DBC22 Financial Accounting - II

Financial Accounting - II 1.
1 Royalty Accounts - I
LESSON - 1
Royalty Accounts - I
1.0 Objectives :
After going through this lesson the student can know what is Royalty ?
Who are parties involved in Royalties agreement ?
What are the different terms used in Royalties ?
How these transactions are recorded in the books of lessee can be learned.
Structure :
1.1 Introduction.
1.2 Explanation of terms
1.3 Lease premium
1.4 Accounting treatment
1.5 Entries in the books of lessee
1.6 Illustration
1.7 Summary
1.8 Questions
1.9 Exercises
1.10 Suggested Books
1.1 Introduction.
Royalty is a periodical payment, based on output or sale, required to be paid by one person
to another in consideration of some special rights acquired e.g. the right to exploit a mine or colliery
to publish a book or to manufacture an article under a patent. Royalties arises with the agreement
between two parties one is the owner of the asset or the person who has rights over the asset.
Other is the person who acquired the right of using it for payment of a Royalty. The person who
makes the payment to the owner of the asset in exchange for the right to use his asset is known as
‘lessee’ and the owner of the asset as lessor or landlord.
The lessee making the payment of royalty treats it as ordinary business expenditure and
debits Royalty Account. Royalty Account is a nominal account and is closed at the end of every
accounting year by transferring it to profit and loss Account. Strictly speaking, royalty based on
output is a part of cost of production and as such should be transferred to Trading account, royalty
based on sales is a selling expenditure and as such should be transferred to profit and loss Account
Here the student should note that a lump - sum payment for the outright purchase of a
patent, mine or book is not treated as royalty but is a capital expenditure and recorded as a fixed
asset.
Acharya Nagarjuna University 1.2 Centre for Distance Education
1.2 Explanation of Terms :

In royalty agreement between the lessor and the lessee, usually contains certain clauses as
regards ‘minimum rent’ ‘short working’ and Recoupment of short working. Before going to the
Accounting treatment of the transactions relating to Royalties, it is necessary to understand these
terms.
1. Minium Rent or Dead Rent or Fixed Rent :
In the early days of business, production or sale of any concern will be very low. Hence, there
is ever possibility that the Royalty based on production or sale will also be low in that period. To safe
guard the interest of the landlord from the low income and also to guarantee him the receipt of a
minium amount in case of low output or sale, the minium Rent clause will be included in the Royalties
agreement. It also give incentive to the lessee to increase the production or sales. Thus minium
rent may be defined as “The minimum amount which is payable by the lessee to the landlord,
irrespective of production or sale” In the presence of minimum rent clause in Royalty agreement
actual royalty based on output or sales or minium rent whichever is higher is payable For example;
Madhu coal CO has taken a lease of coal mine with a rent of Rs 30,000 a year and with a rate of
royalty at Rs 5 per tonne of coal extracted and if the production in the first year is 4000 tonnes and
in the second year, 8,000 tonnes then Madhu coal CO will have to pay Rs 30,000 the minimum rent
in the first year because the benefit derived by Madhu coal co. is less than the minimum rent
agreed upon i.e. 4000 5 5 per tonne. It will pay Rs 40,000 in the second year because the benefit
derived (Rs. 5 5 8000) is more than the minium rent.
2. Short working
The excess of minimum rent over actual royalty calculated on the basis of output or sales
is termed as short working. In the example cited above, there is a short working of Rs. 1,000 i.e.
Rs. 30,000 minimum Rent - Rs 20,000 actual royalty for 4000 tonnes @ Rs 5 per ton.
3. Recouping short workings :
Depending upon the nature of business, It is normally seen that in the first few years, the
work does not gather the required momentum because of the absorption of time in preparation for
starting the production e.g. installation of machines construction of houses and other buildings etc.
or pushing up the sales e.g. Lack of knowledge to the consumers. The short working thus arising
cannot be attributed to the lapses on the part of lessee. Keeping this in view royalty agreement may
contain a clause that short workings i.e.; the excess amount paid in earlier years, are recoverable
by the lessee in subsequent years when royalties are in excess of the minimum rent. This right of
getting back the excess payment made in the earlier years is called the right of recoupment of
short workings, The right of recoupment of shortworkings can be.
a. Fixed
b. Floating
When the lessor promises to compensate the loss only in first few years, say four to five
years, the right is said to be fixed, Any short working arising beyond this period cannot be reimbursed.
But when the lessor promises to compensate the loss of any year in the next or subsequent two or
Financial Accounting - II 1.3 Royalty Accounts - I
three years, then the right is said to be floating because this can be availed of in any year when
short working arises.
It the Royalties agreement allowed to recoup the short working then the short workings should
be carried forward and shown in the Balance sheet so long as they are recoverable and short
workings which could not be recouped should be closed by transferring to the profit and loss
Account. If there is no provision in the royalty agreement for recoupment of short workings the
same should be transferred to the profit and loss Account in the very year of the short workings.
The short working clause thus may permit the lessee :
a. to carry forward the short workings indefinitely or
b. to set off short workings with in a certain number of years following the year in which the
short working occurs; or
c. to set off the short workings only within a certain number of years after the commencement
of the lease.
The questions of short working or its recoupment does not arise if the royalty agreement
does not contain a clause of minium rent. In such a case, the payment of royalty is simply based on
output or sales.
1.3 Lease premium in addition to Royalty :
In some cases the lessee may agree to pay lump - sum to the lessor in addition to
royalty. This extra payment in addition to royalty is known as lease premium or goodwill. This is a
capital expenditure for the lessee which can be written off every year out of the profit and loss
Account during the lease period by some suitable method.
1.4. Accounting treatment :
The accounting treatment has been dealt with in the books of lesser as well as in the books
of landlord. Journal entries are given below.
1.5 Accounting Entries in the Books of Lessee :
1. If minimum Rent account is not opened in the books.
i. When production is less than the minimum rent.
Royalty account Dr (with actual royalty)
short working account Dr (with the shortage)
To Landlord account (with minimum rent)
(Being minimum rent payable)

ii. When royalty paid :
Land lord account Dr (with minimum rent)
To Back Account
(Being minimum rent paid)
iii. When Royalty is transferred :
Profit and loss account
or
Production account Dr
To Royalty account (with actual Royalty)
(Being Royalty transferred to P&L A/c.)
The debit balance of short working Account will be carried forward and shown as an asset in
the Balance sheet till it is recoupable.
2. If minimum Rent account is opened in the books :
i.. Minimum Rent account Dr
To Land lord account.
(Being minimum rent payable to Landlord)
ii Royalties account Dr
short workings account Dr.
To Minimum Rent account.
(Being actual Royalties and short workings recorded)
iii. Landlord account Dr.
To bank Account.
(Being Minimum rent paid).
iv. Profit and loss or production account Dr
To Royalties account.
(Being Royalties amount transferred to P&L A/c.)

These entries will be repeated every year.

When the actual royalty due exceeds the minimum rent. The entries will be :
i. Royalties account Dr
To landlord account
(Being the Royalties payable)
ii. Land lord account Dr
To short workings account
To Bank account
(Being the amount paid after recoupment of short workings.)
iii. Profit and loss (or production) account Dr
To Royalties account
(Being actual Royalties transferred to P&L account)
The debit balance, if any in the short workings account which is no longer recoupable should
be written off to profit and loss account with the following entry.
Profit and loss account Dr
To short workings account.
(Being transfer of irrecoverable short workings to P&L A/c)
Minimum rent account is opened only for those years when the actual royalty is less than the
minimum rent and short working occurs.
1.6 Illustration I :
The Visu coal co LTD took a lease of mine from M/s C.V.K. Co for a period of 25 years from
1st Jan. 2002 upon the terms of a royalty of 50 praise per tonne of coal raised with the minimum
rent of Rs 20,000 and short workings if any, can be recouped within the subsequent three years.
The following was the production of coal in the first five years.
Year Production
in tonnes
2002 6,000
2003 36,000
2004 48,000
2005 60,000
2006 64,000
Solution : Before solving the problem a Royalty Table is prepared
Year Production Royalty Minimum Short Surplus S.W. S.W. C.V.K.
In tonnes Rs. Rent Workings Recouped not co
Rs. recouped
2002 6,000 3,000 20,000 17,000 ----- --- ----- 20,000
2003 36,000 18,000 2,000 ----- ----- ----- 20,000
2004 48,000 24,000 ----- 4,000 4,000 ----- 20,000
2005 60,000 30,000 ------ 10,000 10,000 3,000 20,000
2006 64,000 32,000 ----- 12,000 2,000 ----- 30,000
In the books of visu coal co. Ltd.
1st Method : When there is no ‘Minimum rent’ Account
Date Particulars L.F. Debit Credit
Rs. Rs.
2002 Royalty Account Dr 3,000
Short workings Account Dr 17,000
To M/s C.V.K. Company 20,000
(Being Minimum rent payable
as Royalty is less than Minimum rent)
M/s C.V.K. Company Account Dr 20,000
To Bank account 20,000
(Being minimum Rent paid)
Production Account Dr 3,000
To Royalty Account. 3,000
(Being Royalty transferred to
Production Account) 18,000

Short working Account Dr.

To M/s C.V.K. company 20,000
(Being Minimum rent payable as
Royalty is less than minimum Rent)
M/s C.V.K company Account Dr 20,000
To Bank Account 1,000
(Being Minimum rent paid)
To Royalty Account 18,000
(Being Royalty transferred to production
Account)
To short workings Account
(Being Royalty payable after 4,000
deduction of short workings)
M/s C.V.K. company Account Dr 20,000
To Bank account 20,000
To Royalty Account 24,000
(Being Royalty transferred to
production Account) 30,000

To. S.W Recouped A/c 20,000
(Being Royalty payable after
deduction of short working) 20,000
M/s C.V.K.. company A/c Dr
To Bank A/c 20,000
P&L Account Dr 3,000
To short working A/c 3,000
To Royalty Account 30.000
(Being Royalty & short workings
not recouped transferred to
Production and P&L A/c respectively)
2006 Royalties A/c Dr 32,000
Dec 31 To short workings A/c.
To M/s. C.V.K. Company A/c 2,000
(Being Royalties payable after 30,000
deducting short working)
Dec 31 M/s. C.V.K company A/c Dr 32,000
(Being Royalties paid)
Dec 31 Production Account Dr 32,000
To Royalties Account 32,000
(Being Royalties transferred to
Production Account)
Method II :
With minimum Rent A/c Method : The student should note that minimum rent account
is opened for the years when there is short workings i.e, the actual royalty is less than the minimum
rent. The payment to landlord is always the Royalty or Minimum Rent whichever is higher. The
royalty A/c may also be transferred to profit and loss Account. These points can be learned through
the following illustration.
Illustration II :
P.K. Rao took a lease of a mine from P.N Rao for a period of 20 years from 1.1.2000 upon the
terms of royalty of Re 1 per each tonne of output with a minimum rent of Rs. 40,000 P.K. Rao had
the right of recouping short working during the first Four years. The following were the production.
Year Out put in tonnes
2000 5,000
2001 24,000
2002 40,000
2003 60,000
2004 75,000
Give necessary journal entries in the books of P.K Rao.
Solution : Royalty Table Min. Rent Rs 40,000
Year Output Royalty S.W Surplus S.W S.W. P.N.Rao
tonnes Rs. Rs. Rs Recouped not recouped
2000 5,000 5,000 35,000 ---- ---- ------ 40,000
2001 24,000 24,000 16,000 ---- --- ----- 40,000
2002 40,000 40,000 ------ ------- ------ ------- 40,000
2003 60,000 60,000 - - -- - 20,000 20,000 31,000 40,000
2004 75,000 75,000 ------ 35,000 ----- ----- 75,000
In the books of P.K Rao
Journal entries
Rs. Rs.
2000 Minimum rent A/c Dr 40,000
Dec31 To P.N. Rao A/c. 40,000
(Being Minimum rent payable
Royalty Account Dr 5,000

Short workings Account Dr 35,000

To minimum rent A/c 40,000
(Being minimum rent transferred)
to Royalties Account & short
workings Account)
P.N Rao Account Dr 40,000
(Being minimum Rent Paid)
P&L Account Dr 5,000
To Royalties Account. 5,000
(Being Royalties transferred
to P&L A/c)
2001 Minimum rent Account Dr 40,000
Dec 31 To P.N. Rao A/c. 40,000
(Being Minimum rent payable)
Royalty Account Dr 24,000
2001 Short workings Account Dr 16,000
Dec 31 To minimum rent A/c 40,000
(Being minimum rent transferred)
to Royalties Account & short
workings Account)
2001 P.N Rao Account Dr 40,000
Dec 31 To Bank Account 40,000
(Being minimum Rent Paid)
P&L and Loss Account Dr 24,000
To Royalties Account. 24,000
to P&L A/c)
2002 Royalties Account Dr 40,000
Dec 31 To P.N Rao Account 40,000
(Being Royalty payable)
To Bank A/c 40,000
(Being Royalty paid)
2002 Profit & Loss Account Dr 40,000
Dec31 To Royalties Account 40,000
(Being Royalties transferred to
Profit & Loss Account)
Dec 31 To short working A/c 20,000
To P.N. Rao A/c 40,000
(Being Royalties Payable after
deducting short workings)
Dec31 To Bank Account 40,000
(Being amount paid after
deducting short workings)
2003 Profit and loss Account Dr 91,000
Dec31 To Royalties A/c 60,000
To short workings A/c 31,000
(Being Royalties and short
workings not received transferred
to profit and loss Account)

Dec31 To P.N. Rao Account 75,000
(Being Royalties payable)
2004 P.N. Rao Account Dr 75,000
Dec31 To Bank Account 75,000
(Being Royalty paid)
2004 Profit and loss Account Dr 75,000
Dec31 To Royalty Account 75,000
to profit and loss Account)
Illustration - 3
Saroja owned the patent of an Electric Rice cooker. M/s Jaya prada & company acquired
the right to manufacture and sell cookers for six years on the following terms.
a. Jaya prada & co to pay saroja a royalty of Rs 10 for each cooker sold with a minimum
annual payment of Rs 1,00,000. Accounts to be settled annually on 31st December.
b. If in any year the royalty calculated on cookers sold amounted to less than Rs 1,00,000
Jaya prada & co have the right to deduct the deficiency from the royalty payable in excess of that
sum in two following years.
The number of Rice cookers sold was as follows.
Year Sales
2004 9,000
2005 9,500
2006 12,000
2007 18,000
you are required to prepare necessary ledger accounts to record the above transactions in
the books of M/s Jaya prada & company which are closed annually on 31st December.
Solution : Royalty Table Minimum Rent Rs. 1,00,000
Year Sales Royalty S.W Surplus S.W Recouped S.W.not Saroja
Rs. Rs. recouped
2004 9,000 90,000 10,000 ------ -------- ----- 1,00,000
2005 9,500 95,000 5,000 ------ -------- -----

1,00,000
2006 12000 1,20,000 ----- 20,000 10,000 Nil 1,10,000
2007 18,000 1,80,000 ------ 80,000 5,000 Nil 1,75,000
Ledger Accounts in the book of Jaya Prada & Co.
Dr Royalties Account Cr
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2004 2004
Dec 31 To Saroja 90,000 Dec 31 By P & L A/c 90,000
2005 2005
Dec 31 To Saroja 95,000 Dec 31 By P & L A/c 95,000
2006 2006
Dec 31 To Saroja 1,20,000 Dec 31 By P & L A/c 1,20,000
2007 2007
Dec 31 To Saroja 1,80,000 Dec 31 By P & L A/c 1,80,000
Dr Saroja Account Cr
Rs. Rs.
2004 To Bank A/c 1,00,000 2004 By Royalties A/c 90,000
Dec 31 Dec 31 By Short working 10,000

1,00,000 1,00,000
2005 To Bank A/c 1,00,000 2005 By Royalties A/c 95,000
Dec 31 Dec 31 By Short working 5,000
1,00,000 1,00,000
2006 To Short workings 10,000 2006 By Royalties A/c 1,20,000
Dec 31 To Bank A/c 110000 Dec 31
1,20,000 1,20,000
2007 To Short workings 5,000 2007 180,000
Dec 31 To Bank 17,5000 Dec 31 By Royalties A/c 180,000
1,00,000 1,80,000
Dr Short working Account Cr
Rs. Rs.
2004 To saroja A/c 10,000 2004 By Balance c/d 10,000
Dec31 Dec31
10,000 10,000
2005
Jan 1 To Bal b/d 10,000 2005
Dec 31 To Saroja A/c 5,000 Dec31 By Balance c/d 15,000
15,000 15,000
2006 To Bal b/d 15,000 2006 By saroja 10,000
By Bal c/d 5,000
15,000 15,000
2007 To Bal b/d 5,000 2007
Dec31 By saroja 5,000
5,000 5,000
Illustration : 4
Nalini Ltd gave a lease of a mine to the Rajini mines for a period of 20 years from 1st
January 2004 on the following terms and conditions.
1. A royalty of Re 1 per every ton of production payable subject to a minimum rent of

Rs. 48,000 per annum.
2. Short working can be recovered during the subsequent two years.
The following details are available from accounting records :
Year Opening stock Sales in Closing stock in

in metric tons metric tons metric tons
2004 Nil 24,000 4,000
2005 4000 32,000 8,000
2006 8,000 44,000 4,000
2007 12,000 60,000 8,000
Write up the necessary ledger accounts in the books of mining company .
Solution :
Calculation of production :
Production = sales + cl.stock - opening stock
2004 = 24000 + 4000 - Nil = 28,000 tons
2006 = 32000 + 8000 - 4000 = 36,000 tons
2006 = 44000 + 4000 - 8000 = 40,000 tons
2007 = 60000 + 8000 - 12000 = 54,000 tons
Royalty Table
Minimum Rent Rs. 48,000
Year Production Royalty S.W Surplus S.W Recouped S.W.not Nalini
Rs. Rs. recouped Ltd.
2004 28,000 28,000 20,000 ------ -------- ----- 48,000
2005 36,000 36,000 12,000 ------ -------- -----
48,000
2006 40,000 40,000 8,000 ------ ------- 20,000 48,000
2007 54,000 54,000 ------ 6,000 6,000 6,000 48,000
Ledger Accounts
in the books of Rajini Mining Ltd.
Rs. Rs.
2004 To Nalini Ltd. 28,000 2004 By P & L A/c 28,000
Dec31 Dec31
2005 To Nalini Ltd 36,000 2005 By P & L A/c 36,000
Dec31 Dec31
Dec31 Dec 31
Dec 31 Dec 31
Dr Nalini Ltd Account Cr

Rs. Rs.
2004 To Bank A/c 48,000 2004 By Royalty A/c 28,000
Dec31 Dec31 By S.W.A/c 20,000
48,000 48,000
48,000 48,000
48,000 48,000
2007 To S.W.A/c 6,000 2007 By Royalty A/c 54,000
Dec31 To Bank 48,000 Dec31
54,000 54,000
Dr Short workings Account Cr

Rs. Rs.
2004 To Nalini Ltd. 20,000 2004 By Bal c/d 20,000
Dec31 Dec31
20,000 20,000
2005
Jan 1 To Bal b/d 20,000 2005 By Bal c/d 32,000
Dec31 Dec31
To Nalini Ltd., 12,000
32,000 32,000
2006
Jan 31 To Bal b/d 32,000 2006 By P & L A/c 20,000
Dec31 Dec31 By Bal c/d 20,000
To Nalini Ltd., 8,000
40,000 40,000
2007 To Bal b/d 20,000 2007 By Nalini & Co 6,000
Jan31 Dec31 By P & L A/c 6,000
By Bal c/d 8,000
20,000 20,000
2008 To Bal b/d 8,000
Strike or lock out :
Due to strike or lock out or natural calamity if the production was stopped in any year which
is not in the hands of lessee, in the royalties agreement to reduce the minimum Rent proportionately
for the period worked or the actual Royalty calculated on the basis of production or sale may be
paid in that particular year. This can be understood with the following illustrations.
Illustration. 5 :
A colliery company took a lease which provided for the payment of royalty at Rs. 2-00 per
tonne with a minimum rent of Rs. 34,000 per annum. Short workings if any can be recouped during
the subsequent three years.
According to Royalties agreement if in any year the normal rent was not attained due to strike
or accident the minimum rent was to be reduced proportionately having regard to the length of
stoppage
The out put for the year ended 31 Dec was :

2000 16,000 tonnes
2001 16,500 tonnes
2002 17,000 tonnes
2003 18,000 tonnes
2004 15,000 tonnes
2005 48,000 tonnes
During the year ended 31st Dec 2004 there was a stoppage (due to stike) of Production for
three months prepare minimum Rent Account, Royalty Account, landlord’s account and short
workings account in the ledger of the colliery company.
Solution : Royalty Table Min Rent Rs. 34,000
Year Production Royalty Short Surplus S.W. S.W. not Land Lord
In tonnes Rs. Workings Rs. Recouped Recouped
2000 16,000 32,000 2,000 ---- ---- ---- 34,000
2001 16,500 33,000 1,000 ---- ---- ---- 34,000
2002 17,000 34,000 ---- ---- ---- ---- 34,000
2003 18,000 36,000 ---- 2,000 2,000 ---- 34,000
2004 15,000 30,000 ---- 4,500 1,000 ---- 29,000
2005 48,000 96,000 ---- 62,000 ---- ---- 96,000
9
Minimum Rent during 2004 is reduced Proportionately i.e. 34,000 5 = 2,5500
12
In the ledger of colliery company
Dr Royalty A/c Cr
Rs. Rs.
2000 32,000 2000 By P & L A/c 32,000
Dec31 To Minimum Rent A/c Dec31
2001 2001 By P & L A/c 33,000
Dec31 To Minimum Rent A/c 33,000 Dec31
2002 2002 By P & L A/c 34,000

Dec31 To Land lord A/c 34,000 Dec31
2003 To S.W. A/c. 2,000 2003 By P & L A/c 36,000

Dec31 To Land lord A/c 34,000 Dec31
36,000 36,000
2004 To Land lord A/c 29,000 2004 By P & L A/c 30,000
Dec31 To S.W. A/c. 1,000 Dec 31
30,000 30,000
2005 To Land lord A/c 96,000 2005 By P & L A/c 96,000
Dec 31 Dec31
Dr Short working Account Cr
Rs. Rs.
2000 To M. Rent A/c 2,000 2000 By Balance c/d 2,000
Dec31 Dec31
2,000 2,000
2001
Jan 1 To Bal c/d 2,000 2001
Dec 31 To M. Rent A/c 1,000 Dec31 By Balance c/d 3,000
3,000 3,000
2002 2002
Jan1 To Bal b/d 3,000 Dec31 By Bal c/d 3,000
3,000 3,000
2003 2003
Jan1 To Bal b/d 3,000 Dec31 Royalty 2,000
By Balance c/d 1,000
3,000 3,000
2004
Jan To Bal b/d 2004
1,000 Dec31 By Royalty 1,000
Minimum Rent Account Cr

Rs. Rs.
2000 To Landlord A/c 34,000 2000 By Royalty A/c 32,000
Dec31 Dec31 S.W A/c 2000
34,000 34,000
2001
Dec31 To Landlord A/c 34,000 2001 By Royalty A/c 33,000
Dec31 By S.W A/c 1,000
34,000 34,000
Dr Land lord Account Cr
Rs. Rs.
2000 2000
Dec 31 To Bank A/c 34,000 Dec 31 By M.Rent A/c 34,000
2001 2001
2002 2006
Dec 31 To Bank A/c 34,000 Dec 31 By Royalties A/c 34,000
2003 2003
Dec31 To S.W. A/c 2,000 Dec31 By Royalties A/c 36,000
To Bank A/c 34,000
36,000 36,000
2004 2004
Dec31 To S.W A/c 1,000 Dec 31 By Royalty A/c 30,000
To Bank A/c 29,000
30,000 30,000
2005 2005
Dec31 To Bank A/c 96,000 Dec31 By Royalty A/c 96,000
Illustration : 6
Bihar coal co Ltd. leased a piece of land at a Royalty of Rs 3/- per tonne with a dead rent of
Rs. 80,000 per annum. short working can be recouped out of the surplus of next five years. In the
event of strike and the minimum rental not being reached, the lease provided that the actual royalties
earned for the year discharged all rental obligations for that year.
The royalties payable during the years was as follows :

Year Royalty payable
Rs.
2000 26,000
2001 74,000
2002 90,000
2003 1,12,000
2004 1,40,000
2005 70,000 (strike)
2006 1,30,000
Write up the Minimum rent Account, Royalty account, shortworkings account and landlord
account in the books of Bihar coal co Ltd.
Solution : Royalty Table Min Rent rs 80,000
Year Royalty Short Surplus S.W. S.W. not landlord
Rs. Workings Rs. Recouped Recouped
2000 26,000 54,000 ---- ---- ---- 80,000
2001 74,000 6,000 ---- ---- ---- 80,000

2002 90,000 ---- 10,000 10,000 ---- 80,000
2003 1,12,000 ---- 32,000 32,000 ---- 80,000
2004 1,40,000 ---- 60,000 18,000 ---- 1,22,000
2005 70,000 ---- ---- - - - -70,000
2006 1,30,000 ---- 50,000 - - - -1,30,000
In the ledger of Bihar Coal company.
Minimum Rent Account Cr

Rs. Rs.
2000 To Landlord A/c 80,000 2000 By Royalty A/c 26,000
Dec31 Dec31 S.W A/c 54,000
80,000 80,000
2001
Dec31 To Landlord A/c 80,000 2001 By Royalty A/c 74,000
Dec31 By S.W A/c 6,000
80,000 80,000
Rs. Rs.
2000 2000
Dec31 To Minimum Rent A/c 26,000 Dec31 By P & L A/c 26,000
2001
Dec31 To Minimum Rent A/c 74,000 2001
Dec31 By P & L A/c 74,000
2002 2002
Dec31 To Land lord A/c 80,000 Dec31 By P & L A/c 90,000
To S.W A/c 10,000
90,000 90,000
2003 2003
Dec31 To Land lord A/c 80,000 Dec 31 By P & L A/c 112,000
To S.W A/c 32,000
112,000 112,000
2004 2004
To S.W. A/c 18,000
140,000 140,000
2005 70,000 2004 70,000
2006 1,30,000 2006 1,30,000
Dec31 To Land lord A/c 130,000 Dec 31 By P & L A/c 130,000
Dr Short workings Account Cr

Rs. Rs.
2000 To M. Rent A/c 54,000 2000 By Balance c/d 54,000
Dec31 Dec31
54,000 54,000
2001
Jan 1 To Bal c/d 54,000 2001
Dec 31 To M. Rent A/c 6,000 Dec31 By Balance c/d 60,000
60,000 60,000
2002 2002 By Royalty A/c 10,000
Jan1 To Bal b/d 60,000 Dec31 By Bal c/d 50,000
60,000 60,000
2003
Jan1 To Bal b/d 50,000 2003
Dec31 To Royalty A/c 32,000
50,000 50,000
2004
Jan1 To Bal b/d 18,000 2004
Dec31 By Royalty A/c 18,000
18,000 18,000
Dr Land Lord Account Cr

Rs. Rs.
2000 2000
2001 2001
2002 To S.W A/c 10,000 2002 By Royalty A/c 90,000
Dec 31 To Bank A/c 80,000 Dec 31
90,000 90,000
2003 To S.W A/c 32,000 2003
Dec31 To Bank A/c 80,000 Dec31 By Royalys A/c 1,12,000
1,12,000 1,12,000
2004 2004
Dec31 To S.W A/c 18,000 Dec 31 By Royalty A/c 1,40,000
To Bank A/c 1,12,000
1,40,000 1,40,000
2005 2005
Dec31 To Bank A/c 70,000 Dec31 By Royalty A/c 70,000
2006 2006
Dec31 To Bank A/c 1,30,000 Dec31 By Royalty A/c 1,30,000
1.7 Summary :
Royalty is a periodical payment, based on output or sale, required to be made by one person
to another in consideration of some special rights acquired. In royalties agreement there will be two
parties 1. lessee 2. Land lord. Minimum rent is the amount payble to the land lord irrespective of
production or sale. If the Minimum rent is more than the actual Royalties then the diffrence is
Known as short workings. these short working can be recouped out of the surplus of the subsequent
years, this is known as recoumpment of short workings. Recoupment may be allowed for a fixed
period from the date of agreement or it may be for certain years from the year in which short
workings arised. short workings not recouped is a loss and should be transferred to profit and loss
account in the books of lessee. In case of strike the minimum rent is reduced in the proportion of
days worked or actual royalties may discharge the liability.
1.8 Questions :
1. What is meant by Royalties ?
2. What is Royalty? Explain briefly who will pay the Royalty to whom ?
3. Explain Minimum rent.
4. Explain short workings.
5. How can be short workings recouped ?
1.9 Excercises :
1. On 1st January 2002 chittaranjan collieries Ltd. leased a piece of land agreeing to pay
therefore a minium rent of Rs 2000 in the first year Rs 4,000 in the second year and there
after Rs 6000 per annum merging into a royarly of 40 paise per tonne with power to recoup
short workings over the first three years only, the output for four years starting from 2002 -
Dec 31, were as follows. 2002 - 1,000; 2003 - 10,000; 2004 - 18,000; 2005 - 20,000 tonnes.
Record these transactions in the ledger of the company.
2. A colliery is leased to National coal syndicate on a royalty of Re 1 per tonne on the
output. A minimum rent of Rs 16,000 a year and allowances for short working porovided in the
lease as he can deduct it in the first three years. the coal actually raised is as follows.
Year Output Tonnes
1 8,000
2 10,000
3 18,000
4 28,000
5 34,000
Draw up Royalty account land lords Account shortworking Account. Minimum rent account in
the books of the syndicated.
3. Sri viswanath wrote a book on Accountancy and got it published with Maruthi publications
on the following conditions.
a. Royalty payable is Rs.20 for copy sold.
b. Minimum rent payble each year Rs 60,000
c. short working can be recorded in the first three years of the agreement other details were
Year No.of copies Unsold copies,
2003 8,800 800
2004 12,000 1,600
2005 20,000 3,200
2006 28,000 4,000
2007 32,000 5,200
prepare necessary Accounts in the books of the publisher for the above period.
4. Venkat Ltd., took a mine on lease from suraj on a Royalty of Rs. 2 per tonne with a
minimum rent of Rupees 40,000 per year.
Each years excess of minimum rent over Royalties is recoverable out of the Royalties of next
year only. In the event of strike and minium rent not being reached the lease provided that the
acual Royalties.earned for the year would be the full Royalty obligation for the year.
The results of the working were as follows.
Year Actual Royalty
Rs
1st year Nil
2nd year 48,000
3rd year 32,000 (strike)
4th year 36,000
Show Royalties Account short workings Account and Suraj Account in the books of Venkat
Ltd.
5. Assam Tea Co., took a lease for 10 years on a tea estate, royalty being Rs 1,50 per
every KG of tea leaves produced. Minimum rent per annum Rs 31,000. short workings are to
be recouped in the next 2 years when the production is distrupted due to any reason, the
minimum rent can be reduced to 60%. Production for the first six years was as follows :
Year Production
K.G.S
1. 10,000
2. 12,000
3. 28,000
4. 25,000
5. 50,000
6. 15,000
6th year production was reduced because of labour problems. show the necessary accounts
in the books of Assam tea Co.
6. Gangadhar took a lease of a coal mine from the landlord on the condition that for every
ton of coal raised the Royalty being Re 1 with a minimum rent of Rs 16,000 per annum. The
shortworkings if any should be recouped in the next year only. Production was
2000 - 4000 tons 2001 - 20,000 tons,
2002 - 40,000 tons and 2003 - 64,000 tons,
2004 - 70,000 tons and 2005 - 72,000 tons.
Journalise the above transactions in the books of Gangadhar and also show minimum Rent
Account.
7. Mr. Prasad wrote a book on cost Accounts and get it published with Everest publishers
on the following terms :
a. Minimum rent payable is Rs 20 per copy sold.
b. shortworkings can be recouped in the first three years of agreement. other details were :
Year M. Rent Actual Royalty
1 25,000 22,500
2 30,000 27,500
3 35,000 32,500
4 40,000 45,000
5 45,000 50,000
6 50,000 60,000
The deficiency of any year is to be set off against excess payable within the next two years.
give Journal entries in the books of X
8. Sri Krishna company took a coal mine on 1-1- 2002 on lease from Rukmini for a period
of 20 years. The company agreed to pay Rs 2 per ton with a minimum rent of Rs 50,000. The
short workings can be recouped under the agreement during the first five years but on the
conditions that only 50% of Royalty in excess of minimum rent can be used for the recoup-
ment of shortworkings. The output of coal for the first five years was 18000, 24,000, 30,000.
40,000 and 48,000. tones respectively.
Prepare necessary accounts in the books of sri krisha company.
9. On 1st January 2002 the Gudur mines leased some land for a minimum rent of Rs
60,000 for the first year Rs 65,000 for the second year and Rs 1,20,000 per annum there after
merging into a royalty of Re.1/- per ton with power to recoup short workings over two years of
such short working. The outputs were as under.
Year Output
2002 50,000
2003 90,000
2004 1,30,000
2005 1,70,000
2006 2,00,000
2007 2,50,000
Show the accounts as would appear in the books of Gudur mines.
10. Balaram collieries Co extracted coal under a lease with the following terms; Minimum
rent Rs 70,000. Royalty Rs. 2/- Each years short workings are recoverable during the subse-
quent three years. In the event of strike, if minium rent was not attained, the minium rent was
to be regarded as having to the length of the stopage. Out put was as follows.
Year Out put Year Output
1 20,000 4 110,000
2 50,000 5 8,40,000
3 80,000 6 1,70,000
During 5th year there was a strike lasting for 4 Months, prepare short workings A/c, Royalty A/
c in the books of BalaRam collieries Co.
1.10 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal
Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta Dr. Ch. Suravinda
Financial Accounting - II 2.1 Royalty - II
LESSON - 2
ROYALTY - II
2.0. Objectives :
In the previous lesson the student learned what is Royalty and how these transactions are
recorded in the books of lessee. After going through this chapter you can learn how the transactions
of royalties are recorded in the books of land lord ? What is sublease ?
Structure :
2.1. Introduction
2.2. Accounting treatment.
2.3. Illustrations
2.4. Sub lease
2.5. Accounting treatment
2.6. In the books of lessee
2.7. Summary
2.8. Self Assessment Questions
2.9. Exercises
2.10 Suggested Readings
2.1. Introduction :
In Royalty agreement there must be two parties, one, the owner of an Asset or the person
who hade the actual right over the Asset known as Land lord, other person is one who acquires this
right of using the Asset and pays some amount as royalty, calculated on the basis of production or
sale is known as lessee. In this lesson we will see how the transactions of Royalty have been
recorded in the books of Land lord.
In the books of Landlord :
Royalty receivable is an income to the land lord so Royalty account is credited with the amount.
i) When actual Royalty is less than minimum rent :
Lessee account Dr
To Royalty receivable Account
To short workings suspense Account
(Being minimum rent receivable)
ii) When amount received :
Bank Account Dr
To Lessee Account
(Being minimum rent received)
iii) To transfer royalty to P & L A/c
Royalty receivable Account Dr
To Profit & Loss Account A/c
(Being royalty transferred to P & L A/c)
2. When actual Royalty is more than minimum rent and if short working recouped.
i) Lessee Account Dr
Short working suspense Account Dr
To Royalty Receivable Account
(Being the amount receivable after deducting short workings)
ii) Bank Account Dr
To Lessee Account
(Being the amount received)
iii) Transfer royalty to P & L A/c
Royalty Receivable Account Dr
To Profit and Loss Account
(Being Royalty transferred to P & L A/c)
3. When short workings are transferred on the expiry of the right of recoupment.
Short workings suspense Account Dr
To Profit and Loss Account
(Being short workings transferred to P & L A/c)
2.3. Illustration I
Mr. Prabhakar who wrote a text book in physics gave the right of publishing the book to Sultan
Chand & Sons. The royalty Rs.2 per every book sold. Minimum Rent is Rs.1,50,000/- per annum.
Short workings, if any can be recouped with in the first five years of the lease. The sales were as
follows :
Year Sales
1 10,000
2 48,000
3 80,000
4 1,20,000
5 1,20,000
Write up the necessary journal entries in the books of Mr. Prabhakar.
Solution :
Before solving the problem we have to prepare a Royalties table.
Royalty Table M.Rent Rs.1,50,000/-
Year Sales Royalty S.w.sug Surplus S.W. S.W. not Sultan
Suspense Rs. Recouped Recouped Chand
Rs. Rs Rs.
1 10,000 20,000 1,30,000 - - - 1,50,000
2 48,000 96,000 54,000 - - - 1,50,000
3 80,000 1,60,000 - 10,000 10,000 - 1,50,000

4 1,20,000 2,40,000 - 90,000 90,000 - 1,50,000
5 1,20,000 2,40,000 - 90,000 84,000 - 1,56,000
In the books of Mr. Prabhakar (Land Lord)

Journal Entries
Rs. Rs.
Ist Year Sultan chand & Co Account Dr 1,50,000

To Royalty receivable A/c 20,000
To S.W. Suspense A/c 1,30,000
Bank Account Dr 1,50,000
To Sultan chand & Co A/c 1,50,000
(Being Minimum Rent received)
Royalty receivable A/c Dr 1,50,000
To Profit & Loss A/c 1,50,000
2nd Year Sultan chand & Co Account Dr 1,50,000
To Royalty receivable A/c 96,000
To S.W. Suspense A/c 54,000
(Being Minimum Rent received)
Royalty receivable A/c Dr 96,000
To Profit & Loss A/c 96,000
3rd year
Sultan chand & Co Account Dr 1,50,000
Short workings suspense Account Dr 10,000
To Royalty receivable A/c 1,60,000
(Being Royalty receivable)
(Being Royalty received)
(Being Royalty Receivable transferred to P & L A/c)
4th Year
To Royalties receivable A/c 2,40,000
5th Year
To Royalty receivable A/c 2,40,000
Illustration -2
A took a lease of coal mine from S on a roylty of Rs.10 per tonne raised. The output was as
under.
Ist year 10,000
2nd Year 16,000
3rd Year 20,000
4th year 16,000
Minimum rent was Rs.1,50,000 per annum. Short workings can be recouped in the first two
years of the lease agreement.
Prepare necessary ledger accounts in the books of S, Land lord.
Solution : In the books of S.
Royalty Receivable Table M. Rent Rs.1,50,000
Year Sales Royalty S.w.sus. Surplus S.W. S.W. not Sultan
Rs. Rs. Recouped Recouped Chand
1. 10,000 1,00,000 50,000 - - - 1,50,000
2. 16,000 1,60,000 - 10,000 10,000 40,000 1,50,000
3. 20,000 2,00,000 - 50,000 - - 2,00,000
4. 16,000 1,60,000 - 10,000 - - 1,60,000
Ledger
Dr. Royalties Received Account Cr.
Rs. Rs.
Ist Year To P & L A/c 1,00,000 Ist Year By A's A/c 1,00,000
2nd Year To P & L A/c 1,60,000 2ndYear By A's A/c 1,50,000
By S.W. Suspense 10,000
1,60,000 1,60,000
3rd Year To P & L A/c 2,00,000 3rdYear By A's A/c 2,00,000
4th Year To P & L A/c 1,60,000 4thYear By A's A/c 1,60,000
Short workings suspense account

Rs. Rs.
Ist Year To Bal c/d 50,000 Ist Year By A's A/c 50,000
50,000 50,000
2nd Year To Royalty Receivable
A/c To P & L A/c 10,000 2nd By Bal.b/d 50,000
40,000
50,000 50,000
A's Account
Rs. Rs.
Ist Yr To Royalty Receivable A/c 1,00,000 Ist Year By Bank A/c 1,50,000
To S.W. suspense A/c 50,000
1,50,000 1,50,000
2nd Yr To Royalty Receivable A/c 1,50,000 2 year By Bank A/c 1,50,000
1,50,000 1,50,000
3rd Yr To Royalty Receivable A/c 2,00,000 3 year By Bank A/c 2,00,000
2,00,000 2,00,000
4th Yr To Royalty Receivable A/c 1,60,000 2 year By Bank A/c 1,60,000
1,60,000 1,60,000
2.4. Sub - lease :
Sometimes the tenant or lessee transfers a part of the right of producing an article or publishing
a book or any other type of right acquired by him to sub-tenant or sub - lessee. In such a case the
lessee assumes the position of a land lord to the sub-lessee. That means he acts dual role i.e.
Lessee to the original landlord and landlord to the sub-lessee. This type of arrangement results in
three parties 1. Land Lord, 2. Lessee, 3. Sub -Lessee. The accounting treatment in this case is as
follows ;

1. In the books of original owner of the right : His capacity is that of the landlord and the
accounting entries are done exactly in the way explained earlier in this lesson.
2. In the books of the tenant : The tenant of the original Lessee has two capacities i.e.when
looked from the point of view of original owner he stands in the capacity of a tenant and
when looked from the point of view of subtenant his position is equal to that of owner.
Thus, in the books of tenant two sets of entries are made. First from the point of view of
lessee and secondly from the point of view of landlord.
3. In the books of sub-tenant, in this case, entries are made from the view of lessee which
is explained in the previous chapter.
2.6. In the books of Lessee Accounting treatment :

Lessee prepares two accounts for royalties one for royalty payable and the other for royalty
receivable. While calculating royalty payable to the land lord it should be calculated on the production
or sale of both tenant and sub-tenant.
Royalties payable account is debited with the total amount of royalty payable to the landlord
and is credited with the royalties earned on the grant of sub-lease. The balance of royalties
payable account is transferred to production or profit and loss account.
Royalty receivable account is credited with the amount of royalty earned and debited with the
amount of royalty payable on such production to the original landlord. The balance of this account
is transferred to profit and loss account.
At this level the student must note that the rate of royalty is always higher is sub-lease when
compared to original lease.
In case of short workings also he has to prepare a short workings account to show the
working between the landlord and tenant, and a short workings suspense account for showing the
short working between the tenant and sub-tenant.
All these things can be understood with the following illustration.
Illustration 3 :
On Ist January 2001, Mr. Mahati obtained a mining lease and from that date he sub-leased a
part of the mine to Mr. Tumbur. Prepare ledger accounts in the books of Mr. Mahati from the
following data.
Year Output Ouput
mahati Tumbur
2001 4,000 tonnes 2,000 tonnes
2005 10,000 tonnes 8,000 tonnes
2006 12,000 tonnes 9,000 tonnes
Royalty
per tonne Rs.2 Rs.3
Mahati Tumbur
Minimum Rent per annum Rs.20,000 Rs.15,000
Short workings recoverable first 3 years 2 years
Solution
Royalty payable M.Rent Rs.20,000
Year Total out Royalty S.W. Surplus S.W. S.W.not Land Lord
put Rs. recouped recouped
in tonnes
Rs. Rs Rs. Rs. Rs.
2001 6,000 12,000 8,000 - - - 20,000
2002 9,000 18,000 2,000 - - 20,000
2003 12,000 24,000 --- 4,000 4,000 6,000 20,000
2004 15,000 30,000 - 10,000 - - 30,000
2005 18,000 36,000 - 16,000 - - 30,000
2006 21,000 42,000 22,000 - - 42,000
Royalty Receivable Table M.Rent Rs.15,000

Year Output Royalty S.W. Surplus S.W. S.W. not Tumbur
recouped Recouped
Rs. Rs. Rs. Rs. Rs. Rs.
2001 2,000 6,000 9,000 - - - 15,000
2002 3,500 10,500 4,500 - - 13,500 15,000
2003 5,000 15,000 - - - - 15,000
2004 6,500 19,500 - 4,500 - - 19,500
2005 8,000 24,000 - 9,000 - - 24,000
2006 9,000 27,000 - 12,000 - - 27,000
Ledger
IN THE BOOKS OF MAHATI
Dr. Royalty Payable A/c Cr
Rs. Rs.
2001 To Land Lord 12,000 2001 By R. Receivable A/c 4,000
By Production A/c 8,000
12,000 12,000
18,000 18,000
24,000 24,000
30,000 30,000
36,000 36,000
42,000 42,000
Royalty Receivable Account

Rs. Rs
2001 To Royalty Payable 4,000 2001 By Tumbur A/c 6,000
To P & L A/c 2,000
6,000 6,000
To P & L A/c 3,500
10,500 10,500

To P & L A/c 5,000
15,000 15,000
To P & L A/c 6,500
19,500 19,500
To P & L A/c 8,000
24,000 24,000
To P & L A/c 9,000
27,000 27,000
Dr. Short workings Account Cr.

Rs. Rs
2001 To Land Lord 8,000 2001 By Balance c/d 8,000
8,000 8,000
2002 To Bal.b/d 8,000 2002 By Balance c/d 10,000
To Land lord 2,000
10,000 10,000
2003 To Bal b/d 10,000 2003 By Land Lord A/c 4,000
By P & L 6,000
10,000 10,000
Dr. Short working suspense Account Cr

Rs. Rs
2001 To Bal c/d 9,000 2001 By Tumbur 9,000
9,000 9,000
2002 To Bal c/d 13,500 2001 By Bal b/d 9,000
By Tumbur 4,500
13,500 13,500
2003 To Profit & Loss A/c 13,500 2003 By Bal b/d 13,500
13,500 13,500
Dr. Land Lord Account Cr.

Rs. Rs
2001 To Bank 20,000 2001 By R. Payable A/c 12,000
By S.Workings A/c 8,000
20,000 20,000
By S.Workings A/c 2,000
20,000 20,000
2003 To Short working 4,000 2003 By R. Payable A/c 24,000
To Bank A/c 20,000
24,000 24,000
30,000 30,000
36,000 36,000
42,000 42,000
Dr. Tumbur (Sub-Tenant) Account Cr.

Rs. Rs
2001 To Royalty 2001 By Bank A/c 15,000
Receivable A/c 6,000
To S.W. Suspense 9,000
15,000 15,000
To S.W. Suspense 4,500
15,000 15,000
15,000 15,000

19,500 19,500
24,000 24,000
27,000 27,000
2.7. Summary :
The person who had the actual right over the Asset is known as Landlord. Sometimes the
lessee transfers a part of the right to an other person at a higher rate of royalty. This is known as
sub-lease. In case of sub-lease the tenant plays dual role i.e.as tenant to the landlord and as
landlord to the sub-tenant.
2.8. Self Assessment Questions :
1. Explain sub-lease agreement
2. What is short workings suspense Account ? When it is prepared ?
3. Explain the status of the original lessee on subletting.
2.9 Exercises :
Dheeraj Ltd leased a property from Bhaskar at a royalty of Rs.1.50 per ton with a minimum
rent of Rs.10,000 p.a. Short workings can be recouped with in the first three years. Due to any
reason production stopped and the minimum rental value not being reached the lease provide that
the actual royalties earned for that year discharge all rental obligation for the year.
The results of the working of the property are given below
Year Actual Royalties
Rs
2001 2000
2002 2500
2003 4,000
2004 10,000
2005 11,500
2006 13,000
2007 5,000 (Strike)
Write the necessary ledger accounts in he books of Bhaskar.
2. Bharat Mining company Ltd. takes a lease of coal mine for 10 years from 1-1-2000 on
a minimum rent of Rs.24,000 p.a. The Royalty is Rs.1 per tonne of coal raised. Short workings
can be recouped during the first three years of lease only. The company closes books on
31st Dec each year. Coal raised is as follows
2000 12000 tonnes

2001 16,000 tonnes
2002 20,000 tonnes
2003 12,000 tonnes
2004 14,000 tonnes
2005 18,000 tonnes
2006 25,000 tonnes
Prepare necessary ledger accounts in the books of land lord.
3. Srinidhi coal limited took a piece of land on a minimum rent of Rs.6000 in the first year,
Rs.12,000 in the second years merging into a royalty of Rs.3 per ton of coal raised with
power to recoup short workings during the first three years only. The annul output for four
years were as follows. 1 Year 1000 tonnes 2nd year 2000 tons 3rd year 3000 tonnes and 4th
year 4000 tonnes show necessary ledger accounts in the books of Landlord.
4. Singareni coal Co. Ltd. obtained the lease of a coal field for 99 years from Mr. Sarma on
the following terms from Ist January 2000.
1. Royalty will be Rs.2 per tonne of coal raised

2. Minimum rent will be Rs.20,000 for the first year with an annual increase of Rs.1,000
till it reaches Rs.25,000
3. Short workings if any are recoverable only with in the first three years.
The coal raised by mining company is as under.
2000 - 2000 tonnes
2001 - 4000 tonnes
2002 - 6000 tonnes
2003 - 8,000 tonnes
2004 - 10,000 tonnes
Show the necessary ledger account in the books of Mr. Sarma.
5. A colliery company took the lease of a coal field on a royalty of Rs.3 per ton raised
with a minimum rent of Rs.30,000 and power to recoup short workings during the first four
years of the lease. With the information provided prepare Landlord A/c
Year Out put in tonnes
2000 2,000
2001 3,000
2002 5,000
2003 6,000
2004 7,500
2005 9,000
2006 10,000
6. Bihar Coal Co is landlord of a mine leased on a royalty of Re 1 per tonne of coal raised
with a minimum rent of Rs 18,000 per annum and a power to recoup short workings during
the first five years of lease. The output for the first five years was as follows.
Year Tonnes
1 7,000
2 10,000
3 20,000
4 25,000
5 27,500
Write up the necessary ledger Accounts in the books of coal company
7. Gangadhar and co took a lease of coal mine from the landlord on the condition that for
every ton of coal raised the Royalty being Re 1 with a minimum rent of Rs 80,000 per annum.
The short working if any should be received in the next year only.
Out of this Gangadhar leased a piece of land to Mr. Visweswar on the condition that for every
ton of coal raised the Royalty being Rs 2 with a minimum rent of Rs 40,000 per annum. The
short working if any should be recouped in the first there years of agreement. Production was
as follows.
Year Gangadhar Visweswar
in tonnes in tones
2000 35,000 15,000
2001 45,000 25,000
2002 60,000 40,000
2003 75,000 50,000
Show the necessary ledger accounts in the books of landlord and Gangadhar to record the
above transactions
8. A owned certain patent rights. He granted a licence to B to use such rights on royalty basis.
B appointed a sub-lessee, to sold the product in a particular areas the following are the
relevant particulars.
year sales sales

B C
Rs Rs.
1 2,00,000 5,00,000
2 2,50,000 60,000
3 3,00,000 70,000
4 3,50,000 80,000
5 4,00,000 90,000
Minimum rent
per Annum 40,000 10,000
Royalty 5% on sales 10% on sales
Recoupment of short working within 2years 3 years
Prepare necessary ledger accounts in the books of both the parties.

Financial Accountancy : R.L. Gupta & V.K. Gupta
- Dr. Ch. Suravinda

Financial Accounting - II 3.1 Hire Purchase system - I
LESSON - 3
Hire Purchase system - I
3.0 Objective : By going through this lesson the student is able to understood what is
Hire purchase system ? What are its features and How these transactions are recorded in the
books of Accounts
Structure :
3.1 Introduction.
3.2 Features
3.3 Instalment system
3.4 Distinction between Hire Purchase and Instalment system.
3.5 systems of Accounting records.
3.5.1 goods of considerable value
3.6 Journal entries in the books of buyer.
3.7 Journal entries in the books of Hire vendor
3.8 Illustrations.
3.9 summary
3.10 Self AssessQuestions
3.11 Exercises.
3.1 Introduction :
Most of the trade now - a - days carried on the basis of not only on credit but also under
instalment payment that means the buyer need not pay the cost of goods. Immediately, certain
percentage is paid on the date of agreement and the remaining in instalment. This system of
purchase is known as Hire purchase system or Instalment Purchase system.
3.2 Features:
Under hire purchase system, the buyer acquires the possession of the goods immediately
and agrees to pay the total hire purchase price in instalments. Each instalment being treated as
hire charges till the payment of last instalment. After payment of last instalment the ownership of
goods is passes from the seller to the buyer If the buyer makes default in payment of any instalment
the seller has a right to take back the goods from the buyer, and the amount already received is
treated as a hire charge. But if the buyer is paying all the instalments on the due dates the sellers
has no right to repossess these goods from the buyer. The purchaser can also return the goods at
anytime without having to pay further instalments that means he has an option to buy the goods.
Thus this system is advantageous both to the buyer and the seller. The buyer gets the facility of
paying the total amount in instalments under this system and the seller is able to sell more goods
under this system. Under the Hire purchase Act, the purchaser has certain rights the chief of
which is that. if a certain proportion of the total amount due is paid, the goods cannot be repossessed
without sanction of the court. There is also a ceiling on the interest that can be charged.
3.3 Instalment system
In case of instalment system, both the possession and ownership of goods are transferred
to the buyer immediately on signing the contract, In case the buyer defaults, the seller cannot take
back the goods sold, he can only sue for non payment of the instalments.
3.4 Distinction between Hire purchase system and instalment
purchase system
The following are the main Points of distinction between the two systems.
Hire purchase Instalment purchase
1. It is an agreement of Hiring. 1. It is an agreement of sale.
2. The ownership remains with the 2. The ownership passes from seller to the
seller until the payment of last buyer immediatly on entering the
instalment agreement.
3. Goods can be returned if the buyer 3. The goods cannot be returned by the
does not want to pay rest of the buyer to the seller unless there is some
instalments. default on the part of the seller.
4. The buyer can do all these things.
4. Under this system the buyer cannot sell
destroy transfer damage or pledge the
goods.
5. Under instalment purchase the seller
5. Under this system the seller can can sue in the court of law if the buyer
reposses the goods if the buyer was in was in default in payment of any
default of payment of any instalment instalment.
In case of both Hire purchase and instalment system, the buyer has to pay more than the
cash price. This is because of the fact that hire purchase price includes interest. It is called as hire
charges or finance charges, The buyer cannot debit the whole amount paid to the cost of asset
acquired. Only the cash price should be debited to asset account and interest is to be charged to
profit and loss account treating it as a revenue expense.
3.5 Systems of Accounting Records :

The systems of maintaining records for hire purchase transactions is different in each of the
following circumstances.
1. When goods of substantial sales value are the subject matter of sale. e.g.trucks, heavy
machinery.
2. When goods of small sales value are the subject matter of sale.
As we have already seen that there are two parties in the hire purchase agreement. i.e. buyer
and seller.
3.5.1 Goods of considerable value
In case the hire purchase transactions relating to goods of substantial sales value, in the
Books of buyer’s there are three methods of recording hire purchase transactions in the books of
the buyer.
1. Treating the goods not becoming the property of the buyer
Under this method goods purchased under hire purchase system will not become the property
of the buyer until at the instalment are paid.
3.6 Journal entries in the books of buyer

1. When an asset is purchased on hire Purchase
No Entry
2. For down Payment on the date of agreement
Asset Account Dr.
To cash account.
3. When first instalment due
Asset Account Dr
Interest Account Dr
To Hire vender Account.
4. When Instalment Paid.
Hire vender A/c Dr
To cash Account.
5. When depreciation charged.
Depreciation Account Dr
To Asset A/c.
6. When depreciation and Interest transferred to P & L Account
Profit & Loss Account Dr
To interest Account Dr
To Depreciation Account
Note : Entries 3 to 6 will be repeated in the subsequent years until last instalment paid.
2. Treating the goods as outright property
When the goods purchased on hire purchase system is treated as property of the business,
the following entries appears in the books of the buyer.
1. When an asset is purchased on hire purchase system.
Asset Account Dr
To Hire Vendor Account
2. For down payment on the date of agreement
Hire vendor Account Dr
To Cash / Bank Account.
3. Before 1st instalment date for Interest due
Interest Account Dr
To vendor Account
4. For the payment of 1st instalment
Hire vendor Account Dr
To Bank Account
5. For depreciation.
Depeciation Acount Dr
To Asset Account
6. For transfer of interest and depreciation to profit and loss account.
Profit and loss Account Dr
To Interest Account
To Depreciation Account.
Note : Entries 3 to 6 appears in all the years,
3. Interest suspense Method :
Under this method, the total interest payable due to purchase of asset under Hire purchase is
debited to interest suspense account, Interest included in each instalment is credited to interest
suspense account by giving debit to interest account. The following entries appears in the books of
the buyer.
1. When an asset is purchased on hire purchase system.
Asset Account Dr
Interest suspense A/c Dr
To Hire vender A/c.
2. For down payment on the date of agreement.
Hire vender Account Dr
To Bank A/c.
3. For interest due at the end of the year
Interest Account Dr
To Interest suspense Account.
4. For the payment of the first instalment
Hire vendor Account Dr.
To Bank Account.
5. For depreciation at the year end
Depreciation Account Dr
To Asset Account
6. For transfer of interest and depreciation to profit and loss account
Profit and Loss account Dr
To Interest account
To Depreciation account.
Note : Entries from 3 to 6 will appear every year.
Generally the second method is adopted in the absence of any specific method in the
examination Questions.
3.7 Journal Entries in the books of Hire vendor

Under the first Method :
1. When goods are sold on hire purchase
Hire purchaser’s Account Dr
To sales Account.
2. For cash received on the date of agreement.

Bank Account Dr
To Hire purchaser’s Account.
3. For interest due on instalment at the end of the year.
Hire purchasers Account Dr
To Interest Account.
4. For receipt of the instalment.
Bank Account Dr
To Hire purchasers Account.
5. For transferring the balance of interest
to profit and loss account.
Interest Account Dr
To Profit and loss Account.
Note : Entries of 3 to 5 will appear in every year.
Interest suspense Method :
Under this method, the differences between the hire purchase price and the cashprice is
credited to the interest suspense account. As and when the interest becomes due on each
instalment, it is credited to interest account and corresponding debit given to interest suspense
account. The following entries passed under this method.
1. When goods are sold on hire purchase
Hire purchaser’s Account Dr
To sales Account
To Interest suspense Account
2. For cash received on delivery
Bank Account Dr
To Hire purchaser’s Account
3. For interest due on instalment at the
end of the year.
Interest suspense Account Dr
To Interest Account
4. For receipt of the amount of instalment
Bank Account Dr
To Hire purchaser’s Account
5. For transfer of Interest to P & L A/c
Interest Account Dr
To P & L A/c
Note : Entries from 3 to 5 appears every year. Interest in the last instalment will be
difference between the instalment payable and amount remaining unpaid by way of principal.
3.8 Illustration – I
‘Y’ acquires from ‘X’ machine on hire purchase system on 1-1-2004. The cash price is
Rs. 60,000. Payment is to be made as follows Down payment Rs 1,00,00 and 21,000 annually for
three years. Interest is to be charged @ 12%. p.a pass the necessary journal entries and ledger
accounts in the books of both the parties under three Methods.
Solution :
calculation of Interest :
1 - 1 - 2004 Cash price Instalment Interest
included Purchase
In instalment
Down payment on 60,000 ----
1-1-2004 10,000 10,000
due on 1-1-2004. 50,000
Interest @ 12% on In first instalment 15,000 21,000 6,000
due on 31-12-2004 35,000
Interest included in 2nd
instalment @ 12% on 35,000 16,800 21,000 4,200
due on 31-12-2005
Interest included in 18,200
3rd instalment
(Difference between 18,200 21,000 2,800
21,000 - 18,200)
Due on 31-12-2005
Total Nil 73,000 13,000
Calculation of Depreciation : Rs.

