Accountancy

केन्द्रीय विद्यालय संगठन क्षेत्रीय कायाालय जयपरु
Kendriya Vidyalaya Sangathan Regional Office

Jaipur
Class - XII
ACCOUNTANCY [055]
TERM 1
Study Material, Question Bank, 5 Sample Question

Papers with Answer Key
Based on
Latest CBSE Exam Pattern for the
Session 2021-22
के न्द्रीय विद्यालय संगठन क्षेत्रीय कायाालय जयपरु
Kendriya Vidyalaya Sangathan Regional Office
Jaipur
Our Patron
SH. B.L. MORODIA

DEPUTY
COMMISSIONER
KVS RO JAIPUR
JAIPUR
SH. DIGG RAJ MEENA
Dr. R.K.
Meena PRINCIPAL
KV NO.1 AJMER
ASSISTANT
COMMISSIONER KVS RO
Overall Coordinators:
1. Mr. I M Sharma (KV1, Jaipur)
2. Mr. Ajay Sharma (KV1, Ajmer)
Sr.No. Name of the Teacher KV Name
1. Mr. Rajesh Devenda KV, Nasirabad
2. Mr. Alak Das KV4, Jaipur
3. Mr. Vijay Kumar Borah KV, Alwar
4. Mr. Anil Chauhan KV2, Bikaner
5. Mrs. Anjani Kumar KV1, Bikaner
6. Ms. Anju Cheema KV, Phulera
7. Mr. Govardhan Vora KV1, Udaipur
8. Mrs. Meenakshi Verma KV2, Ajmer
9. Mrs. Ritu Vinayak KV, Bhilwara
10. Mrs. Shikha Sareen KV6, Jaipur
11. Ms. Renuka KV1, Jaipur
12. Mrs. Anjali Saluja KV, Baran
13. Mrs. Kavita Chandna KV, Lalgarh Jattan
14. Mr. Neelesh Sharma KV, Beawer
Table of Contents
*******************
S.NO. TOPICS PG.NO.
1. CBSE SYLLABUS TERM-1 (2021-22) 1
2. STUDY MATERIAL including QUESTION BANK: 2 – 22
23-34
TERM-1 35-45
PART-A 46-62
ACCOUNTING OF PARTNERSHIP FIRMS:
CHAPTER-1 FUNDAMENTALS OF PARTNERSHIP
CHAPTER-2 CHANGE IN PROFIT SHARING
63-69
RATIO CHAPTER-3 ADMISSION OF A NEW
PARTNER
70-74
ACCOUNTING OF COMPANY: 75-87
CHAPTER-1 ISSUE OF SHARES
PART-B
ANALYSIS OF FINANCIAL STATEMENTS

CHAPTER-1 FINANCIAL STATEMENTS
CHAPTER-2 ANALYSIS OF FINANCIAL
STATEMENTS CHAPTER-3 RATIO ANALYSIS
3. CBSE SAMPLE PAPER BLUE PRINT 88

(CHAPTER-WISE ANALYSIS)
4. SAMPLE PAPERS 89-105

SQP-1 106-116
SQP-2 117-125
SQP-3 126-139
SQP-4 140-152
SQP-5
MARKING SCHEME AND BLUE-PRINT 153
MS-1 154
MS-2
156
MS-3
158
MS-4
MS-5
162
****************************************************************************************
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1
PART-A - ACCOUNTING FORPARTNERSHIP FIRMS:
****************************************************************************************************
*
Chapter-1
Fundamental of Partnership And Goodwill
Partnership is a form of business organization in which two or more competent

persons join together to carry on any lawful business after entering into an
agreement to share the profit and loss of the business. Persons who have
entered
into partnership are individually called partners and collectively known as Firm.
Definition
Section 4 of the Indian Partnership Act 1932 defines partnership as “the
relation between persons who have agreed to share the profits of a business carried
on by all or any one of them acting for all”.
Nature of partnership
The essential features of partnership are:
1 Number of persons: In order to form a partnership there must
be at least 2 persons. Maximum limit is 50.
2 Agreement: In order to form a partnership there must be an
agreement .The agreement may be oral or written.
Note: It is not necessary that such an agreement is in written form.
An oral agreement is equally valid. But in order to avoid disputes, it
is preferred that the partners have written agreement. The written
agreement is known as a partnership deed.
1 Always to conduct a business: The agreement should be to carry on some
lawful business.
2 Unlimited liability: In partnership the liability of each partner is
unlimited. It is joint and several.
3 No separate legal existence: A partnership is not a legal entity.
It has no separate legal existence apart from its members. It
can’t purchase property in its own name.
4 Sharing of profit/ loss: The profit should be shared by the
partners in an agreed ratio. If there is no specific agreement in
this regard, the partners will share the profit equally.
5 Mutual agency: Each partner can participate in the conduct of a business
and act for the firm. Similarly, each partner is bound by the acts of other
partners. Thus a partner is both an agent and a principal. He is an agent
when he makes the other partners liable for his acts. He is the principal
when the other partners make him liable for their acts.
Partnership Deed: Deed is a document which contains terms of the agreement
between partners, about the objective of business, contribution of capital, share of
profit & loss, rights and duties of partners, entitlement of interest on capital – salary
etc. The Partnership Act does not require that the agreement must be in writing to
avoid conflicts that may arise in the future.The deed should be properly drafted and
prepared as per the provision of the ‘Stamp Act’ and preferably registered with the
Registrar of Firms.
2
Rules applicable in the absence of Partnership Deed
In the absence of Partnership Deed, following provision of Indian Partnership
Act, 1932 will be applicable:
(a) Interest on Capital: No partner is entitled for interest on capital.
(b) Interest on Drawings: No interest is to be charged on the drawings made
by partners.
(c) Remuneration for Firm’s Work: No partner is entitled to get salary or
other remuneration for taking part in the business activities of the firm.
(d) Profit-Sharing Ratio: Profits and losses of the firm are to be shared equally.
(e) Interest on Advance (Loan to the firm): If any partner has advanced some
money to the firm other than the capital, he/she is entitled for interest on the
such advance amount @ 6% p.a.
Fixed v/s Fluctuating Capital
As per the consent of all partners, they may decide to have their capital fixed
or fluctuate.
Fixed Capital: Capital of the partners remains unchanged year after year except
on the following situations:
(1) ByAdditional capital introduced by partners’ as per agreement
(2) Excess capital withdrawn permanently, as per agreement
In the case of Fixed Capital, there is need to prepare two accounts of partners
– (a) Capital Accounts (b) Current Accounts
Capital Accounts (Fixed)

Particulars A B Particulars A B
Cash A/c xxx Xxx Balance b/d xxx xxx

(excess capital Cash A/c xxx xxx
withdrawn) Balance c/d xxx Xxx (additional capital introduced)
xxx Xxx xxx Xxx
Current Accounts
Balance b/d xxx xxx Balance b/d (if Cr. xxx xx

(ifDr. balance) balance) x
Drawings xxx xxx P/L Appropriation A/c xxx
Interest onDrawings xxx xxx Interest on Capital xxx xx
Balance c/d xxx xxx Salary xxx x
(if Cr. balance derived) Balance c/d xxx xx
(if Dr. balance derived) x
xx
x
xx
x
xxx Xxx xxx xxx
Fluctuating Capital: Capitals of the partners will change year after year due to
adjustments (claims and charges of partners) relating to the current year. There is
need to prepare only one account of partners i.e. Capital Account.
3
Capital Account
Cash A/c Xxx xxx Balance b/d xxx xxx

(excess capital P/L Appropriation A/c xxx xxx
withdrawn) Drawings xxx xxx Interest onCapital xxx xxx
Interest onDrawings xxx xxx Salary xxx xxx
Balance c/d xxx xxx Cash A/c xxx xxx
(additional capital introduced)
Xxx xxx xxx Xxx

Difference between fixed capital method and fluctuating capital method
Basis Fixed Capital Method Fluctuating Capital Method
Number of Accounts Under this method two Under this method there is
accounts are maintained for only one account for each
each partner viz.capital partner, i.e capital account.
account and current account.
Adjustments All adjustments are recorded All adjustments are

in a separate account known recorded in the capital
as account itself.
current account.
Fixed Balance The capital account balance The balance of the capital
remains unchanged unless account fluctuates from
there is addition to or year to year.
withdrawal of capital.
Credit Balance The capital accounts always The capital account

show a credit balance. sometimes shows a
debit balance.
Appearance in Both capital and current Only capital account

the Balance account balance will appear balance appears.
Sheet
Distribution of profit/ loss among partners:

Profit and Loss Account is prepared to find the Net Profit or Net Loss of an accounting
year. The balance of profit and loss account will be used to divide between partners as
share of profit or loss in their profit-sharing ratio But if any adjustments’ is/are still to
be adjusted relating to profit and loss account then before distributing the balance of
profit and loss account, “Profit and Loss Adjustment Account” is required to prepare.
The balance of profit or loss derived from the profit and loss adjustment account will
be distributed between partners.
Note: Profit & Loss A/c –> Profit & Loss Adjustment A/c –> Profit &
Loss Appropriation A/c (All these accounts are
Nominal
Account)
4
Profit and Loss Appropriation Account:
It is prepared for the allocation /division of profit or loss between partners
after adjustments relating to – interest on capital, interest on drawings, salary
etc. Profit and Loss Appropriation Account
Particulars Amt. Particulars Amt.
Interest on xxx Profit & Loss a/c xxx
CapitalSalary xxx Interest on xxx
Capital / Current A/c xxx Drawings
(balancing figure as share Capital/Current A/c xxx
of profit) (balancing figure as share of
A: xxx loss) A: xxx
B: xxx B: xxx
XXX XXX
Difference between appropriation of profit and charge against profit:

Appropriation of profit Charge against profit
1. It is the distribution of net profit to 1.It should be deducted from revenue to

various heads like interest on capital, calculate net profit or net loss, takes place
partners salary etc. as per agreement. in P & L A/C
2. It is possible only if there is profit 3. It 2. It should be charged even if there is a
is done after the creation of all charges loss. 3. It should be done before the
against profit. appropriation of profit.
4. It is debited to the P & L 4. It is debited to Profit and loss account.
Appropriation Account.
5. Eg.Interest on capital, partner’s 5. Eg.staff salary, managers
salary, partner’s commission ,amount commission, interest on loan,
transferred to reserve etc. advertisement etc
Guarantee of Profit to a partner:
A partner may have a guarantee from all other or from any partners’ that his/her
profit will not be less than the certain amount in any year. If the actual share of profit
is less than the guaranteed amount of profit then deficit profit will be compensatedby
guarantors’ partners in their profit-sharing ratio. This adjustment may be taken into
the profit and loss appropriation account while distributing profits OR it may be
adjusted by passing an adjusted Journal entry.
Example 1: A, B and C are partners in a firm sharing profit in the ratio of 3:2:1. C has
guarantee from A and B that his profit will not be less than Rs. 30,000 in any year. The
profit for the year ending 31stMarch, 2020 is Rs. 1,20,000. Pass necessary Journal
entries for the above information.
Solution: The actual share of profit of C is = 1/6th of 1,20,000 = 20,000. Therefore,
his profit is less than the guaranteed amount of profit Rs. 30,000.
Hence, Rs. 10,000 deficit profit will be sacrificed by A and B in their profit-sharing
ratio between them i.e. in 3:2 ratio.
5
Journal Entries
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
1 Profit & Loss Appropriation A/c 1,20,000 60,000
Dr. 40,000
To A’s Capital A/c 20,000
To B’s Capital A/c
To C’s Capital A/c
(being profit distributed in 3:2:1 ratio) 6,000
2 A’s Capital A/c (3/5th of 10,000) Dr. B’s
Capital A/c (2/5th of 10,000) Dr. To C’s 4,000 10,000
Capital A/c
(being guarantee of profit adjusted)
Example 2: Aman, Babul and Chaman are partners in a firm sharing profit in the ratio
of 5:3:2. Their balance of capital as on 31st March, 2019 are – Aman: Rs. 10,00,000; Babul:
Rs. 5,00,000 and Chaman: Rs. 3,00,000. They are entitled for interest on capital @ 10%
p.a. and interest on drawings to be charged @ 5% p.a. In the year 2019-20, they have
made drawings - Rs. 15,000;Rs. 10,000 and Rs. 5,000 respectively. Chaman is also
entitled for Salary @ Rs. 5,000 per month. For the year ending 31st March, 2020, the
profits of the firm (after charging salary but before charging interest on capital and
adjustment of interest on drawings) Rs. 3,00,000. Prepare Profit and Loss Appropriation
Account.
Solution:
Profit and Loss Appropriation Account
Particulars Amt. in Rs. Particulars Amt. in Rs.
Interest on Capital 1,80,000 Profit & Loss A/c 3,60,000

Aman: 1,00,000 Interest on Drawings 1,500
Babul: 50,000 Aman: 750
Chaman: 30,000 Babul: 500
Salary (to Chaman) 60,000 Chaman: 250
Capital A/cs: 1,21,500
Aman: 60,750
Babul: 36,450
Chaman: 24,300
3,61,500 3,61,500
Net Profit before adjustment of Salary to Chaman = 3,00,000 + 60,000 = Rs. 3,60,00
6
Past Adjustment:
After the allocation of profits/losses between partners, if it is coming to know that
some of the adjustments are omitted while preparing Profit and Loss Appropriation
Account relating to – Salary to a partner, Interest on Capital, Interest on Drawings and
not following the actual profit-sharing ratio. It is required to make an adjustment
entry
on the first day of next accounting year for the same. The adjustment Journal entry
will be passed to adjust the partners Capital / Current Account (if capitals are fixed).
Journal Entry
Date Particulars L. Dr. Cr.
F.
A’s Capital / Current A/c Dr. B’s Capital / Current XXX XXX
A/c Dr. To C’s Capital / Current A/c XXX
(Being passed adjustment made)
Table showing adjustment of Capital / Current Account

Particulars A B C Total
(A) To be given: XXX XXX XXX XXX

XXX XXX XXX XXX
(a) Interest on capital
XXX XXX XXX XXX
(b) Salary (XXX) (XXX) (XXX) (XXX)
(c) Share of profit
(d) Interest on Drawings
(B) Already Given: XXX XXX XXX XXX

As share of profit
XXX XXX XXX XXX
Adjustment to be made XX (Dr.) XX (Dr.) XX (Cr.)
Example: A, B and C are partners in a firm having fixed capital of Rs. 3,00,000;
Rs. 2,00,000 and
Rs. 1,00,000 respectively. Profits of the firm for the year ended 31stMarch, 2020
Rs. 1,20,000 was distributed between partners in their capital proportion. After
the allocation of profits, it finds that the following terms of the deed was ignored:
(a) Interest on capital allowed to partners @ 10% p.a.
(b) Salary allowed to partner C @ Rs. 2,500 per month.
(c) Interest on drawings to be charged on partners as Rs. 5,000; Rs. 3,000 and
Rs. 2,000 respectively.
(d) Profits or losses to be shared in the ratio of 2:2:1.
Pass an adjustment Journal entry for the above.
7
Solution:
Journal Entry
Dat Particulars L.F. Dr. Cr.
e
Dr. 19,0 26,000

A’s Current A/c 00
Dr. 7,00
B’s CurrenA/c
To C’s Current A/c 0
(Being past adjustment made)
Table showing adjustment of Current Account

Particulars A B C Total
(A) To be given: 30,000 20,000 10,000 60,000

(a) Interest on capital ----- ----- 30,000 30,000
(b) Salary 16,000 16,000 8,000 40,000
(c) Share of profit (5,000) (3,000) (2,000) (10,000)
(d) Interest on Drawings
(B) Already Given: 41,000 33,000 46,000 1,20,000

As share of profit
60,000 40,000 20,000 1,20,000
Adjustment to be made 19,000 7,000 26,000 (Cr.)

