Xii Acc Kvs Ro Agra 2021-22 Term 1

Accountancy / XII (2021-22) Term-1
STUDENT SUPPORT MATERIAL
Class: XII
Subject: Accountancy
Session 2021-22
(Term – I)
KENDRIYA VIDYALAYA SANGATHAN

REGIONAL OFFICE - AGRA
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INSPIRATION
Shri C S Azad, Deputy Commissioner, KVS RO Agra
Shri M L Mishra, Asstt. Commissioner, KVS RO Agra
MENTOR
Mr. Chandra Mohan Singh
Incharge Principal
KV CRPF Rampur
CONTENT TEAM
Mr. Ajay Bahadur, PGT Commerce, KV Lalitpur
Mr. Amit Kumar, PGT Commerce, KV Talbehat
Ms. Madhubala, PGT Commerce, KV Moradabad
Ms. Anjana Mathur, PGT Commerce, KV Aligarh
Mr. Yogesh Kumar, PGT Commerce, KV No. 3 Agra Cantt.
Mr. Anshumali Srivastava, PGT Commerce, KV No. 2 Agra Cantt.
EDITING TEAM
Ms. Mamta Singh, PGT Commerce, KV No.2 Jhansi Cantt.
Ms. P Shyamala Devi, PGT Commerce, KV Sec. 24 Noida (S-1)
Mr. Ankur Goel, PGT Commerce, KV Meerut SL
Ms. Bhawna Sharma, PGT Commerce, KV Bulandshahar (S-1)
Mr. Pankaj Verma, PGT Commerce, KV Babina Cantt.
Mr. Hemant Meena, PGT Commerce, KV No. 2 Agra Cantt.
COMPILATION TEAM
Mr. Chandra Mohan Singh, Incharge Principal, KV CRPF Rampur
Mr. Ajay Garg, PGT Commerce, KV CRPF Rampur
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INDEX
S. No. Particulars Page No.
1 Syllabus for Term-1 (2021-22) 4
Accounting for Partnership Firms
2 Partnership Fundamentals 5 – 24
3 Change in Profit Sharing Ratio 25 – 39
4 Admission of a Partner 40 – 58
Accounting for Companies
5 Issue of Shares 59 – 74
Analysis of Financial Statements
6 Financial Statements of Company: 75 – 83
7 Ratio Analysis 84 - 97
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ACCOUNTANCY
CLASS XII
SYLLABUS
Session 2021-22 (Term -1)
Units Name of The Chapter/Unit Marks

Part A: UNIT: Accounting for Partnership Firms
Fundamentals
Change in Profit Sharing Ratio 18
Admission of a Partner
UNIT: Company Accounts
Issue of Shares 12
Part B: Analysis of Financial Statements
Financial Statements of a Company:
Statement of Profit & Loss and Balance Sheet in
prescribed from with major heading and sub
10
headings (as per Schedule III to the companies Act
213)
Tools of Analysis - Accounting Ratios
OR
Computerised Accounting:
10
Overview of Computerised Accounting System
Accounting Application of Electronic Spreadsheet
Total 40
Project Work (Part – 1) 10
Grand Total 50
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Accounting for Partnership Firms –

Partnership Fundamentals
Meaning of Partnership
―Partnership is the relations between two or more persons who have agreed to share the profits
of a business carried on by all or any one of them acting for all‖.
Section-4 of the Indian Partnership Act, 1932
Features of Partnership
(i) Two or more persons: There must be at least two persons to form a valid partnership. The
maximum number of partners cannot exceed the number of partners prescribed by
Companies Act, 2013 which is 50 in any business whether banking or non- banking.
(ii) Agreement: Partnership comes into existence by an agreement (either written or oral
among the partners. The written agreement among the partners is called Partnership Deed.
(iii) Existence of business and profit motive: A partnership can be formed for the purpose of
carrying on legal business with the intention of earning profits. A joint ownership of some
property by itself cannot be called a partnership.
(iv) Sharing of Profits: An agreement between the partners must be aimed at sharing the
profits. If some persons join hands to run some charitable activity, it will not be called
partnership. Father, if a partner is deprived of his right to share the profits of the business,
he cannot be called as partner.
(v) Business carried on by all or any of them acting for all: It means that each partner can
participate in the conduct of business and each partner is bound by the acts of other
partners in respect to the business of the firm.
(vi) Relationship of Principal and Agent: Each partner is an agent ad well as a partner of the
firm. An agent, because he can bind the other partners by his acts and principal, because
he himself can be bound by the acts of the other partners.
Partnership Deed
Since partnership is the outcome of an agreement, it is essential that there must be some terms
and conditions agreed upon by all the partners. Such terms and conditions may be either
written or oral. The law does not make it compulsory to have a written agreement. However, in
order to avoid all misunderstandings and disputes, it is always the best course to have a written
agreement duly signed and registered under the Act.
The partnership deed is a written agreement among the partners which contains the terms of
agreement. It is also called ‗Articles of Partnership‘. A partnership deed should contain the
following points:
(i) Name and address of the firm as well as partners.
(ii) Name and addresses of the partners.
(iii) Nature and place of the business.
(iv) Duration, if any of partnership.
(v) Capital contribution by each partner.
(vi) Interest on capital.
(vii) Drawings and interest on drawings.
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(viii) Profit sharing ratio.

(ix) Interest on loan.
(x) Partner‘s Salary/commission etc.
Benefits of Partnership Deed
(i) It regulates the rights, duties and liabilities of each partner.

(ii) It helps to avoid any misunderstanding amongst the partners because all the terms and
conditions of partnership have been laid down beforehand in the deed.
(iii) Any dispute amongst the partners may be settled easily as the partnership deed may be
Hence, it is always best course to have a written partnership deed duly signed by all the
partners and registered under the Act.
Rules applicable in the absence of partnership deed
Profit sharing Ratio Equal, Irrespective of capital contribution.
Interest on Capital No Interest on Capital is to be allowed to any Partner
Interest on Drawings No interest on Drawings is to be charged to any partner
Salary or Commission to a Partner Not allowed to any partner
Interest on loan by a Partner Interest is allowed @ 6% per annum.
Distribution of Profits among Partners
Transactions of the partnership firm are recorded according to the principles of Double-entry
book keeping system, and as in the case of a sole proprietorship concern a partnership firm will
also prepare Trading account, Profit & Loss account and Balance Sheet at the end of every year.
The only difference between accounting of a sole trader and partnership firm is that the profits
of the partnership firm are divided amongst the partners.
A Profit and Loss Appropriation Account is prepared to show the distribution of profits among
partners as per the provision of Partnership Deed (or as per the provision of Indian Partnership
Act, 1932 in the absence of Partnership Deed). It is an extension of profit and Loss Account. It is
nominal account. It records entries for interest on capital, Interest on Drawings, Salary to the
partner, and division of profits among the partners.
The Journal Entries regarding Profit and Loss Appropriation Account are as follows:
(i) For transfer of balance of Profit and Loss Account
Profit and Loss A/C Dr.

To Profit and Loss Appropriation A/c
(ii) For Interest on Capital
For allowing Interest on Capital:
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Interest on Capital A/c Dr.

To Partner‘s Capital/Current A/c
(Being interest on capital allowed @ % p.a.)
For transferring Interest on Capital to P & L Appropriation A/c
Profit and Loss Appropriation A/C Dr.

To Interest on Capital A/c
(Being interest on capital transferred to P & L Appropriation A/c)
(iii) For Salary or Commission payable to a partner
For allowing Salary or Commission to a partner:
Partners Salary/Commission A/C Dr.

To Partner‘s Capital/Current A/c
(Being salary/commission payable to a partner)
For transferring Partner‘s Salary/Commission A/c to Profit and Loss Appropriation A/c:

To Partner‘s Salary/Commission A/c
(iv) For transfer of Reserves:

To Reserve A/c
(Being reserve created)
(v) For Interest on Drawings:
For charging interest on a partner‘s drawings:

Partner‘s Capital/Current A/C. Dr.
To Interest on Drawings A/c
(Being interest on drawings charged @ % p.a.)
For transferring interest on drawings to Profit and Loss Appropriation A/c

Interest on Drawings A/C Dr.
To Profit and Loss Appropriation A/c
(Being interest on drawings transferred to P&L appropriation A/c)
(vi) For transfer to Profit (i.e. Credit Balance of Profit and Loss Appropriation Account

To Partners Capital/Current A/c
(Being profits distributed among partners)
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Profit and Loss Appropriations A/C

for the year ending on ___________________
Particulars ` Particulars `
To Interest on Capital: By Profit and Loss A/c

A (Net Profits transferred from P &
B L A/c)
To Partner‘s Salary/Commission By Interest on drawings:
A A
B B
To Reserves
To Profits transferred to capital
A/cs of:
A
B
Partner’s Capital Accounts
Partner’s Capital Accounts: It is an account which represents the partners‘ interest in the
business.
In case of partnership business, a separate capital account is maintained for each partner. The
capital accounts of partners may be maintained by any of the following two methods.
(i) Fixed Capital Accounts

(ii) Fluctuating Capital Accounts
Fixed Capital Accounts
Under this method the original capitals invested by the partners remain constant, unless
additional capital is introduced by an agreement. All entries relating to drawings, interest on
capitals, interest on drawings, salary to partner, share of profits/losses are made in separate
account which is called as Current Account. Thus the following two accounts are maintained
when capitals are fixed.
Capital Account: This account will always show a credit balance: Balance of Capital account
remains fixed, it does not change every year that is why it is called fixed capital method and only
the following two transactions are recorded in the Fixed Capital Accounts:
(i) Permanent Additional Capital Introduced
(ii) ·Permanent Capital Withdrawn or Drawings out of Capital only
Partner’s Capital A/Cs
Particulars X(Rs.) Y(Rs.) Particulars X(Rs.) Y(Rs.)
To Cash/Bank A/c By Balance b/d

(Capital Withdrawn) (Opening Cr. Balance)
To Balance c/d By Cash/Bank A/c
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(Closing balance) (Additional Capital

Introduced)
Current Account: The Current account may show a debit or credit balance. All the usual
adjustments such as interest on Capital, partner‘s salary/commission, drawings (out of profits),
interest on drawings and share in profits or losses etc. are recorded in this account. All the
Current Year‘s adjustments are recorded in this account that is why it is called Current account.
Partner’s Current A/Cs.
To Balance b/d
(Opening Dr. Balance)
By Balance b/d
To Drawings (out of
(Opening Cr. Balance)
Profits)
By Interest on Capital
To Interest on
By Partner‘s Salary or
Drawings
Commission
To Profit and Loss
By Profit and Loss App.
A/c (Share in
A/c (Share in Profits)
losses)
By Balance c/d
To Balance c/d
(Closing Dr. Balance)
(Closing credit
Balance)
Note:
(i) Debit balance of Current Account is shown in Assets side of Balance Sheet.
(ii) Credits balance of Current Account A/c is shown in Liabilities side of balance Sheet.
(iii) Balance of Fixed Capital Accounts are always shown in Liabilities side of Balance Sheet as
it will be always be credit balance.
Fluctuating Capital Account
In this method only one account i.e., Capital Account of each and every partner is prepared and
all the adjustment such as interest on capital interest on drawings etc, are recorded in this
account under this method, Capital account may show a debit or credit balance and the balance
of this account changes frequently from time to time therefore it is called fluctuating Capital
Account. In this method the capitals are not fixed.
In the absence of information, the Capital Accounts should be prepared by this method.
Partner’s Capital
To Balance b/d By Balance b/d
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(Opening Dr. Balance) (Opening Cr. Balance)

To Cash/Bank A/c By Cash/Bank A/c
(Capital Withdrawn) (Additional Capital
To Drawings Introduced)
(out of profits) By Interest on Capital
To Interest on Drawings By Partner‘s Salary or
To Profit and Loss A/c Commission
(Share in losses) By Profit and Loss
To Balance c/d Appropriation A/c
(Closing credit Balance) (Share in Profits)
By Balance c/d
(Closing Dr. Balance)
INTEREST ON CAPITAL
Interest on partners‘ capital will be allowed only when it has been specifically mentioned in the
partnership deed. If interest on capital is to be allowed as per the agreement, it should be
calculated with respect to the time, rate of interest and the amount of capital. Interest on Capital
can be treated as either:
a. An Appropriation of profit; or
b. A charge against profit.
A. Interest on Capital: An Appropriation of Profits:
In case of Losses Interest on Capital is NOT ALLOWED
In cases of Sufficient
Interest on Capital is ALLOWED IN FULL
Profits
In case of Insufficient Interest will be restricted to the amount of profit. Hence, profit will be
Profits distributed in the ratio of interest on capital of each partner.
B. Interest on Capital: As a Charge against Profits:

Interest on Capital is always allowed in full irrespective of amount of profits of losses.
Note:
Interest on Capital is always calculated on the OPENING CAPITAL.
Il‘ Opening Capital is not given in the question; it should be ascertained as follows:
Particulars (Rs.)
Capital at the End xxx

Add: 1. Drawing xxx
2. Interest on Drawings xxx
3. Losses during the year xxx
Less: 1. Additional Capital Introduced (xxx)
2. Profits during the year (xxx) xxx
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3. Any salary/commission received

Opening Capital ……………
INTEREST ON DRAWINGS
Interest on drawing is charged by the firm only when it is clearly mentioned in Partnership
Deed. It is calculated with reference to the time period for which the money was withdrawn.
There are two cases in which calculation of interest on drawings may arise:
Case 1: When Rate of Interest on Drawings is given in % p.a.
1. When date of Drawing is not given
Interest on Drawing =
Note: Interest is calculated for a period of 6 months, we assume drawings have been done evenly
during the year, that is why we take average six months tenure.
2. When date of Drawings is given
Interest on Drawing =
Case 2: When different amount are withdrawn on different dates:

We have the following two methods to calculate the amount of interest on Drawing:
1. Simple Interest Method

In this method, interest on drawing is calculated for each amount of drawing individually on the
basis of periods for which it remained withdrawn till the close of accounting period.
2. Product Method
In this method, the amounts of drawings are multiplied by the period for which it remained
withdrawn during the period; Thereafter the products are added and interest is calculated on
the total of products so arrived at for one month. The advantage of this system is that separate
calculations are not required each time.
We can explain the above mentioned two methods with the help of an example.
Month Date Drawings Amount
May 1 12000
July 31 6000
September 30 9000
November 30 12000
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Month Date Drawings Amount
January 1 8000
March 31 7000
Interest on drawings is to be charged @ 9% p.a.
SIMPLE METHOD
DATE AMOUNT PERIOD INTEREST @9%
1 MAY 12000 11 990
31 JULY 6000 8 360
30 SEP 9000 6 405
30 NOV 12000 4 360
1 JAN 8000 3 180
31 MAR 7000 0 00
TOTAL 54000 2295
PRODUCT METHOD
DATE AMOUNT PERIOD PRODUCTS
1 MAY 12000 11 132000
31 JULY 6000 8 48000
30 SEP 9000 6 54000
30 NOV 12000 4 48000
1 JAN 8000 3 24000
31 MAR 7000 0 00
TOTAL 54000 306000
Interest = Total of products * 9/100* 1/12= 306000*9/100*1/12 = Rs 2295/-.
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Case 3: When an equal amount is withdrawn regularly
Interest on Drawing can be calculated using either Product Method or Direct Method (i.e. Short
Cut Method)
Direct Method will be used only if all the following three conditions are satisfied:
1. Amount should be same throughout the period

2. Date of Drawings should be same throughout the period
3. Drawings should be made regularly without any gap.
4. Interest on Drawing =
T = Time (in months) for which interest is to be
charged
Value of T under Different circumstances will be as under:
Quarterly Monthly Drawings

Monthly Drawings Half yearly Drawings
Drawings for 12 for 06 Months (last 6
for 12 Months for 12 Months
Months months)
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7.5 (beginning of every
3.5(beginning of the
6.5(beginning of (beginning of month for six month
month for last six
the month) every quarter) in the beginning of 6
month)
months)
6
middle of every
3(middle of the
6(middle of very 6(middle of every month for six month
month for last six
month) quarter) in the beginning of 6
month)
months)
3 (end of every
5.5( end of every 4.5(end of every month for six month 2.5(end of the month
month) quitter) in the beginning of 6 for last six month)
months)
INTEREST ON PARTNERS LOAN
If a partner has given loan to the firm, he is entitled to receive interest on such loan at an agreed
rate.
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It is a charge against profits. It is provided irrespective of profits or loss. It will also be

provided in the absence of Partnership Deed @ 6% per annum.
The following entries are passed to record the interest on partner‘s loan
(i) For allowing Interest on loan:
Interest on Partner‘s Loan A/c Dr.

To Partner‘s Loan A/c
(Being interest on loan allowed @ % p.a.)
(ii) For transferring Interest on Loan to Profit and Loss A/c:
Profit and Loss A/c Dr.

To Interest on Loan A/c
(Being Interest on loan transferred to P & L A/c)
It is always DEBITED to Profit and Loss A/c
Rent Paid to Partner: Rent paid to a partner is also a charge against profits and it will also be
DEBITED to Profit and Loss A/c.
Note:
Interest on A‘s Loan =
= =Rs. 5,000
PAST ADJUSTMENTS
If, after preparation of Final Accounts of firm, it is found that some errors or commission in
accounts has occurred than such errors or omissions are rectified in the next year by passing an
adjustment entry.
A statement is prepared to ascertain the net effect of such errors or omissions on partner‘s
capital/current accounts in the following manner.
Statement showing adjustment
Particulars A (`) B (`) C (`)
A Amount to be given credited

Interest on Capital
(Not allowed or provided at a lower rate)
Partner‘s Salary or Commission etc.
(Omitted to be recorded)
Actual Profits
(To be distributed in correct ratio)
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Total A
B. Amount already given to be taken back now debited

* Interest on Capital (If given at a higher rate)
* Interest on Drawings (If not charged)
* Profits already distributed in wrong ratio (debited now)
Total B
Net Effect (A - B) +/- +/- +/-
+ Indicates Amount to be credited to Partner’s Capital Account – Indicates Amount to be

Debited to Partners Capital Account
Journal
Particulars LF. Debit(`) Debit(`)

Date
Partners‘ Capital A/C Dr. (Amount to be Debited)

To Partners‘ Capital A/c (Amount to be Credited)
(Being adjustment entry passed)
During Past Adjustment it is not compulsory that capital accounts of all partners are affected.
More than one partners Capital Account may be debited or credited but amount of debit & credit
should be equal.
GUARANTEE OF PROFITS TO A PARTNER
Guarantee is an assurance given to the partner of the firm that at least a fixed amount shall be
given to him/her irrespective of his/her actual share in profits of the firm. If actual share in
profits is less than the guaranteed amount in that case the deficit amount shall be borne either
by the firm or by any partner as the case may be or as may have been decided bay an
agreement.
Note:
Guarantee to a partner is given for minimum share in profits. If the actual share in profits is
more than the minimum share in profits, then the actual profits will be allowed to the partner.
Case: 1. When guarantee is given by FIRM (i.e. by all the Partners of the firm)
(i) If share in actual profits is less than the guaranteed amount then. Guaranteed
amount to a partner is first written off against the profits and then,
(ii) Remaining profits are distributed among the remaining partners in the remaining
ratio.
Case: 2. When guarantee is given by a partner or partners to another partner.