Cash price on 1-1-2004 60,000
Less Depreciation @ 20% for 2004 12,000
Balance on 1-1-05 48,000
Balance on 1-1-06 38,400
Balance on 1-1-07 30,720
Solution :
First Method : In the books of y & co.
Rs. Rs.
2004 Machinery A/c Dr 10,000
Jan1 To Bank A/c. 10,000
(Being down payment paid)
Dec 31 Machinery Account Dr 15,000
Interest A/c Dr 6,000
To x’s A/c 21,000
(Being Instalment due)
Dec 31 X’s A/c Dr 21,000
To Bank A/c 21,000
(Being Instalment paid)
Dec 31 Depreciation A/c Dr 12,000
To Machinery A/c 12,000
(Being Depreciation charged)
Dec31 Profit & loss Account Dr 18,000
To Interest A/c 6,000
To Depreciation A/c 12,000
(Being interests & Depreciation
transferred to P & L A/c)
Dec31 Interest A/c Dr 4,200
To X’s A/c 21,000
(Being 2nd instalment due)
Dec 31 x’s A/c Dr 21,000
To Bank A/c 21,000
(Being 2nd Instalment paid)
Dec 31 Depreciation A/c Dr 9,600
To Matchinery A/c 9,600
(Being Depreciation charged
on Asset)
Dec 31 Profit & loss Account Dr 13,800
(Being interests & Depreciation transfered to P&L A/c)
Dec31 Interest A/c Dr 2,800
To x’s A/c 21,000
(Being 3rd instalment due)
Dec31 x’s A/c Dr 21,000
To Bank A/c 21,000
(Being 3rd instalment paid)
Dec31 Depreciation A/c Dr 7,680
To Machinery A/c
(Being Depreciation charged on Asset) 7,680
To Interest Account 2,800
To Depreciation Account 7,680
(Being Interest and Depreciation
transferred to P & L Account)
LEDGER
Dr Machinery Account Cr
Rs. Rs.
2004 2004
Ja1 To Bank 10,000 By Depreciation A/c 12,000
Dec31 To Bank 15,000 Dec 31 By Bal c/d 13,000
25,000 25,000
2005
Jan1 To Bal b/d 13,000 2005 By Depreciation 9,600
Dec 31 To Bank A/c 16,000 Dec 31 By Bal c/d 20,200
29,800 29,800
2006
Dec 31 To Bank A/c 18,200 Dec31 By Bal c/d 30,720
2007
Jan1 To Bal b/d 38,400 38,400
Dr Interest Account Cr
Rs. Rs.
2004 To x Account 6,000 2004 By P & L A/c 6,000
Dec31 Dec 31
2005 2005
Dec31 To x Account 4,200 Dec31 By P & L A/c 4,200
2006 2006
Dec31 To x Account 2,800 Dec31 By P & L A/c 2,800
Dr. Depriciation Account Cr

Rs. Rs.
2004 To Machinery A/c 12,000 2004 By P & L A/c 12,000
Dec31 Dec 31
2005 2005
Dec31 To Machinery A/c 9,600 Dec31 By P & L A/c 9,600
2006 2006
Second Method :
Dr Journal Entries Cr
Rs. Rs.
Jan1 To x’s A/c 60,000
(Being Machinery purchased
on Hire purchase)
Jan1 x’s A/c Dr 10,000
To Bank A/c 10,000
Dec 31 Interest A/c Dr 6,000
To x’s Account 6,000
(Being interest due)
Dec 31 To x’s Account Dr 21,000
To Bank A/c 21,0001
(Being1st instalment paid)
Depreciation A/c Dr 12,000
Dec31 To Machinery A/c 12,000
on asset)
To Depreciation Account
(Being Interest & Depreciation 12,000
2005 Interest Account Dr 4,200
Dec31 To x’s A/c 4,200
Dec 31 x’s A/c Dr 21,000
To Bank A/c 21,000
(Being 2nd instalment paid)
Dec 31 Depreciation Account Dr 9,600
To Machinery Account 9,600
on Asset)
(Being Interest & Depreciation
Dec31 To x’s Account 2,800
Dec31 x’s Account Dr 21,000
(Being 3rd instalment Paid)
Dec31 Depreciation Account Dr 7,680
on Asset)
Dec31 Profit & loss Account Dr 10.480
To Depreciation A/c 7680
transferred to P & L A/c
Rs. Rs.
2004
Jan1 To x’s A/c 60,000 2004 By Depreciation A/c 12,000
Dec 31 Dec 31 By Bal c/d 48,000
60,000 60,000
2005
Dec31 By Bal c/d 38,400
48,000 48,000
2006
2007 38,400 38,400
Jan1 To Bal b/d 30,720
Dr ‘X’ Account Cr
Rs. Rs.
2004 2004
Dec31 To Bank 10,000 Jan 1 By Machinery A/c 60,000
To Bank 21,000 Dec 31 By Interest A/c 6,000
Dec 31 To Bal c/d 35,000
66,000 66,000
2005 2005
Dec 31 To Bank 21,000 Jan 1 By Bal b/d 35,000
Dec 31 To Bal c/d 18,200 Dec 31 By Interest A/c 42,000
39,200 39,200
2006 2006
Dec 31 To Bank 21,000 Jan 1 By Bal b/d 18,200
Dec 31 By Interest A/c 2,800
21,000 21,000

Rs. Rs.
2004 2004
Dec31 To x’s A/c 6,000 Dec31 By P & L A/c 6,000
2005 2005
Dec 31 To x’s A/c 4,200 Dec31 By P & L A/c 4,200
2006
Dec 31 To x’s A/c 2,800 2006 By P & L A/c 2,800
Dec31
Depreciation Account
Rs. Rs.
2004 2004
2005 2005
Dec 31 To Machinery A/c 9,600 Dec31 By P & L A/c 9,600
2006
Dec 31 To Machinery A/c 7,680 2006 By P & L A/c 7,680
Dec31
Dr Journal Entries Cr
Rs. Rs.
Jan1 Interest Suspense A/c Dr 13,000
To x’s A/c 73,000
(Being Machinery purchased
on Hire purchase)
Jan1 x’s Account Dr 10,000
To Bank A/c 10,000
Dec 31 Interest Account Dr 6,000
Interest suspense Account 6,000
Dec 31 To x’s Account Dr 21,000
To Bank A/c 21,000
(Being 1st instalment paid)
on asset)
Dec31 To Interest suspense A/c 4,200
(Being Interest due)
Dec31 x’s Account Dr 21,000

(Being 2nd instalment paid)
2005 Depreciation Account Dr 9,600
Dec31 To Machinery Account 9,600
on Machinery)
(Being Depreciation and Interest
Dec31 To Interest suspense A/c 2,800
Dec 31 x’s Account Dr 21,000
To Bank A/c 21,000
(Being 3rd instalment paid)
(Being Depreciation charged)
Rs. Rs.
2004 To x Account 60,000 2004 By Depreciation 6,000
Jan1 Dec31 By Bal c/d 48,000
60,000 60,000
2005
Dec31 Bal c/d 38,400
48,000 48,000
2006 To Bal b/d 38,400 2006 By Depreciation 7,680
Jan 1 Dec31 By Bal c/d 30,720
38,400 38,400
2007 To Bal b/d 30,720
Dr Interest suspense A/c Cr

Rs. Rs.
2004 To x’ Account 13,000 2004 By Interest A/c 6,000
Jan1 Dec31 By Bal c/d 7,000
13,000 13,000
2005
Jan1 To Bal b/d 7,000 2005 By Interest A/c 4,200
7,000 7,000
2006 To Bal b/d 2,800 2006 By Interest A/c 2,800
Jan1 Dec31
Dr X’s Account Cr
Rs. Rs.
2004Jan1To Bank A/c 10,000 2004 Jan1 By Machinery A/c 60,000
Dec 31 To Bank A/c 21,000 Jan1 By Interest suspence A/c 13,000
Dec31 Bal c/d 42,000
73,000 73,000
2005
Dec31 To Bank A/c 21,000 2005 By Bal b/d 42,000
Dec31 To Bal c/d 21,000 Jan1
42,000 42,000
2006 2006
Dec31 To Bank A/c 21,000 Dec31 By Bal c/d 21,000
21,000 21,000
First Method : In the books of ‘x’

Journal Entries
Rs. Rs.
2004 y’s Account Dr 60,000
Jan1 To sales Account 60,000
(Being Machine sold on Hire purchase)
Jan 1 Bank Account Dr Dr 10,000
y’s Account Dr 10,000
(Being down payment received)
Dec 31 y’s Account Dr 6,000
(Being Interest in 1st instalment)
Dec 31 Bank Account Dr 21,000

To y’s Account 12,000
(Being 1st instalment received)
Dec31 Interest Account Dr 6,000
To Profit & loss Account 6,000
(Being interest transferred to P & L
Account)
Dec 31 To Interest Account 4,200
(Being interest received)
Dec31 Bank Account Dr 21,000
(Being 2nd instalment received)
To Profit & Loss Account 4,200
(Being interest transferred to
P & L Account)
Dec 31 To Interest Account 2,800
(Being 3rd instalment received)
(Being interest transferred to P & L A/c)
LEDGER
Dr y’s Account Cr
Rs. Rs.
2004 To H. Sales A/c 60,000 2004 Jan1 By Bank A/c 10,000
Jan1 To Interest A/c 6,000 Dec 31 By Bank A/c 21,000
Dec 31 By Bank c/d 35,000
Dec31 66,000 66,000
2005Jan1To Bal b/d 35,000 2005 By Bank A/c 21,000
Dec31 To Interest A/c 4200 Dec31 By Balance c/d 18,200
39,200 Dec 31 39,200
2006
Jan1 To Bal b/d 18,200 2006
Dec31 To Interest A/c 2,800 Dec31 By Bank A/c 21,000
21,000 12,000
Rs. Rs.
2004 To P & L Account 6,000 2004 By y’s Account 6,000
Dec1 Dec31
2005 2005
Jan1 To P & L Account 4,200 Dec31 By y’s Account 4,200
2006 2006
Dec31 To P & L Account 2,800 Dec31 By y’s Account 2,800
2nd Method :
Journal Entries
Rs. Rs.
Jan1 To Interest suspense A/c 13,000
To Hire sales Account 60,000
(Being Machine sold on Hire)
and total interest payable for it)
Jan1 Bank Account Dr Dr 10,000
(Being down payment received)
Dec 31 Interest suspense Account Dr 6,000
(Being Interest due in 1st instalment)
Dec 31 Bank Account Dr 21,000
(Being 1st instalment received)
To Profit & loss Account 6,000
(Being interest transferred to P & L
Account)
2005 Interest Suspense Account Dr 4,200
Dec31 To Interest Account 4,200
(Being 2nd instalment received)
(Being interest transferred to
P & L Account)

(Being 3rd instalment received)
(Being interest transferred to P & L A/c)
LEDGER
Dr y’s Account Cr
Rs. Rs.
2004 To H. Sale 60,000 2004Jan1 By Bank 10,000
Jan1 To Interest sus A/c 13,000 Dec 31 To Bank 21,000
Dec 31 Bal c/d 42,000
73,000 73,000
2005Jan1Bal b/d 42,000 2005 By Bank 21,000
42,000 42,000
2006
Jan1 To Bal b/d 21,000 2006
Dec31 By Bank 21,000
21,000 21,000
Dr Interest suspense A/c

Cr
Rs. Rs.
2004 To Interest A/c 6,000 2004 By y’s Account 13,000
Dec31 To Bal c/d 7,000 Jan1
13,000 13,000
2005 To Interest A/c 4,200 2005
Dec31 2,800 Jan1 By Bal b/d 7,000
7,000 7,000
2006 2006
Dec31 To Interest A/c 2,800 Jan1 By Bal b/d 2,800
2,800 2,800

Rs. Rs.
2004 To P & L A/c 6,000 2004 By Interest suspense 6,000
Dec31 Dec31
Dec31 Dec31
Dec31
Illustration – II
When there are different amount of instalments.
Surya purchased a machine on hire purchase system. The total cash price of the machine is
67,000, payable Rs 16,000 down and there instalments of Rs 24,000 Rs. 20,000 and Rs. 18,700
payable at the end of the first, second and third year respectively. Interest is charged at 5% P.a.
Charge depreciation at 10% on straight line method. Prepare ledger Accounts in the books of surya.
Solution :
calculation of Interest and Depreciation
year of Payment Total Instalment Interest Cash Price Deprecation

Price
Machine Purchased 67,000
Down Payment 8,000 8,000 ---- 8,000 -----
59,000
At the end of 21,050 24,000 2,950 21050 6,700
1st year 37,950
At the end of 20,100 22000 1900 20100 6,700
2nd year 17,850
At the end of
3rd year 17,850 18,700 850 17850 6700
Nil 72700 5700 67000
Rs. Rs.
To Hire vendor A/c 67,000 Year end By Depreciation 6,700
end By Bal c/d 60,300
67,000 67,000
2nd To Bal b/d 60,300 2nd year By Depeciation 6,700

year end By Bal c/d 53,600
60,300 60,300
3rd To Bal b/d 53,600 3rd year By Depreciation 6,700
end By Bal c/d 46,900
53,600 53,600
4th To Bal b/d 46,900
Dr Hire vendor Account Cr

Rs. Rs.
1st year To Bank A/c 8,000 1st Year By Machinery 67,000
To Bank A/c 24,000 By Interest 2,950
To Bal c/d 37,950
69,950 69,950
2nd To Bank A/c 22,000 2nd year By Bal b/d 37,950
year To Bal c/d 17,850 end Interest A/c 19,000
39,850 39,850
3rd To Bank 18,700 3rd year By Bal b/d 17,850
end By Interest A/c 850
18,700 By (bal fig) 18,700
Rs. Rs.
1st To Hire vendor 2,950 1st By Profit & loss 2950
2nd To Hire vendor 1900 2nd By P & L A/c 1900
3rd To Hire vendor 850 3rd By P & L A/c 850
Dr Depreciation Account Cr
Rs. Rs.
1st To Machinery 6,700 1st By P & L A/c 6,700
2nd To Machinery 6,700 2nd By P & L A/c 6,700
3rd To Machinery 6,700 3rd By P & L A/c 6,700

When the instalments are exclusive of interest :
Illustration - 3
On 1st January 2,000 vindhya purchased a machine from Nivedita on Hire - purchase basis.
The particulars are as follows;
Cash price is Rs 50,000 payable as follows on signing the agreement Rs 20,000 and balance
in three instalments of rs 10,000 each plus interest. Interest is charged at 5% on outstanding balance
Depreciation at 10% p.a on written down value method. Prepare Nivedita Account in the books of
vindhya.
Dr Nivedita Account
Cr
Rs. Rs.
2000 Jan1 To Bank A/c 20,000 2000 By Machinery A/c 50,000
Dec 31 To Bank A/c 11,500 Jan1 By Interest A/c 1,500
Dec31 To Balance c/d 20,000 Dec31
51,500 51,500
2001 2001
Dec31 To Bank A/c 11,000 Jan1 By Bal b/d 20,000
Dec 31 To Bal c/d 10,000 Dec31 By interest A/c 1,000
21,000 21,000
2002 2002
Dec31 To Bank A/c 10,500 Jan1 By Bal b/d 10,000
Dec31 By interest A/c 500
10,500 10,500
Calculation of interest when rate is not given

If the rate of interest is not given in the problem, first total interest will be calculated by deducting
cash price from the total hire purchase price. Then the total interest is distributed in the ratio of
outstanding balance of each year.
Illustration 4
On 1st January 2000 Akhil took delivery from Nikhil co Ltd of a machine on hire purchase
system. Rs 6000 being paid on delivery and the balance in five instalments of Rs 12,000 each
payable annually on 31st December. The cash price of the machine was Rs 60000. Calculate the
amount of interest of each year.
Solution : Rs
2000 Amount Outstanding After down payment 60,000
2001 Amount Outstanding After 1st instalment 48,000
2002 Amount Outstanding After 2nd instalment 36,000
2003 Amount Outstanding After 3rd instalment 24,000
2004 Amount Outstanding After 4th instalment 12,000
Total interest for all the five years is Rs 6,000. (66000 - 60000) Which should be divided in the ratio
of 5 : 4 : 3 : 2 : 1 for five years.
Hence the interest comes to
5
2000 Rs 6,000 5 = Rs 2000
15
4
2001 Rs 6,000 5 = Rs 1600
15
3
2002 Rs 6,000 5 = Rs 1200
15
2
2003 Rs 6,000 5 = Rs 800
15
1
2004 Rs 6,000 5 = Rs 400
15
Calculation of cash price when it is not given

Sometimes in the question the cash price is not given. For solving the problem first we have
to find out the cash price with which the asset account is debited For calculating the cash price first
take the final instalment an deduct interest from it. Interest can be calculated by using the formula
= Rate of interest /100 + rate of interest. The remaining amount after deducting the interest represents
the amount due at the beginning of the year. The opening balance of the current year also represent
the closing balance of the previous year after payment of instalment. The total of these two will give
the amount due at the end of the last but one year. This procedure followed until the first instalment
To that amount add down payment then we can find the cash price of the asset this can be better
understood with the following illustration.
Illustration 5
On January 1st sai purchased a machine on Hire Purchase under a Hire purchase agreement
which provided for an initial payment of Rs 30,000 and the balance in four equal annual instalments
of Rs 40,000 each, rate of interest is 6% per annum find out the cash price of the machine.
Solution:
No of Balance Amount of Total Interest Opening balance
instalments Rs instalments Rs at 6/106 Rs
4 Nil 40,000 40,000 2264 37,736
3 37,736 40,000 77,736 4400 73,336
2 73,336 40,000 1,13,336 6415 1,06,920
1 1,06,920 40,000 1,46,920 8320 1,38,600
Cash = 1,38,600 + 30,000(Down payment) = Rs 1,68,600

Illustration 6
Little Masters purchase a machinery on instalment basis from Machine Manufacturing co Ltd
on the following terms :
a. Cash down payment at the time of signing agreement Rs 24,000

b. Five annual instalments of Rs 15,400
c. Interest at 10% p.a, is charged by the seller.
d. Depreciation at 20% p.a. on W,D.V basis is written off on machinery.
g. Machinery is sold for Rs 30,000 on completion of payments of instalments
show the machinery account for the entire period.
Solution :
In the books of Little Masters.
Year Particulars Amount Year Particulars Amount
Rs. Rs.
I To Machine 82,378 I By Depreciation 16,476
Manufacturers A/c By Balance c/d 65,902
82,378 82,378
II To Balance b/d 65,902 II By Depreciation 13,180
65,902 65,902
III To Balance b/d 52,722 III By Depreciation 10,544
52,722 52,722
IV To Balance b/d 42,178 IV By Depreciation 8,436
42,178 47,178
V To Balance b/d 33,742 V By Depreciation 6,748
33,742 33,742
VI To Balance b/d 26,994 VI By Bank A/c 30,000
To P & L 3,006
30,000 30,000
Working :
Calculation of Cash Price.
No of Balance Amount of Total Interest Opening balance
instalments Rs instalments Rs at 6/106 Rs
V NiL 15,400 15,400 1,400 14,000
IV 14,000 15,400 29,400 2,672 26,728
III 26,728 15,400 42,128 3,830 38,298
II 38,298 15,400 53,698 4,882 48,816
I 48,816 15,400 64,216 5,838 58,378
 Cash Price = 58,378 + 24,000 (Down payment) = Rs 82,378
3.9 Summary :
Most of the trade now - a - days carried on the basis of not only on credit but also under
instalment payment, under hire purchase system the buyer acquires the possession of the goods
immediately and agrees to pay the remaining balance in instalments. After payment of last instalment
the ownership of goods is passed from the seller to buyer. If the buyer makes default in payment of
instalment the seller has righ to take back the goods from the buyer. The amount already paid is
treated as hire charges for using the asset.
3.10 Self Assessment Questions :

1. What do you mean by hire - purchase system ?
2. What is instalment purchase ?
3. Write down the differences between hire purchase and instalment purchase.
4. Write down the features of hire - purchase system.
5. Explain the methods of recording hire purchase transactions in purchaser’s book.
6. Explain cash price hire purchase price and down payment.
7. In the absence of Interest rate how can it be calculated ?
8. In the absence of cash price, how can it be calculated ?
3.11 Excercises :
1. Nani purchased a Machine under hire purchase system at a cash price of Rs 56,000. He has
to make down payment of Rs 24,000 Further he has to make payment of Rs 10,000 each in
four annual instalments. Calculate the interest included in each instalment.
2. PQR company purchased an asset from EFG Co Ltd. On 1-1-2000 on hire purchase system
and paid Rs 30,000 at the time of signing the agreement and agreed to pay the balance in four
equal instalments of Rs 40,000 each on 31st December every year. Vendor company charges
5% rate of interest per year depreciate the asset at 10% p.a. On straight line mouthod. Write
up the ledger accounts in the books of both the parties.
3. Mr. Venkat purchased a machine from Hari on 1st January 2000 on Hire purchase system.
The cash price of machine Rs 50,000. Down payment is Rs 26,000. Balance in three equal
installments of Rs 10,000 each. Find out how much interest is included in each instalment.
4. Mr. Kartik purchased a truck on Hire purchase system for Rs 56,000. Payment to be made
Rs. 15,000 down and three instalments of Rs 15,000 each at the end of each year. The rate
of interest is charged at 5% p.a. on the balance due. The purchaser is depreciating the truck
at 10% p.a.on reducing balance method. Write down the necessary journal entries and ledger
accounts to record the above transaction in the books of both the parties.
5. On 1st April 2002. Somu purchased a machine on hire purchase by paying Rs 1,500 as initial
payment and the balance in four equal instalments of Rs 2,000 each at the end of every year.
The rate of interest charged is at 6% p.a. Determine the cash price of the machine.
6. 1-4-2000. Surat Transport company purchased from Metro Motors Ltd., three trucks costing
Rs 5,00,000/- each on Hire purchase system. Payment was to be made, Rs 3,00,000 down
and the remainder in three equal instalments together with interest at 9% p.a. at the end of
each year. Surat transport company writes off depreciation at 20% on reducing balance.
Write up the necessary ledger accounts in the books of both the parties.
7. Mr. white purchased a Machinery on hire purchase system and agreed to pay in five instalments
at the end of each year, It also agreed to pay interest at 10% p.a. on the balance due of cash
price every year. Calculate the interest included in each instalment.
Instalment Amount paid
Rs
1 2,250
2 2,100
3 1,950
4 1,800
5 1,650
8. A Ltd purchased three Buses from B Ltd costing Rs 75,000 each on Hire purchase system.
Payment was to be made Rs 45,000 cash down and the remainder in three equal yearly
instalments together with interest at 12% p.a B Ltd writes off depreciation at 20% p.a on
diminishing balance method. Prepare necessary Accounts in the books of A Ltd.
9. Mr. Mani purchased a machine under Hire - purchases agreement from siddhartha Motars a
machine costing Rs 31,000, The payment was to be made as follows.
Rs
on siging the agreement 6,000
1st, 2nd & 3rd instalments 10000 each
Calculate interest for each year.
10. The Rajastan Transport company purchased three lorries from leyland Motars on Hire
purchase system on 1st January 2000. Paying cash Rs 20,000 and agreeing to pay further
three instalments of Rs 20,000 each on 31st December each year the cash price of the lorry
is Rs 74,500. And the leyland Ltd charge interest at 5% p.a The Madras Transport company
writes off 10% o.a. as depreciation on the reducing instalment system. Pass Journal entries
and prepare necessary ledger accounts in the books of Rajastan Transport company.
11. A company hires a machine on the hire purchase system. The hire purchase price was
Rs. 32,000 payable Rs. 8,000 down and rest in three instalments of Rs 8,000 company is
writing off depreciation at 10% on written down value, open necessary ledger accounts in the
books of the company.
12. Nikhil delivers a machine on hire purchase system for Rs 150,000 including interest at 10%
p.a. on cash value to be paid as follows, Down payment Rs 24,000 1st instalment Rs 36,000,
2nd instalment Rs 66,000 and third instalment Rs 24,000 at end of each year. Show ledger
accounts in the books of vendor.
13. Anirudh purchases a L.C.D TV set on Hire purchase basis for Rs 1,00,000 and makes the
payment in the following order.
Down payment Rs 20,000
1st instalment Rs 40,000
2nd instalment Rs 20,000
3rd instalment Rs 20,000
The cash Price is Rs 86,000
Prepare necessary ledger account in the books of vender.
14. Gowtami purchased a truck on Hire purchase system. The cash price of the truck was Rs
1,49,000. He paid Rs 40,000 on signing of the agreement and rest in three annul instalments
of rs 40,000 each calculate interest for each year.
15. Sahiti purchased an asset on hire purchase system on agreement to pay as follows. On
down payment Rs 40,000 at the end of first year Rs 56,000, at the end of second year 52,000,
at the end of third year Rs 48,000 and at the end of fourth year Rs 44,000. Annul interest rate
is 10% prepare necessary ledger accounts in the books of both the parties.

Dr. Ch. Suravinda

Financial Accounting - II 4.1 Hire Purchase - II
LESSON - 4
HIRE PURCHASE II
4.0. Object : In the previous lesson you learned what is Hire purchase ? How these transactions
are recorded in the books of both hire purchaser and hire vendor. Already we learned that if a hire
purchaser failed to pay any installment the hire vendor had a right of repossession. After going
through the current lesson the student can know how the transactions of repossession recorded
in the books ? What is instalment system ? What is the difference between these two ?
Structure :
4.1. Introduction
4.2. Types of repossession
4.3. Accounting treatment in case of complete repossession.
4.4. Accounting treatment in case of partial repossession.
4.5. Accounting treatment in case of small value items.
4.6. Hire purchase trading Account
4.7. Stock and Debtors system
4.8. Summary
4.9. Self Assessment Questions
4.10. Exercises
4.1. Introduction :
When the hire purchaser failed to pay any instalment the vendor has a right to repossess the
goods sold on hire purchase. The amount already paid is forfeited by treating it as hire charges for
using the asset.
4.2. Types of repossession :

There are two methods of repossession. They are :
1. The vendor takes the complete repossession of asset and
2. The vendor takes repossession of only a part of the total asset sold on hire purchase
system. This is known as partial repossession.
The accounting treatment for these two methods is different. Hence, we discuss them
separately.
Accounting treatment in case of complete repossession
4.2.1 In the books of Hire purchaser :
The following steps should be followed by the student to record the transactions relating to
complete repossession :
1. In the year of default, entries for interest and Depreciation should be passed as usual
that means except the entry for payment, all the entries are passed.
2. Close the account of vendor by transferring the balance to asset account by debiting
the vendor's account and crediting the asset account.
3. Balance left in the asset account will represent loss on default and will be closed by
transferring to the profit and loss account.
4.2.2. In the books of vendor :
The following steps are necessary in the books of vendor in case of complete repossession.
1. Entry for interest due is passed as usual in the year of default.
2. Close the account of hire purchaser by transferring its balance to repossessed stock
account i.e. hire purchaser account is credited and repossessed stock account is
Debited.
3. The repossessed stock account is further debited with expenses incurred in repairing
or overhauling.
4. When these stock is sold again, with the sale price, the repossessed stock account is
credited.
5. The balance in this account represent either profit or loss, this account is closed by
transferring this balance to profit and loss account.
This can be better understood with the following illustration.
Illustration - I
M/s Sri Rama Motar transport Co purchased a truck on hire-purchase system for Rs.2,50,000
on Ist January 2004. Payment to be made Rs.1,00,000 down and three annual installments of
Rs.75,000 each payable on 31st December every year. Rate of interest is 25% per annum. The
buyer depreciates the truck at 20 percent per annum on written down value method.
Because of Financial difficulties M/s. Sri Rama Motor Transport Co, after having paid down
payment and first instalment at the end of Ist year, could not pay second installment and the vendor
took possession of the truck. Vendor, after spending Rs.75,000 on repairs of the asset sold it away
for Rs.1,62,500/-
Open necessary ledger accounts in the books of both the parties to record the transactions
of repossession.
Solution :
Calculation of Interest and Depreciation
Date of Payment Total Instal- Interest Cash Price Depreci-
Cash Price ments ations
Ist Jan 2004 2,50,000
Down Payment 1,00,000 1,00,000 --- 1,00,000 ---
31st Dec 2004 1,50,000
37,500 75,000 37,500 7,5000 50,000
1,12,500
31st Dec 2005 46,875 75,000 28,125 46,875 40,000
31st Dec 2006 65,625 75,000 9,375 65,625 32,000
65,625 75,000 9,375 65,625 32,000
Nil 3,25,000 75,000 2,50,000
In the books of Sri Rama Motor transport company

Dr. Truck Account Cr
Rs. Rs.
2004 2004
Jan1 To Hire Vendor A/c 2,50,000 Dec 31 By Depreciation 50,000
Dec 31 By Bal c/d 2,00,000
2,50,000 2,50,000
2005 2005
Jan 1 Bal b/d 2,00,000 Dec 31 By Depreciation 40,000
Dec 31 By Hire Vendor 1,40,625
By P & L A/c 19,375
2,00,000 2,00,000
Hire Vendor Account

Rs. Rs.
2004 2004
Jan 1 To Bank A/c 1,00,000 Jan 1 By Truck A/c. 2,50,000
Dec31 To Bank A/c 75,000 Dec 31 By Interest A/c 37,5000
Dec 31 Balance C/d 1,12,500
2,87,500 2,87,500
2005 2005
Dec 31 To Truck A/c 1,40,625 Jan 1 By Balance b/d 1,12,500
Dec 31 By Interest a/c 28,125
1,40,625 1,40,625
In the Book of Hire Vendor

Sri Rama Motar Transport Company
Rs. Rs.
2004 2004
Jan 1 To Sales a/c 2,50,000 Jan 1 By Bank A/c 1,00,000
Dec31 To Interest a/c 37,500 Dec 31 By Bank a/c 75,000
By Balance c/d 1,12,500
2,87,500 2,87,500
2005 2005
Jan 1 To Balance b/d 1,12,500 By Respossed stock 1,40,625
Dec31 To Interest a/c 28,125
1,40,625 1,40,625
Repossessed Stock Account

Dr Cr
Rs. Rs.
2005 2005
Dec31 To Sri Rama Dec 31 By Bank 16,2,500
Motor Transport
Company A/c 1,40,625
Dec31 To Bank a/c 7,500
Dec31 To P & L A/c 14,425
1,62,500 1,62,500
4.4. Accounting treatment in case of partial repossession :

The following method is followed in case the seller takes possession of only part of the total
assets sold to buyer.
1. In the year of default also pass the entries for interest due and for depreciation as done
in the case of complete repossession.
2. In this case both buyer and seller do not close seller's and buyer's account in their
respective books. The entry is passed with the agreed value of the asset which is
taken away by the seller. The seller always calculate the asset value taken over at a
higher rate of depreciation.
3. The buyer finds out the value of asset still left with him using the normal rate of depreciation
with this balance the asset account is continued, i.e. this account shows the balance of
that asset which is left to him by the seller.
4. After crediting the asset account with the value of asset taken away by the seller and
after keeping the balance of the asset left as calculated above the difference shown by
the asset account represents either profit or loss on default. This difference is transferred
to profit and loss account.
This can be better understood by the following illustration.
Illustraiton II
A Transport company purchased 2 trucks costing Rs.1,60,000 each from Seshagiri Auto
Ltd., on Ist January 2004, on the basis of hire purchase system. The terms were; payment on
delivery Rs.40,000 for each truck. Remainder in 3 equal instalments together with interest at 10%
per annum to be paid at the end of each year.
Transport company writes of off 25% depreciation each year on the diminishing balance
method. Transport Ltd paid the instalments due on 31st December 2004 and on 31st December
2005 but could not pay the final instalment.
Seshagiri Auto Ltd., repossessed one truck adjusting its value against the amount due. The
repossession was done on the basis of 30% depreciation on the diminshing balance method. The
vendor spend Rs.16,000 for the repairs and over hauling of the truck and sold it for Rs.80,000.
Write up the ledger accounts in the books of both parties.
Solution
In the books of Transport company
Dr Trucks Account Cr
Rs. Rs.
2004 2004
Jan 1 To Seshagiri 3,20,000 Dec 31 By Depreciation A/c 80,000
Auto Ltd A/c By Balance c/d 2,40,000
3,20,000 3,20,000
2004
Jan1 To Balance b/d 2,40,000 Dec 31 By Depreciation A/c 60,000
Dec 31 By Balance c/d 1,80,000
2,40,000 2,40,000
2006 2006
Jan 1 To Balance b/d 1,80,000 Dec 31 By Depreciation A/c 45,000
Dec 31 By Seshagiri Auto Ltd.A/c 54,880
Dec 31 By P & L A/c 12.620
Dec 31 By Balance c/d 67,500
1,80,000 1,80,000
Dr. Seshagiri Auto Ltd. Cr

Rs. Rs.
2004 2004
Jan 1 To Bank 80,000 Jan 1 By Trucks A/c 3,20,000
To Bank 1,04,000 Jan 1 By Interest A/c 24,000
Dec31 To Balance c/d 1,60,000
3,44,000 3,44,000
2005 2005
Dec31 To Bank A/c 96,000 Jan 1 By Balance b/d 1,60,000
Dec31 To Balance c/d 80,000 Dec 31 By Interest A/c 16,000
1,76,000 1,76,000
2006 2006
Dec31 To Truck A/c 54,880 Jan 1 By Balance b/d 80,000
Dec 31 To Balance c/d 33,120 Dec 31 By Interest A/c 8,000
88,000 88,000
2007
Jan 1 By Balance b/d 33,120
In the books of Seshagiri Auto ltd.
Dr. Transport Company Account Cr
Rs. Rs.
2004 2004
Jan 1 To Sales A/c 3,20,000 Jan 1 By Bank A/c 80,000
Dec31 To Interest A/c 24,000 Jan 1 By Bank 1,04,000
Dec 31 By Balance c/d 1,60,000
3,44,000 3,44,000
2005 2005
Jan 1 To Balance b/d 1,60,000 Dec 31 By Bank A/c 96,000
Dec31 To Interest A/c 16,000 Dec 31 By balance c/d 80,000
1,76,000 1,76,000
2006 2006
Jan 1 To Balance b/d 80,000 Dec 31By Repossessed Stock A/c 54,880
Dec31 To Interst A/c 8,000 By Balance c/d 33,120
88,000 88,000
2007
Jan 1 To Balance b/d 33,120
Dr Re possessed Stock Account

Cr
Rs. Rs.
2006 2006
Dec31 To Seshagiri Dec 31 By Bank A/c 80,000
transport Co.A/c 54,800
Dec31 To Bank A/c 16,000
(expenses)
Dec31 To Profit & Loss A/c 9,120
80,000 80,000
Working Notes :
1. Value of truck repossessed :
Cost 2004 1,60,000
Less: Dep. at 30% P.A. 48,000
Balance on 1-1-2005 1,12,000
Less : Dep. for 2005 @ 30% 33,600
Balance on 1-1-2006 78,400
Less : Dep. for 2006@ 30% 23,520
54,880
2. Value of truck retained :

Cost 2004 1,60,000
Less : Dep. for 2004 @25% 40,000
Balance on 1-1-2005 1,20,000
Less : Dep. for 2005 @ 25% 30,000
Balance on 1-1-2006 90,000
Less : Dep. for 2006@ 25% 23,500
67,500
4.5. Accounting treatment for sales of small value items :

When seller sells goods of small value on hire purchase system, it may become inconvenient
for him to maintain separate accounts for each customer, as in the case of considerable high value
items. Hence under such circumstances he maintains a subsidiary book and records there the
date of contract, name of customer, description of the article, number of instalments and dates of
payment of instalments.
Profit for this type of business is calculated in two ways 1. by preparing hire- purchase
trading account and 2. by preparing hire purchase adjustment account. In detail we will see how
these accounts are prepared.
4.6 Hire purchase trading Account :
To prepare a hire purchase trading account the following information is needed.
1. Opening Stock : This information is not needed if the business is run as a department
of the main shop. Like simple trade account, this figure is shown on the debit side of
hire-purchase trading account.
2. Instalment unpaid and not due : This information is needed whether the business is
run as a department or as an independent business. This information is available at
hire purchase price so it must be reduced to cost price and then shown on the debit
side of hire-purchase trading account.
3. Purchases : If the business is run independently then purchases term is used. But
when business is run as a department, then the information relating to purchases made
by the department is given under the term, 'goods sold during the year'. Since goods
sold during the year are given at hire purchase price, they are reduced to cost price.
This is shown on the debit side of hire purchase trading account.
Sales : Hire purchase trading account is credited with sales. But in hire purchase
trading account, instead of showing single figure of sales three figures are shown.
Opening balance of instalments due but not received is shown on the debit side of the
trading account and cash received from customers during the year and closing balance
of instalments due but not received are shown on the credit side.
4. Stock at the end : This is shown on the credit side of hire purchase trading account
except in case of department of the main shop.
5. Stock with customers : This is shown on the credit side of hire-purchase trading
account as cost price irrespective of the type of business. It is also termed as instalments
unpaid and not due.
This can be better understood with the following illustration.

Illustration 3:
Vinod sells goods on hire-purchase system at cost plus 60 percent. From the following
prepare
Hire-purchase Trading Account.
2006
April 1 Goods out on hire purchase at Rs.
hire purchase price 1,60,000
2007 March 31 Instalments not due and unpaid 3,60,000
Instalments due and unpaid 20,000
The following transactions took place during the year :
1. Goods sold on hire purchase system at hire purchase price 8,00,000
2. Cash received from customers on hire purchase price 5,60,000
3. Goods received back on default (Instalments due Rs.20,000)
valued at 4,000
Solution :
Dr. Hire Purchase Trading Account Cr.
Rs. Rs.
To Goods out B Cash received 5,60,000
on hire purchase at cost By Instalment due 20,000
100
(1,60,000 x ) 1,00,000 By Returns 4,000
160
To Goods sold By Instalments not
at Cost due at cost
100 100
(8,00,000 x ) 5,00,000 (3,60,000 x ) 2,25,000
160 160
To Net profit 2,09,000
8,09,000 8,09,000
Note : When goods are received back they are included into stock at cost price or market
price whichever is lower and are shown in the trading account on the credit side.
Illustration 4 :
Vyshnavi & Co has a hire-purchase department and goods are sold on hire-purchase at
cost plus 60%. From the following information prepare Hire purchase Trading Account to ascertain
the profit or loss made in the hire-purchase department.
2006
April 1 Goods with Hire purchase customers at (H.P. Price) 3,20,000
March 31 Goods sold on hire-purchase during the year at H.P. price 16,00,000
Cash received during the year from customers 11,20,000
Repossed goods valued at (Instalments due Rs.40,000) 6,000
Goods with the H.P. customers at H.P. price 7,20,000
Solution :
Vyshnavi & Co
Dr. Hire purchase Trading Account Cr.
Rs. Rs.
2006 2006
April To Stock 3,20,000 April.1 By Bank 11,20,000
To Goods sold 16,00,000 By Repossessed stock 6,000
To Stock Reserve 2,70,000 By Instalments due 40,000
(72,000 x 60/160 ) By Hire purchase Stock 7,20,000
To P&L 4,16,000 By Stock Reserve A/c 1,20,000
(3,20,000 x )
By Goods sold on H.p. 6,00,000
(16,00,000 x 60/100)
26,06,000 26,06,000
Dr. Goods sold on Hire Purchase Account Cr.

Rs. Rs.
2007 2006
Marh31 To Hire purchase April 1 By H.P. Trading A/c 16,00,000
(Loading) 6,00,000
To Purchases A/c 10,00,000
16,00,000 16,00,000
Dr. Instalments due Account Cr.

Rs. Rs.
2007 2007
Mar31 To H.P. Trading A/c. 40,000 Mar 31 By Balance c/d 40,000
40,000 40,000
Aprl1 To Balance b/d 40,000
Dr. Hire Purchase Stock Account Cr

Rs. Rs.
2007 2006
APrl1 To Balance b/d 3,20,000 April 1 By H.P,. Trading 3,20,000
A/c. (transfer)
Mar31 To H.P. Trading A/c 7,20,000 Mar 31 By Balance c/d 7,20,000
To Balance b/d 7,20,000
Dr. Stock Reserve Account Cr.

Rs. Rs.
2007 2006
Mar31 To H.P. Trading A/c 1,20,000 Aprl.1 By Balance b/d 1,20,000
(Transfer)
2007 2007
Mar31 To Balance c/d 2,70,000 Mar.31 By H.P. Trading A/c 2,70,000
Aprl By Balance b/d 2,70,000
Working
Calculation of instalments due : Rs.
Op.Stock (H.P. Price) 3,20,000
Good sold 16,00,000
19,20,000
Rs.
Less : Cash received 11,20,000
Repossessed goods (H.P. Price) 40,000
Stock with customers 7,20,000 18,80,000
Instalments due 40,000
4.7. Stock and Debtors system:

Under this method the following ledger accounts are prepared
1. Hire purchase stock account
2. Shop stock account
3. Hire purchase debtors account
4. Goods on hire -purchase account.
5. Hire purchase adjustment account.
The following journal entries are passed to record the transactions under this system.
1. When goods are made available for sale on hire purchase:
Shops stock A/c Dr

To Purchase A/c (at Cost price)
(Being goods available for Sale)
2. When goods sold on HP.
a) Hire purchase stock A/c Dr
To goods sold on H.P. A/c
(at sale price)
b) Goods sold on H.P. A/c (Sale price) Dr
To Shop stock A/c (Cost price)
To H.P. Adjustment A/c
3. When instalments become due
Hire purchase debtors A/c Dr
To Hire purchase Stock A/c
4. When cash is received
Cash A/c Dr
To Hire purchase Stock A/c
5. For loading included in instalment not due
H.P. Adjustment A/c Dr
To Stock Reserve A/c
6. For instalments not paid of repossessed goods
Repossessed goods A/c Dr
To Hire purchase debtors A/c
7. For Profit
H.P. Adjustment A/c
To P & L A/c
8. For Loss
P & L A/c Dr
To H.P. Adjustment A/c
Illustration 5 :
A trader sold out goods on hire purchase at a profit of 25% on cost price. Prepare a.
Hire purchase stock Account b. Shop stock account and cl. Hire purchase Debtor’s account in the
books of the Trader from the following details.
Stock in godown : Rs.
On 1-4-2006 1,20,000
On 31-3-2007 1,00,000
Over due instalments :
On 1-4-2006 8,000
On 31-3-2007 12,000
Goods with customers on hire purchases
On 1-4-2006 1,44,000
Purchases 2,58,400
Installments received 2,40,000
Solution :
H.P. Stock A/c
Date Particulars Invoice Amount Date Particulars Invoice Amount
Rs. Rs.
1-1-06 To Bal b/d 1,44,000 1,15,200 31-3-07 By H.P.
Debtors A/c 2,44,000 2,44,000
31-3-07 To Goods sold 3,48,000 2,78,400 31-3-07 By Bal c/d 2,48,000 1,98,400
31-3-07 ToGross profit --- 48,899
4,92,000 4,42,400 4,92,000 4,42,400
Dr. Shop Stock A/c Cr.

Rs. Rs.
1-4-06 To Bal b/d 1,20,000 31-307 By Cost of goods
31-3-07 To purchase A/c 2,58,400 31-3-07 Sold on H.p. 2,78,400
31-3-07 (Bal fig)
31-3-07 By Bal c/d 1,00,000
3,78,400 3,78,400
Dr. H.P.Debtors A/c Cr.

Rs. Rs.
1-4-06 To Bal b/d 8,000 31-307 By Bank A/c 2,40,000
31-3-07 To H.P. Stock A/c 2,44,000 31-3-07 By Balance c/d 12,000
2,52,000 2,52,000
4.8. Summary
The hire - vender can repossess the goods sold on hire purchase if the purchaser commits
default in payment of any instalment Repossession can be complete or partial. Partial reposses-
sion occurs when the vender sells different goods on hire purchase to the same party and allows
him to continue his business with goods not repossessed. When hire purchase transactions are of
small value, the hire vender may prepare Hire purchase trading account on stock method. Under
stock and debtors method, hire purchase stock account, goods on hire purchase account and Hire
purchase adjustment account are prepared.

1. What is Hire purchase trading account ? Why is it prepared ? Give a proforma.
2. What is the difference between hire purchase trading account and Hire purchase ad-
justment account.
3. Explain the methods of repossession.
4.10 Exercises :1
1. X Purchased a machine on 1st Jan 2000 on Hire - purchase system. The cash price of the
machine is Rs 149000. The terms of the agreement provided for payment of Rs 40,000 at
the end of every six months over two years. The first payment was to be made on 30th June
2000. Rate of interest is 6% p.a. Wrote off 10% Depreciation on the reducing balance system
and closed his books on 30th June every year. Could not pay the instalment due on 30th June
2001 and as a result, the hire vender took back the machine give the machine a/c and vender
account in the books of X.
2. Y Ltd purchased a machine from Z Ltd on 1st January 2001 on the Hire purchase system.
The cash price of the machine was Rs.1,20,000, payment was to be made Rs 40,000 half
yearly over two years. The first payment was to be made on 30th June 2001. Rate of interest
5% p.a. Depreciation to be written off @ 10% p.a on the diminishing balance method. The
books of accounts were closed on 30th June every year. The instalment due on 30th June
2002 could not be paid and as a result of which the vender took repossession of the machine.
Prepare machine account and hire vender account in the books of Ltd.
3 Pavan purchased six trucks on hire - purchase on 1st July 2002. The cash price of each truck
was Rs 2,50,000. He was to pay 20% of the cash purchase price at the time of delivery and
the balance in five yearly instalments starting from June 2003 with interest at 20% per an-
num.
On pavan’s failure to pay the instalment due on June 2004 it was agreed that pavan would
return 3 trucks to the vendor and remaining would be retained by him. The returned trucks
were valued at 30% per annum where as pavan depreciates trucks at 20% p.a.
Vender after spending Rs 5000 on repairs sold away all the three trucks for Rs 2,00,000
Show necessary accounts in the books of both the parties.
4. On January 2000 Yogesh acquires 3 machines on hire purchase from Somesh at 10% p.a
interest Yogesh immediately pays Rs 1,20,000 and also agrees to pay in three annual
instalments of
Rs. 2,00,000 each. The first instalment becoming due at Dec 31, 2000. Yogesh duly pays
the first instalment but fails to pay thereafter, on yogesh’s default somesh repossessed all
machines yogesh is charging depreciation at 20% p.a on straight line basis at 31st Decem-
ber each year, show the relevant ledger accounts in the books of both the parties.
5. Naveen purchased four machines of Rs 70,000 each from Praveen under hire purchase
system. The down payment is Rs 75,000 and three instalments of Rs 75,000 each at the end
of each year. Naveen depreciates the machines at 10% per annum on the straight line method.
Down payment and first instalment were paid. Naveen could not pay the second instalment
and therefore praveen took back three machines leaving one machine with Naveen. The
machines were taken at 20% depreciation on written down method. Praveen repaired the
machines at a cost of Rs 15,600 and sold them for Rs 1,75,000.
Prepare necessary ledger accounts in the books of both the parties.
6. Nitin sells goods on hire purchase price which is made of profit at 50% on hire purchase
Price. Calculate profits from the information given below by preparing Hire Purchase trading
and Hire - purchase adjustment accounts.
2006 Rs.
April Instalments due 4,50,000
2007
March 31 Instalments due during the year 12,00,000
Cash received during the year 15,00,000
goods sold during the year 12,60,000
Instalments unpaid (not due)
On 31 March 2007 3,00,000
Goods repossessed during the year
(amount due 15,000) valued at 1,500
7. Rajesh sells goods at hire - purchase price. Hire purchase price is made of profit at 50% on
hire purchase price. Calculate profit from the information given below by preparing hire -
purchase trading account.
2007 Rs.
Jan 1 Instalments due in the beggning 75,000
Dec 31 Installments due during the year 2,00,000
Cash received during the year 2,50,000
goods sold during the year 2,10,000
Instalments unpaid (not due)
on 31st December 50,000
goods repossessed during
the year (amount due Rs 2,500) 500
8. Comfort furnishers supply the furnishing on hire purchase. Terms at a profit of 50% over the
cost. The following are the transactions for the year ended 31st Dec 2007.
2007 Rs.
Jan 1 stock out on hire at cost 1,20,000
Jan 1 Instalments due (customers still paying) 10,800
goods repossessed during the year
(for instalments unpaid) evaluated at 900
instalments realised during year. 234000
Dec31 stock out on hire at cost 114000
Dec 31 Instalments due (customers still paying) 18,000
Prepare hire purchase stock account Hire purchase debtors account and Hire- purchase
adjustment account.

Dr. Ch. Suravinda

Financial Accounting - II 5.1 Single Entry - I
LESSON - 5
Single Entry - I
5.0. Objective : After going through this lesson the student can know a different system
of accounting, (other than double entry) which is usually adopted by small proprietors, traders and
professional people, famously known as single entry system of accounting.
Structure :
5.1 Introduction.
5.2 Definition
5.3 Features
5.4 Difference between single Entry and Double Entry
5.5 Defects of single Entry.
5.6 Methods of ascertaining profit
5.7 Preparation of statement of Affairs.
5.8 Differences between statement of Affairs and Balance sheet.
5.9 Statement of Affairs or Net worth Method.
5.10 Summary
5.11 Self Assessment Questions
5.12 Exercises.
5.13 Suggested Books
5.1 Introduction.
Single Entry system is the method of maintaining accounts which does not exactly follow
the principles of double entry system. Under this method the principles of the double entry system
are not being followed for all transactions, that means both the aspects of certain transactions are
recorded while only one aspect is recorded for certain transactions. Under this methods usually
the personal accounts of the debtors and creditors are kept and real and nominal accounts may not
be maintained in the books. Small traders general merchants, medical practitioners, lawyers and
other professional people usually adopt this system joint stock companies cannot adopt this system
because they are required to maintain complete records of all transactions under the companies
Act 1956.
5.2 Definition :
Kohler defines it as “A system of book - keeping in which as a rule only records of cash and
of personal accounts are maintained, it is a always incomplete double entry varying with
circumstances”.
Thus single entry is not any practical system of accounting but rather the double entry system
in an incomplete and disjoined form.
There are two types of single entry.
1. Pure single Entry : Under this system only the personal accounts of the debtors and
creditors are kept, all real and nominal accounts are not maintained.
2. Single Entry in the popular sense: This method of single entry along with personal
accounts of Debtors and creditors, real accounts like cash and bank accounts are maintained.
5.3 Features :
Single entry system has the following features
1. Books according to this system can be kept only by a sole trader or by a partnership
firm. Joint stock companies cannot keep books on single entry system.
2. In this system it is very common to keep only personal accounts and to avoid real and
nominal account.
3. It is vert common in this system to keep one cash book which mixes up business as
well as private transactions.
4. Under this system for any information one has to depend on original vouchers, For
example in the case of credit sales, the proprietor may keep the invoice without recording
it any where and at the end of the year the total of the invoices gives an idea of total
credit sales of the business.
5. This system lacks uniformity as it is a mere adjustment of double entry system according
to the convenience of the person.
6. It is difficult to prepare trading, profit and loss account and balance sheet due to the
absence of nominal and real accounts in the ledger.
5.4.Difference between single Entry and Double entry :

The following are the main differences between these two systems
Single Entry Double Entry

1. It is an incomplete record of final 1. It is a complete record of the financial
transactions transactions
2. Under this system only personal 2. All accounts personal as well as
accounts are maintained. inpersonal are maintained in the double
entry method.
3. Books maintained by the single entry 3. As the books are maintained
system are not reliable because a systematically, they are reliable.
complete record of transactions is not
maintained.
4. Due to lack of complete record of 4. Trial Balance can be prepared under this
transactions trial Balance can not be system.
prepared to check arithmetical accuracy.
5. In the absence of nominal accounts a 5. Profit and loss account can be prepared
Trading and profit and loss Account can because a complete record of all
not be prepared to ascertain profit. transactions is available in the books.
6. As The information regarding Assets is 6. Under this system a complete record of
not available, we cannot prepare the real accounts is available so we can
Balance sheet. prepare the Balance sheet.
5.5. Defects of single Entry:

Single entry system is an incomplete system of accounts. Hence it suffers from the following
defects or limitations.
1. This system is an unscientific method of accounting.
2. It does not record both the aspects of a transactions therefore at the end of the year
arithmetical accuracy of the books cannot be checked by preparing a trial balance.
3. In the absence of check the possibility of fraud or misappropriation is grater in case of
single entry than in the case of double entry system.
4. In the absence of nominal accounts, trading and profit and loss account can be prepared
to ascertain profit or loss.
5. In the absence of real accounts. It is not possible to know the exact financial position of
the business on any particular day by preparing a Balance sheet.
6. No correct price of the business is available and thus it is a set back at the time of sale
of the business.
7. Information obtained from the records cannot be relied upon because of lack of test
and free from doubt.
8. It is difficult to get loans from banks and other financial institutions as proper and reliable
balance sheet is absent.
9. Financial strength or soundness of the firm cannot be judged because true and reliable
figure of net profit or asset and liabilities is not available.
10. It is very difficult to ascertain the value of goodwill of the business.
11. The proprietor cannot know the progress made by the business over past year as the
figures of sales and net profit and rate of net profit on sales cannot be known.
Inspite of the above defects the single entry method of maintaining accounts is quite popular
with small firms which cannot afford to spend money on maintenance of accounts under double
entry.
5.6 Methods of Ascertaining Profits :

In the absence of real accounts in the books maintained on the single entry it is not possible
to prepare the Balance sheet of the business. Similarly in the absence of nominal accounts profits
cannot be calculated by preparing trading and profit and loss account. Therefore to find the profit of
a period and to judge the financial position of the business we can adopt any of the two methods.
a. Statement of Affairs or net worth Method.
b. Conversion Method. The working of both the methods has been discussed one after the
other.
5.7 Preparation of statement of Affairs :

The following points should be considered while preparing statement of Affairs.
1. The cash book should be balanced. Cash in hand should be verified with the balance
as shown by the cash book.
2. The bank balance as per cash book should be reconciled with the pass book balance.
3. The list of debtors and creditors should be prepared from the personal accounts
maintained in the ledger.
4. Stock in trade should be taken and valued at cost or market price whichever is lower
5. The values of fixed assets should be ascertained from the information as may be
available.
6. Depreciation if any on fixed assets should be provided.
7. All out standing expenses and incomes should be considered and shown in statement
of Affairs.
8. Expenses paid in advance and incomes received in advance should also be provided
and shown in the statement of Affairs.
9. The excess of assets over liabilities will represent the capital on that date.
5.8 Difference between statement of Affairs and Balance sheet :
The purpose of preparation of both the statements is to show the financial position of the
business on a particular date but there are certain differences between these two, those can be
explained as follows.
Statement of Affairs Balance sheet
1. The financial position disclosed by the 1. Financial position disclosed by the
statement of Affairs is not reliable. Balance sheet is reliable.
2. It is prepared with the information
2. It is prepared with balances extracted
available in the incomplete books.
from books maintained on the double
entry system.
3. It helps in ascertainment of trading profit
3. The primary purpose of a Balance sheet
or loss for a particular period, as well
is to a Balance sheet is to show the
as the financial position on a particular
financial position of the business on a
date.
particular date.
4. Due to incomplete record there is a
4. No fact is omitted or committed because
possibility of omission of some facts.
complete record for the transactions takes
place.
5.9 Statement Affairs or net worth Method:

Statement of Affairs method is one of the methods of ascertaining profits under the single
Entry system. Trading and profit and loss account cannot be prepared from books maintained on
single entry basis because nominal accounts are not maintained in the ledger. Hence we prepare
a statement of affairs for the purpose of calculation of profits. The following procedure is followed:
1. First of all, a statement of affairs at the beginning of the year is prepared to determine
the amount of capital at the beginning of the year.
2. Similarly, a statement of Affairs at the close of the year is prepared to determine the
amount of capital at the end of the year.
3. Drawings are added to the capital at the end because drawings made during the year
can reduce capital at the end.
4. Similarly capital introduced during the year should be deducted from the capital at the
end for the reason that the capital at the end would have been less by that amount if
such addition to the capital is not made during the year.
5. Capital at the beginning of the year as ascertained in step one should be deducted from
the adjusted capital ascertained in step four and the difference will be either a trading
profit or ;loss. If the adjusted capital at the end exceeds will be profit for the year. If the
adjusted capital at the end of the year is less than the capital at the beginning of the
year, the difference will be loss for the year.
6. Interest on capital and interest on drawings is adjusted to profit or loss to arrive at the
net profit or loss for the year.
This can be betterly understood with the following illustration.
Illustration I
Arun keeps his books on the single entry system and the following information is available.
1st Jan 2007 31st Dec 2007
Rs. Rs.
Furniture 4,000 4,000
Stock 56,000 61,000
Sundry Debtors 42,000 68,000
Cash 3,000 4,000
Sundry creditors 35,000 38,000
Bills payable ------ 6,000
loan ------ 10,000
Investments ------ 20,000
He has drawn out of the business Rs 10,000 during the year.
Prepare a statement showing his profit for the year ended 31st December 2007 after writing
off 10% depreciation on furniture and making a provision for bad debts of 10% on sundry debtors.
Solution:
Statement of Affairs of Mr. Arun as on 1-1-2007
Liabilities Amount Assets Amount
Rs Rs
Sundry creditors 35,000 Cash 3,000
Capital Account 70,000 Sundry debtors 42,000
(Balancing figure) Stock 56,000
Furniture 4,000
1,05,000 1,05,000
Statement of Affairs of Mr. Arun as on 1-1-2007
Rs Rs
Bills payable 6000 Cash 4,000
Sundry creditors 38,000 Investments 20,000
Loan 10,000 Sundry Debtors 68,000
Capital Account 95,800 Less Provision 6,800 61,200
(Balancing figure) for bad debts
Stock 61,000
Furniture 4,000
LessDepreciation 400 3,600
1,49,800 1,49,800
Statement of profit of Mr. Arun for the year ended 31st December 2007 Rs.
Capital at the end of the year 95,800
Add : Drawings during the year 10,000
1,05,800
less : Capital at the beginning of the year 70,000
Profit for the year. 35,800
Illustration 2
Varun keeps his books by the single Entry method. His position on 31st March 2007 was as
follows.
Cash in hand Rs 7,200; cash at Bank Rs 76,500 Debtors Rs 55,200; stock Rs 85,800 Furniture
Rs 15,000; creditors for goods Rs 56,100 Expenses outstanding Rs 6,000
On 1st october, 2007, varun introduced Rs 30,000 as further capital in the business and
withdrew on the same date Rs 21,000 out of which he spent Rs 15,000 on the purchase of a
machine for the business on 31st March 2008 his position was as follows :
Cash in hand Rs 6,300; cash at bank Rs. 82,500; stock Rs 94,500; Debtors Rs 72,600
Furniture Rs 18,000; creditors Rs 75,600; prepaid Insurance Rs 600.
Prepare the necessary statement showing the profit or loss made by him during the year
ended 31st March 2008 after making the following adjustment. Depreciate Furniture and Machine
@ 10% p.a; baddebts Rs.3,600 for doubtful debts @5%. Goods taken for personal use amounted
to Rs.4,500. Also provide interest on capital @ 10% p.a.
Solution :
Statement of Affairs of Varun as on 31st March 2007.
Rs Rs
Creditors 56,100 Cash in hand 7,200
Expenses outstanding 6000 Cash at Bank 76,500
Capital 1,77,600 Debtors 55,200
Furniture 15,000
2,39,700 2,39,700
Statement of Affairs of Varun as on 31st March 2008.
Liabilities Amount Assets Amount Amount
Rs Rs. Rs
Capital 20,4,450 Cash at Bank 82,500
Debtors 72,600
less Bad debts 3,600
69,000
less Provision 3,450 65,550
Prepaid Insurance 600
Furniture 18,000
less Depreciation
on 1,5000 for
1year 1500
on 3,000 for
1/2year 150 1650 16,350
Machinery 15,000
less Depreciation
for 1/2 year 750 14,250
2,80,050 2,80,050
Note : Date of purchase of new furniture is not given in the question, so depreciation on this
furniture has been charged for half year.
Statement of Profit of Varun as on 31st March 2008.

Amount Amount
Rs. Rs.
Capital as at the 31st March 2008 204450
Add Drawings 6000
Cash (21000 - 15000) goods 4500 10500
less Additional capital introduced 214950
30000
less capital as at 1-4-2007 184950
177600
profit before allowing interest 7,350
on capital
less Interest on capital @ 10% p.a
on Rs 1,77,600 for 1year. 17760
on Rs 30000 for 1/2 year. 1500 19260
loss for the year. 11910
Illustration 3
Nalini, Rajani, sujani were in partnership and towards the end of 2007 most of their books
and records were destroyed in the fire. The Balance sheet as on 31st December. 2006 was as
follows:
Rs Rs
Creditors 22,000 Cash 9,600

Capital Debtors 14,400
Nalini 18,000 Stock 26,000
Rajini 12,000 Machinery 5,760
Sujani 6,000 36,000 Fixtures & Fittings 2,400
Current A/cs:
Nalini 580 Currant Account
Rajini 400 980 Sujani 680
58,980 58,980
The partners drawing during 2007 have been proved at A- Rs 5600, B- Rs 4000 and C-Rs
2,600. on 31st Dec, 2007 the cash was Rs 12,800, Debtors Rs 16,100, stock Rs 2360 Advance
payments Rs 100 and creditors Rs 24,160. Machinery is to be depreciated by 10% per annum and
Fixtures and fillings at 71/2%. 5% Interest is to be allowed on capitals. The partners share profits in
the proportions of 1/2, 1/3 and 1/6.
You are required to prepare a statement showing the net trading profit for the year 2007 and
the division of the same between the partners, together with the Balance sheet as on 31st December
2007.
Statement of affairs of M/s Nalini, Rajani, Sujani as at 31st December 2007

Liabilities Amount Amount Assets Amount Amount
Rs Rs Rs Rs
Creditors Cash 12,800
Capitals 24,160 Debtors 16,100
Stock 23,600
Nalini 18,000 Prepaid expenses 100
Rajani 12,000 Machinery 5,760
Sujani 6,000 36,000 less Depreciation 576 5,184
Fixtures & Eittings 2,400
less Depreciation 180 2,220
Combined current
Account of
Nalini, Rajani, sujani 156
60,160 60,160
Statement of Profit of Profit & Loss

For the year ending 31st Dec 2007.
Amount Amount
Rs. Rs.
Combine of current Accounts of
Nalini, Rajani, Sujani on 31-12-07 -156
Add Drawings during the year:
Nalini 5600
Rajani 4000
Sujani 2600 12200
less Combined current Account 1-1-07 12,044
Nalini 580
Rajani 400
Sujani -680 300
profit before allowing interest 117,44
on capital
less Interest on capital @ 5% p.a
Nalini 900
Rajani 600
Sujani 300 1,800
Net profit made during the year 9,944
Devided among Nalini, Rajani Sujani
as follows :
Nalini - 1/2 of 9944 4,972
Rajani - 1/3 of 9944 3,316
Sujani - 1/6 of 9944 1,656
Balance sheet Nalini, Rajani and Sujani

as at 31st December 2007.
Liabilities Amount Amount Assets Amount Amount
Rs Rs Rs Rs
Capitals Debtors 16,100
Stock 23,600
Nalini 18,000 Prepaid expenses 100
Rajani 12,000 Machinery 5,760
Sujani 6,000 36,000 less Depreciation 576 5,184
Nalini Curent A/c Fixtures & Eittings 2,400
Balance on 1-1-07 580 less Depreciation 180 2,220
Add Interest 900
Profit 4,972
6,452
less Drawings 5,600 852 Sujani Current Account
Rajani Current A/c 400 Balance on 1-1-07 680
Balance of 1-1-07 Add Drawings 2,600
Add Interest 600 3,280
Profit 3,316 less Interest 300
4,316 Profit 1650 1.956 1324
less Drawings 4,000 316
61,328 61,328
5.10 Summary
Small proprietors, traders and professional people usually adopt a system of keeping
incomplete book - keeping records, This is known as single entry system. Limited companies
cannot adopt this system of acounting. Under this system only personal accounts are kept. Real
and nominal accounts are generally not maintained. One cash book is kept in which business and
private transactions of the proprietor are mixed up. This system lacks uniformity. It is an adjustment
of double entry system to suit the convenience of a person. It is difficult to prepare final accounts in
the absence of real and nominal accounts. Single entry system is full of defects. Arithmetical accuracy
of the books cannot be checked by preparing a trial balance. Frauds are common under this system.
Profits can be ascertained under two methods. 1. Statement of Affairs or net worth Method 2.
Convertion method. Under networth method, to find out the capital on the opening and closing
days, the accounting equation “capital = Assets - Labilities to outsiders” is used and statement of
affairs prepared accordingly. Adjustments with regard to drawings, capital introduced, depreciation
etc. are made to closing capital and then true profit or loss is ascertained.
5.11. Self Assessment Questions :

1. What do you mean by single entry system ?
2. How does profit can be ascertained under single entry system.
3. What are the features of single entry system ?
4. Briefly describe the limitations of single entry system.
5. Distinguish single entry system from double entry system.
6. What is a statement of Affairs.
7. What are the differences between a statement of Affairs and a Balance sheet.
8. What are the methods of ascertaining profit under single entry system.
5.12. Exercises :
1. Kusuma a Retail merchant commenced business with a capital of Rs 75,000 on 1-1-
2006. subsequently on 1st May 2006, she invested a further sum of Rs 35,000 as capital in
the business, During the year he has with drawn Rs 15,000 for his personal use. On 31-12-
2007 her assets and liabilities were : cash at Bank Rs 30,000, Debtors Rs 40,000, stock of
goods Rs 160,000, Furnitures Rs 20,000 and sundry creditors Rs 50,000
Ascertain profit or loss for the year 2006.
2. Subba Rao keeps books by the single entry system. Assets and liabilities on 31st
December 2006 and 2007 were as under :
31 - 12 - 2006 31 - 12 - 2007
Cash in hand 1,200 1,800
Cash at Bank 1,800 12,000
Stock 1,20,000 1,14,000
Sundry debtors 51,000 84,000
Plant and Mechinery 90,000 1,62,000
Sundry creditors 1,32,000 1,74,000
During the year Subba Rao introduced Rs 30,000 as further capital in the business and with
drew Rs 4,500 per month.
From the above prepare a statement showing the profit or loss made by him for the year
ended 31-12-2007.
3. Chalapati kept their books on single Entry system their position on 31-12-2006 was as follows:
Cash in hand Rs 1400; cash at Bank Rs 21,000 stock Rs 14,0000! Sundry Debtors Rs
59,500; Fixtures and Fittings RS 12,600; plant and Machinery Rs. 1,05,000; Sundry Creditors
Rs 1,54,000.
Chalapati put Rs 3,5000 during the year as new capital and his drawings were @ Rs 5,250
per month.
His position on 31st Dec 2007 was as follows:
Cash in hand Rs 2,100 : Cash at Bank Rs 14,000: sundry Debtors Rs 98,000 stock Rs
1,33,000 plant and Machinery Rs 1,89,000: Fixtures and Fittings Rs. 10,500 sundry creditors Rs
2,03,000.
From the above information prepare a statement of Affairs showing profit or loss during the
year 31-12-2007.
4. Aravind commenced business on 1-1-2006 with capital of RS 2,00,000. He immediately
bought furniture for Rs 48,000 During the year he borrowed Rs 120000 from his wife and introduced
a further capital of his own amounting to Rs 76,000. He had withdrawn Rs 7200 at the end of each
month for family expenses. On 31st December 2006, his position was as follows.
Cash in hand Rs 4,800; cash at Bank Rs 62,400 sundry Debtors; Rs 1,15,200; stock Rs
1,63,200: Bills Receivable Rs 38,400: sundry creditors Rs12,000; Rent due Rs 3600.
Furniture to be depreciated by 10% Ascertain the profit or loss made by Aravind during 2006.
5. Phalgun commenced business on 1st january 2007 with a capital of Rs 18,0000. Soon
after he bought furniture and fixtures for Rs 32,000. On 30th June 2007 he borrow Rs 90,000 from
his brother at 12% per annum (interest not yet paid) and introduced a further capital of his own
amounting Rs 2700. He withdrew @ Rs 5400 per month at the end of each month for household
expenses. On 31st December 2007 his position was as follows.
Cash in hand Rs 3600: Cash at Bank Rs. 46,800 sundry Debtors Rs 86,400: stock Rs
90,000: Bills Receivable Rs 28,800: sundry creditors Rs 9,000 and owing for rent Rs 2,700.
Furniture and fixtures are to be depreciated by 10% Ascertain the profit or loss made by
phalgun during 2007.
6. Vijay commended business on 1st January 2007 with a capital of Rs 1,00,000 which he
paid into Banking Account opened for that purpose. On the same date he bought stock valved at
Rs 65,000 and furniture which cost Rs 20,000. He kept his books on single entry basis. On 31st
December 2007, stock was valued at Rs 83,000. There were book debts amounting to Rs 34,000
of which Rs 2000 represented debts which were irrecoverable. Creditors amounted to Rs 36,000
and the cash book showed a balance of Rs 16,500, but according to pass Book, the balance at
vijays credit was only Rs 14500 he having given his son Rs 2,000 and omitted to enter in the cash
book. Vijay with drew Rs 18,000 from the business for his private expences and in addition he used
Rs 5000 worth of goods from his shop He took RS 10,000 as loan from his wife during the year.
Prepare a statement showing vijay’s profit or loss in the business for the year ended 31-12-
2007 from the above information.
7. Sobhan and Bharat are equal partners in a business in which the books are kept by single
entry. The position of affairs on 1st January was as follows:
Liabilities Rs Assets Rs
Bills payable 12,920 Cash in hand 540
Sundry creditors 40,580 Cash at bank 4,400
Capital Accounts Bills Receivable 8,140
Sobhan 1,46,800 Sundry Debtors 97,360
Bharat 1,46,800 Stock 65,700
Plant 1,60,360
Furniture 10,600
3,47,100 3,47,100
The following was the state of affairs on 31st December; cash in hand Rs 8000; Cash at
Bank Rs 11,680; Debtors Rs 1,12,580; Bills Receivable Rs 13,680 stock Rs 73,460; Creditors Rs
42,940; Bills payable Rs 11,900. The partners had drawn Rs 9,000 each and were further entitled
to interest on their capital at 5% per annum. It was agreed to depreciate plant at the rate of 10% and
furniture at 5%. Draw up the final accounts.
8. Chinna, Madhu, Vasu are in partnership and keep their books by single entry. The state of
Affairs of the firm as on 30th september 2006 was as under.
Bills payable 2,100 Cash in hand 3,750
Expenses outstanding 1,950 Cash at bank 10,350
Creditors 23,100 Bills Receivable 9,000
Capital Accounts Debtors 30,600
Chinna 15000 Stock 25,200
Bharat 15000 Madhu’s Current A/c. 2,790
Vasu 15000 45,000
Chinna Current A/c 6,450
Vasu Current A/c 3,090
81,690 81,690
The position of the firm on 30th September 2007 was :
Cash in hand Rs 4,200 : Cash at Bank Rs 10,710; Debtors Rs 36,900; stock Rs 28,080;
Bills payable Rs 1500; creditors Rs 18,600 and 4% investment of the face value of Rs 6,000
purchased at 97%
Each partner had drawn Rs 750 per month at the beginning of every month during the year.
8% interest on capital and drawings drawn during the year is to be charged. On Ist April 2007 each
partner had introduced Rs 4,500 as further capital in the firm.
Ascertain the profit or loss made by the firm during the year ending september 30,2007 and
show the Balance sheet as on that date.

