FUNDAMENTALS

Meaning, Minimum and Maximum Partners

Essential Features of Partnership

Two or More Partners
Agreement
Lawful Business
Profit- sharing
Mutual Agency
Partnership Deed Vs. Partnership Act 1932
Charge against profits & appropriation of profits
Calculation of Interest on capital
Calculation of Interest on Drawings
Time Factor Formula

PRODUCT METHOD
 Salary and Commission to partners

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Partners capital Account Method
IF NET PROFITS ARE INAPPROPRIATE/ NOT SUFFICIENT
GUARANTEE OF PROFITS TO A PARTNER WITH JOURNAL
GOODWILL
 Meaning
Goodwill is the value of the reputation of a firm which enables it to earn
higher profits.
Goodwill shown in Balance sheet under main head NON CURRENT ASSETS
& SUB HEAD PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE
ASSETS- PROPERTY, PLANT AND EQUIPMENT

It is a fixed intangible assets not a fictitious assets

Classification of goodwill
1. Purchased goodwill Recorded in books
2. Self generated goodwill not recorded in books (AS-26)
Need for valuation of goodwill
a) When a new partner is admitted
b) When a partner retires or dies
c) When there is a change in the profit-sharing ratio
d) At the time of sale of a business
e) When partnership firm is converted into a company
f) When two or more firm amalgamate
Factors affecting the value of goodwill

a) Efficient management
b) Favourable location
c) Favourable contract
d) Longer establishment of business
e) Quality products
f) Past performance
g) Good customer relations
h) Sales after services, etc.
Methods of Goodwill Valuation
TREATMENT OF ABNORMAL PROFITS & ABNORMAL LOSSES
Q.1) Doremon, Shinchan and Nobita are partners sharing profits and losses in the ratio of
3:2:1. With effect from 1st April, 2022 they agree to share profits equally. For this purpose,
goodwill is to be valued at two year’s purchase of the average profit of last four years which
were as follows:

• Year ending on 31st March,2019 ₹ 50,000 (Profit)

• Year ending on 31st March,2020 ₹ 1,20,000 (Profit)

• Year ending on 31st March,2021 ₹ 1,80,000 (Profit)

• Year ending on 31st March,2022 ₹ 70,000 (Loss)

On 1st April, 2021 a Motor Bike costing ₹ 50,000 was purchased and debited to travelling
expenses account, on which depreciation is to be charged @ 20% p.a. by Straight Line
Method. The firm also paid an annual insurance premium of ₹ 20,000 which had already
been charged to Profit and Loss Account for all the years. Journalise the transaction along
with the working notes.
CHANGE IN PSR
 Meaning
When existing partners decide to change their profit sharing ratio
It leads to dissolution of partnership/reconstitution of partnership

In case of any partner(s) gain due to change in profit sharing ratio then
He/she will compensate to sacrificing partner(s)
Sacrificing ratio = old ratio – new ratio
Gaining ratio = new ratio – old ratio
Q.1) X,Y & Z are partners sharing profits & losses in ratio 5:3:2. with effect
from 1st April they decide to share profits equally.
Calculate each partner’s gain or sacrifice.
Treatment of goodwill
 Revaluation A/c
Alter value/ New value/ Revised value will Appear in New Balance sheet
Nature- Nominal Account
 Revaluation Account
Particulars Amount ₹ Particulars Amount ₹
To Increase in liability x By Decrease in liability x
To Decrease in assets x By Increase in assets x
To Unrecorded liability x By Unrecorded assets x
To Revaluation Gain transfer to x By Revaluation Loss transfer to x
Partner’s Capital/ Current A/c Partner’s Capital/ Current A/c

xx xx
Exception cases
B. Revaluation Gain/ loss
DISTRIBUTABLE ITEMS
 Exception cases
A. Distributable items
If These items will Not Distributed in Partners capital A/c and
These items will then appear in New Balance sheet.
Adjustment entry (OR)
Not want to disturb the General Reserves.
ADMISSION
JOURNAL ENTRIES DURING ADMISSION OF A NEW PARTNER
GOODWILL RAISED & WRITTEN OFF
HIDDEN GOODWILL
Q.1) X and Y are partners with capitals of ₹50,000 each. They admit Z as a partner for ¼
share of profits. Z brings in ₹80,000 as his share of capital. Profit and loss account showed
a credit balance of 40,000 as on date of admission of Z.
calculate Z share of Goodwill
 ADJUSTMENT OF CAPITAL (CASE 1)

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CASE 2 (ADJUSTMENT OF CAPITAL)
RETIREMENT
Calculation of New ratio & Gaining Ratio

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TREATMENT OF GOODWILL

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Q.1) P, Q and R are partners sharing profits in ratio of 3:2:1. R retires from the firm by selling
his share of profit to P & Q and the following entry was passed.