(i) Calculate the share in profits for the partner to whom guarantee is given.
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(ii) If share in profits is more than the guaranteed amount, distribute the profit as per
the profit and loss sharing ratio in usual manner.
(iii) If share in profits is less than the guaranteed amount, find the difference between
the share in profits and the guaranteed amount and the difference known as
deficiency.
Deficiency is contributed by the partner or partners who guaranteed in certain
ratio and subtracted from his or their respective shares.
MCQs:
Q1. Sirya and Riya are partners sharing profits and losses in the ratio 4 : 1. Mariya was
manager who received the salary of ` 4,000 p.m. in addition to a commission of 5% on net
profits after charging such commission. Profit for the year is ` 6,78,000 before charging salary.
Find the total remuneration of Mariya.
(A) ` 78,000
(B) ` 88,000
(C) ` 87,000
(D) ` 76,000
ANS: A
Q2. In a partnership firm, partner A is entitled a monthly salary of ` 7,500. At the end of the
year, firm earned a profit of ` 75,000 after charging T‘s salary. If the manager is entitled a
commission of 10% on the net profit after charging his commission, Manager‘s commission will
be:
(A) ` 7,5000
(B) ` 16,500
(C) ` 8,250
(D) ` 15,000
ANS: D
Q3. A, B and C are partners sharing profits and losses equally. Their capital balances on March,
31, 2012 are ` 80,000, ` 60,000 and ` ₹40,000 respectively. Their personal assets are worth as
follows : A— ` 20,000, B— ` ₹15,000 and C — ` 10,000. The extent of their liability in the firm
would be :
(A) A — ` 80,000 : B — ` 60,000 : and C —` 40,000
(B) A — ` 20,000 : B — ` 15,000 : and C — ` 10,000
(C) A — ` 1,00,000 : B — ` 75,000 : and C — ` ₹50,000
(D) Equal
ANS: B
Q4. X and Y are partners in a partnership firm without any agreement. A has withdrawn? `
50,000 out of his Capital as drawings. Interest on drawings may be charged from A by the firm:
(A) @ 5% Per Annum
(B) @ 6% Per Annum
(C) @ 6% Per Month
(D) No interest can be charged
ANS : D
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Q5. A and B are partners in a partnership firm without any agreement. A devotes more time for
the firm as compare to B. A will get the following commission in addition to profit in the firm‘s
profit:
(A) 6% of profit
(B) 4% of profit
(C) 5% of profit
(D) None of the above
ANS: D
Q6. Following are essential elements of a partnership firm except:

(A) At least two persons
(B) There is an agreement between all partners
(C) Equal share of profits and losses
(D) Partnership agreement is for some business.
ANS: C
Q7. Features of a partnership firm are

(A) Two or more persons are carrying common business under an agreement.
(B) They are sharing profits and losses in the fixed ratio.
(C) Business is carried by all or any of them acting tor all as an agent.
(D) All of the above
ANS: D
Q8. Which of the following statement is true?

(A) a minor cannot be admitted as a partner
(B) a minor can be admitted as a partner, only into the benefits of the partnership
(C) a minor can be admitted as a partner but his rights and liabilities are same of adult partner
(D) none of the above
ANS: B
Q9. In case of partnership the act of any partner is :

(A) Binding on all partners
(B) Binding on that partner only
(C) Binding on all partners except that particular partner
(D) None of the above.
ANs: A
Q10. Ostensible partners are those who

(A) do not contribute any capital but get some share of profit for lending their name to the
business
(B) contribute very less capital but get equal profit
(C) do not contribute any capital and without having any interest in the business, lend their
name to the business
(D) contribute maximum capital of the business.
ANS: C
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Q11. Sleeping partners are those who

(A) take active part in the conduct of the business but provide no capital. However, salary is paid
to them.
(B) do not take any part in the conduct of the business but provide capital and share profits and
losses in the agreed ratio
(C) take active part in the conduct of the business but provide no capital. However, share profits
and losses in the agreed ratio.
(D) do not take any part in the conduct of the business and contribute no capital. However,
share profits and losses in the agreed ratio.
ANS: B
Q12. The relation of partner with the firm is that of:

(A) An Owner
(B) An Agent
(C) An Owner and an Agent
(D) Manager
ANS: C
Q13. What should be the minimum number of persons to form a Partnership:

(A) 2
(B) 7
(C) 10
(D) 20
ANS: A
Q14. Number of partners in a partnership firm may be:

(A) Maximum Two
(B) Maximum Ten
(C) Maximum One Hundred
(D) Maximum Fifty
ANS: D
Q15, Liability of partner is:

(A) Limited
(B) Unlimited
(C) Determined by Court
(D) Determined by Partnership Ac
ANS: B
Q16. Which one of the following is NOT an essential feature of a partnership?

(A) There must be an agreement
(B) There must be a business
(C) The business must be carried on for profits
(D) The business must be carried on by all the partners
ANS: D
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Q17. Every partner is bound to attend diligently to his in the conduct of the business.
(A) Rights
(B) Meetings
(C) Capital
(D) Duties
ANS: D
Q18. Forming a Partnership Deed is:

(A) Mandatory
(B) Mandatory in Writing
(C) Not Mandatory
(D) none of the above
ANS: C
Q19. Partnership Deed is also called.

(A) Prospectus
(B) Articles of Association
(C) Principles of Partnership
(D) Articles of Partnership
ANS: D
Q20. Which of the following is not incorporated in the Partnership Act?

(A) profit and loss are to be shared equally
(B) no interest is to be charged on capital
(C) all loans are to be charged interest @6% p.a.
(D) all drawings are to be charged interest
ANS: D
Q21. When is the Partnership Act enforced?

(A) when there is no partnership deed
(B) where there is a partnership deed but there are differences of opinion between the partners
(C) when capital contribution by the partners varies
(D) when the partner‘s salary and interest on capital are not incorporated in the partnership
deed
ANS: A
Q22. In the absence of Partnership Deed, the interest is allowed on partner‘s capital:
(A) @ 6% p.a.
(B) @ 5% p.a.
(C) @ 12% p.a.
(D) No interest is allowed
ANS: D
Q23. In the absence of a partnership deed, the allowable rate of interest on partner‘s loan
account will be :
(A) 6% Simple Interest
(B) 6% p.a. Simple Interest
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(C) 12% Simple Interest

(D) 12% Compounded Annually
ANS: B
Q24. A and B are partners in partnership firm without any agreement. A has given a loan of `
50,000 to the firm. At the end of year loss was incurred in the business. Following interest may
be paid to A by the firm:
(A) @5% Per Annum
(B) @ 6% Per Annum
(C) @ 6% Per Month
(D) As there is a loss in the business, interest can‘t be paid
ANS: B
Q25. In the absence of partnership deed, the following rule will apply:
(A) No interest on capital
(B) Profit sharing in capital ratio
(C) Profit based salary to working partner
(D) 9% p.a. interest on drawings
ANS: A
Q26. In the absence of agreement, partners are not entitled to:

(A) Salary
(B) Commission
(C) Equal share in profit
(D) Both (a) and (b)
ANS: D
Q27. Interest on capital will be paid to the partners if provided for in the partnership deed but
only out of:
(A) Profits
(B) Reserves
(C) Accumulated Profits
(D) Goodwill
ANS: A
Q28. Which one of the following items cannot be recorded in the profit and loss appropriation
account?
(A) Interest on capital
(B) Interest on drawings
(C) Rent paid to partners
(D) Partner‘s salary
ANS: C
Q29. If any loan or advance is provided by partner then, balance of such Loan Account should
be transferred to:
(A) B/S Assets side
(B) B/S Liability Side
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(C) Partner‘s Capital A/c

(D) Partner‘s Current A/c
ANS: B
Q30. A, B and C were Partners with capitals of ` 50,000; ` 40,000 and ` 30,000 respectively
carrying on business in partnership. The firm‘s reported profit for the year was ` 80,000. As per
provision of the Indian Partnership Act, 1932, find out the share of each partner in the above
amount after taking into account that no interest has been provided on an advance by A of `
20,000 in addition to his capital contribution.
(A) ` 26,267 for Partner B and C and ` 27,466 for Partner A.
(B) ` 26,667 each partner.
(C) ` 33,333 for A ` 26,667 for B and ` 20,000 for C.
(D) ` 30,000 each partner.
ANS: A
Q31. A, B, and C are partners in a firm. At the time of division of profit for the year, there was
dispute between the partners. .Profit before interest on partner‘s capital was ` 6,000 and Y
determined interest @ 24% p.a. on his loan of ` 80,000. There was no agreement on this point.
Calculate the amount payable to A, B, and C respectively.
(A) ` 2,000 to each partner.
(B) Loss of ` 4,400 for A and C; Twill take ` 14,800.
(C) ` 400 for A, ` 5,200 for Land ` 400 for C.
(D) None of the above
ANS: C
Q32. X, Y, and Z are partners in a firm. At the time of division of profit for the year, there was
dispute between the partners. Profit before interest on partner‘s capital was ` 6,00,000 and Z
demanded minimum profit of ` 5,00,000 as his financial position was not good. However, there
was no written agreement on this point.
(A) Other partners will pay Z the minimum profit and will share the loss equally.
(B) Other partners will pay Z the minimum profit and will share the loss in capital ratio.
(C) X and Y will take ` 50,000 each and Z will take ` 5,00,000.
(D) ` 2,00,000 to each of the partners.
ANS: D
Q33. On 1st June 2019, a partner introduced in the firm additional capital ` 50,000. In the
absence of partnership deed, on 31st March 2020 he will receive interest:
(A) ` 3,000
(B) Zero
(C) ` 2,500
(D) ` 1,800
ANS: B
Q34. On 1st January 2020, a partner advanced a loan of ` 1,00,000 to the firm. In the absence
of agreement, interest on loan on 31st March 2021 will be:
(A) Nil
(B) ` 1,500
21
(C) ` 3,000
(D) ` 6,000
ANS: B
Q35. A partner introduced additional capital of ₹30,000 and advanced a loan of ` 40,000 to the
firm at the beginning of the year. Partner will receive year‘s interest:
(A) ` 4,200
(B) ` 2,400
(C) Nil
(D) ` 1,800
ANS: B
Q36. In the absence of partnership deed, partners share profits or losses:

(A) In the ratio of their Capitals
(B) In the ratio decided by the court
(C) Equally
(D) In the ratio of time devoted
ANS: C
Q37. In the absence of Partnership Deed:

(A) Interest will not be charged on partner‘s drawings
(B) Interest will be charged @. 5% p.a. on partner‘s drawings
(C) Interest will be charged @ 6% p.a. on partner‘s drawings
(D) Interest will be charged @ 12% p.a. on partner‘s drawings
ANS: A
Q38. In the absence of express agreement, interest @ 6% p.a. is provided :

(A) On opening balance of partner‘s capital accounts
(B) On closing balance of partner‘s capital accounts
(C) On loan given by partners to the firm
(D) On opening balance of partner‘s current accounts
ANS: C
Q39. Which of the following items are recorded in the Profit & Loss Appropriation Account of a
partnership firm?
(A) Interest on Capital
(B) Salary to Partner
(C) Transfer to Reserve
(D) All of the above
ANS: D
Q40. Is rent paid to a partner appropriation of profits?

(A) It is appropriation of profit
(B) It is not appropriation of profit
(C) If partner‘s contribution as capital is maximum
(D) If partner is a working partner.
ANS: D
22
Q41. According to Profit and Loss Account, the net profit for the year is ` 1,50,000. The total
interest on partner‘s capital is ₹18,000 and interest on partner‘s drawings is ` 2,000. The net
profit as per Profit and Loss Appropriation Account will be:
(A) ` 1,66,000
(B) ` 1,70,000
(C) ` 1,30,000
(D) ` 1,34,000
ANS: D
Q42. According to Profit and Loss Account, the net profit for the year is ` 4,20,000. Salary of a
partner is` 5,000 per month and the commission of another partner is` 10,000. The interest on
drawings of partners is `4,000. The net profit as per Profit and Loss Appropriation Account will
be:
(A)` 3,54,000
(B)` 3,46,000
(C)` 4,09,000
(D)` 4,01,000
ANS: A
Q43. Anil and Bimal are partners. According to Profit and Loss Account, the net profit for the
year is ` 2,00,000. The total interest on partner‘s drawings is ` 1,000. Anil salary is ` 40,000 per
year and Bimal. salary is `₹3,000 per month. The net profit as per Profit and Loss Appropriation
Account will be:
(A) ` 1,23,000
(B) ` 1,25,000
(C) ` 1,56,000
(D) ` 1,58,000
ANS: B
Q44. According to Profit and Loss Account, the net profit for the year is ` 1,40,000. The total
interest on partner‘s capital is ` 8,000 and a partner is to be allowed commission of ` 5,000. The
total interest on partner‘s drawings is ` 1,200. The net profit as per Profit and Loss
Appropriation Account will be:
(A) ` 1,28,200
(B) ` 1,44,200
(C) ` 1,25,800
(D) ` 1,41,800
ANS: A
Q45. Sonam and Ankita are partners in a firm. Sarila capital is ` 70,000 and Ankita‘ Capital is `
50.000. Firm‘s profit is` 60,000. Ankita share in profit will be:
(A) ` 25,000
(B) ` 3 0,000
(C) ` 35,000
(D) ` 20,00
ANS: B
23
Q46. A, B and C are partners. A‘s capital is ` 3,00,000 and B‘s capital is `1,00,000. C has not
invested any amount as capital but he alone manages the whole business. C wants ` 30,000 p.a.
as salary. Firm earned a profit of `1,50,000. How much will be each partner‘s share of profit:
(A) A ` 60,000; B ` 60,000; C ` Nil
(B) A ` 90,000; B ` 30,000; C ` Nil
(C) A ` 40,000; B ` 40,000 and C ` 40,000
(D) A ` 50,000; B ` 50,000 and C ` 50,000
ANS: D
Q 47. Net profit of a firm is ` 49,500. Manager is entitled to a commission of 10% on profits
before charging his commission. Manager‘s Commission will be:
(A) ` 4,950
(B) ` 4,500
(C) ` 5,500
(D) ` 495
ANS: A
Q48. Net profit of a firm is ` 79,800. Manager is entitled to a commission of 5% of profits after
charging his commission. Manager‘s Commission will be:
(A) ` 4,200
(B) ` 380
(C) ` 3,990
(D) ` 3,800
ANS: D
Q49. Ram and Shyam are partners in the ratio of 3 : 2. Before profit distribution, ‗Ram is
entitled to 5% commission of the net profit (after charging such commission). Before charging
commission, firm‘s profit was ₹42,000. Shyam‘s share in profit will be:
(A) ` 16,000
(B) ` 24,000
(C) ` 26,000
(D) ` 16,400
ANS: A
Q50. A, B and C are partners in the ratio of 5 : 3 : 2. Before B‘s salary of ` 17,000 firm‘s profit is
` 97,000. How much in total B will receive from the firm?
(A) ` 17,000
(B) ` 40,000
(C) ` 24,000
(D) ` 41,000
ANS: D
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Accounting for Partnership Firms -

Change in Profit Sharing Ratio among Existing Partners
Reconstitution of a Partnership Firm

Partnership is the result of an agreement between persons for sharing the profits of a business.
Any change in the partnership agreement brings to an end the existing agreement and a new
agreement comes into force. The change in the agreement results in changes in the relationship
among the partners. In such a case, although the firm continues, it amounts to the
reconstitution of the partnership firm. Reconstitution of the firm may happen in the following
circumstances:
(i) Change in the profit-sharing ratio among the existing partners: For example, A and B
are partners in a firm sharing profits in the ratio of 2:1. In future, they decide to share
profits in the ratio of 3:1. It amounts to reconstitution of the firm.
(ii) Admission of a new partner: For example, Charu and Dinesh are partners sharing
profits equally. On April 1, 2019, they decided to admit Sudha as a new partner with
l/4th share. It results into reconstitution of the firm.
(iii) Retirement of an existing partner: For example, Babita, Gita and Sita are partners
sharing profits in the ratio of 1 : 2 : 3. Sita Retires from the firm on March 31, 2019. It
amounts to reconstitution of the firm.
(iv) Death of a Partner: For example, P, Q and R are partners In a firm sharing profits in the
ratio of 4 : 3 : 2. R dies on March 31, 2019. P and Q decide to share future profits equally.
It also amounts to reconstitution of the firm.
(v) Amalgamation of two partnership firms: For example, Λ and B are partners in a firm
sharing profits in the ratio of 2 : 1. To eliminate competition they amalgamate their firm
with the firm of C and D who are sharing profits in the ratio of 3 : 1. The new ratios for A,
B, C and D are agreed at 2 : 1 : 3 : 1. It amounts to reconstitution of the firm of A and B
on the one hand and the firm C and D on the other hand and a new reconstituted firm is
formed.
Change in Profit Sharing Ratio Among the Existing Partners

Sometimes the existing partners decide to change their profit -sharing ratio. The change is
necessitated due to the change in capital contribution or in active participation in
management. As a result of change in profit sharing ratio, one or more of the existing partners
may acquire extra share in profits at the cost of one or more of other partners. In such a case,
in order to maintain equity among the partners, it is necessary to make adjustments for
goodwill, revaluation of assets and liabilities, reserves, accumulated profits and losses etc.
These adjustments are similar to those made at the time of admission or retirement of a
partner.
Adjustments required at the time of change in the profit sharing ratio:
(i) Determination of Sacrificing Ratio and Gaining Ratio
(ii) Accounting for Goodwill
(iii) Accounting Treatment of Reserves and Accumulated Profits
(iv) Accounting for Revaluation of Assets and Liabilities
(v) Adjustment of Capitals
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Sacrificing Ratio
Whenever there is a change in the profit- sharing ratio, one or more of the existing partners
have to surrender some of their old share in favour of one or more of other partners. The ratio
of surrender of profit -sharing ratio is called sacrificing ratio. It is calculated as follows:
Sacrificing Ratio = Old Ratio - New Ratio
The purpose of calculating sacrificing ratio is to determine the amount of compensation to be
paid by the gaining partner (i.e., the partner whose share has increased as a result of change)
to the sacrificing partner (i.e., the partner whose share has decreased as a result of change).
Such compensation is usually paid on the basis of proportionate amount of goodwill.
Gaining Ratio
As a result of change in profit sharing ratio, one or more of the existing partners gain some
portion of other partner‘s share of profit. The ratio of gain of profit- sharing ratio is called
gaining ratio. It is calculated as follows:
Gaining Ratio = New Ratio - Old Ratio
Goodwill
Meaning of Goodwill
Over a period of time, a well - established business develops an advantage of good name,
reputation and wide business connections. This helps the business to earn more profits as
compared to a newly setup business. In accounting, the monetary value of such advantage is
known as ―goodwill‖.
Factors Affecting the Value of Goodwill

The main factors affecting the value of goodwill are as follows:
(i) Nature of business: A firm that produces high value added products or having as table
demand disable to earn more profits and therefore has more goodwill.
(ii) Location: If the business is centrally located or is at a place having heavy customer traffic,
the goodwill tends to be high.
(iii) Efficiency of management: A well-managed concern usually enjoys the advantage of high
productivity and cost efficiency. This leads to higher profits and so the value of good will
also be high.
(iv) Market situation: The monopoly condition or limited competition enables the concerned to
earn high profits which leads to higher value of goodwill.
(v) Special advantages: The firm that enjoys special advantages like import licenses, low rate
and assured supply of electricity, long-term contracts for supply of materials, well-known
collaborators, patents, trademarks etc. enjoy higher value of goodwill.
Need for Valuation of Goodwill
In a partnership firm, goodwill needs to be valued in the following circumstances:

(i) Change in the profit-sharing ratio amongst the existing partners;
(ii) Admission of new partner;
(iii) Retirement of a partner;
(iv) Death of a partner; and
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(v) Dissolution of a firm involving sale of business as a going concern.

(vi) Amalgamation of partnership firm
Methods of Valuation of Goodwill
1. Average Profits Method
(a) Simple Average
Stepwise procedure to calculate Goodwill under this method:

Step1: Work out profits or losses given for each of the past year after taking into
account abnormalities, if any.
Step2: Calculate average by dividing the total profit of all the years by the number of
years.
Step3: Goodwill= Average Profit x Number of year's purchase.
(b) Weighted Average
This is a better method than the simple average method. It takes into account the
importance of each year. Under this method, earlier years are less important than
the recent years. Thus, each year's profit is multiplied by its respective number
(weight) in chronological order. The latest year will be given the highest weight and
the earliest year will be given lowest weight. Each profit figure will be multiplied by
its weight and then the total of these products will be calculated. This total will be
divided by the total of weights.
Then Goodwill = Weighted average x number of years' purchase
2. Super Profit Method
Stepwise procedure to calculate Goodwill under this method:

Calculate the average profit,
(i) Calculate the normal profit on the capital employed on the basis of the normal rate
of return, Formula = Normal Profit = Capital Employed x NRR /100
(ii) Calculate the super profits by deducting normal profit from the average profits,
Formula: Super Profit = Average Profit - Normal Profit
(iii) Goodwill = Super profits x number of years 'purchase.
3. Capitalisation Method
Under this method the goodwill can be calculated in two ways: (a) by capitalizing the
average profits, or (b) by capitalizing the super profits.
(a) Capitalisation of Average Profits: This involves the following steps:

(i) As certain the average profits based on the past few years' performance.
(ii) Capitalize the average profits on the basis of the normal rate of return to
ascertain the capitalised value of average profits as follows: Average Profits x
100/Normal rate of Return
27
(iii) As certain the actual capital employed (net assets) by deducting outside
liabilities from the total assets (excluding goodwill).
(iv) Capital Employed/Net Assets = Total Assets (excluding goodwill) –
Outside Liabilities
(v) Compute the value of goodwill by deducting net assets from the
capitalised value of average profits, i.e.(ii)–(iii).
(b) Capitalisation of Super Profits: It involves the following steps.