- Dr. Ch. Suravinda

Financial Accounting - II 6.1 Single Entry - II
LESSON - 6
SINGLE ENTRY - II
6.0 Objective : In the previous lesson you learned that the profit under single entry
system can be ascertained under two methods i.e. statement of Affairs Method and convertion
method. As we have already seen how the statement of Affairs is prepared, In the present lesson
you can learn the convertion method how the account under single entry can be converted into
double entry system.
Structure :
6.1 Introduction.
6.2 Conversion of Books of last year from single entry into Double entry
6.3 Some important points for conversion
6.4 Illustrations
6.5 Summary
6.6 Questions
6.7 Excercises
6.8 Suggested Books
6.1 Introduction.
The word conversion denote the change of accounts prepared under single entry system
into Double entry system. If any business concern desire to change the system of accounting from
single entry to double entry on a given date the following procedure should be adopted :
A statement of Affairs should be prepared on the date on which the change is to be made. For
bringing into books the various assets and liabilities appearing in the statement of Affairs an opening
journal entry should be made as follows :
Various Assets Account Dr

To various liabilities Account
To Capital Account
(Being balance brought forward from the
statement of Affairs)
The books will thus be opened under the double entry. In future all transactions should be
recorded according to the double entry system. i.e: first through proper subsidiary books and then
posted to the ledger.
6.2 Conversion of Books of last year

If a businessman wants to convert the books of the 2000 maintained on single entry system
into double entry system in 2001, he should follow the following procedure, which is based on the
assumption that proper subsidiary books have been maintained under the single entry system.
1. A statement of Affairs at the beginning of the year 2000 should be prepared and posted
from it all those accounts which have not been maintained already.
2. The cash book should be gone through and entries relating to impersonal accounts should
be posted to their respective accounts as these items were not posted to impersonal accounts
under the single entry system. This would complete the double entry of the cash book
3. The Debtors and creditors accounts which have already been kept under the single entry
system Should be scrutinised in order to find out the items which have been made direct there in
without passing through the accounts e,g, debts, discouns, allowances etc should be posted to
their respective impersonal accounts so that the two-fold effect of such transactions may be
completed.
4. If a petty cash book is maintained, the monthly analysis should be posted to the debit of
the various accounts for expences and the total credited to petty cash account.
5. After completing the double entry of all the transactions of the previous year, a trial balance
should then be prepared to test the arithmetical accuracy of the books. After taking into consideration
the necessary adjustments like outstanding expenses and incomes, depreciation, provision for
bad debts and discounts, Trading and profit and loss account and Balance sheet should be prepared
in the usual manner.
6.3 Important points for conversion

For the convenience of the students for converting the single entry into double entry some
important points are given below.
1. Ascertainment of credit sales and credit purchases.
Usually a question on single entry does not give the figures of credit sales and credit purchases
so to find them out a Total Debtors Account and a Total creditors account is prepared.
Illustration I
From the following information you are required to calculate total purchases :
Rs.
Cash purchases 2,55,000
Creditors as on April 1, 2006 1,20,000
Cash paid to creditors 4,65,000
Purchases returns 15,000
Creditors as on March 31st 2007 2,01,000
Solution :
Dr Total Creditors Account Cr
Amount Amount
Rs Rs
To cash 4,65,000 By Balance b/d 1,20,000
To returns 15,000 By Purchases made
To Balance c/d 2,01,000 during the year 56,100
(Balancing figure)
6,81,000 68,1000
Total Purchases = Cash purchases 2,55,000

Credit purchases 5,61,000
8,16,000
Illustration 2
From the following information calculate Total sales :
Rs.
Opening debtors 20,000
Cash received from debtors 40,000
Cash sales 40,000
Closing debtors 32,000
Returns inward 2,000
Bad debts 8,000
Solution :
Dr Total Debtors Account Cr
Amount Amount
Rs Rs
To Balance b/d 20,000 By Cash 40,000
To credit sales By Returns 2,000
(Balancing figure) 62,000 By Bad debts 8,000
82,000 82,000
Total Sales = Cash Sales = 40,000

Credit Sales = 62,000
1,02,000
2. Ascertainment of opening and closing Debtors and creditors when credit sales and
purchases are given :
In such a case the opening or closing balance of debtors and creditors can easily be
ascertained by preparing the total Debtors and total creditors account as already explained. The
balancing figure in the Total Debtors Account and the Total creditors Account will be opening or
closing balance of debtors and creditors.
Illustration 3
Calculate debtors balance at the end :
Rs
Opening debtors 1,00,000
Total sales 4,00,000
Bad debts 10,000
Returns inwards 2,500
cash sales 50,000
cash received from customers 1,50,000
Bills Received from customers 45,000
Solution :
Amount Amount
Rs Rs
To Balance b/d 1,00,000 By Bad debts 10,000
To Sales By Returns 2,500
(4,00,000 – 50,000) 3,50,000 By Cash 1,50,000
By B/R 4,500
By Balabce c/d 2,42,500
4,50,000 4,50,000
Illustration 4
Calculate creditors balance at the end.
Rs.
Sundry creditors on the Opening day 7,600
Cash paid to creditors 1,750
Discount Received 250
Credit Purchases 9,300
Acceptances given to creditors 5,870
Solution :
Dr Sundry Creditors Account Cr
Amount Amount
Rs Rs
To Cash 1750 By Balance b/d 7,600
To Discount250 By Credit purchases 9,300
To Bills payable 5870
To Balance c/d
(Balancing figure) 9030
16,900 16,900
3. Ascertainment of Bills Receivable and Bills payable :

Sometimes the question may not give the opening or closing balances of Bills Receivable
and Bills payable. Such figures can be found out by preparing the Bills Receivable Account and
Bills payable Account as shown below:
Illustration 5
Calculate opening Balance of Bills receivable from the following information.
Rs.
Bills Receivable accepted during the year 41,800
Bills Receivable en cashed during the year 41,800
Bills Receivable Dishonoured 3,600
Bills Receivable at the end of the year 12,000
Solution :
Dr Bills Receivable Account Cr
Amount Amount
Rs Rs
To Balance b/d 15,600 By cash 41,800
(Balancing fig) By Bills dishonoured 3,600
To Bills received 41,800 By Balance c/d 12,000
57,400 57,400
Illustration 6
From the following data calculate the opening Balance of Bills payable.
Rs.
Cash paid during the year on Bills 44,500
Closing Balance of Bills payable 35,000
Bills accepted during the year 54,500
Bills Payable Account
Dr Cr
Amount Amount
Rs Rs
To Cash 44,500 By Balance b/d 25,000
To Balance c/d 35,000 (Balancing figure)
By Creditors (acceptances) 54,500
79,500 79,500
4. Ascertainment of opening and closing stock when Rate of gross profit is given.
These figures will be calculated as follows :
Opening stock = Cost of goods sold + Cl. stock - Purchases.
Closing stock = Opening stock + Purchases - Cost of goods sold
Illustration 6
Calculate the stock at the end
Rs.
Stock in the beginning 20,000
Cash Sales 60,000
Credit sales 40,000
Purchases 70,000
Rate of gross Profit on cost 1/3
Solution :
Total sales Rs
Cash sales = 60,000
Credit sales = 40,000
=1,00,000
Cost of goods sold is = 100000 5 3/4 = 75,000
Closing stock = op. stock + purchases – cost of goods sold.
= 20,000 + 70,000 – 75,000
= Rs 15,000
Note : If gross profit Ratio on Cost of goods is given in the problem, first we have to convert
it on sales.
On cost of goods = on sales

25% = 20%
33/3% = 25%
50% = 33 1/3%
662/3% = 50%
1/2 = 1/3
1/3 = 1/4
1/3 = 1/5
1/4 = 1/5
1/5 = 1/6
1/6 = 1/7 and so on
In the above problem grass Profit is 1/3 on cost of goods sold. It is equal to 1/4 of sales i.e.
100000 5 1/4 = Rs 25,000.
5. Ascertainment of opening Balance of capital, an Asset or a liability.
Such a missing figure can be ascertained by preparing the opening statement of Affairs. The
missing item would be the balancing figure in the statement of Affairs.
This can be seen in the following example.
Illustration 7
calculate the capital in the beginning.
Rs.
Profit made during the year 48,000
capital at the end 1,60,000
Capital introduced during the year 40,000
Drawings 24,000
Solution :
Dr Capital Account Cr
Amount Amount
Rs Rs
By Balance b/d 96,000
(Balance figures)
To Drawings 24,000 By Cash 40,000
To Balance c/d 160,000 By Profit 48,000
184,000 184,000
It can be calculated by the following equation :

Profits = Capital at the end + Drawings – Capital Introduced – Capital in the beginning.
Capital in the begginning = Rs 16,0000 + Rs 24,000 – Rs 40,000 – Rs 48,000 = 96,000
6. Ascertainment of cash and Bank Balances :

Sometimes opening and closing balance of cash in hand or cash at Bank are not given, such
figures can be ascertained by preparing the columnar cash Book. When all the known items are
written up in the cash Book, the balancing figure would be the missing item.
Illustration 8 :
From the following information find the cash balance on the opening day.
Rs.
Cash received from the Debtors 25,000
Cash sales 15,000
Interest paid 1,100
Drawings 3,000
Salaries 9,500
Expenses paid 8,900
Amount paid to creditors 16,000
Cl. Balance of cash 4,500
Solution :
Cash Book
Recipts Amount Payments Amount
Rs Rs
To Balance b/d 3,000 By interest 1,100
(Balancing figure) By Drawings 3,000
To Sales 5,000 By Salaries 9,500
To Debtors 25,000 By Expenses 8,900
By Creditors 16,000
43,000 43,000
Illustration 9
From the following particulars extracted from the books of a trader kept under the single
Entry system, you are required to find out the figures for credit sales and credit purchases by
showing the total Debtors Account and total creditors Account. Show also the Bills Receivable
Account and Bills payable Account,
Balance 1-1-2007 :
Amount Amount
Rs Rs
Total Debtors 1,14,400 Discount allowed 8,400
to customers
Bills Receivable 8,000 Returns from customers 3,250
Total creditors 52,800 Return to suppliers 2,660
Bills Payable 5,000 Bad debts written off` 7,080
H is transaction for the year
Cash paid to creditors 1,40,500
Discount allowed by
suppliers 5,300 Cash received
Cash received from against bills
customers 270800 receivable 28,400
Payment made agains Bills payable 14,000 Closing Balances 31-12-07
Bills receivable Dishonoured 22,00 Total debtors 1,11,200

Bad debts previously written off 2000 Total creditors 56,800
now recovered Bills receivable 2,000
cash sales during the year 31,600 Bills payable 6,000
Cash purchases during the year 38,500
Solution :
Rs. Rs.
2007 2007
Jan 1 To Bal b/d 1,14,400 2007 By cash 2,70,800
Jan1 to By Discount 8,400
Jan 1 To Bills Receivable A/c 2,200 Dec31 By Returns in words 3,250
to To Credit sales 3,08,730 By Bad debts 7080
Dec31 (Balancing figure) By Bills Receivable A/c 24,600
4,25,330 4,25,330
2008
Jan 1 To Bal b/d 1,11,200
Dr Total Creditors Account Cr

Rs. Rs.
2007 To cash 1,40,500 2007
Jan 1 To Discount 5,300 Jan 1 By Balance b/d 52,800
to To Returns out words 2,660 Jan 1 By credit purchases 1,67,460
Dec31 To Bills payable 15,000 to (Balancing big)
Dec31 To Balance c/d 56800 Dec31
2,20,260 2,20,260
2008
Jan By Balance b/d 56,800
Dr Bills Receivable Account Cr

Rs. Rs.
2007 To Balance b/d 8,000 2007
Jan 1 To Total Debtors (B/R) 24,600 Jan 1 By cash 28,400
to Dec31 (Balancing figure) By Total Debtors A/c 2200
Dec31 (Bills dishonoured) 2,000
Dec31 Balance c/d
32,600 32,600
2008
Jan 1 To Balance b/d 2,000
Dr Bills Payable Account Cr

Rs. Rs.
2007 2007
Jan 1 To Cash (B/R) 14000 Jan 1 By Balance b/d 5,000
to
Dec31 To Balance c/d 6000 Jan 1 By Total creditors
to (Bills accepted) 15,000
Dec31 (Balancing fig)
20,000 20,000
2008
Jan 1 By Balnce b/d 6,000
Illustration 10 :
Anil carries on a small business, but he does not maintain a complete set of account books.
He banks all receipts and makes all payments only by means of cheques. He maintains properly a
cash book, a sales ledger and a purchase ledger. He also makes a proper record of the assets and
labilities as at the close of every accounting year. From such records you are able to gather the
following facts :
Receipts Amount Payments Amount

Rs Rs
From sundry Debtors 52,875 New plant purchased 1,875
Cash sales 12,375 Drawings 4,500
Paid in by the proprietor 7,500 Salaries 3,375
Interest paid 225
Telephone 375
Rent 3,600
Light and power 1,425
Sundry expenses 6,375
Sundry creditors
(Purchase ledger Accounts) 22,875
72,750 72,750
Assets and liabilities :

As at 31-12-2006 As at 31-12-2007
Rs Rs
Sundry Creditors 7,575 7,200
Sundry Debtors 11,250 18,375
Bank 1,875 ------
Stock 18,750 9,375
Plant 22,500 21,975
From the above data, prepare the profit and loss Account for the year ended 31st December,
2007 and the Balance sheet as on that date.
Solution :
Trading and profit and loss Account of Mr. Anil for the year ended 31-December 2007.
Particulars Amount Particulars Amount
Rs Rs
To opening stock 18,750 By sales
To Purchases 22,500 Cash 12,375
To wages 20,175 Credit 60,000 72,375
To Light and power 1,425
To gross profit c/d 18,900 By closing stock 9,375
81,750 81,750
To salaries 3,375
To Interest 225
To Telephone 375 By gross profit b/d 18,900
To Rent 3,600
To sundry expenses 6,375
To Depreciation 2,430
To Net - profit 2,520
18,900 18,900
Balance sheet of Mr. Anil

as on 31st December 2007,
Libilities Amount Amount Assets Amount Amount
Rs Rs Rs Rs
Sundry creditors 7200 Cash at Bank 98,25
Capital Account Sundry Debtors 18,375
as on 1-1-07 46,800 Stock 9,375
Add Additional
capital 7,500 Plant on 1-1-07 22,500
Net profit 2,520 Add Purchase 1,875
56,820 24,375
Less Drawings. 4,500 52,320 less Depreciation 2,430 21945
59,520 59520
Working Notes :
1. Calculation of credit purchases :
Creditors Account.
Rs Rs
To cash account 22,875 By Balance b/d 7,575
Balance c/d 7,200 By credit purchases 22,500
(Balancing fig)
30,075 30,075
2. Calculation of credit Sales :
Sundry Debtors Account
Rs Rs
To balance b/d 11,250 By Cash 52,875
To credit sales 60,000 By Balance b/d 18,375
(Balancing fig)
71,250 71,250
3. Calculation of Depreciation of Plant : Rs.

Book value of plant on 1-1-07 22,500
Add Plant purchased 1,875
24,375
less Book value of plant on 31-12-07 21,945
Depreciation for the year 2,430
4. Calculation of Balance at Bank : Rs.

Balance as on 1-1-07 1,875
Add Receipts for the year 72,750
74,625
less Payment made during the year 64,800
Balance as on 31-12-07 9,825
5. Computation of capital as on 1-1-07
Statement of Affairs
Sundry creditors 7,575 Cash at Bank 1,875
Capital (Balancing figure) 46,800 Sundry Debtors 11,250
Stock 18,750
Plant 22,500
54,375 54,375
Illustration : 11
Mr. Ajay Kumar keeping his books under single Entry system has placed the following facts
before you :
1. His statement of Affairs as on 1st Jan 2007.
2. A summary of cash transactions for the year 2007.
3. A list of remaining transactions for the year.
1.
Rs Rs
Bank over draft 1,00,000 Debtors 300000
creditors 2,00,000 less Provision 15000 28,500
Bills payable 12,000 Bills Receivable 72,000
Outstanding exp 8,000 Stock 2,80,000
Capital Account 6,08,000 Plant 2,00,000
Building 80,000
Cash in hand 11,000
9,28,000 9,28,000
2.
Rs Rs
To Balance on 1-1-07 11,000 By payment to crs 7,20,000
To Bills Receivable 2,00,000 By cash purchases 1,60,000
To Debtors 8,72,000 By Bills payable 3,20,000
To cash sales 1,64,000 By salaries 60,000
To Mrs. Ajay kumar 1,00,000 By Rent 32,000
By general exp 18,000
By Drawings 21,600
13,47,000 13,47,000
3.
Rs Rs
Total sales 16,10,000 Stock on 31-12-07 3,40,000
Total purchases 14,40,000 Outstanding general expenses 12,000
Discount allowed 4,000
Discount Received 8,000 Bad debts 8,000
Bills Receivable 1,20,000 Prepaid rent 7,200
31-12-07
Bills payable accepted 3,72,000
during the year.
Provide 5%. For doubtful debts and 2 1/2 % for discount on debtors. Depreciate building by
2% and plant by 10%.
You are required to prepare trading and profit and loss account and Balance sheet of M.r Ajay
Kumar form the above particulars.
Solution :
Trading & Profit and Loss Account of Mr. Ajay Kumar
For the year ending 31 Dec 2007.
Rs Rs Rs Rs
To opening stock 2,80,000 By sales 9,825
To purchases Cash 1,64,000
Cash 1,60,000 Credit 14,46,000 16,10,000
Credit 12,80,000 14,40,000 By closing stock 3,40,000
To G Profit c/d 2,30,000
19,50,000 19,50,000
To salaries 60,000
To rent 36,000 By gross profit b/d 2,30,000
less prepaid 7,200 28,800
To gen. expences 18,000 By Discount
less out standing 8,000 Received 8,000
last year 10,000
Add out standing 12,000 22,000
this year
To Discount allowed 4,000
To Bad Debts 8,000
Add provision for 30,700
Doubtful debts 38,700
less Existing 15,000 23,700
provision
To provision for
Discount on Drs 14,584
To Depreciation :
Buildings 1,600
Plant 20,000 21,600
To Net profit 63,316
2,38,000 2,38,000
Balance sheet of Mr. Ajay Kumar

as on 31st December 2007.
Liabilities Rs Rs Assets Rs Rs
Out standing 12,000 Cash in hand 11,400
expenses
Bills payable 64,000 Bills Receivable 1,20,000
Creditors 3,80,000 Debtors 6,14,000
Bank O.D 1,00,000 less provision 30,700

Mrs. Ajay’s loan 1,00,000 for Bad debts
Capital A/c 6,44,700
on 1-1-2007 6,08,000 less Provision
less Drawings 21,600 for Discount 14,584 5,68,716
5,86,400 Stock 3,40,000
Add Net profit 63,316 6,49,716 Prepaid Rent 7,200
Plant 2,00,000
less Depreciation 20,000 1,80,000
Buildings 80,000
less Depreciation 1,600 78,400
13,0,5716 13,05,716
Workings Notes :
1. Calculation of Debtors as on 31-12-07
Total Debtors Account
Rs Rs
To Balance b/d 3,00,000 By Cash 8,72,000
To credit sales 14,46,000 By Bills Receivable A/c
2,48,000
By Discount allowed 4,000
By Bad debts 8,000
17,46,000 17,46,000
Bills Receivable Account

Rs Rs
To Balance b/d 72,000 By Cash 2,00,000
To Debtors Account 2,48,000 By Balance c/d 1,20,000
(Balancing figure)
3,20,000 3,20,000
Total creditors Account
Rs Rs
To cash 7,20,000 By Balance b/d 2,00,000
To Discount8,000 By Total credit 1,20,000
To Bills payable Account 3,72,000 Purchases
To Balance c/d 3,80,000
14,80,000 14,80,000
Bills payable Account
Rs Rs
Tocash 3,20,000 By Balance b/d 12,000
To Balance c/d 64,000 By Total creditors A/c 3,72,000
(Balancing figure)
3,84,000 3,84,000
Illustration 12
Sri Gopi krishna a small producer of machine parts has supplied the following details of his
business transactions.
Rs.
Cash and Discount credited to Debtors 3,21,000
Discount Received 1,000
Expences paid in cash 17,000
Bad debts 2,500
Cash withdrawal from Bank 22,500
Expensed paid by cheque 17,500
Cash collections from Debtors 1,01,500
Cash deposit in Bank 77,500
Cash drawings 7,500
Cheques collected from Debtors 2,16,000
Drawings by cheques 21,000
Cash in hand on 30-9-2007 11,000
Cheques paid to creditors 2,67,000
Total sales 3,45,500
Cash purchases 10,500
Cash paid to creditors 31,500
As on 1-10-2006 As at 1-10-2007
Rs Rs
Debtors ? 75,000
Cash and Bank Balance 69,500 26,500
Stock 43,500 52,500
Plant 28,000 23,000
Furniture 11.000 11.000
Creditors 30,000 47,000
Labilities for expenses 2,500 4,000
You are required to prepare Trading and profit and loss Account for the year ending 30-9-07
and Balance sheet as at that date for Sri Gopi Krishna..
Solution :
Trading and profit and loss Account of Gopi Krishna for the year ending 30-9-07
Dr Cr
Rs Rs Rs Rs Rs
To opening stock 43,500 By sales
To purchases Cash 11,500
Cash 10,500 Credit 3,34,000 3,45,500
Credit 3,16,500 3,27,000 By closing stock 52,500
To Gross profit c/d 27,500
3,98,000 3,98,000
To Expences By gross profit b/d 27,500
by cash 17,000 By Discount Received 1,000
by cheque 17,500 Net loss 18,500
34,500
less out standing 2,500
last year
Add out standing 32,000
this year 4,000 36,000
To Discount allowed 3,500
To Bad Debts 2,500
On palant 5,000
(28000 - 23000) 47,000 47,000
Balance sheet of Shri Gopi Krishna as on 30th september, 2007.

Outstanding Expenses 4,000 Cash at Bank 15,500
Capital Stock 52,500
As on 1-10-06 Debtors 75,000
184000 Furniture 11,000
less:Drawings28,500 Plant 28,000
Net loss 18,500 less Depreciation 5,000 23,000
47,000 1,37,000
1,88,000 188,000
Working Notes :
Dr Cr
Particulars Cash Bank Particulars Cash Bank
Rs. Rs Rs.
To Balance b/d 50,000 By Expenses 17,000 17,000
(Balance fig for bank) By Cash 22,500
(69500 - 50,000) 19,500 By Bank 77,500
To Bank, cash 22,500 77,500 By Drawings 7,500 21,000
Debtors 1,01,500 2,16,000 By Creditors 31,500 2,67,000
Cash sales 11,500 By Purchases 10,500
(Balafig) By Balance c/d 11,000 155,00
15,50,000 3,43,500 1,55,000 3,43,500
Dr Sundry Debtors Account Cr

Rs Rs
To Balance b/d 64,500 By Cash 1,01,500
(Balancing figure) By Bank 2,16,000
To credit sales By Discout 3,500
Total sales 3,45,500 By Bad debts 2,500
less cash sales 11,500 3,34,000 By Balance c/d 75,000
3,98,500 3,98,500
Dr Balance sheet as at 1-10-2006 Cr

Rs Rs
Out standing Expenses 25,000 Bank 50,000
Capital (Balancing figure) 1,84,000 Debtors 64,500
Stock 43,500
Furniture 11,000
Plant 28,000
2,16,500 1,16,500
Dr Creditors Account Cr
Rs Rs
To Bank 2,67,000 By Balance b/d 30,000
To Cash 31,500 By credit purchases
To Discout 1,000 (Bal - fig) 3,16,500
To Balance c/d 47,000
3,46,500 3,46,500
6.5 Summary :
Under single Entry system profits can be ascertained by either statement of affairs method
or by conversion method. Conversion method involves a number of steps necessary to convert
single entry or incomplete records into double entry records. For this purchase, cash/Bank account,
Total debtors account, Total creditors accounts, Bills receivable and Bills payable accounts are
prepared to find out the missing figure of credit purchases or credit sales. Opening capital is found
out by preparing the opening statement of affairs. After finding out the missing figures final account
can easily be prepared.

1. State the necessary steps that are required to be taken to convert single entry into double
entry.
2. State briefly how you would convert a set of books, which had been kept on the single Entry
into the Double Entry.
6.7 Excercises
1. Mr. Krishna commenced business as a cloth merchant on 1st January , 2007 with a capital
of Rs 20,000. On the same date he purchased furniture for cash Rs 6,000. The books are
maintained by single Entry method. From the following particulars calculate cash in hand on
31st December, 2007. Prepare trading and profit and loss account for the year ending 31st
December, 2007 and the Balance sheet as on that date.
Rs
sales (including cash sales Rs 14,000) 34,000
Purchases (including cash purchases Rs 8,000)
30,000
Drawings 2,400
Salaries 4,000
Bad debts written off 1,000
Business Expenses 1,400
Stock of goods on 31-12-2007 13,000
Sundry Debtors on 31-12-2007 10,400
Sundry creditors on 31-12-2007 7,200
Provide depreciation on furniture at 10% p.a.
2. Mani a trader does not keep proper books of account he is able to give you the following
information regarding his assets and liabilities.
As on Dec 31 As on Dec 31
2006 2006
Creditors for goods 21,000 19,000
Creditors for expenses 1,500 1,800
Bills payable 8,700 11,500
Stock (at cost) 28,000 25,000
Furniture 10,000 12,000
Cash 5,100 ?
The following additional information is also available in respect of his business for 2007.
Rs
Bills payable issued 20,800
Payments to creditors 31,000
Cash sales 15,000
Expenses paid 6,600
Drawings 8,000
Bad debts during the year amounted to Rs 900 As regards sales, he informs you it is his
practice to sell goods at cost + 25% . Prepare the annual accounts for 2007 provide for depreciation
on furniture at 10%.
3. From the following details, prepare Trading profit and loss Account and Balance sheet.
As on 1-1-2007 As on 1-1-2007
Stock 25,000 12,500
Debtors 62,500 87,500
Cash 6,250 10,000
Creditors 37,500 43,750
Bad debts Rs 1250, Discount received Rs 3,750 Discount allowed Rs 2,500. Sundry expenses
Rs 7,500 payable to creditors Rs 1,12,500 Received from debtors Rs 1,33,750. Drawings Rs
10,000, sales returns Rs 3,750 Purchase returns Rs 1,250 charge depreciation on furniture at 5%.
4. Sri Ram commenced business on 1st Jan 2007 with a capital of Rs 25,000 out of this he
purchased furniture Rs 4,000. During the year he borrowed from his wife Rs 5,000. and
introduced a further capital of Rs 3,000.
From the following particulars extracted from his books prepare the Trading and profit and
loss account and Balance sheet as on 31-12-2007.
Rs.
Receipts from debtors 46,700
Cash sales 30,000
waged paid 1,000
Salaries to staff 6,200
Trade Expenses 3,400
Cash Drawings 7,700
Paid to creditors 50,000
Discounts Allowed to debtors 800
Bad debts 1,500
Sri Ram used goods worth Rs 1,300 for private purpases which was not recorded in the
book. On 31-12-2007 his debtors were worth Rs 21,000 and creditors Rs 15,000 stock in trade is
Rs 10,000 Furniture is to be depreciated at 20% per annum.
5. The following information is supplied from which you are required to prepare the p & L Account
for the year ended 31st Dec 2007.
1-1-2007 31-1-2007
Rs Rs
Sundry Assets 18,000 20,000
Stock 1,400 19,000
Cash in hand 8,200 4,800
cash at a Bank 2,200 8,000
Debtors ? 26,000
Creditors 12,000 9,800
Outstanding expenses 1,000 600
Details of transactions for 2007
Rs.
Receipts from and discount credited to Debtors
2,45,000
Returns from debtors 6,000
Bad debts 1,000
Sales cash and credit 3,00,000
Returns to creditors 3,000
Payments to creditors by cheque 2,36,200
Receipts from debtors deposited into Bank 2,43,000
Salary paid out of bank 18,000
Expenses paid by cash 5,000
Drawings cash 9,400
Purchase of sundry assets by cheque 2,000
Cash with drawn from bank 21,000
Cash sales deposited in Bank ?
Discount allowed by creditors 4,000
Debtors at the beginning Rs 50,000 and at the end Rs 60,000 cash received from debtors Rs
40,000. Allowances Rs 4,000, Bad debts Rs 6,000 Discount allowed Rs 2,000. Draw the relevant
ledger account and calculate credit sales.
7. Suneel maintained his books under single entry system. He maintained a cash book and a
debtors ledger and creditors ledger. He desires you to prepare final accounts for the year
ended 31st December 2007. The analysis of his cash book showed the following.
Receipts Rs Payments Rs
Received from debtors 17,625 New plant 625
Cash sales 4,125 Drawings 1,500
Additional capital 2,500 wages 7,200
Salaries 1,125
Interest 75
Telephone 125
Rent 1,200
Printing 2,125
Creditors 7,625
24,250 21,600
Additional Information :
1-1-2007 31-12-2007
Creditors 2525 2400
Debtors 3750 6125
Bank 625 ?
Stock 6250 3125
Plant 7500 7315
8. Balaji maintains his records under single - entry method. His financial position as on 1-1-2007
was as follows.
Capital Rs 70,000; Creditors Rs 17,000; Freehold property Rs 50,000; Stock Rs 25,000;

Debtors Rs 20,000; Furniture Rs 20,000.
Cash Account
To debtors 15,000 By Bank O.D. 10000
To Cash sales 80,000 By Drawings 3,000
By Expenses 50,000
By Payments to
Creditors 20,000
95,000 95,000
Additional information :
Balance on 31-12-2007, stock Rs 30,000; Debtors Rs 25,000; Creditors Rs 20,000; Depreciate
Free hold property and furniture at 10% and 15% respectively. Create 2 1/2% Reserve for doubtful
debts on debtors.
Show the trading account, profit and loss Account and Balance sheet as on that date.

Dr. Ch. Suravinda

Financial Accounting - II 7.1 Non - Trading Concerns - I
LESSON - 7
NON TRADING CONCERNS - I

7.0 Object : After going through this lesson the student can know what is a Non trading
concern> What are the books maintained by them ? How a Receipt and Payment account and an
Income and Expenditure account is prepared ?
Structure :
7.1 Introduction.
7.2 Capital and Revenue.
7.3 Capital Expenditure.
7.4 Revenue Expenditure
7.5 Revenue Expenditure becoming capital expenditure.
7.6 Usual items of capital expenditure.
7.7 Usual items of Revenue expenditure.
7.8 Capital and Revenue Receipts.
7.9 Receipts and Payments Account.
7.10 Income and Expenditure Account.
7.11 Preparation of income and expenditure Accunt from Receipts and Payment
account.
7.12 Summary
7.14 Exercises
7.1. Introductions :
The purpose of every trading or manufacturing activity is to make profit. But there are certain
charitable and social institutions which are created not with a profit making object but for the
development of welfare activities, both for the general public and for its members such as educational
institutions, hospitals, clubs, charitable trusts etc. are called non - trading concerns.
These non profitable institution are not interested in the quantum of profits earned by them
during the year but certainly they are interested in knowing the receipts and expenditure during the
year and their financial position at the end of each year. To achieve these objectives they prepare
the following statements.
a. Receipts and payments account.
b. Income and Expenditure account.
c. Balance sheet.
The concepts of capital and revenue are very important in the preparation of Final accounts
of Non - Trading concerns, Therefore let us first know the distinction between capital and revenue
items.
7.2. Capital and Revenue :

One of the objects of Accounting is to determine whether the business has earned profit or
not. For this purpose a proper distinction between capital and revenue, as regards expenditure
receipts and losses, is required. Failure or neglect to discriminate capital and Revenue will falsify
the whole of the results of accounting For example, plant may purchased and charged to the
purchases account, some of the fixed assets may be sold and the proceeds may be treated as
income. In each case both the profit and loss account and Balance sheet will be affected while
preparing the final accounts, all revenue items are included in the revenue account i.e. Trading and
profit and loss account and all capital items in the balance sheet. Any error committed in distinguish
between “capital” and “Revenue” will effect the ascertainment of correct profit.
It is very different to give a clear cut rule as to distinguish capital and revenue expenditure.
However, the following rules may serve as a guide for making distinction between capital and
revenue expenditure.
7.3. Capital Expenditure :
Capital expenditure is such an expenditure which benefits the business over a long period. It
includes assets acquired for the purpose of earning and not for resale, improving and extending
fixed assets, increasing the earning capacity of the business and raising capital for the business.
Purchase of new plant, additions to the building, brokerage and commission paid for procuring long
term loans are a few examples of such expenditure. All items of capital expenditure appear on the
asset side of the Balance sheet.
7.4. Revenue Expenditure :
Revenue expenditure consists of expenditure incure on one accounting period and the full
benefit of it is enjoyed in the same period. Therefore, it is normally of recurring nature. Such an
expenditure does not increase the earning capacity of the business and it does not bring into
existence an asset. It includes expenses incurred for acquiring assets for resale at a profit or for
conversion into finished products, for maintaining fixed assets for resale at a profit or for conversion
into finished products for maintaining fixed assets in good working order e.g. normal repairs and
renewal of plant, white washing of building replacement of machinery etc; for keeping the organization
going eg. Rent, rates and taxes, wages and salaries, insurance and other trade charges. All items
of revenue expenditure appear in the trading and profit and loss Account.
7.5. Revenue Expenditure becoming capital Expenditure or

capitalised Expenditure:
An expenditure which is primarily of revenue nature but incurred for the purpose of acquiring
any asset or additing to its value is termed as capitalised expenditure. The following are some of
the examples of revenue expenditure becoming capital expenditure.
1. Repairs : Repairs are usually revenue expenditure but if we purchase a second hand
machinery and pay for repairs necessary to make it suitable for our purpose, then repairs become
capital expenditure and should be added to the cost of the machinery.
2. Wages : Wages are usually a revenue charge but if paid to the employees for the construction
or erection or installation of the fixed assets of the business ,then these become capital expenditure
and should be added to the cost of the fixed asset concerned.
3. Legal expenses : Legal expenses are usually a revenue charge but if paid on acquiring
a property should form an additional cost of the asset acquired.
Those are usually a revenue items but payments made for transporting newly acquired asset
will form additional cost of the asset thus being treated as capital expenditure.
4. Freight and carriage : These are usually a revenue items but payments made for
transporting newly acquired asset will form additional cost of the asset thus being treated as capital
expenditure.
5. Interest : Interest on borrowing and capital generally a revenue item is allowed to be
treated as capital item if paid during the period of construction.
6. Preliminary expenses :Initial expenses, connected with the formation of a company though
revenue in nature are allowed to be capitalised and can be shown as and asset in the balance
sheet.
7. Brokerage and stamp duty : Normally these are revenue items but, brokerage paid on
the purchase of a property and also the stamp duty on it may be treated as capital expenditure as
an additional cost of purchase
8. Development Expenditure : In concerns like mines, tea, calories, horticulture, rubber
plantations etc. a sizeable amount is spent during the period of development and upto the time they
begin to earn. Such expenses must be treated as capital expenditure.
9. Advertising : A huge sum spent on advertising in a year, the benefit of which shall accrue
in future years, also may have the effect of creating a future good will and thus sums spent may be
capitalised. For example, lakhs of rupees are spent in changing the name from Binaca to cibaca
and Hutch to oda.
10. Raw materials and stores : They are usually a revenue charge but if consumed in
making of a fixed assect they must be treated as a part of the cost of the asset.
Deferred revenue Expenditure : It is the expenditure which would normally be treated as
revenue expenditure but, it is not written off in one year as its benefit is to completely exhaustible in
the year in which it is incurred or is of a non - recurring and special nature and large in amount. It
may be spread over a number of years a proportionate amount being charged to the profit and loss
account of each year and the balance is carried forward to subsequent years as deferred revenue
expenditure and is shown as an asset in the balance sheet. Sometimes extraordinary losses are
also treated as deferred revenue expenditure and charged to profit and loss account for four to five
years.
7.6. Usual items of capital expenditure :
The following items usually represent capital expenditure.
1. Cost of acquisition of fixed asset like good will, land, building, leasehold promises, tools
and equipment, furniture, trade marks etc.
2. Expenses of putting a new asset in a working condition like installation and erection
expenses of any fixed asset.
3. Additions or extensions or structural improvements to the existing assets leading to
their working efficiency or revenue earning capacity or cost reduction e.g. refurnishing
of the sitting accommodation of a cinema hall etc.
4. Development nature like development of mines and plantation.
5. Formation expenses of a business are called priliminary expenses like preparing and
filing the legal documents required for starting a business etc.
7.7 Usuall items of Revenue Expenditure :

The following are usuall items of revenue expenditure.
1. Expenses incurred in the ordinary conduct and administration of the business e.g rents,
salaries, wages, advertisement etc.
2. Expenses incurred in purchasing raw materials or stock of finished goods for resale
and supplies like grease, cotton, oil for machines etc.
3. Expenses incurred to maintain assets in working order like ordinary repairs renewals
or alterations etc.
4. Expenses incurred on maintaining or pushing sales like, carriage of finished goods,
commission, travelling expenses, free samples and gifts etc.
5. Loss arising from sale of fixed assets.
6. Loss arising from damage, destruction, theft of stock in trade, cash etc.
7. Loss arising from depreciation in the values of fixed assets or book values of assets
discarded.
8. Annual renewal fees of patents etc.
Illustration 1
which of the following expenditures are capital, revenue or deferred revenue expenditure.
1. Rs 10,000 spent on dismantling, removing and reinstallation of machinery.
2. Rs 2,00,000 was spent on putting up a gallery in a theatre hall.
3. Rs 3,000 paid as insurance premium.
4. The freight and cartage on the new machinery amounted to Rs 5,000 and the erection
charges cost Rs 1000
5. A machinery whose book value was Rs 17,000 and was sold for Rs 7,000
6. Rs 15,000 was paid as compensation for cancellation of a contract.
7. An amount of Rs 1000 was spent as legal expenses for maintaining an existing title to
the assets of the business.
8. Rs 1,50,000 was spent on advertising a new product in the market.
9. Rs 20,000 was spent on white washing and painting of the factory building.
10. Rs 1,500 was spent by a chartered accountant on books helping in his profession.
Solution :
1. Rs 10,000 spent on dismantling, removing and reinstallation is a capital expenditure.
2. Rs 2,00,000 spent on putting up a gallery in a cinema hall is a capital expenditure
3. Insurances premium paid is a revenue expenditure
4. Rs 5,000 spent on freight and cartage and the erection charges Rs 1,000 on new
machinery is a capital expenditure and it shall be added to the cost of the machinery
5. Rs. 10,000 incurred as a loss on the sale of an old machinery being manageable is a
revenue loss and to be debited to the profit and loss account of the year in which it
occurs.
6. Rs 15000 paid for cancellation of contract is a capital expenditure since it has resulted
in avoiding an unnecessary investment.
7. Rs 1000 spent as legal expenses on defending the title to the assets of the business as
8. Rs 1,50,000 spent on advertising is a heavy amount, so it should be capitalised and the
portion of current year should be debited to profit and loss account and the remaining
portion should be shown in the balance sheet till it is completely wiped off.
9. Rs 20,000 spent on white washing and painting of the factory building is a revenue
expenditure.
10. Rs 1,500 spent by a chartered Accountant on books helping in his profession is a
7.8. Capital and Revenue Receipts :

Capital receipts of business comprise capital contributed by partner or by the share holders,
loans sale proceeds of any fixed assets etc. In case of clubs and associations, receipts on account
of life subscriptions, entry free, government grants, legacies and endowments are capital receipts,
Revenue receipts, received commission, interest on investment etc. In case of club etc annual
subscriptions, sale of golf balls, receipts arising out of the premises being given to others for use
on charges are revenue receipts, Revenue receipts are treated in the revenue account while the
capital receipts are treated in the balance sheet.
Guidelines for deciding a receipt as capital or revenue :

The following guidelines may be stated to decide whether a particular receipt is capital or
revenue.
1. Nature of receipts is to be determined by its character in the hands of the person
receiving it not by the source from which payment was made e.g. payment of interest
out of capital by a company still under construction is capital expenditure for the company
but revenue receipt in the hands of the person receiving it.
2. In case of a single transaction of purchase and sale of property the motive of the owner
will decide whether the receipt is capital or revenue ex; A sells shares held by him as
investment it is a capital receipt but if A sells the shares with speculative motive it will be
a revenue receipt.
3. A receipt on account of fixed asset is a capital receipt while a receipt on account of
current assect is a revenue receipt, for ex; sale proceeds of building, plant etc constitute
capital receipt while sale of stock - in - trade is revenue receipt.
4. Where a receipt is in substitution of a source of income there it is a capital receipt but
if it is in substitution of income alone it is a revenue receipt. For eg; if a railway passenger
meets with an accident and dies or is permanently disabled, compensation received
from the railway department is capital receipt because this receipt is in substitution of
source of income i.e his life, but if he is rendered only temporarily disabled the receipt
will be revenue one as it is in substitution of income alone i,e loss of earnings during the
period of disablement.
5. Where a sum is received for the surrender of certain right, there it is a capital receipt
but where the sum received is in the nature of compensation for loss of future profits
there it is a revenue receipt. For eg. A the lease holder of fire field and manufacturer of
fire - clay goods was prevented by the railway company for working on the field adjacent
to the railway lines. Amount paid by the railway company to A is a capital receipt because
it is the receipt in lieu of his right to work upon the clay field.
Examples of capital Receipts :
1. Compensation received for the loss of right of future remuneration.
2. Compensation received for suspension of export license.
3. Compensation received by one partner of a partnership from another partner for
relinquishing all his rights in the partnership etc.
Examples of Revenue Receipts :
1. Receipts of annuities for transfer of a capital asset.
2. Lump - sum received in consideration of reduction of remuneration
3. Compensation received for premature termination of contract.
4. Considerations received for transfer of permits etc.
Capital and Revenue losses :
Revenue loss is the loss of some revenue receipts in the course of the business and is
incidental to it. Any loss which can’t be termed as revenue loss is a capital loss. For eg: loss of
stock - in - trade by fire, white ants or by theft is a revenue loss where as loss of fixed assect like
building plant etc. By fire or accident or earth quake is a capital loss.
Loss caused to the business by reason of cash being is appropriated by an employee is a
revenue loss but if the fund reach home of the owner and there after if the funds are lost, then the
loss is outside the trade and not incidental to the business therefore it is a capital loss ($Exceptions
are banks or lending houses).
7.9. Receipts and payments Account :
It is a summary of cash transactions at the end of a particular period showing the receipts
and payments of cash during the period under different heads.
Features :
The features of Receipts and payments account are as follows.
1. It is prepared by non - trading concerns in lieu of cash book of trading concerns.
2. It is a real account.
3. It starts with the opening balance of cash in hand and at bank.
4. All receipts and payments of cash are entered on the debit and credit side respectively.
5. No distinction is made between the capital and revenue items while entering the receipts
and payments.
6. All receipts and payments whether they are relating to the current, preceding or
succeeding period, are written in this account.
7. Opening balance of this account shows cash in hand at the begining of the accounting
period and closing balance shows cash in hand at the end of accounting period.
8. All types of Accounts i,e, personal real and nominal are written in this account.
9. No adjustments, outstanding expenses, prepaid expenses provision for doubtful debts
or depreciation are made in this account as it is prepared on cash system of accounting.
10. It does not reveal the financial results or the financial position of the account of the
accrued incomes and outstanding expenses.
The following is a specimen of the receipts an payments account of a club for a particular
year.
Receipts and payments Account of .......................
for the year ending 31 March 2007.
Dr. Cr
Receipt Rs Payment Rs
To Balance b/d xxx By Rent xxx
To Subscriptions xxx By Furniture xxx
To Entrance fee xxx By Sports Material purchased xxx
To Legacy xxx By Building xxx
To Donations for building xxx By Ground maintenance xxx
To Interest received xxx By Salaries xxx
To Sale of furniture xxx By Honorarium xxx
To Sale of old Sports material xxx By Match expenses xxx
To Match fund xxx By Stationery xxx
By Investments xxx
By Entertainment xxx
By Balance c/d xxx
xxx xxx
Illustration 1
Jimkhana club kept its accounts on cash basis and the figures for the year 2006-07 are given
below. You are required to prepare Receipts and payments Account
Rs. Rs.
Subscriptions received watchmans wages 27,200
2005 - 06 8000 salaries 40,000
2006 - 07 72,000 postage 4,800
stationery 12,000
Receipts from
common Room 50,000 Rent 20,000
Hiring Rooms 4,000 cash in hand
Billiards Rooms 24,000 1 - 4- 2006 7,200
supplies room 34,000
Receipts and payments Account of JimKhana Club for the year ending on 31 - 3- 2007
Dr. Cr
Receipts Amount Payment Amount
Rs Rs.
To Balance b/d 7,200 By supplies for
To Subscriptions Entertainment Room 34,000
2005-2006 8,000 By Watchman’s wages 27,200
2006-2007 72,000 By Salaries 40,000
To Receipts from By Postage 4,800
Common Room 50,000 By Stationery 12,000
Hiring Room 4,000 By Rent 20,000
Billiards Rooms 24,000 By Electricity 16,000
1,65,200 1,65,200
7.10. Income and Expenditure Account :

It is prepared by non - trading concerns in lieu of profit and loss Account. To know whether
during a particular period the income of the concern or organisation have exceeded or faller short
of the expenses this account is prepared. In this account current expenses are compared with
current incomes. The features of this account are.
1. It does not start with any opening balance.
2. It is a nominal account Expenses are shown on the debit side and incomes on the
credit side.
3. Only revenue items are recorded in it capital items are totally excluded.
4. Only incomes and expenses of the concerned year are recorded in it and income and
expenditure relating to the preceding or succeeding periods are excluded while preparing
this account.
5. This account is prepared on mercantile system of accountancy and thus all adjustments
relating to prepaid or outstanding expenses and incomes, provision for depreciation or
doubtful debts will be made.
6. Only nominal accounts are taken into consideration for the preparation of this account
and for personal and real accounts a Balance sheet must be prepared along with this
account.
Difference between Receipts and payments.
Account and Income and Expenditure Account
The following are the main differences between a Receipts and payments Account and Income
and Expenditure Account.
Receipts and payments account It come and Expenditure Account.
1. It is a real Account 1. It is a nominal account.
2. It is like cash book prepared by trading 2. It is like profit and loss account prepared
concerns. by non - trading concerns.
3. It starts with a balance being cash at the 3. It does not start with any opening balance.
being of the year.
4. Receipts are shown on the debit sid and 4. Incomes are shown the credit side and
payment on the credit side. expenditure on the debit side.
5. All items whether of capital or revenue 5. Only revenue items are shown in this
nature are shown in this account. account.
6. All receipts and payments whether they are 6. Income and expenditure of the current
of preceding, current or succeeding period year only shown in it.
are entered in it.
7. Outstanding receipts and payments are not 7. Income and expenses are shown after
shown in it as it is prepared on cash basis. including all outstanding income and
expenses on accrued basis.
8. The closing balance represents cash in 8. The closing balance represents surplus
hand on that date. or deficit for the concerned period.
9. It is not necessary to prepare Balance sheet 9. The Balance sheet must be prepared
along with this account. in order to accommodate real and
personal accounts a long with this account.
7.11. Preparation of Income and expenditure Account from Receipts

and payments Account :
The following steps are to be taken to convert a receipts and payments account into an
Income and Expenditure account:
1. Leave the opening and closing balance of cash given in the Receipts and payments
account.
2. Take only revenue items of income and expenditure and leave all those items which are
of capital nature.
3. Make all adjustments for outstanding and prepaid incomes and expenses, provision for
depreciation or bad debts etc.
4. Take items only of the current period i.e; items relating to the preceding and succeeding
periods are to be ignored.
5. In Income and Expenditure account expenditure is recorded on the debit side and income
is recorded on the credit side.
6. Once Income and Expenditure Account is balanced it shows either surplus or deficit, If
credit balance is more than Debit balance it is called surplus and if the debit balance is
more than credit balance, it is called as Deficit.
Illustration - 2
From the following particulars prepare Income and Expenditure account of Guntur club for
the year ended 31st Dec 2007.
Subscriptions received for 2007 22,000
Entrance fees received for 2007 3,000
subscriptions and entrance fee 1120
for 2006 (estimated Rs 600 realised)
subscriptions and entrance fees for 2008 6,200
subscriptions for 2007 to be taken at 4000
Miscilenious Expenses 840
Expenses for 2007 paid 32,000
Expenses unpaid 920
Liabilities for 2007 paid
(estimated Rs 2800) 2400
Audit fees for 2007 not paid 800
Profit on service account net 9200
Interest on loan paid 1280
capital expenditure written off 4800
surplus from 2006 account 1600
capital expenditure in 2007 8240
provide for depreciation
for this year 2680
cash in hand 7200
Solution :
Guntur club Income And Expenditure Account for the year ended 31st December 2007.
Expenditure Amount Income Amount

Rs Rs
To Expenses By subscription and
(32000 + 920) 32,920 Entrance fees
To Audit Fees 800 (22000 + 3000 + 4000 +520) 29,520
To Interest on loan 1,280 By Miscellaneous Expenses 8,400
To Capital Expenditure 4,800
(Written off) By Liabilities provided
To Depreciation 2,680 in excess last year
Surplus 5,040 (2800 - 2400) 400
By Profit on service account. 9,200
47,520 4,7520
7.12. Summary :
The institution which are created not with a Profit making object but for the development of
Welfare activities both for the General Public and for its members are called Non-trading concerns.
Even this concerns are not started with Profit motive these concerns also will have certain expenses
and incomes, Assets and Liabilities. At the end of the year to know the total expenses, Incomes
and to know the Financial positions of the concerns they prepare certain accounts such as receipts
and payments account, Income and Expenditure account and Balance sheet. Receipt and Payment
account is a in lieu of cash book, and incoming expenditure account is in lieu of profit and loss
account of the trading concerns.
7.13.Self Assessment Questions :

1. What is Capital Expenditure ? Illustrate.
2. What is Revenue Expenditure ? Illustrate.
3. Distinguish Capital and Revenue Expenditure giving illustrations.
4. What is Deferred Revenue Expenditure ? Illustrate.
5. What are Capital and Revenue receipts ? Explain with illustrations.
6. Explain the importance of distinguishing the Capital and Revenue items while
preparing final accounts of concerns.
7. What types of accounts are prepared by non-trading concerns ?
8. What is Receipts and Payments account ?
9. What is Income and Expenditure account ?
7.14. Exercises
1. From the following items find out which are of Capital and Revenue items.
1. Amount paid on goods purchased Rs.1,000
2. Rs. 2,000 paid for whitewash of cinema theatre.
3. Rs. 2,500 paid for repairs of second hand lorry purchased.
4. New machinery purchase and erection charges paid Rs.5,000.
5. Repairs on machinery Rs.1,000.
6. Spare parts of machinery Rs.1,500.
7. Equipment purchased for improving the production capacity Rs.10,000.
2. The following are the expenses paid by the Padmalaya Ltd. for construction of cinema theatre
upto 30th June, 1999. Find out whether they are Capital Expenditure or Revenue Expenditure.
Rs.
1. Purchased second hand furniture 50,000
Repairs of furniture 5,000
Wages paid for erection 4,000
2. Licence fee 25,000
3. Fine paid for violation of rules 1,000
4. Fire Insurance 2,000
5. Construction of temporary accommodation to workers at site,
which is demolished after completion of construction work 11,000
3. Out of the followings which are Capital and Revenue items.

1. Cost of dismantling, removing and re-installing plant Rs.8,000
2. For transporting goods to the new spot Rs.1,600.
3. Sale of old machinery Rs.6,000 which had a book value of Rs.10,000. Installation of
new machinery at a cost of Rs.15,000.
4. Installation expenses of new machinery Rs.500.
5. Repairs paid Rs.2,500.
6. Construction of new factory building with a cost of Rs.5,00,000. Cost of preparation of
p l a n
(blue print) Rs.30,000, repairs of old building Rs.20,000.
7. Fire Insurance Premium Rs.2,000.
4. From the following particulars prepare a Receipts and Payments A/c

Rs.
Cash in hand 1,000
Cash at Bank 5,000
Subscription Receive 33,000
Donations received 2,600
Investments purchased 10,000
Rent paid 4,000
General expenses 2,100
Postage & Stationery 700
Sundry expenses 300
Cash balance at close 200
(Ans : Cash at Bank closing Rs.24,300)
5. Prepare a Receipt and Payment account from the following particulars.

Rs.
Opening balance of cash in hand 1,800
Rent paid 450
Stationery purchased 540
Subscriptions received
Previous year 1,800
Current year 4,050 5,850
Honorarium paid 810
Sale of old furniture 1,890
Flood relief expenses 684
Repairs 756
(Ans : Cash in hand closing Rs.6,300)
6. From the following particulars prepare Income and Expenditure account

Rs.
Fees collected (Including Rs.24,000
on account of last year) 2,24,000
Fees for the year outstanding 40,000
Salary paid (including Rs.2,400 on
account of last year) 19,200
Salary outstanding 3,200
Entertainment expenses 4,000
Tournament expenses 8,000
Meeting expenses 16,000
Travelling & Conveyance 6,400
Purchase of books 16,000
Periodicals 8,000
Rents 9,600
Postage, Telephone and Telegrams 13,600
Printing and Stationery 4,000
(Ans : Surplus Rs.1,56,800)
7. Following is the Receipt and Payments account of Visakapatnam cultural club for the year
ended 31-12-2000.
Dr. Cr.
To Donations 25,000 By Salaries 900
To Life membership 2,000 By Cricket 300
To Sports competition fund 5,000 By Tennis 270
To Subscription 1,600 By Inusrance 180
(including Rs.50 for 2001) By Garden maintenance 85
To Locker rent 50 By Printing 15
To Interest on securities 200 By Telephone 125
To Cricket 150 By Investments 9,000
To Tennis 100 By Balance c/d 1,825
To Billiards 100
34,200 34,200
Subscriptions receivable for 2000 Rs.150, outstanding salaries Rs.100. Half of the
donations are to be capitalised, accrued interest Rs.300, Prepaid insurance Rs.30.
Prepare Income and Expenditure Account for the year ended 31-12-2000.
(Asn : Surplus Rs.13,155)

Dr. Ch. Suravinda

Financial Accounting - II 8.1 Non - Trading Concerns - II
LESSON - 8
NON TRADING CONCERNS II

8.0. Object : In the previous lesson you learned what is a Non trading concern and how
a receipt and payment account and an Income and Expenditure Account is prepared? After going
through this lesson the student can know how the Balance sheet of a Non - Trading concern is
prepared ? And what are the items appear in this statement ?.
Structure :
8.1 Introduction.
8.2 Some special terms pertaining to Non -Trading concerns.
8.3 Illustrations
8.4 Summary
8.6 Excercises
8.1 Introduction
Even a non - Trading concern is established with service motive, these concerns also will
have some assets as well as liabilities for expenses etc. Hence the Income and Expenditure Account
is accompained by the Balance sheet like in trading concerns a balance sheet is to be prepared
even by non - Trading concerns to complete the double entry effect. The Balance sheet covers all
those items such as assets, capital fund etc. Capital Fund is similar to capital Account of Trading
concerns. Non - Trading concerns do not have formal capital like that of Trading concerns. Hence,
excess of income over expenditure and capital receipts or receipts that are capitalised are
accumulated under the heading “ capital Fund” and shown as liability in the Balance sheet.
8.2 Some special terms pertaining to Non - Trading organisations :

While preparing final accounts of non - profit organisations the following items are often
used:
1. Legacy : When an amount is received as per the will of some person it is called legacy As
it is non - recurring and capital nature, it is to be capitalised. But if the amount is small it can be
taken as an in come.
2. Donation : Donations are often received by these organisations from both individuals and
institutions, Donation is the amount received as a gift. Donations may be broadly classified into two
categories; viz : specific donations and general donations.
a) Specific Donations : A donation received for a specific purpose, whether big or small is
capitalised and is taken to the liabilities side of the balance sheet For example a donation for the
construction of a building. This amount should be utilised only for the purpose for which it is received.
b) General Donations : A general donation is the amount given by parties without specifically
mentioning the purpose for which it should be utilised. This amount can be spent for any purpose.
However, normally general donations of big amounts are capitalised and small amounts are treated
as revenue income.
3. Endowment Fund : “ Endowment is the money or property given by parties so as to
provide a permanent source of income to support the institution, e.g: the corpus fund of a university
since the fund provides a permanent means of support, any amount received on account of this is
capitalised and shown as a liability, but the interest or dividend received on account of this fund is
treated as income.
4. General fund : Amounts which are received for no specific purpose and which are
capitalised are shown under this head on the liabilities side of Balance sheet. But the income
obtained on account of this fund is taken to the credit side of income and expenditure account.
5. Specific funds : Amounts received for a specific purpose are capitalised and shown in
the Balance sheet on its liablities side e.g; price fund tournment fund, building fund, receipts and
incomes on account of these specific funds should be added to the fund account and should not be
taken to Income and Expenditure Account. All expenses on account of these funds should be
deducted from the particular fund in the Balance sheet only. In case the expenses exceed the fund
amount the excess expenses should be charged to the debit side of the income and Expenditure
Account.
6. Subscription : Amounts agreed to be paid by the members or subscribers regularly at
periodical intervals are called subscriptions : They are a regular source of income to the organisation.
Hence subscriptions are shown as income.
7. Admission or Entrance fees : This is the amount received from a member at the time of
his initial admission or readmission into the organisation. There is a difference of opinion about the
treatment of this item in accounts. Some people argue that it should be capitalised since it is not a
recurring item as each member pays it only once. However, there are others who contend that
though it is paid by each member only once, the club or college receives it regularly and that as
such, according to them, it should be treated as income, whatever the arguments are, in the absence
of specific instructions to capitalise. entrance or admission fees, it may be treated as revenue
income i.e. shown as the credit side of income and expenditure account.
8. Honourarium : It is taken payment made to certain people for their services. It is generally
treated as revenue expenditure and charged to the Income and Expenditure Account. But if the
amount is paid on account of a specific programme conducted in connection with a specific fund
the amount should be deducted from the specific fund in the Balance sheet.
9. Sale of old Assets : Any receipt from the sale of an old asset such as furniture, is a capital
receipt and as such it should not be taken to Income and Expenditure account, It should be deducted
from the concerned asset in the Balance sheet. However, any loss on the sale of asset is charged
to income and expenditure account. In case of gain on the sale of an asset, if the amount is small,
it is taken to the Income and Expenditure Account, but if it is a big amount it is treated as a capital
gain and shown in the Balance sheet.
10. Sale of old news papers etc: The amount received on account of sale of old news
papers or old sports material etc. treated as revenue income.
Illustration I
From the following Receipts and payments account of a Hospital for the year ending 31-12-
2007 prepare an Income and Expenditure Account and Balance sheet as at the date.
Receipts and Payments Account
for the year ended 31-12-2007.
Rs Rs
To Cash in hand 3,565 By Medicine 15,295
To Subscriptions 23,998 By Doctors honourarium 4,500
To Donations 7250 By Salaries 13,750
To Interest on By petty expenses 230
investments @ 7% 3,500 By Equipment 7,500
To Proceeds from charity 5,225 By Expenses on charity show 375
Cash in hand 1,888
43,538 43,538
Additional Information
1-1-2007 31-12-2007
1. Subscriptions due 120 140
2. Subscriptions received in Advance 32 55
3. Stock of medicines 4405 4870
4. Estimated value of equipment 10,600 15,800
5. Buildings (cost less depreciation) 20,000 19,000
Solution :
Balance sheet as on 1-1-2007

Subscriptions received Buildings 20,000
in advance 32 Equipment 10,600
Capital fund Stock of medicines 4,405
(Balancing figure) 88,658 Investments 50,000
Cash in hand 3565
Subscriptions due 120
88,690 88,690
Income and Expenditure Account for the year ended 31st December , 2007.
Dr Cr
Expenditure Amount Assets Amount
Rs Rs
To cost of medicines 14,830 By subscription 23,995
To Salaries 13,750 By Donations 7,259
To Doctors honourarium 4,500 By Interest on investments 3,500
To Petty expences 230 By proceeds from
To Depreciation charity show 5m225
Equipment 2300
Buildings 1000 3,300 Less expenses 375 4850
To Excess of Income
over expenditure 2985
39,595 39595
Dr Balance sheet as on 31-12-2007 Cr

Rs Rs
subscription received Buildings 20,000
in advance 55 less Depreciation 1,000 19,000
Capital fund 88658 4,500 Equipment 10,600
Add Excess Add additions 7,500
of Income 18,100
Over expend Less: Depreciation 2,300 15,800
deture 2,985 91,643 Stock of medicines 4,870
Investments 50,000
Cash in hand 1,888
Subscriptions due 140
91,698 91,698
Working Notes :
1. Cost of Medicines used Rs.
Stock of Medicines 1-1-2007 4,405
Add Purchases during the year 15,295
19,700
Less Stock of Medicines on 31-12-2007 4,870
14,830
2. Subscriptions : Rs
Actual amount received 23,998
less Received for 2006 120
Received in advance 55 175
23,823
Add Due at the end of the year 140
Received in advance in 2006 32 172
23,995
3. Depreciation on Equipment Rs.
Equipment on 1-1-2007 10,600
Add Additional during the year 7,500
less Equipment on 31-12-2007 18,100
15,800
2,300
Illustration II
The following is the statement of assets and liabilities of the city central library as at 30-6-
2006.