Date Particulars L.F. Debit Credit

P’s Capital A/c dr. 90,000
Q’s Capital A/c dr. 60,000
To R’s Capital A/c 1,50,000
(Being Adjustment made for goodwill)

Find out New Profit-Sharing Ratio of P & Q.

GOODWILL RAISED AND WRITTEN OFF

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Q.2) X Y and Z are partners sharing profit in the ratio of 3:2:1. Goodwill is appearing in the
books at a value of 60,000. Y retires and at the time of Y’s retirement goodwill is valued at
84,000. X and Z decided to share future profits in the ratio of 2:1. Pass the necessary
journal entries through goodwill account.
ADJUSTMENT OF CAPITAL (CASE 01)
ADJUSTMENT OF CAPITAL (CASE 2)
ADJUSTMENT OF CAPITAL (CASE 2A)
DEATH
CALCULATION OF DECEASED SHARE OF PROFITS UPTO DATE OF DEATH
TREATMENT OF GOODWILL
DECEASED PARTNER’S CAPITAL ACCOUNT
DISSOLUTION
Basics
 Dissolution of a partnership firm
Dissolution of the firm means dissolution of partnership among all the
partners in the firm.
It means end of economic relationship among the partners and business is
closed

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 Mode of dissolution of a firm are

➢ By mutual agreements
➢ Compulsory dissolution
a) when all the partners except one become insolvent
b) when business of the firm becomes unlawful
➢ By Notice

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➢ On happening of an event
a) on death of a partner
b) on the insolvency of a partner
c) on completion of the venture / objective
d) on the expiry of the period for which the firm was formed

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➢ Dissolution by Court
a) when a partner has become of unsound mind
b) when a partner permanently incapable of performing his duties
as a partner
c) when a partner is found guilty of misconduct
d) Continuously breach of contract by a partner or partners
e) The business of the firm can’t be carried on except at a loss
f) When a partner other than a partner filing a suit, has transferred
the whole of interest in the firm to a third party
g) Any other reason where court finds dissolution of the firm justified

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 Difference between Dissolution of firm and
Dissolution of partnership
Basis Dissolution of firm Dissolution of partnership
Meaning It means closure of the firm and It means change in business
end of business relationship relationship among the partners
among all the partners the firm continues its business
Business Business of the firm comes to an Business of the firm continues
continuation end
Economic Economic relationship between/ Economic relationship between/
relationship among the partners ends among the partners changes
Closure of Books of accounts have to be Books of accounts need not be
books of A/c closed closed
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Basis Dissolution of firm Dissolution of partnership
Settlement Assets are sold and liabilities are Assets and liabilities are revalued
of assets and paid off and balance if any is and revaluation gain or loss is
liabilities distributed among partners distributed among partners
Effect Dissolution of firm also means Dissolution of partnership may or
dissolution of partnership may not involve dissolution of the
firm
Court It can be either voluntarily by It always voluntary
intervention the partners or compulsory by
court order

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These Liabilities Must Be paid with their Book value if Question is silent
about their Payment

A) Creditors/ sundry creditors

B) Bills Payable
C) Employees provident Fund
D)Bank Overdraft
E) Advance income
F) Outstanding expenses
G) Bank loan/ wife loan

Investment Fluctuation Fund, Provision for Bad and doubtful debts &
provision for depreciation are only Transfer credit of Realisation Account.
Tangible Assets Must Be Realised with their Book value if Question is silent
about their Sale

Ignore Realisation of Intangible Assets

Partner’s Self Loan Account (Loan given by Partner to Firm)
BASICS OF JOURNAL ENTRIES
TREATMENT OF REALISATION EXPENSES
Q.1) Ravi, Shankar and Madhur were partners in a firm sharing profits in the ratio of 7:2:1.
On 31st march,2018 firm was dissolved, and after transferring sundry assets (other than
cash in hand and cash at bank) and third party liabilities in the realisation account the
following transaction took place:
i) Debtors amounting to ₹1,40,000 were handed over to a debt collection agency which
charged 5% commission. The remaining debtors were ₹47,000 out of which debtors of
₹17,000 could not be recovered because the same became insolvent.

ii) Creditors amounting to ₹5,000 were paid ₹3,500 in full settlement of their claim and
balance creditors were handed over stock of ₹90,000 in full settlement of their claim of
₹95,000.