(i) Calculate capital employed of the firm, which is equal to total assets minus
outside liabilities.
(ii) Calculate Normal profit = Capital Employed X Normal Rate of Return/100
(iii) Calculate average profit for past years, as specified.
(iii) Super profits = average profits/Actual profit - normal profits
(iv) Goodwill = Super Profits × 100/ Normal Rate of Return
Note: In other words, goodwill is the capitalised value of super profits. The amount of goodwill
worked out by this method will be exactly the same as calculated by capitalising the average
profits.
ACCOUNTING TREATMENT OF GOODWILL
GOODWIL TO BE ADJUSTED THROUGH PARTNERS’ CAPITAL/CURRENT ACCOUNTS OR

BY RAISING AND WRITING OFF GOODWILL
Treatment of existing Goodwill appearing in the Balance Sheet:

Journal entry:
Old Partners‘ Capital/Current a/c………………Dr. (In Old profit sharing ratio)

To Goodwill a/c
(Being the existing goodwill is written off)
Method 1: When goodwill is adjusted through partners’ capital /current accounts Journal
Entry:
Gaining Partners‘ Capital/ Current a/c………Dr. (in Gaining ratio)
To Sacrificing Partners 'Capital /Current a/c (in sacrificing ratio)
(Being the compensation of gaining partners to Sacrificing partners)
Method 2: When Goodwill is raised and Written off
Goodwill a/c…………………………….Dr. (Full revised value of Goodwill)

To Old Partners‘ Capital/ Current a/c (In old Profit sharing ratio)
(Being the goodwill raised and credited to Partners Capital accounts in old profit sharing
ratio)
All Partners Capital/ Current a/c ........ Dr. (In new profit sharing ratio)
(Including Incoming or new partner)
To Goodwill a/c (With value of Goodwill)
(Being the goodwill debited to Partners Capital accounts in New profit sharing ratio)
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Accounting treatment of Reserves and Accumulated profits when there is change in the
profit sharing ratio of existing partner’s
Case (i) When Reserves and Accumulated Profits/Losses are to be transferred to Capital
Accounts:
If, at the time of change in the profit sharing ratio, there are Reserves or Accumulated
profits/losses existing in the books of the firm, these should be transferred to the Partner‘s
Capital Accounts (if capitals are fluctuating) or to Current Accounts (if capitals are fixed) in their
old profit sharing ratio. The reason for such transfer is that these reserves and accumulated
profits/losses have come into existence before the change in profit sharing ratio and hence
belong to the partners in their old profit sharing ratio. Following entries are passed for this
purpose:
(i) For Transfer of Reserves and Accumulated Profits:
Reserve A/c Dr.

Profit & Loss A/c Dr.
Workmen‘s Compensation Reserve A/c Dr. (Excess of Reserve over Actual Liability)
Investment Fluctuation Reserve A/c Dr. (Excess of Reserve over difference between
Book value and Market value)
To Old Partner‘s Capital or Current A/c (in Old Ratio)
(ii) For transfer of Accumulated Losses:
Old Partner‘s Capital or Current A/c Dr. (in Old Ratio)

To Profit & Loss A/c
To Deferred Revenue Expenditure A/c (for example Advertisement Suspense A/c)
Workmen Compensation Reserve:

This reserve is created out of firm‘s profits to pay compensation to employees. At the time of
change in profit sharing ratio, it is treated as follows:
(1) If there is no claim against Workmen Compensation Reserve: In such a case, the entire
amount of Workmen Compensation Reserve is credited to the Capital Accounts of partners in
their old profit sharing ratio: The Journal Entry passed is:
Workmen Compensation Reserve A/c Dr.

To Partner‘s Capital A/c
(Workmen Compensation Reserve credited to partners‘ Capital Accounts in their old profit
sharing ratio)
(2) If the claim for workmen compensation is lower than the amount of Workmen
Compensation Reserve: The amount of claim is credited to ‗Provision for Workmen
Compensation Claim A/c‘ and balance is credited to the Capital Accounts of partners in their
old profit sharing ratio (Suppose Workmen Compensation Reserve is ` 50,000 and liability for
claim is ` 20,000). The Journal Entry passed is:
29
Workmen Compensation Reserve A/c Dr. 50,000

To Provision for Workmen Compensation Claim A/c 20,000
To Partner‘s Capital A/c 30,000
(Amount of claim transferred to liability and balance to partner‘s Capital Accounts in their
old profit- sharing ratio)
(3) If the claim is equal to Workmen Compensation Reserve: Entire amount of Workmen
Compensation Reserve is transferred to Provision for Workmen Compensation Claim A/c :
Workmen Compensation Reserve A/c Dr.

To Provision for Workmen Compensation Claim A/c
(Provision made for workmen compensation claim)
(4) If the claim is more than the amount of Workmen Compensation Reserve:
Entire amount of Workmen Compensation Reserve along with the excess claim is credited to
‗Provision for Workmen Compensation Claim A/c‘. The amount of excess claim is debited to
‗Revaluation Account‘ because the loss must be borne by partners in their old profit sharing
ratio. (Suppose Workmen Compensation Reserve is ` 50,000 and liability for claim is `
60,000). The Journal entries passed are:
(i) Workmen Compensation Reserve A/c Dr. 50,000

Revaluation A/c Dr. 10,000
To Provision for Workmen Compensation Claim A/c 60,000
(Amount of claim debited to Workmen Compensation Reserve and Revaluation A/c)
(ii) Partners‘ Capital A/c Dr. 10,000

To Revaluation A/c 10,000
(Loss on revaluation transferred to capital accounts of partners in their old profit
sharing ratio)
Investment Fluctuation Reserve

This reserve is created out of firm‘s profits to meet the fall in the market value of investments. At
the time of change in profit sharing ratio, this reserve is treated as follows:
1. When Book Value and Market Value of Investments is same: In such a case, the entire
amount of Investment Fluctuation Reserve is transferred to the Capital Accounts of partners
in their old profit sharing ratio. The entry is:
Investment Fluctuation Reserve A/c Dr.

To Partner‘s Capital A/c
2. When Market value of Investments is less than the Book Value: In such a case, the
accounting treatment depends on the quantum of decrease. There may be three possibilities:
(i) Fall in the value is Less Than Investment Fluctuation Reserve: In such a case, Investment
Fluctuation Reserve, to the extent of fall in value, is credited to Investments A/c and the
balance is credited to Partner‘s Capital A/c in their old profit sharing ratio.
The entry is:
30

To Investments A/c (Book Value - Market Value)
To Partner‘s Capital A/cs (In old ratio)
(ii) Fall in the value is Equal to Investment Fluctuation Reserve: In such a case, entire
amount of Investment Fluctuation Reserve is credited to Investments A/c. The entry is:

To Investments A/c
(III) Fall in the value is more than Investment Fluctuation Reserve: In such a case, entire
amount of Investment Fluctuation Reserve, along with the amount of excess fall in value is
credited to Investments A/c. The amount of excess fall is debited to Revaluation A/c because
the loss must be borne by the partners in their old profit sharing ratio. The entries are:
(i) Investment Fluctuation Reserve A/c Dr.

Revaluation A/c Dr.
To Investments A/c
(ii) Partner‘s Capital A/c Dr. (In old ratio)

To Revaluation A/c
3. When Market Value of Investments is more than the Book value: In such a case three
entries are passed:
(i) Entire amount of Investment Fluctuation Reserve is credited to Partner‘s Capital A/c:

To Partner‘s Capital A/c (In old ratio)
(ii) Increase in the value of Investments is debited to Investments A/c and credited to
Revaluation A/c:
Investments A/c Dr. (To bring the value of Investments to Market Value)
To Revaluation A/c
(iii) Revaluation A/c Dr.

To Partner‘s Capital A/c (In old ratio)
Accounting for Revaluation of Assets and Liabilities when there is change in the profit-
sharing ratio of existing partners
Assets and liabilities of a firm must also be revalued at the time of change in profit sharing ratio
of existing partners. The reason is that the realizable or actual value of assets and liabilities may
be different from those shown in the Balance Sheet. It is possible that with the passage of time
some of the assets might have appreciated in value while the value of certain other assets might
have decreased and no record has been made of such changes in the books of accounts.
Revaluation of assets and liabilities becomes necessary because the change in the value of
31
assets and liabilities belongs to the period prior to change in profit sharing ratio and hence must
be shared by the partners in their old profit-sharing ratio.
Multiple Choice Questions:

SOURCE BASED QUESTIONS
CASE STUDY 1
Read the following case study and answer the following-
Feelgood enterprise is a partnership business with Gyan, Manya and Sania as
partners engaged in trading business of Readymade Garments. They sharing
profits and losses in the ratio of 3: 2:1. They Sania wants to change profit sharing
ratio rest of the partners agreed upon and the new profit sharing ratio will be 1:1:1.
For this purpose, goodwill is to be valued at two year‘s purchase of the average
profit of last four years which were as follows:
Year ending on 31st March 2017 ` 1,00,000 (Profit)
Year ending on 31st March 2020 ` 1,60,000 (Loss)
On 1st October, 2018 a Motor bike costing ` 60,000 was purchased and debited to
travelling expenses on which depreciation is to be charged @ 20% p.a. as per
written down value method.
1 What will be the Gaining ratio of Sania?
a) 1/6
b) 1/3
c) 1/4
d) 1/12
2 What will be amount of Goodwill of firm?
a) ` 2,80,000
b) ` 2,66,667
c) ` 2,70,000
d) ` 3,25,000
3 Calculate the amount of motor car to be shown in Balance Sheet as on 31 st March
2020?
a) ` 36,000
b) ` 48,000
c) ` 44,200
d) ` 43,200
4 What will be correct adjustment entry for Goodwill? ( d)
a) Sania‘s Capital A/c Dr. 45,000
To Gyan‘s Capital A/c 45,000
b) Manya‘s capital A/c Dr. 60,000

To Sania‘s Capital A/c 15,000
c) Manya‘s current A/c Dr. 60,000

32
d) Premium for Goodwill A/c Dr. 60,000

ANSWER: 1(c), 2( c), 3(d ), 4(a)

CASE STUDY 2
Amit and Kartik are partners sharing profits and losses equally. They decided to
admit Saurabh for an equal share in the profits. For this purpose, the goodwill of the
firm was to be valued at four years‘ purchase of super profits.
The Balance Sheet of the firm on Saurabh‘s admission was as follows:
Liabilities Amount Assets Amount

` `
Capitals : Machinery 75,000
Amit 90,000 Furniture 15,000
Kartik 50,000 1,40,000 Stock 30,000
Reserve 20,000 Sundry Debtors 20,000
Loan 25,000 Cash 50,000
Sundry Creditors 5,000
1,90,000 1,90,000
The normal rate of return is 12% per annum. Average profits of the firm for the last
four years were ` 30,000.
1 What will be the capital employed of the firm?

a) ` 1,40,000
b) ` 1,60,000
c) ` 1,85,000
d) ` 1,90,000
2 Find out the amount of Super Profit?
a) ` 11,000
b) ` 12,000
c) ` 11,200
d) ` 10,800
3 If partners want to write off the amount of reserve what will be journal entry?
a) Reserve A/c Dr. 20,000
To Amit‘ Capital A/c 6,666
To Kartik‘s Capital A/c 6,666
To Saurabh‘s Capital A/c 6,667
b) Reserve A/c Dr. 20,000
c) Saurabh‘s Capital A/c Dr. 20,000

33
d) Saurabh‘s Capital A/c Dr. 6,666

4
Find out Saurabh‘s Share of Goodwill?
a) ` 14,400
b) ` 43,200
c) ` 45,000
d) ` 15,000
Answer: 1(b), 2(d), 3(b), 4(a)
CASE STUDY 3
Read the following case study and answer the following-
A and B are partners sharing profits in the ratio of 3:2 with effect from 1 st April
2021, they decided to share profits equally. Goodwill appeared in the book at `
25000, As on 1st April, 2021 it was valued at ` 100000 they decided to carry
goodwill in the books of the firm.
1 What is the gaining /sacrifcing ratio of A and B?

a) 1:2 (sacrifice and gain)
b) 1:4(gain and sacrifce)
c) 1:1(gain and sacrifice)
d) 2:2(sacrifice and gain)
2 What amount of goodwill will be written off?
a) ` 25000
b) ` 100000
c) ` 125000
d) ` 75000
3 Which partner has to bring premium for goodwill?
a) A
b) B
c) Both A and B
d) None of the above
4 Which is the self-generated goodwill & purchased goodwill?
a) ` 25000 and ` 75000
b) ` 100000 and ` 25000
c) ` 25000 and ` 100000
d) ` 75000 and ` 125000
Answer: 1(c), 2(b), 3(b), 4(c)

Assertion Reasoning Based Questions
1 Assertion: Weighted average profit method is considered better than the simple
average profit method.
Reasoning: Weighted average profit method assigns more weightage to the profits
of the latest year which is more likely to be earned in the future.
(a) Both (A) and (R) are true and (R) is the correct explanation of (A).
(b) Both (A) and (R) are true and (R) is not the correct explanation of (A).
34
(c) (A) is true, but (R) is false

(d) (A) is false, but (R) is true
Answer: (a) Both (A) and (R) are true and (R) is the correct explanation of (A).
2
Assertion: Reserves and accumulated profits are credited to the capital accounts
of all partners in their old profit-sharing ratio
Reasoning: It has been set apart out of the profits earned in the period before
change. If they are not adjusted at present, they will get adjusted later in their new
profit-sharing ratio which will result in loss to the sacrificing partner and gain to
the gaining partner.
a) Both (A) and (R) are true and (R) is the correct explanation of (A).
b) Both (A) and (R) are true and (R) is not the correct explanation of (A).
c) (A) is true, but (R) is false
d) (A) is false, but (R) is true
3
Assertion: The change in profit sharing ratio amongst existing partners, should the
assets and liabilities be revalued
Reasoning: the profit or loss on revaluation should be credited or debited to the
accounts of the partners in their old profit-sharing ratio.
4
Assertion: Goodwill is a fictitious Asset.
Reasoning: Fictitious assets do not have a value.it cannot be purchased or sold
with any other asset.
Answer: (A) is false, but (R) is true
5
Assertion: Goodwill is an intangible asset since it has no physical existence and
cannot be seen or touched.
Reasoning: It is internally generated over a long period of time.
c) (A)is true, but (R) is false
d) (A)is false, but (R) is true
Answer: (b) Both (A) and (R) are true and (R) is not the correct explanation of (A).
6 Assertion: In Super Profit Method, Goodwill is calculated on the basis of surplus
35
(excess) profits earned by a firm in comparison to average profits earned by other

firms. If a business has no anticipated excess earnings, it will have no goodwill.
Reasoning: Super Profit method is an extension of weightage average profit method
to find out Goodwill.
Answer: (A) is true, but (R) is false
TRUE / FALSE TYPE QUESTION

1
Which of the following statement is false regarding Factors affecting goodwill?
a) Location of the Business
b) Good industrial relations
c) Favourable Government regulations
d) Unstable political conditions
Answer: d) Unstable political conditions
2
Which of the following statement is false regarding self-generated goodwill?
a) It is internally generated over a long period of time.
b) It is amortized (i.e. depreciated) over its useful economic life.
c) A true cost cannot be placed on this type of goodwill. Its valuation depends
on the subjective judgement of the valuer.
d) As per Accounting Standard 26 (Intangible Assets), it is not recorded in the
books of accounts because consideration in money or money‘s worth has not
been paid for it.
Answer: d) As per Accounting Standard 26 (Intangible Assets), it is not recorded in
the books of accounts because consideration in money or money‘s worth has not
been paid for it.
3
Which of the following statement is false regarding Purchased Goodwill?
a) It arises on purchase of a business or any assets
b) As per Accounting Standard 26 (Intangible Assets), it is not recorded in the
books of accounts because consideration in money or money‘s worth has not
been paid for it.
c) It is shown in the Balance Sheet as an asset.
d) It is amortized (i.e. depreciated) over its useful economic life.
Answer: b) It is amortized (i.e. depreciated) over its useful economic life
MATCH THE FOLLOWING TYPE QUESTION
1
Identify the correct set for the following:
i) OLD RATIO – NEW RATIO A. Gaining Ratio
ii) Goodwill B. Fixed Assets
iii) General Reserve C. Credit Balance
36
iv) New Ratio- Old Ratio D. Sacrificing Ratio
(a) i) A, ii) B, iii) C, iv) D

(b) i) D, ii) B, iii) C, iv) A
(c) i) D, ii) C, iii) B, iv) A
(d) i) C, ii) B, iii) A, iv) D
Answer: (b) i) D, ii) B, iii) C, iv) A
2
Identify the correct set for the following:
i) Average Profit – Normal Profit A. Goodwill
ii) Super Profit- Average Profit B. Weighted Average Profit
iii) Average Profit * No. of Year Purchase C. Super Profit
iv) Product / Total weight D. Normal Profit
(a) i) A, ii) B, iii) C, iv) D

(b) i) C, ii) B, iii) D, iv) A
(c) i) C, ii) D, iii) A, iv) B
(d) i) C, ii) B, iii) A, iv) D
Answer: (b) i) D, ii) B, iii) C, iv) A
DIRECT QUESTIONS
1 The excess amount which the firm can get on selling its assets over and above the
saleable value of its assets is called:
(A) Surplus (B) Super profits
(C) Reserve (D) Goodwill
Answer: (D) Goodwill
2 Total Capital employed in the firm is ` 8,00,000, reasonable rate of return is 15%
and Profit for the year is ` 12,00,000. The value of goodwill of the firm as per
capitalization method would be:
(A) ` 82,00,000 (B) ` 12,00,000
(C) ` 72,00,000 (D) ` 42,00,000
Answer: (C) Rs.72,00,000
3 A firm earns ` 1,10,000. The normal rate of return is 10%. The assets of the firm
amounted to ` 11,00,000 and liabilities to ` 1,00,000. Value of goodwill by
capitalisation of Average Actual Profits will be:
(A) ` 2,00,000 (B) ` 10,000
(C) ` 5,000 (D) ` 1,00,000
Answer: (D) ` 1,00,000
4 A, B and Care partner sharing profits in the ratio of 1 : 2 : 3. On 1-4-2021 they
decided to share the profits equally. On the date there was a credit balance of `
1,20,000 in their Profit and Loss Account and a balance of ` 1,80,000 in General
Reserve Account. Instead of closing the General Reserve Account and Profit and
Loss Account, it is decided to record an adjustment entry for the same. In the
necessary adjustment entry to give effect to the above arrangement:
(A) Dr. A by ` 50,000; Cr. B by ` 50,000
(B) Cr. A by ` 50,000; Dr. B by ` 50,000
37
(C) Dr. A by ` 50,000; Cr. C by ` 50,000