Rs Rs
Out standing expences 6,500 Cash 32,000
Capital Fund 4,43,500 Furniture 48,500
Debtors :
Subscriptions outstanding 7500
For use of lecture hall 3500 11,000
Books Account 1,68,500
Investments 50,000
Buildings 1,40,000
4,50,000 4,50,000
The following were the cash transactions for the year ending 30-6-2007
Particulars Amount Particulars Amount

Rs Rs
To Balance b/d 32,000 By salaries 24,000
To Entrance Fee 26,000 By Municipal taxes 7,000
To subscriptions 85,000 By Insurance on builder 5,000
To sale of furniture 6,000 By Additions to library 12,500
To sale of old News By Outstanding creditors
Papers 600 of last year paid 6,500
Repairs 2,500
To rent on library hall 10,400 By Electric installation expenses 45,000

To proceeds from By printing & stationery 4,000
lectures and entertainments 30,000 By postage 500
By sundry expenses 1500
Balance c/d 81,500
1,90,000 1,90,000
It was ascertained that Rs 11,000 was outstanding by way of subscriptions and Rs 3,750 for
use of library hall. Insurance on building was prepaid to the extent of 1,750. There were creditors
outstanding for expenses to the extent of Rs 8000,
You are required to prepare an Income and Expenditure Account and Balance sheet as at
30-6-2007 after providing for depreciation on building @ 2 1/2% and writing down investments by
5% and library books by 10%.
Solutions:
Dr City Central Library Income & Expenditure for year ending 30-6-2007 Cr
Rs Rs
To Salaries 24,000 By subscriptions 85,000
To municipal taxes 1,000 Add Outstand 11,000
96,000
To insurance 5000
less prepaid 1750 3250 less last year 7500 88,500
To repairs 2500 By sale of old Newspaper 600
To sundry expenses 1500 By rent of library hall 10,400
To printing & stationery 4000 Add Out standing 3,750
To postage 500 14,150
To outstanding expenses 8000 less Last year 3500 10,650
To Depreciation 3500 By proceeds from
Buildings
Investment 25,00 lectures and entertainment 30,000
Library books 18,700
To surplus (excess of
income over expenditure) 54,100
1,29,750 1,29,750
Dr City central Library Balance sheet as on 30-6-2007 Cr

(1) Rs. (2) (3) (4) Rs
Capital fund 4,43,500 Buildings 1,40,000

Add surplus 54,900 less Depreciation 3,500 1,36,500
Entrance fees 26,000 5,24,400 Furniture 48,500
outstanding express 8,000 less furniture sold 6,000 42,500
Electric Installation 45,000
Library books 1,68,500
Add Additions 12,500
1,81,100
less Depreciation 18,100 1,62,900
Investments 50,000
Less Depreciation 2,500 47,500
Sundry debtors
For subscriptions 11,000
For rent of library hall 3,750
Prepaid insurance 1,750
Cash 81,500
5,32,400 5,32,400
Sometimes income and Expenditure and Recipts and payment amounts are given in the
question and it is required to prepare the balance sheet both at the beginning and at the end of the
period, in such case following procedure may be adopted.
1. From the particulars given in the questions prepare the balance sheet in the biginning of
the year.
2. Compare the ‘receipts side’ of the Receipts and payments amount to income side of
income and expenditure about to ascertain (i). Subscription in arears, previous and current years
(ii). income received in advance and (iii) sale of an asset during the year
3. Similarly compare the payment side of the Receipts and payment account to expenditure
side of the income and expenditure account to ascertain, (i) outstanding expenses during the year.
(ii) prepaid expenses during the year. (iii) stock of stationery in hand (iv) depreciation on assets and
(v) purchase of an asset during the year.
Illustration 5
From the following information relating to Hyderabad sports club prepare the balance sheet
as on 1-1-2007 and 31-12-2007. Assets and liabilities as on 1-1-2007 club grounds and pavilion
Rs,250,000 sports equipments Rs, 1,50,000, Furniture Rs 3,51,000 and subscription in assets on
that date Rs 5000. Creditors For stationery Rs 5,000.
Receipts and payment for the year

Ending on 31-12-2007
Rs Rs
To Balance b/d 25,000 By printing and stationery 15,000
To Subscription
2006 4,500 By Salaries 55,000
2007 90,000 By Advertising 10,000
2008 2,500 By Fire insurance 7,500
To Sale of old news papers 1,500 By Furniture 10,000
To Rent received 11,000 By Investment 90,000
To Entrance fees 60,000 By Balance c/d 7,000
1,94,500 1,94,500
Dr Income and expenditure Account for the year ending on 31-12-2007 Cr
Rs Rs
To Salaries 60,000 By subscriptions 95,000
To Printing and stationery 14,000 By entrance fees 60,000
To Audit fees 2500 By rent received 12,000
To Advertising 10,000 By sale of old news paper 1,500
To fire insurance 6,000
To Depreciation on
sports equipment 30,000
To Furniture 4,000
To excess of income over
Expenditure 42,000
1,68,500 1,68,500
Solution :
Dr Balance sheet As on 1-1-2007 Cr
Liabilities Amount Asserts Amount
Rs Rs
Creditors for stationery 5000 Cash 25,000
Capital Fund 4,60,000 Ground and pavilion 2,50,000
Sports equipment 1,50,000
Furniture 35,000
Subscription outstanding 3,000
4,65,000 4,65,000
Dr Balance sheet As on 31-12-2007 Cr

Liabilities Amount Asserts Amount
Rs Rs
Creditors for stationery 4000 Cash 7000
Salary outstanding 5000 Ground and pavilion 2,50,000
Audit fees out standing 2500 Sports equipment 1,20,000
(1,50,000 - 30,000) 1,20,000
Subscriptions in advance 2500 Furniture 41,000
(35,000 + 10,000 - 4000)
Capital Fund 4,60,000
Add surplus 42,000 5,02,000 Investments 90,000
Subscription outstanding
2006 500
207 5000 5,500
Insurance prepaid 1,500
(7500 - 6000)
Rent Due 1000
(12000 - 11,000)
5,16,000 5,16,000
Some times Income and expenditure account is given along with notes and it is required to
prepare the receipts and payments account. In such a case the following producer may be adopted.
1. All expenditure, whether capital or revenue or relating to the current succeeding and preceding
period incurred during the year must be shown on the credit side of this account.
2. All receipt of cash, whether capital. Revenue or relating to the current, seding and preceding
period, should go to debit side of this account.
3. Opening and closing balance of receipts and payment account are to be taken into
consideration.
4. Eliminate all adjustments relating to provisions for doubtful debts or depreciation which are
madefor preparing income and expenditure account.
5. Purchase or sale of assets can be calculated by comparing the net value of asset on two
dates beginning and the end of the year.
Illustration 6
The following is the Income and expenditure account of Guntur stadium club for the year
ended 31st March 2007.
Dr Income and Expenditure Account Cr
For the year ended 31-3-2007
Rs Rs
To salaries 7,800 By subscription 27,200
To Rent 1,800 By Donation 2000
To Printing 300
To Insurance 200
To Audit fees 300
To Games & sports 1,400
To Subscription written off 140
To Miscellaneous expences 5,800
To loss on sales of furniture 1,000
To Depreciation on sports
Equipment 24,00
To furniture 1,240
To excess of income
over expenditure 6,820
29,200 29,200
31-3-2006 31-3-2007
Subscription in areas 1040 1,480
Advance subscription 400 600
Outstanding expences
Rent 200 320
Salaries 480 140
Audit fees 200 300
Sports equipment loss depreciation 10,000 9,600
Furniture less depreciation 12,000 11,160
Prepaid Insurance ----- 60
Book value of furniture sold is Rs 2,800
Entrance fees capitalised Rs 1600. On 1st April 2007 there was no cash in hand but there is
bank overdraft for Rs. 6,000 on 31st march 2007, cash in hand amounted to Rs 340 and the
remaining was Bank balance.
Prepare the receipts and payment amount of the club for the year ended 31st march 2007.
Solution:
Dr Guntur stadium club receipt and Cr
payments Account for the year ended 31-3-2007
Receipts Amount Income Amount
Rs Rs
To subscription Received By Balance b/d 6000
(27,200 + 1040)+ 600) - (1480 - 400) 26,820 By sports equipments 2000
-140) 2000 (9600 + 2400 – 10,000)
To Donations received 1,600 By Furniture purchased 32,00
To Entrance Fees 1,800 (11,160 + 2800 + 1240
To sale of furniture - 12,000)
(2800 - 1000) By salaries 8140
(7800 + 480 – 140)
By Rent
(1800 + 200 – 320) 1680
By printing 300
By Insurances (200 + 60) 260
By Games & Sports 1,400
By Misc, expences 5,800
By closing balance
Cash in hand 340
Cash in hand 2900 3,240
32,220 32,220
Illustration - 7
Secunderabad club had the following assets and libilities as on 1-1-2007. cash in hand Rs
12,000, subscription receivable Rs 12,00. Furniture Rs 6000, Sports material Rs 3600. Investments
Rs 15,000, buildings Rs 30,000 outstanding for supplies Rs 1,800 and capital fund Rs 66,000
During the year 2007 the club did the following business.
Subscriptions received (including the arrears) Rs 18,000 subscriptions due Rs 18,00 paid to
the outstanding creditors for supplies, subscriptions to News papers Rs 3000, Sports material
purchased Rs 6,000, sale of old newspapers Rs 300, meeting expenses Rs 2,700; lighting charges
Rs 2,400 salaries of establishments RS 6,000 stocks of sports material at the end Rs 3,000 interest
received on incestment RS 450 (out standing Rs 150) Borrowing Rs 12,000, donations received
Rs 10,800 (hay to be capitalised) provide depreciation at 5% on furniture and buildings
Prepare a Receipts and payment amount an Income and expenditure amount for the year
31st Dec 2007, and a Balance sheet as on that date.
Secundrabad club Receipts and payment Account
for the year ended 31-12-2007
Dr Cr
Receipts Amount Payments Amount
Rs Rs
To Balance b/d 12,000 By outstanding creditors 1800
To Subscriptions 18,000 for supplies
To Sale of old news paper 300 By subscription to news papers 3,000
To Interest on investments 450 By purchase of sports materials
To Borrowings 12,000 By meeting expenses 6,000
To Donations 10,800 By lighting charges 2,700
By salaries of establishment 6,000
By purchase of furniture 2,400
By Annual function expenses 2,250
By Balance c/d` 27,000
53,550 53,550
Income and expenditure Account for the year 31-12-2007
Dr Cr
Rs Rs
To subscription to By subscription
News papers 3000 (18000 + 1800 – 1200) 18,600
To sports materials used
(6000 + 3,600 – 3,000) 6,600 By sale of old News papers 300
To Meeting expenses 2,700 By interest on investments 600
To lighting charges 2,400 By Donations 5,400
To salaries of establishement 6,000
To functions expenses
To annual function expenses 2,250
To Depreciation on
Furniture 300
Buildings 1500 1,800

To Surplus 150
24,900 24,900
Dr Balance sheet as on 31-12-2007 Cr

Rs Rs
Borrowing 12,000 Cash in hand 27,000
Capital fund 66,000 Subscriptions due 18,00
Add surplus 150 Furniture 8,100
Donations 5,400 71,550 (6000 + 2400 – 300)
Stock of sports material 3000
Investment 15,000
Accured Interest 150
Buildings (30,000 - 1,5000) 28,500
83,550 83,550
8.4 Summary :
Non trading concerns Income and Expenditure account is accompanied by the Balance sheet
like in case of Trading concerns. Capital Fund appear in the Balance sheet of Non-Trading concerns
is similar to capital Account of Trading concerns, Non - trading concerns do not have formal capital
like that of Trading concerns. The Exceed of income over expenditure and capital receipts or receipts
that are capitalised are accumulated under the heading “Capital fund” and shown as liability in the
Balance sheet. While preparing Final accounts of Non - Trading organisations special items like
legacies Donations Endowment fund, general fund , special fund Entrance fees, Honorarium etc
should be given importance.

1. Explain the meaning of the following terms
a. Legacies
b. Donation for specific purpose
c. Life member ship fees
d. Entrance fees
e. Endowment fees.
f. Receipts for tournament fund.
2. How will you prepare the Balance sheet both at the beginning and at the end of the
accounting period from a given Receipts and payments Account and an income and
Expenditure Account.
3. What special items are considered while preparing accounts of Non-trading
Concerns?
4. What is legacy ?
5. How will you treat the following items while preparing final accounts of non-trading
concerns ? a) Specific donations b) Entrance fees
6. How do you convert Income and Expenditure account into Receipts and Payments
account?
8.6 Excercises :
1. From the following Trial Balance prepare an Income and Expenditure Account of the Mumbai
club for the year ended 31-12-2007 and a Balance sheet as on that date.
Depreciate furniture by 10% billards tabels and accessories by 20% China glass cuttlery etc.
by 33 1/3. of the subscriptions Rs 2,400 is paid in advance and Rs 1500 is in arrears Rs 1,800 is
owing for salaries to staff.
Debit Credit
Rs Rs
Furniture 15,000 Members subscription 63,360
Billiards table
(brought in 2005) 7500 Sundry receipts from
Chinaglass cuttlery 1998 Billiards etc 10,458
Repairs 4404 Sale of Tickets for
Salaries and wages 13,572 entertainment 19,404
Rent and Telephone 19,164 Sundry creditors 15,600
Fuel and light 9,708 Entrance fees 2,688
Cost of entertainment 13,140 capital fund 24,000
Sundry expences 9,600
Cost of annual dinner 4,560
Sundry debtors 7020
Cash at bank 28,800
Cash in hand 1,044
1,35,510 135,510
2. From the following receipts and payments account for the year ending 31-12-2007 prepare
an income and Expenditure account for the period ending 31-12-2007 and a Balance sheet
as on that date.
To Donations 35,000 By salaries 37,500
To subscriptions 1,15,000 By Help to poor 37,000
To life membership fees 50,000 By Expenses on free
To Legacy 75,000 dispensary 34,500
To Interest received 4000 By postage & stationery 3,500
By Furniture 50,000
By Investments 75,000
By Cash in hand 41,500
2,79,000 2,79,000
1. Subscriptions outstanding for the current year Rs 5,000.
2. Salaries unpaid Rs 5,000
3. Help to poor students promised but unpaid Rs 16,000
4. Expenses of dispensary outstanding Rs 3,000
5. Postage and stationery expenses yet to be paid Rs 4,000
3. Prepare Income and Expenditure account and Balance sheet for 2007 from the Balance
sheet and Receipts and payments account.
Balance sheet As on 31-12-2007

Liabilites Amount Assets Amount
Rs Rs
Capital Fund 13,448 Building 12,000
Subscriptions received Outstanding subscriptions 152
in advance 240 Outstanding lockers rent 96
Out standing expenses 560 Cash 4000
loan 2,000
16,248 16,248
Receipts and Payment Account for the year ended 31-12-2007

Rs Rs
To Balance 1-12007 4,000 By Expenses 2006 480
2007 800
To Subscriptions : 2006 80 By Land 1,600
2007 840 By Interest 160
2008 40 By Mic. expenses 800
To Entrance fees 320
To Lockers rent 280 To Balance c/d 3,320
Misc. Income 1600
7,160 7,160
4. Guntur sports club started on 1-1-2007, Their Receipts and payment A/c for the year 2007
is given below.
Receipts Rs Payment Rs
To Donations 50,000 By Buildings 40,000
To Entrance fees 4000 By Tournment expenses 900
To Tournament Fund 10,000 By Furniture 2,100
Revenue receipts By Revenue Payments
To Subscriptions 3,200 By salaries 18,000

(including Rs.100 for 2008) By cricket expenses 1140
To rent 100 By Insurance 360
To other receipts 700 By gardener 600
To Cricket fees 400 By Investments 18,000
68,400 68,400
1. Subscriptions receivable for the year 2007 Rs 300/-
2. Salaries un paid Rs 170/-
3. Entrance fees are to be capitalised
4. Insurance include 9 months premium for 2008.
4. From the following particulars prepare Income and Expenditure account

Rs.
Fees collected (Including Rs.24,000
on account of last year) 2,24,000
Fees for the year outstanding 40,000
Salary paid (including Rs.2,400 on
account of last year) 19,200
Salary outstanding 3,200
Entertainment expenses 4,000
Tournament expenses 8,000
Meeting expenses 16,000
Travelling & Conveyance 6,400
Purchase of books 16,000
Periodicals 8,000
Rents 9,600
Postage, Telephone and Telegrams 13,600
Printing and Stationery 4,000
(Ans : Surplus Rs.1,56,800)
5. Following is the Receipt and Payments account of Visakapatnam cultural club for the year
ended 31-12-2000.
Dr. Cr.
To Donations 25,000 By Salaries 900
To Life membership 2,000 By Cricket 300
To Sports competition fund 5,000 By Tennis 270

To Subscription 1,600 By Inusrance 180
(including Rs.50 for 2001) By Garden maintenance 85
To Locker rent 50 By Printing 15
To Interest on securities 200 By Telephone 125
To Cricket 150 By Investments 9,000
To Tennis 100 By Balance c/d 1,825
To Billiards 100
34,200 34,200
Subscriptions receivable for 2000 Rs.150, outstanding salaries Rs.100. Half of the
donations are to be capitalised, accrued interest Rs.300, Prepaid insurance Rs.30.
Prepare Income and Expenditure Account for the year ended 31-12-2000.
(Ans : Surplus Rs.13,155)
6. The Receipts & Payments account of the Hyderabad Friends Club for the period ending
31st December, 2000 is given below.
To Donates received 25,000 By Buildings 20,000
To Reserve fund (Being By Furniture 1,050
life numbers fees received) 2,000 By Tournament Expenses
quadrangular match fund 5,000 quadrangular matches 450
Revenue Receipts Revenue payments
To subscriptions (including By salaries 900
Rs. 50 for 2001) 1,600 By Cricket 300
To Lockers rent 50 By Tennis 270
To interest on securities 50 By Insurance (Paid up
To cricket 200 30th September 2001) 180
To sundries 25 By Gardening 85
To Tennis 175 By Printing 15
To Billiards 100 By Telephone 125
By sundries 75
By Investments (at cost) 9,000
34,200 34,200
Subscription fees outstanding for the year 2000 was Rs. 150. Salaries up paid for 2000 Rs, 85,
From the particulars given above prepare an Income and Expenditure account of the club for the
year ended 31st December, 2000 and the Balance Sheet as on that date.
(Ans : Excess of income Over Expenditure, Rs. 400, Balance Sheet Total Rs. 32,085)
7. Tarakarama Sports Club’s Receipts and Payments amount for the year ending 31st Dec.,
20000 is given here under.
To Cash in hand 250 By Salary workmen 2,000
To Cash at Bank 2,250 By Grass cutting machine 1,000
To subscriptions 6,750 By Rent 450
To tournament fund 2,500 By Games expenditure 3,500
To Life members fees 1,500 By Tournament expenditure 1,000
To Entrance fees 250 By office expenditure & Postage 2,250
To Donation Pavilion 4,000 By Games equipment 1,500
To sale of glass 200 By Balance c/d
Cash in hand 750
Cash at Bank 5,250
17,700 17,700
Additional information.
1. Subscriptions receivable for 1999 Rs. 1,000 and for 2,000 Rs. 1,050
2. Games equipment in the beginning was Rs. 250 for 2001.
3. Provide depreciation at 10% on Gras cutting machine.
Prepare Income and Expenditure account for the year ending 31st Dec., 2000 and opening
and closing Balance sheet.
(Ans : Excess of Expenditure Over Income Rs.2,550 Capital fund Rs. 4,500 Balance sheet
Total Rs. 9,200)
8. Prepare the final a/c of Hyderabad Club from the particulars given below for the year ending
31-12-2000.
To Balance b/d 1,200 By Salaries 6,500

To Subscriptions By Rent 1,200
(including 400 for 2001) 6,400 By Printing & Stationery 180
To Interest on investment By postage 50
(Investment cost Rs.40,000) 2,500 By Cycle purchase 800
To Bank interest 50 By Govt. Bands 1,000
To Sale furniture 500 By Balance c/d. 920
10,650 10,650
Adjustments
Subscriptions received included Rs.200/-of 1999
Rent paid included Rs.100/- for Dec.,1999.
Subscriptions due for 2000 Rs. 300/-
Salaries payable Rs. 600/-
Cost of Furniture sold was Rs.640/-
(Ans : Excess of Income over Expenditure Rs. 80 Capital Fund Rs. 14,940 Balance Sheet Total Rs.
43,020)
9. From the following Receipts and Payments account and other information of City Club,
prepare Income and Expenditure account as on 31-12-2000 and Balance Sheet as on that date.
Adjustments :
1. Subscriptions received include Rs. 1,200 - for the year 1999 and Rs.2,400/- for the year
2001.
2. Subscriptions due for the year 2000 - Rs.1,800/-
3. Printing charges payable for 2000 - Rs.240/-
4. Salaries payable for 2000 - Rs. 3,600/-
Receipts & Payment Account on 31-12-2000
1.1.2000 By Salaries 39,000
To Balance of By Rent 7,200
Cash 1800 By printing and stationary 1,080
Bank 5400 By postage 300
7,200 By Purchase of a cycle 1,800
31-12-2000 By Purchase of Govt. Bonds 9,000
To Subscriptions 38,400 31-12-2000
To interest on investments 15,000 By Balance C/D
To Bank interest 300 Cash 180
To sale of furniture 3,000 Bank 5,340
(Cost of furniture 5,520
on 1-1-2000 Rs. 3,840) 63,900 63,900
(Ans: Excess of Expenditure over Income - Rs. 360, Capital Fund - Rs 12,240 Balance Sheet Total
- Rs. 18,120)
10. From the under mentioned Receipts and Payment account for the year ending 31-12-2000 of
French Recreation Club,prepare Income and Expenditure account and Balance Sheet as on that
date.
Receipts and Payments Account

(For the year ended 31-12-2000)
To Balance b/d (Bank) 25,000 By purchase of furniture (1-4-200) 5,000
To subscriptions By salaries 2,000
1999 1,500 By Telephone expenses 300
2000 10,000 By Electricity charges 600
2001 500 12,000 By postage and stationery 150
To Donations 2,000 By Purchase of books 2,500
To Rent 300 By Entertainment expenses 900
To Interest on bank deposits 450 By Purchase of Govt. Bonds 5%
To Entrance fee 1,000 (1-7-2000) 8,000
By Miscellaneous expenses 600
By Balance c/d :
Cash 300
Bank 20,400 20,700
40,750 40,750
The following additional information is available :
1. Salaries outstanding Rs, 1,500.
2. Entertainment expenses outstanding Rs 500
3. Bank interest receivable Rs. 150
4. Subscriptions accrued Rs. 400
5. 50% of entrance fee is to be capitalised.
6. Furniture is to be depreciated at 10% (per annum).
(Ans : Excess of Income over Expenditure - Rs. 7,075 Capital Fund Rs. 26,500, Balance
sheet Total Rs. 36,575)
11. The following is the Receipts and payments statement of the Secunderabad sports Club for
the year ended 31st December, 2000
To Balance 1-1-2000 2,400 By Secretary’s salary 3,600

To Entrance fees 500 By Up-keeps of grounds (c) 2,100
To subscriptions (a) 8,700 By Wages of grounding (d) 2,400
To proceeds of By found rent 150
Concerns 1,500 By Sundry repairs 175
To Interest on (b) By Printing and postage 200
Investment 500 By Balance 31-12-2000 4,945
13,600 13,600
a) This item included subscriptions outstanding brought over from previous year, Rs. 300
b) This item includes Rs. 150 in respect of interest accrued in the preceding period.
c) This item includes Rs. 400 applicable to the previous year.
d) This item includes Rs. 200 applicable to the previous year.
Other ledger balance at the commencement of the financial period were :
Capital fund Rs. 40,100 Income and Expenditure account Credit Balance brought forward
Rs. 8,900, Club premises and Grounds (as per valuation) Rs. 31,000, Investments Rs. 10,000,
Sports material Rs. 2,450, Furniture and Fixtures Rs. 4,000, Books - Rs. 300.
From the above particulars, prepare a Balance sheet at the commencement of the period,
and income end Expenditure account for the period, and a Balance Sheet as the close of the
period.
Entrance fees are to be capitalised. The outstanding labilities on 31st December, 2000 were
wages Rs. 200 and Printing Rs. 100. Interest occurred and outstanding on investments was Rs
120. Depreciate Club premises by 2 per cent, Furniture by 5 per cent and sports Equipment by 331/
3 percent.
(Ans : Excess of Income over Expenditure Rs. 428. Balance sheet total Rs. 50,228)
12. The receipts and payments account of the Hyderabad Athlete, Society, for the year ending
31st December, 2000 is given below. In the Society’s ledger, the following balance are found on the
date.
Rs.
Capital account (Donations etc.) 30,000
Club House and grounds 18,000
Investments at cost 8,000
Furniture & fittings 4,500
Income & expenditure (Cr.) 2,500
Receipts and payment Account for the year ended 31st December, 2000
To Balance 1-1-2000 2,085 By Upkeep of grounds 3,300
To subscriptions 7,200 By Secretary’s salary (c) 2,400
To Entrance fees 320 By Wages of groundman (d) 2,800
To proceeds of By ground rent 150
Lectures 3,500 By Sundry repairs 140
To Interest on By Printing and postage 80
Investment 360 By Balance 31-12-2000 5,595
13,465 13,465
a) This item includes Rs 400, in respect of subscriptions brought over from previous year.
b) This item included Rs. 90, by way of interest occurred in the previous year.
c) This included Rs.400 applicable to the previous ear.
d) This item included Rs. 175, which relates to the previous year.
Other adjustments are :
1) Entrance fees are to be capitalised.
2) Charge 10% depreciation on furniture and 2 percent of club house and grounds.
From these particulars, prepare the final accounts of the Society for the yea 2000.
(Ans Excess of Income over Expenditure Rs. 2,465, Balance Sheet Total Rs. 35,285.)
13. The following particulars related to Cucullate club.
Income and Expenditure Account
To Salaries 4,800 By Entrance fees 36,000
To subscriptions 6,300 By Subscriptions 42,300
To Advertising 5,400 By Rent 12,000
To Audit fees 900
To Fire insurance 3,000
To Excess of Income
over Expenditure 45,900
90,300 90,300
Receipts and Payment Account

To Entrance fees 36,000 By Printing & Stationery 7,500
To Subscriptions By Advertising 5,400
1999 1,800 By Fire Insurance 3,600
2000 40,500 By Investments 60,000
2001 1,200 By Balance c/d 22,500
To Rent received 10,500
1,02,600 1,02,600
The assets on 1-12000 included land and buildings Rs. 1,50,000, sports equipment Rs. 75,000,
Furniture Rs. 12,000, Subscriptions in arrears on that date were Rs. 2,400, Subscriptions in arrears
on 31-12-2000 amounted to Rs. 1,800.
Prepare Balance sheet as at 31-12-2000.
(Ans Capital fund the being Rs.2,52,000 B/s total Rs. 3,01,200)
14. From the following information given the books of a sports club, prepare the Balance sheet
as on 31-12-2000.
Receipts and Payment Account for the year ended 31-12-2000.

To Entrance fees 8,000 By Printing & Stationery 80,000
To Subscriptions By Advertising 2,000
1999 2,400 7,200
2000 40,500 By printing & Stationery 60,000
2001 1,200 (including Rs.1,200 22,500
of the previous year)
By Insurance Premium 4,800
To Interest received 8,000
1,36,800 1,36,800
Income and Expenditure Account for the year ended 31-12-2000.

To Salaries 33,600 By Subscriptions 1,02,000
To Advertising 2,000 By Entrance fees 8,000
To Printing & Stationery 6,000 By Interest received 8,000
To Audit fees 4,000
To Insurance premium 4,000
on sports - equipment 30,000
Furniture 1,600
To Excess of over
Expenditure 45,900
1,18,000 1,18,000
Assets of the club on 1-1-2000 including Sports equipment Rs. 1,00,000, Ground and pavilion
Rs. 1,60,000 and Furniture Rs. 16,000. Subscription in arrears on that date was Rs, 3,200 and
subscription received in advance was Rs. 1,000.
(Ans : B/s Total Rs 3,37,800; Opening capital fund Rs 2,93,800)
15. Andhra Cricket club gives you the following information.
Income and Expenditure Account
for the year ended 31-12-2000.
Expenses Amount Income Amount
Rs Rs
To Remuneration 9,000 By Donation and
To Salaries and wages 12,000 Subscription 51,000
To Rent 6,000 By Barroom receipts 12,000
To Repairs 5,500 Less expenses 10,000 2,000
To Miscellaneous expenses 3,500 By Bank Interest 1,000
To Honoraum to secretary 9,000 By Hire of club hall 6,000
To Depreciation on equipment 2,500
To Surplus 12,500
60,000 60,000
Balance Sheet as on 31-12-2000.

1999 Labilities 2000 1999 Assets 2000
Rs Rs. Rs. Rs.
Capital Fund as 12,500 Equipment 10,000
On 31-12-99 24,000 Outstanding
Entrench fee 5,000 3,000 Subscription 4,000
24,000 Surplus 12,500 41,500 2,500 Cash in hand 2,000
Subscription in 1,250 Cash at bank 5,000
2,000 advance 15,00 10,000 Fixed deposits 25,000
Outstanding expenses
750 Miscellaneous 500
1,000 Salaries and wages 1,500
Honorarium to
1,500 Secretary 1,000
29,250 46,000 29,250 46,000
Prepare the Receipts and payments Account of the club for the year ended 31-12-2000.
(Donations subscriptions received Rs, 49,500, Salaries and wages paid Rs. 11,500, Misc.
expenses paid Rs. 3,750, Honorarium to secretary paid on 9,500).

Dr. Ch. Suravinda

Financial Accounting - II 9.1 Partnership Accounts I – ......
Lesson: 9
Partnership Accounts I – Admission of a partner

9.0 Objective:
After going through the lesson you will be able to understand the following:
1. Definition and meaning of partnership.
2. Accounting procedure while a new partner joins the partnership.
3. Method of calculating goodwill in view of admission.
Structure:
9.1: Definition and meaning of Partnership
9.2: Accounts in Partnership
9.3: Admission in Partnership
9.4: Treatment of Goodwill
9.5: Revaluation of Assets and Liabilities
9.6: Illustrations
9.7: Try yourself
9.8: Summary
9.9: Glossary
9.10: Self Assessment Questions
9.1: Definition and meaning of Partnership:

According to Section 4 of Indian Partnership Act, Partnership is “the relation between
persons who have agreed to share the profits of a business carried on by all or any of them
acting for all”.
The above definition gives the following features to a partnership:
1. It is an association of two or more persons.
2. It has an agreement entered by all the partners concerned.
3. It deals with a business.
4. It can be carried on by all partners or any of them can act for them.
5. The partners share profits and losses as per the agreement.
9.2: Accounts in Partnership:
Partnership accounts do not present much difficulty unless there is an admission, retirement,
death or dissolution. Profit and Loss Account is prepared in the usual way and the Balance Sheet
is also made out in the usual manner. In this lesson we learn how to prepare accounts when a
new partner enters the organization i.e. admission. The following four lessons deals with other
areas of partnership accounts.
9.3: Admission in Partnership:

It is a usual thing that some new partners join the partnership often which is already in
existence and the firm continues its operations as usual with the old and new partners together.
When a new person is admitted as partner, the two main problems to be tackled are regarding a)
treatment of goodwill and b) revaluation of assets and liabilities.
9.4: Treatment of Goodwill:
It is generally observed that a firm, which has been in existence for a number of years, is
in a position to earn a higher amount of profits year after year in comparison to a new firm in spite
of all other things remaining the same. This is because over a period of time a firm establishes its
reputation on account of which not only the old customers continue to patronize the firm but they
also bring new customers. This results in enabling an old established firm to earn excess profits
as compared to a new firm. Goodwill has, therefore, been defined as, “the present value of a
firm’s anticipated excess earnings”.
In the ongoing firm when a new partner is admitted, he automatically enjoys the benefits
of the firm i.e. the goodwill. Therefore, generally the new partner needs to bring some extra
amount towards this goodwill and the existing partners share this in their agreed ratio.
Depending upon the share of profits to be given to the new partner, either a sum of money
will be paid by him to the old partners (through the firm or privately) or the old partners will be
credited with their share of the goodwill. As said earlier, the new partner will take a share of profits
which comes out of the shares of other partners. The old partners must be compensated for such
a loss. The amount to be brought in by the new partner for goodwill is in addition to the amount
to be brought in as capital.
The following are the various possibilities as regards goodwill;
1. Premium Method: Under this method, the new partner brings goodwill in cash which is left in
the business or that cash is withdrawn by the old partners. Sometimes, new partner may pay the
goodwill to the old partners privately.
Journal entries:
a) When the new partner brings goodwill in cash which is left in the business —
i) Cash/Bank A/C Dr
To Goodwill
ii) Goodwill A/C Dr
To Old partners Capitals
b) When goodwill brought in by new partner withdrawn by old partners ——

i) Cash/Bank A/C Dr
To Goodwill
ii) Goodwill A/C Dr
iii) Old partners Capitals A/C Dr
To Cash/Bank
c) When the goodwill is paid by the new partner to the old partners privately, No entry is required.
2. Revaluation Method: The new partners do not bring cash as goodwill but is raised in the
books of the firm. The entry required is as follows:
Goodwill A/C Dr
The old partners Capital accounts are to be credited in their old profit sharing ratio. Goodwill
thus created appears in the balance sheet.
3. Memorandum Revaluation Method: Under this method, goodwill is raised in the books and
then is immediately written off. In the above case, goodwill is credited to the old partners in the
old profit-sharing ratio. But when it is to be written off, the goodwill should be credited to all
partners in the new profit sharing ratio.
When a new partner comes into the organization, the existing ratio of the old partners
should be changed to accommodate him. And the partners who are losing their part of the share
should get benefit in the form of goodwill. This is called as sacrificing ratio. For example, A and B,
sharing in the ratio of 3:2 and admit C as partner and it is agreed that the new profit-sharing ratio
is 2:2:1. It is obvious that B does not suffer at all on C’s admission. He previously received 2/5ths
of profits; he still receives 2/5ths of profits. It is A alone who has suffered and, therefore, any
amount brought in as goodwill by C should be credited to A only. Thus, it is proper to credit
goodwill brought in by a new partner to the old partners in the ratio in which they suffer on the
admission of the new partner.
Goodwill to be inferred: Sometimes, the value of goodwill is not specifically given and has to be
inferred from the arrangement of capital and profit-sharing ratio. Suppose, A’s capital is Rs.5,
000 and B’s capital is also Rs.5, 000 and they share profits equally. They admit C, as equal
partner, on his bringing in Rs.8, 000 as capital. In this case, the point is that C’s capital should
only be one-half of the combined capitals of A and B. If C’s capital is Rs.8, 000 the combined
capitals of A and B should be Rs.16, 000. Since their present capital is Rs.10, 000, there must be
goodwill of Rs.6000 to be shared equally by A and B.
9.5: Revaluation of Assets and Liabilities:
When a new partner is admitted, it is natural that he should not benefit any appreciation in
the value of assets which has occurred or vice versa in the value of assets. Similar is the case
with liabilities. Therefore, assets and liabilities are revalued and the old partners are debited or
credited with the net loss or profit, as the case may be, in the ratio in which they have been
sharing profits and losses. Partners may agree that the change in the value of assets and liabilities
is to be adopted and figures changed accordingly or that the assets and liabilities should continue
to appear in the books of the firm at the old figures.
1. When valued are altered in the books: In this case, a profit and loss adjustment account (or
revaluation account0 is opened and the result is to be transferred to the capitals of the old partners
in their profit sharing ratio.
a) For an increase in asset the following entry is required ——
Asset A/c Dr
To P & L Adj. A/C
b) For a reduction in asset——
P & L Adj. A/C Dr
To Asset A/C
c) For increase in liabilities——
P & L Adj. A/C Dr
To Liability
d) For a decrease in liabilities——
Liability A/C Dr
To P & L Adj. A/C
2. When values are not altered in the books: In this case, the increase in the amounts of assets
and liabilities is entered in a Memorandum Adjustment or Revaluation Account but the
corresponding entry is not made in the asset or liability accounts and the balance is transferred to
old partners’ capital accounts in the old ratio. Then, to complete double entry, the entries made in
the Memorandum Adjustment Account are put down on the reverse side and the balance transferred
to all partners, including the new one, in the new profit-sharing ratio.
9.6: Illustrations:
Illustration 1:
R and S are equal partners in a firm. They decided to admit T as a new partner and to
readjust the Balance Sheet values for this purpose. The balance sheet of the firm as at 31 st
December, 2007 was as under.
Creditors 5,000 Machinery 5,000
Bills payable 2,000 Furniture 3,500
Capital: Stock 3,000
R 7,500 Debtors 5,800
S 5,000 12,500 Less: Reserve 300 5,500
Cash 2,500
19,500 19,500
The following adjustments were to be made before T’s admission:
a) Rs.500 more to be provided for bad debts.
b) Furniture is to be valued at Rs.3, 000.
c) Value of machinery is to be appreciated by Rs.1, 000.
d) Investments worth Rs.600 (not included in Balance Sheet) are to be taken into account.
e) T brings Rs.5, 000 for capital and Rs.2, 000 for Goodwill. The amount of Goodwill is
shared by R and S in their due proportions. Give journal entries and prepare the Balance
Sheet of the firm after admission of T as a partner.
Solution:
Profit and Loss (Adj) A/C Dr 1,000
To Reserve for bad debts 500
To Furniture 500
(Being Assets value reduced)

Machinery A/C Dr 1,000
Investments A/C Dr 600
To Profit and Loss (Adj) A/C 1,600
(Being Assets value raised)
Profit and Loss (Adj) A/C Dr 600
To R’s Capital A/C 300
To S’s Capital A/C 300
(Being profit distributed to partners)
Cash A/C Dr 7,000
To T’s Capital A/C 5,000
To Goodwill 2,000
(Being Capital and Goodwill brought in by T)
Goodwill A/C Dr 2,000
To R’s Capital A/C 1,000
To S’s Capital A/C 1,000
(Being Goodwill distributed between R and S)
Balance Sheet of the New Firm
Liabilities Assets
Creditors 5,000 Furniture 3,000
Bills payable 2,000 Machinery 6,000
Capital: Stock 3,000
R 8,800 Investments 600
S 6,300 Debtors 5,800

T 5,000 20,100 Less: Reserve 800 5,000
Cash 9,500
27,100 27,100
Working Notes:
Profit and Loss Adj. Account
To Reserve for bad debts 500 By Machinery 1,000
To Furniture 500 By Investments 600
To R’s Capital 300
To S’s Capital 300 600
1,600 1,600
Illustration 2:
Mukund and Makarand were partners in a firm sharing profits equally. Their business
position as on 30th June 2007 was as follows:
Balance Sheet
Liabilities Assets
Sundry Creditors 6,000 Cash in hand 150
Bank overdraft 1,500 Stock 3,600
Mukund capital 2,100 Sundry debtors 6,200
Makarand capital 1,600 Furniture 600
Investments 650
11,200 11,200
It is agreed to take Manohar into partnership and to make the following adjustments:
a) Bad debts to be written off for Rs.1, 600.
b) Value of the furniture to be reduced to Rs.400

c) Depreciate stock at 10%.
d) Write off 20% on investments.
e) Create goodwill for Rs.1, 000.
Manohar introduced Rs.1, 000 as capital for his 1/3 share. Other partners’ capitals should be
adjusted according to the new partner’s capital.
Pass necessary journal entries and prepare the balance sheet of the new firm.
Solution:
Profit and Loss (Adj) A/C Dr 2,290
To Reserve for bad debts 1,600
To Furniture 200
To Stock 360
To Investments 130
(Being assets value reduced)
Mukund Capital A/C Dr 1,145
Makaran Capital A/C Dr 1,145
To Profit and Loss (Adj) A/C 2,290
(Being profit transferred to capital accounts)
To Mukund Capital 500
To Makarand Capital 500
(Being goodwill created)
Cash A/C Dr 1,000
To Manohar Capital A/C 1,000

(Being capital brought in by Manohar)
Cash A/C Dr 45
To Makarand Capital 45
(Being the cash brought in)
Mukund Capital A/C Dr 455
To Cash 455
(Being cash paid)
Mukund Capital Account
To Profit & Loss A/C 1,145 By Balance B/D 2,100
To Cash 455 By Goodwill 500
To Balance C/D 1,000
2,600 2,600
Makarand Capital Account
To Profit & Loss A/C 1,145 By Balance B/D 1,600
To Balance C/D 1,000 By Goodwill 500
By Cash 45
2,145 2,145
Manohar Capital Account
By Cash 1,000
Goodwill Account
To Mukund’s Capital 500 By balance C/D 1.000
To Makarand’s Capital 500
1,000 1,000
Cash Account
To Balance B/D 150 By Mukund’s Capital 455
To Manohar’s Capital 1,000 By Balance C/D 740
To Makarand’s Capital 45
1,195 1,195
To Balance B/D 740
Balance Sheet of the New firm
Liabilities Assets
Creditors 6,000 Cash 740
Overdraft 1,500 Stock 3,240
Capitals:
Mukund 1,000 Debtors 6,200
Makarand 1,000 Less: R.B.D 1,600 4,600
Manohar 1,000 3,000 Furniture 400
Investments 520
Goodwill 1,000
10,500 10,500
Working notes:
Profit sharing ratio of old partners: 1:1
New partners share 1/3
Remaining 1-1/3 = 2/3
Mukund’s share 2/3X1/2=1/3
Makaran’s share 2/3X1/2=1/3

Manohar’s Capital for his 1/3 share = 1,000
Mukund’s Capital for his 1/3 share = 1,000
Makarand’s Capital for his 1/3share = 1,000
Illustration 3:
Anup and Bhupal share profits in the proportion of three-fourths and one-fourths. The
Balance Sheet on December 31, 2006 was as follows:
Sundry creditors 41,500 Cash at Bank 22,500
Anup’s Capital 30,000 Bills receivable 3,000
Bhupal’s Capital 16,000 Debtors 16,000
Stock 20,000
Fixtures 1,000
Buildings 25,000
87,000 87,500
On January 1, 2007 Chandrajit was admitted into partnership on the following terms:
a) That Chandrajit pays Rs.10, 000 as his capital for a fifth share.
b) That Chandrajit pays Rs.5, 000 for goodwill half of this sum is to be withdrawn by Anup
and Bhupal.
c) That the capitals of Anup and Bhupal be adjusted on the basis of Chandrajit’s capital
by opening the necessary current accounts.
d) That Stock and Fixtures be reduced by 10% and a 5 % provision be created for doubtful
debts on Debtors and Bills receivable.
e) That value of Buildings is appreciated by 20%.
f) That an item of Rs.650 included in creditors is not likely to be claimed and hence
should be written back.
Solution:
Profit and Loss (Adj) Account
To Stock 2,000 By Buildings 5,000
To Fixtures 100 By Creditors 650

To Reserve on Bills 150
To Anup’s Capital 1,950
To Bhupal’s Capital 650 2,600
5,650 5,650
Anup Capital Account
To Cash 1,875 By Balance B/D 30,000
To Current A/C 3,825 By Profit & Loss A/C 1,950
To Balance C/D 30,000 By Goodwill 3,750
35,700 35,700
Bhupal Capital Account
To Cash 625 By Balance B/D 16,000
To Current A/C 7,275 By Profit & Loss A/C 650
17,900 17,900
Chandrajit Capital Account
By Cash 10,000
Anup Current Account
By Capital 3,825
Bhupal Current Account
By Capital 7,275
Cash Account
To Balance C/D 22,500 By Anup Capital 1,875
To Chandrajit capital 10,000 By Bhupal Capital 625
To Goodwill 5,000 By Balance C/D 35,000
37,500 37,500
Balance Sheet of the firm as on 1-1-2007
Liabilities Assets
Creditors 40,850 Cash at Bank 35,000
Capitals: Bills receivable 2,850
Anup 30,000 Debtors 16,000
Bhupal 10,000 Less: RBD 800 15,200
Chandrajit 10,000 50,000 Stock 18,000
Current Accounts: Fixtures 900
Anup 3,825 Buildings 30,000
Bhupal 7,275 11,100
1,01,950 1,01,950
Working notes:
Old partners’ profit sharing ratio = ¾: ¼ : 1 share 10,000 Capital
New partner ratio = 1/5 (420) : 3 share 30,000 Capital
Remaining = 1-1/5 = 4/5
Anup new Ratio = 4/5 x ¾ = 12/20
Bhupal new Ratio = 4/5 x ¼ = 4/20
New profit sharing ratio = 3 (Anup) : 1 (Bhupal) : 1 (Chandrajit)

Illustration 4:
The balance sheet of Sridhar and Muralidhar as on 31st December 2007 is set out below.
They share profits and losses in the ratio of 2:1.
Liabilities Assets
Sridhar’s Capital 40,000 Freehold property 20,000
Muralidhar’s Capital 30,000 Furniture 6,000
General Reserve 24,000 Stock 12,000
Creditors 16,000 Debtors 60,000
Cash 12,000
1, 10,000 1, 10,000
They agree to admit Purnachandra into the firm subject to the following terms and
conditions:
a) Purnachandra will bring in Rs.21, 000 of which Rs.9, 000 will be treated as his share of
goodwill to be retained in the business.
b) He will be entitles 1/4th share of the profits of the firm.
c) Fifty per cent of the general reserve is to remain as a reserve for bad and doubtful
debts.
d) Depreciation is to be provided on furniture at 5%.
e) Stock is to be revalued at Rs.10, 500.
Show the journal entries giving effect to the above said arrangements (including cash
transaction) and prepare the opening balance sheet of the new partnership.
Solution:
Profit & Loss (Adj) A/C Dr 1,800
To Furniture 300
To Stock 1,500

Sridhar capital A/C Dr 1,200
Muralidhar capital A/C Dr 600
To Profit & Loss (Adj) A/C 1,800
(Being loss distributed among partners)
General Reserve A/C Dr 12,000
(Being provision created from reserve)
To Sridhar Capital 8,000
To Muralidhar Capital 4,000
(Being reserve distributed)
Cash A/C Dr 21,000
To Purnachandra Capital 12,000
To Goodwill 9,000
(Being capital and goodwill brought in by Purnachandra)
To Sridhar Capital 6,000
To Muralidhar Capital 3,000
(Being goodwill distributed)
Balance sheet of the new firm
Liabilities Assets
Capitals: Freehold premises 20,000
Sridhar 52,800 Furniture 5,700

Muralidhar 36,400 Stock 10,500
Purnachandra 12,000 1, 01,200 Debtors 60,000
Creditors 16,000 Less: RBD 12,000 48,000
Cash 33,000
1, 17,200 1, 17,200
Working Notes;
Capital Accounts
Sridhar Muralidhar Purna Sridhar Muralidhar Purna
To P & L A/C 1,200 600 —— By Balance 40,000 30,000 —
To Balance C/D 52,800 36,400 12,000 By Cash 12,000
By Gl. Reserve 8,000 4,000 ——
By Goodwill 6,000 3,000 ——
54,000 37,000 12,000 54,000 37,000 12,000
Illustration 5:
On 1st January 2007, A and B who were in partnership sharing 7/12 and 5/12 respectively,
take in C giving him 1/6 share. A and B were to share future profits in the ratio of 13/24 and 7/24.
Over and above his capital, C brings in Rs. 96, 000 as his goodwill for the 1/6 share. The
cash brought in by C as his capital and his goodwill is credited to one separate account in his
personal name. On 31st December 2007, the Trial Balance of the firm stood as follows:
Machinery 6,00,000 A’s Capital 3,36,000
Furniture 40,000 B’s Capital 2,40,000
Stock 1,20,000 C’s Capital 2,24,000
Debtors 2, 00,000 Creditors 48,000
A’s drawings 32,000 Current year’s profit 2,32,000
10, 80,000 10,80,000

Interest on drawings is to be ignored but interest on capital accounts is to be allowed at
5% per annum after the necessary adjustments therein consequent one’s admission. Prepare
the Balance Sheet of the firm as on December 31, 2007.
Solution:
Working Notes:
Profit sharing ratio of A & B before C’s admission = 7/12 : 5/12
Profit sharing ratio of A & B after C’s admission = 13/24 : 7/24
Sacrificing ratio : A = 7/12- 13/24= 14-13/24 = 1/24
B = 5/12 – 7/24 = 10-7/24 = 3/24
= 1:3
The goodwill brought in by C (which is kept in an account opened in his personal name) is
to be shared by A and B in their sacrificing ratio i.e. 1:3 respectively. This sharing is to be done
immediately after C’s admission. But it was not done at that time. Therefore, this is to be adjusted
now, with retrospective effect.
1. C’s Personal A/C Dr 2,24,000
To C’s Capital 1,28,000
To A’s Capital 24,000
To B’s Capital 72,000
(Being Rs.96,000 goodwill shared by A and B and the balance transferred to C’s capital)
Profit & Loss A/C for the year 2007
To Interest on Capital
A: 3,60,000 x 5/100 18,000 By Balance 2,32,000
B: 3,12,000 x 5/100 15,600
C: 1,28,000 x 5/100 6,400
To Net Profit transferred to
A’s Capital 1,04,000

B’s Capital 56,000

C’s Capital 32,000 1,92,000
2,32,000 2,32,000
A’s Capital Account
To Drawings 32,000 By Balance B/D 3,36,000
To Balance C/D 4,50,000 By C’s personal A/C(goodwill) 24,000
By Interest on capital 18,000
By P & L A/C (profit) 1,04,000
4,82,000 4,82,000
B’s Account
To Drawings 52,000 By Balance B/D 2,40,000
To Balance C/D 3,31,600 By C’s personal A/C(goodwill) 72,000
By Interest on capital 15,600
By P & L A/C (profit) 56,000
3,83,000 3,83,000
C’s Capital Account
To Drawings 8,000 By C’s personal A/C (goodwill) 1,28,000
To Balance C/D 1,58,000 By Interest on capital 6,400
By P & L A/C (profit) 32,000
1,66,400 1,66,400
Balance Sheet of A, B and C as on 31-12-2007
Capital A 4,50,000 Machinery 6,00,000
Capital B 3,31,000 Furniture 40,000
Capital C 1,58,400 Stock 1,20,000
9,88,000 9,88,000
Note:
1. Interest on capital in to be allowed on the amount which is remained after adjusting the
goodwill into the capital accounts.
2. The sacrificing ratio is to be taken into account, when the goodwill is brought in by new
partner in cash and also when the old ratio and new ratio is given.
Illustration 6:
A and B were partners in AB Coal Stores sharing profits equally. On 31st December, 2007,
their balance sheet was as follows:
Liabilities Assets
Creditors 7,480 Furniture and fittings 1,200
Bills payable 8,520 Lorries 9,300
Capitals: Horses and Carts 4,760
A 30,000 Debtors 35,000
B 26,000 56,000 Stock of Coal 7,700
Cash at Bank 13,660
Cash in hand 180
72,000 72,000
On the above date they admitted C as new partner with the following adjustments:
1. A, B and C share future profits in 3:2:1 ratio.
2. As Capital C is bringing Rs.5, 600 debtors (provide 5% reserve), Rs.3, 000 goodwill and
the remaining in cash. C’s capital being Rs.10, 000.
3. The following adjustments were made in A and B balance sheet:
a) Lorries value to be raised to Rs.10, 000.
b) Provide reserve on debtors at 71/2%.
c) Create goodwill for Rs.4, 450.
4. A’s Capital should be equal to that of B.
Pass the necessary journal entries for the above adjustments and prepare cash account,
capital accounts and the new balance sheet.
Solution:
Lorries A/C Dr 700
To P & L A/C 700
(Being the asset value appreciated)
P & L Adj A/C Dr 2,640
To Reserve for bad debts A/C 2,640
(Being the reserve provided on debtors)
A’s Capital A/C Dr 970
B’s Capital A/C Dr 970
To P & L Adj. A/C 1,940
(Being the loss shared to partners)
(Being goodwill created)
Debtors A/C Dr 5,600
Cash A/C (Balancing figure) Dr 1,680
To C’s Capital A/C 10,000
To Reserve for doubtful debts 280
(Being the new partner brings various assets towards capital)
A’s Capital A/C Dr 4,000
To Cash A/C 4,000

(Being the excess capital paid to partner)
P & L Adj. Account
To Reserve for bad debts 2,640 By Lorries 700
By A’s Capital 970
By B’s Capital 970
2,640 2,640
To P & L Adj. A/C 970 By Balance 30,000
To Cash A/C 4,000 By Goodwill 2,225
32,225 32,225
B’s Capital Account
To P & L Adj. A/C 970 By Balance 26,000
28,225 28,225
By Sundries 10,000
Cash Account
To Balance: Bank 13,660 By A’s Capital 4,000
Cash 180By Balance C/D 11,520
To C’s Capital 1,680
15,520 15,520
Balance Sheet of A, B and C on 31-12-2007

Liabilities Assets
Capital A 27,255 Furniture 1,200
Capital B 27,255 Lorries (9,300+700) 10,000
Capital C 10,000 Horses and Carts 4,760
Bills payable 8,520 5,600
40,800
Less: RBD 2,920 37,880
(2,640+280)
Coal Stock 7,700
Goodwill 7,450
Cash 11,520
80,510 80,510
Illustration 7:
The following was the balance sheet of A, B and C who were equal partners, on 1st June
2007.
Liabilities Assets
Bills payable 3,300 Cash 600
Capital Accounts: Stock 11,400
A 16,800 Furniture 2,400
B 12,600 Building 19,500
C 6,000 35,400
44,700 44,700
They decided to take D into partnership and give him a fourth share in the parofits on the
following terms:
1. That D should bring in Rs.9, 000 for goodwill and Rs.15,000 as capital.
2. That one-half of the goodwill shall be withdrawn by the old partners.
3. That stock and furniture be depreciated by 10 per cent.
4. That a provision of 5 per cent on debtors be created for doubtful debts.
5. That a liability for Rs.1, 050 be created against hills discounted.
6. That the value of the building having appreciated, the building should be valued of Rs.27,
000.
7. That the values of liabilities and assets other than cash are not being altered.
Prepare the necessary ledger accounts and the opening balance sheet of the firm as newly
constituted.
Solution:
Working Notes;
Here in this problem, first the Assets and Liabilities were revalued and again after D’s
admission, it was asked no to alter the values of Assets and Liabilities. For this purpose, a
separate account called “Memorandum P & L A/C” is to be prepared.
Memorandum P & L Adj. Account

To Stock 1,140 By Buildings 7,500
To Furniture 240
To Liability on bills discounted 1,080
To Capital A/Cs (profit):
A 1,500
B 1,500
C 1,500 4,500
7,500 7,500
By Sundry Assets (debited to this
Account previously) 3,000
To Buildings 7,500 By Capital Accounts (Less)
A 1,125
B 1,125
C 1,125 4,500
7,500 7,500
Goodwill Account
To A’s Capital 3,000 By Cash 9,000
9,000 9,000
To Cash 1,500 By Balance 16,800
To P & L Adj. A/C 1,125 By P & L Adj. A/C 1,500
21,300 21,300
By Balance B/D 18,675
17,100 17,100
By balance B/D 14,475
10,500 10,500
D’s Capital Account
To P & L Adj. A/C 1,125 By Cash 15,000
15,000 15,000
Cash Account
To Balance 600 By Capital A/C:
To D’s Capital 15,000 A 1,500
To Goodwill 9,000 B 1,500
C 1,500
By Balance C/D 20,100
24,600 24,600
To Balance B/D 20,100
Balance Sheet of A, B, C and D as on 1st June, 2007
Liabilities Assets
Bills payable 3,300 Cash 20,100
Capitals: Stock 11,400
B 14,475 Buildings 19,500
C 7,875
D 13,875
64,200 64,200
Illustration 8:
Sudha and Aruna are partners in a firm sharing profits in the ratio of 2:1. The Balance
Sheet of the firm on 31st December, 2007 was as follows:
Liabilities Assets
Creditors 4,200 Bank 3,012
Investments provision 1,200 Bills receivable 7,500
Workmen compensation fund 3,600 Debtors 12,000
General reserve 6,300 Less: Provision 1,500 10,500
Sudha 18,000 Investments 15,000
Aruna 14,700 32,700 Goodwill 2,988
48,000 48,000
On this date Prathima is admitted for 2/5th share in the profits of the firm. Following
revaluations were made at the time of admission:
1. Accrued incomes not appearing in the books Rs.300
2. Market value of investments is Rs.13, 500.
3. Claim on account of compensation is estimated at Rs.450.
4. Provision for doubtful debts is required at Rs.1800.
5. X, an old customer, whose account was written off as bad, has promised to pay Rs.1, 050
in settlement of his full claim.
6. Sudha and Aruna have purchased machinery on hire-purchase system for Rs.9, 000 of
which only Rs.300 are to be paid. Both machinery and unpaid liability did not appear in the
Balance Sheet.
7. There was a Joint Life Policy on the lives of Sudha and Aruna for Rs.45, 000. Surrender
value of the policy on the date of admission amounted Rs.7, 200. It was decided to record
this as an asset of the new firm.
8. Prathima is required to bring in Rs.30, 000 as capital. Her share of Goodwill was calculated
at Rs.7, 200.
You are required to make journal entries and prepare new Balance Sheet after the admission
of Prathima.
Solution:
Accrued income A/C Dr 300

Workmen compensation fund A/C Dr 3,150
X’s A/C(old customer) Dr 1,050
Joint Life Policy A/C Dr 7,200
To P & L Adj. A/C 20,700
(Being assets and liabilities revalued)
P & L Adj. A/C Dr 900
To Investment Provision A/C 300
To Reserve for doubtful debts 300
To Hire vendor (Machinery) A/C 300
(Being assets and liabilities revalued)
P & L Adj. A/C Dr 19,800
To Sudha Capital A/C 13,200
To Aruna Capital A/C 6,600
(Being the profit on revaluation shared between partners)
To Sudha Capital A/C 4,200
To Aruna Capital A/C 2,100
(Being the accumulated profit shared to partners)
To Sudha Capital 10,008
To Aruna Capital 5,004
(Being the goodwill created)
Full value of goodwill 5/2 x 7,200 =18,000

Less: Already appearing 2,988
15,012
Cash A/C Dr 30,000
To Prathima’s Capital A/C 30,000
(Being the new partner brings capital)
Balance Sheet of Sudha, Aruna and Prathima
Liabilities Assets
Creditors (including hire vendor) 4,500 Cash (3,012 + 30,000) 33,012
Investment provision 1,500 Bills receivable 7,500
Workmen’s compensation fund 450 Debtors 12,000
Capitals: X 1,050
Sudha 45,408 13,050
Aruna 28,404 Less: Provision 1,800 11,250
Prathima 30,000 Stock 9,000
Investments 15,000
Joint life policy 7,200
Machinery 9,000
Goodwill 18,000
Accrued incomes 300
1, 10,262 1, 10,262
Capital Accounts
Sudha Aruna Sudha Aruna
By Balance 18,000 14,700
By P & L Adj. A/C 13,200 6,600
By General reserve 4,200 2,100
To Balance C/D 45,408 28,404 By Goodwill 10,008 5,004
45,408 28,404 45,408 28,404
Profit & Loss Adj. Account