(Dr.) (Dr.)
Actual divisible profits = Net Profit + Interest on Drawings – (Interest on capital

+ Salary)
= 1,20,000 + 10,000 – (60,000 + 30,000)
= 1,30,000 – 90,000 = Rs. 40,000
th
A’s share of profit = 2/5 of 40,000 = Rs. 16,000;
B’s share of profit = 2/5th of 40,000 = Rs. 16,000 and
C’s share of profit = 1/5th of 40,000 = Rs. 8,000.
Calculation of periods for Interest on Drawings

1. Drawings made month-wise
(a) at the beginning of each month throughout the year = (12 + 01) / 2 = 6 ½
months
(b) at the beginning of each month for certain months (9) = (9 + 01) / 2 = 5
months
(c) at the middle of each month throughout the year= (11.5 + 0.5) / 2 = 6
months
(d) at the middle of each month for certain months (7)= (6.5 + 0.5) /
8
2 = 3 ½ months
(e) at the end of each month throughout the year= (11 + 0) / 2 = 5 ½ months (f)
at the end of each month for certain months (6)= (5 + 0) / 2 = 2 ½ months 2.
Drawings made quarterly
(a) at the beginning of each quarter throughout the year= (12 + 3) / 2 = 7 ½
months
(b) at the middle of each quarter throughout the year= (10.5 + 1.5) / 2 = 6
months
(c) at the end of each quarter throughout the year= (9 + 0) / 2 = 4 ½ months In
the above two cases, the periods to charge interest on drawings as under:
Average Period =
No. of months left after first draw + No. of months left after last
draw 2
3. Drawings made throughout the year in lump-sum amount
********* Interest on drawings to be calculated for 6 months ********* 4.
Drawings made throughout the year in different interval period with
uncertain amount
** Interest on drawings to be calculated with Product Method **
Goodwill:
The main factors affecting the value of goodwill are as follows:

Nature of business: A firm that produces high value-added products or having a
stable demand is able to earn more profits and therefore has more goodwill.
Location: If the business is centrally located or is at a place having heavy customer
traffic, the goodwill tends to be high.
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
goodwill will also be high.
Market situation: The monopoly condition or limited competition enables the
concern to earn high profits which leads to higher value of goodwill. Special
advantages: The firm that enjoys special advantages like import licences, 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.
Methods of Valuation of Goodwill :

(a) Average Profits method
Goodwill = Average Profits X No. of purchase year
Example: A firm has profits of the last three years – 2018: Rs. 30,000; 2019: Rs.
45,000 and in 2020: Rs. 45,000. The goodwill valued at 2 ½ purchase of average
profits.
9
(1) What will be the value of goodwill?
Sol.:Goodwill= {(30,000 + 45,000 + 45,000)/3} X 2 ½
= 40,000 x 2.5 = Rs. 1,00,000.
(b) Super Profit method

Goodwill = Super Profits x No. of purchase years
“Super profit is the amount of actual/average profits excess to the normal
profits of the firm”
Super profit = Actual/average profit – Normal Profits
Normal Profit = (Capital employed x NRR*)/100
* NRR = Normal Rate of Return
Example: A firm actual profits of the year Rs. 1,20,000 with capital employed Rs.
10,00,000. The normal rate of return in the same line of business is 10% p.a. Find
the value of goodwill of the firm under the super profit method by 3 purchase
years.
Sol. Goodwill = Super profits x No of purchase year

Super Profit = Actual profits – Normal Profits
Normal Profits = Capital employed x NRR /100
Normal Profits = (10,00,000 x 10) / 100 = 1,00,000
Super profit = 1,20,000 – 1,00,000 = 20,000
Goodwill = 20,000 x 3 = Rs. 60,000.
(c) Capitalization method

a. By Capitalization of Average Profits
b. By Capitalization of Super Profits
(1)Goodwill = Capitalized value of average profits – Capital Employed
Capitalized value of Av. Profit = (Average profits x 100) / NRR Example: A
firm has an average profit of Rs. 90,000. The capital employed in the
firm is Rs. 10,00,000. The normal rate of return is 6% p.a. Find the value of goodwill
by capitalization of average profits method.
Sol.: Goodwill = Capitalized Value of Average Profits – Capital
Employed Capitalized Value of Average Profits =
(90,000 x 100) / 6 = 15,00,000
Goodwill = 15,00,000 – 10,00,000 = Rs. 5,00,000.
(2) Goodwil = (Super profits*100/NRR)
10
Example: A firm has an average profit of Rs. 90,000. The capital employed in the firm
is Rs. 10,00,000. The normal rate of return is 6% p.a. Find the value of goodwill by
capitalization of the Super Profit method.
Sol.: Goodwill = (Super profits x 100) / NRR
Super Profits = Average profits – normal profits
Normal Profits = (Capital Employed X 6) / 100 = 60,000
Super profits = 90,000 -60,000 = 30,000
Goodwill = (30,000 x 100) / 6 = Rs. 5,00,000.
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* QUESTION BANK
Q1. In the absence of partnership deed, interest on capital is allowed at the rate of:
a) 6% p.a. simple interest
b) 6% p.a. compound interest
c) 12% simple interest
d) None of the above.
Q2. Rent to a partner is shown in:
a) Dr. side of Profit And Loss Appropriation A/c
b) Cr. side of Profit And Loss Appropriation A/c
c) Dr. side of Profit And Loss A/c
d) Cr. side of Profit And Loss A/c.
Q3. Which of the following items will be shown in Partner’s Capital A/c under
Fixed Capital method?
a) Drawings from profits
b) Drawings from capital
c) Interest on drawings
d) All of the above.
Q4. Interest on Partner’s Loan will be credited to:
a) Partner’s Loan A/c
b) Partner’s Capital A/c
c) Profit and Loss A/c
Q5. Which one of the following items is not an appropriation out of
profits? a) Interest on capital
b) Salary to a partner
c) Commission to a partner
d) Interest on partner’s loan.
Q6. Following are essential elements of a partnership firm except:
a) At least two persons
b) There is an agreement between all partners
11
c) Equal share of profits and losses
d) Partnership agreement is for some lawful
business activity.
Q7. Which one of the following is not a right of
a partner?
a) Right to inspect the books of the firm
b) Right to take part in the affairs of the company
c) Right to share the profits/losses of the firm
d) Right to receive salary at the end
of each month.
Q8. The relation of partner with the firm is
that of:
a) An owner
b) An agent
c) An owner and agent both
d) A manager.
Q9 Pick the odd one out:
a) Rent to a partner
b) Manager’s commission
c) Interest on partner’s loan
d) Interest on partner’s capital.
Q10. Can a partner be exempted to share the losses of the firm?
a) Yes
b) No
c) Yes, if partnership deed provides so
d) Never.
Q11. 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
Q12. 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.
Q13. What is the minimum number of partners in a partnership
firm? a) 50
b) 100
c) 2
Q14. Current accounts of partners are maintained under which
method? a) Fluctuating Capital method
b) Fixed Capital method
c) Both of the above
12
Q15. Limited Liability Partnerships came into existence in India after the
enactment of:
a) Indian Partnership Act, 1932
b) Limited Liability Partnership Act, 1932
c) Limited Liability partnership Act, 2008
d) Indian Companies Act, 2013.
CCT Based MCQs
Q16. A and B are partners sharing profits and losses equally. They admitted
C as a partner with an equal share giving him a guarantee of minimum
Rs.50,000 profit p.a. The profit for the year after C’s admission was
Rs.1,20,000. What will be the net amount that will be credited to A’s Capital
A/c?
a) Rs.50,000
b) Rs.40,000
c) Rs.35,000
d) Rs.80,000.
Q17 If a partner withdraws an equal amount in the beginning of each month for
a period of 10 months, what will be the average period for calculation of Interest
on Drawings?
a) 6.5 months
b) 7.5 months
c) 6 months
d) 5.5 months.
Q18. X and Y are partners sharing profits and losses in the ratio of 3:2 with
capitalsRs.5,00,000 each. According to the partnership deed, interest on capital
is allowed @ 10% p.a. The profit for the year is Rs. 50,000. What amount will
be credited to X and Y in such a condition?
a) Rs.50,000 to A and B each
b) Rs.25,000 to A and B each
c) Rs.30,000 to A and Rs.20,000 to B
Q19. Manager is entitled to a commission of 10% of the net profits after
charging such commission. The net profit for the year is Rs.1,32,000. What will
be the amount of the manager's commission?
a) Rs.13,200
b) Rs.12,000
c) Rs.10,000
Q20. P and Q are partners sharing profits and losses in the ratio of 2:1 with
capitals Rs.1,00,000 and
Rs.80,000 respectively. The interest on capital has been provided to them @ 8%
13
instead of 10%. In the rectifying adjustment entry, Q will be:
a) Debited by Rs.400
b) Credited by Rs.400
c) Debited by Rs.1600
d) Credited by Rs.1600.
Q21. Akhil and Ravi are partners sharing profits and losses in the ratio of 7:3 with
capitals of Rs.8,00,000 and Rs.6,00,000 respectively. According to partnership deed
interest on capital is to be provided @ 8% p.a. and is to be treated as a charge.
Profit for the year is Rs.80,000. Choose the correct option:
a) A will be credited by Rs. 64,000 and B will be credited by Rs. 48,000.
b) A will be credited by Rs. 56,000 and B will be credited by Rs. 24,000.
c) A will be credited by Rs. 22,400 and B will be credited by Rs. 9,600.
d) A will be credited by Rs. 41,600 and B will be credited by Rs. 38,400.
Q22. X, Y and Z are partners sharing profits and losses equally. Their capitals
on March 31, 2021 are
Rs.80,000; Rs.60,000; Rs.40,000 respectively. Their personal assets are worth
as follows: X- Rs.20,000; Y -
Rs.15,000 and Z- Rs.10,000. The extent of their liability in the
firm would be:
a) X- Rs.80,000; Y- 60,000; Z- Rs.40,000
b) X- Rs.20,000; Y- 15,000; Z- Rs.10,000
c) X- Rs.1,00,000; Y- 75,000; Z- Rs.50,000
d) Equal.
Q23. A and B are partners. B draws a fixed amount at the end of every month.
Interest on drawings is charged @15% p.a. At the end of the year interest on B’s
drawings amounted to Rs.8,250. Drawings of B were:
a) Rs.12,000 p.m.
b) Rs.10,000 p.m.
c) Rs.9,000 p.m.
d) Rs.8,000 p.m.
Q24. Mohit and Rohit were partners in a firm with capitals of Rs.80,000 and
Rs.40,000 respectively. The firm earned a profit of Rs.30,000 during the
year. Mohit's share in the profit will be:
a) Rs 20000
b) Rs 15000
c) Rs 10000
d) Rs 18000.
Q25. R and S are partners sharing profits in the ratio of 2:1. S has advanced a
loan of Rs.1,00,000 to the firm on 1st October, 2020. The net profit earned by
the firm for the year ending 31st March, 2021 is Rs. 90,000. What amount will
be credited to S’s capital account?
a) Rs.60,000
b) Rs.30,000
c) Rs.29,000
d) Rs.32,000.
14
Match the following based MCQs
Q26.
I Interest on Capital A Cr. Side of Profit and Loss
Appropriation A/c
II Interest on Drawings B Dr. side of Profit and Loss

Appropriation A/c
II Interest on Partner’s Loan C Dr. side of Profit and Loss A/c

I
a) I-A; II-B; III-C

b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-B; II-C; III-A
Q27.
I Rent paid to a partner A Charge against profits
II Salary paid to a partner B Appropriations out of profits.
II Partner’s Commission
I
a) I-A; II-B; III-B

b) I-A; II-A; III-B
c) I-A; II-B; III-A
d) I-B; II-A; III-B
Q28.
I Maximum number of partners A 6% p.a.
II Partnership Deed B 50
II Interest on partner’s loan C Written agreement

I
a) I-A; II-B; III-C

b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-B; II-C; III-A
Q29.
I Drawings in the beginning of A 4.5
each quarter
II Drawings in the beginning of B 6.5

each month
II Drawings in the end of each quarter C 7.5

I
a) I-A; II-B; III-C

b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-B; II-C; III-A
Q30.
I One who takes part in A Dormant partner
business activities
II One who does not take part in B Nominal partner

business activities
15
II One who lends his name to a C Active partner
I partnership firm but
actually is not a partner of
the firm.
a) I-A; II-B; III-C

b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-C; II-A; III-B.
Case Study Based Questions

Read the following information carefully and answer the questions
that follow:
X and Y are partners in 3:2. Their capital balances as on 1st April 2020
amounting to Rs.2,00,000 each. On 1st February, 2021, X contributed an
additional capital of Rs.1,00,000. Following are the terms of deed:
a) Interest on capital @ 6% per annum
b) Interest on drawings @ 8% per annum
c) Salary to X Rs.1500 per month
d) Commission to Y @10% on net profit after charging interest on
capital, salary and his commission.
Drawings of the partners were Rs.20,000 and Rs.30,000 respectively during
the year. Net profit earned by the firm was Rs.2,08,000.
Choose the correct option based on the above information:

Q31. What is the amount of Interest on capitals of X and Y:
a) Rs.12,000 each
b) Rs.12,000 to X and Rs. Rs.13,000 to Y
c) Rs.13,000 to X and Rs.12,000 to Y
Q32. What is the amount of interest on drawings of X and Y:

a) Rs. 1200 and Rs. 1800 respectively
b) Rs. 800 and Rs. 1200 respectively
c) Rs. 1200 and Rs. 800 respectively
d) Rs. 1600 Rs. 2400 respectively
Q33. What is the amount of commission
payable to Y?
a) Rs. 15000
b) Rs. 16500
c) Rs. 20800
d) None of these
Q34. What is X's share in the net
divisible profit?
a) Rs. 124400
b) Rs. 83600
c) Rs. 91200
d) Rs. 60800
Q35. What will be the closing capital of X after all
adjustments?
16
a) Rs. 422200
b) Rs. 401400
c) Rs. 300000
d) Rs. 423000
Read the following information carefully and answer the questions

that follow:
A, B and C were partners sharing profits in the ratio of 1:2:3. Their fixed
capitals on 1st April, 2020 were: A Rs.3,00,000; B Rs.4,50,000 and C
Rs.10,00,000. Their partnership deed provided the following:
i. A provides his personal office to the firm for business use charging yearly rent
of Rs.1,50,000.
ii. Interest on capitals @8% p.a. and interest on drawings @ 10% p.a.
iii. A was allowed a salary @ 10,000 per month.
iv. B was allowed a commission of 10% of net profit as shown by Profit
and Loss account, after charging such commission.
v. C was guaranteed a profit of Rs.3,00,000 after making all adjustments.
The net profit for the year ended 31st march, 2021 was
Rs.10,30,000 before making above adjustments.
You are informed that A has withdrawn Rs.5,000 in the beginning of each
month, B has withdrawn
Rs.5,000 at the end of each month and C has withdrawn Rs. 24,000 in
the beginning of each quarter.
Choose the correct option based on the above information:
Q36. A’s rent will be shown in:
a) Profit and loss account
b) Profit and Loss Appropriation account
c) A’s Capital account
Q37. Net profit for the year is:
a) Rs.10,30,000
b) Rs.11,80,000
c) Rs.7,30,000
d) Rs.8,80,000
Q38. What will be the divisible profit?
a) Rs.5,56,000
b) Rs.5,50,000
c) Rs.5,52,000
d) Rs.5,53,000.
Q39. What will be the total interest in drawings?
a) Rs.24,000
b) Rs.12,000
c) Rs.36,000
d) 48,000.
Q40. What will be the commission of B?
a) Rs.8,00,000
b) Rs.96,000
17
c) Rs.80,000
d) Rs.72,000.
Assertion-Reasoning Based questions
Q41. Assertion (A): In the absence of Partnership deed profits and losses
are divided equally among the partners.
Reason(R): This rule is applicable according to Indian partnership Act,
1932. 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, bur (R) is false
d) (A) is false, but (R) is true.
Q42. Assertion (A): Personal properties of a partner may also be used to pay off
the firm’s debts.
Reason(R): All partners have limited liability in the firm.
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 fals
Q43. Assertion (A): Partnership firm is a form of organisation where two
or more persons carry on business activity on the basis of agreement
among them.
Reason(R): The profit or loss arising from the partnership business
is shared by the partners in the agreed ratio.
(A) is true, but (R) is false
Q44. Assertion (A): Maximum number of partners in a partnership firm is
50. Reason(R): Maximum number of partners in a partnership firm is
prescribed in Companies Act, 2013.
Q45. Assertion (A): A partnership deed covers all matters relating to
mutual relationship among the partners.
Reason(R): But in the absence of partnership deed, provisions of the
Indian partnership Act, 1932 shall apply for accounting purposes.
Q46. Assertion (A): Rent to partner is not shown in Profit and Loss
Appropriation Account.
Reason(R): Rent to a partner is a charge against profit..
Both (A) and (R) are true and (R) is not the correct explanation of (A)
18
c) (A) is true, but (R) is false
Q47. Assertion (A): Interest on Partner’s capital may be shown in Profit and
Loss Account.
Reason(R): If Partners treat interest on capital as a charge.
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)
Q48. Assertion (A): Rent payable to partner is credited to Partner’s Capital
account. Reason(R): Rent is payable to partner for letting the firm use his personal
property for business.
Q49. Assertion (A): For calculating Interest on Drawings, product method is used.
Reason(R): Partners withdraw different amounts of money at different
intervals of time.
Q50. Assertion (A): Guarantee of minimum profit may be given to a
partner. Reason(R): It is compulsory as per Indian Partnership Act, 1932.
****************************************************************************************
Fundamentals of Partnership Accounting

Q.NO. Answe Reason/Hint/Explanation
r
1 D Interest on Capital is not allowed if there is no partnership deed.
2 C Rent to a partner is a charge against profit.
3 B Under Fixed Capital method only Withdrawal from capital and

Introduction of Capital are shown in the Capital account, all other
items are shown in Current account.
4 A Interest on Partner’s Loan is not shown in Partner’s Capital account,

it is credited in Partner’s Loan A/c.
19
5 D It is a Charge against profit.
6 C Profits are divided in the ratio decided by partners in partnership deed.
7 D Salary is payable only if it is mentioned in partnership deed.
8 C All the partners are mutual agents of each other and of the firm also
and they are also the owners of the firm.
9 D Interest on Capital is an appropriation out of profits whereas all

other items are charges against profit.
10 C Unless mentioned in the partnership deed, all partners are liable

to share the losses and profits of the firm.
11 A Since all partners are mutual agents of each other and of the company
also.
12 A Since Interest on capital is an appropriation out of profits, it is

paid only out of profits.
13 C As per Indian Partnership Act, 1932, minimum 2 partners

are necessary to start a partnership firm.
14 B Under Fixed Capital method Capital accounts and Current accounts

both are maintained whereas under Fluctuating capital method only
capital accounts are maintained.
15 C The Limited Liability Partnership Act was passed in India in the year
2008.
16 C Share of A in profit= 40,000 less Deficiency paid to C=5,000. So

net amount received by A=35,000.
17 D Time left after first drawing=10 months; Time left after

last drawing=1 month; (10+1)/2=5.5
18 B Interest payable to A and B=50,000 each. So the profit will be

divided in an equal ratio between A and B. When appropriations are
more than profits then the available profit is distributed between the
partners in the ratio of net amount payable to them.
19 B 1,32,000*10/110=12,000.
20 B Q will be credited by Rs.1,600 (interest@2% to be given to Q) and Q

will be debited by Rs.1,200(share of Q in loss to the firm). So, finally Q
will be credited with Rs.400.
21 D IOC to Akhil= Rs.64,000 less share of loss= Rs.22,400

(32,000*7/10). Net amount paid to Akhil= Rs.41,600.
IOC to Ravi= Rs.48,000 less share of loss= Rs.9,600 (32000*3/10).
Net amount paid to Ravi= Rs.38,400.
22 B A partner has unlimited liability in the partnership firm. So he has to

pay the amount of capital plus his personal property to pay off the
debts of the
20
firm.
Since partners have already paid the amount of capital so now they
will have to pay only their personal assets to the firm in case of loss.
23 B 8,250*(100/15)*(12/5.5) =1,20,000/12= 10,000.
24 B In the absence of partnership Deed, profits are shared

equally among the partners.
25 C Net profit of the firm=90,000-3,000(interest on loan) = 87,000. S’s

share in profit=87,000*1/3= 29,000. Only share of profit is credited
to Partner’s Capital a/c, interest on loan is credited to Partner’s
Loan A/c.
26 B IOC is transferred to Dr. side of P& L Appropriation A/c; IOD to Cr. Side
of P & L Appropriation A/c and Interest on Partner’s Loan to the Dr.
side of P & L A/c.
27 A Rent paid to a partner is a charge against profit; Salary and

commission paid to a partner are both appropriations out of profits.
28 D Maximum no. of partners is 50 as per Indian Partnership Act, 1932.
Partnership Deed may be an oral or written agreement among
partners. Interest on a partner's loan is allowed @ 6% p.a. in the
absence of partnership deed.
29 C Average period for drawings in the beginning of each quarter is 7.5;

for the beginning of each month is 6.5 and for the end of each quarter
is 4.5. Formula for calculating average period = (Time left after first
drawing +Time left after last drawing)/2
30 D Check the definitions.
31 C IOC to X= (2,00,000*6/100)+(1,00,000*6/100*2/12)=
13,000 IOC to Y= 2,00,000*6/100= 12,000
32 B IOD will be calculated for an average period of six months since time
of drawings are not given.
33 A 2,08,000-13,000-12,000(IOC)-18,000(salary)= 1,65,000*10/110= 15,000.
34 C Divisible profit=
2,08,000(N.P.)+800+1,200(IOD)-13,000-12,000(IOC)-
18,000(salary)-15,000(commission)= 1,52,000. Share of X in
divisible profit= 1,52,000* 3/5= 91,200
35 B Closing capital of X= 2,00,000(opening

capital)+1,00,000(addl.
capital)+13,000(IOC)+18,000(salary)+91,200(profit
share)-20,000(drawings)- 800(IOD)= 4,01,400.
36 A Charge against profit is shown in P & L A/c.
37 D 10,30,000-1,50,000(rent to the partner)= 8,80,000
21
38 B IOD for A=
60,000*10/100*6.5/12=3,250 IOD for
B=60,000*10/100*5.5/12=2,750 IOD
for C=16,000*10,100*7.5/12=6,000.
Total IOD= 3,250+2,750+6,000= 12,000.
39 C 8,80,000*10/110= 80,000.
40 C 8,80,000(N.P.)+12,000(IOD)-24,000-36,000-80,000(IO
C)- 80,000(commission)-1,20,000(salary)= 5,52,000.
41 A In the absence of partnership Deed, profits are shared equally

among the partners, as per the provisions of Indian partnership
act, 1932.
42 C All partners have unlimited liability.