(D) Cr. A by ` 50,000; Dr. C by ` 50,000
Answer: (C) Dr. A by ` 50,000; Cr. C by ` 50,000
5 A, B and C are partners sharing profits in the ratio of 4 : 3 : 2 decided to share
profits equally. Goodwill of the firm is valued at ` 10,800. In adjusting entry for
goodwill :
(A) A‘s Capital A/c Cr. by ` 4,800; B‘s Capital A/c Cr. by ` 3,600; C‘s Capital A/c
Cr. by ` 2,400.
(B) A‘s Capital A/c Cr. by ` 3,600; B‘s Capital A/c Cr. by ` 3,600; C‘s Capital A/c
Cr. by ` 3,600.
(C) A‘s Capital A/c Dr. by ` 1,200; C‘s Capital A/c Cr. by ` 1,200;
(D) A‘s Capital A/c Cr. by ` 1,200; C‘s Capital A/c Dr. by ` 1,200
Answer: (D) A‘s Capital A/c Cr. by ` 1,200; C‘s Capital A/c Dr. by ` 1,200
6 P, Q and R were partners in a firm sharing profits in 5 : 3 : 2 ratio. They decided to
share the future profits in 2 : 3 : 5. For this purpose the goodwill of the firm was
valued at
` 1,20,000. In adjustment entry for the treatment of goodwill due to change in the
profit sharing ratio :
(A) Cr. P by ` 24,000; Dr. R by ` 24,000
(B) Cr. P by ` 60,000; Dr. R by ` 60,000
(C) Cr. P by ` 36,000; Dr. R by ` 36,000
(D) Dr. P by ` 36,000; Cr. R by ` 36,000
Answer: (C) Cr. P by ` 36,000; Dr. R by ` 36,000
7 A, B and C were partners sharing profits and losses in the ratio of 7 : 3 : 2. From
1st April, 2019 they decided to share profits and losses in the ratio of 8:4:3.
Goodwill is ` 1,20,000. In Adjustment entry for goodwill:
(A) Cr. A by ` 6,000; Dr. B by ` 2,000; Dr. C by ` 4,000
(B) Dr. A by ` 6,000; Cr. B by ` 2,000; Cr. C by ` 4000
(C) Cr. A by ` 6,000; Dr. B by ` 4,000; Dr. C by ` 2,000
(D) Dr. A by ` 6,000; Cr. B by ` 4,000; Cr. C by ` 2,000
Answer: (A) Cr. A by ` 6,000; Dr. B by ` 2,000; Dr. C by ` 4,000
8 Aran and Varan are partners sharing profits in the ratio of 4:3. Their Balance
Sheet showed a balance of ` 56,000 in the General Reserve Account and a debit
balance of ` 14,000 in Profit and Loss Account. They now decided to share the
future profits equally. Instead of closing the General Reserve Account and Profit
and Loss Account, it is decided to pass an adjustment entry for the same. In
adjustment entry :
(A) Dr. Aran by ` 3,000; Cr. Varan by ` 3,000
(B) Dr. Aran by ` 5,000; Cr. Varan by ` 5,000
(C) Cr. Aran by ` 5,000; Dr. Varan by ` 5,000
(D) Cr. Aran by ` 3,000; Dr. Varan by ` 3,000
Answer: (D) Cr. Aran by ` 3,000; Dr. Varan by ` 3,000
9 A, B and C are partners in a firm sharing profits in the ratio of 3 : 4 : 1. They
decided to share profits equally w.e.f. 1st April, 2019. On that date the Profit and
Loss Account showed the credit balance of ` 96,000. Instead of closing the Profit
and Loss Account, it was decided to record an adjustment entry reflecting the
change in profit sharing ratio. In the Journal Entry
38
(A) Dr. A by ` 4,000; Dr. B by ` 16,000; Cr. C by ` 20,000

(B) Cr. A by ` 4,000; Cr. B by ` 16,000; Dr. C by ` 20,000
(C) Cr. A by ` 16,000; Cr. B by ` 4,000; Dr. C by ` 20,000
(D) Dr. A by ` 16,000; Dr. B by ` 4,000; Cr. C by ` 20,000
Answer: (B) Cr. A by ` 4,000; Cr. B by ` 16,000; Dr. C by ` 20,000
10 X, Y and Z are partners in a firm sharing profits in the ratio 4 : 3 : 2. Their
Balance Sheet as at 31-3-2019 showed a debit balance of Profit & Loss A/c `
1,80,000. From 1-4-2019 they will share profits equally. In the necessary journal
entry to give effect to the above arrangement when A Y and Z decided not to close
the Profit & Loss Account:
(A) Dr. X by ` 20,000; Cr. Z by ` 20,000
(B) Cr. X by ` 20,000; Dr. Z by ` 20,000
(C) Dr. X by ` 40,000; Cr. Z by ` 40,000
(D) Cr. X by ` 40,000; Dr. Z by ` 40,000
Answer: (A) Dr. X by ` 20,000; Cr. Z by ` 20,000
39
Accounting for Partnership Firms -

Admission of a Partner
Section 31, Rights, Liabilities, Effects and Adjustments in the event of Admission of a
Partner:
According to section 31 of the Indian Partnership Act, 1932, a person can be admitted as
a new partner:
(i) if it is so agreed in the Partnership Deed, or

(ii) in the absence of the above, if all partners agree for the admission.
Rights and liabilities of the newly admitted partner:
(i) When a partner is newly admitted into the partnership, the new partner gets the following
rights:
a) Right to share the future profits of the firm, and

b) Right to share in the assets of the firm.
(ii) At the same time, the newly admitted partner becomes liable for any liability of the
business incurred after his admission and any loss incurred by the firm.
Effects of admission of a Partner: Following are the effects of admission of a new partner:
(i) New partnership comes into existence.
(ii) Old partnership comes to an end but the firm continues. iii. New partner is entitled to
share of future profits. iv. The combined share of old partners get reduced.
(iii) New partner contributes an agreed amount towards the capital of the firm.
(iv) Goodwill is to be valued and paid to the sacrificing partners for their sacrifice by the
gaining partners through their Capital Accounts.
(v) Incoming partner is entitled to the rights in the assets of the firm and also liable for the
liabilities.
(vi) Adjustment is to be made for reserves, accumulated profits or losses.
(vii) Revaluation of assets and reassessment of liabilities is to be done. The net increase or
decrease is then adjusted in the existing partner‘s capital account in their old profit
sharing ratio.
Adjustments required on the admission of a partner: Following are the adjustments required
on the admission of a partner:
(i) Determining the new profit sharing ratio and gaining/ sacrificing ratio.
(ii) Goodwill valuation and its adjustment.
(iii) Revaluation of Assets and reassessment of liabilities and adjustment of the net gain or loss
on such revaluation.
(iv) Adjustment of reserves, accumulated profits and losses.
40
Determining the new profit sharing ratio and gaining / sacrificing ratio:
Change in Profit Sharing Ratio in the event of admission of a Partner: In the event of
admission of a partner in the existing firm, the incoming partner becomes entitled to share
future profits of the firm. Such share is acquired by the incoming partner from old partners;
therefore, it is necessary to determine new profit sharing ratio and also the gaining or sacrificing
ratio. The new partner may acquire his share from old partner or partners in old ratio, in a
particular ratio (sacrificing ratio) or in a particular fraction from old partners.
 Calculation of new profit sharing ratio when profit share of new or incoming partner is
given but sacrifice made by old partners is not given:
(i) In such a case, it is assumed that the new partner has acquired his share from old
partners in their old profit-sharing ratio.
(ii) Therefore, old partners will continue to share balance profits or losses in their old profit
sharing ratio. It means that, in the absence of any information, profit sharing ratio
among the existing partners remains unchanged.
(iii) Calculation of new profit sharing ratio for each partner will be as follows:
 Deduct new or incoming partners‘ share of profit from 1; and
 Divide the remaining share of profit among old partners in their old profit sharing
ratio.
 Calculation of new profit sharing ratio when share of new or incoming partner is given
and also new profit sharing of old partners is given:
(i) In such a case, new partner‘s share of profit is deducted from 1 and balance share of
profit is divided among old partners in their new profit sharing ratio.
(ii) Such arrangement gives the new profit share of each of the partners in the new firm.
 Calculation of new profit sharing ratio when new or incoming partner acquires his
share from the old or existing partners equally:
(i) In such case, new share of each old partner is to be determined by calculating the new
profit sharing ratio among all the partners.
(ii) The sacrifice made in favour of the new or incoming partner is deducted from the
existing share of profit of each old partner.
share from the old or existing partners in a particular ratio:
(i) In such situation, share of existing or old partners will change to the extent of share
sacrificed on admission of the new or incoming partner.
(ii) New share of profits of the existing partners in the reconstituted firm is determined by
deducting the sacrifice made by them from their existing share of profits.
share in a particular fraction from old or existing partners:
(i) In such situation, share of new or incoming partner is to be determined by adding the
shares surrendered by the old partners in favour of new or incoming partner.
41
(ii) Such share surrendered by the old or existing partners is deducted from their
respective shares to determine old partners‘ shares in the reconstituted firm.
 Calculation of new profit sharing ratio when one of the existing partner retains his
original share of profit on admission of a new partner:
(i) In such a case, the share of profit of new partner and share of profit of existing partner
who retains his old share is deducted from 1.
(ii) After such deduction, remaining share of profit is divided among remaining old
partners in their profit sharing ratio.
 Calculation of sacrificing ratio when share of new or incoming partner is given without
giving details of sacrifice made by old or existing partners:
(i) In such a case, it is assumed that old partners make sacrifice in their old profit sharing
ratio.
(ii) In such situations, sacrificing ratio and old profit sharing ratio will always be same and
therefore, there will be no change in profit sharing ratio of old partners.
 Calculation of sacrificing ratio when old ratio of existing partners and new ratio of all
partners is given:
(i) When old ratio and new ratio of the old and existing partners is available, sacrificing
ratio is to be calculated by deducting the new share from the old share.
(ii) Formula used is as follows:
Sacrificing Share = Old Share – New Share
 Calculation of sacrificing ratio when new or incoming partner acquires the share by
surrender of a particular fraction of shares by old partners:
(i) In such a case, the share surrendered by the partner is deducted from his old share of
profit to determine his share in the reconstituted firm.
(ii) Total of shares surrendered by all the partners in favour of new or incoming partner is
considered as the share of new or incoming partner.
 Gain in Profit Share of Existing or Old Partner or Partners:

(i) In the event of admission of a partner in a partnership firm, some partners sacrifice
while some partners gain.
(ii) Sacrifice made by one or more old partner(s) is the total of share acquired by new or
incoming partner and share gained by existing or old partner or partners.
(iii) Therefore, gain in profit share can be calculated from such shares sacrificed by the
partners or where old and new share is given, by using the below mentioned formula:
Gaining Share = New Share – Old Share
Difference between Sacrificing or New-Profit Sharing Ratio:
Sr.no. Basis Sacrificing Ratio New Profit-Sharing Ratio
1. Meaning Ratio in which the old partners Ratio in which all the partners of the
agree to sacrifice their share in firm including the incoming partner
profits in favour of a new partner. share the future profits and losses.
42
2. Related Old partners of the firm All the partners including incoming
Partners partner
3. Calculation It is calculated using following It is calculated using following

formula: formula:
Sacrificing Ratio = Old Ratio – New Profit-Sharing Ratio = Old

New Ratio Ratio
– Sacrificing Ratio
Valuation, Adjustment and Accounting Treatment of Goodwill:
AS-26 on Valuation and Adjustment of Goodwill:

(i) As per AS-26 on Intangible Assets self-generated goodwill is not recognised as an asset in
the books of account. It means that the goodwill which is internally generated by the
company over past few years, cannot be recognised as it is self-generated by the business.
(ii) Goodwill should be recorded in the books only when consideration in money or money‘s
worth is paid for it, i.e., when goodwill is purchased.
(iii) In case of change in profit sharing ratio among the partners or admission or
retirement/death of a partner, goodwill is not to be raised in the books of the firm as no
consideration in money or money‘s worth is paid for it. If goodwill is raised, it should be
immediately written off.
Accounting Treatment of Goodwill at the time of Admission of a Partner:

In the event of admission of a partner, new partner who acquires the share in future profits from
the existing partners should compensate sacrificing partners by paying them an amount. This
amount paid by the incoming partner is termed as Goodwill or Premium for Goodwill.
Accounting treatment of such Goodwill has been explained with respect to 5 situations which
may arise in the event of partner‘s admission which are as follows:
(i) Goodwill (Premium on Goodwill) is paid privately;
(ii) Goodwill (Premium on Goodwill) is brought in cash or by cheque by the new or Incoming
Partner and is retained in business;
(iii) Goodwill (Premium on Goodwill) is brought in cash or by cheque by the new or Incoming
Partner and is withdrawn by Sacrificing Partners fully or partly;
(iv) Goodwill (Premium on Goodwill) is brought in kind;
(v) Goodwill (Premium on Goodwill) is not brought in full or a part by the new or Incoming
Partner.
Accounting Treatment of Goodwill Existing in Books of Account:
Goodwill existing in the books of the firm is written off by debiting Old Partners‘ Capital
Account/Current Account in their Old Profit Sharing Ratio and crediting Goodwill Account.
Old Partners‘ Capital/Current A/c …Dr. [in Old Ratio]

To Goodwill A/c
43
Accounting Treatment when Goodwill (Premium on Goodwill) is paid privately:

In this situation, Goodwill (Premium on Goodwill) is paid by the new or Incoming Partner
privately to the sacrificing partners. In such situation, journal entry is not passed in the books
of account of the firm.
Accounting Treatment when Goodwill (Premium on Goodwill) is brought in cash or by

cheque by the new or Incoming Partner and is retained in business:
In this situation, either of the 2 options is to be followed to record the accounting treatment of
Goodwill:
A. Amount brought in by the new or Incoming Partner is transferred to Capital Accounts

of the sacrificing partners in their sacrificing ratio. Following entries are to be
passed:
i. Premium for goodwill brought in cash by the new or incoming partner:
Cash/Bank A/c …Dr. [With share of Goodwill]

To Premium for Goodwill A/c
ii. Capital brought in cash by the new or Incoming Partner:
Cash/Bank A/c …Dr. [With Capital brought in Cash]

To New Partner‘s Capital A/c
Alternatively, instead of above 2 entries, a combined single entry can be passed as

follows:
Cash/Bank A/c …Dr. [With Share of Capital and Goodwill]

To New Partner‘s Capital [With Capital]
To Premium for Goodwill A/c [With Share of Goodwill]
B. Goodwill brought in by new partner distributed among the sacrificing partners:
Premium for Goodwill A/c …Dr. [With Share of Goodwill]

To Sacrificing Partners‘ Capital/Current A/c [In sacrificing Ratio]
Amount of Goodwill is credited to the New Partner’s Capital Account and thereafter,
adjusted in favour of old or existing partners in their sacrificing ratio for which following
entries are passed:
i. Cash/Bank A/c …Dr. [With share of goodwill and capital]

To New Partner‘s Capital
(Being the amount brought by new partner for his share of goodwill and
capital)
ii. New Partner‘s Capital A/c …Dr. [With share of goodwill]

To Sacrificing Partner‘s Capital/Current A/cs (Individually)
44
(Being the goodwill brought by new partner distributed among the sacrificing
partners in their sacrificing ratio)
Accounting Treatment when Goodwill (Premium on Goodwill) is brought in cash or by

cheque by the new or Incoming Partner and is withdrawn by Sacrificing Partners fully or
partly: Such amount of premium brought in by the new or incoming partner is shared by the
sacrificing partners in the sacrificing ratio. These sacrificing partners may withdraw the
premium amount fully or partly. Following entries are to be passed:
i. Premium for goodwill brought in cash by the new partner:

Cash/Bank A/c …Dr. [Amount of premium]
To Premium for Goodwill A/c
ii. Sharing of premium for goodwill:
Premium for Goodwill A/c …Dr. [Amount of premium]

To Sacrificing Partners‘ Capital A/c [Sacrificing ratio]
iii. Withdrawal of premium money fully/partly:

Sacrificing Partners‘ Capital A/c …Dr. [Amount withdrawn]
To Cash/Bank A/c
Accounting Treatment when Goodwill (Premium on Goodwill) is brought in kind: In such

situation, the assets brought in are debited individually with their values and Premium for
Goodwill Account is credited with his share of goodwill and also new Partner‘s Capital Account
with his capital. Such Premium for Goodwill is transferred to the Capital Accounts of the
sacrificing partners in their sacrificing ratio. Following are the accounting entries to be passed:
i. Assets brought in by New Partner:
Assets A/c …Dr. [Individually]

To New Partners‘ Capital A/c [With amount of Capital]
To Premium for Goodwill A/c [With share of Goodwill brought in]
ii. Crediting sacrificing partners’ capital accounts for Goodwill:
Premium for Goodwill A/c …Dr.

To Sacrificing Partners‘ Capital A/c [In Sacrificing Ratio]
Accounting Treatment when Goodwill (Premium on Goodwill) is not brought in full or a

part by the new or Incoming Partner: In such case, premium for goodwill account is credited
with the amount of premium for goodwill brought by the new or incoming partner. Transfer
entry is to be passed by debiting New or Incoming Partner‘s Capital/Current Account with the
amount of premium on goodwill not brought by him besides debiting premium for Goodwill
Account with the amount of premium paid by him. Where, Fixed Capital Accounts method is
used for maintaining Capital Accounts, it is debited to his Current Account. Accounting entries
are passed as follows:
45
i. Writing off Goodwill already appearing in the Balance Sheet:
Old Partners‘ Capital/Current A/c …Dr. [In old ratio]

To Goodwill A/c
ii. Amount Brought in by Incoming Partner:
Bank A/c …Dr.

To Incoming Partners‘ Capital A/c [With Capital]
To Premium for Goodwill A/c [With Share of Goodwill brought in]
iii. Credit to Sacrificing Partners by Incoming Partner’s full share of Goodwill:
Premium for Goodwill A/c …Dr. [With Premium for Goodwill brought in]
Incoming Partner‘s Capital/Current A/c …Dr. [With unpaid Share of Goodwill]
To Sacrificing Partners‘ Capital A/c [In sacrificing ratio]
Hidden or Inferred Goodwill: It is possible that the value of Goodwill of the firm is not given
and such value of goodwill is to be inferred based on the net worth (capital of the firm). Such
inferred value of Goodwill is termed as Hidden or Inferred Goodwill. In order to identify the value
of hidden goodwill, following steps are to be followed:
Step 1: Calculate the net worth (including goodwill) of the firm based on the capital brought in
by incoming partner using following formula:
Net Worth = Incoming Partner‘s Capital * Reciprocal of his share)
Step 2: Calculate the actual total capital of all the partners (including the incoming partner)
excluding amount of goodwill.
Step 3: Any excess of step 1 over step 2 is termed as Hidden Goodwill.
Revaluation of Assets and Liabilities
Accounting Treatment for revaluation of assets and reassessment of liabilities: In the event
of change in profit sharing ratio of the partners, assets are revalued and liabilities are to be
reassessed. Such revaluation will result in gain or loss which is to be distributed to the partners
in their old profit sharing ratio. The partners are not necessarily required to record the revised
values in the books of the firm. The partners may decide to:
(i) Record revised values of assets and liabilities; or

(ii) Not to record the revised values of assets and liabilities.
Accounting treatment under each of the option is different and hence, partners need to be
careful of the treatment for the option chosen.
Accounting Treatment when revised values of assets and liabilities are to be recorded: In
such situation, revaluation of assets and reassessment of liabilities are to be recorded in an
account known as ‗Revaluation Account‘ or ‗Profit and Loss Adjustment Account‘.
46
Understanding Revaluation Account: It is an account which is used to record change in value

of assets and liabilities. Following are the items which are to be recorded in the Revaluation
Account:
(i) Credited to Revaluation Account:
 Increase in assets,
 Unrecorded assets,
 Decrease in liabilities,
 Writing back excess provision.
(ii) Debited to Revaluation Account:

 Decrease in assets,
 Increase in liabilities,
 Unrecorded liabilities, Liabilities provided.
(iii) Any gain or loss from the revaluation of assets and liabilities is to be distributed among the
partners in their old profit sharing ratio and is adjusted in their Capital or Current
Accounts.
(iv) Assets and liabilities revalued are to be shown in the books of firm at the revalued figures
only.
Accounting entries to record the Revaluation of Assets and Reassessment of Liabilities:
i. Increase in the value of an asset:
Asset A/c (Individually) …Dr.

To Revaluation A/c
ii. Decrease in the value of an asset:
Revaluation A/c …Dr.

To Asset A/c (Individually)
iii. Increase in the amount of a liability:
Revaluation A/c ...Dr.

To Liability A/c (Individually)
iv. Decrease in the amount of a liability:
Liability A/c (Individually) …Dr.