To Sundry Assets & Liabilities 900 By Sundry Assets & Liabilities 20,700
To Capital Accounts:
Sudha 13,200
Aruna 6,600
20,700 20,700
Note: Liability as compensation fund is only Rs.450; the balance will be accumulated profit, to be
shared by the partners.
9.7: Try yourself:
1. Sunil, Kapil and Rakesh trading in partnership and sharing profits and losses in the proportion
of ½, 1/3 and 1/6 respectively agree to take Ajay into the partnership on the following terms;
a) Ajay should be given ¼ share and he should bring Rs.10, 000 as goodwill and Rs.1, 28,000 as
capital.
b) A reserve for bad and doubtful debts should be created at 5%.
c) The value of Land and Building should be brought up to Rs.6, 20,000.
d) Stock should be taken at Rs.2, 61,000.
e) Machinery should be revalued at Rs.61, 600.
The following is the Balance Sheet of the firm of Sunil, Kapil and Rakesh on the eve of
Ajay’s admission.
Balance Sheet as on 31-12-2007
Sundry Creditors 38,000 Cash on hand 8,000
Partners’ Capitals: Debtors 2, 52,000
Sunil 5, 70,000 Stock 2, 90,000
Kapil 3, 20,000 Machinery 70,000
Rakesh 1, 60,000 10, 50,000 Land and Buildings 4 80,000
Reserve fund 12,000
11, 00,000 11, 00,000
The capitals of the old partners who continue to share in the same proportion in the new
firm as before should be adjusted on the basis of the proportion of Ajay’s capital to his share in the
business, involving cash movements in or out, as the case may be.
Pass journal entries in the books of the new firm, keeping these arrangements in view and
show the balance sheet of the newly constituted firm.
(Capital Accounts: Sunil- 1,92,000; Kapil – Rs.1,28,000; Rakesh – Rs.64,000; Ajay – Rs.1,28,000;
Balance Sheet total – Rs.13,28,000)
2. A and B are partners in a firm sharing profits and losses as 5:3. The position of the firm as on
31st March 2007 is as follows:
Capital and Liabilities Property and Assets

Capital Accounts: Plant and Machinery 40,000
A 30,000 Stock 30,000
B 20,000 50,000 Sundry Debtors 20,000
Sundry Creditors 15,000 Bills receivable 10,000
Bank overdraft 42,500 Cash at bank 7,500
1, 07,500 1,07,500
C now joins them on condition that he will share 3/4th of the future profits, the balance of
profits being shared by A and B as 5:3. He introduces Rs.40, 000 by way of capital in cash and
pays off the overdraft. He also pays Rs.4, 000 by way of premium for goodwill of the business
and this amount is to remain in business. The partners agree to depreciate plant by 10% and
raise a reserve against Sundry Debtors by 5%.
You are asked to journalise the entries in the books of the firm and the resultant Balance
Sheet. How will the partners share future profits?
(Capitals: A – Rs.29,375; B – Rs.19,625; C – Rs.82,500; Balance Sheet total Rs.1,46,500)
3. Shriram and Krishna are partners in a firm sharing profits and losses as Shriram 75% and
Krishna 25% on 1st January, 2007; their position was as given below:
Liabilities Assets
Capital Accounts; Plant 40,000
Shriram 50,000 Stock 10,000
Krishna 30,000 80,000 Debtors 30,000
Sundry Creditors 20,000 Cash at bank 20,000
1,00,000 1,00,000
Nair is now to join the partnership. He agrees to pay the partners Rs.20,000 by way of
goodwill and introduce one half of the combined capital of the two existing partners after depreciating
plant and stock at 20% and 10% respectively and raising a reserve of 10% against Sundry Debtors.
The new partner is to be allowed 1/4th share of the profits of the firm.
You are asked to record the above transactions in the books of the firm and give the
resultant Balance Sheet of the new firm.
(New Capitals: Shriram – Rs.56, 000; Krishan – Rs.32,000; Nair – Rs.44,000; Total of Balance
Sheet – Rs. 1,52,000)
4. The following is the Balance Sheet of Srinivas and Chandrasekhar as on 31st March 2007.
Narayana is admitted as partner on that date when the position of Srinivas and Chandrasekhar
was as under:
Liabilities Assets
Srinivas’s Capital 3,000 Debtors 3,300
Chandrasekhar’s Capital 2,400 Land and Buildings 2,400
Creditors 3,600 Plant and Machinery 3,000
Gerenal Reserve 4,800 Stock 3,600
Workmen’s compensation fund 1,200 Cash and Bank Balances 2,700
15,000 15,000
Srinivas and Chandrasekhar shared profits in the proportion of 3:2. The following terms of
admission are agreed upon:
1. Revaluation of assets: Land and Buildings Rs.5, 400, Stock Rs.4, 800.
2. The liability on workmen’s compensation fund is determined at Rs.600.
3. The new partner has to bring in as his share of goodwill Rs.3,000 in cash.
4. The new partner was to bring further cash as would make his capial equal to 20% of the
combined capitals of partners Srinivas and Chandrasekhar after above revaluation and
adjustments are carried out.
5. The future profit sharing proportions were as under: Srinivas – 2/5th; Chandrasekhar -2/
5th; Narayana – 1/5th. Prepare the new Balance Sheet of the firm and the capital accounts
of the partners.
(New Capitals: Srinivas- Rs.11, 760; Chandrasekhar –Rs.6, 240; Narayana –
Rs.3, 600; Total Balance Sheet – Rs.25, 800)
5. X, Y and Z were partners sharing Profits and Losses in the ratio of 3:2:1. On January 1 st, 2007,
they admitted A into partnership on the following terms:
Goodwill of the firm was valued at Rs.2, 70,000; A paid Rs.45, 000 to X, through the
books, on account of goodwill. A paid in proportionate of capital. It was further agreed that
investments are to be revalued at Rs.54, 000; plant should be reduced to Rs.87, 000. A sum of
Rs.9, 000 included in creditors was to be written back as there was no viability to pay the amount.
The Balance Sheet before A’s admission was as follows:
Liabilities Assets
Creditors 2, 70,000 Cash at bank 1, 20,000
Capitals; Debtors 1, 80,000
X 1, 80,000 Stock 1, 50,000
Y 1, 20,000 Investments at cost 90,000
Z 60,000 Furniture and Fittings 30,000
Reserve 45,000 Plant 1, 05,000
6, 75,000 6, 75,000
The Profits for 2007 were Rs.1, 80,000 and drawings were Rs.45, 000 for X, Rs.36, 000
for Y, Rs.22, 500 for Z and Rs.18, 000 for A.
Journalise the entries to be made on A’s admission, give the capital accounts and the
resulting Balance Sheet.
(Current Accounts: X – Rs.15, 000; Y – Rs.24, 000; Z – Rs.7, 500; A – Rs.12, 000; balance sheet
– Rs.6, 79,500)
9.8: Summary:
Partnership is a business carried on by one partner for all and all working together to
share profits and bear losses. New partners may join the ongoing partnership which is called as
admission of partnership. When a new partner admits into the firm, normally, he brings with him
the capital and an agreed amount of goodwill. There are various ways of preparing accounts
depending on different circumstances. Normally, in admission, a profit and loss adjustment account
and a new balance sheet is to be prepared after adjusting the old partners capital accounts.
9.9: Glossary:
Partnership: It is the relation between persons who have agreed to share the profits of the
business carried on by all or any of them acting for all.
Goodwill: It is the present value of a firm’s anticipated excess earnings.
9.10: Self Assessment Questions:
1. Define partnership. What are the things to be remembered when a new partner comes in?
2. What is goodwill? How it is valued in case of admission of a new partner?
Dr.R.Jayaprakash Reddy.
Financial Accounting - II 10.1 Partnership Accounts II – ......
Lesson: 10
Partnership Accounts II – Retirement or death

of a partner
10.0 Objectives:
After going through this lesson you will be able to understand the following:
1. Treatment of goodwill and revaluation of assets and liabilities in case of retirement or
death of a partner.
2. Purchase of retiring partner’s share by the remaining partners.
3. Treatment of Joint Life policy.
Structure:
10.1: Retirement of a partner
10.1.1: Goodwill
10.1.2: Revaluation of Assets and Liabilities
10.1.3: Payment to Retiring Partner
10.1.4: Purchase of Retiring partner’s share
10.2: Death of a Partner
10.3: Joint Life Policy
10.4: Illustrations
10.5: Try yourself
10.6: Summary
10.7: Glossary
10.1: Retirement of a partner:

In the partnership, any of the partners may retire in accordance with agreement, or with
the consent of the remaining partners or where the partnership is at will, by giving notice in writing
to all other partners of his intention to retire. A retiring partner will not be liable for liabilities
incurred by the firm after his retirement. However, he must give a public notice to that effect.
Such a public notice is not necessary in case of a sleeping or dormant partner.
The problems to be dealt with on retirement of a partner are mainly similar to those arising
on the admission of a partner. The main difference between admission of a partner and retirement
of a partner is on the question of payment of the dues to the retiring partner. Treatment of
goodwill and revaluation of assets and liabilities in retirement are as follows:
10.1.1: Goodwill:
Goodwill will be valued in the manner prescribed in the deed or by mutual understanding.
One of the following cases may be adopted:
1. Goodwill may be raised in the books of the firm. Then the following entry is required.
Goodwill A/C Dr
To Partners’ A/Cs (to all partners in the old profit sharing ratio)
2. Goodwill may be raised in the books of the firm and is written off. The following entries are
required:
a) Goodwill A/C Dr
To Partners’ A/Cs (to all partners in the old profit sharing ratio)
b) Partners’ Capital A/Cs (Remaining partners and in the new profit sharing ratio) Dr
To Goodwill
3. Only the share of the retiring partner is brought into books. The entry is
Goodwill A/C Dr
To Retiring partner Capital A/c (his share level)
In this case, it is advisable to write off the goodwill to the remaining partners in the ratio in
which they gain on the retirement. If goodwill appears in the books already, entries for raising
goodwill should be made only for the difference.
10.1.2: Revaluation of Assets and Liabilities:
The method of dealing with revaluation of assets is exactly similar to that followed at the
time of admission of a partner. The Profit and Loss Adjustment Account or Revaluation Account
will be prepared and the balance transferred to all the partners, including the retiring one, in the
old profit-sharing ratio. Assets and liabilities will then appear in the books at changed values. But
if it is desired that assets and liabilities should continue to appear in the books at the old values,
a Memorandum Revaluation Account will be prepared. Its balance will be transferred to all the
partners in the old profit-sharing ratio and then the same amount will be put on the reverse side
and transferred to the remaining partners in the new profit-sharing ratio.
10.1.3: Payment to Retiring Partner:

The amount due to the retiring partner will be paid as per terms of the partnership agreement
or as otherwise mutually agreed. When the amount payable to the retiring partner is determined,
it will be transferred to his loan account.
Then the journal entry will be:

Retiring Partner’s Capital A/C Dr
To Retiring Partner’s Loan A/C
In case the continuing partners agree to bring cash to pay off the retiring partner, the
entries will be:
Bank A/C Dr
To Continuing Partners’ Capitals A/Cs
(Being cash brought in by the partners in the agreed ratio to pay off the retiring partner)
Retiring Partner’s Capital A/C Dr
To Bank
(Being cash paid to the retiring partner)
In case the continuing partners decide to pay the retiring partner in their individual capacity
in their profit - sharing ratio, the entry will be:
Retiring Partner’s Capital Loan A/C Dr
To Continuing Partners’ Capital A/Cs
The amount due to the retiring partner may be agreed to be paid in installments with
interest. In such case Loan account will be closed after the last installment is paid.
10.1.4: Purchase of retiring partner’s share:
There may, sometimes, be an agreement that the retiring partner’s share in the firm will be
purchased by the remaining partners. If the agreement does not state the proportion in which the
remaining partners will buy the share of the retiring partner, it will be in the profit-sharing ratio. In
the case of purchase, the amount due to the retiring partner is ascertained in the usual manner
and then the retiring partner’s capital account is debited and the other partners’ capital accounts
credited in the profit-sharing ratio or the ratio agreed upon. The retiring partner’s loan will not
figure in the books of the firm and he will look to the partners in their individual capacities for the
satisfaction of his claim.
10.2: Death of a Partner:

In the event of death of a partner, usually, the surviving partners carry on the business,
purchasing the share of the deceased partner after determining the amount due to him and then
treating it as a loan to the firm. The legal representatives or the executor of the deceased partner
will be entitled to get from the firm the amounts due. It is ascertained adding deceased persons
capital, share of goodwill, profit on revaluation and share out of the proceeds of a joint life insurance
policy. Except this, the treatment in accounts is not different from that in case of retirement. After
ascertaining the amount due to the deceased partner, the balance in his capital account should
be transferred to an account opened in the name of his executor.
It should be noted that according to the Partnership Act, the executors would be entitled,
at their choice, to interest at 6% p.a. on the amount due from the date of death to the date of
payment or to that portion of profit which is earned by the firm with the help of the amount due to
the deceased partner. This also applies to a retiring partner.
10.3: Joint Life Policy:

For funds to pay to the executor of a deceased partner, without upsetting the working
capital of the firm, it is usual to take out a joint policy on the lives of the partners. The insurance
company undertakes to pay a fixed sum of money when any of the partners dies. There are three
ways to deal with this in the accounts:
1. All the premiums paid are treated as expenses and debited to Profit and Loss Account
and, when a partner dies, the amount received from the insurance company is
treated as a profit and credited to all partners in the profit-sharing ratio.
2. a) The premiums paid are debited to the Joint Life Policy account.
b) Every year, an amount equal to the premium is debited to the Profit and Loss
Account and credited to Joint Life Policy Reserve account.
c) The Joint Life Policy account and Joint Life Policy Reserve account are
mutually adjusted so as to leave a balance in each account equal to the surrender
value of the policy.
d) When death occurs of a partner, the amount received is credited to the Joint Life
Policy account. The amount standing to the credit of the Joint Life Policy Reserve
account is also transferred to it and then it is closed by transfer to the capital
accounts of all partners.
3. The surrender value of the policy is considered as an asset and the excess of the amount
paid over the surrender value as an expense. In this case, the premiums paid are
debited to a Joint Life Policy account which is reduced to its surrender value by
appropriate debit to the Profit and Loss account. The Joint Life Policy Account is
an asset and will be shown in the Balance Sheet. When a partner dies, the amount
received from the insurance company will be credited to the joint life Policy Account,
the balance on this account being then transferred to the capital accounts of partners
(including the deceased partner) in the profit-sharing ratio.
Illustrations:
Illustration 1:
A, B and C are partners, sharing profits equally. Their Balance Sheet at 31st December
2007 is as follows;
Liabilities Assets
Sundry Creditors 4,000 Cash at Bank 4,000
A 12,000 Sundry debtors 20,000
B 8,000 Less: RBD 1,000 19,000
C 7,500 Stock 18,000
Reserve 6,000 Fixtures 3,500
47,500 47,500
B retires on the date and the following adjustments are to be made for the purpose:
a) Goodwill of the firm is valued at Rs.12, 000.
b) Fixtures to be depreciated by 5%.
c) Stock to be appreciated by 10%.
d) Reserve for bad debts to be increased by Rs.500.
Draw up the Profit and Loss Adjustment Account, Capital Accounts of the partners and the
Opening Balance Sheet of the continuing partners.
Solution:
Profit and Loss Adj. Account
To Fixtures 175 By Stock account 1,800
To A’s Capital 375
To B’s Capital 375
To C’s Capital 375 1,125
1,800 1,800
Goodwill Account
To A’s Capital 4,000 By Balance C/D 12,000
12,000 12,000

Reserve Account
To A’s Capital 2,000 By Balance B/D 6,000
6,000 6,000

To Balance C/D 18,375 By Balance B/D 12,000
By P & L Adj. A/C 375
By Goodwill 4,000
By Reserve 2,000
18,375 18,375
To Loan A/C 24,375 By Balance B/D 18,000
By Goodwill 4,000
By Reserve 2,000
24,375 24,375

By Goodwill 4,000
By Reserve 2,000
13,875 13,875
B’s Loan Account
By Capital A/C23,475
Balance Sheet of A and C as on 31-12-2007

Liabilities Assets
A 18,375 Debtors 20,000
C 13,875 Less: RBD 1,500 18,500
B’s Loan Account 24,375 Stock (18,000+1,800) 19,800
Fixtures 3,325
Goodwill 12,000
60,625 60,625
Illustration 2:
Viswanath, Gavaskar and Sobers are in partnership sharing profits equally. Sobers retired
on 31 March 2007. The Balance Sheet of the firm on 31st December 2006 stood as follows:
st
Balance Sheet
Liabilities Assets
Creditors 7,740 Cash in hand and bank 3,000
General Reserve 2,400 Debtors 6,000
Investment fluctuation 720 Stock 6,000
Reserve for doubtful debts 480 Investments (at cost) 3,000
Capitals: Freehold property 24,000
Viswanath 18,000 Goodwill 11,340
Gavaskar 12,000
Sobers 12,000 42,000
53,340 53,340
On the date of retirement it was found that: a) Freehold property e valued at Rs.34, 800.b)
Investments be valued at Rs.2, 820. c) Debtors were all good. d) Stock is valued at Rs.5, 640. e)
Goodwill is valued at on year’s purchase of the average profit of the past five years. f) Sobers
share of profit to the date of retirement be calculated on the basis of average profit of the preceding
three years.
The books showed the profits of the last five years as follows: 2002 – Rs.6, 900; 2003 –
Rs.8, 400; 2004 – Rs.5, 400; 2005 – Rs.4, 800; 2006 – Rs.6000.
You are required to pass journal entries, give capital account of Sobers, and prepare
Balance Sheet of the remaining partners.
Solution:
Calculation of Goodwill:
Total profit of 5 years: 6,900+8,400+5,400+4,800+6,000=31,500
One year’s average goodwill = 31,500/5 = 6,300
Goodwill already appearing in Balance Sheet = 11,340
Less: Revalued amount 6,300
Decrease in the value of Goodwill 5,040
Sobers’s share of profit to the date of retirement:
Date of Balance Sheet 31 December 2006
Date of retirement 31 March 2007 i.e. after 3 months.
Total of the preceding 3 years profit = 5,400+4,800+6,000 = 16,200
Average = 16,800/3 = 5,400
Profit for 3 months = 5,400/12x3 = 1,350
Sobers’s share = 1,350x 1/3 = 450
Journal entries;
1. P & L Adj. A/C Dr 5,400
To Stock 360
To Goodwill 5,040
(Being the assets revalued)
2. Freehold Property A/C Dr 10,800
RBD A/C Dr 480
Investment fluctuation fund A/C Dr 540
To P & L Adj. A/C 11,820
(Being two assets revalued)
3. P & L Adj. A/C Dr 6,420

To Viswanath’s Capital 2,140
To Gavaskar’s Capital 2,140
To Sobers’s Capital 2,140
(Being the profit on revaluation distributed among the partners)
4. General Reserve A/C Dr 2,400
To Viswanath’s Capital 800
To Gavaskar’s Capital 800
To Sobers’s Capital 800
(Being the accumulated profit distributed to the partners)
5. P & L Suspense A/C Dr 450
To Sobers’s Capital 450
(Being the share of profit to the date of retirement (3 months)
Credited to partner)
6. Sobers’s Capital A/C Dr 15,390
To Sobers’s Loan A/C 15,390
(Being the retiring partner’s claim transferred to the loan account)
Sobers’s Capital Account
To Loan A/C 15,390 By Balance 12,000
By P & L Adj. A/C 2,140
By General Reserve 800
By P & L Suspense A/C 450
(3 months profit)
15,390 15,390
Balance Sheet of Viswanath and Gavaskar as on 31-3-2007
Liabilities Assets
Capitals: Cash 3,000
Viswanath 20,940 Debtors 6,000
Gavaskar 14,940 Stock 5,640
Sobers Loan A/C 15,390 Investments 3,000
Creditors 7,740 Freehold Property 34,800
Investment fluctuation fund 180 Goodwill 6,300
P & L Suspense A/C 450
59,190 59,190
Working notes:
Profit and Loss Adjustment Account
To Sundry Assets 5,400 By Sundry Assets 11,820
To Capital Accounts:
Viswanath 2,140
Gavaskar 2,140
Sobers 2,140 6,420
11,820 11,820
Capital Account
Viswanath Gavaskar Viswanath Gavaskar
By balance 18,000 12,000
P & L Adj. A/C 2,140 2,140
General Reserve 800 800
20,740 20,740
Note:
As the Goodwill is already appearing in the Balance Sheet, no special treatment for Goodwill
is necessary. It is enough to adjust in the P & L Adj. A/C, along with other assets.
Investments: Actual value as per Balance Sheet = 5,000
Less: Existing fund 1,200
Value as per Balance Sheet 3,800
i.e. there is an appreciation in the value by Rs.900. This appreciation is shown in another way by
reducing the investment fluctuation fund.
Illustration 3:
P, Q and R are partners, sharing profits equally. Balance Sheet at 31st December 2007 is
as follows:
Liabilities Assets
Current Accounts; R’s Current A/C 2,500
P 2,000 Bills receivable 5,000
Q 3,000 Sundry debtors 20,000
Reserve Capitals: Less: RBD 1,000 19,000
P 10,000 Stock 18,000
Q 15,000 Fixture 3,500
R 10,000
51,000 51,000
R retires on that date and the following adjustments are to be made for the purpose:
1. Goodwill is valued at Rs.12,000.
2. Fixtures to be depreciated by 5%.
3. Stock to be appreciated by 10%.
4. Bad debts provision to be increased by Rs.500.
Find out the amount due to R and transfer it to his loan account. Pass journal entries,
open partners account and Profit and Loss Adjustment Account, and prepare the opening Balance
Sheet of the continuing partners.
Solution:
Journal entries:
1. P & L Adj. A/C Dr 675
To Fixtures 175
(Being Assets value reduced)
2. Stock A/C Dr 1,800
To P & L Adj.A/C 1,800
(Being Asset value rose)
3. P & L Adj. A/C Dr 1,125

To P’s Current A/C 375
To Q’s Current A/C 375
To R’s Current A/C 375
(Being profit transferred to current accounts)
4. Goodwill A/C Dr 12,000
To P’s Current A/C 4,000
To Q’s Current A/C 4,000
To R’s Current A/C 4,000
(Being Goodwill created)
5. Reserve A/C Dr 6,000
(Being Reserve distributed)
6. R’s Current A/C Dr 3,875
To R’s Capital A/C 3,875
(Being current account balance transferred to Capital Account)
7. R’s Capital A/C Dr 13,875
To R’s Loan A/C 13,875
(Being Capital account balance transferred to Loan account)
Profit and Loss Adjustment Account
To Fixtures 175 By Stock 1,800
To P’s Current A/C 375
To Q’s Current A/C 375
To R’s Current A/C 375
1,800 1,800
Goodwill Account
12,000
P’s Current Account

To Balance C/D 8,375 By Balanace B/D 2,000
By Goodwill 4,000
By Reserve 2,000
8,375 8,375
Q’s Current Account
By Goodwill 4,000
By Reserve 2,000
9,375 9,375
R’s Current Account

To Balance C/D 2,500 By P & L Adj. A/C 375
To Capital A/C 3,875 By Goodwill 4,000
By Reserve 2,000
6,375 6,375
R’s Capital Account

To Loan A/C 13,875 By Balance B/D 10,000
By Current A/C 3,875
13,875 13,875
R’s Loan Account

To Balance C/D 13,875 By Capital A/C 13,875
13,875 13,875
Balance Sheet of P and Q

Liabilities Assets
Creditors 5,000 Bank Balance 3,000
R’s Loan A/C 13,875 Bills receivable 5,000
Current Accounts: Debtors 20,000
P 8,375 Less: RBD 1,500 18,500
Q 9,375 17,750 Stock 19,800
Capital Accounts: Fixtures 3,325
P 10,000 Goodwill 12,000
Q 15,000 25,000
61,625 61,625
Illustration 4:
The Balance Sheet of A, B and C who were sharing profits is proportion to their capitals
stood as follows on December 31, 2007.
Liabilities Assets
Sundry Creditors 6,90,000 Cash at Bank 5,50,000
Capital Accounts: Sundry Debtors 5,00,000
A 20,00,000 Less : Provision 10,000 4,90,000
B 15,00,000 Stock 8,00,000
C 10,00,000 45,00,000 Plant and Machinery 8,50,000
Land and Buildings 25,00,000
51,90,000 51,90,000
B retired on the above date and the following was agreed upon:
1) That stock is depreciated by 6%.
2) That the provision for Doubtful debts be brought up to 5% on Debtors.
3) That the Land and Buildings be appreciated by 20%.
4) That a provision of Rs.7, 700 be made I respect of outstanding legal charges.
5) That the Goodwill of the entire firm be fixed at Rs.10,00,000 and B’s share of it be adjusted into
the amounts of A and C who are going to share future profits in the ratio 5:3.
6) That the assets and liabilities (except cash) were to appear in the balance sheet at their old
figures.
7) That the entire capital of the firm as newly constituted be fixed at Rs.28,00,000 between A and
C in the proportion of 5:3 (actual cash to be brought in or paid off, as the case may be).
Pass journal entries to give effect to above arrangements. Show the Balance Sheet after
B’s retirement. Also give a statement showing how much cash is brought in by or pay to the
partners.
Solution:
Profit sharing ratio of A, B & C 4:3:2 i.e. 4/9; 3/9; 2/9
New profit sharing A & C = 5:3 = 5/8; 3/8
Gaining Ratio of A = 5/8 – 4/9 = 13/72
Gaining Ratio of C = 3/8-2/9 = 11/72
= 13:11
Goodwill share given to B, shall be charged to A & C in this ratio.
Total Capital of the firm after B’s retirement = 28,00,000
A’s Capital = 28,00,000 x 5/18 = 17,50,000
C’s Capital = 28,00,000 x 3/8 = 10,50,000
Journal entries:
1. P & L Adj. A/C Dr 1,40,000
To Stock 48,000
To Outstanding legal bills 77,000
2. Land and Buildings A/C Dr 5,00,000
To P & L A/C 5,00,000
(Being the assets appreciated)
3. P & L A/C Dr 3,60,000
To A’s Capital 1,60,000
To B’s Capital 1,20,000
(Being the profit on revaluation distributed to partners)
4. A’s Capital A/C Dr 1,95,000
C’s Capital A/C Dr 1,65,000
To B’s Capital A/C 3,60,000
(Being the retiring partner’s share of goodwill changed to continuing partners capitals in their
gaining ratio i.e. 13:11)
5. B’s Capital A/C Dr 19,80,000
To B’s Loan A/C 19,80,000
(Being the retiring partner’s claim transferred to his Loan A/C)
6. A’s Capital A/C Dr 2,25,000
C’s Capital A/C Dr 1,35,000
To P & L Adj. A/C 3,60,000
(Being Loss on revaluation distributed to A & c in their new ratio i.e.5:3; assuming that the value
of assets and liabilities were reinstated)
7. Cash A/C Dr 2,80,000
To C’s Capital 2,70,000
(Being the shortage in Capital Accounts brought in by partners)
Memorandum P & L Adj. Account
To Stock 48,000 By Land & Buildings 5,00,000
To RBD 15,000
To Outstanding legal bills 77,000
To A’s Capital 1,60,000
To B’s Capital 1,20,000
To C’s Capital 80,000 3,60,000
5,00,000 5,00,000
To Land & Buildings 5,00,000By Sundry Assets&Liabilities 1,40,000
By A’s Capital 2,25,000
By B’s Capital 1,35,000 3,60,000
5,00,000 5,00,000

To B’s Capital (goodwill) 1,95,000By Balance 20,00,000
To P & L Adj. A/C 2,25,000By P & L Adj.A/C 1,60,000
To Balance C/D 17,50,000 By Cash ( brought in) 10,000
21,70,000 21,70,000
By Balance B/D 17,50,000
To Loan A/C 19,80,000 By Balance 15,00,000
By P & L Adj. A/C 1,20,000
By A’s Capital A/C- Goodwill 1,95,000
By C’s Capital A/C – Goodwill 1,65,000
19,80,000 19,80,000
To B’s Capital – goodwill 1,65,000 By Balance 10,00,000
To P & L Adj. A/C 1,35,000 By P & L Adj. A/C 80,000
To Balance C/D 10,50,000 By Cash (brought in) 2,70,000
13,50,000 13,50,000
By Balance B/D 10,50,000
B’s Loan Account

By Capital 19,80,000
Balance Sheet A & c as on 1-1-2007
Liabilities Assets
Creditors 6,90,000 Cash 5,50,000+2,80,000 8,30,000
Capitals: Debtors 5,00,000
A 17,50,000 Less: Provision 10,000 4,90,000
C 10,50,000 Stock 8,00,000
B’s Loan A/C 19,80,000 Plant 8,50,000
54,70,000 54,70,000
A C
Capitals of partners before the cash brought in 17,40,000 7,80,000
Cash to be brought in 10,000 2,70,000
Illustration 5:
Bedi and Prasanna were carrying on business, as equal partners. It was agreed that Bedi
should retire from the firm on March 31, 2007, and that his son Chandra should join Prasanna
from 1st April, 2007, and should be entitled to one third of the profits. The Balance Sheet on
March 31, 2007 was as follows:
Bedi’s Capital 23,800 Cash at bank 7,700
Prasanna’s Capital 19,740 Sundry debtors 11,270
Sundry Liabilities 6,860 Furniture 9,940
Buildings 14,490
Goodwill 7,000
50,400 50,400
On 31st March, 2007, goodwill was valued of Rs.15, 400 and Buildings at Rs.16, 800. It
was agreed that enough money should be introduced to enable Bedi to be paid out and leave
Rs.7, 000 cash by way of working capital. Prasanna and AChandra were to provide such sums as
would make their capital proportionate to their share of profits. Bedi agreed to make a friendly
loan to Chandra by transfer from his capital account of half the amount which Chandra had to
provide.
Prasanna and Chandra paid in cash due from them on 1st April, 2007 and the amount due
to Bedi was paid out on the same day.
Pass the necessary journal entries and prepare the Balance Sheet as on 1st April, 207.
Solution:
Balance Sheet (after paying off Bedi and after the admission of Chandra)
Liabilities Assets
Sundry Liabilities 6,860 Cash (as per revaluation) 7,000
(no change in revaluation) Debtors(no change) 11,270
Combined Capital of Prasanna Furniture (no change) 9,940
And Chandra (Bal. Fig) 53,550 Buidings (as per revaluation) 16,800
Goodwill (as per revaluation) 15,400
60,410 60,410
Total Capital of Prasanna Chandra after paying off Bedi 55,550
Prasanna’s share 2/3 = 53,550 x 2/3 35,700
Chandra’s share 1/3 = 53,550 x1/3 17,850
Less: Transfers from his father’s A/C(Bedi’s A/C)1/2 8,925
Cash to be brought in by Chandra 8,925
Journal Entries:
Buildings A/C Dr 8,400
To P & L Adj. A/C 10,710
(Being the assets appreciated)
2. P & L Adj. A/C Dr 10,710
To Bedi’s Capital 5,355
To Prasanna’s Capital 5,355
(Being the profit on revaluation distributed to partners)
3. Cash A/C Dr 19,530
To Prasanna’s Capital 10,605
To Chandra’s Capital 8,925
(Being shortage of capital brought in by Prasanna and the new partner brings half of his share of
capital)
4. Bedi’s Capital A/C Dr 29,155
To Cash 20,230
To Chandra’s Capital A/C 8,925
(Being retiring partner’s claim settled and some account transferred to his son’s capital (New
partner) A/C)
Balance Sheet of Prasanna and Chandra as on 1-4-2007
Liabilities Assets
Prasanna 35,700 Debtors 11,270
Chandra 17,850 Furniture 9,940
Sundry Liabilities 6,860 Buildings 16,800
Goodwill 15,400
60,410 60,410
Working Notes:
Bedi’s Capital Account
To Chandra’s Capital A/c 8,925 By P & L Adj. A/C 5,355
29,155 29,155
Prasanna’s Capital Account
By Balance 19,740
By P & L Adj. A/C 5,355
By Cash 10,605
35,700
Chandra’s Capital Account
By Cash 8,925
By Bedi’s Capital 8,925
17,850
Prasanna’s Capital in the new firm: 35,700
Less: Existing Capital after revaluation 25,095
Cash to be brought in 10,605
Cash Account
To Balance 7,700 By Bedi’s Capital 20,230
To Prasanna’s Capital 10,650 By Balanace C/D 7,000
To Chandra Capital 8,925 (working capital)
27,230 27,230
Illustration 6:
A, B and C are partners sharing profits and losses in the proportion of 3:2:1 and their
Balance Sheet of 31st December, 2007 was as follows:
Bills payable 7,560 Cash in hand 250
Creditors 12,300 Cash at bank 960
General Reserve 3,000 Bills receivable 3,300
Capitals: Debtors 7,450
A 10,000 Stock 12,470
B 6,000 Investments 10,430
C 4,000 20,000 Building 8,000
44,860 42,860
B died on February 28 2007 and according to partnership agreement his executor is entitled
to be paid out as follows:
a) The capital to his credit at the time of his death and interest up to the time of his death
at 6% per annum.
b) His appropriate share of general reserve.
c) His share of profit to the date of his death which is to be taken on the basis of preceding
year’s profit.
d)His share of goodwill which is calculated at two year’s purchase of the average profit of
the preceding three years.
The investments were sold for Rs.16,020 and B’s executor was paid off. The profits in the
three preceding years was 2004 – Rs.7,800; 2005 – Rs.9,000; 2006 – Rs.9,600.
Pass the journal entries and write the accounts of B.
Solution:
Journal entries:
1. Interest on capital A/C Dr 60.00
To B’s Capital Account 60.00
(Being the interest for 2 months @ 6% due to B)
To C’s Capital 500
(Being the accumulated profits shared)
3. P & L A/C Dr 533.33
To B’s Capital 533.33
(Being the share of profit on the basis of preceding year’s profit)
To A’s Capital 8,800.00
To B’s Capital 5,866.67
To C’s Capital 2,933.33
(Being the goodwill raised)
(7,800+9,000+9,600=26,400/3x2=17,600)
5. Cash A/C Dr 16,020
To Investment A/C 16,020
(Being the assets sold)
6. B’s Capital A/C Dr 13,460
To B’s executor’s A/C 13,460
(Being the claim transferred to executor’s account)
7. Executor’s Account Dr 13,460
To Cash 13,460
(Being cash paid to the executor)
To Executor’s A/C 13,460.00 By Balance 6,000.00
By Interest on capital
(6,000x2/12x6/100)
By General Reserve 1,000.00
(3,000 x 1/3)
By P & L A/C (9,600x2/12x1/3) 533.33
By Goodwill 5,866.67
13,460.00 13,460.00
Illustration 7:
A, B and C carried on business in partnership, profits being divisible in 3:2:1. The balance
sheet on 31st December 2006 showed their capitals as Rs.10, 400; Rs. 5,000 and Rs.3, 000
respectively. On 28th February 2007 A died. From the following particulars prepare an account for
presentation to A’s executor.
a) The firm issued the partners’ lives severally A for Rs.9, 000, B for Rs.4, 800 and C for Rs.2,400.
The premiums have been charged to the profit and loss account. The surrender value on 28 th
February 2007 was one fourth of the sum assured.
b) Capital carries interest at 5% per annum.
c) A’s drawings from 1st January 2007 to the date of his death were Rs.1, 200.
d) A’s share of profits for the portion of the current year in which he was alive was to be taken at
the sum calculated on the average of the previous three completed years and goodwill was to be
raised on the basis of two years’ purchase of average profits of those three years.
The profits of the three previous completed years were Rs.9, 200; Rs.7, 400 and Rs.8,
600 respectively.
Show A’s account. Take calculations to the nearest rupee.
Solution:
To Drawings 1,200 By Balance 10,400
By Joint life policy 5,400
By Interest on Capital(for 2 months) 87
By P & L A/C(share of profit) 700
To A’s Executor’s A/C 23,787 By Goodwill 8,400
24,987 24,987
A’s Executor’s Account
By A’s Capital A/C 24,987
Working Notes:
Joint Life Policy: A 9,000 ( full value as he leaves the firm)
B (4,800 x ¼) 1,200
C (2,400 x ¼) 600
10,800
A’s share = 10,800 x ½ = 5,400.
Interest on Capital = 10,400 x 5/100 x 2/12 = 87 (approx)
Share of profit = profit for the 3 preceding years =9,200+7,400+8,600=25,200
Average of one year = 25,200/3 = 8,400.
Profit for 2 months = 8,400 x 2/12 = 1,400
A’s share = 1,400 x ½ =700
Goodwill: Two years’ purchase of average profits of 3 years
Average profit = 8,400
2 years’ purchase = 8,400x 2 = 16,800
Goodwill = 16,800
A’s share = 16,800 x ½= 8,400.
Illustration 7:
S, J and N were partners sharing profits and losses in the ratio of 3:2:1 on 31st December
2007. Their balance sheet was as follows:
Creditors 8,000 Goodwill 6,000
General Reserve 9,000 Buildings 20,000
Capitals: Patents
5,000
S 35,000 Machinery 15,000
J 20,000 Stock 8,000
N 15,000 70,000 Debtors 8,000
Cash at Bank 25,000
87,000 87,000
J died on 1st July 2007. The following terms and conditions were agreed upon between
her executor and the remaining partners.
a) Goodwill was valued at 1 ½ years purchase price of past three years’ profits which were
as follows:
2004 16,000
2005 8,000
2006 12,000
b) Patents were valued at Rs.8, 000; buildings at Rs.25, 000; and machinery at Rs.24,
000.
c) Profit up to the date of death of J was to be taken on the basis of the average profits of
the past three years.
d) Interest on capital at 5% per annum was to be charged.
e) Cash amounting to Rs.7, 500 was paid immediately and the balance due to the executor
of the deceased was payable together with interest at 6% per annum in two equal yearly
installments.
f) Reserve for bad and doubtful debts was to be provided for an amount of
Rs. 1,000.
g) J’s drawings up to the date of his death were Rs.4, 000.
Draft the necessary journal entries to record the above transactions and prepare J’s capital
account as on the date of her death.
Solution:
Journal entries:
To J’s Capital A/C 3,000
(Being J’s share in the reserve transferred to his capital account)
Patents A/C Dr 3,000
Buildings A/c Dr 5,000
To P & L Adj. A/C 29,000
(Being Assets revalued)
3. P & L Adj. A/C Dr 1,000
(Being provision credited on debtors)
4. P & L Adj. A/C Dr 28,000
To S’s Capital 14,000
To J’s Capital 9,333

To N’s Capital 4,667
(Being profit on revaluation distributed)
5. Profit and Loss Suspense A/C Dr 2,000
To J’s Capital A/C 2,000
(Being the share of profit of J for six months transferred to his account)
6. Interest on Capital A/C Dr 500
To J’s Capital A/C 500
(Being interest on Capital for six months transferred to his account)
7. J’s Capital A/C Dr 30,833
To Executor’s A/C 30,833
(Being J’s capital balance transferred to his Executor’s account)
8. Executor’s A/C Dr 7,500
To Cash 7,500
(Being part payment made)
J’s Capital Account
To Drawings 4,000 By Balance B/D 20,000
To Executor’s A/C 30,833 By Reserve 3,000
By P & L Adj. A/C 9,333
By P & L Suspense A/C 2,000
By Interest on Capital 500
34,833 34,833
Executor’s Account
To Cash 7,500 By J’s Capital A/C 30,833
30,333 30,333
Working Notes:
Goodwill 1 ½ years purchase of the average profit of preceding 3 years
3 years profit = 16,000+8,000+12,000=36,000
1 year average = 36,000/3=12,000
11/2 years average = 12,000 x 1 ½ = 18,000
Less: Goodwill already in the balance sheet = 6,000
Increase in goodwill =12,000
Illustration 8:
A and B who share profit in the ratio of 3:2, took out a joint life policy on 1st May, 2000 for
Rs.30, 000. The annual premium was Rs.1, 300. The surrender value of the policy was:
2000 – Nil; 2001 – Rs.400; 2002 – Rs.900; 2003 – Rs.1, 450.
B died on 15th September, 2003 and the amount of the policy was received on 31 st
December, 2003. The books are closed on December 31 each year.
Give journal entries if premium paid is written off to profit and loss account each year.
Solution:
Journal Entries:
May 1, 2000 Joint life policy A/C Dr 1,300
To Cash 1,300
(Being the 1st premium paid on Joint Policy)
Dec 31,2000 P & L A/C Dr 1,300
To Joint Policy Reserve A/C 1,300
(Being the reserve created for Joint Policy)
Joint Life Policy Reserve A/C Dr 1,300
To Joint Life Policy 1,300
(Being the surrender value taken into account)
May 1, 2001 Joint Life Policy A/c Dr 1,300
To Cash 1,300
nd
(Being the 2 premium paid)
Dec 31, 2001 P & L A/C Dr 1,300
To Joint Life Policy Reserve 1,300
(Being the reserve created for Joint Life Policy)
Joint Life Policy Reserve A/C Dr 900
To Joint Life Policy 900
(Being the surrender value of Rs.400 taken into account)
May 1, 2002 Joint Life Policy A/C Dr 1,300
To Cash 1,300
(Being 3rd premium paid)
Dec 31, 2002 P & L A/C Dr 1,300
(Being the reserve created)

(Being the surrender value Rs.900 taken into account)
May 1.2003 Joint Life Policy A/C Dr 1,300
To Cash 1,300
th
(Being the 4 premium paid)
Dec 31, 2003 Cash A/C Dr 30,000
To Joint Policy 30,000
(Being the policy surrendered due to the death of a partner and cash received)
(Being the reserve cancelled)
(Being the policy amount distributed among the partners)
Working Notes:
Joint Life Policy Account
1-5-00 To Cash 1,300 31-12-00By Joint Life Policy Reserve 1,300
1-5-01 To Cash 1,300 31-12-01 By Joint Life Policy Reserve 900
By Balance C/D 400
1,300 1,300
1-1-02 To Balance B/D 400 31-12-02 By Joint Life Policy Reserve 800
1-5-02 To Cash 1,300 By Balance C/D 900
1,700 1,700
1-1-03 To Balance B/D 900 31-12-03 By Cash 30,000
1-5-03 To Cash 1,300 By Joint Life Policy reserve 900
To B’s Capital 11,480 28,700
30,900 30,900
Joint Life Policy Reserve Account
31-12-00 To Joint Life Policy 1,300 31-12-00 By P & L A/C 1,300
31-12-01 To Joint Life Policy 900 31-12-01 By P & L A/C 1,300
To Balance C/D 400
1,300 1,300
31-12-02 To Joint Life Policy 800 1-1-02 By Balance B/D 400
To Balanace C/D 900 31-12-02 By P & L A/C 1,300
1,700 1,700
31-12-03 To Joint Life Policy 900 1—1-03 By Balance B/D 900
Illustration 9:
Shiv, Shankar and Shambu took a joint life policy on 10th January, 2000, to provide the
necessary amount at the time a partner’s death. The policy amount is
Rs.40, 000. On 10th January 2003 they paid Rs.1, 000 as last annual premium. Shiv died on 20th
February 2003. The surrender value of the policy was as follows:
2000 - Nil: 2001 - 250; 2002 - 450;
After the death of Shiv, on 1st March the policy amount received. Pass the necessary
journal entries regarding the policy for three years. Show the final adjustment after Shiv’s death.
Partners share profits in 2:1 ratio and close the books every year on 31st December.
Solution:
Journal Entries:
10-1-00 Joint Life Policy A/C Dr 1,000
To Cash 1,000
(Being the first premium paid)
31-12-00 P & L A/C Dr 1,000
(Being the premium transferred to P & L A/C and created reserve)
Joint Life Policy Reserve A/C Dr 1,000
To Joint Life Policy A/C 1,000
To Cash 1,000
(Being the second premium paid)
31-12-01 P & L A/C Dr 1,000
To Joint Life Policy Reserve A/C 1,000
(Being the premium transferred to P & L A/C)
To Cash 1,000
(Being the third premium paid)
31-12-02 P & L A/C Dr 1,000
(Being the premium transferred to P & L A/C)
To Cash 1,000
(Being fourth premium paid)
1-3-2003 Cash A/C Dr 40,000
To Joint Life Policy 40,000
(Being the policy amount received)
To Shiv’s Capital 9,750
To Shankar’s Capital 9,750
To Shambu’s Capital 9,750
(Being the policy amount distributed to partners)
(Being the reserve account written off)
Joint Life Policy Account
10-1-00 To Cash 1,000 31-12-00By Joint Life Policy Reserve 1,000
10-1-01 To Cash 1,000 31-12-01By Joint Life Policy Reserve 750
By Balance C/D 250
1,000 1,000
1-1-02 To Balance B/D 250 31-12-02By Joint Life Policy Reserve 800
To Cash 1,000 By Balance C/D 450
1,250 1,250
1-1-03 To Balance B/D 450 1-3-03 By Cash 40,000
10-1-03 To Cash 1,000 ByJoint Life Policy Reserve 450
To Shiv’s Capital 19,500
To Shankar’s Capital 9,750
To Sambu’s Capital 9,750
40,450 40,450
Joint Life Policy Reserve Account
31-12-00 To Joint Life Policy A/C 1,000 31-12-00 By P & L A/C 1,000
31-12-01 To Joint Life Policy A/C 750 31-12-01 By P & L A/C 1,000
To Balance C/D 250
1,000 1,000
31-12-02 To Joint Life Policy A/C 800 1-1-02 By Balance B/D 250
To Balance C/D 450 31-12-02 By P & L A/C 1,000
1,250 1,250
1-3-03 To Joint Life Policy A/C 450 1-1-03 By Balance B/D 450
Try yourself:
1. A, B and c were carrying on business in partnership sharing profits and losses in the ratio of
3:2:1. On 31st December 2003, Balance Sheet of the firm stood as follows:
Liabilities Assets
Sundry Creditors 13,590 Cash 5,900
Capital Accounts: Debtors 8,000
A 15,000 Stock 11,690
B 10,000 Buildings 23,000
C 10,000 35,000
48,590 48,590
B retired on the above mentioned date on the following terms:
i) Buildings are to be appreciated by Rs.7, 000.
ii) Provision for bad debts is to be made @ 5% on debtors.
iii) Goodwill of the firm is to be valued at Rs.9, 000 and adjustment is this respect to be made
without raising goodwill account.
iv) Rs.5, 000 is to be paid to B immediately and the balance due to him be treated as a loan
carrying interest @ 6% per annum. Pass journal entries to record the above transactions and
show the Balance Sheet of the firm as it would appear immediately after B’s retirement.
(A’s Capital: Rs.16, 050; C’s Capital: Rs.10, 350; B’s Loan A/C: Rs.10, 200)
2. The Balance Sheet of X,Y and Z who were sharing profits in the ratio of 4:3:2 respectively stood
as follows on 31st December, 2007:
Liabilities Assets
Capital Accounts: Sundry Debtors 3,045
X 12,000 Less: Provision 105 2,940
Y 9,000 Stock 4,800
Z 6,000 27,000 Plant and Machinery 5,100
Land and Buildings 15,000
31,140 31,140
Y having given notice to retire from the firm, the following adjustments in the books of the
firm were agreed upon:
1. That land and buildings are appreciated by 10%.
2. The provision for bad debts is no longer necessary.
3. That the stock is to be appreciated by 20%.
4. That adjustment is to be made in the accounts to rectify a mistake previously made whereby Y
was credited in excess by Rs.810 while X and Y were debited in excess by Rs.420 and Rs.390
respectively.
5. That the goodwill of the firm is to fixed at Rs.5, 400 and Y’s share of the same is to be adjusted
to that of X and Z who are going to share in future profits in the ratio of 2:1.
6. That the entire capital of the firm, as newly constituted, will be readjusted by fringing in or
paying of cash so that the future capital of X and Z is in the ratio of 2:1.
Pass journal entries and prepare the Balance Sheet of the new firm showing Y’s balance
as loan.
(New capitals of X Rs.12, 480; Z Rs.6, 240; Y’s loan A/C Rs.10, 845; B/S total
Rs.33, 705)
3. Gupta, Badal and sinha are in partnership sharing profits and losses in the ratio of 2:2:1. Sinha
retires on 31st December, 2007. The Balance Sheet of the firm on the date of retirement of Sinha
is as follows:
Liabilities Assets
Creditors 2,300 Cash in hand 500
General Reserve 2,500 Cash at Bank 3,000
Gupta 10,000 Stock 10,000
Badal 8,000 Buildings 8,000
Sinha 7,200 25,200 Furniture 2,000
Profit & Loss Account 500 Goodwill 1,000
30,500 30,500
The following adjustments are to be made:
1. Buildings are to be revalued at Rs.10, 000.
2. Bad debts to be written off Rs.400.
3. Stock is to be revalued at Rs.9 000.
4. Furniture is to be revalued at Rs.1, 800.
5. The Goodwill of the firm is to be completely written off.
6. It was agreed to pay Rs.2, 000 only to the sundry creditors in full settlement of their dues.
7. The amount available at Bank is agreed to be paid to Sinha and the balance of the amount
due to Sinha to be transferred to his loan account.
You are required to prepare capital accounts of the partners, profit and loss adjustment
account and balance sheet of the firm.
(New Capitals: Gupta: Rs.11,080; Badal: Rs.9, 80; Sinha Loan A/C: Rs.4,740; Total of
Balance Sheet: Rs.26,900)
4. Amit, Dharam and Rajesh were partners sharing profits and losses in the ratio of 5:3:2. They
had taken out a joint life policy of the face value of Rs.24,000. On 31st December 2007 its
surrender value was Rs.4,800 on this date the balance sheet of the firm stood as under:
Liabilities Assets
Sundry creditors 6,360 Fixed assets 30,000
Expenses outstanding 840 Stock 13,200
Reserve 3,600 Book debts 10,800
Capitals: Cash at bank 2,400
Amit 24,000
Dharam 12,000
Rajesh 9,000 45,600
56,400 56,400
On this date Dharam decided to retire and for this purpose: i) goodwill was valued at
Rs.18, 000; ii) fixed assets were valued at Rs.36, 000 and iii) stock was considered as worth
Rs.12, 000.
Dharam to be paid through cash brought in by Amit and Rajesh in such a way as to make
their capitals proportionate to their new profit sharing ratio which was Amit 3/5 and Rsjesh 2/5.
Goodwill was to be passed through books without raising a goodwill account. The joint life policy
was also not to appear in the balance sheet.
Record these matters in the journal of the firm and prepare the resultant balance sheet.
(New Capitals: Amit: Rs.32,400; Rajesh: Rs.21,600;Cash to Dharam: Rs.21,360; Total of Balance
Sheet: Rs.61,200)
5. X, Y and Z were partners sharing profits in 6:4:3. The amount payable to the expired partner
will be paid 40% in the first year, 40% in the second year and 20% in the third year. To ascertain
the amount of an expired partner, the following items should be taken into account:
1. Share of profit should be calculated basing on the profits of the year in which the partner died.
2. Goodwill should be calculated basing on the two years’ purchase of the average profits of the
preceding three years profits plus the profits of the year in which the partner died up to the date of
his death.
3. Interest should be calculated at 6% on capital.
X died on 1st January 2004. Business closes every year on 31st March. Profits of the
preceding years were:
2000-01 42,000
2001-02 46,500
2002-03 48,000
2003-04 52,000
X Capital on 31st March 2003 was Rs.20, 000; X drawings from 31st March 2003 to 1st
January 2004 were Rs.6, 200. Show X executor’s account up to full payment.
(X executor’s account (beginning balance): Rs.75, 750; Last installment Rs.16, 059 (including
interest))
10.6: Summary:
This lesson dealt with the accounting procedure when a partner retires or dies in the firm.
The retirement or death basically makes no difference as the existing partners have to pay his
part. However, in certain aspects there are some differences. The retired partner’s due is
transferred to his loan account and will be paid later. The deceased partner’s due is transferred
to his executor’s account and will be paid immediately or with interest. Treatment of goodwill and
revaluation of assets and liabilities are almost same as in admission of partnership. Joint Life
Policy helps the partnership firm when a person dies and it has three methods of accounting
treatment.
10.7: Glossary:
Joint Life Policy: It is a policy taken on the lives of partners to meet the commitment when a
partner dies.

1. How goodwill is treated when a partner dies?
2. What are the accounting differences in retirement and death of a partner?
3. Explain the methods of Joint Life Policy treatment when a partner dies?
Financial Accounting - II 11.1 Partnership Accounts III – ......
Lesson 11
Partnership Accounts III: Amalgamation

11.0 Objective:
1. Meaning and purpose of amalgamation in partnership firms.
2. Method of accounting.
Structure:
11.1: Meaning of amalgamation
11.2: Journal entries
11.3: Illustrations
11.4: Try yourself
11.5: Summary
11.6: Glossary
11.1: Meaning of Amalgamation:

When two or more firms of similar nature merge, there come many economies.
Because of this, often firms merge or amalgamate themselves. The partners in the old firm
continue in the new firm. They reach an agreement regarding the revaluation of assets, future
sharing of profits and other modalities. These require separate entries in the books of old
partnership firms and new firm. After amalgamation, the firm will continue the operations and
the old partnership firms ceased to exist. For example, A &B firm and C & D firms may
amalgamate and become A, B, C & D firm. The partners in the old firms become partners of
the new firm. Their old firms will be closed down after amalgamation.
11.2: Journal Entries:
The following journal entries are required in the books of old firms and new firm when
amalgamation takes place:
Books of Old Firms
1. For Goodwill: The value of goodwill will be ascertained in case of each firm and the amount
will be credited to their respective partners’ capital accounts in their respective books.
Goodwill A/C Dr
To Partners’ Capital A/C
3. Reserve and other undistributed profits: They will be credited to the partners of each of
the firms in their respective books.
Reserves Dr
P & L A/C Dr
To Partners’ Capital A/C
In case of losses the entry will be reversed.
3. Revaluation of assets and liabilities: A profit and loss adjustment account will be opened in
each firm’s books. The profit or loss will be credited or debited to their partners’ capital
accounts in the old profit sharing ratio.
i) For increase in the value of assets or decrease in the value of liabilities:
Assets/Liabilities Dr
To P & L Adj. A/C
ii) For decrease in the value of assets or increase in the value of liabilities:
P & L Adj. A/C Dr
To Assets/Liabilities
iii) For distribution of profits:
P & L Adj. A/C Dr
To partners’ Capital A/Cs
In case of loss the entry will be reversed
4. For an asset taken over by a partner:
Partner’s Capital A/C Dr
To Asset A/C
5. For a liability taken over by a partner:
Liability A/C Dr
To Partner’s Capital A/C
6. For assets and liabilities taken over by the new firm:
New Firm Dr
Liabilities A/C Dr
To Assets A/C
7. Assets or Liabilities not taken over by the new firm will be either sold away or paid off and
any profit or loss on such selling or payment will be transferred to partners’ capital accounts in
their profit and loss sharing ratio. In case they are not disposed off, the will be transferred to
partners’ capital accounts in the ratio of their capitals.
8. Partners’ capital accounts will be closed by transferring them to the new firm’s account.
Partners’ Capital A/Cs Dr
To New Firm A/C
Books of New Firm
1. For assets and liabilities taken over:
Assets taken over Dr
To Liabilities taken over
To Partners’ Capital A/Cs
2. For any further contribution towards capital by the partners:
Bank A/C Dr
3. For any capital withdrawn by the partners:
Partners’ Capital A/Cs Dr
To Bank
11.3: Illustrations:
Illustration 1:
X and Y are two sole traders, their Balance Sheets as on 1st January 2007 are given
below:
Balance Sheet of X
Sundry creditors 8,000 Plant and Machinery 10,000
Capital Account 20,000 Stock in trade 5,000
Sundry debtors 11,000
Cash at bank 2,000
28,000 28,000
Balance Sheet of Y
Sundry creditors 8,000 Plant and Machinery 10,000
Capital Account 20,000 Stock in trade 5,000
Sundry debtors 11,000
Cash at bank 2,000

28,000 28000
They agree to amalgamate their business as on 1-1-2007. The following revaluations
were to be made:
a) Plant and Machinery were to be reduced by 10%.
b) Stock in trade was to be reduced in case of X by 20% and in the case of Y 10%.
c) A reserve of 2 ½ % is to be made against Sundry debtors.
d) Each partner is to be credited with goodwill of Rs.5, 000.
You are required to give journal entries for recording the above transactions in the
books of X and Y. Give also the amalgamated Balance Sheet of the partners as on 1-1-2007.
Solution:
Books of X
Journal Entries:
1. P & L Adj. A/C Dr 2,275
To Plant and Machinery 1,000
To Stock in trade 1,000
(Being the assets value reduced)
2. Capital A/C Dr 2,275
To P & L Adj. A/C 2,275
(Being loss transferred to capital)
To Capital 5,000
(Being goodwill transferred to capital)
4. Creditors A/C Dr 8,000
Reserve for bad debts A/C Dr 275
New firm A/C Dr 22,725
To Goodwill 5,000
To Debtors 11,000
To Bank 2,000
(Being various assets and liabilities transferred to the new firm)
To New firm 22,725
(Being the capital account closed)
Books of Y
Journal Entries:
1. P & L Adj. A/C Dr 1,175
To Stock in trade 500
To P & L Adj. A/C 1,775
(Being loss transferred to capital)
To Capital 5,000
(Being goodwill transferred to capital)
Reserve for bad debts A/C Dr 275
New firm A/C Dr 23,225
To Goodwill 5,000
To Debtors 11,000
To Bank 2,000
(Being various assets and liabilities transferred to the new firm)
To New firm 23,225

(Being the capital account closed)
Liabilities Assets
Sundry Creditors 16,000 Goodwill 10,000
Capitals: Plant and Machinery 18,000
X 22,725 Stock in trade 8,500
Y 23,,225 45,950 Debtors 22,000
Less: RBD 550 21,450
Bank 4,000
61,950 61,950
Illustration 2:
The following were the Balance Sheet of M/S A & B M/S C and D on December31,
2007.
Liabilities Assets
A&B C&D A&B C&D
Sundry Creditors 40,000 50,000 Cash at Back 11,200 13,400
Mrs.A’s Loan 10,000 Stock 40,800 36,600
Capitals: Sundry Debtors 30,000 40,000
A 80,000 Furniture 8,000 10,000
B 40,000 Premises 80,000 —
C 48,000 Investments ——— 30,000
D 32,000
1, 70,000 1, 30,000 1, 70,000 1,30,000
The two firms decided to amalgamate their businesses as from 1st January, 2007.
For this purpose it was agreed that Mrs.A’s loan should be repaid and that the investments of M/
C C and D be not taken over by the new firm. Goodwill of M/S A and B was fixed at Rs.16, 000
and that of M/S C and D at Rs.20, 000. Premises were revalued at Rs.1, 00,000 but the stock of
M/S A and B was found over-valued by Rs.8, 000. The stock of M/S C and D was under valued by
Rs.4, 000. A provision of 5% was created for bad debts of both the firms. The total capital of the
new firm was to be Rs.80, 000 and the capital of each partner was to be in his profit-sharing ratio
which was to be 3:2:3:2. Goodwill account in the new firm was to be written off.
Close the books of the two firms and pass opening entries of M/S A, B, C and D. Also
give the Balance Sheet of the newly constituted firm.
Solution:
Books of M/S A and B
1. Mrs A’s Loan A/C Dr 10,000
To Cash 10,000
(Being the loan paid off before amalgamation)
2. P & L Adj. A/C Dr 9,500
To Stock 8,000
3. Premises A/C Dr 20,000
To P & L Adj. A/C 20,000
(Being the asset appreciated)
4. P & L Adj. A/C Dr 10,500
(Being the profit on realization shared to partners)
6. M/S A, B, C and D A/C (New firm)Dr 1,46,500

Creditors A/C Dr 40,000
RBD A/C Dr 1,500
To Cash 1,200
To Stock 32,800
To Debtors 30,000
To Furniture 8,000
To Premises 10,000
To Goodwill 16,000
(Being the assets and liabilities transferred to new firm)
7. A’s Capital A/C Dr 93,250
B’s Capital A/C Dr 53,250
To A,B,C and D (New firm) 1,46,500
(Being the capitals transferred to new firm)
Books of C and D
1. P & L Adj. A/C Dr 2,000
To RBD 2,000
(Being the asset revalued)
2. Stock A/C Dr 4,000
To P & L Adj. 4,000
(Being the asset revalued)
3. P & L Adj. A/C Dr 2,000
To D’s Capital 1,000
(Being the profit on revaluation shared to partners)
5. C’s Capital A/C Dr 18,000
D’s Capital A/C Dr 12,000
To Investments 30,000
(Being the asset not taken over by the new firm shared to partners in their capital ratio)
6. M/S A, B, C and D A/C Dr 72,000
RBD A/C Dr 2,000
To Cash 13,400
To Stock 40,600
To Debtors 40,000
To Furniture 10,000
To Goodwill 20,000
7. C’s Capital A/C Dr 41,000
To A, B, C and D A/C 72,000
(Being the capitals transferred)
Books of A, B, C and D
1. Cash A/C Dr 14,600
Stock A/C Dr 73,400
Furniture A/C Dr 18,000
Premises A/C Dr 1,00,000
To Creditors 90,000
To RBD 3,500
To A’sCapital 93,250
(Being the assets and liabilities of old firms acquired)
C’s Capital A/C Dr 10,800
To Goodwill 36,000
(Being the goodwill written off)
3. Cash A/C Dr 26,000
(Being the cash brought in partners to make their capitals proportionate to the profit sharing
ratio)

To A’s Current A/C 34,450
To B’s Current A/C 14,050
(Being the surplus amount in capitals transferred to current accounts, as there is no sufficient
cash)
Balance Sheet of M/S A, B, C, and D as on 1-1-2007
Liabilities Assets
A 48,000 Stock 73,400
B 32,000 Debtors 70,000
C 48,000 Less: RBD 3,500 66,500
D 32,000 Furniture 18,000
Current Accounts: Premises 1,00,000
A 34,450
B 14,050
Creditors 90,000
2,98,500 2,98,500
Note: The assets and liabilities not taken over the new firm are to be transferred to capital
accounts of respective partners in their capital ratio.
Capitals of Partners of the New Firm
A B C D
Capitals transferred Less goodwill 82,450 46,050 30,200 23,800
Less: Capitals to be in the new firm 48,000 32,000 48,000 32,000
Cash to be payable or to be brought in (-) 34,450 14,050 -17,800 – 8,200
Illustration 3:
Richard and Lloyd have been carrying on businesses as general merchants. They
decided to amalgamate, and, henceforth, trade under the name of R&L on the following terms:
1. Each partner shall have a fixed capital of Rs.40, 000.
2. Richard’s stock is to be brought in at Rs.12, 800 and Lloyd’s at Rs.10, 800.
3. Provisions for Bad debts are to be increased to 6% on debtors.
4. Lloyd’s furniture is not to be taken over while Richard’s furniture is to be taken at Rs.1,
800.
5. Richard is to pay the loan from his son before amalgamation.
6. Any deficiency on the net assets brought in is to be paid into the firm’s bankers while
any excess is to be withdrawn.
Richard’s Balance Sheet on 31-12-2007
Liabilities Assets
Creditors 4,800 Furniture and Fixtures 1,400
Loan from his son 2,400 Machinery 20,000
Capital 42,540 Stock in trade 13,600
Debtors 11,000
Less: RBD 480 10,520
Cash at Bank 4,220
49,740 49,740
Lloyd’s Balance Sheet on 31-12-2007
Liabilities Assets
Creditors 8,400 Furniture and fixtures 800
Capital 40,400 Machinery 22,000
Stock in trade 11,200
Debtors 12,100
Less: RBD 500 11,600
Cash at Bank 3,200
48,800 48,800
Give journal entries necessary to adjust each trader’s books prior to amalgamation and
the opening journal entries and the Balance Sheet of M/S R & L.
Solution:
Books of Richard
1. Loan from his son A/C Dr 2,400
To Cash 2,400
(Being the loan paid off)