43 B Both the statements are two different facts.
44 C Maximum number of partners is 50 according to Indian partnership

Act, 1932 and 100 as per Indian Companies Act, 2013.
45 B Both the statements are two different facts.
46 A Charge against profit is shown in the P & L account.
47 A Charge against profit is shown in the P & L account.
48 D Rent payable to a partner is not shown in the Capital account;

it is shown in the Rent payable account.
49 A Both the statements are true and R is the correct explanation of A.
50 C Guarantee of minimum profit to a partner depends on

mutual consent of partners, it is not compulsory.
****************************************************************************************
22
CHAPTER-2
Reconstitution of Partnership- Change in Profit sharing Ratio
Meaning of Reconstitution:
Any change in agreement of partnership is called reconstitution of partnership firm. In
following circumstances a partnership firm may be reconstituted:
1. Change in Profit Sharing Ratio
2. Admission of a partner
3. Retirement/Death of a partner
Change in profit sharing ratio among the existing partners
Meaning:
When all the partners of a firm agree to change their profit sharing ratio, the ratio may
be changed. In this case one profit is purchasing a share of a partner from another one.
In other words, the share of one partner may increase and the share of another partner
may decrease.
Accounting treatment of goodwill:

In case of change in profit sharing ratio, the gaining partner must compensate the
sacrificing partner by paying the proportionate amount of goodwill.
Illustration 1
Amit and Kajal were partners in a firm sharing profits in the ratio of 3:2. With effect from
January 1, 2021 they agreed to share profits equally. For this purpose the goodwillof the
firm was valued at Rs.60,000. Pass the necessary journal entry.
Solution:
Journal
Date Particulars L.F Debit Credi
. t
Rs.
Rs.
2021 Kajal capital A/c Dr. 6,000 6,000

Jan 1 To Amit' Capital A/c
(Adjustment for goodwill on
change in profit sharing ratio)
Working Notes:
Old ratio of A and B = 3:2
New ratio of A and B = 1:1
Sacrifice or Gain:
Amit = 3/5 – 1/2 = 65/10 = 1/10 Sacrifice
Kajal = 2/5 – 1/2 = 45/10 = 1/10 Gain
23
Accounting treatment of Reserves and Accumulated Profits:
Case (i) When reserves and accumulated profits/losses are to be distributed At

the time of change in profit sharing ratio, if there are some reserves or accumulated
profits/losses existing in the books of the firm, these should be distributed to partners
in their old profit sharing ratio.
Illustration 2 :
Vaishali, Vinod and Anjali are partners sharing profits in the ratio of 4:3:2. From April
1,2021, they decided to share the profits equally. On that date their books showed a
credit balance of Rs.3,60,000 in the profit and loss account and a balance of Rs.90,000
inthe
General reserve. Record the journal entry for distribution of these profits and reserves.
Solution :
Journal
Date Particulars L.F. Debit Credit
2021 Profit & Loss Dr. 3,60,00 2,00,0

0
Apr. 1 General Reserve A/c Dr. 00
90,000
To Vaishali's Capital A/c 1,50,0
To Vinod's Capital A/c 00
To Anjali's Capital A/c 1,00,0

(Profit and general reserve 00
distributed in old ratio)
Illustration 3 :
Anjum and Kanchan are partners sharing profits and losses in the ratio of 3:2, From
April 1, 2021 they decided to share the profits in the ratio of 2:1. On that date, the profit
and loss account showed a debit balance of Rs.1,20,000. Record the Journal for
transferring this to partner's capital accounts.
Solution :
Journal
2021 Anjum's capital A/c Dr. Kanchan's 72,000 1,20,00

0
Apr. 1 capital A/c Dr. 48,000
To Profit and Loss A/c
(Undistributed losses transferred to
partners' capital accounts in old
ratio)
24
Case (ii) When accumulated profits/losses are not be distributed at the time of
change in ratio:
Partners may decide that reserves and accumulated profits/losses will not be affected
and remain in the books with the same figure. In this case, the gaining partner must
compensate the sacrificing partner by the share gained by him i.e.
Gaining Partner's Capital A/c Dr.
To Sacrificing Partner's Capital A/c.
Illustration 4:
Keshav, Meenakshi and Mohit, sharing profit and losses in the ratio of 1:2:2, decide to
share future profit equally with effect from April 1, 2021. On that date the general
reserve showed a balance of Rs.2,40,000. Partners do not want to distribute the
reserves. You are required to give the adjusting entry.
Solution:
Journal
2011 Keshav's capital A/c Dr. 32,000
Apr. 1 To Meenakshi's capital A/c 16,000
To Mohit's capital A/c 16,000

(Adjustment for General reserve
onchange in profit sharing ratio
Working Notes:
Keshav : Meenakshi : Mohit
Old ratio 1/5 : 2/5 : 2/5
New ratio 1/3 : 1/3 : 1/3
Sacrifice or Gain:
Keshav = 1/5 – 1/3 = 35/15 = 2/15 (Gain)
Meenakshi = 2/5 – 1/3 = 65/15 = 1/15 (Sacrifice)
Mohit = 2/5 – 1/3 = 65/15 = 1/15 (Sacrifice)
Illustration 5:
Neha, Niharika, and Nitin are partners sharing profits and losses in the ratio of 2:3:4.
They decided to change their ratio and their new ratio is 4:3:2. They also decided to pass
a single journal entry to adjust the following without affecting their book values: ` Profit
& Loss account 80,000 General Reserve 40,000 Advertisement Suspense A/c 30,000 You
are required to give a single journal entry to adjust the above.
Solution:
25
JOURNAL
Neha's capital A/c Dr. 20,00
0
To Nitin's capital A/c 20,000
(adjustment for profit & loss A/c,
General reserves and advertisement
Suspense A/c
Working Notes:
Profit & Loss account 80,000 Add: General Reserve 40,000 1,20,000
Less: Advertisement Suspense 30,000 Total amount to be adjusted
90,00 0
Neha Niharika Nitin
Old ratio 2/9 3/9 4/9
New ration 4/9 3/9 Sacrifice or Nitin = 4/92/9=2/9 (Sacrifice)
Gain : 2/9
Neha = 2/94/9=2/9 (Gain)
Niharika = 3/93/9=0 (No change)
Accounting treatment for Revaluation of Assets and reassessment of

Liabilities on change in Profit sharing ratio:
At the time of change in profit sharing ratio of existing partners, Assets and liabilities of a
firm must be revalued because actual realizable value of assets and liabilities may be
different from their book values. Change in the assets and liabilities belongs to the
period prior to change in profit sharing ratio and therefore it must be shared in the old
profit sharing ratio.
Revaluation of assets and liabilities may be treated in two ways:
(i) When revised values are to be shown in the books.
(ii) When revised values are not to be shown in the books
When revised values are to be shown in the books:
In this case revaluation of assets and liabilities is completed with the help
of"Revaluation Account”. This account is also known as “Profit and Loss Adjustment
Account”. All losses due to revaluation are shown in the debit side of this account and all
gains due to revaluation are shown in the credit side of this account.
Note : (1) Increase in the value of an Asset and decrease in the value of a liability result
in profit.
(2) Decrease in the value of any asset and Increase in the value of liability gives loss.
26
Illustration 6:
Piyush, Puja and Praveen are partners sharing profits and losses in the ratio of 3:3:2.
Balance sheet as on March 31,2021

Liabilities Amount Assets Amount
Sundry creditors 48,000 Cash at bank 74,000

Bank Loan 72,000 Sundry debtors 88,000
Capital : Stock 2,40,000
Piyush 4,00,000 Puja Machinery 3,18,000
3,00,000 Praveen Building 4,00,000
3,00,000 10,00,0
00 11,20,00
11,20,0 0
00
Partners decided that with effect from April 1, 2021, they would share profits and
losses in the ratio of 4:3:2. It was agreed that:
(i) Stock is valued at Rs.2,20,000.
(ii) Machinery is to be depreciated at 10%.
(iii) A provision for doubtful debts is to be made on debtors at 5%.
(iv) Building is to be appreciated by 20%.
(v) A liability for Rs.5,000 included in sundry creditors is not likely to arise. Partners
agreed that the revised values are to be recorded in the books. You are required to
prepare a journal, revaluation account, partners’ capital account and revisedbalance
sheet.
Journal
2021 Revaluation A/c Dr. To 56,200 20,000

Stock 31,800
To Machinery
To Provision for doubtful debts
A/c (Revaluation of assets)
Building A/c 80,000

Sundry creditors 5,000 85,000
To Revaluation A/c
(Revaluation of assets and
liabilities)
Revaluation A/c 28,800 10,800

10,800
To Piyush's capital A/c 7,200
To Pooja's capital A/c
To Praveen's capital A/c
(Profit on revaluation)
27
Revaluation Account
Particulars Amt Particulars Amt
To stock 20,000 By building 80,000
To machinery 0 By sundry creditors 5,000
To Provision for bad debts 4,400
To profit distributed :
Piyush 10,800
Pooja 10,800
Praveen 7,200
28,800
85,000 85,000
Partners' Capital Account

Particular Piyush raveen Piyush a
s ular s een
To 4,10, 3,10,8 3,07,2 By 4,00, 3,00, 3,00,00

80 0 00 0 00 0 0
balance balance
c/d b/d
10,80 10,800
By 0 7,200
4,10, 00 00 revaluatio 3,10,
80 0 n 4,10, 80 0 3,07,20
80 0 0
3,10,8 3,07,2
00 00
Balance Sheet
as at April 1, 2021
Sundry creditors 43,000 Cash at bank 74,000
Bank Loan 72,000 Sundry debtors
Capital account : 88,000 Less : P.B.D. 0 83,600
5%
Piyush 4,10,000 Puja
3,10,800 Praveen 2,20,0
3,07,200 Stock 00
Machinery 2,86,2
10
00
4,80,00
0
11,43,80 11,43,8
0 00
When revised values are not to be shown in the books :
Illustration 7
In illustration 6, Partners agreed that the revised value of assets and liabilities are not to
be shown in the books. You are required to record the effect by passing a single journal
entry. Also prepare the revised value balance sheet.
28
Journal 2021 Piyush's capital A/c Dr.
2,000
Date Particulars L.F. Debit Rs.
Credit Rs.
Apr. 1 1,200 To Pooja's capital A/c
To Praveen's capital A/c 800

(Adjustment for profit on
revaluation)
Capital Accounts
Particular Piyush a Particular Piyush a

s een s een
To Pooja's 1,200 3,01,2 3,00,8 By 4,00,00 1,200 0

Balance 0
Capital 800 000 00 b/d
A/cTo 3,98,00 4,00,0
Praveen 00 3,00,8
By 00 3,0
Capital Piyush's 3,01,2
00 003,00
A/c To Capital
Balance A/c ,800
C/d 0,0
00
800
Balance Sheet
as at April 1, 2021
Sundry Credito 48,000 Cash at bank 74,000
Bank Loan 72,000 Sundry debtors 88,000
Capital account Stock 2,40,000
:
Piyush 3,98,000 Machinery 3,18,000
Puja 3,01,200 Building 4,00,000
Praveen 3,00,800
10,00,000
11,20,000 11,20,000
`
Working Notes:
Gain due to revaluation
Building 80,000
Sundry creditors 5,000
Total A 85,000
Less: loss due to revaluation
Stock 20,000
Machinery
Provision for doubtful debts
29
(Sacrifice)
Praveen = 2/829 = 2/72
Total B (Sacrifice) Amount to be
Net gain from revaluation adjusted :
Total (AB) Piyush = 28,800 x 5/72 =
2,000 Debit Pooja = 28,800 x
Old Ratio = 3:3:2 3/72 = 1,200 Credit Praveen
New Ratio = 4:3:2 = 28,800 x 2/72 = 800
Sacrifice or Gain : Credit
Piyush = 3/84/9 = 5/72 31,800 4,400
(Gain) 56,200 28,800
Pooja = 3/83/9 = 3/72
***************************************************************************************
Change in Profit Sharing Ratio

Question Bank
Q.1 When the balance sheet is prepared after Change in profit sharing ratio (after
completing the Revaluation Account), values are shown in it. (a) Historical value (b)
Realisable value
(c) Market value (d) Revalued value
Q.2 If at the time of Change in profit sharing ratio, there is some unrecorded asset, it
will be to Account.
(a) Debited, Revaluation (b) Credited, Revaluation (c) Debited, Goodwill (d) Credited,
Partners’ Capital Q.3 Gaining partner will pay for his gained share in the firm’s future
profits in favour of sacrificing partners. The Sacrificing partners gets to such
compensation amount in: (a) Gaining Ratio (b) Sacrificing Ratio
(c) Capital Ratio (d) Profit Sharing Ratio
Q.4 Sacrificing Ratio:
(a)New Ratio – Old Ratio (b) Old Ratio – Gaining Ratio (c) Old Ratio –
New Ratio (d) Gaining Ratio – Old Ratio Q.5 Partner's capital account is
credited when there is .
(a) Profit on revaluation (b) transfer of general reserve (c) transfer of
accumulated profits (d) All of the above
Q.6 As per Accounting Standard Goodwill is treated as an intangible asset. (a) 25 (b)
26
(c) 27 (d) 27
Q.7 If goodwill is already appearing in the books of accounts at the time of change
in profit sharing ratio, then it should be written off in .
(a) New Ratio (b) Gaining Ratio
30
(c) Sacrificing Ratio (d) Old Ratio
Q.8 When Goodwill treatment is made at the time of change in profit sharing ratio.
goodwill account is .
(a) Never be raised in the book (B) Be raised in the book
(C) Be partially raised in the books (D) Be raised as per the agreement of the
partners.
Q.9 At the time of change in profit sharing ratio, amount remaining in Investment
Fluctuation Reserve after meeting the fall in value of Investment is:
(a) Credited in Sacrificing Ratio (b)Credited in New Profit Sh. Ratio (c) Credited
in Old Profit Sharing Ratio (d) Credited in Gaining Ratio Q. 10 P, Q and R were partners
in a firm in the ratio of 5:4:3. It is agreed that Q would retain his original share. If P & R
future share will be the same than who will be sacrificed for whom.
(a) P to R (b) R to P
(c) No Sacrifice (d) None of the above
Q.11 Any change in the relationship of existing partners which results in an end of the
existing agreement and enforces making of new agreement is called:
(a) Revaluation of partnership (b) Reconstitution of partnership (c)
Realisation of partnership (d) None of the above
Q.12Accumulated Losses or deferred Revenue expenditure (Advertisement suspense)
are transferred to partners' capital accounts at the time of reconstitution in: (a) Old
profit-sharing ratio (b) Sacrificing Ratio
(c) Gaining ratio (d) New profit-sharing ratio Q,13 Revaluation
Account is a:
(a) Real Account (b) Nominal Account
(C) Personal Account (D) None of the Above
Q.14 The Need of revaluation of assets and liabilities:
(a)Assets and Liabilities should appear at revised values
(b)Any profit and loss an account of change in values belong to old partners
(c) All unrecorded assets and liabilities get recorded
(d) All of the Above
Q.15 Revaluation account is debited, when .
(a) Value of liability is Increases (b) Value of assets is Decreasing.
(c) Both (A) & (B) (d) Either (A) or (B)
Q.16 Revaluation account is credited, when .
(a) Value of liability is increases (b) Value of liability is not affected.
(c) Value of asset is increases (d) None of the above
Q.17 X and Y shared profits and losses in the ratio of 3:2. With effect from 1st April
2020 they agreed to share profit equally. The Goodwill of the firm was valued at Rs.
60,000. The adjustment entry will be
(a) Debit Y and credit X with Rs. 6,000
(b) Debit X and credit Y with Rs. 6000
(c) Debit X and credit Y with Rs. 600
(d) Debit bi and credit X with Rs. 600
Q.18 Amit and Bimal are partners in a firm sharing profits in the ratio of 3: 2. They decided
to share future profits 2/3 and 1/3. Calculate Amit’s gain or sacrifice
(a) 1/15 (gain) (b) 5/10 (gain)
(c) 1/10 (Gain) (d) 1/15 (sacrifice)
Q.19 Avni and Bhawana were partners in a firm sharing profit or loss equally. With
31
effect from 1st April 2020 they agreed to share profits in the ratio of 4 : 3. Due to change
in profit sharing ratio, Avni’s gain or sacrifice will be :
(A) Gain 1/14 (B) Sacrifice 1/14
(C) Gain 4/7 (D) Sacrifice 3/7
Q.20 A and B were partners in a firm sharing profit or loss in the ratio of 3 : 1. With
effect from Jan. 1, 2021 they agreed to share profit or loss in the ratio of 2 : 1. Due
to change in profit-loss sharing ratio, B’s gain or sacrifice will be :
(A) Gain 1/12 (B) Sacrifice 1/12
(C) Gain 1/3 (D) Sacrifice 1/3
Q.21 A, B and C were partners in a firm sharing profits in the ratio of 3:4:1. They decided to
share profits equally w.e.f from 1 .4.2019. On that date the profit and loss account showed
a 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 thejournal
entry:
(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
Q.22 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
Q.23 X, Y and Z are partners sharing profits and losses in the ratio 5 : 3 : 2. They
decide to share the future profits in the ratio 3 : 2 : 1. Workmen compensation
reserve appearing in the balance sheet on the date if no information is available for
the same will be :
(a) Distributed to the partners in old profit sharing ratio
(b) Distributed to the partners in new profit sharing ratio
(c) Distributed to the partners in capital ratio
(d) Carried forward to new balance sheet without any adjustment
Directions (Q.No 24-27): Each of the following questions consists of two
statements, one is Assertion (A) and the other is Reason (R). Give answer: (a)
Both Assertion (A) and Reason (R) are true and Reason( R) is the correct
explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true but Reason(R) is not the
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
Q.24 Assertion (A): Change in profit sharing ratio of the existing partner results in
the reconstitution of the Partnership firm.
Reason (R): Change in profit sharing ratio does not change the relationship
among existing partners.
Ans.
Q.25 Assertion (A): Change in profit sharing ratio among partners increase the
combined shares of Partners.
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Reason (R): Partners whose profit shares have decreased as a result of
change in profit sharing ratio are known as sacrificing partners.
Ans.
Q.26 Assertion (A): Partners whose profit shares have increased as a result of change
in profit sharing ratio are known as gaining partners.
Reason (R): Old profit share of a partner if deducted from his new profit share
is gained profit share.
Ans.
Q.27 Assertion (A): It is necessary to adjust goodwill at the time of Change in profit
sharing ratio .
Reason (R): At the time of Change in profit sharing ratio , gaining
partner compensate for sacrificing a partner by paying him goodwill.
Ans.
Directions (Q.No 28-21) Case Study Based Questions :
R, S and T were partners in a firm sharing profits in the ratio of 1:2:3. on
31.03.2021 their Balance Sheet was as follows :
Balance Sheet as at 31.03.2021
Liabilities Amount(Rs.) Assets Amount
(Rs.)
Creditors 50,000 Land 50,000