To Revaluation A/c
v. Recording an unrecorded asset:

Unrecorded Asset A/c …Dr.
To Revaluation A/c
vi. Recording an unrecorded liability:
47

To Unrecorded Liability A/c
vii. Revaluation Gain(profit):

To Old Partners‘ Capital A/cs [In old profit sharing ratio]
viii. Revaluation Loss:
Old Partners‘ Capital A/cs …Dr. [In old profit sharing ratio]
To Revaluation A/c
Specimen of a Revaluation Account:
Dr. REVALUATION ACCOUNT Cr.
Particulars Amount Particulars Amount

To Assets (individually) … By Assets (individually) …
-Decrease in value on revaluation -Increase in value on

revaluation
To Liabilities (individually) … …
By Liabilities (individually)
-Increase in amount on
reassessment -Decrease in amount on
… reassessment …
To Unrecorded Liabilities A/c
To Partners‘ Capital A/c … By Unrecorded Assets A/c …
(Remuneration)
… By Loss on Revaluation …
To Cash/Bank A/c (Expenses) transferred to Partners‘ Capital (or
… Current) A/cs*
To Gain (Profit) on Revaluation
transferred to Partners‘ Capital (or …
Current) A/cs*
… …
 Only one will appear at a time
Note: If Revaluation Account is prepared by an entity, assets and liabilities will appear in the
Balance Sheet of the reconstituted firm at their revised (changed) values.
Treatment for profit or loss arising from the revaluation of assets and reassessment of
liabilities:
(i) In the event of change in the profit sharing ratio, assets are revalued and liabilities are
reassessed. This is basically done to increase or decrease the value of assets and liabilities
up to the date of change in profit sharing ratio.
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(ii) The net gain or loss arising on account of such revaluation and reassessment is for the
period before the change in profit sharing ratio. Such gain or loss is therefore, credited or
debited to the Partner‘s Capital Accounts in their old profit sharing ratio.
Points to remember for adjustments:
(i) Care has to be taken to adjust and revalue the assets. Difference between asset reduced by
10% and asset reduced to 10% should be done with care. The term ‗by‘ means value of
asset is to be brought down by 10%. The term ‗to‘ means value of asset is to be brought
down by 90%.
(ii) If it is mentioned that ‗All debtors are good‘, then it is to be understood that Provision for
Doubtful Debts is not required and hence should be credited (written back) to Revaluation
Account.
(iii) When bad debts and provision for doubtful debts both are specified in the question, first
bad debts are to be deducted from Debtors and then Provision for Doubtful Debts is to be
calculated on balance bad debts. Any excess of Bad Debts over old Provision for Doubtful
Debts should be debited to Revaluation Account. Also, any deficit in Provision for Doubtful
Debts should be debited to Revaluation Account.
Treatment of Reserves and Accumulated Profits or Losses
If any reserves and accumulated profits or losses exist in the books of firm at the time of change
in profit sharing ratio, they are to be transferred to the Partners‘ Capital Accounts or their
Current Accounts in their old profit sharing ratio as such existing reserves and profits are
earned before the reconstitution of the firm.
Workmen Compensation Reserve:
Meaning:
(i) It is a reserve that is set aside or appropriated out of firm‘s profits to meet any of the
possible liabilities with respect to employees‘ compensation, if it arises.
(ii) Claim with respect to such liabilities may or may not arise.
(iii) The amount of claim may or may not be equal to the amount of reserves.
Accounting Treatment of Workmen Compensation Reserve under different situations:

Following are the journal entries for explaining accounting treatment of Workmen Compensation
Reserve under different situation:
a. When claim against workmen compensation reserve does not exist: In this situation,
amount of this reserve is transferred to Partners‘ Capital Accounts in their old profit
sharing ratio. Entry to be passed is:
Workmen Compensation Reserves A/c …Dr.

To Partners‘ Capital (or Current) A/c
(Being workmen compensation reserves credited to partners‘ capital or current
accounts in their old profit sharing ratio)
b. When claim for workmen compensation reserve exists: In such situation, treatment
shall depend on the amount of liabilities:
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i. Claim is equal to reserves: Amount of reserves is transferred to Provision for

Workmen Compensation Claim Account. Entry to be passed:
Workmen Compensation Reserves A/c …Dr.

(Being the provision made for estimated compensation claim)
ii. Claim amount is lower than the reserve: Excess of Workmen Compensation
Reserve over the Workmen Compensation Claim is credited to all partners in their
old profit sharing ratio. Entry is:
Workmen Compensation Reserve A/c …Dr.

To Old Partners‘ Capital or Current A/c
(Being the surplus of Workmen Compensation Reserve transferred to Old Partners‘
Capital or Current Account in their old profit sharing ratio)
iii. Claim amount is higher than the reserve: Amount in excess of reserve is debited
to Revaluation Account as the loss is to be borne by the partners in old profit
sharing ratio. Entry is:
a. Workmen Compensation Reserve A/c …Dr.

(Being amount of estimated claim debited to Workmen Compensation Reserve
and
Revaluation Account)
b. Old Partners‘ Capital or Current A/cs …Dr. (In Old Ratio)

To Revaluation A/c
(Being the loss on revaluation transferred to Capital or Current Account of
partners in their old profit sharing ratio)
Investments Fluctuation Reserve:
Meaning:
(i) It is a reserve which is set aside out of the profits to meet fall in the market value of
investments.
(ii) In order to decide the treatment of this reserve, it is necessary to first determine whether
the book value and the market value are same or different and if different, which value is
higher and which is lower.
Accounting Treatment of Investment Fluctuation Reserve:
(i) When Book Value and Market Value are same: Entry has to be passed to transfer the
amount of Investment Fluctuation Reserve to Partners‘ Capital or Current Accounts in
their old profit sharing ratio as below:
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Investment Fluctuation Reserve A/c …Dr.

To Partners‘ Capital (or Current) A/c [In Old Ratio]
(ii) When Market Value if less than the Book Value: In this case, treatment of Investments
Fluctuation Reserve shall depend on the quantum of decrease, which has 3 possibilities as
follows:
a. Fall in Value is less than Investments Fluctuation Reserve: The amount of

Investment Fluctuation Reserve to the extent of fall in value, is transferred to
Investment Account and balance is distributed among the partners in their old profit
sharing ratio for which following entry is to be passed:

To Investment A/c [Book Value – Market Value]
To Old Partners‘ Capital (or Current) A/c [In Old Ratio]
b. Fall in Value is Equal to Investments Fluctuation Reserve: In this case, amount of

Investment Fluctuation Reserve is transferred to Investment Account and no amount
is distributed among the partners. Entry for the same is as follows:

To Investment A/c
c. Fall in Value is More than Investments Fluctuation Reserve: In this case, amount
of Investments Fluctuation Reserve along with balance amount of fall in value is
transferred to Investment Account and the amount in excess of reserve is debited to
the Revaluation Account for which following entries are passed:

To Investment A/c
Partners‘ Capital (or Current) A/c …Dr. [In Old Ratio]

To Revaluation A/c
(iii) When there is an Increase in Market Value of Investment: In this case, total amount of
Investment Fluctuation Reserve is distributed among partners and increase in value of
investment is credited to Revaluation Account for which following entry is to be passed:
• Investment Fluctuation Reserve A/c …Dr.

• Investment A/c …Dr.

To Revaluation A/c [Investment Brought up to Market Value]
• Revaluation A/c …Dr.

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Treatment of reserves, accumulated profits and losses:
Journal Entries to be passed for the mentioned transactions are as follows:
a. For distributing reserves and accumulated profits:

General Reserves A/c …Dr.
Profit and Loss A/c …Dr.
Workmen Compensation Reserves A/c* …Dr.
Investment Fluctuation Reserve A/c** …Dr.
To All Partners‘ Capital A/c (In old profit sharing ratio)
*Amount of workmen compensation reserve distributed shall be excess of reserves over liability.
**Amount of investment fluctuation reserve distributed shall be excess of reserve over difference
between Book Value and Market Value.
b. For writing off accumulated losses:
All Partners‘ Capital A/c …Dr. (In old profit sharing ratio)
To Profit and Loss A/c
Multiple Choice Questions
1. A new partner may be admitted into a partnership :

(A) With the consent of any one partner
(B) With the consent of majority of partners
(C) With the consent of all old partners
(D) With the consent of 2/3rd of old partners
2. X and Y are partners sharing profit in the ratio of 3 : 2. Z was admitted with 1/4 share in
profits which he acquires equally from X and Y. The new ratio will be:
(A) 9 : 6 : 5
(B) 19 : 11 : 10
(C) 3 : 3 : 2
(D) 3 : 2 : 4
3. A and B are partners sharing profits and losses in the ratio of 7 : 5. They agree to admit C,
their manager, into partnership who is to get 1/6th share in the profits. He acquires this
share as 1/24th from A and 1/8th from B, The new profit sharing ratio will be:
(A) 13 : 7 : 4
(B) 7 : 13 : 4
(C) 7 : 5 : 6
(D) 5 : 7 : 6
4. A and B are partners sharing profits in the ratio of 5 : 3. A surrenders 14th of his share
and B surrenders 15 of his share in favour of C, a new partner. What is the sacrificing
ratio?
(A) 4 : 5
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(B) 5 : 4
(C) 12 : 25
(D) 25 : 12
5. Partners A, B and C share the profits of a business in the ratio of 3 : 2 : 1 respectively.

They admit D who brings in ₹60,000 for his share of goodwill. A, B, C and D decide to
share the profits respectively in the ratio of 5 : 3 : 2 : 2. Credit will be given to:
(A) A ` 6,000; B ` 6,000

(B) A ` 30,000; B ` 18,000; C ` 12,000
(C) A ` 30,000; B ` 20,000; C ` 10,000
(D) A ` 30,000; B ` 30,000
6. X and Y are partners in a firm sharing profits in the ratio of 5 : 3. They admitted Z as a
new partner. The new profit sharing ratio will be 4 : 3 : 2. The firm‘s goodwill on Z‘s
admission was valued at ` 1,26,000. But Z could not bring any amount of goodwill in
Cash. Credit will be given to:
(A) X ` 17,500; Y ` 10,500
(B) X ` 16,000; Y ` 12,000
(C) X ` 22,750; Y ` 5,250
(D) A ` 1,02,375; Y ` 23,625
7. When a new partner does not bring his share of goodwill in cash, the amount is debited to:
(A) Cash A/c
(B) Premium A/c
(C) Current A/c of the new partner
(D) Capital A/c of the old partners
8. When the balance sheet is prepared after the new partnership agreement, the assets and
liabilities are recorded at:
(A) Historical cost
(B) Current cost
(C) Realisable value
(D) Revalued figures
9. Revaluation Account or Profit and Loss Adjustment A/c is a

(A) Real Account
(B) Personal Account
(C) Nominal Account
(D) Asset Account
10. A and B are partners sharing profits in the ratio of 2 : 3. Their Balance Sheet shows
Machinery at ` 2,00,000; Stock at ` 80,000 and Debtors at ` 1,60,000. C is admitted and
new profit sharing ratio is agreed at 6 : 9 : 5. Machinery is revalued at ` 1,40,000 and a
provision is made for doubtful debts @ 5%. A‘s share in loss on revaluation amount to `
20,000. Revalued value of Stock will be:
(A) ` 62,000
(B) ` 1,00,000
(C) ` 60,000
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(D) ` 98,000
11 Sacrificing ratio is used to distribute in case of admission of a partner:

(A) Reserves
(B) Goodwill
(C) Revaluation Profit
(D) Balance in Profit and Loss Account
12. A and B are partners of a partnership firm sharing profits in the ratio of 3 : 2 respectively.
C was admitted for 1/5th share of profit. Machinery would be appreciated by 10% (book
value ` 80,000) and building would be depreciated by 20% (` 2,00,000). Unrecorded
debtors of ` 1,250 would be brought into books now and a creditor amounting to ` 2,750
died and need not pay anything on this account. What will be profit/loss on revaluation?
(A) Loss ` 28.000
(B) Loss ` 40,000
(C) Profits ` 28,000
(D) Profits ` 40,000
13. A and B are in partnership sharing profits in the ratio of 3 : 2. They take C as a new
partner. Goodwill of the firm is valued at ` 3,00,000 and C brings ` 30,000 as his share of
goodwill in cash which is entirely credited to the Capital Account of A. New profit sharing
ratio will be:
(A) 3 : 2 : 1
(B) 6 : 3 : 1
(C) 5 : 4 : 1
(D) 4 : 5 : 1
14. On the admission of a new partner:

(A) Old firm is dissolved
(B) Old partnership is dissolved
(C) Both old partnership and firm are dissolved
(D) Neither partnership nor firm is dissolved
15. If at the time of admission, some profit and loss account balance appears in the books, it
will be transferred to:
(A) Profit & Loss Adjustment Account
(B) All partners‘ Capital Accounts
(C) Old partners‘ Capital Accounts
(D) Revaluation Account
Case Study Base Questions
(On the basis of Case study 1, answer questions 16-20 and on basis of Case Study 2, answer
questions 21-25.)
Case Study 1: Murari and Vohra were partners with capitals of ` 1,20,000 and ` 1,60,000
respectively. On 1st April, 2010 they admitted Yadav as a partner for one forth share in profit.
Yadav brings his capital ` 2,00,000 and Goodwill for 1/4th share in cash. Goodwill of the firm is
valued at ` 3,60,000 on admission of Yadav.
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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 ` 80,000 and
Building ` 2,00,000.
It was agreed that Stock should be depreciated by ` 2,000; Plant to 80%; ` 5000 should be
written off as Bad Debts; A Provision for Bad Debt is to be kept at 5% of Debtors. Building
should be appreciated by 25%.
16. What would be the new profit sharing ratio after Yadav‘s admission?
(A) 1:1:1
(B) 3:4:2
(C) 3:4:5
(D) 3:3:2
17. Yadav would bring ` ……………………….. as his share of goodwill.

(A) 3,60,000
(B) 90,000
(C) 50,000
(D) 80,000
18. What would be the amount of cash balance in firm before admission of Yadav?
(A) ` 25,000
(B) ` 1,00,000
(C) ` 3,55,000
(D) ` 75,000
19. The amount Provision for Bad Debts would be ` ……………………

(A) 2,000
(B) 1,250
(C) 1,750
(D) 5,000
20. Which of the following right/rights Yadav would get after admission?
(A) Right to admission
(B) Right to share future profits
(C) Right to share assets
(D) Both B and C
Case Study 2: A and B are partners in a firm. Their Balance Sheet as at 31st Marsh 2021 was:
Liabilities Amount Assets Amount
Workmen Compensation 5,400 Cash 10,000
Reserve Debtors 80,000
Outstanding Expenses 3,200 Less: Pro. for Bad Debts 4,000 76,000
Creditors 30,000 Stock 20,000
A‘s Capital 50,000 Machine 38,600
B‘s Capital 60,000 Profit and Loss A/c 4,000
1,48,000 1,48,000
On 1st April 2021, they admitted C as a new partner on the following conditions:
55
(i) C will bring ` 40,000 as capital but unable to bring his share of goodwill in cash.
(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 ` 6,000 are to be written off.
(v) Creditors are to be paid ` 2,000 more.
(vi) ` 2,000 are to be provided for an unrecorded liability for damage.
(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.
(ix) Goodwill of the firm is valued at ` 18,000.
21. Sacrificing Ratio of A and B will be:

(A) 1:1
(B) 3:2
(C) Only B sacrifices 1/6
(D) Only A sacrifices 2/6
22. For C‘s share of goodwill …………………………… A/c will be debited with ` ………………….
(A) C‘s Current; 3,000
(B) C‘s Capital A/c; 18,000
(C) B‘s Current A/c; 3,000
(D) A‘ Capital A/c; 3,000
23. Which of the following is correct treatment:

(A) Workmen Compensation Fund…………… Dr 5,400
To A‘s Capital A/c 2,700
To B‘s Capital A/c 2,700
(B) Workmen Compensation Fund…………… Dr 5,400
To C‘s Capital A/c 900
(C) Workmen Compensation Fund…………… Dr 2,400
(D) Workmen Compensation Fund…………… Dr 5,400
To A‘s Current A/c 2,700
To B‘s Current A/c 2,700
24. What entry will be passed for Shikha, an old customer whose account was written off as
bad debts has promised to pay Rs.2,500:
(A) Shikha … Dr 2,500

To Revaluation A/c 2,500
(B) Revaluation A/c … Dr 2,500
To Bad Debts Recovered A/c 2,500
(C) Cash A/c … Dr 2,500
To Bad Debts Recovered A/c 2,500
(D) No entry will be passed.
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25. Balance of Profit and Loss A/c will be :

(A) Debited to A and B in old ratio.
(B) Credited to A and B in old ratio,
(C) Debited to A and B in their new ratio
(D) Credited to A B and C in new ratio.
Assertion – Reasoning Based Questions
26. Assertion (A): The ratio in which old partners sacrifice their share of profit in favour of
new partner is called ‗Sacrificing Ratio.‘
Reason (R): Old partners get goodwill share from new partner in sacrificing ratio.
(A) Both Assertion (A) and Reason(R) are true and Reason(R) is correct explanation of
Assertion (A).
(B) Both Assertion (A) and Reason(R) are true and Reason(R) is not correct explanation of
Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.
27. Assertion (A): At the time of admission of a new partner Balance of General Reserve is
transferred to Old Partners‘ Capital A/c in old ratio.
Reason (R): General Reserve appearing in Balance Sheet is created out of past profits.
Assertion (A).
Assertion (A).
28. Assertion (A): New partner always bring his share of goodwill in cash.
Reason (R): New partner brings goodwill against the sacrifice made by old partners for his
share of Profit.
Assertion (A).
Assertion (A).
29. Assertion (A): At admission existing goodwill is written off by debiting to old partners‘
capital A/c
Reason (R): Goodwill is an intangible and fictitious asset.
Assertion (A).
Assertion (A).
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30. Assertion (A): At the time of admission of a new partner surplus of Investment Fluctuation
Reserve over loss in value of Investment is transferred to Old Partners‘ Capital A/c in old
ratio.
Reason (R): Loss in value of Investment, if any, is adjusted first from Investment
Fluctuation Reserve.
Assertion (A).
Assertion(A).
ANSWERS
Q.No. Answer Q.No. Answer Q.No. Answer Q.No. Answer Q.No. Answer
1 A 2 B 3 A 4 D 5 D
6 C 7 C 8 D 9 C 10 D
11 B 12 A 13 C 14 B 15 C
Case Study Based Questions

16 D 17 B 18 A 19 C 20 D
21 C 22 A 23 C 24 D 25 A
Assertion Reasoning Based Questions

26 B 27 A 28 D 29 C 30 A
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Accounting for Companies – Share Capital
Meaning of Company
Company A joint stock company is an artificial person, created by law, having separate entity
distinct from its members with a perpetual succession and a common seal.
Characteristics or Features of a Company
(i) Artificial person (ii) Voluntary association (iii) Created by law

(iv) Capital divisible into transferable shares (v) Limited liability
(vi) Perpetual succession (vii) Common seal
(viii) Separate legal entity from its members (ix) May sue or be sued
Kinds of Companies
Private company is one which has a minimum paid up share capital as may be prescribed and
which by its Articles of Association:
(i) Restricts the right to transfer its shares, if any.
(ii) Except in One Person Company, limits the number of its members excluding its present
and past employee members to 200; If any share is held jointly by two or more persons,
they shall be treated as a single member.
(iii) Prohibits any invitation to the public to subscribe for any securities of the company.
(iv) The minimum number of members required to form a private company is two.
The name of a private company ends with the words, ‗Private Limited‘.
Public company As per Section 2 (7) of Companies Act, 2013, public company is a company
which
(i) is not a private company.
(ii) has a minimum paid-up capital as may be prescribed.
(iii) is a private company, which is a subsidiary of a public company. Minimum requirement of
a public company is seven persons.
(iv) A Public Company must have a minimum of 7 members and there is no restriction on the
maximum number though.
(v) A public limited company should have at least 3 directors but not more than 15 directors.
One person company is a company which has only one person as a member. It is a company
incorporated as a private company which has only one member. Rule 3 of the Companies
(Incorporation) Rules, 2014 provides that:
(i) Only a natural person being an Indian citizen and resident in India can form one person
company or can be nominee for the sole member of one person company.
(ii) One person can form only one ‗one person company‘ or become nominee of one such
company.
(iii) It cannot be formed for charitable purpose.
(iv) It cannot carry out non-banking financial investment activities including investment in
securities of anybody corporate.
59
(v) Its paid-up share capital is not more than Rs 50 lakhs.