2. Furniture A/C Dr 400
Capital A/C Dr 580
To Stock 800
To RBD (660-480) 180
(Being the assets revalued and loss debited to capital account)
Note: As there is one partner (Sole trader) the profit or loss arising out of revaluation can be
credited or debited to his capital account directly. No need of Preparation of P & L Adj.
Account.
3. M/S R & L A/C (New firm) Dr 41,960
RBD A/C Dr 600
To Furniture 1,800
To Machinery 20,000
To Stock 12,820
To Debtors 11,000
To Cash 1,820
To M/S R & L (New firm) 41,960
(Being the capital transferred to new firm)
Books of Lloyd
To Furniture 800
To Stock 400
To RBD (726 – 500) 226
(Being the asset not taken over by the new firm, i.e. Furniture and loss on revaluation debited
to capital Account)
2. M/S R & L A/C (New firm) Dr 38,974
RBD A/C Dr 726
To Machinery 22,000
To Stock 10,800
To Debtors 12,100
To Cash 3,200
To M/S R & L (New firm) 38,974
(Being the capital transferred to new firm)
Books of M/S R & L (New Firm)
1. Furniture A/C Dr 1,800
Stock A/C Dr 23,600
Cash A/C Dr 5,020
To Creditors 13,200
To RBD 1,386
To Richard’s Capital 41,960
To Lloyd’s Capital 38,974
(Being the assets and liabilities of both firms acquired)
2. Cash A/C Dr 1,026
To Lloyd’s Capital 1,026
(Being the cash brought in partner to make his capital Rs.40, 000)
3. Richard’s Capital A/C Dr 1,960
To Cash 1,960
(Being the surplus capital paid to partner, to make his capital Rs.40, 000)
Balance Sheet of M/S R & L as on 31-12-2007
Liabilities Assets
Capitals: Furniture 1,800
Richard 40,000 Machinery 42,000
Lloyd 40,000 Stock 23,600
Less: RBD 1,386 21,714
Cash (See note) 4,086
93,200 93,200
Note:
Cash: Balance transferred 5,020
Add: Brought in by Lloyd 1,026
6,046
Less: Paid to Richard 1,960
4,086
Illustration 4:
R and S are partners sharing profits and losses equally in a business similar to that
carried on by T. In order to avoid competition they decided to amalgamate the two
businesses by taking over the assets and liabilities of T and admitting him into partnership
with them as from 1st January, 2007. Their Balance Sheets as at 31st December, 2006 were
as follows:
Liabilities R&S T Assets R&S T
Sundry creditors 15,000 37,500 Cash 300 700
Bank overdraft 5,000 32,000 Debtors 35,000
Bills payable — 3,000 Less: Provision1,500 33,500 25,000
Loan — 10,500 Stock 21,200 26,300
Capital Accounts: Investment — 27,000
R 20,000 T’s Capital (over drawn) — 4,000
S 15,000 35,000 ——
55,000 83,000 55,000 83,000
The new partnership is to be carried on as R, S and T and it was agreed among all
the partners that the book debts of both the businesses should be provided with bad debts
provisions at 10% and the stock to be reduced by 5% for the purpose of amalgamation and
that the investments of T should be valued at Rs.35, 000 and that T was credited with a
sum of Rs.5, 000 for goodwill. It was further agreed that in order to raise the total capital of
the firm to Rs.60, 000, each partner shall introduce such sum as would make his capital in
the new business equal to one third of the capital.
Give journal entries in the books of the new firm and show amalgamated Balance
Sheet as at 1st January 2007.
Solution:
Books of the New Firm
1. Cash A/C Dr 300
Stock A/C (21,200-1,060) Dr 20,140
To Sundry Creditors 15,000
To Bank Overdraft 5,000
To RBD 3,500
To R’s Capital 18,470
To S’s Capital 13,470
(Being the assets and liabilities of old firm acquired)
R’s Capital 20,000 – 1,530 (loss on revaluation) : 18,470
S’s Capital 15,000 – 1,530 (loss on revaluation): 13,470
Loss on Revaluation: RBD = 3,500 – 1,500 2,000
Stock 1.060
3.060
R’s share 3,060/2 =1,530
S’s share 3,060/2 =1,530
2. Cash A/C Dr 700
Stock A/C (26,300 – 1,315) Dr 24,985
Investments A/C Dr 35,000
To RBD 2,500
To Bank overdraft 32,000
To Bills payable 3,000
To Loan 10,500
To T’s Capital 5,185
(Being the assets and liabilities of old firm acquired)
T’s Capital 4,000
Profit revaluation:
Goodwill 5,000
Investment 8,000
13,000
less: RBD 2,500
Stock 1,315 3,815 9,185
Capital 5,185
3. Cash A/C Dr 22,875
To R’s Capital (20,000 – 18,470) 1,530
To S’s Capital (20,000 – 13,470) 6,530
To T’s Capital (20,000 – 5,135) 14,815
(Being the partners brings cash to make their capital Rs.20, 000 each)
Balance Sheet of R, S and T as on 1-1-2007
Liabilities Assets
Capitals: Cash (300+700+22,875) 23,875
R 20,000 Debtors 60,000
S 20,000 Less: RBD10% 6,000 54,000
T 20,000 Stock (20,140 + 24,985) 45,125
Sundry Creditors 52,500 Investments 35,000
Bank overdraft 37,000 Goodwill 5,000
Loan 10,500
Bills payable 3,000
1, 63,000 1,63,000
Illustration 5:
X &Co. having X and Y as equal partners decided to amalgamate with P& Co. having P
and Q as equal partners on the following terms and conditions:
1. The new firm to take investments at 10% depreciation, land at Rs.80,000, premises at
Rs.45,000, Machinery at Rs.9,000 and to take over only the trade liabilities of both the firms.
The debtors are taken over at book values including reserve.
2. The new firm to pay Rs.12, 000 to each firm for goodwill.
3. Typewriters at the written off value of Rs.800, belonging to P & Co. and not appearing in the
Balance Sheet was also not taken over by the new firm.
4. It was also agreed that the furniture belonging to both the firms be not taken over by the new
firm.
5. All the four partners in the new firm to bring in Rs.1, 60,000 as capital in equal shares.
The following were the Balance Sheets of both the firms on the date of amalgamation.
Balance Sheets
Liabilities X&Co. Y&Co. Assets X&Co. Y&Co.
Sundry Creditors 20,000 10,000 Cash at Bank 15,000 8,000
Bills payable 5,000 ——— Investments 10,000 8,000
Bank Overdraft 2,000 10,000 Debtors 10,000
X’s Loan 6,000 Less:Provision 1,000 9,000 8,000
Capitals: Furniture 12,000 6,000
X 35,000 — Premises 30,000 ———
Y 22,000 — Land ———— 50,000
P —— 36,000 Machinery 15,000 ———
Q —— 20,000 Goodwill 9,000 ——
General Reserve 8,000 3,000
Investment fluctuation
Fund 2,000 1,000
1, 00,000 80,000 1, 00,000 80,000
Pass journal entries in the books of both the firms and prepare a Balance Sheet of the
new firm.
Solution:
Books of X&Co.
1. P& L Adj. A/C Dr 6,000
Investment fluctuation fund A/C 1,000
To Machinery 6,000
To Investment 1,000
(Being the assets depreciated and decrease in investment value adjusted in investment
reserve)
2. Premises A/C Dr 15,000
To P&L Adj.A/C 15,000
(Being the asset appreciated)
3. P&L Adj. A/C Dr 9,000
To X’s Capital 4,500
To Y’s Capital 4,500
(Being the profit on revaluation shared)
4. General Reserve AC Dr 8,000
Investment fluctuation fund A/C Dr 1,000
(Being the reserve and balance in investment fund shared to partners)
(Being the goodwill adjusted)
6. Bank overdraft A/C Dr 2,000

X’s Loan A/C Dr 6,000
(Being the liabilities not taken over by the new firm transferred to capital accounts in their
capital ratio i.e. 35:22)
7. X’s Capital A/C Dr 7,368
Y’s Capital A/C Dr 4,632
To Furniture 12,000
(Being the asset not taken over debited to capital accounts)
8. New Firm A/C Dr 74,000
Bills payable A/C Dr 5,000
Reserve for bad debts A/C Dr 1,000
To Bank 15,000
To Debtors 10,000
To Premises 45,000
To Machinery 9,000
To Goodwill 12,000
9. X’s Capital A/C Dr 43,044

Y’s Capital A/C Dr 30,956
To New Firm 74,000
Working Notes:
Goodwill value to be raised is Rs.12, 000 but already Rs.9, 000 is appearing in the
Balance Sheet. The difference only can be adjusted.
Capital Accounts
X Y X Y
To Furniture 7,368 4,632 By Balance 35,000 22,000
To New Firm 43,044 30,956 By P&L Adj. A/C 4,500 4,500
By Gel. Reserve &
Investment fund 4,500 4,500
By Goodwill 1,500 1,500
By Liabilities 4,912 4,912
50,412 35,588 50,412 35,558
Books of P&Co.
1. Typewriter A/C Dr 800
Land A/C Dr 30,000
To P&L Adj. A/C 30,800
(Being asset revalued and unrecorded asset taken into the books)
2. Investment fluctuation fund A/C Dr 800

To Investments 800
(Being the asset revalued and difference adjusted out of reserve)

3. P&L Adj. A/C Dr 30,800
To P’s Capital 15,400
To Q’s Capital 15,400
(Being the profit on revaluation shared to partners)
Investment fluctuation fund A/C Dr 200
(Being the reserve and balance in investment fund shared)
(Being the goodwill created)
6. P’s Capital A/C Dr 4,371
Q’s Capital A/C Dr 2,429
To Furniture 6,000
To Typewriter 6,000
(Being the assets not taken over by the new firm debited to capital of partners in their capital
sharing ratio of 9:5)
7. Bank overdraft A/C Dr 10,000

(Being the liability not taken over credited to capitals)
New Firm A/C Dr 1,05,200
To Bank 8,000
To Debtors 8,000
To Land 80,000
To Goodwill 12,000
9. P’s Capital A/C Dr 61,058
Q’s Capital A/C Dr 44,142
To New Firm 1,05,200
Working Notes:
Capital Accounts
P Q P Q
To Furniture& Type By Balance 36,000 20,000
Writer 4,371 2,429 By P&L Adj.A/C 15,400 15,400
To New Firm 61,058 44,142 By Gen. Reserve 1,600 1,600
By Goodwill 6,000 6,000
By Overdraft 6,429 3,571
65,429 46,571 65,429 46,571
Books of New Firm
Liabilities Assets
Capitals: Cash at Bank(see working notes) 3,800
X 40,000 Investments 16,200
Y 40,000 Debtors 18,000
P 40,000 Less:Provision 1,000 17,000
Q 40,000 Machinery 9,000
Creditors 30,000 Premises 45,000
Bills payable 5,000 Land 80,000
Goodwill 24,000
1, 95,000 1, 95,000
Working Notes: X Y P Q
Capitals transferred 43,044 30,956 61,058 44,142
Capitals in the new firm 40,000 40,000 40,000 40,000
Cash payable or to brought in 3,044 - 9,044 21,058 4,142
Cash at Bank: Balance transferred 23,000
Cash brought in by Y 9,044
32,044
Less: Cash paid to X 3,044
P 21,054
Q 4,142 28,244
3,800
Illustration 6:
The Balance Sheets of Sun and Moon and A and B as on 31st December 2007 were as
follows:
S&M A&B S&M A&B
Captials: Land & Workshops 50,000 60,000
Sun 50,000 Machinery& Tools 35,000 40,000
Moon 50,000 Furniture&Fixtures 15,000 17,500
A 50,000 Sundry Debtors 30,000 42,500
B 50,000 Stock 40,000 50,000
Creditors 75,000 50,000 Cash at Bank 1,500 5,000
Loan 50,000
Outstanding expenses 10,000 15,000
1, 85,000 2, 15,000 1, 85,000 2,15,000
The two firms decided to amalgamate and form in S, M, A & B Co. with effect from 1 st
January 2007. Partners would share equally between themselves as they were doing prior to
amalgamation and they agreed to the following revaluation of assets and liabilities:
Sun & Moon A&B
Land and Workshops 50,000 50,000
Machinery and Tools 35,000 40,000
Furniture and Fixtures 12,500 12,500
Stock 40,000 40,000
Outstanding expenses 10,000 10,000
In addition to the above it was decided —
i) That the new firm would not take over the loan of A&B which is taken over by the
two partners equally.
ii) That the goodwill of Sun & Moon and A&B was valued at Rs.50, 000 and Rs.25, 000
respectively in the first instance but for the purpose o the Balance Sheet of the new
firm the combined goodwill could be valued at Rs.60,000.
iii) That the reconstructed capitals of partners should be Rs.70, 000 each, introducing
cash if necessary.
You are required to show the profit and loss adj. accounts of amalgamating firms and
partners capital accounts before and after amalgamation and the balance sheet of the new
firm.
Solution:
Books of Sun and Moon
P & L Adjustment Account
To Furniture A/c 2,500 By Sun Capital A/C 2,500
To RBD 2,500 By Moon Capital A/C 2,500
5,000 5,000
Sun Capital Account
To P&L Adj. A/C 2,500 By Balance 50,000
To New Firm 72,500 By Goodwill (1/2 of 50,000) 25,000
75,000 75,000
Moon Capital Account
To P&L Adj. A/C 2,500 By Balance 50,000
To New Firm 72,500 By Goodwill (1/2 of 50,000) 25,000
75,000 75,000
Books of A and B
P & L Adj. Account
To Land 14,000 By A’s Capital 17,500
To Furniture 5,000 By B’s Capital 17,500
To RBD 7,500
To Stock 10,000
To Outstanding expenses 2,500
35,000 35,000
To P & L 17,500 By Balance 50,000
To New Firm 70,000 By Goodwill 12,500
By Loan (not taken over) 25,000
87,500 87,500
To P & L Adj. A/C 17,500 By Balance 50,000
To New Firm 70,000 By Goodwill 12,500
By Loan (not taken over) 25,000
87,500 87,500
Books of New Firm
Balance Sheet of New Firm as on 1-1-2007
Liabilities Assets
Capitals: Land and Workshops 1,00,000
Sun 70,000 Machinery 75,000
Moon 70,000 Furniture 25,000
A 70,000 Debtors 72,500
B 70,000 Less: Provision10, 000 62,500
Creditors 1,25,000 Stock 80,000
Outstanding expenses 27,500 Goodwill 60,000
Cash (see working notes) 30,000
4, 32,500 4, 32,500
Working Notes:
Goodwill transferred from old firm 50,000+25,000 75000
Less: Goodwill to be shown in the Balance Sheet 60,000
Goodwill to be written off from Capital Accounts 15,000
Sun Moon A B
Capital transferred to New Firm 72,500 72,500 70,000 70,000
Less: Goodwill share (15,000 x ¼) 3,750 3,750 3,750 3,750
68,750 68,750 66,250 66,250
Cash to be brought in 1,250 1,250 3,750 3,750
Capital of the partners in the New Firm 70,000 70,000 70,000 70,000
Debtors:
Transferred from old firm 30,000 + 42,500 72,500
Less RBD transferred 2,500 + 7,500 10,000
62,500
Cash Balance:
Balance transferred from old firms 15,000 + 5,000 20,000
Add: Cash brought in by the partners 10,000
30,000
11.4: Try yourself:
1. A and B who are in partnership sharing profits and losses in the proportion of three-fifths and
two-fifths respectively, decided to admit into partnership C who is trading alone in the same
line. Their Balance Sheets on the 31st December, 2006 are as follows:
Liabilities A&B C Assets A&B C
A’s Capital Account 1, 05,000 Cash 20,000 10,000
B’s Capital Account 70,000 Book debts 65,000 2,500
C’s Capital Account 20,000 Machinery 35,000 —
Creditors 15,000 7,500 Stock 70,000 15,000
Reserve 10,000
2, 00,000 7,500 2, 00,000 27,500
It is decided that C should be given a quarter share in the new firm, A and B sharing the
balance in the old proportion. It is also agreed that C’s assets and liabilities were to be taken
over as per his balance sheet, but the following adjustments were to be made in A and B’s
balance sheet:
a) Debtors to be written off by Rs.15, 000.
b) Stocks to be written off by Rs.15, 000.
c) Machinery to be written off by Rs.5, 000.
C also agrees to pay privately to A and B by way of goodwill quarter share of A and B’s
profits for the last two years which were 2005 – Rs.27, 000; 2006 –Rs.33, 000. It was also
decided that the partners’ capitals in the new business shall be in the same proportion as they
share profits.
Draw up the new firm’s Balance Sheet as at 1st January 2007 and state a) the total cost
to C for his share in the business, b) how much A and B will each receive for goodwill.
(A’s Capital: Rs.76, 500; B’s Capital: Rs.51, 000; C’s Capital: Rs.42, 500; Total of Balance
Sheet Rs.1, 92,500; C pays Rs.9, 000 to A and Rs.6, 000 to B as goodwill)
2. Singh and Khan have each been carrying on business as general merchants. They decide
to amalgamate, and, henceforth, trade under the name of Singh & Khan, on the following
terms:
1) Each partner shall have fixed capital of Rs.10, 000.
2) Singh’s stock is to be brought in at Rs.3, 200 and Khan‘s at Rs.2, 700.
3) Provisions for bad debts are to be increased to 6 per cent on the debtors.
4) Khan’s furniture is not to be taken over while Singh’s furniture is to be taken at
Rs.450.
5) Singh is to pay the loan from his son before amalgamation.
6) Any deficiency on the net assets brought in it’s to be paid into the firm’s bankers
while any excess is to be withdrawn.
The Balance Sheets of Singh and Khan as on 31st December, 2007.
Liabilities Singh Khan Assets Singh Khan
Creditors 1,200 2,100 Furniture and Fixtures 350 200
Loan from his son 600 — Machinery 5,000 5,500
Capital 10,635 10,100 Stock in trade 3,400 2,800
Debtors 2,750 3,025
Less: Provision 120 2,630 125 2,900
Cash at Bank 1,055 800
12,435 12,200 12,435 12,200
Give journal entries necessary to adjust each trader’s books prior to amalgamation and
the opening balance sheet of Singh and Khan.
(Khan pays: Rs.257; Singh receives: Rs.1, 090; Total of Balance Sheet: Rs.23, 300)
3. Two partnership firms, carrying on business under the styles of Black & Co. and White & Co.
respectively, decide to amalgamate into Grey & Co. with effect from 1st April, 2007. The
Balance Sheets are as follows:
Liabilities Black & Co. White & Co. Assets Black & Co. White & Co
B’s Capital 19,000 Plant and Machinery 10,000
X’s Capital 10,000 Stock in trade 20,000 5,000
Y’s Capital 2,000 Sundry debtors 10,000 10,000
Sundry Creditors10, 000 28,000 A’s Capital 4,000
Bank overdraft 15,000 Cash in hand 6,000
Cash at bank 9,000
Goodwill 10,000
44,000 40,000 44,000 40,000
The following further information is given:
i) Goodwill of Black & Co. is to be valued on the basis of 3 years’ purchase of the average
profits for 3 years in excess of 10% of the total assets of the firm, the total assets being taken
as on 31st March 2007 and the profits for the three preceding years were:
2004-05 Rs.11, 000 (after a credit of Rs.3, 000 in respect of claims raised in 2002-03)
2005-06 Rs.6, 000
2006-07 Rs.12, 000 (after a debit of Rs.1, 000 for loss by theft)
ii) X brings in Rs.8, 750 and Y Rs.16, 750 as fresh capital into the new firm but otherwise they
will be deemed to have contributed capitals in proportion to their share in profits, taking the
capitals and A and B in total as the base.
iii) A and B will bring or take cash to make their capitals in the profit sharing ratio.
iv) Goodwill will not remain in the books of Grey & Co.
v) Black & Co owes Rs.5, 000 to White & Co.
vi) Stock of Black & Co. includes Rs.10, 000 worth goods purchased from White & Co. whose
practice is to sell goods at a margin of 25%.
vii) The two pairs of partners as between themselves will share profits in the ratio of 3:5 but the
old profit-sharing ratios amongst the partners will remain undisturbed.
viii) B will make a gift of Rs.5, 000 to A towards his capital.
Prepare journal entries for White & Co. and the Balance Sheet of Grey & Co.
(Total of the balance sheet: Rs.71, 500)
4. A and B carry on independent business in provisions and their positions as at 30 th
September, 2007 are reflected in the Balance Sheets given below:
Liabilities A B Assets A B
Creditors 1, 10,000 47,000 Stock in trade 1, 70,000 98,000
Payable expense 750 2,000 Sundry debtors 89,000 37,000
Bills payable 12,500 —— Cash at Bank 13,000 7,500
Capital Account 1, 53,000 95,500 Cash in hand 987 234
Investments 513 —
2, 76,250 1, 44,500 2, 76,250 1, 44,500
Both of them want to form a partnership firm form 1 October, 2007 on the following
understanding:
a) The capital of the partnership would be Rs. 3 lakhs which would be contributed by
them in the ratio 2:1.
b) The assets of the individual businesses would be evaluated by C at which the
contribution due by A and B.
c) C gave his valuation report as follows: Business of A: Stock in trade to be written
down by 15% and a portion of Sundry debtors amounting to Rs.9, 000 estimated
unrealizable not to be assumed by a firm; furniture to be valued at Rs.2, 000 and
investments to be taken at market value of Rs.1, 000.
Assets of B: Stocks to written up by 10% and sundry debtors to be admitted at 85%
of their value; rest of the assets to be assumed at their book value.
d) The firm is not to assume any creditors other than the dues on account of
purchases made.
Prepare the opening Balance Sheet of the firm.
(A introduces Rs.8, 513 and B withdraws Rs.1, 750; Balance Sheet: Rs.4, 58, 750)
11.5: Summary:
Two partnership firms amalgamate themselves to reap economies and to avoid
unnecessary competition between them. The assets and liabilities of the firms are revalued and
capital accounts of the partners are adjusted accordingly after preparing profit and loss
adjustment account. Closing the old firms, new balance sheet of the new firm is prepared and
new capital accounts are opened.
11.6: Glossary:
Amalgamation: Merging of two partnership firms into one single new firm is called
amalgamation.

1. How amalgamation takes place in partnership? And what is the procedure adopted while it
is taking place?
Financial Accounting - II 12.1 Partnership Accounts IV – ......
Lesson: 12
Partnership Accounts IV – Dissolution of a

partnership firm
12.0 Objective:
1. Dissolution of partnership firm and partnership.
2. Modes of dissolution.
3. Accounting procedure for dissolution.
4. Selling a partnership firm to a company.
Structure:
12.1: Dissolution of Partnership firm – Introduction
12.2: Dissolution of Partnership and Partnership firm
12.3: Modes of dissolution of a Partnership Firm
12.4: Accounting Entries
12.5: Sale to a Company
12.6: Illustrations
12.7: Try yourself
12.8: Summary
12.9: Glossary
12.1: Dissolution of Partnership firm – Introduction:

In the foregoing lessons we have studied about partnership accounts relating to admission
and retirement or death. In this lesson let us know about dissolution. Dissolution is nothing but
closing down the business which is running at present. The existing partner ceased to do business
and apart after taking their shares and thus the existing business with its present shape comes to
an end. When there is a change in the partnership deed i.e. admission of a new partner or
retirement or death of a partner, it is also a kind of dissolution. Closing the firm totally is no doubt
dissolution. Selling a partnership firm to a company is also dissolution. Let us discuss all these
aspects in this lesson.
12.2: Dissolution of Partnership and Partnership firm:

Any change in the relations of the partners is called dissolution of partnership. Thus, in all
those cases where a partnership is reconstituted, there is dissolution of the partnership. For
example, in case there is a partnership between X and Y, and a new partner Z is admitted, the
partnership between X and Y comes to an end and a new partnership between X, Y and Z comes
into existence. Hence, in dissolution of the partnership, the firm continues in a reconstituted form.
Similarly, a retirement or death of a partner also leads to reconstitution of the partnership.
The dissolution of partnership among all the partners of a firm is called the dissolution of
the firm. In this case, the business of the firm is closed down and its affairs are wound up. The
assets are realized and the liabilities are paid off. The dissolution of a partnership may or may not
result in the dissolution of a firm but the dissolution of a firm will necessarily result in the dissolution
of the partnership.
12.3: Modes of dissolution of a Partnership Firm:

Partnership firm may be dissolved voluntarily or with the intervention of the court. Here in
this lesson, we consider only voluntary dissolution. This dissolution may take place in any of the
following ways:
1. Dissolution by agreement: A partnership firm comes into existence by mutual agreement
and, therefore, it can be dissolved by the mutual consent of all the partners.
2. Compulsory dissolution: In the following cases a partnership firm will have to be
compulsorily dissolved:
a) by the adjudication of all the partners or of all the partners but one as insolvent, or
b) by the business of firm becoming unlawful due to the happening of any such event.
3. Dissolution on the happening of certain contingencies: In the absence of any contract
to the contrary, a firm will be dissolved on the happening of the following contingencies:
a) on the expiry of the fixed period for which the firm was constituted,
b) on the completion of the adventure or undertaking for the carrying out of which the firm
was constituted.
c) on the death of a partner; and
d) on the adjudication of a partner as insolvent.
4. Dissolution by notice: When a partnership is at will, the firm may be dissolved by any
partner giving a notice in writing to all the other partners of his intention to dissolve the firm. The
firm will be taken to be dissolved from the date as specified in the notice, or if no date is mentioned
from the date of the communication of the notice to the last of the partners.
In this lesson, only voluntary and mutual agreed dissolution related problems are
discussed. At the time of dissolution, a realization account is prepared and all assets and liabilities
are sold and paid off and the result of realization will be transferred to the capital accounts of the
partners and finally, the partners’ accounts are also be closed down. When partners take assets
or responsibility of liabilities their capital accounts are adjusted accordingly.
12.4: Accounting Entries:

In the event of dissolution of a partnership firm, all its assets are sold away and liabilities
paid off. A Realisation Account is opened in order to find out any profit or loss on realization of
assets and making payment of liabilities.
Journal Entries:
1. For transfer of assets to Realisation Account:
Realisation A/C Dr
To Sundry Assets A/C
It is to be noted that when an asset is transferred to the Realisation Account, its
corresponding provision or reserve appearing on the liabilities side of the balance sheet, will also
be transferred to the Realisation Account. For example, Investments and Joint Life Insurance
Policy appear on the assets side of the balance sheet while Investments Fluctuation Fund and
Joint Life Insurance Policy Reserve appear on the liabilities side of the balance sheet. The
accounting entries in the event of dissolution of the firm would be as follows:
a) Realisation A/C Dr
To Investments A/C
To Joint Life Insurance Policy A/C
b) Investments Fluctuation Fund A/C Dr
Joint Life Insurance Policy Reserve A/C Dr
To Realisation A/C
2. For transfer of liabilities to Realisation Account:
Liabilities A/C Dr
To Realisation A/C
All liabilities excluding partners’ loans will be transferred at book values. Each liability
should debit individually. This will close accounts of all liabilities transferred.
3. For Realisation of assets:
Cash/Bank A/C Dr
To Realisation A/C
4. For payment of liabilities:
Realisation A/C Dr
To Cash/Bank A/C
5. In case a partner takes an asset:
To Realisation A/C
6. In case a partner agrees to meet a liability:
Realisation A/C Dr
7. For expenses on Realisation:
Realisation A/C Dr
To Cash/Bank
8. For profit on Realisation:
Realisation A/C Dr
9. For paying off partner’s loan:
Partner’s Loan A/C Dr
To Bank A/C
10. For distribution of reserves, undistributed profits etc.
P & L A/C Dr
Reserve A/C Dr
11. For cash brought in by a partner on account of his account showing a debit balance:
Cash/Bank A/C Dr
12. The credit balance in a partner’s capital account will be paid off:
To Cash/Bank A/C
12.5: Sale to a Company:

Often, a partnership firm converts itself into a joint stock limited company or sells its business
to an existing one. Broadly, the procedure already discussed above will be followed for closing
the books of the firm. Realization Account will be opened and assets transferred to it, so also
liabilities as per the agreement reached with the company. Whatever the company pays as
purchase consideration will be credited to the Realisation Account. If expenses are incurred by
the firm, the amount will be debited to Realisation Account. If the creditors are taken over by the
company, no further treatment is necessary except transferring them to Realisation Account. But
if the creditors are to be paid by the firm, the actual amount paid to them will be debited to liability
account concerned; the difference between the book figure and the amount actually paid should
be transferred to the Realisation Account. The profit or loss on realization will be transferred to
the capital accounts in the profit-sharing ratio.
Usually, the company takes over all the assets including cash. Therefore, cash should
also be transferred to Realisation Account. Otherwise, it will not be transferred. Normally, the
company will discharge the amount due from it in the form of cash, debentures and shares.
Separate accounts will be opened for debentures and shares received. Partners will divide the
debentures and shares among themselves, in absence of an express agreement, in the ratio of
their final claims, that is to say, in the ratio of capitals standing after the loss or profit on realization
has been transferred. Further, since no fraction of a share or debenture can be issued, the
nearest whole number being made in cash. If there is an agreement to divide the shares or
debentures in a particular manner, the agreement should be followed.
It is to be noted that if there is some valueless assets in the books of the firm and if this
has to be divided among the partners, it should be divided in the profit-sharing ratio so that any
ultimate profit or loss may correspond to the ratio in which profits are shared.
Illustration 1:
The Balance Sheet of a firm showed the following position as on 31st December, 2007.
Liabilities Assets
Partners Capitals: Buildings 40,000
D 25,000 Investments 10,000
E 20,000 Debtors 5,000
F 15,000 60,000 Bank Balance 15,000
Sundry Creditors 10,000
70,000 70,000
The partnership was dissolved on 31-12-2007. Creditors were paid at 5% discount. D
agreed to take over buildings at Rs.45, 000, E took over investments at Rs, 26,000 and F took
debtors at Rs.3, 000.
Show necessary accounts in the firm’s books.
Solution:
Realisation Account
To Buildings 40,000 By Creditors 10,000
To Investments 10,000 By D’s Capital – Buildings 45,000
To Debtors 5,000 E’s Capital – Investments 26,000
To Cash – Creditors 9,500 F’s Capital – Debtors 3,000
To D’s Capital – profit 6,500
To E’s Capital – profit 6,500
To F’s Capital – profit 6,500 19,500

84,000 84,000
D’s Capital Account
To Realisation A/C 45,000 By Balance B/D 25,000
By Realisation A/C 6,500
By Cash 13,500
45,000 45,000
E’s Capital Account
26,500 26,500
F’s Capital Accounts
To Cash 18,500 By Realisation A/C 6,500
21,500 21,500
Cash Account
To Balance B/D 15,000 By Realisation A/C 9,500
To D’s Capital 13,500 By E’s Capital A/C 500
By F’s Capital A/C 18,500
28,500 28,500
Illustration 2:
The following was the Balance Sheet of Raja and Sudhir as on 31st December, 2007.
Liabilities Assets
Mrs. Raja’s Loan 10,000 Stock in trade 6,000
Sudhir’s Loan 15,000 Sundry Debtors 20,000
Reserve Fund 5,000 Less: Provisions 1,000 19,000
Raja’s Capital 10,000 Furniture & Fittings 4,000
Sudhir’s Capital 8,000 Machinery and Plant 28,000
Investments 10,000
Profit and Loss Account 7,500
86,000 86,000
The firm was dissolved on 31st December, 2007 and the following was the result:
a) Raja took over investments, at an agreed value of Rs.8, 000 and agreed to pay of the loan
of Mrs. Raja.
b) The assets realized the following:
Stock 5,000 Machinery and Plant 25,500
Expenses 1,100 Furniture & Fittings 4,500
Debtors 18,000
c) The Sundry Creditors were paid off less 2 ½ % discount. Raja and Sudhir shared profits
and losses in the ratio of 3:2. Journalise the entries to be made on the dissolution and show
Realisation Account, Cash Account, and Partners’ Capital Accounts.
Solution:
Journal Entries:
1. Realisation A/C Dr 68,000
To Stock 6,000
To Debtors 20,000
To Furniture & Fixtures 4,000
To Machinery 28,000
(Being assets transferred to Realisation account)
2. Bad debts Reserve A/C Dr 10,000
Mrs. Raja’s loan A/C Dr 10,000
To Realisation A/C 49,000
(Being liabilities transferred to Realisation account)
3. Raja’s Capital A/C Dr 8,000
(Being investments taken over by Raja)
To Raja’s Capital A/C 10,000
(Being the risk of payment for liability of Mrs. Raja taken over by Raja)
5. Cash A/C Dr 53,000
(Being the assets realized)
To Cash 1,100
(Being realization expenses paid)
To Cash 37,050
(Being liabilities paid)
8. Reserve Fund A/C Dr 5,000
To Raja Capital 3,000
To Sudhir Capital 2,000
(Being reserve fund distributed)
9. Raja Capital A/C Dr 4,500
Sudhir Capital A/C Dr 3,000
To Profit and Loss A/C 7,500
(Being loss distributed)
10. Sudhir Loan A/C Dr 15,000
To Cash 15,000
(Being Sudhir’s loan paid)
Realisatin Account
To Sundry Assets 68,000 By Sundry Liabilities 49,000
To Raja Capital 10,000 By Raja Capital 8,000
To Cash – expenses 1,100 By Cash – Assets 53,000
To Cash – liabilities 37,050 By Raja Capital – loss 3,690
By Sudhir Capital – loss 2,460
1,16,150 1,16,150
Raja Capital Account
To Profit and Loss A/C 4,500 By Balance B/D 10,000
To Realisation A/C 8,000 By Reserve fund 3,000
To Realisation A/C – loss 3,690 By Realisation 10,000
To Cash A/C 6,810
23,000 23,000
Sudhir Capital Account
To Profit and Loss A/C 3,000 By Balance B/D 8,000
To Realisation A/C – loss 2,460 By Reserve fund 2,000
To Cash 4,540
10,000 10,000
Cash Account
To Realisation A/C 53,000 By Realisation A/C 37,050
By Sudhir’s Loan 15,000
By Raja Capital 6,810
By Sudhir Capital 4,540
64,500 64,500
Illustration 3:
A, B and C commenced business on 1st January 2006, with capitals of Rs.50,000, Rs.40,000
and Rs.30,000. Profits and losses were shared in the ratio of 4:3:3 capitals carried interest at 5%
per annum. During 2006, and 2007, they made profits of Rs.20, 000, and Rs.25, 000 (before
allowing interest). Drawings of each partner were Rs.5, 000 per year.
On 31st December 2007, the firm was dissolved. Creditors on that date were Rs.12, 000.
The assets realized Rs.1, 30,000 net. Give necessary accounts to close the books of the firm.
Solution:
Balance Sheet of the firm as on 31-12-2007
Liabilities Assets
Creditors 12,000 Sundry Assets 1, 47,000
Joint Capital (A, B & C) (Bal. Fig)
On 1-1-2006 1, 20,000
Add: 2 years’ profits 45,000

1, 65,000
Less: 2 years’ drawings 30,000 1, 35,000
1, 47,000 1,47,000
Which means Rs.1, 47,000 worth of assets was realized Rs.1, 30,000.
To ascertain the capital of each partner, capital accounts should be prepared for 2006 and
2007.
To Drawings 5,000 1-1-2006 By Cash 50,000
31-12-2006 To Balance C/D 53,100 31-12-2006By Interest 2,500
By P & L A/C 5,600
58,100 58,100
To Drawings 5,000 1-1-2007 By Balance B/D 53,100
31-12-2007 To Realisation A/C 6,800 31-12-2007 By Interest 2,655
By P & L A/C 7,500
63,255 63,255
31-12-2006 To Balance C/D 41,200 31-12-2006 By Interest 2,000
By P & L A/C 4,200
46,200 46,200
31-12-2007 To Realisation A/C 5,100 31-12-2007 By Interest 2,060
To Cash 38,785 By P & L A/C 5,625
48,885 48,885
31-12-2006 To Balanace C/D 30,700 31-12-2006By Interest 1,500
By P & L A/C 4,200
35,700 35,700
31-12-2007 To Realisation A/C 5,100 31-12-2007By Interest 1,535
To Cash 27,760 By P & L A/C 5,625
37,860 37,860
Realisation Account
To Sundry Assets 1,47,000 By Creditors 12,000
By Cash – Assets 1,30,000
To Cash – Creditors 12,000 By A’s Capital 6,800
By B’s Capital 5,100
By C’s Capital 17,000
1,59,000 1,59,000
Cash Account
To Realisation A/C - 1,30,000 By Realisation A/C - 12,000
(Assets realized) ( Creditors paid)
By A’s Capital 51,455
By B’s Capital 38,785
By C’s Capital 27,760
1,30,000 1,30,000
Illustration 4:
A, B and C decided to dissolve their partnership on 30th June, 2007. Their Balance Sheet
is as follows:
Liabilities Assets
A 12,000 Stock 3,700
B 9,000 Loose Tools 800
C 6,000 Plant and Machinery 6,000
Freehold premises 10,000
30,400 30,400
B and C agreed to form a new partnership to carry on the business and it is agreed that
they shall acquire from the old firm the following assets at figures shown below:
Stock 4,000
Loose Tools 500
Motor Vehicles 2,500
Plant and Machinery 7,800
Goodwill 6,000
The partnership agreement of A, B and C provide that trading profit and loss shall be
divided in the ratio of 3:2:1 and that capital profits or losses shall be divided in proportion of their
respective capitals.
Debtors realize Rs.5, 900 and discounts amounting to Rs.72 are secured on payments
due to creditors.
Prepare the necessary accounts of A, B and C giving effect to these transaction and draw
up the opening Balance Sheet of B and C bring the necessary cash to pay A in the ratio of 3:2.
Solution:
Realisation Account
To Debtors 6,200 By Creditors 3,400
To Stock 3,700 By B & C Joint Account:
To Loose Tools 800 Stock 4,000
To Motor Vehicles 1,200 Loose Tools 500
To Plant and Machinery 6,000 Vehicles 2,500
To Freehold Premises 10,000 Plant 7,800
To Cash – Creditors (3,400-72) 3,328 Freehold 8,400
To A’s Capital 3,236 Goodwill 6,000 29,200
To B’s Capital 2,424 By Cash – debtors 5,900
To C’s Capital 1,612 7,272
38,500 38,500
The profit realized on Stock, Bills receivable, Bills payable and Creditors is revenue profit
or trading profit.
The profit realized on other fixed assets is capital profit.
Profit on Stock 300
Profit on Creditors 72
372
Loss on debtors 300
Trading profit or Revenue profit 72
A’s Share 72 x ½ = 36
B’s Share 72 x 1/3 = 24
C’s Share 72 x 1/6 = 12
Total Profit on realization 7,272
Less: Trading Profit 72
Capital Profit 7,200
A’s Share 7,200 x 4/9 = 3,200
B’s Share 7,200 x 3/9 = 2,400
C’s Share 7,200 x 2/9 = 1,600
Total Profit to A 3,200 + 36 = 3,236
Total Profit to B 2,400 + 24 = 2,424
Total Profit to C 1,600 + 12 = 1,612
B & C Joint Account
To Realisation A/C 29,200 By B’s Capital A/C 17,523
By C’s Capital A/C 11,677
29,200 29,200
Cash Account
To Balance 2,500 By Realisation – Creditors 3,328
To Realisation – Debtors 5,900 By A’s Capital 15,236
18,564 18,564
To Cash – payment 15,236 By Balance 12,000
By Realisation 3,236
15,236 15,236
To B & C Joint A/C 17,523 By Balance 9,000
By Cash 6,099
17,523 17,523
To B & C Joint A/C 11,677 By Balance 6,000
By Cash 4,065
11,677 11,677
Books of New Firm
Balance Sheet of B & C
Liabilities Assets
B 17,523 Loose Tools 500
C 11,677 Motor Vehicles 2,500
Freehold Premises 8,400
Goodwill 6,000
29,200 29,200
Working Notes:
Cash available as per Balance Sheet 2,500
Add: Realisation on Debtors 5,900
8,400
Less: Payment to creditors 3,328
Cash available to pay to A 5,072
Cash required to pay to A 15,236
Cash brought by B & C in the ratio of 3:2 10,164
B = 10,164 x 3/5 = 6,099
C= 10,164 x 2/5 = 4,065
Illustration 5:
Rao, Gopi and Krishna are partners of a firm of Chartered Accountants having office at
Nagpur, Pune and Goa, sharing profits and losses in the ratio of 5:3:2 respectively. The statement
of affairs of the firm as at 31st March, 2007 is shown below:
Capital Accounts:
Rao 1,50,000
Gopi 1,20,000
Krishna 60,000
Current Accounts:
Rao 75,500
Gopi 25,750
Krishna 11,150
Accounts payable 49,150
Accounts receivable:
Nagpur 1,20,000
Pune 86,250
Goa 98,750
Goodwill 50,000
Cash in hand 5,750
Cash with bank 57,000
On that date, Rao desires to retire from the firm and other two partners agree and it is
decided that Gopi would take over the Nagpur and Pune offices and Krishna would take over the
Goa office with respective assets and liabilities. You are given the following additional information:
a) Rao’s share of goodwill is valued at Rs.1,50,000 and this would be brought by Gopi and
Krishna in their profit sharing ratios.
b) Accounts payable include rent of the Goa office for the months of February and March
2007 at the monthly rate of Rs.2,500 and the balance represents outstanding expenses of
Nagpur and Pune offices.
c) Cash in hand is to be utilized to pay Rao and other settlements to take place before 1 st
May, 2007.
d) Accounts receivable to be discounted by 2%.
Draw up the necessary accounts to give effect to the above and also the books of the firm.
Solution:
Realisation Account
To Accounts receivable A/C: By Accounts payable 49,150
Nagpur 1,20,000 By Gopi’s Capital A/C 2,02,125
Pune 86,250 (Assets taken)
Goa 98,750 By Krishna’s Capital A/C 96,775
To Gopi’s Capital A/C 44,150 By Gopi’s Capital A/C – loss 16,830
To Krishna ‘s Capital A/C 5,000 By Krishna’s Capital A/C – loss 11,200
Goodwill 50,000 By Rao’s Capital A/C – loss 28,050
4, 04,150 4, 04,150
Rao’s Capital Account
To Realisation A/c 28,050 By Balance 1,50,000
To Cash – payment 3,47,450 By Current A/C – transfer 75,500
By Gopi’s Capital – goodwill 90,000
By Krishna’s Capital – goodwill 60,000
3,75,500 3,75,500
Gopi’s Capital Account
To Current A/C – transfer 25,750 By Balaance 1,20,000
To Realisation – loss 16,830 By Realisation – liability 44,150
To Realisation – assets taken 2,02,125 By Cash – introduced 1,70,555
3,34,705 3,34,705
Krishna’s Capital Account
To Current A/C – transfer 11,150 By Balance 60,000
To Realisation – loss 11,220 By Realisation – liability 5,000
To Realisation – assets taken 96,775 By Cash – introduced 1,14,195
1,79,145 1,79,145
Cash Account
To Balance : Bank 57,000 By Rao’s Capital 3,47,450
Cash 5,750
To Gopi’s Capital 1,70,555
To Krishna’s Capital 1,14,145
3,47,450 3,47,450
Working Notes:
Assets taken over by partners:
Gopi Krishna
(Nagpur and Pune offices) (Goa office)
Accounts receivable (1,20,000 + 86,250) 2,06,250 98,750
Less: 2% discount 4,125 1,975
Net value of Assets taken over (to be debited to
Capitals and creditors to Realisation A/C) 2, 02,125 96,775
Liabilities:
Accounts payable 49,150
Less; 2 months rent of Goa office @ 2,500 per month 5,000
Liabilities of Nagpur and Pune offices 44,150
That is liabilities taken over by Gopi: Rs.44, 150 (to be credited capital and debited to Realisation
Account0
Liabilities taken over by Krishna Rs.5, 000.
Goodwill: The balance appearing in the Trial Balance is to be transferred to Realisation account
to write off it, and Rao’s share of Goodwill is credited him and debited to Gopi and Krishna in their
profit sharing ratio.
Cash: Gopi and Krishna brought cash as their capital accounts shown debit balance. The existing
cash balance and the amount brought in by Gopi and Krishan is utilized to pay off Rao’s claim.
Current Accounts: The balance in Current Accounts is transferred to respective sides of Capital
Accounts and all the adjustments wee carried out through Capital Accounts.
Sale to a company:
Illustration 6:
The Balance Sheet of Young and Active sharing 5/8 and 3/8 respectively stood as follows,
when they determined to sell of their business to a newly started Joint Stock Company:
Liabilities Assets
Young Capital 60,000 Machinery 32,000
Active Capital 36,000 Debtors 20,000

Reserve 8,000 Stock 64,000
1, 20,000 1, 20,000
The company takes over all the assets except cash for Rs.1, 20,000 of which Rs.80, 000
payable in shares of the company and Rs.40, 000 in cash. The expenses of realization amounted
to Rs.720 and the creditors were paid off at 5% discount.
Pass journal entries and open realization, cash and capital accounts in the books of the
firm.
Solution:
Journal Entries:
1. Realisation A/C Dr 1,16,000
To Machinery 32,000
To Debtors 20,000
To Stock 64,000
(Being assets transferred to realization account)
To Realisation 16,000
(Being creditors transferred to realization accounts)
3. Company A/C Dr 1,20,000
To Realisation 1,20,000
(Being the assets sold)
4. Cash A/C Dr 40,000
Shares A/C Dr 80,000
To Company 1,20,000
(Being the purchase consideration received)
5. Realisation A/C Dr 720
To Cash 720
(Being expenses paid)
To Cash 15,200
(Being creditors paid with 5% discount)
7. Reserve A/C Dr 8,000
To Young’s Capital 5,000
To Active’s Capital 3,000
(Being Reserve distributed)
To Active’s Capital 1,530
(Being profit on realization distributed)
9. Young’s Capital A/C Dr 50,000
Active’s Capital A/C Dr 30,000
To Shares 80,000
(Being shares distributed in the final capital ratio)
10. Young’s Capital A/C Dr 17,550
Active’s Capital A/C Dr 10,530
To Cash 28,080
(Being final settlement made)
Realisation Account
To Machinery 32,000 By Creditors 16,000
To Debtors 20,000 By Company 1,20,000
To Stock 64,000
To Cash – expenses 720
To Cash – creditors 15,200
To Active’s Capital 1,530 4,080
1,36,000 1,36,000
Cash Account
To Balance B/D 4,000 By Realisation A/C 720
To Company A/C 40,000 By Realisation A/C 15,200
By Young’s Capital 7,500
By Active’s Capital 10,530 28,080
44,000 44,000
Shares Account
To Comapany A/C 80,000 By Young’s Capital 50,000
By Active Capital 30,000
80,000 80,000
Young’s Capital Account
To Shares 50,000 By Balance B/D 60,000
By Reserve 5,000
67,550 67,550
Active’s Capital Account
To Shares 30,000 By Balanace B/D 36,000
By Reserve 3,000
40,530 40,530
Working Notes:
Final Capital Ratio: 67,550: 40,530
5: 3
Note: shares should be distributed first in the final capital ratio.
Illustration 7:
Ram and Shyam are in partnership sharing profits and losses in the ratio of two-thirds and
one-thirds respectively. Their Balance Sheet as on 31st December 2007, on which date they
agreed to convert their business into a limited company was as follows:
Balance Sheet
Liabilities Assets
Mortgage on Freehold premises 10,000 Sundry Debtors 26,000
Ram 20,000 Plant 5,000
Shyam 10,000 30,000 Freehold premises 16,000
70,000 70,000
The company takes over all the assets and liabilities with the exception of the mortgage
loan purchase price being Rs.60, 000, payable as to Rs.12, 000 in cash, Rs.24, 000 in debentures
and the balance in equity shares of the company.
Close the books of the firm after the above transactions have been carried out including
the payment of mortgage. The partners agree to share the debentures and shares in proportion
to their capitals.
Solution:
Purchase Consideration:
In the form of cash 12,000
In the form of debentures 24,000
In the form of equity shares 24,000
60,000
Realisation Account
To Cash 7,000 By Creditors 30,000
To Debtors 26,000 By Company A/C 60,000
To Stock 16,000
To Plant 5,000
To Freehold premises 16,000
To Ram’s Capital 13,333
To Shyam’s Capital 6,667 20,000
90,000 90,000
Company Accounts
To realization A/C 60,000 By Cash 12,000
By Debentures 24,000
By Shares 24,000
60,000 60,000
Mortgage Loan Account
10,000 10,000
Cash Account
To Company A/C 12,000 By Mortgage Loan 10,000
By Ram’s Capital 1,333
By Shyam’s Capital 667
12,000 12,000
Debentures Account
To Company A/C 24,000 By Ram’s Capital 16,000
By Shyam’s Capital 8,000
24,000 24,000
Shares Account
To Company A/C 24,000 By Ram’s Capital 16,000
By Shyam’s Capital 8,000
24,000 24,000
Ram’s Capital Account

To Debentures 16,000 By Balance B/D 20,000
To Shares 16,000 By Realisation A/C 13,333
To Cash 1,333
33,333 33,333
Shyam’s Capital Account
To Debentures 8,000 By Balance B/D 10,000
To Shares 8,000 By Realisation A/C 6,667
To Cash 667
16,667 16,667
Illustration 8:
Rao and Reddy carry on business in partnership wished to dissolve the firm and sell off
the business to a limited company on 31st December, 2006, when the firm’s position was as
under:
Sundry Creditors 21,250 Furniture 3,320

Rao’s Capital 34,000 Stock 15,380
Reddy’s Capital 17,000 Debtors 48,450
Cash 5,100
72,250 72,250
The arrangement with the limited company was as follows:
a) Furniture and stock were purchased at Balance Sheet values less 10%.
b) Goodwill of the firm was valued at Rs.10, 120.
c) The firm’s debtors, cash and creditors were not to be taken over by the company, but the
company agreed to collect the book debts and discharge the liabilities of the vendors as
agent, for which services the company was to he paid 3% on all collections from the
vendors’ debtors and 2% on cash paid to Vendors’ creditors.
d) The purchase price was to be discharged by the company in fully paid ordinary shares of
Rs.100 each at a premium of Rs.10 per share.
The company received during the first two months after the purchase of business Rs.48, 000
from vendors’ debtors in full satisfaction. The creditors were paid off less Rs.250 allowed by
them as discount. The company paid the balance due to the vendors on March 1, 2007.
Ignore the question of interim distribution of cash write up the realization account, cash
account and the capital accounts of the partners.
Solution:
Purchase Consideration:
Assets taken over:
Furniture 3,320
Less: 10% 332 2,988
Stock 15,380
Less: 10% 1,538 13,842
Goodwill 10,120
Purchase price 26,950
In the form of shares of Rs.110 each
Number of shares: 26,950/110 = 245
Cash collected by the company from debtor on behalf of the firm: 48,000
Less: Cash paid to creditors on behalf of the firm 21,000
27,000
Cash due from the company
Less: Commission 48,000 x 3/100 1,440
21,000 x 2/100 420 1,860
Cash received from the company 25,140
Realisation Account
To Furniture 3,320 By Creditors 21,250
To Stock 15,380 By Company A/C 26,950
To Debtors 48,450 By Company A/C- cash due 25,140
To Rao’s Capital 3,095
To Reddy’s Capital 3,095 6,190
73,340 73,340
Company Account
To Realisation A/C 26,950 By Shares – Company 26,950
To Realisation A/C 25,140 By Cash 25,140
52,090 52,090
Shares Account
To Company A/C 26,950 By Rao’s Capital 17,490
By Reddy’s Capital 9,460
26,950 26,950
Cash Account
To Balance 5,100 By Rao’s Capital 19,605
To Company A/C 25,140 By Reddy’s Capital 10,635
30,240 30,240
Rao’s Capital Account
37,095 37,095
Reddy’s Capital Account
To Cash 10,635 By Realisation 3,095
20,095 20,095
Note: Shares to be distributed first in the ratio of final claims of the partners =
37,095:20095 = 370: 201 (adjusted)
Shares to Rao = 245 x 371/572 = 17,490
Shares to Reddy = 245 x 201/572 = 9,460
The remaining claim to the partners should be paid in cash.
12.7: Try yourself:

1. Rahul and Kiran are partners sharing profits as 2:1. The position of the firm as on 31 st
December 2007 when they decided to dissolve the business was as follows:
Liabilities Assets
Sundry Creditors 15,000 Plant and Machinery 25,000
General Reserve 10,000 Furniture 4,000
Capital Accounts: Stock 10,000
Rahul 22,000 Sundry Debtors 20,000
Kiran 22,000 44,000 Cash at Bank 10,000
69,000 69,000
The realization shows the following result:
a) Rahul took over plant and machinery and furniture at book values less 10%.
b) Kiran took over the stock and goodwill at Rs.17, 500
c) Sundry debtors realized Rs.18, 500.
d) Sundry creditors wee settled at a discount of 5%.
Close the books of the firm.
(Rahul gets Rs.5, 134 and Kiran gets Rs.9, 116)
2. Lakshman, Mukund and Mohan sharing profits in the proportion of 3:2:1 agreed upon
dissolution of their partnership on 31st December, 2007 on which date their Balance Sheet
was as under:
Liabilities Assets
Capital Accounts: Machinery 60,750
Lakshman 60,000 Stock in trade 11,325
Mukund 30,000 90,000 Investments 31,245
Mrs.Lakshman Loan 15,000 Joint Life Policy 21,000
Life Policy Fund 21,000 Less: Provision 900 13,050
Investments fluctuation fund 9,000 Current Account – Mohan 17,250
Cash at bank 8,130
1, 62,750 1,62,750
The Life Policy is surrendered for Rs.18, 000. The investments are taken over by Lakshman
for Rs.26, 250. Lakshman agrees to discharge his wife’s loan. Mukund takes over all the
stock at Rs.10, 500 and debtors amounting to Rs.7, 500 at Rs.6, 000. Machinery is sold for
Rs.82, 500. The remaining debtors realize 50% of book value. The expenses of realization
amount to Rs.900.
It is found that an investment not recorded in the books is worth Rs.3, 000. The same is
taken over by one of the creditors at this value.
Show the necessary ledger accounts including the final accounts of the partners on
completion of the disillusion of the firm.
(Realisation: Lakshma – Rs.21,353; Mukund – Rs.14,235; Mohan – Rs.7,117; Final settlement:
Lakshman gets Rs.70,103; Mukund gets Rs.27,735; Mohan pays Rs.10,133)
3. P, Q and R carried on business in partnership. On 31st December, 2007, their balance sheet
was as under:
Liabilities Assets
Sundry Creditors 40,500 Land and Buildings 36,000
P’s Loan 54,000 Plant and Machinery 72,000
Capital Accounts: Loose Plant and Tools 13,500
P 1, 08,000 Stock in trade 90,000
Q 90,000 Sundry debtors 1, 26,000
R 67,500 2, 65,500 Cash at Bank 22,500
3, 60,000 3, 60,000
They decided to dissolve the firm as on 31st December, 2007. Q and R continued the
business, agreeing to purchase P’s share in the capital of the firm in the proportions in which
they shared profits and losses. P agreed to allow his loan to remain in the business. Profits
and losses are shared: P two-fifths, Q two- fifths, and R one-fifths. Q and R utilize the cash at
bank to pay P and contribute the balance.
For the purpose of the dissolution, the following valuations were made:
Goodwill 45,000; Land and Buildings Rs.50,500; Plant and Machinery as in the Balance Sheet,
subject to 10% depreciation; Loose plant and tools as in the Balance Sheet; Stock in trade
Rs.81, 000; Sundry Debtors as in the Balance Sheet, subject to Rs.9, 900; Provision for bad
debts and an allowance of 5% for discounts. The liability to sundry creditors is taken over by
Q and R subject to a allowance of Rs.1, 800 for discounts.
Q and R continue to share profits and losses in the same proportion as before. Draw up
the Realisation Account and other necessary accounts in the books of P, Q and R to close the
books and opening Balance Sheet of M/S Q and R together with their opening entries.
(Realisation: P- Rs.7, 758; Q – Rs.7, 758; R – Rs.3, 879; P receives cash Rs.1, 15,758; New
firm total of Balance Sheet Rs.3, 55,095)
4. X, Y and Z carry on business in partnership sharing profits and losses ½, 3/8 and 1/8
respectively. On 31st March, 2007, they agreed to sell their business to a limited company.
Their position on that date was as follows:
Liabilities Assets
X Capital 40,000 Freehold property 36,000
Y Capital 30,000 Machinery 24,000
Z Capital 26,000 Book debts 30,000
Loan on Mortgage 8,000 Stock 26,000
1, 20,000 1, 20,000
The company took the following assets at the valuation shown below:
Freehold property 44,000 Machinery 22,000
Book debts 28,000 Stock 24,000
Goodwill 8,000
The company also agreed to pay the creditors which were agreed at Rs.15, 400. The
company paid Rs.67, 000 in fully paid shares of Rs.10 each and the balance in cash. The
expenses amounted to Rs.1, 000.
You are required to prepare Realisation and other related accounts in the books of the
firm with the calculation of purchase consideration)
( Realisation A/C: X – Rs.4, 800; Y – Rs.3, 600; Z – Rs.1, 200; Cash to X – Rs.16, 380; Y –
Rs.12, 280; Z – Rs.9, 940; Purchase consideration: Rs.1,10,600;)
5. Rao, Raheman and Robert were partners in a partnership firm sharing profits in ½, 3/8, 1/
8 ratio. On 31st December, 2007 they want to sell the firm to a newly established Joint Stock
Company. Their position on the above date was as follows:
Liabilities Assets
Capitals: Freehold Assets 18,000
Rao 20,000 Machinery 12,000
Raheman 15,000 Book debts 15,000
Robert 13,000 48,000 Stock 13,000
60,000 60,000
Company took the following assets as under:
Freehold Assets Rs.26, 000; Machinery Rs. 10, 000; Book debts Rs.14, 000; Stock
Rs.12, 000; Goodwill Rs.5, 000.
The purchase price of Freehold assets and machinery for Rs.36, 000 are to be paid in the
form of equity shares, the purchase price of book debts, stock and goodwill are to be paid in cash.
The partnership firm paid creditors with 3% discount. Expenses of Realisation amounted to Rs.1,
000.
Pass the necessary journal entries to close the books of the firm and prepare the necessary
ledger accounts to show the result of dissolution and final settlement among the partners.
(Realisation A/C: Rao – Rs.4, 180; Raheman – Rs. 3, 135; Robert – Rs.1, 045; Rao receives –
Rs.8, 750 and shares Rs.15, 430; Reheman receives Rs.6, 565 and shares Rs.11, 570; Robert
receives Rs.5, 045 and shares Rs.9, 000; Purchase consideration: Rs.67, 000)
12. 8: Summary:
Partnership dissolves when the term of the partnership expires, or when the
adventure completes, or when any of the partners die or retire or insolvent. In all these cases, the
partnership firm may continue with the remaining partners. There is also a possibility of dissolution
of partnership firm. When all the partners agree, or any of the partners become insolvent, or
when business becomes illegal or when partnership has a will or when court orders; the partnership
firm dissolves. In this lesson the accounting procedure when a firm dissolves voluntarily are
discussed. Further, the method of accounts when a firm is sold to a joint stock company is also
discussed.
12.9: Glossary:
Dissolution of partnership: Closure of the existing partnership relation among the partners
is called dissolution of partnership. The expiry of the term of duration, the completion of the
adventure, the death of a partner, the insolvency of a partner and the retirement of a partner lead
to dissolution of partnership.
Dissolution of partnership firm: It is the closure of the existing partnership firm after
clearing the assets and liabilities and closing down and settling the capital accounts of partners
once for all.
Purchase Consideration: It is the value or compensation offered by the buying company
to the partnership firm for taking the firm into its fold. The consideration consists of cash or cash
with shares and debentures.