Bills Payable 20,000 Building 50,000
General Reserve 30,000 Plant 1,00,000
Capital : Stock 40,000
Debtor 30,000
R 1,00,000 Bank 5,000
S 50,000
T 25,000
1,75,000
2,75,000
2,75,000
R, S, and T decided to share the profits equally with effect from 1.04.2021. For this it
was agreed that:
a. Goodwill of the firm is valued at Rs.1,50,000.
b. Land was revalued at Rs.80,000 and buildings depreciated by 6%.
c. Creditors of Rs.6,000 were not likely to be claimed and hence to be written off.
Q.28 What amount will be recorded in the revaluation account of revaluation of

Land? (a) 80000 (b) 50000
(c) 30000 (d) None of the above
Q.29 What amount is transferred to the S Capital account on behalf of the
Revaluation account?
(a) Rs.11,000 Credit (b) Rs.11000 Debit
(c) Either (a) or (b) (d) Neither (a) nor (b)
Q.30 What is the journal entry of Goodwill accounting treatment of the above problem?
(a) Goodwill ac. Dr.150000/ To R Cap 25000; To S Cap50000 & To T Cap75000
33
(b) R a/c Dr. & T a/c Cr by Rs.25,000
(c) Premium for Goodwill Dr. 150000/ To R Cap 25000; To S Cap50000
& To T Cap75000
(d) None of the above
Q.31 What is the T’s Capital account Balance after all adjustments:
(a) Rs.55,000 (b) Rs.81500
(c) Neither (a) or (b) (d) Rs.85500
Answer Key:
Question No Suggested answer
1 (d) Revalued value
2 (a) Debited, Revaluation
3 (b) Sacrificing Ratio
4 (c) Old Ratio – New Ratio
5 (d) All of the above
6 (b) 26
7 (d) Old Ratio
8 (a) Never be raised in the book
9 (c) Credited in Old Profit Sharing Ratio
10 (b) R to P
11 (b) Reconstitution of partnership
12 (a) Old profit-sharing ratio
13 (b) Nominal Account
14 (d) All of the Above
15 (c) Both (A) & (B)
16 (c) Value of asset is increases
17 (a) Debit Y and credit X with Rs. 6,000
18 (a) 1/15 (gain)
19 (A) Gain 1/14
20 (B) Sacrifice 1/12
21 (b) Cr. A by 4,000; Cr. B by 16,000; Dr C by 20,000
22 (c) Cr. P by ₹36,000; Dr. R by ₹36,000
23 (a) Distributed to the partners in old

profit sharing ratio
24 (C)
25 (d)
26 (b)
27 (a)
28 (c) 30000
29 (a) Rs.11,000 Credit

30 R a/c Dr. & T a/c Cr by Rs.25,000
31 (b) Rs.81500
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34
Chapter-3
ADMISSION OF A PARTNER
*************************************************************
**
When a firm requires additional capital or managerial help or both for the expansion of
its business a new partner may be admitted to supplement its existing resources.
According to the Partnership Act 1932, a new partner can be admitted into the firm
only with the consent of all the existing partners unless otherwise agreed upon. With
the admission of a new partner, the partnership firm is reconstituted and a new
agreement is entered into to carry on the business of the firm.
A newly admitted partner acquires two main rights in the firm–
1. Right to share the assets of the partnership firm; and
2. Right to share the profits of the partnership firm.
● For the right to acquire share in the assets and profits of the partnership firm,
the partner brings an agreed amount of capital either in cash or in kind. ●
Moreover, in the case of an established firm which may be earning more profits
than the normal rate of return on its capital, the new partner is required to
contribute some additional amount known as premium or goodwill.
● This is done primarily to compensate the existing partners for loss of their
share in super profits of the firm.
Following are the other important points which require attention at the time
of admission of a new partner:
1. New profit sharing ratio;
2. Sacrificing ratio;
3. Valuation and adjustment of goodwill;
4. Revaluation of assets and Reassessment of liabilities;
5. Distribution of accumulated profits (reserves); and
6. Adjustment of partners’ capitals.
New Profit Sharing Ratio
● When a new partner is admitted he acquires his share in profits from the old
partners.
● But, what will be the share of the new partner and how he will acquire it from the
existing partners is decided mutually among the old partners and the new
partner.
● However, if nothing is specified as to how does the new partner acquire his share
from the old partners; it may be assumed that he gets it from them in their profit
sharing ratio.
35
● In any case, on admission of a new partner, the profit sharing ratio among the old
partners will change keeping in view their respective contribution to the profit
sharing ratio of the incoming partner.
● Hence, there is a need to ascertain the new profit sharing ratio among all the
partners. This depends upon how the new partner acquires his share from the
old partners for which there are many possibilities. Let us understand it with
the help of the following illustrations.
Sacrificing Ratio
● The ratio in which the old partners agree to sacrifice their share of profit in
favour of the incoming partner is called sacrificing ratio. The sacrifice by a
partner is equal to :
Old Share of Profit – New Share of Profit

● The new partner is required to compensate the old partner’s for their loss of share
in the super profits of the firm for which he brings in an additional amount
known as premium or goodwill.
● This amount is shared by the existing partners in the ratio in which they forgo
their shares in favour of the new partner which is called sacrificing ratio.
Treatment of Goodwill
● The incoming partner who acquires his share in the profits of the firm from the
existing partners brings in some additional amount to compensate them for
loss of their share in super profits.
● It is termed as his share of goodwill (also called premium).
● Alternatively he may agree that a goodwill account be raised in the books of the
firm by giving the necessary credit to the old partners.
● Thus, when a new partner is admitted, goodwill can be treated in two ways:
(1) By Premium Method
(2) By Revaluation Method.
Premium Method
● This method is followed when the new partner pays his share of goodwill in
cash.
● The amount of premium brought in by the new partner is shared by the
existing partners in their ratio of sacrifice.
● If this amount is paid to the old partners directly (privately) by the new
partner, no entry is made in the books of the firm. But, when the amount is
paid through the firm, which is generally the case, the following journal
entries are passed:
(i) Cash A/c Dr.
To Goodwill A/c
(Amount brought by new partner
as premium)
36
(ii) Goodwill A/c Dr.
To Existing Partners Capital A/c
(Individually) (Goodwill
distributed among the existing
partners in their sacrificing ratio)
Alternatively, it is credited to the new partner’s capital account and then

adjusted in favour of the existing partners in their sacrificing ratio. In that case the
journal entries will be as follows:
(i) Cash A/c Dr.
To New Partner’s Capital A/c

(Amount brought by new partner
for his share of goodwill)
(ii) Dr.
New Partner’s Capital A/c
To Existing Partner’s Capital A/cs
(Individually) (Goodwill brought by
new partners distributed among the
existing partners in their sacrificing
ratio)
If the partners decide that the amount of premium credited to their capital
accounts should be retained in business, there is no need to pass any additional entry.
If, however, they decide to withdraw their amounts, (in full or in part) the following
additional entry will be passed:
Existing Partner’s Capital A/c (Individually) Dr.
To Cash A/c
(The amount of goodwill withdrawn by the existing
partners)
When goodwill already exists in books:

● When a new partner brings in his share of goodwill in cash, some amount of
goodwill already exists in books.
● In that case, after crediting the old partners by the amount of goodwill brought
in by the new partner, the existing goodwill must be written off by debiting the
old partners in their old profit sharing ratio.
● But, if it is decided that the goodwill may continue to appear in the books at its
old value, the amount to be brought in by new partner will have to be
proportionately reduced i.e.,
● The partner will be required to bring cash only for this share of the excess of the
agreed value of goodwill over the amount of goodwill already appearing in
books.
Revaluation Method
● This method is followed when the new partner does not bring in his share of
goodwill in cash.
37
● In such a situation, the goodwill account is raised in the books of account by
crediting the old partners in the old profit sharing ratio.
● When goodwill account is to be raised in the books of account there are two
possibilities,
(a) No goodwill appears in books at the time of admission, and (b)
Goodwill already exists in books at the time of admission.
(a) When no goodwill exists in the books:
● When no goodwill exists in the books at the time of the admission of a new
partner, the goodwill account must be raised at its full value.
● This can be done by debiting a goodwill account with its full value and crediting
the old partners’ capital accounts in their profit sharing ratio.
● The journal entry will be:
Goodwill A/c Dr.

To Old Partners’ Capitals A/c (individually)
(Goodwill raised at full value in the old ratio)
The goodwill thus raised shall appear in the balance sheet of the firm at its full value.
When goodwill already exists in books:
● In that case, after crediting the old partners by the amount of goodwill brought
in by the new partner, the existing goodwill must be written off by debiting the
old partners in their old profit sharing ratio.
● But, if it is decided that the goodwill may continue to appear in the books at its
old value, the amount to be brought in by a new partner will have to be
proportionately reduced .
Hidden Goodwill
● Sometimes the value of goodwill is not given at the time of admission of a new
partner.
● In such a situation it has to be inferred from the arrangement of the capital and
profit sharing ratio.
Adjustment for Accumulated Profits and Losses
● Sometimes a firm may have accumulated profits not yet transferred to capital
accounts of the partners. These are usually in the firm of general reserve,
reserve fund and/or Profit and Loss Account balance.
● The new partner is not entitled to have any share in such accumulated profits.
These are distributed among the partners by transferring it to their capital
accounts in the old profit sharing ratio.
● Similarly, if there are some accumulated losses in the form of a debit balance of
profit and loss account appearing in the balance sheet of the firm.
Revaluation of Assets and Reassessment of Liabilities
At the time of admission of a new partner, it is always desirable to ascertain whether
the assets of the firm are shown in books at their current values.
38
● In case the assets are overstated or understated, these are revalued. ● Similarly, a
reassessment of the liabilities is also done so that these are brought in the books at
their correct values.
● At times there may also be some unrecorded assets and liabilities of the firm.
These also have to be brought into the books of the firm. For this purpose the
firm has to prepare the Revaluation Account.
● The gain or loss on revaluation of each asset and liability is transferred to this
account and finally its balance is transferred to the capital accounts of the old
partners in their old profit sharing ratio.
● If the revaluation account finally shows a credit balance then it indicates net gain
and if there is a debit balance then it indicates net loss.
Which will be transferred to the capital accounts of the old partners in old ratio.
The journal entries recorded for revaluation of assets and reassessment of
liabilities are as follows:
(i) For increase in the value of an asset

Asset A/c Dr.
To Revaluation A/c (Gain)
(ii) For reduction in the value of an asset
Revaluation A/c Dr.
To Asset A/c (Loss)
(iii) For appreciation in the amount of a liability
Revaluation A/c Dr.
To Liability A/c (Loss)
(iv) For reduction in the amount of a liability
Liability A/c Dr.
(v) For an unrecorded asset
Cash A/c Dr.
(vi) For an unrecorded liability
Revaluation A/c Dr.
To Cash A/c (Loss)
(vii) For transfer of gain on Revaluation if credit balance
Revaluation A/c Dr.
To Old Partners Capital A/cs (Old ratio)
(individually)
(viii) For transferring loss on revaluation
Old partner’s Capital A/cs Dr.
(Individually) (Old ratio)
To Revaluation A/c
Note: Entries (i), (ii), (iii) and (iv) are recorded only with the amount increase
and decrease in the value of assets and liabilities.
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39
ADMISSION OF A PARTNER
Question bank
Q. 1 Which of the following is not the reconstitution of

partnership? a) Admission of a partner
b) Dissolution of Partnership
c) Change in Profit Sharing Ratio
d) Retirement of a partner
Q. 2 On the admission of a new partner:

a) Old partnership is dissolved
b) Both old partnership and firm are dissolved
c) Old firm is dissolved
d) None of the above
Q. 3 Sacrificing ratio is used to distribute------------------ in case of admission of a

partner.
a) Premium of Goodwill
b) Revaluation Profit or Loss
c) Profit and Loss Account (Credit Balance)
d) Both b and c
Q. 4 . At the time of admission of a partner, what will be the effect of the following
information? Balance in Workmen compensation reserve ₹ 2,80,000. Claim for
workmen compensation ₹2,20,000.
(A) ₹ 2,80,000 Debited to the Partner’s capital Accounts.
(B) ₹ 2,20,000 Debited to Revaluation Account.
(C) ₹ 60,000 Credited to the Partner’s capital Accounts.
(D) ₹ 60,000 to Debited Revaluation Account.
Q. 5 Himanshu and Naman share profits & losses equally. Their capitals were Rs.1,20,000
and Rs. 80,000 respectively. There was also a balance of Rs. 60,000 inGeneral
reserve and revaluation gain amounted to Rs. 15,000. They admit friend Ashish
with 1/5 share. Ashish brings Rs.90,000 as capital. Calculate the amount of
goodwill of the firm.
a. Rs.1,00,000
b. Rs. 85,000
c. Rs.20,000
d. None of the above
Q. 6 Yash and Manan are partners sharing profits in the ratio of 2:1. They admit
Kushagra into partnership for 25% share of profit. Kushagra acquired the share
from old partners in the ratio of 3:2. The new profit sharing ratio will be:
a) 14:31:15
b) 3:2:1
c) 31:14:15
d) 2:3:1
40
Q. 7. Riya and Diya are partners as per provisions of Indian Partnership Act 1932.
On admission of a new partner Megha for 20% share, a revaluation accountis
prepared. Megha claims to have equal share in revaluation profits. Choose the
correct accounting treatment.
a) Megha’s share of revaluation profit is equal.

