80,000 1,00,000
(c) Cash and Cash Equivalents 4 3,75,000 3,40,000
Total 25,45,000 19,90,000
Notes to Accounts

2018 2017
2,000, 10% Debentures of Rs 100 each ... 2,00,000
Bank Loan 1,00,000 .............
1,00,000 2,00,000
3. Tangible Assets
Land and Building 6,50,000 8,00,000
10,10,000 12,00,000
4. Cash and Cash Equivalents
Cash in Hand 70,000 50,000
Bank Balance 3,05,000 2,90,000
3,75,000 3,40,000
1. Contingent Liability: 31st March, 2018 31st March, 2017

2. Proposed Dividend 20% 15%
2. Income tax paid during the year includes 15,000 paid towards Distribution Tax.
3. Land and Building of book value 1,50,000 was sold at a profit of 10%.
4. The rate of depreciation on Plant and Machinery is 10%.


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12th Accounts by CA, Cma Santosh Kumar Sir

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CHAPTER’S NAME PAGE NUMBER

10. ISSUE OF DEBENTURES 174--188

11. REDEMPTION OF DEBENTURES 189--193

12. FINANCIAL STATEMENT OF COMPANY 194--221

13. ANALYSIS OF FINANCIAL STATEMENTS 222--226

14. TOOLS OF FINANCIAL STATEMENT ANALYSIS 227--240

15. RATIO ANALYSIS 241--292

16. CASH FLOW STATEMENTS 293--323

NOTE:- FOLLOW SEQUENCE GIVEN ABOVE WHILE STUDYING

1 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

CHAPTER 1. ACCOUNTING OF GST

Characteristics of Goods And Services Tax (GST)

Objective Of Goods And Services Tax (GST)

2 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

Classification OF GST :- GST in levied under following three categories:

3 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

ACCOUNTING OF GST PAID (INPUT GST):-

4 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

CHAPTER 2. ACCOUNTING FOR PARTNERSHIP FIRM– FUNDAMENTALS

Essential Elements (Main Features) of Partnership

1. There must be two or more persons.

Liabilities of partners:- subject to agreement among the partners,

Some other Important Provisions of the Partnership Act, 1932

(iv) Registration of the firm is optional and not compulsory.

5 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

(i) Name and address of the firm.

Benefits or Advantages or importance of having a Partnership Deed

(i) It facilitates functioning of the business.

(i) Interest is not allowed on Partners' Capitals

DISTRIBUTION OF PROFITS AMONG PARTNERS- PROFIT AND LOSS APPROPRIATION

Features of Profit and Loss Appropriation Account

Profit and Loss Account Profit and Loss Appropriation Account

7 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

1. LLP is subject to income tax like any other Partnership firm.

Benefits of a LLP are:

8 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

(1) Salary will be paid to Halu @ Rs. 10,000 per month.

Particulars Dr. (Rs.) Particulars Cr. (Rs.)

9 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

(i) Stock as at 31st March, 2021 was Rs. 50,000:

Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT

10 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

Interest on Y's Drawings = Rs. 1,00,000 x 10/100 x 6/12 = Rs. 5,000.

When Appropriations of profit are more than Available Profit

Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT

(i) Fixed Capital Accounts Method;

Current Account of each partner is debited with:

11 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

(iv) Transfer of any amount to Capital Account permanently.

Difference between Fixed Capital Account and Fluctuating Capital Account

Difference between Capital Account and Current Account

Basis Capital Account Current Account

12 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

Solution Profit And Loss Appropriation Account

COMPUTATION OF INTEREST ON DRAWINGS:-- Drawings mean the amount withdrawn, in cash or in

Difference between Drawings Against Profit and Drawings Against Capital

13 CONCEPTONLINECLASSES.COM MOB. 9999631597,8448322142, 0120-4225003/4/5

(i) in the beginning of the month,

Case 1. If he withdrew Rs. 6,000 in the beginning of each quarter.

Case 2. If he withdrew Rs. 6,000 at the end of each quarter.

Case 3. If he withdrew Rs. 9,000 in the middle of each quarter.