1. Distinguish between dissolution of partnership and dissolution of partnership firm.
2. Mention the accounting procedure when a joint stock company purchases a partnership
firm.
Financial Accounting - II 13.1 Partnership Accounts V – ......
Lesson: 13
Partnership Accounts: V – Insolvency
13.0 Objective:
After going through the lesson, you will be able to understand the following:
1. Accounting method when a partner becomes insolvent.
2. Garner vs. Murray case.
3. Accounting procedure when all partners become insolvent.
4. Piece meal method of distribution after realization of assets.
Structure:
13.1: Insolvency - Introduction
13.2: Garner vs. Murray Case
13.3: When all partners are insolvent
13.4: Gradual realization of assets and piecemeal distribution
13.5: Illustrations
13.6: Try yourself
13.7: Summary
13.8: Glossary
13.9: Questions
13.1: Insolvency - Introduction:

Whenever any partner in the partnership firm becomes insolvent, the firm dissolves and
the burden of the insolvent partner should be borne by the solvent partners in their profit sharing
ratio. As usual, a realization account needs to be prepared and the loss or profit that comes out
of it should be transferred to the partners. The debit balance of the insolvent partner should be
transferred to the debit side of the solvent partners in their respective profit sharing ratio and thus
the accounts of all partners will be closed. This is a usual practice to be adopted. But after the
case of Garner vs. Murray, the method of bearing the burden of insolvent partner had changed. In
this lesson, we discuss the accounting procedure before and after this case and also the case
when all partners become insolvent. Finally, the piece meal distribution method of the sale proceeds
when a partnership firm dissolves is also discussed.
13.2: Garner vs. Murray Case:

When a partner becomes insolvent, he may not be in a position to pay the amount owed
by him to the firm in full. The amount not so paid is a loss to the firm. This loss has to be borne
by the solvent partners. Generally, they share in their profit sharing ratio. This was the procedure
used to be adopted before Garner vs. Murray case. The Garner vs. Murray case gave a new look
regarding sharing the loss of the insolvent partner. The case says the following points:
1. The solvent partners should bring in cash their share of loss on realization.
2. The loss on account of insolvency of a partner should then be borne by the solvent partners
in the ratio of their capitals after bringing in cash such loss on realization.
According to this case, the loss on account of insolvency of partner should be borne by
the solvent partners in the ratio of their capitals standing in the balance sheet, just before
the dissolution of the partnership firm.
In this connection, the following points should be noted:
1. The term capitals here mean the real capitals of the partners and not the capitals as may
be standing in the books of the partnership firm in the names of different partners. This
distinction is particularly important when the partners are maintaining their capital accounts
on fluctuating capital system. The true capitals in case of this system will be ascertained
after making all adjustments regarding reserves, drawings, unrecorded assets on the date
of the balance sheet, just before dissolution of the partnership firm.
2. In case a partner, though solvent has a debit balance in his capital account, just before the
dissolution of the partnership firm, such a partner will not be required to bear the loss on
account of insolvency of a partner.
13.3: When all partners are insolvent:

If all the partners are insolvent then the creditors cannot expect to be paid in full. All the
cash available, together with whatever can be received from the private estates of all partners,
will be paid to the creditors after the expenses of realization are met. The Realisation Account
should be prepared in the usual course but creditors should not be transferred to this account nor
will payment to creditors be debited to this amount. The loss on realization should be transferred
to the capital accounts of partners in the profit-sharing ratio. The available cash should then be
paid to the creditors. The amount remaining unpaid should be transferred to Deficiency Account
to which account the balances of partners’ capital accounts should be transferred. Thus, the
books will be closed.
13.4: Gradual realization of assets and piecemeal distribution:
In the previous lessons, it is assumed that all assets have been realised on the date of
dissolution and all liabilities have also been paid on that date. This assumption makes possible
the ascertainment of profit or loss on realization immediately. However, in actual practice, this
does not happen. The assets are sold gradually to realize the best price for them. Similarly, the
liabilities are paid gradually depending upon amount realised from the sale of the assets. Thus,
the final profit or loss on realization can be known only after the expiry of certain time when all
assets are completely realised and all liabilities completely paid off.
After payment of all outside liabilities and partners loans, the capitals of the partners are
returned. However, the amount payable to a partner on account of his capital cannot be ascertained,
unless the total profit or loss on realization is known. This means that the partners should not be
paid any amount till realization is complete. This may create financial problems for the partners,
since on the one hand the partnership business is being dissolved and on the other the partners
do not get any money from the firm to start a new business or to meet their expenses. Thus, the
partners should not be required to wait till realization is complete. They should be paid as and
when the firm has funds left with it after payment of all outside liabilities. This is called as piecemeal
distribution of assets.
In dissolution, first of all the outside creditors have to be paid, then if surplus remains, any
loans given by the partners over and above their capitals are paid and last of all the partners’
capitals will be paid off. It is clear, therefore, that any cash in hand or cash collected should be
distributed among creditors until all of them are paid off. It is to be remembered that sufficient
funds for liabilities are to be kept in hand for future contingencies like for bills discounted expected
to be dishonoured.
Basis of distribution: As we know well, the profit or loss cannot be adjusted in the capital
accounts immediately. However, cash must be distributed in such a way that the amounts finally
left unpaid (i.e. the loss to be borne by the partners) are in the ratio in which profits and losses are
shared. The available cash cannot be distributed according to the profit sharing ratio (unless the
capitals are themselves in the profit sharing ratio) because that will leave the balances unpaid out
of proportion. The cash available cannot also be distributed in the ratio of capitals because, and
then the partners will be forced to bear the final loss in the ratio of capitals which may be different
from the profit sharing ratio.
Illustration 1:
Partners A, B and C share profits in the ratio of 2:1:2 respectively on 31st March 2007.
They decided to dissolve the partnership. The Balance Sheet as on that date is given below:
Liabilities Assets
Sundry Creditors 40,000 Balance in Bank 4,000
Capitals: Other assets 3, 96,000
A 1, 60,000
B 1, 60,000
C 40,000
4, 00,000 4, 00,000
The assets realized Rs.2, 40, 000 only, and realization expenses were Rs.10, 000. C has
been declared insolvent. C has no assets other than the capital stated above.
Show the capital accounts of the partners, before and after the decision of Garner vs.
Murray.
Solution:
Realisation Account
To Other assets 3, 96,000 By Creditors 40,000
To Cash – expenses 10,000 By Cash 2, 40,000
To cash – creditors 40,000 By Realisation – loss:
A 66,400
B 33,200
C 66,400 1, 66,000
4, 46,000 4, 46,000
Before Garner vs. Murray case:
To Realisation – loss 66,400 By Balance 1, 60,000
To Cash 76,000
1, 60,000 1, 60,000
To Realisation – loss 33,200 By Balance 1, 60,000
To Cash 1, 18,000
1, 60,000 1, 60,000
To Realisation – loss 66,400 By Balance 40,000
By B’s Capital 8,800 26,400
(Profit sharing ratio: 2:1)
66,400 66,400
Cash Account
To Balance 4,000 By Realisation- exps.& liabilities 50,000
To Realisation 2, 40,000 By A’s Capital 76,000
By B’s Capital 1, 18,000
2, 44,000 2, 44,000
After Garner vs. Murray case:
To Realisation A/C 66,400 By Balance 1, 60,000
To C’s Capital 13,200 By Cash (nominal entry) 66,400
To Cash 1, 46,800
2, 26,400 2, 26,400
To Realisation A/C 33,200 By Balance 1, 60,000
To C’s Capital 13,200 By Cash (nominal entry) 33,200
To Cash 1, 46,800
1, 93,200 1, 93,200
To Realisation A/C 66,400 By Balance 40,000
By B’s Capital 13,200 26,400
66,400 66,400
Cash Account
To Balance 4,000 By Realisation – Exps.&liabilities 50,000
To Realisation A/C 2, 40,000 By A’s Capital 1, 46,800
To A’s Capital (nominal) 66,400 By B’s Capital 1, 46,800
To B’s Capital (nominal) 33,200
3, 43,600 3, 43,600
Real Payment:
A: 1, 46,800 – 66,400 = 80,400
B: 1, 46,800 – 33,200 = 1, 13,600
Note:
Before Garner vs. Murray case – the debit balance of insolvent partner is shared by solvent
partners in their profit sharing ratio (2:1).
After the case – the debit balance of insolvent partner is to be shared by solvent partners in their
final capital ratio (after writing the entry for bringing their share of realization less cash) (1:1).
Illustration 2:
The position of Rakesh, Rajeev and Ramesh on June 30, 2007 was as follows:
Rakesh Loan Account 16,000 Sundry Assets 68,000
Rakesh Capital 25,600 Ramesh Capital 31,200
Rajeev Capital 14,400
Profit and Loss A/C 28,000
1, 09,200 1, 09,200
Profits and losses are shared Rakesh 18/35; Rajeev 7/35. The firm is dissolved on the
above date. Sundry assets realize Rs.56, 000. Sundry creditors are paid Rs.24, 000 in full
settlement. Expenses amount to Rs.3, 200. Ramesh is insolvent.
Assume the capitals are not fixed. Close the books of the firm.
Solution:
Realisation Account
To Sundry Assets 68,000 By Creditors A/C 25,200
To Cash – expenses 3,200 By Cash – expenses 56,000
To Cash – creditors 24,000 By Rakesh Capital 7,200
By Rajeev Capital 2,800
By Ramesh Capital 4,000 14,000
95,000 95,000
Rakesh Capital Account
To Ramesh Capital 18,133 By P & L A/C 14,400
To Cash 21,867 By Cash 7,200
47,200 47,200
Rajeev Capital Account
To Ramesh Capital 9,067 By P & L A/C 5,600
To Cash 10,933 By Cash 2,800
22,800 22,800
Ramesh Capital Account
To Balance 31,200 By P & L A/C 8,000
To Realisation – loss 4,000 By Rakesh Capital 18,133
ByRajeev Capital 9,067 27,200
(Final Capital ratio)
35,200 35,200
Cash Account
To Balance 10,000 By Realisation – expenses 3,200
To Realisation – assets 56,000 By Realisation – creditors 24,000
To Rakesh Capital 7,200 By Rakesh Loan 16,000
To Rajeev Capital 2,800 By Rakesh Capital 21,867
By Rajeev Capital 10,933
76,000 76,000
Note: When a partner becomes insolvent, the formula in Garner vs. Murray case is to be applied.
As per that formula – a) the realization loss is to be shared to all partners; b) the solvent partners
should bring their share of realization less in cash; c) the debit balance in insolvent partner’s
capital account should be charged to solvent partners’ capital account in their final capital ratio.
Illustration 3:
X, Y and Z were in partnership sharing profits and losses in the ratio of 1/5, 3/10 and ½.
The following is their Balance Sheet as on 30th June 2007 when they decided to dissolve:
Liabilities Assets
X Capital 3,000 Cash 1,000
Y Capital 4,000 Plant and Machinery 5,000
Z Capital 3,000 Sundry Debtors 20,000
Trade Creditors 12,000 Advance to X 2,000
Loan from Bank on book debts, plant etc. 14,000 Loss to date 8,000
36,000 36,000
The assets realized Rs.20, 000. X has private estate which is valued at Rs.4, 000. Y is
insolvent. From Z’s estate a dividend of 50 paise in a rupee is received.
Show the Realisation Account and the accounts of the partners assuming that all entries
relating to dissolution are passed through the Realisation Account.
Solution:
Realisation Account
To Plant 5,000 By Loan from Bank 14,000
To Sundry Debtors 20,000 By Creditors 12,000
To advance to X 2,000 By Cash – assets 20,000
Advance to X 2,000 22,000
By X Capital 1,000
To Cash – loan 14,000 By Y Capital 1,500
- Creditors 12,000 26,000 By Z Capital 2,500 5,000
53,000 53,000
Cash Account
To Balance 1,000 By Realisation – liabilities 26,000
To Realisation – assets 22,000
To X Capital 1,250
To Z Capital 1,750
26,000 26,000
X Capital Account
To P & L A/C 1,600 By Cash (Bal. Fig) 1,250
To Z Capital 750
To Y Capital 900
4,250 4,250
Y Capital Account
To P & L A/C 2,400 By X Capital 900
To Z Capital 1,000
4,900 4,900
Z Capital Account
To P & L A/C 4,000 By Cash 1,750
By X Capital 750
By Y Capital 1,000 1,750
6,500 6,500
Note: First Z capital account was settled as his capital is showing a debit balance. It was transferred
to capitals of X and Y in their capitals ratio 3:4. Then Y capital account debit balance was transferred
to X capital Account. The necessary cash was then brought in by X.
Illustration 4:
The Balance Sheet of O, P, Q, and R showed the following position on dissolution.
Balance Sheet
Liabilities Assets
O’s Capital 15,000 Q’s Capital 10,000
P’s Capital 10,000 R’s Capital 3,000
Profit on Realisation 12,000
47,000 47,000
Show the final adjustments among the partners assuming that R is insolvent.
Solution:
Realisation Account
To O’s Capital 3,000 By Balance B/D 12,000
To R’s Capital 3,000
12,000 12,000
Creditors’ Account
10,000 10,000
O’s Capital Account
18,000 18,000
P’s Capital Account
13,000 13,000
Q’s Capital Account
By Cash 7,000
10,000 10,000

3,000 3,000
Cash Account
To Balance B/D 34,000 By Creditors A/C 10,000
To Q’s Capital A/C 7,000 By O’s Capital A/C 18,000
By P’s Capital A/C 13,000
41,000 41,000
Illustration 5:
P, Q, R and S were partners sharing profits and losses in the ratio of 3:3:2:2.
Following was their Balance Sheet as on 30th June 2007.
Liabilities Assets
Sundry Creditors 15,500 Cash at bank 2,000
P’s Loan 10,000 Sundry debtors 16,000
Capital Accounts: Less: Provision 500 15,500
P 20,000 Stock 10,000
Q 15,000 35,000 Furniture and fittings 4,000
Trade marks 7,000
Capital Accounts:
R 16,000
S 6,000 22,000
60,500 60,500
On 30th June, 2007 the firm was dissolved and Q was appointed to realize the assets and
pay off the liabilities. He was appointed to receive 5% commission on the amounts finally paid to
other partners as capital. He was to bear the expenses of realization. The assets realized as
followed.
Study debtors 11,000 Stock 8,000
Furniture and fittings 1,000 Trade marks 4,000
Creditors were paid off in full, in addition a contingent liability for bills receivable discounted
materialized to the extent of Rs.2, 500. Also there was a joint life policy for Rs.30, 000. This was
surrendered for Rs.3, 000. Expenses of realization amounted to Rs.500. R was insolvent but
Rs.3, 700 were recovered from his estate.
Write up the necessary accounts to close the books of the firm.
Solution:
Realisation Account
To Debtors 16,000 By Reserve for bad debts 500
To Stock 10,000 By Creditors 15,500
To Furniture 4,000 By Cash – Debtors 11,000
To Trade marks 7,000 Stock 8,000
To Cash – Creditors 15,500 Furniture 1,000
Discounted bill 2,500 18,000 Trademarks 4,000
Policy 3,000 27,000
By Realisation – loss:
By P’s Capital A/C 3,600
By Q’s Capital A/C 3,600
By R’s Capital A/C 2,400
By S’s Capital A/C 2,400 12,000
55,000 55,000
P’s Loan Account
10,000 10,000
P’s Capital Account
To Realisation A/C – loss 3,600 By Balance B/D 20,000
To R’s Capital A/C 8,400 By Cash (nominal entry) 3,600
To Q’s Capital – commission 381
To Cash 11,219
23,000 23,000
Q’s Capital Account
To Realisation A/C –loss 3,600 By Balance B/D 15,000
To R’s Capital A/C 6,300 By Cash (nominal entry) 3,600
To Cash – expenses 500 By P’s Capital – commission 381
To Cash 8,581 (8,000 x 5/105)
18,981 18,981
To Balance B/D 16,000 By Cash 3,700
To Realisation A/C –loss 2,400 By P’s Capital 8,400
By R’s Capital 6,300 14,700
18,400 18,400
S’s Capital Account
To Balance B/D 6,000 By Cash 8,400
To Realisation – loss 2,400
8,400 8,400
Cash Account
To Balance B/D 2,000 By Realisation – liabilities 18,000
To Realisation A/C 27,000 By P’s Loan 10,000
To R’s Capital A/C 3,700 By Q’s Capital – expenses 500
To S’s Capital A/C 8,400 By P’s Capital (11,210 – 3,600) 11,219
To P’s Capital (nominal entry) 3,600 By Q’s Capital (8,581 – 3,600) 8,581
48,300 48,300
Note: S’s Capital account shows debit balance, but he is not insolvent. He brings in the necessary
cash. R is insolvent. His debit balance charged to P and Q in their final capital ratio i.e. after
writing the entry for bringing their loss of realization in cash. But really any partner, who is solvent,
does not bring cash for the realization loss. A notional entry will be written for bringing cash.
Therefore the actual amount payable to P comes to Rs.8, 000 (20,000-3,600+8,400). On this
amount, the commission to Q is to be calculated. If calculation is made as 5/100 on 8, 000, P
does not get Rs.8, 000. So calculation shall be 5/105 on 8, 000. The commission is to be
chargeable to P as the realization account and other partners’ capital accounts were already
closed.
It is assumed that expenses of realization were paid first by the firm, and then they were
charged to Q, who has to bear them.
Illustration 6:
A, B and C are partners in a business sharing profits equally. Their Balance Sheet at 31 st
March 2007 is as follows:
Liabilities Assets
Sundry Creditors 10,000 Furniture 2,100
Bills payable 2,000 Stock 15,400
Capital Accounts: Sundry debtors 18,000
A 12,000 Less: Provision 900 17,100
B 9,000 C’s Current Account 5,000
C 1,000 22,000 Cash in hand 1,400
Current Accounts:
A 2,000
B 2,000 3,000
41,000 41,000
C is insolvent and his estate pays Rs.1, 800 to the firm. The partnership is consequently
dissolved and sundry debtors, stock and furniture realize Rs.23, 600. Sundry creditors are settled
at Rs.8, 000. You are required to prepare the necessary ledger accounts to close the books of
the firm in accordance with the decision in Garner vs. Murray.
Solution:
Realisation Account
To Furniture 2,100 By Reserve for bad debts 900
To Stock 15,400 By Creditors 10,000
To Debtors 18,000 By Bills payable 2,000
To Cash – creditors 8,000 By Cash – assets realized 23,600
- bills payable2,000 10,000 By A’s Current A/C 3,000
By B’s Current A/C 3,000
By C’s Current A/C 3,000 9,000
45,500 45,500
A’s Current Account
To C’s Capital A/c 2,400 By Reserve fund 1,000
(4/7th share of C’s deficiency) By Cash 3,000
To A’s Capital A/C – transfer 600
6,000 6,000
B’s Current Account
To C’s Capital A/C(3/7th share) 1,800 By Reserve fund 1,000
To B’s Capital – transfer 1,200
6,000 6,000
C’s Current Account
To Balance 5,000 By Reserve fund 1,000
To Realisation A/C 3,000 By C’s Capital A/C – transfer 7,000
8,000 8,000
By Current A/C 600
12,600 12,600
By Current A/C 1,200
10,200 10,200
To Current A/C 7,000 By Balance 1,000
By Cash – brought in 1,800
By A’s Current A/C (4/7th share) 2,400
By B’s Current A/C (3/7th share) 1,800
7,000 7,000
Cash Account
To Balance 1,400 By Realisation – liabilities 10,000
To Realisation – assets 23,600 By A’s Capital A/C 12,600
To A’s Current A/C – loss brought in 3,000 By B’s Capital A/C 10,200
To B’s Current A/C – loss brought in 3,000
To C’s Capital A/C – loss brought in 1,800
32,800 32,800
Note: In the case of Garner vs. Murray, the solvent partners have to bring their share of realization
loss in cash before sharing the deficiency caused by the insolvency of one of the partners. But
when the partners have current accounts in addition to their capital accounts, they need not bring
the loss in cash, as it makes no difference even if it is not brought in.
When there are current accounts the following procedure is to be followed:
1) Insolvent partner’s current account balance is to be transferred to his capital account.
2) Debit balance of his capital account is to be charged to the current account of other
solvent partners in their capital ratio.
3) Current account balances of solvent partners to be transferred to respective capital accounts
and the final payment are to be made.
Insolvency of all Partners:
Illustration 7:
Kalyan and Krishna are equal partners. Their Balance Sheet stood as under:
Liabilities Assets
Kalyan’s Capital 6,000 Plant and Machinery 13,750
Creditors 39,000 Furniture 5,000
Debtors 5,000
Stock 6,250
Cash at bank 3,000
Krishna’s drawings 12,000
45,000 45,000
The partnership was dissolved and the assets were realised as follows:
Stock Rs.3, 500; Furniture Rs.3, 000; Debtors Rs.5, 000; Machinery Rs.6, 000;
The cost of collecting and distributing the estate amounted to Rs.1, 500. Kalyan’s private
estate is not sufficient even to pay his private debts, whereas in Krishna’s private estate there is
a surplus of Rs.500.
Prepare Realisation account, cash account and profit and loss account and creditors’
account showing dividend payable to creditors.
Solution:
Realisation Account
To Plant and Machinery 13,750 By Cash – Stock 3,500
To Furniture 5,000 - Furniture 3,000
To Debtors 5,000 - Machinery 6,000
To Stock 6,250 - Debtors 5,000 17,500
To Cash – expenses 1,500 By Kalyan Capital A/C 7, 000
By Krishna Capital A/C7, 00014,000
31,500 31,500
Creditors Account
To Cash A/C 19,500 By Balance 39,000
To Deficiency (or P & L A/C) 19,500
39,000 39,000
Cash Account
To Balance 3,000 By Realisation A/C 1,500
To Realisation A/C 17,500 By Creditors 19,500
To Krishna’s Capital 500
21,000 21,000
Kalyan’s Capital Account
By Deficiency (or P & L A/C) 1,000
7,000 7,000
Krishna’s Capital Account
To Balance 12,000 By Cash 500
To Realisation A/C 7,000 By Deficicency (or P & L A/C) 18,500
19,000 19,000
Deficiency Account (P & L A/C)
To Kalyan’s Capital A/C 1,000 By Creditors A/C 19,500
To Krishna’s Capital A/C 18,500
19,500 19,500
Note: When all partners became insolvent, the creditors need not be transferred to realization
account. In such case the realization account shall be utilized only for the assets and expenses.
Illustration 8:
Below is the Balance Sheet of A, B and C as on December 31, 2007.
Liabilities Assets
Sundry creditors 40,000 Cash 1,000
A’s Loan 10,000 Stock 24,000
Capital Accounts: Debtors 20,000
B 3,000 8,000 C’s Capital overdrawn 10,000
58,000 58,000
Due to the inability to pay the creditors, the firm is dissolved. B and C cannot pay anything.
A can contribute only Rs.1, 500 from his private estate. Stock realises Rs.15, 000. Debtors
realize Rs.16, 000 and furniture is sold for Rs.1, 000. Expenses amounted to Rs.3, 000. Prepare
accounts to close the books of the firm.
Solution:
Realisation Account
To Stock 24,000 By Cash – assets 32,000
To Debtors 20,000 By A’s Capital – loss 6,000
To Furniture 3,000 By B’s Capital – loss 6,000
To Cash – expenses 3,000 By C’s Capital – loss 6,000
50,000 50,000
Creditors Accounts
To Deficiency A/C 8,500
40,000 40,000
A’s Loan Account
To Deficiency A/C 10,000 By Balance B/D 10,000
10,000 10,000
To Realisation A/C – loss 6,000 By Balance B/D 5,000
To Deficiency A/C 500 By Cash 1,500
6,500 6,500
To Realisation A/C - loss 6,000 By Balance B/D 3,000
By Deficiency A/C 3,000
6,000 6,000
To Balance B/D 10,000 By Deficiency A/C 16,000
To Realisation A/C – loss 6,000
16,000 16,000
Cash Account
To Realisation A/C 32,000 By Creditors A/C 31,500
To A’s Capital A/C 1,500
34,500 34,500
Deficiency Account
To B’s Capital A/C 3,000 By Creditors A/C 8,500
To C’s Capital A/C 16,000 By A’s Loan A/C 10,000
By A’s Capital A/C 500
19,000 19,000
Note: When all partners become insolvent, the firm becomes unable to pay the creditors in full.
In such cases the creditors should not be transferred to Realisation account. As the creditors are
not satisfied fully the question of payment of A’s loan does not arise and that loan shall be
transferable to Deficiency account.
Gradual or Piecemeal Distribution:
Illustration 9:
Moon, Light and Shade were partners sharing profits in the ratio 4:3:1. They want to
dissolve the firm from the following Balance Sheet as on 31st March 2007.
Balance Sheet 31-12-2007

Liabilities Assets
Creditors 2,625 Sundry Assets 18,500
Bank Overdraft 875
Capital Accounts:
Moon 7,000
Light 3,000
Shade 5,000 15,000
18,500 18,500
Capital should be repaid whenever the assets realised. Firm’s assets realised as follows:
May 2,000
July 1,500
September 2,500
October 4,000
December 6,500
No additional amount was realised.
From the above Balance Sheet and other information prepare the statement showing the
interim distribution of cash.
Solution:
Statement showing the distribution of cash
Particulars Creditors OD Moon Light Shade
Balances 2,625 875 7,000 3,000 5,000
Less: Receipts in May (3:1) 1,500 500 — — —
1,125 375 7,000 3,000 5,000
Less: Receipts in July (3:1) 1,125 375 — — —
— — 7,000 3,000 5,000
Less: Receipts in September — — — — 2,500
— — 7,000 3,000 2,500
Less: Receipts in October — — — — 750
— — 7,000 3,000 1,750
Remaining (4,000-750) to Moon &
Shade in 4:1 ratio — — 2,600 — 650
— — 4,400 3,000 1,100
Less: Receipts in December ( 500 in
6,500 to Moon and Shade in 4:1ratio) — — 400 — 100
— — 4,000 3,000 1,000
Remaining 6,000 in 4:3:1 ratio — — 3,000 2,250 750
Partners’ share in loss (4:3:1) — — 1,000 750 250
Note: The liabilities are to be payable first. Creditors and overdraft were in the ratio of 3:1. Until
they are discharged completely the cash available is to be distributed between creditors and
overdraft in the ratio of 3:1. The amount available in the first two installments is sufficient to
discharge the liabilities.
The cash realised in the subsequent installments is to be distributed to the partners so as
to bring their capitals in to their profit sharing ratio. It will enable the partners to suffer the loss on
realization (which can be known only at the end of last installment) in their profit sharing ratio.
Working Notes:
Total book value of assets 18,500
Less: Assets realised in installments 16,500
Loss on Realisation 2,000
Moon’s share 2,000 x 4/8 1,000
Light’s share 2,000 x 3/8 750
Shade’s share 2,000 x 1/8 250
Cash Account
May To Realisation A/C 2,000 May By Creditors 1,500
July To Realisation A/C 1,500 By Overdraft 500
Sept. To Realisation A/C 2,500 July By Creditors 1,125
Oct To Realisation A/C 4,000 By Overdraft 375
Dec To Realisation A/C 6,500 Sept. By Shade Capital 2,500
October By Moon Capital 2,600
By Shade Capital 1,400
Dec. By Moon Capital 3,400
By Light Capital 2,250
By Shade Capital 850
16,500 16,500
Moon’s Capital Account
Oct. To Cash 2,600 By Balance B/D 7,000
Dec. To Cash 3,400
7,000 7,000
Light’s Capital Account
Dec. To Cash 2,250 By Balance B/D 3,000
To Realisation A/C 750
3,000 3,000
Shade’s Capital Account
Sep. To Cash 2,500 By Balance B/D 5,000
Oct. To Cash 1,400
Dec. To Cash 850
To Realisation A/C 250
5,000 5,000
Creditors’s Account
May To Cash 1,500 By Balance B/D 2,625
July To Cash 1,125
2,625 2,625
Overdraft Account
May To Cash 500 By Balance B/D 875
July To Cash 375
875 875
13.6: Try yourself:

1. A, B and C were equal partners. On 31st December, 2007, their position was as follows:
A’s Capital 2,000 Cash 1,500
B’s Capital 600 C’s Capital 200
Loss on Realisation 900
2,600 2,600
C is insolvent and can pay nothing. Close the books of the firm ignoring the decision in
Garner vs. Murray.
(A gets Rs.1, 450 and B gets Rs.50)
2. The following is the balance sheet of a firm as on 31st December 2007, when D has become
insolvent:
Balance Sheet as on 31st December, 2007
Liabilities Assets
Sundry Creditors 10,000 Sundry Assets 50,000
General Reserve 10,000 C’s Capital A/C 10,000
A’s Capital A/C 30,000 D’s Capital A/C 10,000
B’s Capital A/C 20,000
70,000 70,000
The assets realised Rs.40, 000. Creditors are paid in full. Partners share profits and
losses equally. You are required to close the books of the firm applying Garner vs. Murray rule.
(D’s deficiency Rs.7,500; A’s share Rs.4, 432 and B’s share Rs.3,068; Finally A gets Rs.26, 590
and B gets Rs.18, 410)
3. A, B and C were partners in a firm. They shared profits and losses in 40%, 30%, and 30%
respectively. The firm was dissolved and B was appointed to realize assets and distribute the
proceeds. B is to receive 5% commission on the amounts realized from sale of assets and to
bear all expenses of realization. The Balance Sheet on the date of dissolution was as under:
Liabilities Assets
Creditors 17,700 Cash 450
A’s Capital 9,000 Debtors 13,650
B’s Capital 6,000 Less: Provision 750 12,900

Stock 18,000
C’s Capital overdrawn 1,350
32,700 32,700
Debtors realized Rs.10, 500; stock Rs.13, 500; goodwill Rs.600. Creditors were paid
Rs.17, 250 in full settlement. In addition, outstanding creditors Rs.150 and expenses Rs.180
paid by B. A and B agreed to receive Rs.900 in full settlement from C.
Show the Realisation Account, Cash Account and Capital Accounts of the partners.
(Loss on Realisation: A- Rs.2,892; B- Rs.2,169; C- Rs.2,169; A gets Rs.7,428 and B gets Rs.
Rs.6,003)
4. Ram and Shyam were in equal partnership. Their Balance Sheet stood as under on 31 st
December, 2007 when the firm was dissolved.
Creditors 3,200 Machinery and Plant 1,200
Ram’s Capital 400 Furniture 300
Debtors 500
Stock 400
Cash 180
Shyam’s drawings 1,020
3,600 3,600
The assets realised as under:
Machinery 600 Furniture 100
Debtors 400 Stock 300
The expenses of realization amounted to Rs.140. Ram’s private estate is not sufficient
even to pay his private debts, whereas in Shyam’s private estate there is a surplus of Rs.140 only.
Give accounts to close the books of the firm.
(Profit on Realisation: Ram – Rs.240; Shyam – Rs.240; Deficiency Rs.1, 450)
5. A, B and C carried on business as partners, sharing profits and losses in the ratio of 3:4:5.
They decided to dissolve the partnership as on 1st July, 2007 and agreed that the sale of the
assets should not be forced but should be made gradually. As the realization was not likely to be
completed for over a year and as the partners wished the receipts from sales to be dealt with as
and when received, you are asked to prepare a scheme for the equitable distribution of such
receipts.
The following was the Balance Sheet of the firm at the date of dissolution:
Liabilities Assets
Creditors 10,000 Sundry Assets 36,000
B’s Loan Account 2,000
Capital Accounts:
A 12,000
B 8,000
C 4,000 24,000
36,000 36,000
The net amounts realised from the gradual sale of assets were as follows:
1st Installment 5,000
2nd Installment 10,000
3rd Installment 5,100
4th Installment 6,300
5th Installment 5,700
Draw up a detailed statement showing the distribution of each installment received and
the final settlement.
( In II installment A gets Rs.3,000; In III installment A gets Rs.3,900 and B Rs.1,200; In IV installment
A gets Rs.2,700; B Rs.3,600; In V installment A gets Rs.1,425; B Rs.1,900 and C Rs.2,375)
13. 7: Summary:
Insolvency of a partner, Insolvency of all partners and distribution of the proceeds among
the partners are discussed in this lesson at length along with their accounting procedures. Garner
vs. Murray case and method of distribution of loss among the solvent partners and final settlement
are also discussed with suitable accounting problems. Finally, in this lesson, the piecemeal method
of distribution of proceeds of assets among partners is discussed.
13.8: Glossary:
Garner vs. Murray case: Under this case - first, the solvent partners should bring in cash equal
to their share of the loss on realisation and second – the loss due to the insolvency of a partner
should be divided among the other partners in the ratio of capitals then standing.

1. Explain the peculiarities of Garner vs. Murray case with an illustration.
2. Explain the procedure of accounting and distribution of proceeds of assets among the partners
and creditors under piecemeal distribution.
Dr. R.Jayaprakash Reddy.
Lesson - 14
BRANCH ACCOUNTING - I
BRANCHES NOT KEEPING FULL SYSTEM OF
ACCOUNTING/ DEPENDENT BRANCHES
OBJECTIVES:
The objective of this lesson is
1. To understand the purpose of branch accounting
2. To Know the salient features of dependent branches.
3. To follow the accounting treatment under debtors system and stock and debtors system.
STRUCTURE:
14.1 Introduction
14.2 Objectives of Branch Accounting
14.3 Types of Branches
14.4 Branch not keeping full system of accounting
14.5 System of accounting for branch
14.6 Debtors system
i) Cost price method
ii) Invoice price method
14.7 Final account system
14.8 Stock and Debtors system
a) Goods charged to branch at cost price
b) Goods charged to branch at seeling price
14.9 Distinction between wholesale and Retail profit.
14.10 Summary
14.12 Exercises
14.13 Refrence Books
Centre for Distance Education 13.2 Acharya Nagarjuna University
14.1 INTRODUCTION:
In order to increase the sales, the business houses are required to market their products
over a large territory and to have an effective and efficient retailing, a business is split into certain
branches or departments. The various divisions of the business are located under the same roof,
they are known as departments. If the various divisions are located in different places of the same
city or in different cities of the same country or in different countries, these are known as branches.
14.2 OBJECTIVES OF BRANCH ACCOUNTING :

A proper accouting system is to be adopted for recording business transactions in case of
a business having different branches. The main object of keeping branch accounts is dependent
on the nature of the business and specific need of a particular branch.
The objectives of Branch Accounting are as followss :
i. To Know the profit or loss of each branch seperately.
ii. To ascertain the financial position of each branch on a particular date.
iii. To know the cash and goods requirements of the various branches.
iv. To evaluate the progress and performance of each branch.
v. To calculate commission for payment to the manager if based on profits of branch.
vi. To know the profitability of each branch and type of business for expansion of the
business.
vii. To give correct suggestions for the improvement in the working of the various branches.
14.3 TYPES OF BRANCHES :

Branches can be broadly classified into two categories for the purpose of recording the
business transactions in the books of branch accounts.
1. Branch not keeping full system of accounting / Dependent brnaches.
2. Branch keeping full system of accounting / Independent branches.
i. Home Branches
ii. Foreign Branches
14.4 BRANCHES NOT KEEPING FULL SYSTEM OF ACCOUNTING /

DEPENDENT BRANCHES :
Branches not keeping full system of accounting are also known as dependent branches.
The dependent branch does not maintain its own set of books. All the records have to be maintained
by the Head office.
FINANCIALACCOUNT -II 14.3 Branch Accounting - I
The following are the main features of such branches :
1. All purchases are made by the Head Office. The branches sell only those goods which
are received from Head office. Some times the branches may be allowed to make
purchases from the local markets.
2. Goods are supplied by the Head office to such branches either at cost price or at
invoice price.
3. All expenses of the branch such as rent, salary of staff, advertisement etc are directly
paid by the Head office.
4. Petty expenses are paid by the branch manager out of petty cash book balance. Petty
cash book is maintained at the branch either as simple cash book or on imprest system.
5. The amount received from cash sales or cash received from the debtors is either
remitted to the head office daily or deposited in the account of head office in some
local bank.
6. The branch manager is normally expected to sell the goods for cash only but he may
be authorised to sell goods on credit in certain cases.
The branches with the above features do not keep proper set of books of accounts. In
order to supply the requisite accounting information to the head office, each branch keeps some
memorandum records such as the stock register, the cash book and petty cash book. If the branch
is authorised to make credit sales, a sales Day book and a Debtors ledger will also be required to
be maintained.
14.5 SYSTEM OF ACCOUNTING FOR BRANCH :

Branches of the above type do not keep proper accounts, but accounts are maintained
only in the Head office books. The system of accounting for branch to be adopted by the Head
Office depends on the size of the branch and the degree of control to be exercised, the nature and
volume of branch transactions. Keeping in view of the above factors the head office may keep the
accounts of the Branch according to any of the following methods.
1. Debtors system
2. Final account system
3. Stock and Debtors system
4. Whole sale Branch system.
14.6 DEBTORS SYSTEM :

This system is adopted when branch is small in size. Under this system head office opens
an account for each branch. This account is known as " Branch account ". Branch account is a
nominal account. It serves the same purpose as the profit & loss account. In other words, This
account is prepared to know the profit made by the branch. The goods supplied by the Head office
to branch may be either at cost price or at invoice price ( cost plus profit ).
Th following are the Journal entries which are passed in the books of Head Office to record
branch transactions.
1. When goods are sent to Branch
Branch A/C Dr
To goods sent to
branch A/C
2. For goods returned by the Branch to Head office
Goods sent to branch A/C Dr
To Branch A/C
3. For transfering the goods to another branch
To Branch A/C
4. For expenses at the branch met by the Head office.
Branch A/C Dr
To Bank A/C
5. For remittances received from the branch
Bank A/C Dr
To Branch A/C
6. For transfer of balance in goods sent to branch account
To purchases / Trading A/C
7. For closing the balance of assets
Branch Assets A/C Dr
To Branch A/C
8. For beginning balances of assets ( next year )
Branch A/C Dr
To Branch Assets A/C
9. For closing balances of liabilities
Branch A/C Dr
To Branch A/C
10. For opening balances of liabilities ( next year )
Branch liabilities A/C Dr
To Branch A/C
11. For branch profit
Branch A/C Dr
To General profit & loss A/C
12. For branch loss
General profit & loss A/C Dr
To branch A/C
The Branch account will appear as follows :
Branch Account
(IN HEAD OFFICE BOOKS )
To opening Balances By Branch liabilities A/C (opeining balances)
Branch cas in hand By Bank ( remittances)
Branch at stock (at cost) Cash sales
Branch Furniture Cash received from debtors
Branch Prepaid insurance etc. By closing balances
To goods sent to Branch A/C Petty cash
To Bank ( expenses paid by H.O) Stock
To Branch liabilities A/C Detors
( Closing balances ) Furniture
To General profit & loss A/C ( profit) Prepaid expenses
By General profit & loss A/C ( loss)
1. Branch account shows opening and closing balances of assets and liabilities.
2. Branch account does not show credit sales, sales returns, discounts allowed,
allowences bad debts depreciation on fixed assets.
3. Goods in transit will be shown either on both sides of the branch a/c or will be ignored
totally.
4. The branch a/c debited with the opening balance of petty cash and the amount sent by
the Head Office and credited with the closing balance of petty cash. Petty expenses
are automatically charged to branch a/c
5. If the branch has purchased any fixed asset then the branch a/c will be credited by the
Head office and the remittance from the branch will be reduced by the amount.
6. If the branch has sold any fixed asset for cash it will increase the remittance and
reduce the value of asset at the end.
Cost Price Method .
Illustration 1 :
Messers naveen brothers are having their head office at Delhi and Branch at Bombay. The
following are the transactions of the Head office with Branch for the Year ended 31st March 2007.
Rs.
Sotck at Branch as on 1-4-2006 30,000
Debtors at the Branch as on 1-4-2006 16,000
Petty cash as on 1-4-2006 500
Goods supplied to the Branch 1,50,000
Remittances from Branch:
Cash sales 10,000
Realisation of debtors 1,57,000
Amount sent to Branch :
Salary 7,400
Rent 2,400
Petty cash 3,000
Stock at Branch as on 31-3-2007 23,000
Sundry debtors at the branch as on 31-3-2007 50,000
Petty cash as on 31-3-2007 750
Show the Branch Account in the books of Head office.
In Naveen Brothers Books
Bombay Branch Account
Rs. Rs.
To Balance b/d By Bank Remittances
stock at Branch 30,000 Cash saler 10,000
Branch debtors 16,000 Debtors 1,57,000
Petty cas 500 1,67,000
To goods sent to branch A/C 1,50,000 By Balances
To bank (expenses) stock at Branch 23,000
Salary 7400 Branch debtors 50,000
Rent 2400 Petty cas 750
petty cash 3000 12,800
To General profit & loss A/C __31,450 _______
2,40,750 2,40,750
llustration 2 :
From the following particulars relating to kanpur branch for the year ending 31st March
2007, prepare branch account in the Head Office Books.
Rs.
Balances as on 1-4-2006
Stock at the Branch 30,000
Debtors at the Branch 60,000
Petty cash at the Branch 600
Goods sent to Branch during the year 5,04,000
Remittances from the Branch
For cash sales 1,20,000
Received from debtors 4,20,000 5,40,000
Goods returned by the Branch 4,000
Credit sales during 2006-07 4,56,000
Cheques sent to Branch during the year :
For salaries 18,000
For Rent & Taxes 3,000
For petty cash 2,200 23,200
Balances as on 31-3-2007
Stock at the Branch 50,000
Petty cash 400
Debtors 96,000
In the Books of Head office
Kanpur Branch Account for the Year ended 31-3-2007
Rs. Rs.
By cash :
To Branch stock 30,000 Cash saler 1,20,000
To Branch Debtors 60,000 Received from
To Branch petty cash 600 debtors 4,20,000 5,40,000
To goods sent to By Branch stock A/C 50,000
Branch A/C 5,04,000 By Branch debtors A/C 96,000
Less returns to H.O. 4,000 5,00,000
To Bank ( expenses ) By Branch petty cash 400
Salaries 18,000
Rent & taxes 3,000
Petty cash 2,200 23,200
To General profit &
Loss A/C 72,600 _______
6,86,400 6,86,400
llustration 3 :
Shriram solvents co., Bangalore opened a branch at Hyderabad on Ist April 2006. The
following information is available in respect of the branch for the year 2006 -07.
Rs.
Goods sent to the branch 37,500
Cash sales at the branch 25,000
Credit sales at the branch 30,000
Salaries of the branch staff paid by the Head office 7,500
Office expenses of the branch paid by the Head office 6,000
Cash remittances to branch towards petty cash 3,000
Petty cash at branch on 31-3-2007 250
Stock at the branch on 31-3-2007 13,500
Debtors at the branch on 31-3-2007 2,500
Prepare branch A/C to show the profit /loss from the branch for the year
In the Books of Shriram solvent co Bangalore
Hyderabad Branch Account
Rs. Rs.
By Bank ( Remittances)
To Branch sent to Branch A/C 37,500 Cash saler 25,000
To Branch expenses cash collected
Salaries 7,500 form customers 27,500 52,500
office expenses 6,000 13,500 By Balances at the end 31-3-07
To cash remitted to Stock 13,500
Branch towards petty cash 3,000 Debtors 2,500
To profit transfened to General Petty cash 250
Loss A/C 14,750 ______
68,750 68,750
Branch Debtors Account
Rs. Rs.
To sales - credit 30,000 By cash ( balancing figure) 27,500
______ By Balance C/d 2,500
30,000 30,000
Note :
1. Cash collected from customers Rs. 27500 is missing figure in this question. This can be found
out by preparing branch debtors account.
2. Credit sales do not appear in the branch account. It is taken only to Branch debtors account.
lustration 4 :
From the following particulars relating to Delhi branch for the year ending December 31,2007
prepare Branch account in the books of Head office.
Rs.
Stock at the branch on Jan 1, 2007 20,000
Branch Debtors on Jan 1, 2007 8,000
Branch Debtors on Dec 31, 2007 9,800
Petty cash at branch on Jan 1, 2007 1,000
Furniture at Branch on Jan 1, 2007 4,000
Prepaid Fire insurance on Jan 1, 2007 300
Salaries outstanding at branch on Jan 1, 2007 200
Goods sent to branch during the year 1,60,000
Cash sales during the year 2,60,000
Credit sales during the year 80,000
Cash paid by the branch debtors direct to Head office 4,000
Discount allowed to debtors 200
Cash sent to branch for expenses :
Rent 4000
Salaries 4800
Petty cash 2000
Insurance up to
March 31st 2008 1200 12,000
Goods returned by the branch 2,000
Goods returned by the debtors 4,000
Stock on December 31 10,000
Petty expenses by the branch 1,700
Provide depreciation on furniture 10% P.A.
Goods costing Rs. 2400 were destroyed on account of fire and a sum of Rs. 2000 was
received from the Insurance company.
In the Books of Head Office
Delhi Branch Account
Rs. Rs.
To stock 20,000 By salaries out standing 200
To debtors 8,000 By Bank Remittances
To petty cash 1,000 Cash sales 2,60,000
To Furniture 4,000 Cash received
To prepaid insurance 300 from debtors 70,000
To goods sent to branch account 1,60,000 cash paid debtors
To Bank ( expenses detors direct to H.O 4,000
Rent 4,000 Received from
Salaries 4,800 Insurace company 2,000 3,36,000
petty cash 2,000 By good sent to branch
Insurance 1,200 12,000 ( returned to goods by the
branch to H.O) 2,000
To General profit & loss account 1,57,900 By stock 10,000
By petty cash 1,300
By Debtors 9,800
By Furniture 3,600
By prepaid insurance (1/4xRs1200) 300
_______ _______
3,63,200 3,63,200
Working Notes :
Calcution of petty cash at the end :
Opening balance 1000
Add cash received from H.O. 2000
Total cash with the branch 3000
Less spent by the branch 1700
Closing balance 1300
Invoice price method :
The goods may be sent to the branch by the Head office either at cost price or at a price
higher than the cost price i.e. invoice price. Invoice price means cost plus some percentage of
profit. The branch manager is required to sell the goods at invoice price only. Generally goods are
marked on invoice price to maintain secrecy and to have effective control on stock.
Adjustments in Head office Books :
The branch records are not in any way affected due to invocing of goods at cost plus profit.
But inorder to calculated the profit or loss made by the branch, some accounting adjustments are
required in the books of Head office.
1. For adjustment of excess price of the opening stock at branch
stock reserve A/C Dr
To Branch A/C
2. For adjustment of excess price of goods sent to branch less returns to Head office
Goods sent to Branch A/C Dr
To Branch A/C
3. For adjustment of excess price of the closing stock of unsold goods at branch
Branch A/C Dr
To stock reserve A/C
Calculation of Mark - up or Load :
For calculating the excess price the following procedure is adopted :
1. When percentage of profit is given on cost, and goods are sent at invoice price.
Example : Suppose the goods are invoiced at cost plus 25%
Let us assume :
Cost is Rs. 100
 25 
Pofit is Rs. 25  100x 
 100 
Then selling price = 100+ 25 = 125

The ratio of profit to selling price is 25/125
Then take 1/5 of the invoice price is the excess price or loading.
2. When percentage of profit is given on selling price and cost price is given.
Percentage profit is 25 % on selling price
Assume selling price is Rs. 100
percentage of profit.
25% on selling price Rs. 25
Cost is Rs. 75 ( 100- 25)
1 1 25
So the percentage on cost will be 33 % or of cost i.e
3 3 75
3. If the percentages are given on cost or on selling prices the same amounts are given,
then take same percentage of profit on cost or on selling price.
IIlustration 5 :
A Head office in Meerut has a branch in Kanpur to which goods are invoiced by the Head
office at cost plus 25%. All cash received by the branch is daily remitted to Head office. From the
following particulars show how the Branch account will appear in the H.O. books. Entries are to be
made at invoice price.
Rs.
Stock on Jan 1, 2007 62,500
Debtors on Jan 1, 2007 60,000
Goods supplied by the H.O( at Invoice price ) 2,00,000
Cash sales 80,000
Cash received from customers 1,47,500
Goods returned to the Head office ( at Invoice price) 12,000
Cheques received from the H.O.
Wages and salaries 55,000
Rent, Rates & Taxes 15,000
Sundry expenses 2,550 72,550
Stock on 31-12-2007 ( at invoice price) 75,000
Debtors on 31-12-2007 1,12,500
Liability for petty expenses 550
Branch Account
Rs. Rs.
To Branch stock A/C 62,500 By Bank ( Remittances)
To Branch Debtors A/C 60,000 Cash sales 80,000
To goods sent to Cash from
Branch 20,00,000 debtors 1,47,500 2,27,500
Less returns to H.O. 12,000 1,88,000 By Branch stock A/C 75,000
To Bank A/C By Branch Debtors A/C 1,12,500
wages & salaries 55,000 By stock reserve A/C
25
Rent Rates & taxes 15,000 62,500 x 12,500
125
To stock reserve A/C By goods sent to
25 25
75,000 x 15,000 18,800 x 37,600
125 125
To liability for petty expenses 550
To General profity loss A/C 66,500
_______ _______
4,65,100 4,65,100
Note :
Percentage of profit on cost 25%
Assume
Cost = Rs. 100
Profit = Rs. 25
Selling price = Rs. 125
Profit percentage is given on cost. But invoice price is given in the problem. So percentage
of profit on invoice price is 25/125 or 1/5 x 100 = 20 %.
IIlustration 6 :
Sun shine co has an olde established branch at kolkata. Goods are invoiced to the branch
at 20% profit on invoice price, the branch having been instructed to send all cash daily to hte Head
office. All expenses are paid by the Head office except petty expenses which are met by the
Branch manager. From the following particulars you are required to prepare branch account in the
books of Head office.
Rs.
Stock on Jan 1, 2007 ( invoice price ) 30,000
Sundry Debtors on Jan 1, 2007 18,000
Cash in Hand on Jan , 1, 2007 800
Office furniture on Jan, 1, 2007 2,400
Goods supplied by the Head office ( Inovice price) 1,60,000
Goods returned to Head office 2,000
Goods returned by Debtors 960
Debtors at the end 16,440
Cash sales 1,00,000
Credit sales 60,000
Discount allowed 600
Expenses paid by Head office
Rent 2,400
Salary 4,800
stationery and Printing 600 7,800
Petty expenses paid by Branch manager 560
Stock on 31-2-2007 ( Invoice price) 28,000
Provide depreciation on furniture @ 10% P.A.
In the Books of Sunshine co
Branch Account
Rs. Rs.
To Branch Debtors A/C 18,000 Cash sales 1,00,000
To Branch cash in hand 800 Cash from
To Branch office furniture 2,400 debtors 60,000 1,60,000
To Goods sent to By Branch stock 28,000
Branch A/C 1,60,000 By Branch Debtors 16,440
Less return to H.O. 2,000 1,58,000 By Branch Furniture 2,160
20
To Bank (expenses) By Stock reserve 30,000 x 6,000
100
Rent 2,400 By Goods sent to Branch A/C
20
Salary 4,800 1,58,000 x 31,600
100
Stationery & printing 600 7,800 By cash in hand ( 800-560) 240
20
To stock Reserve 28,000 x 5,600
100
To General profit & loss A/C
(profit) 21,840
_______ _______
2,44,440 2,44,440
Working Notes :
Calculation of cash received from Debtors
Debtors Account
Rs. Rs.
To Branch b/d 18,000 By sales returns A/C 960
To sales (credit ) A/C 60,000 By cash ( Balancing figure) 60,000
By Discount 600
______ By Balance C/D 16,440
78,000 78,000
IIlustration 7 :
Messers ABC co has a branch at madras goods are invoiced from Head office at cost plus
33 1/3 %. Find out profit at the branch according to Debtors system.
Opening Balances :
Debtors 12,000
Petty cash 1,200
Furniture 2,400
Stock (I.P) 10,000
Cash sent by Head office for petty expenses Rs. 2500. Branch expenses and lossess.
Frieght & Advetisement 6,000
Bad debts 100
Depreciation on furniture 100
Petty expenses 2,000
Sales :
Cash 60,000
Credit 40,000 1,00,000
Goods returned by Debtors 1,000
Goods returned by Branch to Head office 2,000
Cash received from Debtors 20,000
Stock at the end ( I.P) 8,000
Goods invoiced by Head office during the year 1,02,000
In the Books of ABC co
Branch Account
Rs. Rs.
To Branch Debtors A/C 12,000 By Bank ( Remittances)
To Branch petty cash 1,200 Cash sales 60,000
To Branch furniture 2,400 Cash received from
To Branch stock 10,000 debtors 20,000 80,000
To Goods sent to By Branch stock A/C 8,000
Branch A/C 1,02,000 By Branch Debtors 30,900
Less return to H.O. 2,000 1,00,000 By Branch Furniture 2,300
To Bank A/C ( Cash sent) 2,500 By Branch petty cash
To Bank A/C (1200 + 2500 - 2000) 1,700
1
Freight & Advertisement 6,000 By stock reserve (1,00,000 x ) 2500
4
1
To Stock reserve A/C ( 8000 x ) 2,000 By goods sent to Branch A/C
4
1
To General profit & loss A/C __12,800 1,00,000 x 25,000
4
1,47,900 1,47,900
Working Notes :
Calculation of Debtors at the end
Debtors Account
Rs. Rs.
To Branch b/d 12,000 By bad debts 100
To credit sales A/C 40,000 By sales returns 1,000
By cash 20,000
______ By Balance C/D ( bal fig) 30,900
52,000 52,000
IIlustration 8 :
Royal brothers & Co of Bombay has a branch at Madras. Goods are sent by the Head
office at invoice price which is at profit of 20% on invoice price. All expenses are paid by the Head
office. From the following paritculars prepare branch account in the Head office books when goods
are shown at invoice price.
Opening Balances :
Stock at invoice prices 11,000
Petty cash 100
Goods sent to branch at invoice price 20,000
Expenses made by head office :
Rent 600
Wages 200
Salary etc. 900
Remittances made to head office
Cash sales 2,650
Cash collected from Debtors 21,000
Goods returned by Branch at invoice price 300
Credit sales 22,800
Balance at the end
Stock at invoice price 13,000
Petty cash ( including Miscellaneous
income Rs 25 not remitted) 125
Bad debts 300
Goods returned by customers 700
Calculation of Debtors at the end
Debtors Account
Rs. Rs.
To Branch b/d ( bal fig) 1,700 By bad debts 300
To sales credit 22,800 By allowences 500
By sales returns 700
By cash 21,000
______ By Balance C/D 2,000
24,500 24,500
In the Books of Royal Brothers & Co.
Madras Branch Account
Rs. Rs.
To Branch Debtors A/C 1,700 Cash sales 2,650
To Branch petty cash A/C 100 Cash from
To Goods sent to debtors 21,000 23,650
Branch A/C 20,000 By Branch stock A/C 13,000
Less return to H.O. 300 19,700 By Branch Debtors A/C 2,000
To Bank By Branch petty cash A/C 100
Rent 600 By stock reserve A/C
20
Wages 200 11000 x 2,200
100
Salary 900 1,700 By Goods sent to Branch A/C
20 20
To stock reserve (13000 x ) 2,600 (19700 x ) 3,940
100 100
To general profity & loss A/C 8,095 By Miscellaneous Income 25
44,895 44,895
14. 7 FINAL ACCOUNT SYSTEM :

According to this system the profit or loss made by the branch is determined by preparing
Branch Trading and profit & loss account at cost price. It should be carefully noted that all expenses
whether paid by the head office or by the branch are debited to the Trading & profit & loss account
prepared for the branch. The profit & loss as disclosed by this account is exactly same as that of
the branch account prepared according to Debtors system. The Branch trading and profit & loss
A/C is only a memorandum account not forming part of the full accounting system. If the branch
trading & profit and loss account, then such a branch account will be treated as a personal account.
Then branch account will show a debit balance which will be equal to net worth or net assets
available at branch at the end of the accounting period.
IIlustration 9 :
A Bombay merchant has a branch at Madras to which he charges but the goods at cost
plus 25%. The madras Branch keeps its own sales ledger and remits all cash received to the
Head office every day. All expenses are paid from teh Head office. The Transactions for the Branch
during the year 2007 were as follows :
Stock 1-1-2007 22,000
Debtors 1-1-2007 200
Petty cash 1-1-2007 200
Cash sales 5,300
Credit sales 47,900
Goods sent to Branch at I.P 40,000
Collections on ledger accounts 42,000
Goods returned to H.O at I.P 600
Bad debts 600
Allowences to customers 500
Returns Inwards 1,000
Cheques sent to Branch
Rent 1,200
Wages 400
Salary and other expenses 1,800
Stock ( 31-12-2007) at I.P 26,000
Debtors ( 31-12-2007) at I.P 4,000
Petty cash ( 31-12-2007) including miscellaneous
income Rs. 50 not remitted 250
Prepare Branch Trading and profit & loss account and Branch account for the year
ending 31-12-2007
Branch Trading and Profit & Loss account for the year ending 31-12-2007
Rs. Rs.
To opening stock (2200 -4400) 17,600 By sales
To goods sent to Branch A/C Cash 5,300
( 40,000 - 8,000) 32,000 Credit 47,900
53,200
Less returns (600 -120) 480 31,520 Less returns 1,000 52,200
To wages 400 By closing stock (26000-5200) 20,800
To Gross profit C/D 22,480
______ ______
73,000 73,000
To bad debts 600 By gross profit b/d 22,480
To allowences 500 By Accrued income 50
To Rent 1,200
To salaries & other expenses 1,800
______ ______
22,530 22,530
Branch Account ( personal )
Rs. Rs.
To opening balance By remittances (5300 +42000) 47,300
Stock 17,600 By Balance C/D
Debtors 200 (20800 + 4000+250) 25,050
Petty cash 200
To Goods sent to Branch32,000
Less returns 480 31,520
To bank expenses 3,400
To profit 19,430 ______
72,350 72,350
14.8 STOCK AND DEBTORS SYSTEM :

There is yet another method of calculating profit and loss of a branch which is known as
stock and Debtors system or Analytical Method. According to this system instead of opening one
branch account, separate accounts are opened for various transactions at branch. According to
this system a separate ledger for each branch will have to be maintained at head office for keeping
accounts. Such as Branch stock, Branch Debtors, goods sent to Branch, Branch expenses, and
Branch Assets etc. The Branch cash or petty cash account may sometime be required to be
maintained if the branch is permitted to use the available cash for making certain payments.
Preparation branch stock account will however, vary from branch to branch depending upon the
method charging out the goods sent to branch.
A) Goods charged to Branch at Cost price :
In this the following accounts are prepared in the books of the head office -
1. Branch stock Account : This account is similar to that of the Branch trading account.
This account is debited with opening stock at branch, goods sent to branch and the
goods returned to the branch by customers. This account is credited with cash sales,
credit sales made by the branch, the goods returned by branch to head office and
closing stock at branch. The balance of this account represents gross profit or gross
loss and the same is transferred to branch profit & loss A/C.
2. Goods sent to Branch Account : This account maintained in the books of the head
office is credited with goods sent to branch and is debited with goods returned to
branch. At the end of the year the balance of this account is transferred to purchases
or trading account.
3. Branch Debtors account : This is prepared when the branch sells goods on credit
and for ascertaining the balance of debtors at branch.
4. Branch petty cash account : This account is debited with the balance of petty cash
and cash sent to the branch by the H.O. and is credited with all petty cash expenses
incurred by the branch. The balance is petty cash available in hand.
5. Branch profit & loss account : The gross profit or loss from Branch stock account is
transfered to this account. The branch expenses and loss are debited to this account
and incomes are credited to this account. The balance of this account is net profit or
loss for the year.
6. Branch cash Account : This account is maintained for recording all cash transactions
relating to the branch.
The following journal entries will be required for preparation ofbranch accounts according
to Stock & Debtors system in the books of H.O.
1. For goods sent to branch
Branch stock A/C Dr
To Goods sent to branch A/C
2. For goods returned by branch
To Branch stock A/C
3. For cash sales at branch remitted to H.O.
Branch cash A/C Dr
To Branch stock A/C
4. For credit sales at branch
Branch Debtors A/C Dr
To Branch stock A/C
5. Returns from customers
Branch stock A/C Dr
To Branch Debtors A/C
6. Bad debts & Discount etc allowed.
Branch Expenses A/C Dr
7. Cash received from branch debtors remitted to H.O.
Branch Cash A/C Dr
8. Shortage of goods in branch stock
Branch P&L A/C Dr
To Branch stock A/C
9. Surplus of goods in branch stock
Branch Stock A/C Dr
To Branch P&L A/C
10. Expenses paid by head office
To cash A/C
11. Transfer of branch expenses to branch P&L A/C
Branch P&L A/C Dr
To Branch stock A/C
12. For goods in transit
Goods in transit A/C Dr
To Branch stock A/C
13. For goods lost in transit being abnormal loss
Branch P&L A/C Dr
Insurance claim receivable A/C
( if any claim is admitted )
To Branch stock A/C
14. For transfer of branch gross profit
Branch Stock A/C Dr
To Branch P&L A/C\
15. Transfer of branch net profit
Branch P&L A/C Dr
To General P&L A/C
IIlustration 10 :
XY Ltd. invoices goods to their various branches at cost and the branches sell on credit as
well as for cash. From the following details relating to Baroda Branch, prepare necessary accounts
in the books of head office.
Rs.
Stock on 1st Jan 2007 30,000
Stock on 31st Dec 2007 28,000
Debtors on 1st Jan 2007 50,000
Debtors on 31st Dec 2007 70,000
Cash at Branch on 1St Jan 2007 1,000
Cash sent to branch 3,000
Goods sent to branch 1,00,000
Cash sales 64,000
Credit sales 1,16,000
Allowances to customers 600
Returns from customers 1,200
Discount allowed to customers 4,000
Remittance from branch 1,40,000
Rent & Tax 3,000
Wages & Salaries 10,000
General trade charges 3,000
Normal loss of goods due to wastage 2,000
Abnormal loss of goods due to pilferage 4,000
Branch Stock Account
Rs. Rs.
2007 2007
Jan1 To Balance b/d 30,000 Dec 31 By cash A/C 64,000
Dec31 To goods sent Dec 31 By Branch Debtors A/C 1,16,000
to branchA/C 1,00,000 Dec 31 By goods sent to
To Branch Debtors 1,200 to branch A/C 1,000
To Branch P& L A/C ( gross profit) 81,800 By Branch P&L A/C ( pilferage0 4,000
______ ______
1,13,000 1,13,000
Goods Sent To Branch Account
Rs. Rs.
2007 2007
Dec31 To Balance stock 1,000 Dec 31 By Branch stock 1,00,000
Dec31 To Purchases A/c b/f 99,000 _______
1,00,000 1,00,000
Rs. Rs.
2007 2007
Jan 1 To Balance b/d 50,000 Dec 31 By Branch cash b/f 89,200
Dec31 To Branch stock 1,16,000 By Branch expenses
Allowences 600
Discount 4,000
Bad debts 1,000 5,600
Branch stock 1,200
Balance c/d 70,000
________ _______
1,66,000 1,66,000
Branch Cash Account
Rs. Rs.
2007 2007
Jan 1 To Balance b/d 1,000 Dec 31 By Branch expenses
Dec31 To General cash A/C 3,000 Rent & Taxes 3,000
To Branch stock A/C 64,000 Wages & salaries 10,000
To Branch debtors A/C 89,200 General Trade
charges 3,000 16,000
Dec 31By General cash A/C 1,40,000
Dec 31 By Balance C/d 1,200
________ _______
1,57,200 1,57,200
Branch Expenses Account
Rs. Rs.
2007 2007
Dec 31 By Branch expenses Dec 31 By Branch P&L A/C 21,600
Rent & Taxes 3,000
Wages & salaries 10,000
General Trade
charges 3,000 16,000
Dec 31 Branch debtors A/C 5,600 ______
21,600 21,600
Branch profit and Loss Account
Rs. Rs.
2007 2007
Dec31 By Branch expenses Dec 31 By Branch stock A/C
Allowences 600 ( Gross profit ) 81,800
Discount 4,000
Bad debts 1,000
Rent & Taxes 3,000
Wages & salaries 10,000
General Trade charges 3,000
Branch stock 4,000
( cost of goods pilfered)
To net profit transferred to General
P& L A/C 56,200
______ ______
81,800 81,800
IIlustration 11 :
A Head office in Delhi has a branch at Bombay where goods are invoiced at cost price
from the following particulars, prepare the necessary ledger accounts in the book of H.O.
Rs.
Stock on 1-1-2007 10,000
Debtors on 1-1-2007 8,750
Petty cash at Branch on 1-1-2007 1,250
Goods sent to branch 50,000
Cash sales 18,750
Goods returned to H.O. 2,500
Bad debts 625
Discount & allowences 1,875
Goods returned by customers 5,000
Expenses of branch
Salaries 10,000
Rent & Taxes 1,250
Petty expenses 1,500 12,750
Stock as on 31-12-2007 15,000
Debtors on 31-12-2007 12,500
Petty cash at branch at 31-12-07 1,000
In the Book of Head Office
Branch stock Account
Rs. Rs.
To balance b/d 10,000 By Bank A/C 18,750
To goods sent to Branch A/C 50,000 By Branch Debtors A/C 48,750
To Branch Debtors A/C 5,000 By goods sent to branch A/C 2,500
To Branch P&L A/C 20,000 By Balance C/D 15,000
85,000 85,000