b ) Megha’s share of revaluation profit is 20%.
c) Megha’s share is revaluation profit is nil
d) none of the above.
Q. 8 Heena and Sudha share Profit & Loss equally. Their capitals were Rs.1,20,000 and
Rs. 80,000 respectively. There was also a balance of Rs. 60,000 in General reserve
and revaluation gain amounted to Rs. 15,000. They admit friend Teena with 1/5
share. Teena brings Rs.90,000 as capital. Calculate the amount of goodwill of the
firm.
a) Rs.85,000
b) Rs.1,00,000
c) Rs.20,000
Q. 9 At the time of admission of a partner, what will be the effect of the following
information? Balance in Workmen compensation reserve ₹40,000. Claim for
workmen compensation ₹45,000.
(A) ₹45,000 Debited to the Partner’s capital Accounts.
(B) ₹40,000 Debited to Revaluation Account.
(C) ₹5,000 Debited to Revaluation Account.
(D) ₹5,000 Credited to Revaluation Account.
Q. 10 Which of the following is not true with respect to Admission of a
partner? a) A new partner can be admitted if it is agreed in the partnership
deed. b) If all the partners agree, a new partner can be admitted.
c) A new partner has to bring relatively higher capital as compared to the existing
partners
d) A new partner gets right in the assets of the firm
Q. 11 As per -------- , only purchased goodwill can be shown in the Balance Sheet.
a) AS 37
b) AS 26
c) Section 37
d) AS 37
Q. 12 Revaluation of liabilities at the time of admission of a partner shows a gain in its

revaluation process. It indicates that their present value is ………(i)................from
their ……(ii)…….
(A ) (i) Less (ii) Book Value.
(B) (i) More (ii) Book Value.
(C) ) (i) Less (ii) Fixed Asset
(D) ) (i) More (ii) Current Asset.
Q. 13 Daisy and Jasmine were partners in a firm in the ratio 3:1. Their Balance Sheet
41
showed Land & Building at ₹ 3,00,000; Stock at ₹ 1,10,000; Patents ₹ 1,12,000 Debtors
at ₹1,02,000 and Creditors at ₹ 80,000. Lily was admitted and new profit-sharing ratio
was agreed at 5:4:1. Stock was revalued at ₹ 6,70,000, Patents of ₹ 12,000 becomes
useless ,Creditors of ₹ 25,000 are not likely to be claimed, Debtors requires a Provision
for doubtful debts @ 5%. Daisy’s share in profit on revaluation amounted to ₹ 30,000.
Revalued value of Land & Building will be:
(A) ₹ 2,25,000
(B) ₹ 2,15,000
(C) ₹ 3,15,000
(D) ₹ 3,75,000
Q. 14. . Mohan and Rakesh were partners sharing profits and losses in the ratio of 2:1.
On 1st April,2021 they admitted Ashad as a new partner and new ratio was decided
as 2:1:1. Goodwill of the firm was valued as ₹4,80,000. Ashad couldn’t bring any
amount for goodwill. Amount of goodwill share to be credited to Mohan and Rakesh
Account’s will be: -
(A) ₹ 60,000 and ₹ 60,000 respectively
(B) ₹ 80,000 and ₹ 80,000 respectively
(C) ₹ 40,000 and ₹ 80,000 respectively
(D) ₹ 80,000 and ₹ 40,000 respectively
Q. 15 At the time of admission of a partner, Employees Provident Fund
is: a) Distributed to partners in the old profit sharing ratio
b) Distributed to partners in the new profit sharing ratio
c) Adjusted through gaining ratio
Q. 16 If at the time of admission if there is some unrecorded liability, it will be

------------- to------------------Account.
a) Debited, Revaluation
b) Credited, Revaluation
c) Debited, Goodwill
d) Credited, Partners’ Capital
Q. 17 At the time of admission of a new partner, the balance of Workmen Compensation

Reserve will be transferred to:
a) Old partners in the old profit sharing ratio
b) Sacrificing partners in the sacrificing ratio
c) Revaluation Account
d) All partners in the new profit sharing ratio
Q. 18 The firm of P, Q and R with profit sharing ratio of 6:3:1, had the balance in General
Reserve Account amounting Rs. 1,80,000. S joined as a new partner and the new
profit sharing ratio was decided to be 3:3:3:1. Partners decide to keep the General
Reserve unchanged in the books of accounts. The effect will be:
a) P will be credited by Rs. 54,000
b) P will be debited by Rs. 54,000
c) P will be credited by Rs. 36.000
d) P will be debited by Rs. 36,000
Q. 19 Which statement is true with respect to AS-26?
a) Purchased goodwill can be shown in the Balance Sheet assets side.
42
b) Revalued goodwill can be shown in the Balance Sheet
c) Both purchased goodwill and revalued can be shown in the Balance Sheet
Q. 20 Premium brought by newly admitted partner should be:

a) Credited to sacrificing partners
b) Credited to all partners in the new profit sharing ratio
c) Credited to old partners in the old profit sharing ratio
d) Credited to only gaining partners
Q. 21 Sacrificing ratio is calculated because:

a) Profit shown by Revaluation Account can be credited to sacrificing partners b)
Goodwill brought in by the incoming partner can be credited to the new partner c)
Goodwill brought in by the incoming partner can be credited to the sacrificing
partners
d) Both a and c
Q.22 At the time of admission of a partner, what will be the effect of the following
information? Balance in Workmen compensation reserve ₹ 2,80,000. Claim for
workmen compensation ₹2,20,000.
(A) ₹ 2,80,000 Debited to the Partner’s capital Accounts.
(B) ₹ 2,20,000 Debited to Revaluation Account.
(C) ₹ 60,000 Credited to the Partner’s capital Accounts.
(D) ₹ 60,000 to Debited Revaluation Account.
Q. 23 Revaluation Account is a------------ Account.
a) Real
b) Nominal
c) Personal
d) Liability
Q. 24 Match the following:

i. Sacrificing Ratio A Nominal Account
ii. Gaining Ratio B Reconstitution of Partnership
iii. Revaluation Account C New Ratio – Old Ratio
iv. Admission of a Partner D Old Ratio – New Ratio
a) i- B, ii-C, iii-A, iv-D

b) i- D, ii-B, iii-A, iv-C
c) i- D, ii-C, iii-A, iv-B
d) i- D, ii-C, iii-B, iv-A
Q. 25 Match the following with respect to journal entries for treatment of goodwill.
i. Incoming partner brings his share of A No Entry
goodwill
ii. Incoming partner does not bring B Premium for Goodwill A/c Dr.
his share of goodwill Incoming Partner’s Capital A/c Dr.
To Sacrificing Partners Capital A/c
iii. Incoming partner pays his share C Premium for Goodwill A/c Dr. To
of goodwill privately Sacrificing Partners Capital A/c
43
iv. Incoming partner brings only a part D Incoming Partner’s Capital A/c Dr.
of his share of goodwill To Sacrificing Partners Capital
A/c
a) i- B, ii-C, iii-A, iv-D

b) i- C, ii-D, iii-A, iv-B
c) i- D, ii-C, iii-A, iv-B
d) i- D, ii-C, iii-B, iv-A
26. Distribution of ‘General Reserve’ at the time of change in profit sharing ratio of
existing partners is shared by (i) whereas in case of admission of a partner it is shared
by (ii) .
(A) (i) Remaining Partners, (ii) All Partners.
(B) (i) All Partners, (ii) Old partners.
(C) (i) New Partner, (ii) All partner.
(D) (i)Sacrificing Partner,(ii)Incoming partner.
27. Amar and Prem are partners in a firm sharing profits and losses in the ratio of
3:1. Balance Sheet (Extract)
Liabilities ₹ Assets ₹
Land & Building

30,00,000
If the value of Land & Building reflected in the balance sheet is undervalued by 16
4/6 %, find out the value of Land & Building to be shown in the new Balance Sheet:
(A) ₹ 25,00,000
(B) ₹ 36,00,000
(C) ₹ 24,00,000
(D) ₹35,00,000
28. Gain / loss on revaluation at the time of change in profit sharing ratio of existing
partners is shared by (i) whereas in case of admission of a partner it is shared by (ii) .
(A) (i) Remaining Partners, (ii) All Partners.
(B) (i) All Partners, (ii) Old partners.
(C) (i) New Partner, (ii) All partner.
(D) (i)Sacrificing Partner,(ii)Incoming partner.
29. Arun and Vijay are partners in a firm sharing profits and losses in the ratio of
5:1. Balance Sheet (Extract)
Liabilities ₹ Assets ₹
Machinery 40,000
If the value of machinery reflected in the balance sheet is overvalued by 33 %, find out
the value of Machinery to be shown in the new Balance Sheet:
(A) ₹ 44,000
(B) ₹48,000
(C) ₹ 32,000
44
(D) ₹30,000
30. At the time of reconstitution of a partnership firm, recording of an
unrecorded liability will lead to:
(A) Gain to the existing partners
(B) Loss to the existing partners
(C) Neither gain nor loss to the existing partners
(D) None of the above
31. At the time of reconstitution of a partnership firm, recording of an

unrecorded prepaid insurance of Rs. 3,300 will lead to:
(A) Loss to the existing partners
(B) Gain to the existing partners
(C) Neither gain nor loss to the existing partners
(D) None of the above
32. Given below are two statements, one labelled as Assertion (A) and the other
labelled as Reason (R):
Assertion (A): Revaluation A/c is prepared at the time of Admission of a
partner. Reason (R): The profit or loss on the revaluation of assets and
liabilities, on reconstitution of firm, is related to old partners in their old raio.
In the context of the above two statements, which of the following is
correct? Codes:
(A) Both (A) and (R) are correct and (R) is the correct reason of (A).
(B) Both (A) and (R) are correct but (R) is not the correct reason of
(A). (C) Only (R) is correct.
(D) Both (A) and (R) are wrong.
33. Given below are two statements, one labelled as Assertion (A) and the other
labelled as Reason (R)
Assertion (A): On reconstitution of a firm, ‘Interest on Drawings’ is shown in P &
L Appropriation A/c.
Reason (R): On admission of a partner, ‘ Interest on Drawings’ are charge against
the profits.
In the context of the above statements, which one of the following is
correct? Codes:
(A) (A) is correct, but (R) is wrong.
(B) Both (A) and (R) are correct.
(C) (A) is wrong, but (R) is correct.
Answers:
1. b 2. a 3. a 4. C 5. B 6. C 7. C 8. A 9. C 10.c 11.b 12. A 13. D 14. D
15.d 16.a 17.a 18.a 19.a 20.a 21.c 22. C 23.b 24.c 25. B 26. B 27. D
28. B 29. D 30. B 31. B 32. A 33. A
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45
Part-B Accounting of Companies
Chapter-1ACCOUNTING FORSHARE CAPITAL
Features of a Company:-
• Body Corporate: A company is formed according to the provisions of Law
enforced from time to time.
• Separate Legal Entity: A company has a separate legal entity which is distinct
and separate from its members
• Limited Liability: The liability of the members of the company is limited to the
extent of unpaid amount of the shares held by them
• Perpetual Succession: The company being an artificial person created by
law continues to exist irrespective of the changes in its membership
• Common Seal: The company being an artificial person, cannot sign its name by
itself • Transferability of Shares: The shares of a public limited company are freely
transferable
• May Sue or be Sued: A company being a legal person can enter into contracts and
can enforce the contractual rights against others. It can sue and be sued in its name if
there is a breach of contract by the company.
Share: Capital of a company is divided in certain units of a fixed amount. These

units are known as Shares. It’s the basis of ownership in a company.
Type of shares:
(1) Preference Shares :-According to Section 43 of The Companies Act, 2013,

a preference share is one, which fulfils the following conditions :
(a) That it carries a preferential right to dividend to be paid either as a fixed amount
payable to preference shareholders or an amount calculated by a fixed rate of the
nominal value of each share before any dividend is paid to the equity shareholders.
(b) That with respect to capital it carries or will carry, on the winding up of the
company, the preferential right to the repayment of capital before anything is paid
to equity shareholders.
(2) Equity Shares: According to Section 43 of The Companies Act, 2013, an equity share
is a share which is not a preference share. In other words, shares which do not enjoy any
preferential right in the payment of dividend or repayment of capital, are termed as
equity/ordinary shares.
DIFFERENTIATE BETWEEN PREFERENCE SHARES AND EQUITY SHARES
BASIS PREFERENCE SHARES EQUITY SHARES
DIVIDEND Dividend paid at fixed rate Rate of dividend is not fixed
RIGHT TO They have a right to Payment of dividend is

RECEIVE receive dividend before made after the payment of
DIVIDEND any dividend paid on preference dividend.
equity shares
46
PAYMENT OF They have right to return Equity share capital is
CAPITAL of capital in the case of paid only when
winding up, before any preference share capital
capital is returned to is paid out fully.
equity
shareholders
VOTING RIGHTS Preference shareholders Equity shareholders

do not have any voting enjoy voting rights
rights
PARTICIPATION They do not have a right They have full right to

IN to participate in participate in
MANAGEMENT management of the management of the
company company.
Share Capital of a Company: A company, being an artificial person, cannot generate its
own capital which has necessarily to be collected from several persons. These persons
are known as shareholders and the amount contributed by them is called share capital.
Since the number of shareholders is very very large, a separate capital account cannot
be opened for each one of them. Hence, innumerable streams of capital contribution
merge their identities in a common capital account called a ‘Share Capital Account’.
Categories of Share Capital: From accounting point of view the share capital of the
company can be classified as follows:
• Authorised Capital: Authorised capital is the amount of share capital which a
company is authorised to issue by its Memorandum of Association. It is also called
Nominal or Registered capital. The authorised capital can be increased or decreased as
per the procedure laid down in the Companies Act. It should be noted that the company
need not issue the entire authorised capital for public subscription at a time. Depending
upon its requirement, it may issue share capital but in any case, it should not be more
than the amount of authorised capital.
• Issued Capital: It is that part of the authorised capital which is actually issued to the
public for subscription including the shares allotted to vendors and the signatories to
the company’s memorandum. The authorised capital which is not offered for public
subscription is known as ‘unissued capital’. Unissued capital may be offered for public
subscription at a later date.
• Subscribed Capital: It is that part of the issued capital which has been actually
subscribed by the public. When the shares offered for public subscription are subscribed
fully by the public the issued capital and subscribed capital would be the same. It may be
noted that ultimately, the subscribed capital may be equal to or less than issued capital.
Incase the number of shares subscribed is less than what is offered, the company allots
only the number of shares for which subscription has been received. In case it is higher
than what is offered, the allotment will be equal to the offer.
• Called up Capital: It is that part of the subscribed capital which has been called up on
the shares, i.e., what the company has asked the shareholders to pay. The company may
decide to call the entire amount or part of the face value of the shares, For example, if the
face value (also called nominal value) of a share allotted is Rs. 10 and the company has
called up only Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share.
The remaining Rs. 3 may be collected from its shareholders as and when needed.
• Paid up Capital: It is that portion of the called up capital which has been actually
received from the shareholders. When the shareholders have paid all the called amount,
the called up capital is the same as the paid up capital. If any of the shareholders has not
paid an amount on calls, such an amount may be called as ‘calls in arrears’.
47
Paid up capital =Called-up Capital - Call in arrears.
• Uncalled Capital: That portion of the subscribed capital which has not yet been
called up.
• Reserve Capital: A company may reserve a portion of its uncalled capital to be
called only in the event of winding up of the company. Such an uncalled amount is
called ‘Reserve Capital’ of the company. It is available only for the creditors on
winding up of the company.
Private Placement :- The term "Private Placement" has been defined under section 42
of the Companies Act, 2013 as:"Any offer to a group selected by the company to
subscribe its securities via issuing a private placement offer letter and satisfying the
conditions specified in section 42 of the Companies Act,2013. One of the conditions
specified under section 42 of the act is that such offer or invitation shall not be made to
more than 50 persons or as may be prescribed in a particular financial year"
What does it mean to have an ESOP plan?