(vi) Its average annual turnover should not exceed Rs 2 crores.
Share
According to Section 2 (84) of the Companies Act, 2013, share means a share in the share
capital of a company and includes stock. The capital of company is divided into a number of
equal units. Each unit is called a share. A company may divide its capital into share of ` 100, Rs
50, ` 10, ` 5 or even ` 1 each.
Types of Shares
Preference shares: According to Section 43 (b) of the Companies Act, 2013, preference shares
are the shares which carry the following two preferential rights:
(i) Preferential right of dividend to be paid as fixed amount or an amount calculated at a fixed
rate, which may either be free of or subject to income tax.
(ii) Return of capital on the winding up of the company before that of equity shares. Holders of
preference shares are called preference shareholders.
Equity shares: According to Section 43(a) of the Companies Act 2013, equity share is that share
which is not a preference share. Equity shares are the most commonly issued class of shares
which 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.
Share Capital It is that part of the capital of a company, which is represented by the total
nominal value of shares, which it has issued.
Types OR Classes of Preference Shares
(a) With Reference to Dividend:
1. Cumulative Preference shares: Cumulative preference shares are these preference

shares, the holders of which are entitled to receive arrears of dividend before any
dividend is paid on equity shares.
2. Non-cumulative Preference shares: Non-cumulative preference shares are those

preference share, the holders of which do not have the right to receive arrear of divided.
If no dividend is declared in any year due to any reason. Such shareholders get nothing,
nor they can claim unpaid dividend in any subsequent years.
(b) With Reference to Participation
1. Participating preference shares: such shares, in addition to the fixed preference

dividend, carry a right to participate in the surplus profit, if any, after providing dividend
at a stipulated rate to equity shareholders.
2. Non-Participating preference shares: Such shares get only a fixed rate of dividend every
year and do not have a right to participate in the surplus profit.
(c) With Reference to Convertibility
60
1. Convertible preference shares: are those preference shares which have the right/option
to be converted into equity shares.
2. Non-convertible preference shares: are those preference shares which do not have the
right/option to be converted into Equity shares.
(d) With Reference to Redemption
1. Redeemable preference shares: are those preference shares the amount of which can be
redeemed by the company at the time specified for their repayment or earlier.
2. Irredeemable preference shares: are those preference shares the amount of which cannot
be refunded by the company unless the company is wound up. Now a company cannot
issue irredeemable preference shares.
Kinds of Share Capital
(i) Authorised share capital: According to Section 2(8) of Companies Act, 2013, ‗authorised
capital‘ or ‗nominal capital‘ means such capital as is authorised by the memorandum of a
company to be the maximum amount of share capital of a company.
(ii) Issued capital: According to Section 2(50) of the Companies Act, 2013, issued capital
means such capital as the company issues from time to time for subscription.
(iii) Subscribed capital: According to Section 2(86) of the Companies Act, 2013, ‗subscribed
capital‘ means such part of the capital which is for the time being subscribed by the
members of a company.
(a) Subscribed and fully paid-up: Shares are said to be ‗subscribed and fully paid-up‘
when the entire nominal (face) value is called and also paid-up by the shareholders.
(b) Subscribed but not fully paid-up: Shares are said to be ‗subscribed but not fully paid-
up‘ when
 the company has called-up the entire nominal (face) value of the share but has not
received it.
 the company has not called-up the entire nominal (face) value of share.
A reference has been made two terms
(iv) Called-up capital: According to Section 2(15) of the Companies Act, 2013, ‗called-up
capital‘ means such part of the capital, which has been called for payment. Thus, it means
the amount of nominal (face) value called-up by the company to be paid by the
shareholders towards the share capital.
(v) Paid-up share capital: According to Section 2(64) of the Companies Act, 2013, ‗paid-up
share capital‘ or ‗share capital paid-up‘ means the amount that the shareholder has paid
and the company has received against the amount ‗called up‘ against the shares towards
share capital.
(vi) Reserve Capital: It is that portion of uncalled share capital which shall not be capable of
being called up except in the event and for the purpose of the company being wound up.
Capital Reserve: ‗Capital reserve‘ is the reserve which is not free for distribution as dividend. It
is mandatory to create capital reserve in case of capital profits earned by the company. Reserves
which are created out of capital profits are not readily available for distribution as dividend
among the shareholders, e.g. premium on issue of shares of debentures, profits on re-issue of
shares, profits prior to incorporation, premium on redemption of debentures.
61
Minimum Subscription: It is the amount stated in the prospectus as the minimum amount
that must be subscribed. Unless the sum payable on application for the sum so stated
(minimum subscription) has been paid to and received by the company by cheque or other
instruments, security cannot be allotted.
Presentation of Share Capital in Company’s Balance Sheet

As per Schedule III of Companies Act, 2013, share capital is to be disclosed in company‘s
balance sheet in the following manner.
Accounting Treatment of Issue Shares
1. Terms of Issue of Shares
(i) Issue of shares at par: When shares are issued at their face value, the shares are said to
have been issued at par. i.e. issue price and face value are same.
(ii) Issue of shares at premium: When shares are issued at a value that is higher than the
face value of the shares, the shares are said to have been issued at premium, i.e. issue
price is more than face value.
2. Utilisation of Securities Premium Reserve: Section 52 (2) of the Companies Act, 2013
restrict the use of the amount received as premium on securities for the following purposes:
(i) In purchasing its own shares (buy back) (Section 77A).
(ii) Issuing fully paid bonus shares to the members (Section 78).
(iii) Writing-off preliminary expenses of the company (Section 78).
(iv) Writing-off the expenses of, or the commission paid or discount allowed on any issue of
securities or debentures of the company (Section 78).
(v) Providing for the premium payable on the redemption of any redeemable preference shares
or of any debentures of the company (Section 78).
62
3. Accounting Treatment for Issue of Shares for Cash
4. Full Subscription of Shares: When the number of shares applied for, is equal to the number
of shares offered for subscription, the shares are said to be fully subscribed.
5. Over-Subscription of Shares: When the number of shares applied for, is more than the
number of shares offered for subscription, the shares are said to be oversubscribed. Allotment of
shares cannot be made to all the applicants in full.
In case of over-subscription, following three alternatives are available (i) Rejection of applications
(ii) Partial or pro-rata allotment (iii) Combination of pro-rata allotment and rejection
63
6. Under Subscription of Shares: When the number of shares applied for, is less than the
number of shares offered to the public, the shares are said to be under-subscribed.
7. Issue of Shares for Consideration other than Cash
I. Issue of Shares to Vendors

In this regard, the purchase of assets and issue of shares are to be treated as two separate
transactions.
(i) (a) When Assets are Purchased
Assets A/c (Individually) Dr

To Vendor
(Being assets purchased from———-)
(b) When Running is purchased

Sundry Assets A/c Dr
Goodwill A/c* Dr
To Sundry Liabilities A/c To Vendor
To Capital Reserve A/c*
(Being business purchased from vendor for purchase consideration of Rs——-)
NOTE ‗Vendor‘ is credited with purchase consideration payable to him *Either goodwill or
capital Reserve will come.
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(ii) On Issue of Shares

(a) At Par
Vendor A/c Dr
To Share Capital A/c
(Being….shares issued to….@...)
(b) At Premium
Vendor A/c…….. Dr
To Securities Premium Reserve A/c
(Being …..shares issued to …..@... including securities premium reserve…)
II. Issue of Shares to Promoters
Formation Expenses/ Incorporation Exp. Dr

(Being … share of Rs … each issued to promoters of the company)
III. Issue of Shares to Underwriters
(i) Making Underwriting Expenses Due
Underwriting Expenses A/c Dr

To Underwriters A/c
(Being underwriting commission due)
(ii) Issuing Shares to Underwriters
Underwriters A/c Dr
(Being …shares issued @…….per share to underwriters)
8. Calls-in-arrears: When one or more shareholders fail to pay their dues at the time of
allotment or call, it is technically called calls-in-arrears.
Table F of the Companies Act, 2013, provides for the payment of interest on calls-in-arrears at a
rate not exceeding 10% per annum.
9. Calls-in-advance: The part of the whole amount received from the shareholders before the
call is made, is called calls-in-advance.
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This amount is shown on the liabilities side of the balance sheet as a separate item under the
head ‗share capital‘ but is not added to the amount of paid-up capital.
Table F of the Companies Act, 2013, provides for the payment of interest on calls-in-advance at
a rate not exceeding 12% per annum.
Note: Interest on calls-in-arrears and interest on calls-in-advance are not in syllabus.
10. Forfeiture of Shares
Forfeiture of shares means cancellation of shares and seizure of the amount already received
from defaulting shareholders.
(i) Forfeiture of Shares Originally Issued at Par
Share Capital A/c Dr (Called-up money)

To Forfeited Shares A/c (Paid-up money)
To Share Unpaid Calls A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of………….shares for non-payment of call of……….per share)
(ii) Forfeiture of Shares Originally Issued at Premium and Premium was Received

To Share Allotment A/c (Unpaid money excluding premium)
To Share Unpaid Call A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of …… shares for non-payment
of allotment and call of…… per share)
(iii) Forfeiture of Shares Originally Issued at Premium and Premium was not Received
Securities Premium Reserve A/c Dr (Unpaid premium)
To Share Allotment A/c (Unpaid money including premium)
To Share Unpaid Call A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of …… shares for non-payment
of allotment and call of ……per share)
11. Re-issue of Shares
The directors can either cancel or re-issue the forfeited shares. Shares forfeited can be re-issued
at par, at premium or at a discount (but shown as a loss to be debited in share forfeited A/c)
In case, they are re-issued at par, accounting entry will be

Bank A/c Dr
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(Being …..shares reissued at….)
Maximum Permissible Discount:

In case, shares are re-issued at a discount, the amount of discount allowed on the re-issue of
forfeited shares must not exceed the amount forfeited on re-issued shares.
The discount allowed on re-issue of forfeited shares should be debited to the ‘share
forfeiture account’. The journal entry will be
Bank A/c Dr [With the amount received on re-issue]
*Share Forfeiture A/c Dr [With the discount allowed on re-issue]
To Share Capital A/c [With the amount credited as paid-up]
(Being ….shares reissued at ….)
*It is calculated as Number of Shares Re-issued x (Paid-up Value – Re-issue Price Per Share)
If the forfeited shares are re-issued at a price higher than that paid-up, the excess is
credited to securities premium reserve account. The journal entry will be
Bank A/c Dr
To Securities Premium Reserve A/c
(Being ….. shares issued …..)
Transfer of Balance in Forfeited Share Account

Forfeited Shares A/c Dr
To Capital Reserve A/c
(Being balance of share forfeiture account transferred to capital reserve account)
1. Securities Premium Reserves cannot be used for:

(a) Issuing fully paid bonus shares to shareholders
(b) Issuing partly paid bonus shares to shareholders
(c) In purchasing of its own shares (Buy Back of shares)
(d) Writing off preliminary expenses of the company
Answer/Explanation: (b) Issuing partly paid bonus shares to shareholders
Because it is not a purpose identified in section 52(2).
2. Registered Capital is
(a) that part of authorized capital which is issued by the company
(b) the amount of capital which is actually applied by the applicants
(c) the amount of capital which is paid by the shareholders.
(d) the maximum amount of share capital that a company is authorized to issue.
Answer/Explanation: (d) the maximum amount of share capital that a company is authorized to
issue.
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Because Registered and Authorized capital both mean the same and a company can issue only
amount of shares by which a company is authorized.
3. If the discount on reissue of shares forfeited is less than the amount forfeited on those shares,
the surplus is transferred to:
(a) Securities Premium Reserve
(b) General Reserve
(c) Capital Reserve
(d) Statement of Profit and Loss
Answer/Explanation: (c) Capital Reserve
Since it is a capital gain so it is transferred to capital reserve.
4. Shares can be issued

(a) at par
(b) at premium
(c) Both (a) and (b)
(d) None of the above
Answer/Explanation: (c) Both (a) and (b)
Because shares can be issued at par and at premium also.
5. Surya Ltd. has issued 20,000 equity shares of `. 20 each and total nominal face value has
been called. It has received full amount except the final call ` 6 per share on 1,000 equity
shares. These equity shares will be known as:
(a) Subscribed and fully paid
(b) Subscribed but not fully paid
(c) Authorized Capital
Answer/Explanation: (b) Subscribed but not fully paid
Because the shareholders have not paid the final call money so shares have been subscribed but
not fully paid.
6. XYZ Ltd. forfeited 200 equity shares of ` 10 each on which the company has called ` 9 per
share, for the non-payment of allotment money ` 4 per share. On forfeiture, the amount debited
to share capital A/c will be:
(a) ` 1,000
(b) ` 800
(c) ` 200
(d) ` 1,800
Answer/Explanation: (d) ` 1,800
Reason: Called up value = no of shares issued *called up value of share = 200*9=` 1,800
7. A company has called ` 8 out of the nominal face value of share ` 10. It has received ` 7 per
share. What amount will be credited to Share Capital A/c?
(a) ` 10
(b) ` 7
(c) ` 8
(d) ` 3
Answer/Explanation: (c) ` 8
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The company has called the money so the money has been due by the company. And on the
time of due, share capital is credited with the amount of calls so ` 8 will be the answer.
8. Black Ltd. had issued 5,000 equity shares of ` 10 each at par. The application money was ` 3
per share and the public applied for 7,500 shares. Pro rata allotment was made. Sohan applied
for 450 shares. The amount carried forward towards the sum due on allotment will be:
(a) 1,350
(b) 900
(c) 450
(d) 4,500
Answer/Explanation: (c) 450
Amount adjusted will be:
Applied shares=450; allotted shares=300 Excess paid to be adjusted on allotment = (450-
300)*3=450
9. Supernova Ltd. issued 5,000 shares of ` 10 each at a premium @ 20%. Jyoti, a shareholder,
was allotted 500 shares did not pay the first and final call ` 3 per share. On forfeiture of her
shares, the amount debited to Securities Premium Reserve will be:
(a) ` 1,000
(b) ` 500
(c) ` 10,000
(d) ` Nil
Answer/Explanation: (d) Nil
Since the Securities Premium Reserve has been received, it will not be debited at all.
10. On a share of ` 20 issued at a premium of ` 3, full nominal amount has been called-up and
` 16 is received, share capital A/c will be credited by:
(a) ` 20
(b) ` 23
(c) ` 16
(d) ` 3
Answer/Explanation: (a) ` 20
If the full amount has been called, share capital will be credited by the nominal amount since
Securities Premium Reserve is credited separately.
11. Satyam Ltd. issued 20,000 equity shares of ` 10 each payable as ` 3 on application; ` 3 on
allotment and ` 4 on first and final call. Company received the due amount but one shareholder
holding 125 shares failed to pay the allotment and another shareholder holding 75 shares failed
to pay the first and final call money. Total calls-in-arrears is:
(a) ` 875
(b) ` 675
(c) ` 1,600
(d) ` 3,000
Answer/Explanation: (b) ` 675
Calls-in-arrears = (125*3)+(75*4)=` 675
12. Mamta Ltd. forfeited 2,000 equity shares of ` 100 each issued at a premium of 10% for non-
payment of first and final call ` 40 per share. Find out the maximum permissible discount at the
time of reissue of these shares.
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(a) ` 1,20,000
(b) ` 2,00,000
(c) ` 80,000
(d) ` 2,20,000
Answer/Explanation: (a) ` 1,20,000
Maximum permissible discount is equal to the amount already received on the forfeiture of
shares i.e. 2000*6=` 1,20,000.
13. Jindal ltd. forfeited 80 shares of ` 10 each on which the holder had paid only the application
money of ` 3 per share. Out of these, 40 shares were reissued to Mahendra as fully paid for ` 9
per share. The amount transferred to Capital Reserve is:
(a) ` 120
(b) ` 560
(c) ` 80
(d) ` 40
Answer/Explanation: (c) ` 80
Gain on 40 shares = 240/80*40= ` 120; discount =` 40; capital reserve = 120-40=` 80
14. On forfeiture of 50 shares of ` 20 each, ` 1,000 were credited to share forfeiture a/c. These
shares were reissued at ` 22 per share as fully paid. The amount credited to ‗Capital Reserve‖ is:
(a) ` 2,200
(b) ` 1,100
(c) ` 1,000
(d) ` 3,000
Answer/Explanation: (c) ` 1,000
Since forfeited shares are reissued at a premium so all the money received on the reissued
shares will be transferred to Capital Reserve A/c.
15. On forfeiture of 50 shares of ` 20 each, ` 500 were credited to share forfeited account. These
shares were reissued at ` 10 per share as fully paid up. The amount transferred to ‗Capital
Reserve A/c‘ will be:
(a) ` 1,000
(b) ` 500
(c) Nil
(d) ` 100
Answer/Explanation: (c) Nil
Because in this case discount on reissue of shares is equal to the gain on forfeiture of shares.
16. Assertion: Call-in-advance account has a nil balance.

Reason: Calls-in-advance is credited in the entry when it is received and debited in the entry
when is supposed to be received.
(a) Assertion is true but reason is false.
(b) Reason is true but Assertion is false.
(c) Both the Assertion and Reason are true.
(d) Both the Assertion and Reason are false.
Answer/Explanation: (c) Both the Assertion and Reason are true.
Since calls-in-advance is credited when it is received and debited when is due so (c) option is
correct.
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17. On a share of ` 10 each issued at a premium of ` 2 per share payable on allotment and First
and final call each ` 1 per share, company does not receive the amount due on first and final
call. Securities Premium Reserve will be debited on the forfeiture with:
(a) ` 1
(b) ` 2
(c) ` 0
(d) None of the above.
Answer/Explanation: (a) ` 1
Only unpaid amount of securities premium reserves is debited on the forfeiture.
18. Which of the following statement relates to ‗Reserve Capital‘?

(a) It is a part of uncalled capital of the company.
(b) It cannot be used in the lifetime of the company.
(c) It is called only on the liquidation of the company.
(d) All of the above.
Answer/Explanation: (d) All of the above.
All the above given points are features of Reserve Capital.
19. Shelly Ltd. forfeited 6,000 equity shares of ` 10 each, ` 10 called-up, for the non-payment of
final call of ` 1 per share. Half of the forfeited shares were reissued at ` 12 per share as fully
paid up. On reissue of the forfeited shares, the following amount will be transferred to Capital
Reserve A/c:
(a) ` 54,000
(b) ` 27,000
(c) ` 15,000
(d) ` 36,000
Answer/Explanation: (b) ` 27,000
Gain on forfeiture of 6,000 shares = 6,000*9=` 54,000; gain on 3,000 shares=` 27,000 and
shares were reissued at a premium so ` 27,000 will be transferred to capital reserve a/c.
20. The Earth Ltd. invited applications for 35,000 shares of ` 10 each and received applications
for 40,000 shares along with the application money ` 4 per share. Which of the following
alternatives can be followed?
(1) Refund of excess application money and full allotment to the rest of the applicants.
(2) Not to allot any share to some applicants, Full allotment to some applicants and pro rata
allotment to rest of the applicants.
(3) Not to allot any shares to some applicants and pro rata allotment to rest of the applicants.
(4) Make pro rata allotment to all the applicants and adjust the excess amount received towards
call money.
(a) Only (1)

(b) Both (1) and (3)
(c) Only (2)
Since all these options can be used by the company individually or in combination.
21. The company can buy back its own shares from:
(a) Free reserves
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(b) Securities Premium Reserve

(c) Proceeds of any shares or other specified securities.
Since all the options can be used by the company to buy back of its own shares.
22. When shares are issued for consideration other than cash, which account is debited?
(a) Securities Premium Reserve
(b) Capital Reserve
(c) Vendor‘s A/C
(d) Share Capital A/c
Answer/Explanation: (c) Vendor‘s A/C
All the other options are wrong and shares are issued to Vendor so he will be debited.
23. A company took over assets worth ` 10,00,000 and liabilities of ` 3,00,000 for purchase
consideration of ` 12,00,000. A bill payable of ` 2,00,000 is accepted and remaining balance was
paid by issuing shares at a premium of 25% on face value ` 100. How much amount will be
credited to securities premium reserve a/c?
(a) ` 8,00,000
(b) ` 2,00,000
(c) ` 10,00,000
(d) ` 12,00,000
Answer/Explanation: (b) ` 2,00,000
Amount of Securities Premium Reserve = (10,00,000/125) * 25 =` 2,00,000
24. Assertion: A company can give discount on reissue of the forfeited shares upto the extent of
amount already received on them.
Reason: It is the concept of Maximum Permissible Discount and the company always tries to
secure the face value of the share.
(a) Assertion is true but the reason is false.
(b) Reason is true but assertion is false.
(c) Both the assertion and the reason are false.
(d) Both the assertion and the reason are true.
Answer/Explanation: (d) Both the assertion and the reason are true.
Because on reissue of the forfeited share company tries not to issue the shares at a discount
less than the actual face value of the shares. So in order to get the face value only that much
discount is permissible so as to make a company secure its face value of the share.
25. A Ltd. forfeited a share of ` 100 issued at a premium 20% for non-payment of the first call
of ` 30 per share and the final call of ` 10 per share. The minimum price at which this share can
be reissued is:
(a) ` 60
(b) ` 40
(c) ` 100
(d) ` 20
Answer/Explanation: (b) ` 40
Amount received on the forfeited share was ` 60 so the same can be the discount on reissue
hence new issue price = 100-60=` 40.
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26. Discount on reissue of shares is debited to _______________A/c?