iii) A bills receivables ₹2,000 discounted with the bank was dishonoured by its acceptor
and the same had to be met by the firm.

iv) Profit on realisation amounted to ₹6,000.

v) Ravi’s Loan of ₹ 80,000 to the firm and he took over Machinery of ₹ 60,000 as part
payment
Pass the necessary journal entries for the above transaction in the books of Ravi, Shankar
and Madhur.
SHARES
❖ Utilisation of Securities Premium Reserve (SPR)
Section 52(2) of the companies Act, 2013 restricts the use of the amounts received as
premium on securities for the following purpose
a) Issuing fully paid bonus share to the members
b) Writing off preliminary expenses of the company
c) Writing off loss or discount on issue of debenture
d) In purchase its own share (buy back)

e) Providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company
 Difference between Reserve Capital & Capital Reserve
Basis Reserve capital Capital Reserve
Meaning It is the part of the uncalled It is the part of reserve which is
capital which cannot be called up not free for distribute as dividend
except in the event of winding up
Creation It is an uncalled capital It is created out of capital profit
Optional/ma It is not mandatory to have It is mandatory to create capital
ndatory reserve capital reserve in case of capital profits
earned by company
Writing off It cannot be use to write off It can be used to write off capital
capital losses capital loss loss
Resolution Special resolution is required Special resolution is not required

Disclosure It is not disclosed in the company It is disclosed under the head

balance sheet Reserve and surplus in head
shareholder fund
In case of Under subscription All entries should be passed through
Undersubscribed shares.

MINIMUM SUBSCRIPTION SHOULD BE 90%

ISSUE OF SHARES & DEBENTURES CONSIDERATION OTHER THAN CASH
Q.1) X Ltd. Purchased a building from Y Ltd. Consideration paid as follow
issued Equity shares of ₹1,00,000 face value of ₹10 each at Par
5,000 9% Preference shares of 100 each at 10% Premium
cheque ₹2,00,000
2,000 9% debentures of ₹100 each at discount of 10% and
3 months bill payable of ₹47,000 find out the value of building & pass the necessary
journal entries.
FORFEITURE OF SHARES
REISSUE OF SHARES
Q.2) Virender Limited forfeited 20 shares of ₹100 each (₹60 called up) issued at par to
Mukesh on which he had paid ₹20 per share. Out of these, 15 shares were reissued to
Sanjeev as ₹60 paid-up for ₹45 per share.
FORFEITURE OF SHARES ORIGINALLY ISSUED AT PREMIUM
Q.3) A Ltd. forfeited 1,000 shares of ₹10 each, ₹8 paid, for non-payments of final call of ₹2 per
share. Out of these, 400 shares were re-issued as fully paid-up in such a way that ₹2,000 were
transferred to capital reserve.
Q.4) Agro India Ltd. forfeited 150 Equity Shares of ₹10 each issued at a premium of ₹5 per
share, for non-payment of allotment money of ₹8 per share (including premium of ₹5 per
share), the first call of ₹2 per share and the final call of ₹3 per share. Out of these, 100 Equity
Shares were reissued at ₹14 per share. Give Journal entries to record the forfeiture and
reissue of shares.
DEBENTURES
Basic Journal Entries (issue) with terms of redemption
Q.1) On 1st April, 2022, Sakshi Ltd. issued 1,000, 11% Debentures of ₹100 each at a
discount of 6%, redeemable at a premium of 5% after three years. Pass the necessary
Journal entries for the issue of debentures in the books of Sakshi Ltd.
Issue of Debentures as Collateral security
 Interest on debentures
Interest on debentures is always calculated on the face value of debentures.
It is charged against profits.
It is a Fixed Obligation for the company.
Debited to statement of Profit or loss
TDS TREATMENT
 Writing of Discount or loss on issue of debentures

It is a capital loss for the company.