An ESOP (Employee stock option plan) refers to an employee benefit plan which offers
employees an ownership interest in the organization. Employee stock ownership plans
are issued as direct stock, profit-sharing plans or bonuses, and the employer has the
sole discretion in deciding who could avail of these options.
Under the Employee stock option plan (ESOP), an “option” granted to the company
employee carries the right, but not the obligation, to buy a promised number of shares at
a predetermined price. Employee Stock Options are complex call options granted by the
companies as a part of the remuneration package.
Important Terms of ESOP
Grant: Grant means giving an option to the Employees to subscribe to the shares of the
company at the predetermined price.
Grant Date: It is the date of agreement between the enterprise and its employees to the
terms of Employees Stock Option Plan (ESOP).
Vesting: A process to give rights to employees to apply for shares of the company.
Vesting Date: It is the date on which the employee becomes entitled to apply for the
shares once he has satisfied the vesting conditions.
Vesting Period: The period between the grant date and the date on which all the
specified vesting conditions of an Employees Stock Option Plan (ESOP) need to be
satisfied.
Exercise: It means applying by the employee for issue of shares against the option
vested in him.
Exercise Period :Period after vesting within which the employee must exercise the right
to apply for shares against the option vested in him in pursuance of the EmployeesStock
Option Plan.
Exercise Price :The price payable by the employee for exercising the option granted in
pursuance of the Employees Stock Option Plan.
Value of Option :Difference between the market price and the issue price of the
security. Stages of Share Issue: The issue of shares for cash is required to be made in
strict
48
conformity with the procedure laid down by law for the same. When shares are
issued for cash, the amount on them can be collected at one or more of the
following stages:
(i) Application for shares: The application money should be at least 5% of the
face value of the share.
(ii) Allotment of shares
(iii) Call/Calls on shares.:
(The amount on any call should not exceed 25% of the face value of shares. There
must be an interval of at least one month between the making of two calls unless
otherwise provided by the articles of association of the company.) Issue of Shares for
Consideration other than Cash: There are instances where a company enters into an
arrangement with the vendors from whom it has purchased assets, whereby the latter
agrees to accept the payment in the form of fully paid shares of the company issued to
them. Normally, no such cash is received for issue of shares. These shares can also be
issued either at par, at premium or at discount, and the numberof shares to be issued
will depend upon the price at which the shares are issued and the amount payable to the
vendor. The number of shares to be issued to the vendor will be calculated as follows:
Number of shares to be issued= ��
��
��
Calls in Arrears: Sometimes, the full amount called on allotment and/or call (calls) is
not received from the allottees/shareholders. The amount not so received are
cumulatively called ‘Unpaid calls’ or ‘Calls in Arrears’. (if Articles are silent on this
account, Table F is applicable which provides for interest on calls in arrear at a rate
not exceeding 10% per annum.)
Calls in Advance :- Any amount paid by a shareholder in the excess of the amount due
from him on allotment/call (calls) is known as ‘Calls in Advance’ for which a separate
account is maintained. (if Articles are silent on this account, Table F is applicable which
provides for interest on calls in advance at a rate not exceeding 12% per annum.) Over
Subscription: It is possible for the shares of some companies to be oversubscribed
which means that applications for more shares are received than the number offered for
subscription. If the amount of minimum subscription is not received to the extent of
90%, the issue dissolves.
Under Subscription : In case the applications received are less than the number of
shares offered to the public, the issue is termed as ‘under subscribed’. Issue of Shares at
Premium: Shares are issued at a premium, i.e. at an amount more than the nominal or
par value of shares, the amount of premium is credited to a separate account called
‘Securities Premium Reserve Account’, the use of which is strictly regulated by law.
According to Section 52(2) of the Companies Act, Securities Premium Account
may be used by the company for the following purposes only:
1) To fully paid bonus shares;
2) To writing-off preliminary expenses;
3) To writing-off expenses such as expenses, commission or discount on issue
of shares or debentures;
4) To provide premium payable on redemption of debentures or preference shares;
49
5) In buying-back its own shares.
Issue of Shares at Par :The issue of shares at par implies that the shares have been
issued for an amount exactly equal to their face or nominal value.
▪ Issue of Shares
The important steps in the procedure of share issue are:-
• Issue of Prospectus:
• Receipt of Applications:
• Allotment of Shares:
▪ Accounting Treatment
On application : The amount of money paid with various installment
represents contribution to share capital and should ultimately be credited to share
capital. However, for the sake of convenience, initially individual accounts are
opened for each installment. All money received along with application is deposited
with a scheduled bank in a separate account opened for the purpose. The journal entry is
as follows:
Bank A/c Dr.
To Share Application A/c
(Amount received on application for — shares @ Rs. per share) ▪ On
allotment
When minimum subscription has been received and certain legal formalities on
the allotment of shares have been duly compiled with, the directors of the company
proceed to make the allotment of shares.
▪ The journal entries with regard to allotment of shares are as follows:
1. For Transfer of Application Money
Share Application A/c Dr.
To Share Capital A/c
(Application money on Shares allotted/ transferred to Share Capital) 2.
For Money Refunded on Rejected Application
To Bank A/c
(Application money returned on rejected application for shares)
3. For Amount Due on Allotment
Share Allotment A/c Dr.
4. For Adjustment of Excess Application Money
To Share Allotment A/c
(Application Money on Shares @ Rs per shares adjusted to the amount due on
allotment).
5. For Receipt of Allotment Money
Bank A/c Dr.
(Allotment money received on Shares @ Rs. — per share Combined Account)
Note:- The journal entries (2) and (4) can also be combined as follows: Share
Application A/c
To ShareAllotment A/c
To Bank A/c
(Excess application money adjusted to share allotment and balance refunded)
50
On Calls: The amount on any call should not exceed 25% of the face value of shares.
There must be an interval of at least one month between the making of two calls unless
otherwise provided by the articles of association of the company.
When a call is made and the amount of the same is received, the journal entries are as
given below:
1. For Call Amount Due
Share Call A/c Dr.
(Call money due on Shares @ Rs. per share)
2. For Receipt of Call Amount
Bank A/c Dr.
To Share Call A/c
(Call money received)
Calls in Arrears: It may happen that shareholders do not pay the call amount on due
date. When any shareholder fails to pay the amount due on allotment or on any of
the calls, such amount is known as ‘Calls in Arrears’/‘Unpaid Calls’.
Calls in Arrears A/c Dr.
To Share First Call Account A/c
To Share Second and Final Call Account A/c
(Calls in arrears brought into account)
Forfeiture of Shares: Sometimes, shareholders fail to pay one or more installments on
shares allotted to them. In such a case, the company has the authority to forfeit
shares of the defaulters. This is called ‘Forfeiture of Shares’. Forfeiture means the
cancellation of allotment due to breach of contract and to treat the amount
already received on such shares as forfeited to the company.
JOURNAL ENTRY:
(a) Forfeiture of Shares issued at Par:
Share Capital A/c. ......(Called up amount) Dr.
To Share Forfeiture A/c. ......(Paid up amount)
To Calls in Arrear A/C (OR)
To Share Calls A/c (individually)
(.... shares forfeited for non-payment of allotment money and calls made)
Forfeiture of Shares issued at a Premium: If shares were initially issued at a premium
and the premium amount has been fully realised, but some of the shares are forfeited
due to non-payment of call money, the accounting treatment for forfeiture shall be on
the same pattern as in the case of shares issued at par.
(b) Forfeiture of Shares issued at Premium:
Share Capital A/c. (Called up amount) Dr.
Securities Premium Reserve A/c(Unpaid amount)
To Share Forfeiture A/c. ......(Paid up amount)
To Calls in Arrear A/C (unpaid amount) (OR)
To Share Calls A/c (individually)
(.... shares forfeited for non-payment of allotment money and calls made)
Reissue of Shares: The management of a company is vested with the power to reissue
the
shares once forfeited by it, subject of course, to the terms and conditions in the
articles of association relating to the same. The shares can be reissued even at a
51
discount provided the amount of discount allowed does not exceed the credit
balance of the Share forfeiture account relating to shares being reissued.
Therefore, discount allowed on the reissue of forfeited shares is debited to Share
forfeiture account.
Reissued Forfeited Shares at Premium:
Bank A/c ..................................................Dr.
To Securities Premium Reserve A/c(excess amount)
To Share Capital A/c (paid up amount)
(Reissue of shares forfeited premium)
Reissued Forfeited Shares at Discount:
Bank A/c ..................................................Dr.
Share Forfeiture A/c(Deficit amount)
(Reissue of shares forfeited less than the paid up value)
Reissued Forfeited Shares at Par:
Bank A/c ..................................................Dr.
(Reissue of shares forfeited at paid up value)
Capital Reserve :-Once all the forfeited shares have been reissued, any credit balance on
Share forfeiture account is transferred to the Capital Reserve representing profit on
forfeiture of shares. In the event of all forfeited shares not being reissued, the credit
amount on the Share forfeiture account relating to shares yet to be reissued is carried
forward and the remaining balance on the account only is credited to the capital reserve
account.
Share Forfeiture A/c Dr.
To Capital Reserve
(Profit on..............reissued shares transferred to capital reserve)
CALCULATION OF CAPITAL RESERVE: XXXXX
1 AMOUNT FORFEITED ON REISSUED SHARE
= �� X No of
shares reissued �� ℎ��
2.: Less: if any Loss on Reissue (XX)
3. Capital Reserve XXXXX
Tips: Calculate amount forfeited on one share and then multiply it by shares
reissued then deduct loss on share reissued. You will get a capital reserve
quickly.
Disclosure of Share Capital into the Balance Sheet of a
Company Balance Sheet of a Company (As on )
Equity & Liabilities Note No. Amt. in ₹
(A) Shareholders Fund: 1 XX

2 XX
(a) Share Capital
(b) Reserve & Surplus 3
4
(B) Non-Current Liabilities
(C) Current Liabilities
52
Notes to Account:
Particulars
1. Share Capital XXXX

Authorised Capital
(………… shares of ₹…….each share)
Issued Capital XXXXX

(………… shares of ₹…….each share)
Subscribed Capital XXXXX

Subscribed and Fully paid up XXXXX (…………
shares of ₹… ... each share)
Add: Share forfeiture Account XXX (………… shares
of ₹… ... each share)
Subscribed but not fully paid up XXXXX (…………
Less: Calls in Arrear Account (XXXX) ( ...............
Total Share capital
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QUESTION BANK
ACCOUNTING FOR COMPANIES
PART- I
SECTION A m
a
r
k
s
1 Which of the following statements is/are true? 1

(i) Authorized Capital < Issued Capital (ii) Authorized Capital ≥ Issued Capital (iii)
Subscribed Capital ≤ Issued Capital (iv) Subscribed Capital > Issued Capital (a) (i) only (b)
(i) and (iv) Both (c) (ii) and (iii) Both (d) (ii) only
2 Name the head of Capital Clause of Memorandum of Association of a company in which the 1
maximum amount of share capital mentioned is called .
(a) Reserve Capital (b) Subscribed Capital (c) Authorised Capital (d) Issued Capital
3 The part of uncalled capital, to be called only in the liquidation of a company is called: (a) 1
Un-reserved Capital (b) Reserve Capital (c) Capital Reserve (d) Calls-in Arrears
4 Manisha ltd. had been allotted for 600 shares by a Gokul Ltd on pro rata basis which had 1
issued two shares for every three applied. He had paid application money of ₹3 per share and
could not pay allotment money of ₹5 per share. First and final call of ₹2 per share was not yet
made by the company. His shares were forfeited. the following entry will be
passed: Equity Share Capital A/c Dr ₹X
To share Forfeited A/c ₹Y
53
To Calls in Arrear A/c ₹Z
Here X, Y and Z are:
(a) ₹ 6,000; ₹2,700; ₹3,000 respectively. (b) ₹ 9,000; ₹2,700; ₹4,500 respectively.
(c) ₹ 4,800; ₹2,700; ₹2,100 respectively. (d) ₹ 7,200; ₹2,700; ₹4,500 respectively.
5 A shareholder allotted to whom 9,000 shares of ₹ 10 per share failed to pay first & final of ₹ 2 1
per share. ₹ 18,000 to be recorded in the books of company with
(a) Dr. to Calls-in Arrears A/c (b) Dr. to Share Forfeiture A/c (c) Cr. to
Calls-in Arrears A/c (d) Cr. to Share Forfeiture A/c
6 Read the following statement carefully and give the answer for the questions 06 and 1
07: Kokun Ltd is authorised to issue shares 5,00,000 of ₹ 100 each. Company raised the
capital by issuing 2,00,000 shares through e-IPO. As per the decision of the Managing Board
of Directors of the company, the company issued 75,000 shares to their parent company and
40,000 shares issued to existing employees of the company as per their choice and option at
the below price than the market price.
“Company issued 75,000 shares to their parent company” is an example of . (a) Public Issue
(b) Private Placement (c) ESOP (d) Issue other than cash
7 40,000 shares issued to existing employees of the company as per their choice and option at 1
the below price than the market price.” Is an example of
(a) Public Issue (b) Private Placement (c) ESOP (d) Issue other than cash
8 Vibhuti Ltd. forfeited 20 shares of ₹10 each, ₹8 called up, on which John had paid application 1
and allotment money of ₹5 per share, of these, 15 shares were reissued to Parker as fully
paid up for ₹6 per share.
What is the balance in the share Forfeiture Account after the relevant amount has been
transferred to Capital Reserve Account?
(a) ₹0 (b) ₹5 (c) ₹25 (d) ₹100
9 Which one of the following is a permanent representative personal account of share-holders? 1

(a) Share Application A/c (b) Share Allotment A/c (c) Share Application & Allotment
A/c (d) Share Capital A/c
10 Which of the following is a temporary representative personal account of shareholders? (a) 1
Share Application A/c (b) Share Allotment A/c (c) Share Application & Allotment A/c
(d) All of these
11 XYZ Ltd took over business of Bizare ltd and paid for it by issue of 30,000, Equity Shares of 1
₹100 each at a par along with 6% Preference Shares of ₹1,00,00,000 at a premium of 5% and
a cheque of ₹8,00,000.
What was the total agreed purchase consideration payable to Bizare ltd.
(a) ₹1,05,00,000. (b) ₹1,43,00,000. (c) ₹1,40,00,000. (d) ₹1,35,00,000.
12 A shareholder failed to pay share allotment money on 12,000 shares @ ₹ 30 per share. 1
Which one of the following account will be taken into account?
(a) Debited to Share Capital A/c (b) Debited to Calls-in Arrears A/c (c) Credited to
Calls-in Arrears A/c (d) Credited to Share Capital A/c
13 Received share application money towards application & allotment of shares will be credited 1
to which of the following account?
(a) Share Application & Allotment A/c (b) Share Application A/c (c) Share
Capital A/c (d) None of these
54
14 Ashok a shareholder of a company allotted shares to whom 12,000 of ₹ 100 each, failed to 1
pay allotment ₹ 30 per share and first & final call ₹ 30 per share. Ashok had paid only
application money. Pro-rata allotment proportion is 5:6. What will be the amount of calls-in
arrears on allotment, from the following:
(a) ₹ 3,60,000 (b) ₹ 2,64,000 (c) ₹ 96,000 (d) None of these
15 The allowed amount of discount on re-issue of shares will be 1

(a) @ 10% of issue price (b) Up to the amount of forfeited money (c) Could not
issue at discount (d) None of these
16 The allowed amount of discount on re-issue of shares will be 1

(a) @ 10% of issue price (b) Up to the amount of forfeited money (c) Could
not issue at discount (d) None of these
17 12,000 shares of ₹ 100 each forfeited due to non payment of allotment of ₹ 40 per share and 1
first & final call of ₹ 30 per share. Out of the forfeited shares, 9,000 shares were reissued at ₹
80per share fully paid. Which of the following amount of share forfeiture account will be
transferred to Capital Reserve Account?
(a) 1,80,000 (b) 90,000 (c) 3,60,000 (d) 2,70,000
18 Match the columns with reference to share capital of a company: 1

Column I Column II
(A)Capital Reserve (i) Memorandum of Association
(B) Minimum Subscription (ii) Allotment / Calls due but did not receive
(C)Calls-in Arrears (iii) Reserves & Surplus
(D)Authorised Capital (iv) SEBI Guidelines
ABCD
(a) (iii) (iv) (ii) (i)
(b) (ii) (iv) (i) (iii)
(c) (ii) (i) (iii) (iv)
(d) (i) (ii) (iii) (iv)
19 As per SEBI guidelines application money should not be less than...............of the issue price 1
of each share.
a) 10% b) 15% c) 25% d) 50%
20 Minimum subscription amount of 90% is related to which share capital…. a) Authorised 1

Capital b) Issued Capital c) Paid up Capital d) Reserve capital
21 Kaar Ltd forfeited 4,000 shares of ₹20 each, fully called up, on which only application money 1
of ₹6 has been paid. Out of these 2,000 shares were reissued and ₹8,000 has been transferred
to capital reserve. Calculate the rate at which these shares were reissued.
(a) ₹20 Per share (b) ₹18 Per share (c) ₹22 Per share (d) ₹8 Per share
22 AB Ltd purchased a Machinery from XY Ltd for ₹ 4,50,000. AB Ltd immediately paid ₹ 90,000 1
by Bank Draft and the balance by issue of preference share of ₹ 100 each at 20% premium
for the purchase consideration of Machinery to XY Ltd. Shares issued by AB Ltd?
(a) 3,000 preference shares (b) 30,000 preference shares
(c) 3,600 preference shares (d) 36,000 preference shares
23 Shares issued by a company to its employees or directors in consideration of ‘Intellectual 1

Property Rights’(IPR) are called…….
a) Right equity Shares b) Private Equity shares c)Sweat Equity Share d) Bonus Equity
shares
24 Krishan Ltd has Issued Capital of 20, 00,000 Equity shares of ₹10 each. Till Date ₹8 per share 1
have been called up and the entire amount received except calls of ₹4 per share on 800
shares
55
and ₹3 per share from another holder who held 500 shares. What will be amount appearing
as ‘Subscribed but not fully paid capital’ in the balance sheet of the company? (a) ₹
2,00,00,000 (b) ₹ 1,95,99,000 (c) ₹ 1,59,95,300 (d) ₹ 1,99,95,300
25 Reserve capital is a part of …

a) Paid up Capital b) Forfeited share capital
c) Asset d) Capital to be called up only on liquidation of company.
There are two statements marked as Assertion (A) and Reason (R). Read the statements and 1
choose the appropriate option from the options given below for the question 26 to 28: (a)
Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation
of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the
correct explanation of Assertion (A)
(c) Assertion (A) is false, but Reason (R) is true
(d) Assertion (A) is true, but Reason (R) is false
26 Assertion: (A) Received amount of securities premium will not debited to securities 1
premium reserve account, on forfeiture of shares.
Reason (R) Received amount of securities premium will be debited while writing off of
certain type of capital loss or expenditure
27 Assertion (A) Equity shares does not carry fixed rate of dividend and they are the ultimate 1
risk bearer.
Reason (R) Equity shareholders are getting dividend from residual part of profits and in the
case of windup of the company, invested money will be refunded at the last.
28 Assertion (A): A company must receive minimum subscription on public issue of shares. 1
Reason (R): In default to receive minimum subscription, company could not allot its
shares.
29 6,000 shares of ₹ 100 each (applied for 7,500 shares) forfeited due to non-payment of 1
allotment ₹ 40 per share. First & final call was not yet made. Company received only
application money at ₹ 50 per share including premium of ₹ 20 per share. Which of the
following amount will be forfeited by the company?
(a) ₹ 3,75,000 (b) ₹ 3,00,000 (c) ₹ 2,55,000 (d) 1,80,000
30 As per Section 52 of Companies Act 2013, Securities Premium Reserve cannot be utilised 1
for: (a) Writing off capital losses. (b) Issue of fully paid bonus shares. (c) Writing off
discount on issue of securities. (d) Writing off preliminary expenses.
31 Public subscription of shares include: 1

a) To issue prospectus b) To receive Application c)To make allotment d) All of the
above
32 Kamesh Ltd offered 2,00,000 Equity Shares of ₹10 each, of which 1,98,000 shares were
subscribed. The amount was payable as ₹3 on application, ₹4 an allotment and balance on
first call. If a shareholder holding 3,000 shares has defaulted on first call, what is the amount
of money received on first call?
(a) ₹9,000. (b) ₹5,85,000. (c) ₹5,91,000. (d) ₹6,09,000.
33 Calculate the amount of second & final call when Abhijit Ltd, issues Equity shares of ₹10 1
each at a premium of 40% payable on Application ₹3, On Allotment ₹5, On First Call ₹2. (a)
Second & final call ₹3. (b) Second & final call ₹4.
(c) Second & final call ₹1. (d) Second & final call ₹14.
56
34 Anil Ltd, issued a prospectus inviting applications for 2,000 shares. Applications were 1
received for 3,000 shares and pro- rata allotment was made to the applicants of 2,400 shares.
If Dhruv has been allotted 40 shares, how many shares must he have applied for?
(a) 40 (b) 44 (c) 48 (d) 52
35 ……………….is transferred to the Capital Reserve. 1

a)Profit from sale of fixed assets b) Premium on issue of shares c) Profit
on forfeiture of shares d) all of the above
36 Equity shares cannot be issued for the purpose of : 1

a) Cash Receipts b) Purchase of Assets
c) Redemption of Debentures d) Distribution of Dividend
Question no.’s 37 and 38 are based on the hypothetical situation given below. Star 1
Limited is engaged in the manufacture of high-end medical equipment. Considering the
prospects of high growth in this segment the company has decided to expand and for this
purpose additional investment of ₹50,00,00,000 is required. Directors have decided that 20%
of this requirement would be financed by raising long term debts and balance by issue of
Equity shares. As per memorandum of association of the company the face value of Equity
shares is ₹100 each. Also, considering the market standing of the company these shares
would be issued at a premium of 25%. Directors decided to issue sufficient shares to collect
the desired amount (including premium). The prospectus was issued to the public, and the
issue was oversubscribed by 2,00,000 shares which were issued letters of regret. Answer the
below mentioned questions considering that the entire amount was payable on application.
37 What is the total amount collected on application? 1