(a) Share capital
(b) Share forfeited
(c) Share Allotment
(d) Share Application
Answer/Explanation: (b) Share forfeited
Discount on reissue of shares is debited to share forfeited account because loss is charged on
the same account.
27. A forfeited share can:

(a) Not be reissued at a discount.
(b) Reissued at a maximum discount 10%
(c) Be reissued at a maximum discount equal to the amount forfeited.
Answer/Explanation: (c) Be reissued at a maximum discount equal to the amount forfeited.
The concept of maximum permissible discount.
28. Employees Stock option Plan is a type of _______

(a) Special Offer for the managerial staff
(b) Retaining tool for the highly skilled staff
(c) Sweat equity measure
All the other options are the features of ESOP.
Case Study:
Nidhi Ltd. issued 2,000 shares of ` 100 each. All the money was received except on 200 shares
on which only ` 90 per share were received. These shares were forfeited and out of the forfeited
shares 160 shares were reissued at ` 80 each as fully paid.
On the basis of the above case, answer the following questions:
29. On forfeiture of shares, share capital a/c will be debited with;

(a) ` 20,000
(b) ` 2,00,000
(c) ` 2,000
(d) ` 200
Answer/Explanation: (a) ` 20,000
On forfeiture of shares, share capital is debited with the called-up amount which is 200*100 =`
20,000 in this case.
30. Share forfeited a/c will be credited with:

(a) ` 16,000
(b) ` 2,000
(c) ` 20,000
(d) ` 18,000
Answer/Explanation: (d) ` 18,000
Amount received on the forfeited shares is transferred to share forfeited a/c which is 200*90 = `
18,000 in this case.
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31. Discount amount to be debited to share forfeited a/c on reissue of shares will be:
(a) ` 1,600
(b) ` 3,200
(c) ` 4,800
(d) ` 2,000
Discount amount will be 160*20 = ` 3,200.
32. Amount transferred to capital reserve a/c will be:

(a) ` 12,000
(b) ` 11,200
(c) ` 10,800
(d) ` 16,000
Gain on forfeited shares = (18,000/200)*160= ` 14,400
Amount transferred to Capital reserve = 14,400 – 3,200= ` 11,200
33. Assertion: A company can reject the applications and deny allotment of shares to any
shareholder.
Reason: On oversubscription of shares, a company may decide to make pro rata allotment, reject
the excess application or issue a combination of both the options.
(a) Assertion is true but Reason is false.
(b) Reason is true but assertion is false.
(c) Both the assertion and reason are true.
(d) Both the assertion and reason are false.
Answer/Explanation: (c) Both the assertion and reason are true.
A company makes allotment on pro rata basis, by rejecting the excess applications or by
adopting a combination of both, so (c) is correct.
34. Assertion: X ltd. forfeited 2,000 equity shares of ` 10 each on which it had received ` 10,000.
The company can reissue these forfeited shares at ` 4 per share.
Reason: Forfeited shares cannot be issued at discount more than the amount received on these
shares.
(a) Assertion and reason both are incorrect.
(b) Assertion and reason both are correct.
(c) Assertion is correct but the reason is incorrect.
(d) Assertion is incorrect but the reason is correct.
Answer/Explanation: (d) Assertion is incorrect but the reason is correct.
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Financial Statements of a Company
Meaning:
(i) An accounting process initiates with journalising of the transactions and ends with the
preparation of Trial Balance which comprises of all the debit and credit account balances.
(ii) A summary of accounting data which is prepared by an enterprise at the end of an
accounting process with the help of such Trial Balance is known as Financial Statements.
(iii) As per Section 2(40) of the Companies Act, 2013, a set of Financial Statements prepared
in accordance with Schedule III of this Act comprises of a Balance Sheet, Notes to
Accounts, Statement of Profit and Loss and Cash Flow Statement.
Balance Sheet:
Meaning: Balance Sheet or the Position Statement shows the financial position of a business by
providing complete details of its Assets, Liabilities and Equity at a particular date.
Format: As prescribed in Part I of Schedule III of the Companies Act, 2013, Balance Sheet is
prepared as follows:
Particulars Note Figures at Figures at
no. the end of the end of
the Current the
Reporting Previous
Period Reporting
Period
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
… …
a) Share Capital
… …
b) Reserves and Surplus
… …
c) Money received against Share Warrants
2. Share Application Money Pending Allotment
… …
3. Non-Current Liabilities
a) Long-term Borrowings
… …
b) Deferred Tax Liabilities (Net)
… …
c) Other Long-term Liabilities
… …
d) Long-term Provisions
… …
4. Current Liabilities
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 … …
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iii. Capital Work-in-Progress … …

iv. Intangible Assets under Development … …
b) Non-current Investments … …
c) Deferred Tax Assets (Net) … …
d) Long-term Loans and Advances … …
e) Other Non-Current Assets … …
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 … …
Statement of Profit and Loss:

Meaning: It is known as an Income Statement as it takes into consideration all the incomes and
expenses for a particular period in order to determine whether the entity is a profit-making
entity or is running into losses. It shows the profitability of the business entity for a given period
of time.
Format: As prescribed in Part II of Schedule III of the Companies Act, 2013, statement of profit
and loss is prepared as follows:
Particulars Note Figures for Figures for

no. the the
Current Previous
Reporting Reporting
Period Period
I. Revenue from Operations … …

II. Other Income … …
III. Total Revenue (I+II) … …
IV. Expenses
Cost of Materials Consumed … …
Purchases of Stock-in-Trade … …
Changes in Inventories (Finished goods, Work in-
Progress and Stock-in-Trade) … …
Employee Expenses … …
Finance Costs … …
Depreciation Expenses … …
Amortisation Expenses … …
Other Expenses … …
Total Expenses … …
V. Profit before Tax (III-IV) … …
VI. Less: Tax … …
VII. Profit or Loss for the period (V-VI) … …
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Q.1. The following questions consist of two statements, one labelled as the ‗Assertion (A)‘ and
the other as ‗Reason (R)‘. You are to examine these two statements carefully and select the
answers using the code given below:
(a) Both A and R are individually true and R is the correct explanation of A
(b) Both A and R are individually true but R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true
Assertion (A): The limitations of financial statements also form the limitations of the ratio
analysis.
Reason (R): Since the ratios are derived from the financial statements, any weakness in the
original
financial statements will also creep in the derived analysis in the form of Accounting Ratios.
Answer: (b) Both A and R are individually true but R is not the correct explanation of A
Q.2. Assertion (A): Horizontal analysis is also known as static analysis.

Reason (R): Static analysis is made to review & analyse the financial statements of one year
only.
(a) Both A& R are true & R is the correct explanation of A.
(b) Both A& R are true & R is not the correct explanation of A.
(c) A is true but R is false.
(d) R is true but A is false.
Answer: (d) R is true but A is false.
Hint: Horizontal analysis is known as dynamic analysis.
Q.3. Assertion (A): Proposed dividend for the current year is a contingent liability.
Reason (R): Proposed dividend for the current year is not recorded in the books of account.
(a) Both A& R are true & R is the correct explanation of A.
(b) Both A& R are true & R is not the correct explanation of A.
(c) A is true but R is false.
(d) R is true but A is false.
Answer: (b) Both A& R are true & R is not the correct explanation of A.
Hint: Because it is subject to the approval by the shareholders, who may reduce the amount of
dividend to be paid.
Case Study: Following are the information of some items of Ajay Ltd. for the year 2022:
Particulars Amount (`) Particulars Amount (`)
Preliminary Expenses 2,40,000 Motor Vehicles 4,75,000
Goodwill 30,000 Stock in trade 1,40,000
Discount on issue of Debentures 20,000 Provision for tax 1,35,000
10% Debentures 2,00,000 Cash at bank 1,20,000
Bills receivable 16,000 Loose tools 12,000
Based on the above information you are required to answer the following questions. (Q. 4 to Q.7)
Q.4. Which of the following items is shown under the head ‗Current Assets‘ while preparing
company‘s Balance Sheet as per Schedule III of Company Act 2013?
(a) Motor Vehicles, Stock in trade, Provision for tax, Cash at bank, Loose tools
(b) Bills receivable, Stock in trade, Provision for tax, Cash at bank, Loose tools
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(c) Bills receivable, Stock in trade, Cash at bank, Loose tools

(d) Stock in trade, Provision for tax, Cash at bank, Loose tools, Preliminary Expenses
Answer: (c) Bills receivable, Stock in trade, Cash at bank, Loose tools
Q.5. Which of the following items is shown under the head ‗Non-Current Assets‘ while preparing
(a) Motor Vehicles, Stock in trade, Goodwill, Cash at bank, Loose tools
(b) Bills receivable, Goodwill, Motor Vehicles, Loose tools
(c) Goodwill, Motor Vehicles, Loose tools
(d) Goodwill, Motor Vehicles
Answer: (d) Goodwill, Motor Vehicles
Q.6. Loose tools is shown under the sub head _________ of the Balance Sheet as per Revised
Schedule III of Companies Act, 2013.
(a) Fixed Assets
(b) Other Current Assets
(c) Inventories
(d) Stocks
Answer: (c) Inventories
Q.7. Goodwill is shown under the sub head _________ of the Balance Sheet as per Revised
Schedule III of Companies Act, 2013.
(a) Fixed Assets
(b) Non-Current Assets
(c) Intangible Assets
(d) Tangible Assets
Answer: (a) Fixed Assets
Q.8. Under which of the following headings / sub-headings, calls-in-advance will be presented
in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013?
(a) Current Liabilities
(b) Share Capital
(c) Share Application Money Pending Allotment
(d) Reserves and Surplus
Answer: (a) Current Liabilities
Q.9. Which of the following is not a limitation of analysis of financial statements?

(a) Window Dressing
(b) Price level changes ignored
(c) Subjectivity
(d) Intra-firm comparison possible
Answer: (d) Intra-firm comparison possible
Q.10. Debit Balance of Profit and Loss account is shown under the sub head _________ of the
Balance Sheet as per Revised Schedule III of Companies Act, 2013.
(a) Other Current Assets
(b) Reserves and Surplus
(c) Other Current Liabilities
(d) Long-term Provisions
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Answer: (b) Reserves and Surplus
Q.11. Sale of services is a part of ____________ .

(a) Other income
(b) Other expenses
(c) Finance of cost
(d) Revenue from operations
Answer: (d) Revenue from operations
Q12. When Financial Statements of two or more organisations are analysed, it is called:
(a) Intra-firm Analysis
(b) Inter-firm Analysis
(c) Vertical Analysis
(d) None of these
Answer: (b) Inter-firm Analysis
Q.13. As per Companies Act, the Balance Sheet of a company is required to be presented in
……………
(a) Horizontal Form
(b) Vertical Form
(c) Either Horizontal or Vertical Form
(d) Neither of the above
Answer: (b) Vertical Form
Q.14. Provision for Tax appears in a Company‘s Balance Sheet under the Sub-head ………..
(a) Short-term Provisions
(b) Reserves and Surplus
(c) Long-term Provisions
(d) Other Current Liabilities
Answer: (a) Short-term Provisions
Q.15. Which analysis is considered as dynamic?

(a) Horizontal Analysis
(b) Vertical Analysis
(c) Internal Analysis
(d) External Analysis
Answer: (a) Horizontal Analysis
Q.16. Analysis of Financial Statement is significant

(a) For creditors
(b) For Managers
(c) For employees
(d) All the above
Answer: (d) All the above
Q.17. Main limitation of Analysis of Financial Statement is

(a) Affected by window dressing
(b) Difficulty in forecasting
(c) Donate reflect changes in price level
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(d) All the above

Answer: (d) All the above
Q.18. Financial Analysis becomes useless because it

(a) Measures the profitability
(b) Measures the solvency
(c) Lacks qualitative analysis
(d) Makes a comparative study
Answer: (c) Lacks qualitative analysis
Q.19. Which of the following items is shown under the head ‗current assets‘ while preparing
company‘s Balance Sheet?
(a) Investment in property
(b) Patents
(c) Inventories
(d) Vehicles
Answer: (c) Inventories
Q.20. Under which tool of Financial Statement Analysis, 100% is taken as a base and all other
related items are expressed as a percentage of base?
(a) Comparative Statement
(b) Common Size Statement
(c) Ratio analysis
(d) Cash Flow Statement
Answer: (b) Common Size Statement
Q.21. Intra – Firm Analysis is also known as:

(a)Cross- section Analysis
(b)Trend analysis
(c)Dividend decision Analysis
(d)Debt Analysis
Answer: (b) Trend analysis
Case Study: Following are the information of some items of Bahadur Ltd. for the year 2022:
Particulars Amount (`) Particulars Amount (`)
Preliminary Expenses 2,40,000 Motor Vehicles 4,75,000
Goodwill 30,000 Stock in trade 1,40,000
Discount on issue of Provision for tax 1,35,000
Debentures 20,000 Cash at bank 1,20,000
10% Debentures 2,00,000 Loose tools 12,000
Bills receivable 16,000
Based on the above information you are required to answer the following questions. (Q.22 to
Q.25)
Q.22. How much amount is shown under the head ‗Current Assets‘ while preparing company‘s
Balance Sheet as per Schedule III of Company Act 2013?
(a) ` 8,82,000
(b) ` 4,23,000
(c) ` 2,88,000
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(d) ` 6,47,000
Answer: (c) ` 2,88,000
Q.23. How much amount is shown under the head ‗Non-Current Assets‘ while preparing
(a) ` 8,82,000
(b) ` 5,33,000
(c) ` 5,17,000
(d) ` 5,05,000
Answer: (d) ` 5,05,000
Q.24. How much amount is shown under the sub head Inventories of the Balance Sheet as per
Revised Schedule III of Companies Act, 2013.
(a) ` 1,50,000
(b) ` 1,52,000
(c) ` 2,88,000
(d) ` 3,47,000
Answer: (b) `₹ 1,52,000
Q.25. How much amount is related to the sub head Reserves & Surplus of the Balance Sheet as
per Revised Schedule III of Companies Act, 2013.
(a) ` 2,60,000
(b) ` 3,95,000
(c) ` 20,000
(d) ` 2,40,000
Answer: (a) ` 2,60,000
Q.25. Match the following

List I List II
1. Public deposits a) Inventories
2. Trade marks b) Cash and cash equivalents
c) Long term borrowing
d) Intangible fixed assets
(a) 1-c,2-d
(b) 1-a,2-d
(c) 1-b,2-d
(d) 1-c,2-a
Answer: (a) 1-c,2-d

List I List II
1. Loose tools a) Short term borrowing.
2. Bank overdraft b) Cash and cash equivalent.
c) Inventory
d) Long term provision.
(a) 1-c,2-d
(b) 1-c,2-b
(c) 1-b,2-d
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(d) 1-c,2-a
Answer: (d) 1-c,2-a

List I List II
1. Financial statement. a) Balance Sheet
2. Financial analysis. b) Receipts and Payments Account.
c) Ratio
d) Realisation A/c
(a) 1-a,2-b
(b) 1-a,2-c
(c) 1-a,2-d
(d) 1-c,2-a
Answer: (b) 1-a,2-c

List I List II
1. Comparative statement. a) Dynamic analysis.
2. Common size statement. b) Horizontal analysis
c) Vertical analysis.
d) External analysis.
(a) 1-b,2-d
(b) 1-b,2-c
(c) 1-b,2-a
(d) 1-c,2-b
Answer: (b) 1-b,2-c

List I List II
1) Debentures redeemable after 5 years a) Long term provision
2) Debentures redeemable within 1 b) Short term provision
year
c) Other current liability
d) Long term borrowings
(a) 1-d,2-a
(b) 1-d,2-b
(c) 1-d,2-c
(d) 1-c,2-d
Answer: (c) 1-d,2-c

List I List II
1. 500 shares on which final call not a) Authorised share capital
received
2. 500 Shares on which final call has b) Subscribed and fully paid
not been called
c) Subscribed but not fully paid
d) Uncalled capital
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(a) 1-c,2-d
(b) 1-c,2-c
(c) 1-b,2-a
(d) 1-c,2-b
Answer: (b) 1-c,2-c
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Ratio Analysis
Ratio: It is an arithmetical expression of relationship between two related or interdependent

items.
Accounting Ratios: It is a mathematical expression that shows the relationship between

various items or groups of items shown in financial statements.
Objectives of Ratio Analysis:
(i) To know the areas of an enterprise that needs more attention.

(ii) To know about the potential areas that can be improved.
(iii) Helpful in comparative analysis of the performance.
(iv) Helpful in budgeting and forecasting.
(v) To provide analysis of the liquidity, solvency, activity and profitability of an enterprise.
(vi) To provide information useful for making estimates and preparing the plans for the
future.
Advantages of Ratio Analysis:
(i) It is useful in analysis of financial statements.

(ii) Helps in simplifying accounting figures.
(iii) Useful in judging the operating efficiency of business.
(iv) Helps in identification of problem areas.
(v) Helpful in comparative analysis.
Limitations of Ratio Analysis:
(i) Accounting ratios ignore qualitative factors.

(ii) Absence of universally accepted terminology.
(iii) Ratios are affected by window-dressing.
(iv) Effects of inherent limitations of accounting.
(v) Misleading results in the absence of absolute data.
(vi) Price level changes ignored.
(vii) Affected by personal bias and ability of the analyst.
Classification of Accounting Ratios:
In view of the requirements of various users, the accounting ratios may be classified as under
LIQUIDITY RATIOS:
Liquidity ratios measure the firm‘s ability to fulfil its short-term financial obligations.
a) Current Ratio/Working Capital Ratio:

This ratio establishes a relationship between current assets and current liabilities and is
used to assess the short- term financial position of the business concern. Current ratio of
2:1 is considered to be ideal.
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Current Ratio: Current Assets / Current Liabilities
Items Included in Current Assets:

a) Current investments
b) Inventories (Excluding loose tools, stores and spares)
c) Trade receivables (Bills receivable and Sundry debtors less provision for doubtful Debts
d) Cash and cash equivalents (cash in hand, cash at bank, cheques/drafts in hand)
e) Short-term loans and advances
f) Other current assets (prepaid expenses, Accrued /outstanding income)
Items Included in Current Liabilities:

a) Short-term borrowings
b) Trade payables (Bills payable and sundry creditors)
c) 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.)
d) Short-term provisions
b) Liquid Ratio/Quick Ratio/Acid Test Ratio:
This ratio establishes a relationship between liquid assets and current liabilities and is used
to measure the firm‘s ability to pay the claims of creditors immediately. This ratio is a better
indicator of liquidity and ratio 1: 1 is considered to be ideal.
Liquid Ratio: Liquid/Quick Assets / current liabilities
Liquid Assets = Current Assets - (Inventory + Prepaid Expenses)
Items Included in Liquid/Quick Assets

a) Current investments.
b) Trade receivables (bill receivables, debtors less provisions for doubtful debts)
c) Cash and cash equivalents.
d) Short-term loans and advances.
e) Other current assets except prepaid expenses.
f) Items excluded in liquid assets are inventories, prepaid expenses.
Items Included in Current Liabilities

a) Short-term borrowings.
b) Trade payables (bills payable and sundry creditors).
c) Other short-term liabilities.
d) Short-term provisions.
SOLVENCY RATIOS
Solvency ratios judge the long-term financial position of an enterprise i.e. whether the business
is able to pay its long-term liabilities or not.
a) Debt to Equity Ratio: (also called Leverage ratio)
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It establishes the relationship between long-term debt (external equities) and the equity
(internal equities) i.e. shareholders‘ funds.
It is computed to ascertain the soundness of the long-term financial position of the firm.
Generally, the ratio of 2:1 is considered as an ideal.
Debt to Equity Ratio: Long-term Debts / Equity or Shareholders‘ Fund
Items Included in Long-term Debts:

a) long-term borrowings and
b) long-term provisions.
Items Included in Equity or Shareholders‘ Funds=

a) Equity Share Capital
b) Preference Share Capital
c) Reserves and Surplus
Or
Non-current Asset (Tangible assets + Intangible assets + Non-current trade investments +

Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term
borrowings + Long-term provisions)
Working Capital= Current Assets – Current Liabilities
b) Total Assets to Debt Ratio:

It establishes a relationship between total assets and total long-term debts.
Items Included in Total Assets

Total Assets includes
Non-current Assets [Fixed assets (Tangible and intangible 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 +
Other Current Assets]
Items Included in Long-term Debts