It is to be written off in the year it is incurred.
It is first write off from the Balance available in Securities premium reserve
If Amount is insufficient or not available then it is to be written off from
Statement of profit or loss.
 Types of Debentures
1. From security point of view
a) Secured debentures:- these are those debentures which are
secured by either fixed or floating charge on the assets of
the company
b) Unsecured debentures:- these are those debentures that
are not secured by any charge on assets of the company

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• A charge on fixed assets is called fixed charge
• A charge on stock/current assets is called floating charge

2. From Redemption point of view

a) Redeemable debentures :- these are those debentures that are
payable by the company on maturity
b) Irredeemable debentures :- these are those debentures that are not
repayable during the life time of the company and hence are repaid
only when the company is wound up

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3. From Registration point of view :-
a) Registered debentures :- these are the debenture that are registered in
the company records in the name of the holders
b) Bearer debentures :- these are the debentures that are not registered in
the record of the company in the name of the holder. These are
transferable by more delivery

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4. From convertibility point of view:-
a) Convertible debentures :- these are the debentures that are convertible
into shares. If a part of the debentures amount is convertible into equity
shares they are known as partly convertible. Debentures if full amount of
debentures is convertible into equity shares they are known as fully
convertible debentures
b) Non convertible debentures:- these are those debentures that are not
convertible into shares

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In case of issue of debentures consideration other than cash
If Purchase consideration > net assets (Goodwill A/c)
If purchase consideration <net assets (Capital reserve A/c)

➢ if debentures are redeemable at premium, no matter the conditions of

issue, in issue due entry
Loss on issue of debentures debited &
Premium on redemption of debentures credited

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Premium on redemption of debentures is a capital loss and it is shown as main
head non-current liabilities and sub-head other long-term liabilities
It is a personal A/c in traditional approach and liability A/c in modern approach
And the loss on issue of debentures A/c is a capital loss which is written off in the
year it is incurred from
i) Securities premium reserve
iii) Statement of profit and loss

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FINANCIAL STATEMENTS
Operating cycle
Q.1) Classify the liabilities (trade payables) given below as non-
current liabilities and current liabilities giving reasons for such
classification:
Case Particulars Operating Expected period of
cycle payment (in months)
(in month)
i Trade payables 10 8
ii Trade payables 10 12
iii Trade payables 10 15
iv Trade payables 18 15
v Trade payables 18 24
vi Trade Payables 14 13
 Heading & Sub headings
Items Main head Sub head
Calls in Arrears Shareholders fund By way of deduction from
subscribed share capital.
Share forfeited A/c Shareholders fund By way of addition in
subscribed share capital
Calls in advance Current liabilities Other current liabilities
Unclaimed dividend Current liabilities Other current liabilities
% Debenture Non current liabilities Long term borrowings
General reserve, Securities Shareholders fund Reserve and surplus
premium reserve ,DRR/CR,
Statement of P&l (CR)
items Main head Sub head
Statement of P&l Dr. Shareholders fund Reserve & surplus by way
of deduction
Public deposits/ Bonds Non current liability Long term borrowings
Debtors & Bill receivables Current Assets Trade receivable
Creditor & Bill payable Current liability Trade payable
Provision for tax Current liability Short term provision
Bank overdraft Current liability Short term borrowings
Provision for doubtful Current assets By way of deduction from
debt trade receivable

Loose tools/spare & Current assets Inventory

stores
Items Main head Sub head
Cash and Bank balance Current assets Cash & cash equivalent
Goodwill/ Mining Non current assets Property, Plant and
rights/Patents/Trade Equipments and
marks/License intangible assets –
Intangible Assets
items
Unpaid dividend
Premium on redemption of
debentures
Interest on calls in Advance
Loans repayable on Demand
Capital Advances
Capital Work in Progress
Outstanding Salary
Raw materials
Main head Sub head
Current liabilities Other current liabilities
Non current liabilities Other long term liabilities
Current liabilities Other Current liabilities
Current liabilities Short term Borrowings
Non Current Assets Long term loan and Advances
Non Current Assets PPE- intangibles- PPE
Current liabilities Other Current liabilities
Current Assets Inventories
 LIMITATIONS OF FINANCIAL STATEMENTS

1. Historical records
2. Affected by estimates
3. Different accounting practices
4. Qualitative elements are ignored
5. Historical cost concept
ANALYSIS OF FINANCIAL
STATEMENTS
OF A COMPANY
Tools of analysis of Financial statement
• Comparative and common size statements
• Ratios analysis
• Cash flow statement
Types of financial statement analysis
a) External analysis:- external analysis is conducted by those who do not have
access to the detailed records of an enterprise and therefore have to
depend on published account i.e., statement of profit and loss, balance
sheet, directors and auditors reports. Such type of analysis is made by
investors, lenders, creditors, government agencies and research scholars

b) Internal analysis:- internal analysis is conducted by the management to

know the financial position and operational efficiency of the organization.
The important features of such analysis is the management has access to all
information of the enterprise and , therefore the analysis is more detailed
extensive and accurate
c) Horizontal (or dynamic) analysis :- This analysis is made to review and Analyse
financial statements for a number of years. It is a time series analysis. It show
comparison of financial data for several years against a chosen base year. It is
useful for trend analysis and long –term planning. Comparative statements or
comparative financial statements are examples of horizontal analysis