(a) ₹42,50,00,000 (b) ₹40,00,00,000 (c) ₹32,00,00,000 (d) None of the above
38 How many Equity shares were offered for issue by Star Ltd? 1
(a) 40,00,000 shares. b) 50,00,000 shares. c) 35,00,000 shares. (d) 32,00,000 shares.
39 People who start a company are called……….. 1

a) Shareholders b) Directors c) Promoters (d) Auditors
40 Given below are two statements, one labelled as Assertion (A) and the other labelled as 1
Reason (R):
Assertion (A): In case of shares issued on Pro–rata basis, excess money received at the time
of application can be utilised till allotment only.
Reason (R): Company has to pay interest on calls in advance @12% p.a. for amounts
adjusted towards calls (if any). In the context of the above two statements, which of the
following is correct?
(a) Both (A) and (R) are true, but (R) is not the explanation of working capital
management.
(b) Both(A) and (R) are true and (R) is a correct explanation of (A).
(c) Both (A) and (R) are false.
(d) (A) is false, but (R) is true.
57
ANSWERS OF PART -I
1 c 11 b 21 b 31 d
2 c 12 b 22 a 32 b
3 b 13 c 23 c 33 b
4 c 14 b 24 c 34 c
5 a 15 b 25 d 35 d
6 b 16 b 26 b 36 d
7 c 17 a 27 a 37 a
8 c 18 a 28 a 38 d
9 d 19 c 29 c 39 c
10 b 20 b 30 a 40 d
PART-II
Ques.1 : Read the following statement and Mark Option a for true and option b for false.
According to the below given information the final call per share is ₹22. The subscribed
capital of a company is ₹80,00,000 and the nominal value of the share is ₹100 each.
There were no calls in arrear till the final call was made. The final call made was paid on
77,500
shares only. The balance in the calls in arrear amounted to ₹ 55,000. Ques.2 : Read the
following statement and Mark Option a for true and option b for false. Securities
premium received on issue of shares cannot be used for the purpose of Buy back of
shares.
Ques.3: Read the following statement and Mark Option a for true and option b for false.
Share application amount is in the nature of a Real account.
Ques.4. Arrange the following in proper sequence as types of “Share
Capital” (i) Paid up capital
(ii.)Issued capital
(iii)Subscribed capital
(iv.)Called up capital
Ques.5 Maximum limit of premium on shares is:
(A.)32%
(B.)20%
(C.)No limit
(D.)100%
Ques.6 Amount of money not received out of called up capital is:
(A.) Added to share capital
(B.)Subtracted from share capital
(C.) Shown as current liabilities
(D.) Shown as current asset
Ques.7 Following amounts were payable on issue of shares by a company: Rs.3on
application, ₹3 on allotment, ₹2 on first call and ₹.2 on final call. X holding 500 shares
paid only application and allotment money whereas Y holding 400 shares did not pay
58
final call. Amount of calls in arrear will be:
(A.) ₹3,800
(B.) ₹2,800
(C.) ₹1,800
(D.) ₹6,200
Ques.8 Rajan Limited issued 50,000 shares at a price lower than the nominal
value of the share. The shares issued are called:
A) Sweat equity shares
B) Redeemable Preference shares
C) Equity shares
D) Bonus shares
Ques.9 ENGOY Ltd. had allotted 10,000 shares to the applicants of 14,000shares on pro
rata basis, application money on another 6000 shares was refunded. The amount
payable on the application was ₹.2. RAAF applied for 420 shares.The number of shares
allotted to him will be:
(A.) 60 shares
(B.) 340 shares
(C.) 320 shares
(D.) 300 shares
Ques.10 A company issued 4,000 equity shares of ₹ 10 each at par payable as under: On
application ₹3, on allotment ₹2; on first call ₹4 and on final call ₹ 1 per share. Applicants
were received for 16,000 shares. Applications for 6,000 shares were rejected and
pro-rata allotment was made to the applicants for 10,000 shares. How much amount
will be received in cash on first call, when excess application money is adjusted towards
amount due on allotments and calls:
(A.) ₹6.000
(B.) nil
(C.) ₹16,000
(D) ₹10,000
Ques.11 A company issued 4000 equity shares of ₹ 50 each at par payable as under: On
application rupees 20%, on allotment 40%; on first call 10%; on final call-balance
Applications were received for 10,000 shares. Allotment was made pro-rata. How much
will be received in cash on allotment?
(A) ₹ 6.000
(B.) nil
(C.) ₹ 16,000
(D.) ₹ 20,000
Ques.12.Which one of the following is not a part of subscribed
capital: A) Equity shares issued to vendor
B) Preference shares of convertible type
C) Forfeited shares
D) Bonus shares
Ques.13.When nominal(face) value of a share is called up by the company but as some
shareholders did not pay the money, the shares are forfeited. The share capital is shown
in the balance sheet(notes) of a company under the following heading: A) Subscribed
and fully paid up
B) Subscribed but not fully paid up
C) Subscribed and called up
D) Subscribed but not called up
59
Ques.14. Zee Ltd issued 15,000 equity shares of ₹.20 each at a premium of ₹5 payable
₹.5 on application, ₹10 on allotment (including premium)and the balance on first and
final call. The company received applications for 22,500 shares and allotment was made
pro rata. Bittoo to whom 1,200shares were allotted, failed to pay the amount due on
allotment. All his shares were forfeited after the call was made. The forfeited shares were
reissued to Dheeraj at par. Assuming that no other bank transactions took place, the
bank balance of the company after the above transactions is:
A) ₹ 6,85,000
B) ₹. 3,60,500
C) ₹. 3,78,000
D) ₹ 6,34,000
Ques.15. EREK Ltd purchased the sundry assets of M/s Surat Industries for ₹.28,60,000
payable in fully paid shares of Rs. 100each. State the number of shares issued to vendors
when issued at a premium of10%.
A) ₹ 28,000
B) ₹31,778
C) ₹ 28,600
D) ₹26,000
Ques.16. The subscribed share capital of GUL Ltd is ₹1,00,00,000 of ₹100 each. There
were no calls in arrear till the final call was made. The final call was paid on 97,500
shares. The calls in arrear amounted to ₹ 87,500. The final call on share:
A) ₹.20
B) ₹35
C) ₹.25
D) ₹.45
Ques.17. These shares which in addition to the fixed preference dividend, carry a right
to participate in the surplus profits, if any, after dividend at a stipulated rate has been
paid to the equity shareholders are called:
A) Participating preference shares
B) Convertible preference shares
C) Redeemable preference shares
D) Cumulative preference shares
Ques.18. T Ltd had allotted 20,000 shares to the applicants of 24,000 shares on pro rata
basis. The amount payable on application is ₹2. Babua applied for 450 shares. The
number of shares allotted and the amount carried forward for adjustment against
allotment money due from him is:
A) 150shares, ₹375
B) 375 shares, ₹.150
C) 400shares, ₹100
D) 300shares, ₹.300
Ques.19. A company forfeited 3,000 shares of ₹.10each (which were issued at par) held
by Kishore for non payment of allotment money of ₹.5pershare. The called up value per
share was ₹.8. On forfeiture, the amount debited to share capital:
A) ₹ 30,000
B) ₹ 24,000
C) ₹15,000
D) ₹. 6,000
Ques.20. VIRE limited is used shares of ₹.100 each at a premium of 10%. Mr. Q
Purchased 500 shares and paid ₹ 20 on application but did not pay the allotment
60
money of ₹.30. If the company forfeited his 30% shares, the forfeiture account will be
credited by :
A) ₹.4500
B) ₹3500
C) ₹.1650
D) ₹.3000
Ques.21. Daisy Limited forfeited 200 shares ₹10 each who had applied for 500
shares, issued at a premium of10% for non payment of final call of ₹3 per share. Out
of these 100 shares were issued as fully paid up for ₹.15. The profit on reissue is: A)
₹.700
B) ₹.6400
C) ₹.300
D) ₹.400
Ques.22. KOLI Limited was formed with share capital of ₹50,00,000 divided into 50,000
shares of ₹.100 each. 9,000 shares were issued to the vendor as fully paid for purchase
consideration of furniture acquired. 30,000 shares were allotted in payment ofcash on
which ₹70 per share was called and paid. State the amount of subscribed capital:
A) ₹50,00,000
B) ₹.30,50,000
C) ₹.30,00,000
D) ₹.20,00,000
Ques.23. BEWI Limited invited application for 2,00,000 shares of ₹.10each These shares
were issued at premium of ₹11each which was allowed at the time of allotment. All
money was called and duly received except on 10,000 shares on which only application
money of ₹3 per share was received. The company forfeited all the shares. 7000 of
forfeited shares were re-issued at ₹.13 per share. State the amount of securities premium
to be shown under the head-Reserve and surplus.
A) ₹.20,00,000
B) ₹.11,11,000
C) ₹.8,11,000
D) ₹.21,11,000
Ques.24. MEME limited has an authorized capital of ₹.1,00,00,000 divided into 1,00,000
equity shares of ₹.100 each. If offered 90,000 equity shares ₹10 each at a premium of ₹8.
The public applied for 81,000 equity shares. Till 31st March 2018, ₹17(including
premium) was called. An applicant holding 5000 shares did not pay first call of ₹.2 per
share.
As per the above given information:
………………. Is the amount of Share capital to be shown in the balance sheet of the
company.
Ques.25.Out of total face value, liability of a share holder is limited to.................... value
of the share allotted to him.
Ques.26. Match the following:
a)Cumulative Pref. Share i)Repaid after some time
b)Participating Pref. Share ii)converts into equity shares
c)Redeemable Pref. shares iii)Dividend accumulates if not paid
d)Convertible Pref. shares iv)Gets share in surplus profit
The correct match is:
A) a-ii, b-i, c-iii, d-iv
61
B) a-iii, b-iv, c-i, d-ii
C) a-iii, b-iv, c-ii, d-i
D) a -ii, b-iv, c-iii, d-i
Answers:
1.True 6.B 11.D 16.B 21.A 26.B
2.False 7.B 12.C 17.A 22.C
3.False 8.A 13.A 18.B 23.D

4.Issued,Subscribed,Calle 9.D 14.C 19.B 24.Rs.7,19,000
d– up,Paid-up.
5.C 10.A 15.D 20. 25.Calledup

D
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62
PART-B ANALYSISOF FINANCIAL STATEMENTS
CHAPTER-1 Financial Statements of a Company

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* Meaning of Financial Statements
Financial statements are the basic and formal annual reports through which the
corporate management communicates financial information to its owners and various
other external parties which include investors, tax authorities, government,
employees, etc.
Types of Financial Statements:
The financial statements generally include two statements:
(1) Balance Sheet
(2) Statement of Profit and Loss
Apart from these, there is also a need to know about movements of funds and changes in
the financial position of the company. For this purpose, a cash flow statement is prepard.
Format of Balance Sheet (in accordance with the manner prescribed in the
revised Schedule III to the Companies Act, 2013-Part I):
Balance Sheet as on 31st March, 20.....

Particulars Note Figure as Figure as
No. at the end at the end
of Current of Previous
reporting reporting
period period
I. EQUITY AND LIABILITIES

1) Shareholder’s 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
63
Total
II. ASSETS
1) Non-Current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(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
IMPORTANT Points:
(1) Disclosure on the face of the financial statements or in the notes are essential
and mandatory.
(2) Current and Non-current Classification: The classified balance sheet in terms
of current and noncurrent assets and current and non-current liabilities have been
introduced.
An item is classified as current:
 if it is involved in entity’s operating cycle or,
 is expected to be realised/settled within twelve months or,
 if it is held primarily for trading or,
 is cash and cash equivalent or,
 if entity does not have on unconditional rights to defer settlement of liability for
at least 12 months after the reporting period,
 Other assets and liabilities are non-current.
(3) Preliminary expenses are to be written-off completely in the year in which such
expenses are incurred. They should be written-off first from securities premium and
the balance if any, from statement of profit & loss.
64
(4) Borrowing costs such as discount on issue of debentures should be written-off in
the same year in which debentures are issued.
(5) Current maturities to long-term loan include amount repayable within

twelve months/operating cycle under other current liabilities with Note to
Account.
(6) Proposed dividend is shown as contingent liability.
The items of Balance Sheet are discussed as follows:
1) Shareholders Fund
a) Share Capital
i) Authorised Capital
ii) Issued Capital
iii) Subscribed and Fully Paid-up
iv) Subscribed and not Fully Paid-up
Less: Unpaid calls/Calls-in-arrears
Add: Forfeited shares/Share Forfeiture
b) Reserve and Surplus
(i) Capital Reserve (ii) Capital Redemption Reserve (iii) Securities Premium
Reserve (iv) Debenture Redemption Reserve/Sinking Fund (v) Revaluation Reserve
(vi) Share Options Outstanding Account
(vii) Other Reserves (Specifying nature and purpose) like Workmen Compensation
Reserve/Fund, Investment Fluctuation Reserve/Fund and Contingencies’ Reserve
etc.
(viii) Surplus: Balance in statement of profit and loss; disclosing allocations and
Appropriation such as dividend, bonus shares, transfer to/from reserve, etc.(
‘Debit’ balance of statement of profit and loss shall be shown as a negative figure
under ‘Surplus’ head.)
c) Money Received against share warrants: It is the amount received by the

company which is converted into shares at a specified date on a specified rate. The
instrument issued against the amount so received as share warrants.
2) Share Application money pending allotment: Amount of share

application received but allotment is pending on the date of preparing Balance
Sheet.
3) Non-current Liabilities
65
(a) Long term borrowings: Loans which are repayable in more than twelve
months/operating cycle are classified as long-term borrowings on the face of the
balance sheet. e.g. Debentures, Bank Loans, Mortgage Loans, Public deposits, loans
from Financial Institutions etc.
(b) Deferred tax liabilities (net): are always non-current. This is in accordance
with Schedule III of the Companies Act.
(c) Other long term liabilities: e.g. Trade payables & Provident fund to be settled
beyond 12 months from the date of balance sheet or beyond the operating cycle are
classified under “other long-term liabilities”
(d) Long term provisions: The amount of provision settled beyond 12 months from
the balance sheet date or within the operating cycle period from date of its
recognition is classified as long term provisions and shown under non-current
liabilities. e.g. Provision for Encashment of Earned leave/Gratuity etc.
4) Current Liabilities:
(a) Short-term borrowings: Loans repayable on demand or whose original tenure is

not more than twelve months/operating cycle are classified as short-term borrowings
on the face of the balance sheet.
(b) Trade payables: Purchase of goods and services in normal course of business
on Credit settled within 12 months or within the operating cycle
(c) Other current liabilities: Obligations to be settled within 12 months from balance
sheet date or within operating cycle period from date of its recognition other than
Short Terms Borrowings and Trade Payables.
(d) Short-term provisions: The amount of provision settled within 12 months from
the balance sheet date or within the operating cycle period from date of its recognition
is classified as short term provisions and shown under current liabilities. e.g Provisions
for Repairs & Maintenance.
1) Non-Current Assets
(a) Fixed assets: Useful life is beyond 12 Months.
(i) Tangible assets: assets which can be touched and seen and useful life is beyond 12
Months.
(ii) Intangible assets: assets which cannot be touched and seen and useful life
is beyond 12 Months.
(iii) Capital work-in-progress: Tangible assets under construction or making.
66
(iv) Intangible assets under development: Intangible assets under its process
of building.
(b) Non-currentinvestments: Investments expected to realise beyond twelve months

are considered as non-current investments under non-current assets.
(c) Deferred tax assets (net): are always non-current. This is in accordance
with Schedule III of the Companies Act.
(d) Long-term loans and advances: Loans advanced to outsiders or advances given
for trading purposes to be settled by them beyond 12 months from balance sheet date
or beyond operating cycle period from date of its recognition.
(e) Other non-current assets: Trade receivables realised beyond twelve months from
reporting date/ operating cycle starting from the date of their recognition are classified
as “Other non-current assets” under the head non-current assets with Note to
Accounts. Fictitious assets to be written off beyond 12 months etc.
2) Current Assets
(a) Currentinvestments: Investments expected to realise within twelve months are

considered as current investments under current assets.
(b) Inventories: Materials left unsold and unused at the end of the accounting period.
(c) Trade receivables: Sale of goods or services rendered in normal course of

business on credit.
(d) Cash and cash equivalents: ‘Cash’ comprises cash in hand and demand deposits
with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are
readily convertible into known amounts of cash and which are subject to an insignificant
risk of changes in value. An investment normally qualifies as cash equivalents only
when it has a short maturity, of say, three months or less from the date of acquisition.
(e) Short term loans and advances: Loans advanced to outsiders or advances given
for trading purposes to be settled by them within 12 months from balance sheet date or
within operating cycle period from date of its recognition.
(f) Other current assets: Fictitious assets to be written off within 12 months,
Prepaid expenses etc.
Form and content of Statement of Profit and Loss
Statement of Profit and Loss for the year ended ______________

Particulars Note Figure as Figure as
No. at the at the end
end of of Previous
Current reporting
reporti
ng
67
period period
IRevenue from operations

II Other income
IIITotal Revenue (I+II)
IV Expenses:
Cost of materials consumed
Purchases of stock-in-trade
Changes in inventories of finished
goods Work-in-progress and
stock-in-trade
Employee benefits expense
Finance costs
Depreciation and amortisation
expense Other expenses
Total expenses
V Profit before tax(III-IV)
VI Tax
VII Profit after tax(V-VI)
The items of statement of profit and loss are discussed as follows:
1. Revenue from operations
This includes:
(i) Sale of products (ii) Sale of services (iii) Other operating revenues
In respect to a finance company, revenue from operations shall include revenue

from interest, dividend and income from other financial services.
2. Other income
(i) Interest income (in case of a company other than a finance company),
(ii) Dividend income, (iii) Net gain/loss on sale of investments, (iv) Other
non-operating income (net of expenses directly attributable to such income).
3. Expense
Expenses incurred to earn the income shown under various heads as discussed below:
(a) Cost of Materials It applies to manufacturing companies. It consists of raw
materials and other materials consumed in manufacturing
of goods.
(b)Purchase of It means purchases of goods for the purpose of trading.