Non-current Asset (Tangible assets + Intangible assets + Non-current trade investments +
Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term
c) Proprietary Ratio:
It establishes the relationship between proprietors‘ funds and total assets.
Proprietary Ratio: Proprietors‘ Funds or Shareholders‘ Funds / Total assets
Proprietors‘ Funds or Shareholders‘ Funds=

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By Liabilities Approach:
Share Capital + Reserves and Surplus
By Assets Approach:
Non-current Assets (Tangible assets + Intangible assets + Non-current trade investments

+ Long-term loans and advances) + Working Capital – Non- current Liabilities (Long-term
Total assets includes

Non-current Assets [Fixed assets (Tangible and intangible 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 +
Other Current Assets]
ACTIVITY RATIOS
a) Inventory Turnover Ratio:

It establishes a relationship between Cost of Revenue from Operations and average
inventory carried during that period.
Inventory Turnover Ratio: Cost of Revenue from operations / Average Inventory
Cost of Revenue from Operation = Revenue from Operations–Gross Profit

OR
Opening Inventory + Net Purchases + Direct Expenses (Assume to be given) – Closing

Inventories
OR
Cost of materials consumed + purchase of stock- in-trade + change in Inventory (Finished

Goods; Work in Progress & Stock-in-trade) + Direct Expenses (Assume given)
Average Inventory = Opening Inventory + Closing Inventory/2
b) Trade Receivable Turnover Ratio:

It establishes the relationship between Credit Revenue from Operations and Average
Trade Receivables.
Trade Receivable Turnover Ratio= Net credit revenue from operations / Average Trade
Receivable
Net Credit Sales = Total Sales – Cash Sales `
OR
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Credit Revenue from Operation = Revenue from Operation – Cash Revenue from Operation
Average Trade Receivables = (Opening Debtors + Trade Receivable + Closing Debtors +

trade
Receivable) / 2
Trade Receivables = Debtors + Bills Receivables
Debt Collection Period = 365 / 360 Days or 12 Months/ Trade Receivables turnover Ratio
c) Trade Payables / Creditors Turnover Ratio:

It indicates the speed with which the amount is being paid to creditors. The higher the
ratio, the better it is.
Trade Payables / Creditors Turnover Ratio: Net Credit Purchases / Average Trade Payables
Average Trade Payables = (Opening Creditors + Trade Payable + Closing Creditors + trade
Payables) / 2
Average Payment Period = 365 or 12 / Trade Payables Turnover Ratio
In the absence of opening creditors and bills payable, closing creditors and bills payable
can be used in the above formula. Also, if credit purchases are not given, then all
purchases are deemed to be on credit.
d) Working Capital Turnover Ratio:

This ratio shows the number of times the working capital has been rotated in generating
sales.
These ratios measure the profitability of a business assessing and help in overall efficiency
of the business.
Working Capital Turnover Ratio: Revenue from Operations / Working capital
Working Capital = Current assets - Current liabilities
PROFITABILITY RATIOS
a) Gross Profit Ratio:

Gross profit ratio shows the relationship between the net sales gross profit to net sales
(revenue from operations)
Gross profit ratio = Gross profit / revenue from Operations*100 = …..%
Cost of Revenue from Operation = Revenue from Operations–Gross Profit

OR
Opening Inventory + Net Purchases + Direct Expenses (Assume to be given) – Closing

Inventories
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OR
Cost of materials consumed + purchase of stock- in-trade + change in Inventory (Finished

Goods; Work in Progress & Stock-in-trade) + Direct Expenses
Gross Profit = Revenue from operations - Cost of Revenue from operations
In case, a statement of profit and loss is given, cost of revenue from operations i.e. cost of
goods sold is computed by adding cost of materials consumed, purchases of stock-in-trade,
changes in inventories of finished goods, work-in- progress and stock-in-trade and direct
expenses.
b) Operating Ratio:
Operating ratio establishes the relationship between operating cost and revenue from
operations i.e. net sales. = (Cost of Revenue from operations + Operating Expenses) /
revenue from Operations *100
Cost of Revenue from Operations = Cost of Materials Consumed + Purchases of Stock-in-

trade + Change in Inventories of Finished Goods, Work-in-progress and Stock in-trade +
Direct Expenses
Or
Revenue from Operations – Gross Profit.
Operating Expenses = Employees Benefits Expenses + Other Expenses (Other than non-
operating expenses) + Depreciation and Amortization Expenses
Or
Office expenses, administrative expenses, selling and distribution expenses, employees

benefit expenses, depreciation and amortization expenses.
Alternatively operating cost may be calculated as follows:

Operating Cost = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in
Inventories of Finished Goods, Work-in-progress and Stock-in-trade + Employees Benefits
Expenses + Other Expenses (Other than non-operating expenses)
Operating Profit Ratio: Operating profit ratio establishes the relationship between the
operating profit and i.e. (revenue from operations) net sales.
c) Operating Profit Ratio:

Operating profit ratio is an indicator of operational efficiency of the business.
Operating Profit Ratio: = Operating Profit / revenue from Operations * 100 = …..%
Operating Profit = Gross profit + Other Operating Income - Other Operating Expenses
Or
Net Profit (before tax) + non- Operating Expenses/Losses - Non - Operating Incomes
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Or
Revenue from Operations - Operating Cost
d) Net Profit Ratio:

Net profit ratio shows the relationship between net profit and revenue from operations i.e.
net sales. Net profit ratio is an indicator of overall operational efficiency of the business.
Net Profit Ratio = Net profit after tax / Revenue from operations * 100 = ….. %
Net Profit = Revenue from operations - Cost from Revenue from Operations - Operating
Expenses - Non- operating Expenses + Non-operating Income - Tax
e) Return on Investment/Capital Employed:

It establishes the relationship between net profit before interest, tax and preference
dividend and capital employed (equity + debts).
Return on Investment =
Net Profit before interest, Tax and Dividend / capital Employed * 100 = …..%
Capital employed can be calculated from liabilities side approach and assets side
approach as follows:
When Liabilities Approach is Followed, It is computed by adding
(a) Shareholders‘ funds (i.e. share capital, reserves and surplus).
(b) Non-current liabilities (i.e. long-term borrowings and long-term provisions).
When Assets Approach is Followed, It is computed by adding

1. Non-current assets
2. Working capital, i.e. current assets – current liabilities.
NOTE Since, non-operating assets are excluded while determining capital employed,
income from non-operating assets should also be excluded from profit.
Q.1 The Two Basic Measures of Liquidity Ratio are-

(a) Stock and Debtors Turnover Ratio
(b) Current Ratio and operating ratio
(c) Current ratio and Liquid ratio
(d) Gross and Net profit Ratio
Ans. Current ratio and Liquid ratio
Q.2 Ideal Current Ratio is

(a) 3:1
(b) 2:2
(c) 2:1
(d) 1:1
Ans. 2:1
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Q.3 Current Ratio=

(a) Current Assets / Current Liabilities
(b) Quick Assets / Current liabilities
(c) Fixed Assets / Current liabilities
Ans.(a) Current Assets / Current liabilities
Q.4 100 - Operating Profit Ratio is equal to

(a) Operating Ratio
(b) Operating Net profit Ratio
(c) Gross Profit Ratio
(d) Current ratio
Ans. Operating Ratio
Q.5 Liquid Assets=

(a) Current Assets-Inventory
(b) Current Assets + Inventory
(c) Current Assets- (Inventory + prepaid Expenses)
Ans. Current Assets- (Inventory + prepaid Expenses)
Q.6 Which of the following is not Activity Ratio?

(a) Inventory Turnover Ratio
(b) Trade receivable turnover Ratio
(c) Interest coverage Ratio
(d) All of these
Ans. Interest coverage Ratio
Q.7 Debt to Equity ratio=

(a) Debt / Equity
(b) Debt / Shareholders Fund
(d) None of these
Ans. Both (a) and (b)
Q.8 Activity Ratio also known as

(a) Performance Ratio
(b) Turnover Ratio
Ans. Both (a) and (b)
Q.9 Inventory Turnover Ratio =

(a) Cost of revenue from operation / Average Inventory
(b) Cost of revenue from operation / Opening Inventory
(c) Cost of revenue from operation / Closing Inventory
(d) None of these
Ans. Cost of revenue from operation / Average Inventory
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Q.10 Trade receivable Includes:

(a) Debtors
(b) Bills receivables
(c) both (a) and (b)
(d) Either (a) or (b)
Ans. both (a) and (b)
Q11. Working Capital is the :

(A) Cash and Bank Balance
(B) Capital borrowed from the Banks
(C) Difference between Current Assets and Current Liabilities
(D) Difference between Current Assets and Fixed Asset
Ans. (C) Difference between Current Assets and Current Liabilities
Q12. Cash Balance ` 5,000; Trade Payables ` 40,000; Inventory ` 50,000; Trade Receivables `
65,000 and Prepaid Expenses are ` 10,000. Liquid Ratio will be
(A) 1.75 : 1
(B) 2 : 1
(C) 3.25 : 1
(D) 3 : 1
Ans: (A) 1.75 : 1
Q13. Which of the following statements are true about ratio analysis?
(a) Ratio Analysis is useful in financial analysis.
(b) Ratio Analysis is helpful in communication and coordination.
(c) Ratio Analysis is not helpful in identifying weak spots of the business.
(d) Ratio Analysis is helpful in financial planning and forecasting.
(A) A,B and D

(B) A,C and D
(C) A,B and C
(D) A,B,C,D
Ans: (A) A,B and D
Q14. Opening Inventory ` 1,00,000; Closing Inventory ` 1,50,000; Purchases ` 6,00,000;
Carriage ` 25,000; Wages ` 2,00,000. Inventory Turnover Ratio will be:
(A) 6.6 Times
(B) 7.4 Times
(C) 7 Times
(D) 6.2 Times
Ans. (A) 6.6 Times
Q15. Operating ratio is:
(A) Cost of revenue from operations + Selling Expenses/Net revenue from operations
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(B) Cost of production + Operating Expenses/Net revenue from operations

(C) Cost of revenue from operations + Operating Expenses/Net Revenue from Operations
(D) Cost of Production/Net revenue from operations.
Ans. (C) Cost of revenue from operations + Operating Expenses/Net Revenue from Operations
Q16. Revenue from operations, i.e. sales ` 6,00,000, Gross Profit 25% on cost. Gross profit ratio
will be:
(A) 25%
(B) 20%
(C) 22%
(D) 18%
Ans. (B) 20%
Q17. Current ratio of X ltd. is 2.4:1 and Y ltd. is 1.2:1. Choose the most appropriate options
from the followings
(a) Y ltd is better than X ltd.
(b) Both companies are having ideal current ratio
(c) X ltd. is better than Y ltd
(d) Both the companies are having poor liquidity
Ans. (c ) X ltd. is better than Y ltd
Q18. If the current liabilities are ` 120000, Working capital ` 360000 and Inventory is ` 60000.
Its quick ratio will be
(A) 3:1
(B) 3.5:1
(C) 4:1
(D) 4.5:1
Ans. (B) 3.5:1
Q19. Which of the following transactions will increase the Debt of Equity ratio, which is 1 : 2?
(a) Issue of shares for cash
(b) Redemption of Preference shares
(c) Redemption of Debentures
(d) Conversion of Debentures into Shares
Ans. (b) Redemption of Preference shares
Q20. Profit for the objective of calculating a ratio may be taken as

(a) Profit before tax but after interest
(b) Profit before interest and tax
(c) Profit after interest and tax
(d) All of the above
Ans. (d) All of the above
Q21. Which of the following are limitations of ratio analysis?

(a) Ratio Analysis is historical analysis
(b) Ratio analysis ignores qualitative factors.
(c) Ratio Analysis ignores quantitative analysis.
(d) Ratio Analysis may result in false results if variations in price levels are not considered.
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(A) A,C and D

(B) A,B and D
(C) A,B and C
(D) A,B,C,D
Ans. (B) A,B and D
Q22. The ratio analysis is helpful to management in making several decisions, but as a
mechanical substitute for judgement and thinking, it is worse than useless.
(a) True
(b) False
Ans. (a) True
Q23. The ………………………….. indicates the percentage of each sales rupee remaining after the
firm has paid for its goods.
(a) Net profit margin
(b) Operating profit margin
(c) Gross profit margin
(d) Earnings available to equity shareholders
Ans. (c ) Gross profit margin
Q24. Ankur Co. extends credit terms of 45 days to its customers. Its credit collection would be
considered poor if its average collection period was
(a) 32 days
(b) 38 days
(c) 44 days
(d) 57 days
Ans. (d) 57 days
Q25. The …………………….. is useful in evaluating credit and collection policies.

(a) Average payment period
(b) Average collection period
(c) Current ratio
(d) Inventory turnover ratio
Ans. (b) Average collection period
ASSERTION AND REASONING QUESTIONS
The following questions consist of two statements, one labelled as the ‗Assertion (A)‘ and the
other as ‗Reason (R)‘. You are to examine these two statements carefully and select the answers
using the code given below:
(a) Both A and R are individually true and R is the correct explanation of A
(b) Both A and R are individually true but R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true
Q26. Assertion (A): The limitations of financial statements also form the limitations of the ratio
analysis.
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Reason (R): Since the ratios are derived from the financial statements, any weakness in the
original financial statements will also creep in the derived analysis in the form of Accounting
Ratios.
Ans. (a) Both A and R are individually true and R is the correct explanation of A
Q27. Assertion (A): Liquid ratio reveals strength of liquidity of a business unit.
Reason (R): Liquid ratio analyses liquid assets and Current liabilities of a business unit in order
to assess the extent of liquidity.
Q28. Assertion (A): Current ratio establishes relationship between current assets and current
liabilities.
Reason (R): Current ratio is a part of Activity ratio.
Ans. (c) A is true but R is false
Q29. Assertion (A): Gross Profit is the sum of Revenue and cost of revenue from operations.
Reason (R): Gross profit helps in fixing selling prices and assessing efficiency of trading
activities.
Ans. (d) A is false but R is true
Q30. Assertion (A): Prepaid expenses are not considered as liquid assets.
Reason (R): Prepaid expenses cannot be converted into cash.
Q31. Assertion (A):Liquid ratio reveals strength of Liquidity of a business unit.

Reason (R): Liquid ratio analysis liquid assets and liquid liabilities of a business unit in order to
assess the extent of liquidity.
Q32. Assertion (A): Proprietary ratio establishes relationship between proprietors fund and total
assets.
Reason (R): The objective of calculating proprietary ratio is to measure proportion of fixed assets
financed by shareholders funds.
Ans. (b) Both A and R are individually true but R is not the correct explanation of A
CASE STUDY QUESTIONS
Case study 1:
On the basis of the information given below answer the following questions (Q. 33 to 36)
Accounts Guru Ltd. want to analyse its liquidity position along with assessment of Inventory
position from the given information: Inventory Turnover Ratio: 4 times, Inventory in the
beginning was ` 20,000 less than Inventory at the end, Revenue from Operations ` 6,00,000,
Current Liabilities ` 60,000. Gross Profit Ratio 25%, Quick Ratio 0.75 : 1
Answer the following questions:
Q33. State the amount of Cost of Revenue from Operations.

(a) ` 4,50,000
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(b) ` 4,90,000
(c) ` 4,80,000
(d) ` 3,50,000
Ans. (a)
Q34. State the amount of average inventory.

(a) ` 1,25,000
(b) ` 1,12,500
(c) ` 2,50,000
(d) 1,52,000
Ans. (b)
Q35. State the amount of closing inventory.

(a) ` 1,12,000
(b) ` 1,12,500
(c) ` 1,67 500
(d) 1,22,500
Ans. (d)
Q36. State the current ratio of Accounts Guru Ltd.

(a) 2.4:1
(b) 2.5:1
(c ) 2.79: 1
(d) 2.6:1
Ans. (c )
Case study 2:
Read the following hypothetical extract of Rehan Limited and answer the given questions on the
basis of the same:
YEAR(AMOUNT) 2020 (`) 2019 (`) 2018 (`)
Outstanding Expenses 50,000 40,000 25,000

Prepaid Expenses 3,00,000 2,50,000 3,50,000
Trade Payables 18,00,000 16,00,000 14,00,000
Inventory 12,00,000 10,00,000 11,00,000
Trade Receivables 11,00,000 8,00,000 10,00,000
Cash in hand 17,00,000 12,00,000 15,00,000
Revenue from operations 24,00,000 18,00,000 20,00,000
Gross Profit Ratio 12% 15% 18%
Q37. Current Ratio for the year 2020 will be_______________ (Choose the correct alternative)
(a) 2:1
(b) 1.8:1
(c) 2.32:1
(d) 2.4:1
Ans. (c ) 2.32:1
96
Q38. Quick Ratio for the year 2018 will be______________(Choose the correct alternative)
(a) 1.75:1
(b) 1.8:1
(c) 0.94:1
(d) 1.25:1
Ans. (b) 1.8:1
Q39. Inventory turnover ratio for the year 2020 will be______(Choose the correct alternative)
(a) 1.62times
(b) 1.82 times
(c) 1.55times
(d) 1.92 times
Ans. (d) 1.92 times
Q40. Cost of Revenue from Operations for the year 2020 would be _____________________ (Choose
the correct alternative)
(a) ` 21,12,000
(b) ` 21,13,000
(c) ` 21,15,000
(d) ` 21,17,000
Ans. (a) ` 21,12,000
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Xii Acc Kvs Ro Agra 2021-22 Term 1

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Accountancy / XII (2021-22) Term-1

STUDENT SUPPORT MATERIAL

KENDRIYA VIDYALAYA SANGATHAN

S. No. Particulars Page No.

1 Syllabus for Term-1 (2021-22) 4

Accounting for Partnership Firms

3 Change in Profit Sharing Ratio 25 – 39

Accounting for Companies

Analysis of Financial Statements

6 Financial Statements of Company: 75 – 83

Units Name of The Chapter/Unit Marks

Accounting for Partnership Firms –

Section-4 of the Indian Partnership Act, 1932

(viii) Profit sharing ratio.

Benefits of Partnership Deed

(i) It regulates the rights, duties and liabilities of each partner.

Rules applicable in the absence of partnership deed

Profit sharing Ratio Equal, Irrespective of capital contribution.

Interest on Capital No Interest on Capital is to be allowed to any Partner

Interest on Drawings No interest on Drawings is to be charged to any partner

Salary or Commission to a Partner Not allowed to any partner

Interest on loan by a Partner Interest is allowed @ 6% per annum.

Distribution of Profits among Partners

(i) For transfer of balance of Profit and Loss Account

Profit and Loss A/C Dr.

(ii) For Interest on Capital

For allowing Interest on Capital:

Interest on Capital A/c Dr.

For transferring Interest on Capital to P & L Appropriation A/c

Profit and Loss Appropriation A/C Dr.

(iii) For Salary or Commission payable to a partner

For allowing Salary or Commission to a partner:

Partners Salary/Commission A/C Dr.

Profit and Loss Appropriation A/C Dr.

(iv) For transfer of Reserves:

Profit and Loss Appropriation A/C Dr.

(v) For Interest on Drawings:

For charging interest on a partner‘s drawings:

For transferring interest on drawings to Profit and Loss Appropriation A/c

Profit and Loss Appropriation A/C Dr.

Profit and Loss Appropriations A/C

To Interest on Capital: By Profit and Loss A/c

Partner’s Capital Accounts

(i) Fixed Capital Accounts

Fixed Capital Accounts

Partner’s Capital A/Cs

Particulars X(Rs.) Y(Rs.) Particulars X(Rs.) Y(Rs.)

To Cash/Bank A/c By Balance b/d

(Closing balance) (Additional Capital

Particulars X(Rs.) Y(Rs.) Particulars X(Rs.) Y(Rs.)

Fluctuating Capital Account

Particulars X(Rs.) Y(Rs.) Particulars X(Rs.) Y(Rs.)

To Balance b/d By Balance b/d

(Opening Dr. Balance) (Opening Cr. Balance)

A. Interest on Capital: An Appropriation of Profits:

In case of Losses Interest on Capital is NOT ALLOWED

B. Interest on Capital: As a Charge against Profits:

Capital at the End xxx

3. Any salary/commission received

Case 1: When Rate of Interest on Drawings is given in % p.a.

1. When date of Drawing is not given

2. When date of Drawings is given

Case 2: When different amount are withdrawn on different dates:

1. Simple Interest Method

Interest = Total of products * 9/100* 1/12= 3060009/1001/12 = Rs 2295/-.