d) Vertical ( or static) analysis :- This analysis is made to review and analyse the
financial statements of one year only. It is a cross-sectional analysis. Ratio
analysis of the financial statement relating to a particular accounting year is an
example of this type of analysis. Such an anlysis is useful in comparing the
performance of several companies of the same type or divisions or departments
in one enterprise
e) Intra-firm comparison and inter-firm comparison :-
Intra firm comparison : A comparison of financial variables of an enterprise over
a period of time is known as intra firm comparison. It is also called time series
analysis or trend analysis

Inter firm comparison : it compares financial variables of two or more

enterprises or firms to determine their competitive positions. When single set
of statements of two firms is compared it known as cross sectional analysis
ACCOUNTING RATIOS
ALL FORMULAE
CASH FLOW
Format of Cash Flow Statement as per (AS-3) Revised
 Cash flow statement
Particulars Details Amount
A. Cash flow from operating activities
Net profit (surplus) {CY-PY}
Add Transfer to General reserve (CY-PY)
Interim dividend
Proposed dividend (PY)
Provision for tax (CY)
Net profit before tax and extraordinary item
Add Non-Cash items
Depreciation during the year
Goodwill/ Patents/ Trade mark written off
interest expenses
Loss on sale of fixed assets/ investments
Less Interest income
Gain on sale of fixed assets/ investments
Operating profit before working capital changes
Particulars Details Amount
Add increase in current liabilities and decrease in current assets
Less increase in current assets and decrease in current liabilities
(-) Tax paid (PY)
Net cash flow from/ used in operating activities
B. Cash flow from investing activities.
Add Sale of fixed assets/ investment
Interest received/ Rent received/ Dividend received
Less Purchased of fixed assets/ investment/ shares
Goodwill purchased/ Patents purchased
Net cash flow from/ used in investing activities
Particulars Details Amount
C. Cash flow from financing activities
Add Issue of shares/ debentures/ loan taken
Increase in bank overdraft
Increase in Securities Premium Reserve
Less Redemption of share/ debentures/ loan repaid
Interest paid/ Dividend paid
Decrease in bank overdraft
Decrease in Securities Premium Reserve
Net cash flow form/ used in financing activities
D. Cash and Cash equivalents
A+B+C
Add Opening cash and bank
Opening marketable securities
= Closing cash and bank + Marketable securities
Treatment of Some Important Additional Points
 Q.2) following is the balance sheet of X Ltd. as at 31-3-2018
Particulars Note no. 31st March 31st March
2022 2021
I. Equity and Liabilities
1. Shareholder’s Funds
(a) Share Capital 19,00,000 17,00,000
(b) Reserves and Surplus 1 6,00,000 3,00,000
2. Non-current Liabilities
Long-term Borrowings 2 5,00,000 4,00,000
3. Current Liabilities
(a) Short term borrowings 3 1,70,000 1,75,000
(b) Short term provisions 4 2,00,000 1,65,0000
Total 33,70,000 27,40,000
 Particulars Note 31st March 31st March
no. 2022 2021
II assets
1. non-current asset
a) fixed assets
i) tangible assets 5 24,00,000 19,00,000
ii) intangible assets 6 2,00,000 3,00,000
b) non current investments 3,00,000 2,00,000
2. Current assets
a) current investment 1,40,000 1,70,000
b) inventories 2,60,000 1,30,000
c) cash and cash equivalents 70,000 40,000
Total 33,70,000 27,40,000
Particulars 31-3-22 31-3-21
1 reserve and surplus
Surplus i.e. balance sheet 6,00,000 3,00,000
2 long term borrowing
12% long term loan 5,00,000 4,00,000
3 short term borrowing
bank overdraft 1,70,000 1,75,000
4 short term provision
provision for tax 2,00,000 1,65,000
5 tangible assets
machinery 26,00,000 20,00,000
Less depreciation 2,00,000 1,00,000
6 intangible assets (goodwill) 2,00,000 3,00,000
i) 1,00,000, 12% debentures were issued on 1st April, 2021
ii) During the year a piece of machinery costing 80,000 on which accumulated
depreciation was 40,000 was sold at a gain of 10,000
iii) Tax Paid ₹35,000
iv) Proposed dividend on equity for the years ended 31-3-2021 and 2022 are
39,000 and 45,000 respectively
calculate cash flow statement
Thank you

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