Stock in-trade
(c) Changes in It is the difference between opening inventory (stock) of

inventories of finished goods, WIP and stock-in-trade and closing
finished goods, WIP stock-in-trade
and
stock-in-trade
(d)Employees Expenses incurred on employees towards salary, wages,

benefit expenses leave encashment, staff welfare, etc., are shown under this
head.
68
Employees benefit expenses may be further categorised
into direct and indirect expenses.
(e) Finance cost It is the expenses towards interest charges during the year on
the borrowings. Only the interest cost is to be shown under this
head. Other financial expenses such as bank charges are shown
under “Other Expenses”.
(f) Depreciation Depreciation is the diminution in the value of fixed

assets whereas amortisation is writing off the amount
relating to intangible assets.
(g) Other expenses All other expenses which do not fall in the above categories
are shown under other expenses. Other expenses may
further be categorised into direct expenses, indirect
expenses and non-operating expenses.
****************************************************************************************
69
Chapter-2 Analysis of Financial Statements
***************************************************************************************
* Meaning of Analysis of Financial Statements:
The process of critical evaluation of the financial information contained in the

financial statements in order to understand and make decisions regarding the
operations of the firm is called ‘Financial Statement Analysis’.
It is basically a study of relationship among various financial facts and figures as given
in a set of financial statements, and the interpretation thereof to gain an insight into the
profitability and operational efficiency of the firm to assess its financial health and
future prospects.
The term ‘financial analysis’ includes both ‘analysis and interpretation’. These two
are complementary to each other. Analysis is useless without interpretation, and
interpretation without analysis is difficult or even impossible.
The term analysis means simplification of financial data by methodical
classification given in the financial statements.
Interpretation means explaining the meaning and significance of the
data. Significance/Importance of Analysis of Financial Statements:
(a) Finance manager: Financial analysis focuses on the facts and relationships related
to managerial performance, corporate efficiency, financial strengths and weaknesses
and creditworthiness of the company.
(b) Top management: Financial analysis helps the management in measuring the
success of the company’s operations, appraising the individual’s performance and
evaluating the system of internal control.
(c) Trade payables: Trade payables, through an analysis of financial statements,

appraise not only the ability of the company to meet its short-term obligations, but also
judge the probability of its continued ability to meet all its financial obligations in
future.
(d) Lenders: Suppliers of long-term debt are concerned with the firm’s long-term
solvency and survival. They analyse the firm’s profitability over a period of time,
its ability to generate cash, to be able to pay interest and repay the principal and
the relationship between various sources of funds.
(e) Investors: Investors, who have invested their money in the firm’s shares, are
interested about the firm’s earnings. As such, they concentrate on the analysis of
the firm’s present and future profitability. They are also interested in the firm’s
capital structure to ascertain its influences on firm’s earning and risk.
70
(f) Labour unions: Labour unions analyse the financial statements to assess whether it
can presently afford a wage increase and whether it can absorb a wage increase
through increased productivity or by raising the prices.
(g) Others: The economists, researchers, etc., analyse the financial statements to
study the present business and economic conditions. The government agencies need
it for price regulations, taxation and other similar purposes.
Objectives of Analysis of Financial Statements:
• to assess the current profitability and operational efficiency of the firm as a

whole as well as its different departments so as to judge the financial health of the
firm.
• to ascertain the relative importance of different components of the

financial position of the firm.
• to identify the reasons for change in the profitability/financial position of the firm.
• to judge the ability of the firm to repay its debt and assess the short-term as
well as the long-term liquidity position of the firm.
Limitations of Financial Analysis:
1. Financial analysis does not consider price level changes.
2. Financial analysis may be misleading without the knowledge of the changes

in accounting procedure followed by a firm.
3. Financial analysis is just a study of reports of the company.
4. Monetary information alone is considered in financial analysis while

non-monetary aspects are ignored.
5. The financial statements are prepared on the basis of accounting concepts, as such,
it does not reflect the current position.
Tools of Analysis of Financial Statements:
1. Comparative Statements: These are the statements showing the profitability

(statement of profit and loss) and financial position(balance sheet) of a firm for
different periods of time in a comparative form to give an idea about the position of two
or more periods. This analysis is also known as ‘horizontal analysis’.
2. Common Size Statements: These are the statements which indicate the relationship of
different items of a financial statement with a common item by expressing each item as
a percentage of that common item. Common size statements are useful, both, in
intra-firm comparisons over different years and also in making inter-firm comparisons
for the same year or for several years. This analysis is also known as ‘Vertical
analysis’.
71
3. Trend Analysis: It is a technique of studying the operational results and financial
position over a series of years. Using the previous years’ data of a business enterprise,
trend analysis can be done to observe the percentage changes over time in the
selected data.
4. Ratio Analysis: It describes the significant relationship which exists between

various items of a balance sheet and a statement of profit and loss of a firm. As a
technique of financial analysis, accounting ratios measure the comparative
significance of the individual items of the income and position statements. It is
possible to assess the profitability, solvency and efficiency of an enterprise through
the technique of ratio analysis.
5. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of
an organisation. The flow of cash into the business is called cash inflow or positive cash
flow and the flow of cash out of the firm is called cash outflow or a negative cash flow.
The difference between the inflow and outflow of cash is the net cash flow.
****************************************************************************************
Question Bank
Financial Statements & Analysis of Financial Statements
Q.1 Match the items given in Column I with the headings/subheadings (Balance
sheet) as defined in Schedule III of Companies Act 2013.
Column I Column II
(I) Computer software (a) Reserves and Surplus
(II) Calls-in-advance (b) Fixed Assets-Intangible Assets
(III) Interest accrued on Investment (c) Other current Assets
(IV) Securities Premium Reserve (d) Other Current Liabilities
Choose the correct option:

A. (I)-(a), (II)-(b), (III)- (d), (IV)- (c)
B. (I)-(b), (II)- (a), (III)-(d), (IV)- (c)
C. (I)-(d), (II)- (a), (III)-(b), (IV)-(e)
D. (I)- (b), (II)- (d), (III)- (c), (IV)-(a)
Q.2 Which of the following are not the tools of Vertical Analysis?
(i) Ratio Analysis.
(ii) ComparativeStatements.
(iii) Common Size Statements.
(iv) Trend Analysis
(A) Only (iii)

(B) Both (ii) and (iv)
(C) Both (ii) and (iii)
(D) Only (iv)
Q.3 Which of the following is true?
72
An item is classified as current:
(i) if it is involved in entity’s operating cycle
(ii) is expected to be realised/settled within twelve months
(iii) if it is held primarily for trading
(A) Only (ii)

(B) Both (ii) and (iii)
(C) Both (i) and (ii)
(D) All (i), (ii) and (iii)
Q.4 Proposed dividend is a liability.

(A) Current
(B) Non-Current
(C) Contingent
(D) Both (A) and (B)
Q.5 Which of the following statements is False?

(A) Bank Charges are included in the Finance cost in the Statement of Profit Loss. (B)
Interest income is Revenue from Operations in the case of a Finance Company. (C)
Trade receivables realised beyond twelve months classified as “Other non-current
assets”
(D) Current maturities to long-term loan include amount repayable within
twelve months/operating cycle under other current liabilities
Q.6 An investment normally qualifies as cash-equivalent only when from the date of
acquisition it has a short maturity period of:
(A) One month or less
(B) Three months or less
(C) Three months or more
(D) One year or less
Q.7 Which of the following is not a limitation of ‘Financial Statements
Analysis’? (A) It is affected by personal bias.
(B) Inter-firm comparative study possible.
(C) Lack of qualitative analysis.
(D) Ignore price level changes.
Q.8 Under which of the following head/subhead is ‘Share Options Outstanding

Account’ presented in the Balance Sheet of a company?
(A) Reserves and Surplus
(B) Share Capital
(C) Other Long-term Liabilities
(D) Other Current Liabilities
Q.9 Employee benefit expenses include .

(A) Leave Encashment
(B) Depreciation
(c) Bonus
(D) Both (A) and (C)
73
Q.10 ‘Interest accrued but not due on loans’ is shown in the companies’ Balance
Sheet under the sub head .
(A) Reserves and Surplus
(B) Short term provisions
(C) Other Long-term Liabilities
(D) Other Current Liabilities
Q.11 Dividend Income for a Non-Financing Company is-

(A) Revenue from Operations
(B) Other Income
(C) Operating Income
(D) All of the above
Q.12 Given below are two statements, one labelled as Assertion (A) and the
other labelled as Reason (R):
Assertion(A): Analysis and Interpretation are complementary to each other.
Reason(R): Analysis is useless without interpretation, and interpretation
without analysis is difficult or even impossible.
In the context of the above two statements, which of the following is
correct? (A) Both (A) and (R) are correct and (R) is the correct reason for
(A). (B) Both (A) and (R) are correct but (R) is not the correct reason for (A).
(C) Only (R) is correct.
Q.13 The financial statements of a business enterprise include:

(A) Balance sheet
(B) Statement of Profit and loss account
(C) Cash flow statement
(D) All the above
Q.14 Comparative statements are also known as:

(A) Dynamic analysis
(B) Horizontal analysis
(C) Vertical analysis
(D) External analysis
Q.15 Statement I: Unclaimed Dividend is a Contingent Liability.

Statement II: Proposed Dividend is a Current Liability.
Choose the Correct Option:
(A) Only (i) is correct
(B) Only (ii) is correct
(C) Both (i) and (ii) are correct
(D) Both (i) and (ii) are incorrect
*************************************************************************************
* Answers
Ans.1 (D) Ans.2 (B) Ans.3 (DAns.4 (C)Ans.5 (À)Ans.6 (B)
Ans.7 (B)Ans.8 (A)Ans.9 (D)Ans.10 (D)Ans.11 (À)Ans.12 (A)
Ans.13 (D)Ans.14 (B)Ans.15 (D)
*******************************************************************************************
74
Chapter-3 ACCOUNTING RATIOS
Meaning of Accounting Ratio:

Accounting Ratio is a mathematical expression of the relationship between two
related or interdependent items or groups of items shown in the financial statements.
Objectives of Ratio Analysis:
1. To assess the earning capacity, financial soundness and operating efficiency of

an enterprise.
2. To simplify the accounting information.
3. To help in comparative analysis.
4. To determine liquidity, i.e. Short-term solvency (Ability of the enterprise to meet its
short term/current liabilities) and Long-term solvency (Ability of the enterprise to
meet its long term/non-current liabilities).
5. To analyse the profitability of the business/enterprise.
Classification of Accounting Ratios:
1. Liquidity Ratios: (i) Current Ratio; and (ii) Quick Ratio.
2. Solvency Ratios: (i) Debt to Equity Ratio; (ii) Proprietary Ratio; (iii) Total Assets
to Debt Ratio; and (iv) Interest Coverage Ratio.
3. Activity Ratios: (i)Inventory Turnover Ratio; (ii) Trade Receivables Turnover Ratio;
(iii) Trade Payables Turnover Ratio; and (iv) Working Capital Turnover Ratio. 4.
Profitability Ratios: (i) Gross Profit Ratio; (ii) Operating Ratio; (iii) Operating Profit
Ratio; (iv) Net Profit Ratio; and (v) Return on Investment.
Computation of Accounting Ratios:
The following table shows the calculations of all the accounting ratios
Current Assets = Current
Significance Investments + Inventories
Description Formula
of the Ratio (Excluding Stores and
LIQUIDITY RATIOS This ratio Spares and Loose Tools) +
1. Current Current Assetshows Trade Receivables (Net of
Ratio Current Liabilishort-term financial Pro- vision for Doubtful
soundness of the business. Higher Debts)+Cash and Cash
ratio means better capacity to Equivalents + Short-term
meet its Loans and Advances + Other
current obligation. The ideal Current Assets Current
current ratio is 2:1. In case it is Liabilities = Short-term
very high it shows the idleness of Borrowings + Trade
funds. Payable+ Other Current
Liabilities + Short-term
Remarks
Provisions.
75
2. Liquid Liquid Assets or Liquid Ratio is a Quick Assets = Current
Ratio /Acid Quick Assets fairly stringent Assets – Inventories –
Test Ratio Current Liabilities measure of Prepaid
/Quick Ratio liquidity. It is based Expenses Current Liabilities
on those current as per Current Ratio.
assets Note: Inventories and
which are highly liquid, prepaid expenses are not
i.e., can be converted considered as Quick Assets.
into Cash and Cash
Equivalents quickly. A
Quick Ratio of 1:1 is
considered ideal.
1. Debt to Debt SOLVENCYRATIOS Debt = Long-term
Equity Ratio Equity This ratio assesses Borrowings, (i.e.,
(Shareholders’ the long-term debentures, mortgage,
Funds) financial public deposits) +
position and soundness Long-term Provisions
of enterprises. In Shareholders’ Funds =
general, lower the Debt Share Capital + Reserves
to Equity Ratio higher and Surplus Or Noncurrent
the degree of protection Assets
enjoyed by the lenders. (Tangible Assets +
Intangible Assets +
Non-current
Investments +
Long-term Loans and
Advances) +
Working Capital
–Non-current Liabilities
(Long-term
Borrowings
+ Long-term
Provisions). Working
Capital = C.A – C.L
2. Total Assets This ratio measures Total Assets = Non-current

TotalAsset Debt the safety margin Assets (Tangible Assets +
to Debt available to lenders of Intangible Assets
Ratio long-term Non-current Investments +
debts. It measures Long-term Loans and
the extent to which Advances) +
debt is being covered Current Assets [Current
by assets. Investments + Inventories
(including Stores and
Spares and Loose Tools) +
Trade Receivables+ Cash
and Cash Equivalents +
Short-term Loans and
Advances + Other Current
Assets]Debt =
Long-term Borrowings +
Long-term Provisions
3.Propriet Shareholders’ This ratio shows the Shareholders’ Funds =

ary Ratio Funds or Equity extent to which total Share Capital + Reserves
Total Assets assets have been and Surplus
financed by the
proprietor. Higher the
ratio, higher the safety
margin for lenders
and creditors.
76

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केन्द्रीय विद्यालय संगठन क्षेत्रीय कायाालय जयपरु

Kendriya Vidyalaya Sangathan Regional Office

Study Material, Question Bank, 5 Sample Question

SH. B.L. MORODIA

SH. DIGG RAJ MEENA

ANALYSIS OF FINANCIAL STATEMENTS

3. CBSE SAMPLE PAPER BLUE PRINT 88

4. SAMPLE PAPERS 89-105

Partnership is a form of business organization in which two or more competent

Capital Accounts (Fixed)

Cash A/c xxx Xxx Balance b/d xxx xxx

xxx Xxx xxx Xxx

Balance b/d xxx xxx Balance b/d (if Cr. xxx xx

xxx Xxx xxx xxx

Cash A/c Xxx xxx Balance b/d xxx xxx

Xxx xxx xxx Xxx

Adjustments All adjustments are recorded All adjustments are

Credit Balance The capital accounts always The capital account

Appearance in Both capital and current Only capital account

Distribution of profit/ loss among partners:

Difference between appropriation of profit and charge against profit:

1. It is the distribution of net profit to 1.It should be deducted from revenue to

Guarantee of Profit to a partner:

Interest on Capital 1,80,000 Profit & Loss A/c 3,60,000

Table showing adjustment of Capital / Current Account

(A) To be given: XXX XXX XXX XXX

(B) Already Given: XXX XXX XXX XXX

Adjustment to be made XX (Dr.) XX (Dr.) XX (Cr.)

Dr. 19,0 26,000

(Being past adjustment made)

Table showing adjustment of Current Account

(A) To be given: 30,000 20,000 10,000 60,000

(B) Already Given: 41,000 33,000 46,000 1,20,000

Adjustment to be made 19,000 7,000 26,000 (Cr.)

Actual divisible profits = Net Profit + Interest on Drawings – (Interest on capital

Calculation of periods for Interest on Drawings

The main factors affecting the value of goodwill are as follows:

Methods of Valuation of Goodwill :

(b) Super Profit method

Sol. Goodwill = Super profits x No of purchase year

(c) Capitalization method

CCT Based MCQs

II Interest on Drawings B Dr. side of Profit and Loss

II Interest on Partner’s Loan C Dr. side of Profit and Loss A/c

a) I-A; II-B; III-C

II Salary paid to a partner B Appropriations out of profits.

a) I-A; II-B; III-B

II Interest on partner’s loan C Written agreement

a) I-A; II-B; III-C

II Drawings in the beginning of B 6.5

II Drawings in the end of each quarter C 7.5

a) I-A; II-B; III-C

II One who does not take part in B Nominal partner

a) I-A; II-B; III-C

Case Study Based Questions

Choose the correct option based on the above information:

Q32. What is the amount of interest on drawings of X and Y:

Read the following information carefully and answer the questions

Assertion-Reasoning Based questions

Fundamentals of Partnership Accounting

1 D Interest on Capital is not allowed if there is no partnership deed.

2 C Rent to a partner is a charge against profit.

3 B Under Fixed Capital method only Withdrawal from capital and

23 B 8,250(100/15)(12/5.5) =1,20,000/12= 10,000.