Rs. Rs.
To Balance b/d 14,000 By Bank A/c 60,000
To Branch stock A/C 78,000 By Branch stock A/C 8,000
By Branch Expenses A/C
Bad debts 1,000
Discount 3,000
______ By Balance C/D 20,000
92,000 92,000
Goods Sent to Branch Account
Rs. Rs.
To Branch stock A/C 4,000 By Branch stock A/C 8,000
To Purchases A/C 76,000
______ ______
80,000 80,000
Rs. Rs.
To Branch Debtors A/c By Branch P&L A/C 24,800
Bad debts 1,000
Discount 3,000
To bank A/c
Salaries 16,000
Rent & Taxes 2,000
To Branch petty cash A/C
______ ______
24,800 24,800
Branch Petty Cash Account
Rs. Rs.
To Balance b/d 2,000 By Branch expenses A/c 2,800
To bank A/c 2,400 By Balance C/d 1,600
______ ______
4,400 4,400
B) Goods charged to Branch at Selling price :

The stock & debtors system, as discussed above is particularly consideredd very useful
and appropriate where goods are invoiced to the branch at selling price. A brief description of
various accounts opened in the books of the head office is given below.
1. Branch stock Account : In this account the entries are made at invoice price. The
balanace of this account after posting all the relevant entries should be equal to the
stock in hand available at branch, unless there is any surplus or shortage. The profit or
the load included in such surplus or shortage should be transfened to the branch
adjustment account while the cost of such surplus or shortage should be adjusted to
the branch profit & loss account.
2. Branch Adjustment Account : This account is prepared for ascertaining the gross
profit of the branch. This is done by eliminating the loading. The gross profit or loss
transfened to the Branch profit & loss account.
3. Branch profit & loss Account : This account is prepared to ascertain the net profit or
loss at the branch. The branch expenses, shortage of stock at cost value and losses
stock etc are debited to the account. This account is further credited with incomes and
gains, if any at branch and cost value of surplus in branch stock etc. The balance of
this account represents net profit or loss made at the branch during the accounting
period which is transferred to general profit & loss A/C
4. Stock Reserve / Suspense Account : This account is prepared to adjust the loads
included in the value of opening and closing stock at the branch.
A Part from the above other accounts which are required to be prepared are branch
expenses account, Branch Debtors account, Branch Cash account, and Branch assets account
etc.
1. When goods are sent to branch
Branch stock A/C Dr
To goods sent to Branch A/C
Reverse entry will be pass for goods returned to H.O.
2. When sales are made by the branch for cash sales.
Cash A/C Dr
To Branch stock A/C
For credit sales
Branch Debtors A/C Dr
To Branch stock A/C
3. When cash is received from Debtors
Cash A/C Dr
4. For discount allowed, allowences and bad debts
5. When goods are returned by branch debtors
Branch stock A/C Dr
6. When goods are returned by branch debtors direct to head office.
Goods sent to Branch A/C Dr
Branch Adjustment A/C Dr
7. For normal loss of stock
Branch Adjustment A/C Dr ( Invoice price)
To Branch stock A/C
8. For abnormal loss, waste, or leakage or shortage of stock
Branch P&L A/C Dr
To Branch stock A/C
Note: Reverse entry for surplus in stock
9. When goods are transferred from one branch to another branch
Transferor Branch
Goods sent to Branch A/C ( cost ) Dr
Branch Adjustment A/C (loading) Dr
To Branch stock A/C (invoice)
Transfere Branch
Branch Stock A/C ( invoice) Dr
To goods sent to Branch A/C ( cost )
To Branch Adjustment A/C (loading )
10. For apparent profit over the invoice price
Branch stock A/C Dr
To Branch Adjustment A/C
11. For Branch expenses paid in cash
Branch expenses A/C Dr
To cash A/C
12. For closing branch expenses account ( excluding cash in hand at the end ) to branch
P&L account
Branch P&L A/C Dr
( with recurring expenses)
To Branch expenses A/C
13. For adjustment of excess price of the opening stock
Stock reserve A/C Dr
To Branch adjustment A/C
14. For adjustment of excess price of the closing stock
To stock Reserve A/C
15. For adjustment of excess price of goods sent to branch
To Branch adjustment A/C
16. For insurance claim recoverable
Insurance claim A/C Dr
To Branch P&L A/C
17. For transfer of balance of Branch Adjustment A/C ( i.e gross profit )
To Branch P&L A/C
For gross loss reverse entry
18. For transfer of profit or loss to general profit and loss account
a) If profit b) If loss
Branch P&L A/C Dr General P& L A/C Dr
To General P&L A/C To Branch P&L A/C
19. For closing the goods sent to branch account
To purchases or Trading A/C
IIlustration 12 :
Messers Sunil trader, Madras opened a branch at Bangalore on 1-7-2006. The goods were
sent by the head office to the branch invoiced at selling price of the branch which was 125% of the
cost price of the Head office.
The following are the particulars relating to the transactions of Bangalore branch.
Rs.
Goods sent to Branch ( at cost to H.O) 1,40,400
Sales : Cash 62,500
Credit 87,500
Cash collected from Debtors 78,000
Spoiled cloth in bales written off at invoice price 250
Goods returned by debtors to branch 2,500
Cash sent to Branch for :
Salaries 1,500
Freight outward other expenses 5,500
including godown rent 3,000 10,000
Stock on 30 June 2007 at invoice price 27,750
Ascertain the profit or loss for the Bangalore Branch for the year endeed 30-06-07 by
preparing accounts under stock and Debtors system.
Rs. Rs.
To goods sent to branch account By cash A/C ( sales) 62,500
(140400+35100) 1,75,500 By Branch Debtors A/C
To branch Debtors A/C Returns 2,500 ( credit sales) 87,500
By Branch Adjustment Account
( Loading of abnormal loss) 50
By Branch P&L A/C ( cost of AL) 200
_______ _______
1,78,000 1,78,000
Goods Sent to Branch Account
Rs. Rs.
To Branch Adjustment Account By Branch stock Account 1,75,500
(20% of Rs. 175500) 35,100
To purchases account 1,40,400
_______ _______
1,75,500 1,75,500
Rs. Rs.
To Branch stock account 87,500 By cash account 78,000
By Branch stock Account
( sales returns ) 2,500
By Branch expenses account
BY Balance c/d 5,000
_______ _______
87,500 87,500
Rs. Rs.
To cash account By Branch P&L account 12,000
Salaries 1,500
Freight outward 5,500
Other expenses 3,000
To Branch debtors account
(discount ) 2,000
______ ______
12,000 12,000
Branch P&L Account
Rs. Rs.
To branch expenses account 12,000 By Branch Adjustment A/C 29,500
To branch stock A/C
( cost of spoilage ) 200
_______ _______
29,500 29,500
IIlustration 13 :
Crown Industries, Bombay has a branch at Madras to which goods are invoiced at
cost+25%. The Branch makes the sales both for cash and on credit. Branch expenses are paid
direct from Head Office and the branch remits all cash to Head office.
From teh following details, prepare the necesary ledger accounts in Head Office books to
calculate branch profits as per the stock and debtors syste.
Rs.
Goods received from Head office at I.P 60,000
Returns to Head office at I.P 1,200
Branch stock on 1-1-2007 at I.P 6,000
Cash sales 20,000
Credit sales 36,000
Branch Debtors on 1-1-2007 7,200
Cash collected from debtors 32,000
Bad debts in the year 400
Goods returned by debtors to branch 800
Rent, Rates, Taxes at branch 1,800
Branch office expenses 600
Branch stock at I.P on 31 - 12-07 12,000
The difference in Branch stock account is to be treated as surplus.
In the Books of Bombay
Rs. Rs.
To Balance b/d 6,000 By cash A/C 20,000
To goods sent to By branch Debtors A/C 36,000
branch A/C 60,000 By balance C/d 12,000
Less returns 1,200 58,800
( sales returns ) 800
To Branch Adjustment A/C
( Loading of surplus ) 480
To Branch P&L
( Cost of surplus ) 1,920
_______ _______
68,000 68,000
Rs. Rs.
To balance b/d 7,200 By cash A/c 32,000
To branch stock A/C By Branch expenses A/C
( credit sales ) 36,000 Discount 600
Bad debts 400 1,000
By Branch stock A/C
( sales returns) 800
By Balance C/d 9,400
_______ _______
43,200 43,200
Rs. Rs.
To cash A/C 2,400 By Branch P&L A/C 3,400
To Branch Debtors A/C 1,000
______ ______
3,400 3,400
Branch Adjustment Account
Rs. Rs.
To stock reserve A/C 2,400 By stock reserve A/c 1,200
To Branch P&L A/C By goods sent to
( Gross profit ) 11,040 Branch A/C 11,760
By Branch stock A/C 480
_______ _______
13,440 13,440
Branch Profit And Loss A/C
Rs. Rs.
To Branch expenses A/C 3,400 By Branch Adjustment A/C 11,000
To General P&L A/C By Branch stock A/c 1,920
( Net profit) 9,560
_______ _______
12,960 12,960
14.9 DISTINCTION BETWEEN WHOLE SALE AND RETAIL PROFIT AT

BRANCH :
Sometimes head office also sells goods at retail or list price besides sending the goods to
brances at wholesales prices. The difference between the retail price and wholesale price will be
the profit made by the branch. Suppose if an article costs to head office Rs. 100 and it is supplied
to the branches at Rs. 160 at wholesale price but both head office and branches sell goods at
Rs.200 then profit made by the branch will be Rs. 40 ( i.e. Rs 200 - Rs. 160) and not Rs. 100
(Rs.200 - Rs. 100)
IIlustration 14 :
A Head office sends goods to its branch at 20% less than the list price. Goods are sold to
customers at cost plus 100% From the following particulars as certain the profit made at the Head
office and branch on the wholesale basis :
Head office Branch

Rs. Rs.
Opening stock at cost
( at whole sale price in case of Branch ) 20,000 16,000
Purchases 1,00,000 –
Goods sent to Branch ( whole sale price) 48,000 –
Sales 85,000 40,000
If cost Price = Rs 100
List price = Rs 200
Whole sale price = Rs 160

H.O Branch H.O Branch
Rs. Rs. Rs. Rs.
To opening By sales 85,000 40,000
stock 20,000 16,000
To Purchases 1,00,000 – By goods sent to
To goods branch A/C 48,000 –
from H.O. – 48,000
To gross By closing stock 47,500 32,000
profit C/d 60,500 8,000
_______ ______ _______ ______
1,20,500 72,000 1,20,500 72,000
To sundry expenses 7,000 4,000 By gross profit b/d 60,500 8,000
To stock reserve By stock reserve
againt closing againt closing
Branch stock Branch stock
60 60
x 32,000) 12,000 (16000 x ) 6,000
160 160
To Net profit 47,500 4,000

______ _____ ______ _____
66,500 8,000 66,500 8,000
Calculation of closing stock
Head office Branch
Cost Wholesale price
Opening stock at cost
( whole sale price in case of Branch ) 20,000 16,000
Purchases at cost 1,00,000 –
Goods sent to Branch ( whole sale price) 48,000
_______ ______
1,20,000 64,000
Less cost of goods sent to branch
60
( Rs 48,000 x ) 30,000 –
160
_______ ______
90,000 64,000
Less cost of sales to out siders
whole sale price in case in branch
100/200 of Rs. 85,000 42,500
160/200 of Rs. 40,000 32,000
_______ ______
47,500 32,000
14.10 SUMMARY :
Branches are opened by a business enterprise to increase the range of operations of the
business over a wider area. The main office, known as head office controls the branches scattered
over near or distant places. Branches may be dependent branches or independent branches.
Dependent branches may sell the goods merely for cash or for credit also. The proceeds are sent
or remitted directly to the head office either daily or at periodical intervals. An accounts is usually
opened with a local bank where sale proceeds are deposited by the branch. The branch manager
is provided with a small amount of cash on the imprest system for meeting day to day petty items
of expenses. In case of credit sales the debtors accounts are also kept by the branch.
Profit or loss is ascertained by the head office in the case of dependent branches by
preparing barnch account ( under debtors system ) and by preparing Branch adjustment account,
under stock and debtors system. Other accounts prepared under stock and debtors system are
Branch stock account, Branch debtors account and Branch expenses account.
14.11 SELF ASSESSMENT QUESTIONS :

1. What do you mean by branch accounting ? What is its purpose ?
2. Describe the salient features of system of branches not keeping full system of accounting.
3. What are the essential features of branch account under
a. Debtors system, and
b. stock and Debtors system
4. Distinguish between wholesale and retail branches. What are the special accounting
features ?
5. Explain the accounting procedure for branch on the basis of Debtors system and Final
Account system.
14.12 EXERCISES :
1. India Traders, Bombay opened a branch at baroda on Ist January 2007. The following
information is available in respect of the branch for the year 2007.
Rs.
Cash sales at the branch 50,000
Credit sales at the branch 60,000
Salaries of the branch staff
paid by head office 15,000
Office expenses of the branch
paid by the head office 12,000
Cash remittance to branch
towards pety cash 6,000
Petty cash at branch on 31-12-2007 500
Debtors at branch on 31-12-07 27,000
Prepare Branch Account to show profit / Loss from the branch for the year 2007.
[ Profit. Rs. 29,500 ]
2. From the following particulars relating to patna branch for the year ending December31,
2007 prepare branch account in the books of head office.
Rs.
Balances on 1-1-2007
Stock at branch 20,000
Branch debtors 7,000
Petty cash at branch 750
Furniture at branch 6,000
Prepaid fire insurance 575
Salaries out standing at branch 1,050
Cash sent to branch in expenses
Rent 6,000
Salaries 2,700
Petty cash 2,000
Annual insurance upto March 31, 2007 800 11,500
Goods sent to branch during the year 1,40,000
Cash sales during the year 1,65,000
Credit sales during the year 91,500
Cash paid by the branch debtors
direct to Head office 11,000
Goods returned by debtors 3,500
Stock on December 31 19,000
Petty expenses by the branch 1,425
Provide depreciation on furniture at 10% P.A.
( Profit Rs. 1,02,600, Debtors at the end 15,950 ; Petty cash closing balance Rs. 1,325 )
3. Moonshine Co. Delhi has a branch at Kolkata. It invoices goods to the branch at selling
price which is cost plus 33 1/3 %. From the following particulars prepare branch account,
Branch Debtors account and goods sent to Branch Account in the books of Moonshine
Co.
Rs.
Stock on Ist January 2007 at invoice price 15,000
Debtors on Ist January 2007 11,400
Goods invoiced to branch during
the year at invoice price 67,000
Sales at branch
cash 31,000
credit 37,400 68,400
Discount allowed to customers 300
Bad debts written off 250
Cheques sent to branch
salaries 5,000
Stock on 31st Dec 2007 ( invoice price 13,400
[ Profit 9700 ; Debtors at the end 8,250 ]
4. From the details given below relating to pune branch for the year ending March 31,2007.
Prepare pune Branch account and Branch debtors account in the books of Head office.
Show your working clearly. Goods are invoiced to give a profit of 20% of selling price.
Rs.
Stock on 1-4-2006 5,000
Debtors on 1-4-2006 2,000
Furniture on 1-4-2006 1,000
Petty cash on 1-4-2006 200
Insurance prepaid on 1-4-2006 50
Salaries due on 1-4-2006 1,000
Cash sales 55,000
Total sales 70,000
Goods returned by the branch 500
Goods returned by the debtors 200
Cash sent to the branch for
Rent 3,600
Salaries 10,200
Petty cash 600
Insurance ( up to June 2007) 400
Petty cash expenses incurred by the branch 500
Depreciate furniture by 20% stock on 31-3-2007 3,000
[ Profit 22,750 ]
5. A trader has its branch at Madras to which the goods are invoiced at cost plus 20%
prepare Branch A/C in H.O books from the following :
Rs.
Opening stock at branch 24,000
Cash sales at branch 17,500
Credit sales 41,000
Collections from Debtors 37,900
Goods received from H.O. 30,000
Branch Expenses :
Paid by H.O 3,000
Paid by Branch 6,000
Expenses unpaid 1,400
Closing stock at Branch 18,000
Closing balance of debtors 9,160
Goods in transit from H.O. 3,600
[ Profit 18,100 ]
6. A Head office in Bombay has a branch in Ahmedabad to which goods are invoiced by
the head office at cost price plus 25% . All cash received by the branch is remitted to
head office. All expenses are paid from Bombay, from the following particulars, show
how the branch account will appear in the books of the head office.
Rs.
Stock on I st July 2006 ( at invoice price ) 12,500
Debtors on Ist July 2006 12,000
Goods invoiced from Bombay 40,000
Remittances to Bombay
Cash sales 16,000
Cash received from Debtors 29,500 45,000
Goods returned to the head office 2,400
Cheques received from Bombay :
Wages and salaries 11,000
Rent , rates etc. 3,000
Sundry expenses 500 14,500
Stock on June 30,2007 ( invoice price) 15,000
Debtors on June 30,2007 22,500
Liablility for petty expenses 420
[ Profit Rs. 13,000 ]
7. Samata Co. of Hyderabad has a branch at Vijayawada. Goods are invoiced to branch at
cost plus 20%. The expenses of the branch are paid from H.O. From the information
supplied by the branch, prepare trading and P&L A/C of the branch for the year ending
31-3-2007 and slow the account of the Branch as it would appear in the books of the
Head office.
Rs.
Opening stock ( invoice price ) 24,000
Closing stock ( invoice price ) 18,000
Credit sales 41,000
Cash sales 17,500
Receipt from Debtors 35,000
Sundry debtors on 31 - 3- 07 8,500
Goods received from H.O. 34,000
Goods in transit from H.O as on 31-3-07 3,500
Expenses paid by the H.O. for the branch 10,000
[ G.P. Rs. 25,167 ; N.P. 15,167 ; Branch A/C Balance Rs. 23,500 ; Debtors at the beginning Rs.2500]
Stock and Debtors system :
8. X has a retail branch at Allahabad. Goods are sent by the H.O. to the Branch marked at
selling price which cost plus 25%. All the expenses of the Branch are paid by H.O. All
cash collected by the is deposited to the credit of H.O.
From the following particulars of the Branch, prepare Branch stock Account, Branch
Debtors account, Branch expenses account, and Branch Adjustment account in the
books of the Head Office.
Rs.
Debtors on 1-1-2007 12,000
Debtors on 31-12-2007 14,000
Inventory with the Branch at invoice price
On 1 -1 -2007 16,000
On 31-1-2007 17,000
Cash sales during the year 60,000
Total amount deposited in the H.O.
Account during the Year 1,27,000
Return of goods to H.O at invoice price 5,000
Salaries paid 6,000
Rent paid 4,000
Discount allowed to customers 2,000
Spoilage 2,000
[ G.P. 26,400 ; N.P. 11,800 ]
9. Record the following transactions concerning the Delhi Branch for the year ended
Decemeber 31,2007 in the head office books. The head office uses the stock and Debtors
system for recording transactions with and at he branch :
Rs.
Stock at Branch 1-1-07 20,000
Debtors at Branch 1-1-07 9,000
Goods sent to the branch during the year 1,10,000
Cash sales at the Branch 30,000
Cash remitted to the Branch for expenses 8,000
Cash collected from debtors 57,000
Discount allowed to them 1,100
Stock at Branch ( 31 - 12-07 ) 38,000
Petty cash at Branch at the end of the year 100
The Branch remits all the cash collected to the head office and has instructions to sell the
goods at the invoice price i.e cost plus 25%. The opening and closing stocks and goods sent to the
Branch are all at invoice price.
[ G.P. Rs. 18,000 ; N.P. Rs. 7,400 ; Credit Sales Rs. 60,000 ; Shortage of goods Rs. 2,000]
10. X Y Ltd. Calculta started a branch in Bombay on Ist April 2006 to which goods were sent
at 20 % above cost. The branch makes both credit and cash sales. Branch expenses
are met from Branch cash and balance money remitted to H.O. The branch does not
maintain double entry book of account and necessary accounts relating to branch are
maintained in H.O.
Following further details are given for the year ended on 31st March 2007
Rs.
Cost of goods sent to Branch 50,000
Goods received by Branch till
31 st March 2007 at invoice price 54,000
Credit sale for the year 48,000
Debtors as on 31st march 2007 20,800
Bad debts and discount written off 200
Cash remitted to H.O. 43,000
Cash is hand at Branch on 31st March 2007 2,000
Cash remitted by H.O. to Branch during the year 3,000
Cash stock at the Branch at invoice price 6,000
Expenses incurred at Branch 12,000
Show the necessary ledger A/Cs the books of the Head office ( under stock and debtors system)
and profit and loss of the Branch for the year ended on 31st March 2007.
[ G.P. Rs. 36,000. N.P. Rs. 23,800 ; Cash received from debtors Rs. 27,000 and from sales
Rs.27,000]
14.13 REFERENCE BOOKS :
1. Finanical Accountancy - S.P. Jain & K.L. Narang
2. Finanical Accountancy - R.L. Gupta & V.K. Gupta
3. An Introduction to Accountancy - S.N. Maheswari & S.K. Maheswari
P. Usha Rani
Lecturer in Commerce
Hindu College; Guntur
Lesson - 15
BRANCH ACCOUNTING - II
INDEPENDENT BRANCHES / BRANCHES
KEEPING FULL SYSTEM OF ACCOUNTING
OBJECTIVES:
The objective of this lesson is to know the system of accounting when head office maintains
independent branches how reconciliation is made in various transachions between the
H.O and branches.
STRUCTURE:
15.1 Introduction
15.2 Characterstics
15.3 Accounting Treatment
15.4 Reconciliation Entries
15.5 Inter Branch transactions
15.6 Incorporation of Branch Trial Balance In Head Office Books.
15.7 First Method - Illustrations
15.8 Second Method - Illustrations
15.9 Summary
15.11 Exercises
15.12 Refrence Books
15.1 INTRODUCTION:
Branches keeping full system of accunting or independent branches are those brances
which maintain its own set of books. These branches also purchase goods from the market besides
getting the goods from the head office. They can also supply goods to the head office, pay expenses
from the cash realised and deposit cash in their own account. In other words, these branches
operate as an independent unit for all practical purposes but their only link with the head office is
that they are owned by the head office and what ever their profit or loss will be that belongs to the
head office.
15.2 CHARACTERSTICS :
The Characterstics of the accounting system of an Independent branch can be summarised
below :
1. Independent branch keeps a complete set of its books. It may also purchase goods
from outside parties. It maintains its own bank account. It may remit money from time
to time to the Head office as per the Head office instructions.
2. It prepares its own trial balance and Final accounts and sends their copies to the Head
office for their incorporation in the Head office books.
3. It maintains a Head office account in its books. This is of the nature of a personal
account. All transactions relating to the Head office are recorded in this account. The
Head office also maintains a Branch account in its books.
15.3 ACCOUNTING TREATMENT :

i. Purchase of fixed assets : Generally the branch fixed assets are maintained in the
books of Head office. When an asset is purchased the following entries are passed.
a. H.O books Branch books
If the payment Branch fixed assets A/C Dr Head office A/C Dr
is made by the To branch A/C To Branch A/C
branch
b. If the payment Branch fixed assets A/C Dr No Entry
is made by the To branch A/C
Head Office
ii. Depreciation of fixed assets :
H.O books Branch books
Branch Account Dr P& L A/C
To branch fixed Assets A/C To Head office A/C
iii. Head office Expenses :
Branch Account P& L A/C
To P& L A/C To Head office A/C
FINANCIAL ACCOUNT -II 15.3 Branch Accounting - II
15.4 RECONCILIATION ENTRIES :

The balance shown by the Branch account in the Head office books may not tally with the
balance as shown by the Head office Account in the Branch books. The reasons for the difference
and accounting entries required are :
Goods in transit :
The entry for reconciling the difference for this reason may either be passed in the Head
office books or the Branch books but not in both of them.
In the Head office Books
Goods in Transit A/C Dr
To Branch Account
In Branch Books :
Goods in Transit A/C Dr
To Head office A/C
Cash in transit :
The entry for reconciliation of the difference on this account may either be passed by the
Head office or the Branch but not in both of them, as follows :
In the Books of the Head office
Cash in Transit Account Dr
To Branch Account
In the Books of the Branch :
Cash in Transit Account Dr
To Head office A/C
Note : Cash in transit or goods in transit will be shown as an asset in the balance sheet.
15.5 INTER - BRANCH TRANSACITONS :

If the head office has many branches and there is a possibility that some branch may
supply goods or send cahs to the other branch. Such transactions among the branches are called
inter branch transactions. For example if goods are supplied by calculta branch to Delhi branch
and the head office is at Bombay, then the following journal entries will be passed in the book of
head office and branches.
Bombay Books Calculta books Delhi books
i. Delhi Branch A/C Dr Head office A/C Dr Goods received from other
To calculta To Goods supplied to other Branch A/C Dr
branch A/C branch A/C To head office A/C
ii. Cash paid by branch of behalf of H.O
Purchase A/C Dr H.O A/C Dr
To branch A/C To Cash A/C
iii. Cash collected by branch of behalf of H.O
Branch A/C Dr Cash A/C Dr
To calls in Arrears To H.O A/C
If a bill is drawn by one branch on another branch. If a bill is drawn by Agra Branch on
Bombay Branch and the H.O is at Delhi then the following entries will be passed in the books of
H.O and branches :
H.O Books Agra Branch Bombay Branch
i. Agra Branch A/C Dr B/R A/C Dr H.O A/C Dr
To B/P A/C To H.O A/C To B/ P A/C
B/R A/C Dr
To Bombay Branch A/C
15.6 INTCORPORATION OF BRANCH TRIAL BALANCE IN HEAD OFFICE

BOOKS :
Head office and its various branches are under one organisation and it is, therefore
necessary that head office should prepare only one combined balance sheet for the benefit of the
shareholders and the outsiders. For this purpose, the head office is required to incorporate the
branch trial balance in its books. The following are the two methods for incorporation of trial balance.
15.7 FIRST METHOD :
Under this method branch trading and profit & loss account is prepared to incorporate all
revenue items. Assets, liabilites and profit are also incorpurated through branch account in order
to prepare the consolidated balance sheet. The following entries are passed :
1. For incorporating items which are shown on the Debit side of the Trading Account.
Branch Trading Account Dr
To Branch Account
2. For incorporating the items shown on the credit side of the Trading Account.
Branch Account Dr
To Branch Trading Account
3. For transferring of Gross profit to Branch Profit & Loss A/C
Branch Trading Account Dr
To Branch Profit & Loss A/C
4. For incorporating the items appearing on the Debit side of the Branch P&L A/C
Branch P&L A/C Dr
To Branch Account
5. For incorporating the items which appear on the credit side of the P& L Account.
Branch Account Dr
To Branch P&L A/C
6. For transferring the Net profit / Loss to General profit & Loss A/C.
If profit If loss
Branch P& L A/C Dr General P& L A/C Dr
To General P& L A/C To Branch P& L A/C
7. For incorporating of Branch Assets ( after adjustments )
Branch Assets ( individually ) A/C Dr
To Branch A/C
8. For incorporating of Branch Liabilities ( after adjustments )
Branch Account Dr
To Branch liabilities ( individually ) A/C
As a result of these incorporation entries, the Branch Account in the Head office wil be
completely closed.
In the beginning of the next year, the various assets and liabilities will be transferred back to
the Branch by means of the following entries.
1. For Transfer of Assets
Branch Account Dr
To Branch Assets account ( individually )
2. For transfer of Liabilites
Branch Liabilities (Individually ) A/C Dr
To Branch A/C
Illustration 1 :
Give Journal entries for incorporation of Agra Branch Accounts in the Head office and show
the Branch Account in the Head office books after incorporating there in the assets and liabilities.
The Trial Balance as on 31st December 2007 is as under :
Particulars Dr Cr
Rs. Rs.
Manufacturing expenses 11,000
Salaries 11,000
Wages 44,000
Cash in hand 2,200
Purchases 88,000
Goods received from H.O 16,500
Rent 4,400
Sales 1,65,000
Purchase Returns 1,100
Opening stock 33,000
Discount earned 1,100
Debtors 16,500
Creditors 5,500
H.O Account _______ 59,400
2,32,100 2,32,100
Closing stock at Branch Rs. 33,000 Depreciation is to be provided on Branch Mahcinery of
55000 @ 20 percent and Branch Furniture of Rs. 3300 @ 15 percent Rent out standing Rs 550.
Solution :
HEAD OFFICE BOOKS

JOURNAL
Date Particulars Dr Cr
Rs. Rs.
Dec31 2007 Agra Branch A/C Dr 11495

To Branch Machinery A/C 11000
To Branch Furniture A/C 495
( Being the depreciation on Branch
fixed Assets charged to Branch)
Dec31 Agra Trading A/C Dr 191400
To Agra Branch A/C 191400
( Being the total of the following items
in Branch trial
Balance debited to
Branch trading Account -
Rs.
Stock 33000
Purchases 86900
Less returns 89900
Wages 44000
Manufacturing
expenses 11000
Goods received
from H.O 16500
Dec31 Agra Branch A/C Dr 198000
To Agra Trading A/C 198000
( Being the total of the following items
at Branch credited to
Branch Trading A/C
Rs.
Sales 165000
Branch Stock 33000
198000
Dec31 Agra Trading A/C Dr 6600
To Agra P&L A/C 6600
( Being the transfer of gross profit )
Dec31 Agra Profit & Loss A/C Dr 32945
( The total of the following expenses at
Branch debited to branch profit & Loss
A/C
Rs.
Rent 4950
Salaries 11000
General expenses 5500
Depreciation 11495
32945
To Agra P&L A/C 1100
( Being the discount earned at agra
credited to Branch profit & Loss A/C
Dec31 General P & L A/C Dr 25245
To Branch A/C 25245
P & L A/C
( Being the loss transfered to profit &
loss A/C of the Head office )
Dec31 Agra Debtors A/C Dr 16500
Agra Cash A/C Dr 2200
Agra Stock A/C Dr 3300
( Being the transfer of various assets at
Branch to H.O )
To Branch creditors A/C 5500
To Branch expenses 550
out standing A/C
( Being the transfer of liabilities at
Branch to Head office books )
IN HEAD OFFICE BOOKS
Agra Branch Account
Rs. Rs.
Dec 312007 Dec 312007
To Balance b/d 59400 By Agra Trading A/C 191400
To Branch Assets 11495 By Agra profit & Loss A/C
To Agra trading Account 198000 ( expenses 32945
To Agra profit & Loss A/C 1100 By Sundry Assets 51700
To sundry Liabilities 6050 _______
276045 276045
14.8 SECOND METHOD :
Undet this method branch trading and profit & loss account is prepared as a memorandum
account and entry for transferring the net profit or loss is passed in the books of head office. No
entries are passed for incorporating branch assets and Liabilities in the books of the head office
with the result that branch account in the books of head office will show balance equal to net worth
i.e. ( total assets - total liabilites ).
Illustration 2 :
A merchant opens a new branch in Bomboy which trandes independently of the Head
office. The transactions of the Branch for the year ended 31-3-2007 are as under.
The Trial Balance as on 31st December 2007 is as under :
Rs.
Goods supplied by Head office 25000
Purchases from out siders
Credit 16000
Cash 4000 20000
Sales
Credit 16000
Cash 4000 35000
Cash received from customers 31000
Cash paid to creditors 15000
Expenses paid by Branch 9000
Furniture purchased by Branch on credit 4000
Cash received from Head office initially 4000
Remitted to Head office 12000
Prepare Branch trading and profit & Loss Account and the Branch Account in the Head
office Books after incorporation of the Branch trial balance taking the following into consideration.
a. The accounts of the Branch fixed Assets are maintained in H.O. Books.
b. Write off Depreciation on furniture at 5 % per annum.
c. A remittance of Rs. 2000 from the Branch to Head office is in transit.
d. The Branch closing stock is valued at Rs. 14000.
IN THE BOOKS OF H.O.
Bombay Branch Trading and Profit & Loss Account for the year ending 31-3-2007
Rs. Rs.
To goods supplied by Head office 25000 By sales
Cash 5000
Credit 30000 35000
To Purchases :
Credit 16000
Cash 4000 20000 By closing stock 14000
To Gross profit C/d 4000 ______
49000 49000
To expenses 9000 By Gross profit b/d 4000
To Depreciation on By Net loss transferred
furniture 200 to general P & L A/C 5200
9200 9200
Bombay Branch A/C
Rs. Rs.
To cash 4000 By furniture 4000
To Goods sent to Branch 25000 By Remittances 12000
To Branch furniture 200 Less in tranit 2000 10000
By General P&L A/C 5200
By Balance C/D 10000
(16000 - 6000)
_______ _______
29200 29200
Note : Sundry Assets
Closing stock 14000
Cash in transit 2000
Cash in hand _ ----
(400+5000+3100-15000-900-4000-12000) 16000
Sundry Liabilities
S. Cr 16000 - 15000 1000
Creditors for furniture 4000
Advance from debtors 1000
(3100-30000) 6000
Sundry Assets - Sundry liabilites = 16, 000 - 6000 = Rs 10,000
Illustration 3 :
A Madras Head office has an independent branch at Ahmedabad. From the following
particulars, give journal entries to close the books of Ahmedabad branch. Show the Madras Head
office Account in the branch books.
Ahmedabad Branch
Trial Balance
as on 31st Dec 2007
Rs. Rs.
Stock on 1 Jan 8200 Creditors 2700
Purchases 12800 Sales 34950
Wages 6550 Head office 14000
Manufacturing expenses 3400 Discount 150
Rent 1700 Purchase Returns 300
Salaries 5500
Debtors 4000
General expenses 2000
Goods received from H.O 7200
Cash at bank 750 ______
52100 52100
a. Closing stock at branch Rs. 14350
b. The branch fixed assets maintained at H.O books were Machinery Rs 25000, Furniture
Rs. 1000 and depreciation to be allowed at 10 percent on Machinery and 15 percent on
furniture.
c. Rent due Rs. 150
d. A remittance of Rs. 4000 made by branch on 28th December 2007 was received by the
Head Office on 4th january 2008.
IN THE BOOKS OF AHMEDABAD BRANCH

JOURNAL
Date Particulars L.F. Dr Cr
Rs. Rs.
2007 Dec31 Remittance in Tranit A/C Dr 4000
To Madras H.O. Account 4000
( Being the amount remitted on 28-12-
07 to Madras H.O but credited them on
4-1-08)
2007 Dec31 Depreciation Account Dr 2670
( Being depreciation on Branch fixed
assets maintained at Head office
Books)
2007 Dec31 Rent Dr 150
To outstanding Rent 150
( Being the rent outstanding)
2007 Dec31 Madras Head office account Dr 51,150
To Opening stock 8200
To Purchases 12800
To Wages 6550
To Manufacturing expenses 3400
To Rent 1850
To Salaries 5500
To General expenses 2000
To goods received from madras Head office 7200
To Depreciation 2650
( Being the transfer of revesue items to
Head office account )
2007 Dec31 Sales account Dr 34950
Discount Account Dr 150
Purchase Returns Dr 300
Closing Stock Dr 14350
To Madras H.O Account 49750
( Being the transfer of credit balances
of revenue items to Head office
account )
2007 Dec31 Madras Head office account Dr 23100
To closing stock 14350
To Debtors 4000
To cash at Bank 750
To Remittance in transit 4000
( Being the transfer assets to Head
office A/C)
2007 Dec31 Creditors Account Dr 2700
Out standing Rent Dr 150
( Being the transfer of liabilities of
Madras Head office account)
Madras Head office Account
Rs. Rs.
2007 Dec 31 2007 Dec 31
To Sundry Revenues 50150 By Balance b/d 14000
To Sundry Assets 23100 By Remittance in transit 4000
By depreciation Account 2650
By Sundry Revenues 49750
By sundry liabilities 2850
_______ _______
73,250 73,250
15.9 SUMMARY :
An Independent branch operates quite independently of its head office. It buys its own
goods and sells the same at price fixed by itself . It may some supplies from the head office abo.
Cash is deposited in its own account and expenses are met by it only. The head office reconciles
the trial balance of the branch in its bllks after passing the necessary journal entries. Proper
adjustments are made in head office and branch accounts for transit items-goods in transit and
cash in transit; depreciation, inter branch transactions, expenses of head office chargeable to
branches.
15.10 SELF ASSESSMENT QUESTIONS :

1. Journalise the following transactions in the head office books when branches are keeping
full system of accounting -
a. Depreciation on branch fixed assets when their accounts are maintained in head
office books.
b. Goods in transit.
2. How will you incorporate branch assets and liabilites in the head office books in case of
an independent branch ?
3. Explain ' goods in transit ' and ' cash in transit ' .
4. What do you mean by independent system of branch accounting ?
15.11 EXERCISES :
1. The following balances are extracted from the books of the branch.
Rs.
Stock on 1st Jan 2007 39000
Head office ( Credit) 42000
Sundry debtor 15000
Purchases 34500
Goods received from H.O. 42500
Returns to H.O. 2000
Sales 96000
Sundry creditors 6000
Wages 8000
Salaries 2500
Carriage & Freight 1200
Rent, Rates etc 1200
Office expenses 300
Cash in hand 350
Cash at Bank 1450
Stock on 31st Decemeber 2007 42600
The Head office sent goods worth Rs. 7500 to the Branch on 30th December 2007, but
the branch received the same on 7th Jan 2008. The Branch remitted to Head office
Rs.4500 on 27th Dec. 2007 but the money was received by Head office on 2nd Jan.2008.
The Branch Account in the Head office books showed a debit balance of Rs. 54000 on
31st Decemeber 2007. Branch plant and Machinery Account appeared in the Head
office books at Rs. 24,000 on 31st Decemeber 2007 which was to be depreciated by
5percent.
Make the necessary Journal entries in the books of the Head office and the Branch
for reconciling their account. Give also the Journal entries to incorporate branch trial
balance in the Head office books.
[ G. P. Rs. 15,400 ; N.P Rs. 10,200 ]
2. The following is the trial balance of theerut Branch as on 31st december 2007 -
Dr Cr
Rs. Rs.
Delhi Head office 3240
Stock 1st Jan. 2007 6000
Purchases 97800
Goods received from Head office 19000
Sales 138000
Goods supplied to H.O. 6000
Salaries 4500
Debtors 3700
Creditors 1850
Rent 1960
Sundry office expenses 1470
Cash at bank 1780
Furniture 6000
Depreciation on Furniture 400 ______
145850 145850
Stock at branch on 31st Dec. 2007 was valued at Rs. 7700.
Meerut Branch accounting the head office books
On 31st Dec. 2007 stood at Rs. 460 (debit balance)
On 28th Dec. 2007 the head office forwarded. goods of the value of Rs. 3700 to the
branch where they were received on 3rd Jan. 2008.
i . Prepare Trading & Proit and loss account of Meerut Branch for the year ended 31st
December 2007 and its Balancesheet on that date.
ii. Pass Journal entries in the books of the Head office to incorporate the above mentioned
trial balance, and
iii. Show meerut Branch Account as it would be closed in head office's ledger.
[ i. G. P Rs, 28900, N. P Rs. 20570, B/s Total 19180
ii. Total of Meerut Branch Rs. 154010]
3. A firm in Bangalore has a branch at salem. On March 31st 2007 the trial balance of
salem branch stook as follows :
Rs. Rs.
Sales less returns 898000
Creditors 15000
Head office account 305000
Office furniture 38000
Book debts 225700
Goods from H.O. 602000
Stock on 1.4.2006 160000
Salaries, rent etc 124000
Cash in hand and at Bank 68300 _______
1218000 1218000
Closing stock was valued on 31.3.2007 at Rs. 132000. Give incorporation entries for
incorporating the branch trial balance in head office books. Open branch account in the
head office books.
4. From the following information show : (a) the journal entries to incorporate the trial
balance of the branch in the head office book, and (b) the branch current account after
incorporation of the branch data. Pune branch trial balance as at 31st March 2007 is as
under :
Rs. Rs.
Purchases 173500 Sales 382000
Goods from H.O 81000 H.O Current Account 75600
Selling expenses 42600 Creditors 23400
Administration expenses 20400
Sundry expenses 13800
Petty cash 500
cash at bank 12500
Debtors 64000
Stock 1st April 2006 _72700 ______
481000 481000
Stock on hand at the branch on March 31, 2007 was Rs 82,000 Pune branch current
account in the head office books showed a balance of Rs. 84400 while the goods sent
to pune branch account showed a balance of Rs. 89,800 by the closing date. A provition
for doubtful debts is to be raised, calculated at 1 1/2 % of debtors accounts.
5. The delhi branch of National Industries Ltd., sent the following trial balance to the head
office as on 31st December 2007
Rs. Rs.
Sundry debtors 12000 Sundry creditors 8600
Cash in hand 6250 Goods returned to head office 2250
Furniture 1900 Sales 112500
Stock 1-1-2007 2250 Head office account 10250
Goods from Head office 34000
Purchases 66450
Wages & salaries 5500
Trade expenses _5250 ______
133600 133600
The stock on 31st Dec. 2007 was Rs 5200. Pass the necessary Journal entries to
incorporate the above figures in the head office books and show the branch account
and the branch trading and profit and loss account.
[ G.P Rs. 11750 ; N. P Rs. 6500 ]

1. Finanical Accountancy - S.P. Jain & K.L. Narang
2. Finanical Accountancy - R.L. Gupta & V.K. Gupta
3. An Introduction to Accountancy - S.N. Maheswari & S.K. Maheswari
P. Usha Rani
Lecturer in Commerce
Hindu College Guntur
Financial Accounting - II 16.1 Departmental Accounts
Lesson 16
Departmental Accounts:
16.0 Objective:
1. Meaning and purpose of departmental accounts
2. Method of preparation of departmental accounts
3. Interdepartmental transfers and solving problems
Structure:
16.1: Departmental accounts – Meaning and Purpose
16.2: Maintenance of columnar subsidiary books
16.3: Allocation of Expenses
16.4: Inter departmental transfers
16.5: Illustrations
16.6: Try yourself
16.7: Summary
16.8: Glossary
16.1: Departmental accounts – Meaning and Purpose:

A business orgnisation may have many departments producing different types of products
or services. For example, one department may be producing plastic goods; the other may be
producing metal goods and the like. To know the profit and loss of each department, it is better if
separate trading and profit and loss accounts are prepared by the end of each accounting period.
These are called as departmental accounts. The following are the purposes of these accounts:
1. Departmental accounts help in comparing the performance of one department to the other.
2. They are also helpful in formulating policies and programmes relating to the expansion
and growth of the business. New profitable lines of production or trading can be taken up
while the existing lines of production or trading which are giving a loss can be closed
down.
3. They also help the management to appraise the performance of the employees of different
departments based on the results.
16.2: Maintenance of columnar subsidiary books:

The preparation of Departmental Trading and Profit and Loss Account requires maintenance
of proper subsidiary books having appropriate columns for different departments. For example,
if a business has three departments A, B, and C, the subsidiary books such as Purchases Book,
Purchases Returns Book, Sales Book, and Sales Returns Books etc. should have separate columns
for each of the departments. Cash Book may also have columns for recording cash sales of each
of the departments separately in case the volume of cash sales is quite large. The specimen of
a purchases Book having columns for different departments is given below:
Purchases Book
Date Particulars L.F Deptt. A Deptt. B Deptt. C Deptt. D
The same type of rulings may be followed in case of other subsidiary books too.
16.3: Allocation of Expenses:
In order to ascertain the profit or loss made by each department, it is necessary that each
department is charged with a proper share of the various business expenses. They should be
allotted to respective departments on certain basis. The following bases may be adopted for
allocation of such expenses:
1. Expenses incurred specifically for a particular department should be directly charged to
that department. For example, salaries of a particular department should be charged to
that department.
2. Some expenses can be apportioned precisely. For example, it is possible to find out the
amount spent on lighting in each department by means of separate metres or on the basis
of number of point. This would be the basis of allocation.
3. Most of the expenses, however, cannot be allocated precisely. The treatment of such
expenses can be as follows:
a) Expenses that clearly depend upon sales, such as selling commission, bad debts,
discount on sales, carriage outward, should be apportioned on the basis of sales.
Sometimes such expenses are allocated on the basis of number of units sold. But
this is not the usual practice. Sales should include transfers to other departments.
b) Expenses on buildings and premises should be allocated according to area occupied
having regard to any special advantage enjoyed by a department. For instance, a
department housed in the front portion should bear correspondingly higher charge
than others. Sometimes the departments housed in upper storeys are made to
bear proportionately less charges. The expenses will include rent and rates,
insurance on buildings, repairs, etc.
c) Lighting, heating, etc., should be allocated on the basis of number of points unless
metred separately. If number of points is not available, allocation can be made on
the basis of area.
d) Depreciation for each machine should be calculated separately and charged to
departments accordingly. In the absence of any other indication, it may be allocated
in the ratio of sales or wages.
e) Power, unless metred separately, should be allocated according to horsepower of

machinery installed, adjusted for any difference in running hours.
f) Insurance premium should be charged according to the value of the subject matter
insured. Insurance on goods should be allocated on the basis of average stocks
lying in each department. Workmen’s compensation insurance should be
apportioned on the basis of wages paid.
g) Labour welfare expenses should be allocated on the basis of number of workers in
each department.
h) Advertising is usually allocated on the basis of sales but should rather be allocated
according to space devoted to each department because the amounts spent on
advertisement is not dependent on sales usually.
4. Expenses, which cannot be allocated in a reasonable manner like debenture interest,
general manager’s salary, share transfer office expenses etc., should not be allocated, as
nothing will be gained by an arbitrary allocation. Profits revealed by various departments
should be brought down in one account and these unallocatable expenses should be
debited there. Non-departmental profits should also be credited in this account. Alternatively,
the expenses and non-departmental profits can be allocated equally.
16.4: Interdepartmental transfers:

Transfer of goods or services may take place from one department to another. While
preparing the Departmental Trading and Profit and Loss Account, the department receiving the
goods or services should be debited with the value of the goods or services so supplied and
department providing such goods or services should be credited with the same amount.
The transfer of goods from one department to another is usually at cost. However, if such
transfer is at a profit, the profit or loss of each department should be ascertained on the basis of
the transfer price itself. However, if the goods transferred by one department to another at a profit
still remain unsold with the transferee department, an appropriate reserve for unrealized profit will
have to be created by means of the following journal entry.
General Profit & Loss Account Dr
To Stock Reserve
In case the transferee department has also some stock in the beginning of the accounting
year, including some unrealized profit, against which stock reserve was created last year such
reserve will also be transferred to the General Profit & Loss Account by means of the following
journal entry.
Stock Reserve Account Dr
To General Profit & Loss Account
Alternatively, a single journal entry may be passed for the unrealized profit on the basis of
the difference between unrealized profit included in the opening and closing stocks.
1. From the following Trial Balance, prepare Departmental Trading and Profit & Loss Account for
the year ending 31st December, 2007 and a balance sheet as on that date.
Trial Balance as on 31 -12 – 2007
Dr Cr
Capital 30,000
General Reserve 20,000
Stock as on 1-1-2007:
Dept. A 29,500
Dept. A 26,000
Purchases:
Dept. A 50,000
Dept. B 30,000
Wages:
Dept. A 12,000
Dept. B 10,000
Carriage and Freight 800
Salaries 20,000
Traveling expenses 1,500
Rates and Taxes 6,000
Insurance 10,500
Sales:
Dept. A 1, 20,000
Dept. A 80,000
Sundry debtors and Sundry creditors 12,500 7,500
Bills receivable and Bills payable 2,500 2,000
Manager’s salary 5,000
Printing and Stationery 500
Discount 1,000
Advertisement 3,500
Furniture and Fixture 500
Fuel and Water 1,750
Incidental expenses 450
Cash in hand 1,200
Cash at bank 4,800
2, 59,500 2, 59,000
The following additional information is also provided:
Stock on 31st December 2007: Dept. A – Rs. 20,000; Dept. B- Rs.15, 000
Provided 5% Reserved for doubtful debts;
Outstanding wages Dept. A – Rs.600; Dept. B – Rs.400;
Outstanding salaries Rs.4, 000; Rates and Taxes prepaid Rs.1, 500;
Depreciate plant and machinery at 10%.
All allocated expenses are to be apportioned on the basis of turnover.
Solution:
Departmental Trading and Profit & Loss Account
for the year ending 31st December, 2007
Dr Cr
Dept.A Dept B Dept.A Dept. B
To Opening Stock 29,500 26,000 By Sales 1, 20,000 80,000
To Purchases 50,000 30,000 By Closing stock 20,000 15,000
To Wages& outstg. 12,000 10,400
To Carriage freight
(Purchase ratio 5:3) 500 300
To Fuel and Water
(Turnover ratio) 1,050 700
To Gross profit C/D 46,350 27,600
1, 40,000 95,000 1, 40,000 95,000
To Salaries&outstdg. By Gross profit B/D 46,350 27,600
(24,000 in 3:2 ratio) 14,000 9,600
To Traveling exps.
(3:2) 900 600
To Rates and taxes
(Less prepaid0 2,700 1,800
To Insurance (3:2) 6,300 4,200
To Manager’s salary
(3:2) 3,000 2,000
To Printing
Stationery (3:2) 300 200
To Discount (3:2) 600 400
To Advertisement (3:2)2,100 1,400
To Other expenses (3:2) 270 180
To Reserve for doubtful
Debts (3:2) 375 250
To Depreciation (3:2) 930 620
To Net profit 14,475 6,350
46,350 27,600 46,350 27,600
Balance Sheet as on 31-12-2007
Liabilities Assets
Capital 30,000 Debtors 12,500
Add: Net profit 14,475 Less: B D 625 11,875
6,350 50,825
General Reserve 20,000 Bills Receivable 2,500
Creditors 7,500 Premises 14,000
Bills Payable 2,000 Plant & Machinery 15,500
Wages outstanding Less: Depreciation 1,500 13,950
Dept. A 600 Furniture 500
Dept. B 400 1,000 Cash in hand 1,200
Outstanding Salaries 4,000 Cash at bank
Dept. A 20,000
Dept. B 15,000 35,000
Prepaid rates and taxes 1,500
85,325 85,325
2. Anurag Ltd. Has 3 departments. From the following details, prepare trading and P & L Account
in columnar form.
Dept. A Dept. B Dept. C

Stock on 1-1-2007 17,820 5,600 1,250
Stock on 31-12-2007 19,360 4,710 3,160
Outside sales 1, 11,740 56,130 48,510
Wages 27,400 13,280 9,150
Purchases from outside 40,410 15,370 12,560
Salaries 9,450 5,720 4,163
Interdepartmental transfers:
From A to B 9,040
From A to C 4,820
From B to A 11,260
From B to C 2,110
From C to A 3,480
Insurance 2,100
Managerial salaries 12,000
Rent and Taxes 14,600
Traveling expenses 8,700
Postage and telegrams 1,100
Depreciation 7,400
Advertising expenses 4,500
Bad debts:
Dept. A 2,760
Dept. B 1,430
Dept. C 2,240
Printing and stationery 2,600
All expenses which are not given specifically are to be apparitional on the following basis:
Dept. A – 50%; Dept. B – 30%; Dept. C – 20%;
Solution:
Working Notes;
Inter Departmental Transfers
Sales: Purchases:
Dept. A to B 9,040 Dept. A from B 11,260
To C 4,820 from C 3,480
13,860 14,740
Dept. B to A 11,260 Dept. B from A 9,040
B to C 2,190
13,450
Dept. C to A 3,480 Dept. C from A 4,820

From B 2,190
7,050
Departmental Trading and P & L A/C for the year ended ———
A B C A B C
To Opening stock 17,820 5,600 1,250 By Sales 1, 11,740 56,130 48,510
To Purchases 40,410 15,370 12,560 By Transfers 13,860 13,450 3,480
To Transfers 14,740 9,040 7,010 By Closing stock 19,360 4,710 3,160
To Wages 27,400 13,280 9,150
To Gross Profit 44,590 31,000 25,180
1, 44,960 74,290 55,150 1, 44,960 74,290 55,150
To Salaries 9,450 5,720 4,100 By Gross profit 44,590 31,000 25,180
To Mgrl.salaries 6,000 3,600 2,400
To Rent & taxes 7,300 4,380 2,920
To Trav. Exps. 4,350 2,610 1,740
To Postage & Tel. 500 330 220
To Depreciation 3,700 2,220 1,480
To Advertising 2,250 1,350 900
To Bad debts 2,766 1,430 2,240
To Petty expenses 2,650 1,590 1,060
To Prtg. & Stnry. 1,300 780 520
To Insurance 1,050 630 420
To Net Profit 3,230 6,360 7,120
44,590 31,000 25,180 44,590 31,000 25,180
Note: Expenses debited to P & L A/C were apportioned in the ratio 5:3:2.
3. The standing and profit and loss account of Ratio and Gramophone equipment Co. for the six
months ended 31st March 2007 is presented to you in the following form:
Dr Cr
Purchases: Sales:
Radios (A) 1,40,000 Radios (A) 1,50,000
Gramophones (B) 90,600 Gramaphones (B) 1,00,000
Spare parts for servicing (C) 64,400 Receipts from servicing
Salaries and wages 48,000 and repair jobs (C) 25,000
Rent 10,800 Stock on 31-3-2007:
Radios (A) 60,100
Gramophones (B) 20,300
Spare parts for
Servicing ( C ) 44,600
4, 00,000 4, 00,000
Prepare Departmental Accounts for each for the three Departments A, B and C mentioned
above after taking into consideration the following information:
i) Radios and Gramophones are sold at the show room; servicing and repairs are carried
out at the workshop.
ii) Salaries and wages comprises as follows:
Show room ¾
Workshop ¼
It was decided to allocate the show room salaries and wages in the ratio 1:2 between
the departments A and B.
iii) The workshop rent is Rs.500 per month. The rent of the showroom is to be divided
equally between Departments and A and B.
iv) Sundry expenses are to be allocated on the basis of the turnover of each department.
Solution:
Department Trading and P & L A/c for the half year ending 31st March 2007
A B C A B C
To Purchases 1, 40,700 90,600 64,400 By Sales 1, 50,000 1, 00,000 25,000
To Gross profit 69,400 29,700 5,200 By Clo.stock 60,100 20,300 44,600
2, 10,100 1, 20,300 69,600 2, 10,100 1, 20,300 69,600
To Salaries 12,000 24,000 12,000 By Gross Profit B/D69,400 29,700 5,200
To Rent 3,900 3,900 3,000 By Net loss —— 2,200 10,800
To Sundry exps. 6,000 4,000 1,000
69,400 31,900 16,000 69,400 31,900 16,000
Working Notes:
Salaries and Wages 48,000
Of which for showroom 3/4th 36,000
Workshop (C) 1/4th 12,000
Showroom consisting of Depts. A and B. Therefore, Rs.36, 000 is to be divided in the ratio of 1:2
to A and B (given)
A: 36,000X1/3 = 12,000
B: 36,000X1/3 = 24,000
C: 48,000X1/4 = 12,000
Rent: Workshop rent ( C) Rs.500 per month
For six months 6x500 = 3,000
Balance of Rs. 7,900 equally between A & B
i.e 7,900X1/2= 3,900 = A
i.e 7,900 X1/2= 3,900 = B
Sundry Expenses: Turnover Ratio (Sales Ratio)
= 1, 50,000: 1, 00,000: 25,000
6 : 4 : 1
4. From the under mentioned information and instructions, prepare the Departmental Trading and
Profit and Loss Account in columnar form of the three departments of the Outfitting Ltd.
Particulars Tailoring Ladies Wear Outfitting
Stock on 1-1-2007 41,280 33,975 93,721
Stock on 31-12-2007 32,840 43,828 81,626
Purchases during the year 2, 10,342 75,296 1, 39,109
Purchase returns 14,382 5,629 1,823
Sales during the year 4, 00,173 1, 54,085 3, 62,189
Sales returns —— 3,253 11,217
Wages 72,823 30,084 24,613
Goods were transferred from one department to another at cost price as follows:
a) Tailoring to Ladies Wear Rs.389 and to Outfitting Rs.6, 679.

b) Ladies Wear to Tailoring Rs.5, 315.
c) Outfitting to Tailoring Rs.4, 271 and to Ladies Wear Rs.5, 801.
Apportion the following expenses equally:
Stationery Rs.921; Postage Rs.663; General Charges Rs.39; 627, Insurance
Rs.1, 785; and Depreciation Rs.5, 460.
Allocate the following further expenditure as you think best and append notes stating the
basis for each item: Establishment Rs.63, 395, Bad debts Rs.19, 823, Advertising Rs.7, 293 and
Income-tax Rs.11, 028.
Rent and taxes Rs.45, 437 is to be split up to proportion to space occupied i.e. Tailoring 4,
Ladies wear 2, Outfitting 3, other space 2.
Apportionment is to be adjusted to the nearest rupee.
Solution:
Trading and Profit and Loss A/C of Outfitting Ltd
For the year ending 31st December 2007
Dr Cr
Tailoring Ladies Out Tailoring Ladies Out
Ware fitting ware fitting
To Opening Stock 41,280 33,975 93,721By Sales 4,00,173 1,50,000 3,50,972
To Purchases 1,95,000 70,667 37,286 less retrns.
Less returns By Inter detl.
To Inter deptl.tranfrs. 9,586 6,190 6,679 transfers. 7,068 5,315 10,072
To Wages 73,823 30,084 24,613By Clo.stock32,840 43,828 81,626
To Gross profit C/D 1,20,432 50,059 1,80,371
4,40,081 1,99,975 4,42,670 4,40,081 1,99,975 4,42,670
To Stationery 307 307 307By Gross
To Postage 221 221 221 Profit 1,20,432 59,059 1,80,371
To General expenses 13,209 13,209 13,209
To Insurance 595 595 595
To Depreciation 1,820 1,820 1,820
To Est. Expenses 36,226 15,094 12,075
To Bad debts 8,810 3,305 7,708
To Advertisements 3,241 1,216 2,836
To Income tax 6,683 3,342 1,003

To Rent 20,194 10,097 15,146
To Net profit 29,126 9,853 1,25,451
1,20,432 59,059 1,80,371 1,20,432 59,059 1,80,371
Working Notes:
Establishment expenses, apportioned in wages ratio =
72:30:24 or 12:5:4
Bad debts, Advertisement expenses apportioned in sales ratio (adjusted)=
400:150:350 or 8:3:7
Income tax apportioned in Gross Profit ratio (adjusted) =
120:60:18 or 20:10:3
Rent apportioned in the given ratio: 4:2:3
Inter Departmental Transfers
Purchases Sales
Tailoring Dept: Tailoring Dept:
From Ladies wear 5,315 from Ladies wear 389
From Outfitting 4,271 From outfitting 6,679
9,586 7,068
Ladies wear: Ladies wear:
From Tailoring 389 From tailoring 5,315
From Outfitting 5,801
6,190
Outfitting: Outfitting:
From Tailoring 6,679 from Tailoring 4,271
From Ladies wear 5,801
10,072
5. The following purchases were made by a business house having three departments:
Department A 1,000 units
Department B 2,000 units at a total cost Rs.1, 00,000
Department C 2,400 units
Stock on 1st January was:

Department A- 120 units; Department B- 80 units; Department C- 152 units;
The sales were:
Department A 1,020 units at Rs.20 each
Department B 1,920 units at Rs.22.50 each
Department C 2,496 units at Rs.25 each
The rate of gross profit is the same in each case. Prepare Departmental Trading Account.
Solution:
Working Notes:
Selling price of units purchased in each department: (Not actual sales)
Dept. A = 1,000X20 = 20,000
Dept. B= 2,000X25 = 45,000
Dept. C=2,400X25 = 60,000
Selling price of units Purchased =1,25,000
Less: Purchase price 1,00,000
Total Gross Profit 25,000
Rate of Gross Profit o Sales 25,000/1,25,000X1000 = 20%
Calculation of purchase price in each Dept.
A B C
Selling price per unit 20 22.50 25
Less: Profit 25% on selling price 4 4.50 5
Purchase price per unit 16 18.00 20
Actual purchases in each Dept:
A = 1,000 X 10 = 16,000
B = 2,000X 18 = 36,000
C = 2,400 X 20 = 48,000
Total Purchases 1,00,000
Value of opening stock (at cost):

A = 120 X 16 = 1,920
B = 80 X 18 = 1,440
C = 152 X 20 = 3,040
Closing stock and its valuation (at cost)
Opening stock + Purchases – Sales (in units)
A = 120 + 1,000 – 1,020 = 100 units X16 = 1,600
B = 80 + 2,000 – 1,920 = 160 units X 18 = 2,880
C = 152 + 2,400 – 2,496 = 56 units X 20 = 1,120
Departmental Trading Account for the year ending ——
Dr Cr
A B C A B C
To Opening stock 1,920 1,440 3,040 By Sales 20,400 43,200 62,400
To Purchases 16,000 36,000 48,000 By Clo. Stock 1,600 2,880 1,120
To Gross profit 4,080 8,640 12,000
22,000 46,080 63,520 22,000 46,080 63,520
16.6: Try yourself:
1. The Directors of Departmental Store Ltd., wish to ascertain approximately the net profits of A,
B, and C departments separately for the quarter ended March 31, 2007. It is found impracticable
actually to take stock on that date but an adequate system of departmental accounting is in use
and the normal rates of gross profit for the departments concerned are 40%, 30% and 20% on
turnover respectively. Indirect expenses are to be charged in proportion to departmental turnover.
Following are the figures for each department:
A B C
Stock on 1-1-2007 30,000 35,000 15,000

Purchases to March 31, 2007 35,000 37,500 23,500
Sales to March 31, 2007 60,000 50,000 30,000
Direct expenses 10,100 7,250 3,550
Total indirect expenses for the period (including those relating to other departments) were
Rs.21, 000 and total sales of Rs.4, 20,000.
Prepare a statement showing gross profit after making reserve for stock at 10% in respect
of each department.
(Net profits: Dept. A – Rs.17, 090; Dept. B – 8,025; Dept. C- 2,695)
2. X Ltd. had two departments, Cloth and the Rreadymade clothes. The clothes were made by
the firm itself out of cloth supplied by the cloth department at its usual selling price. From the
following figures prepare departmental trading and profit and loss accounts for the year 2007.
Cloth Department Readymade clothes
Opening stock 1-1-2007 90,000 15,000
Purchases 6, 00,000 4,500
Sales 6, 60,000 1,35,000
Transfer to Readymade clothes 90,000 ———
Expenses – Manufacturing 18,000
Selling 12,000 1,800
Stock on 31st December, 2007 1,20,000 18,000
The stock in the readymade clothes department may be considered as consisting of 75%
cloth and 25% other expenses. The cloth department earned gross profit at the rate of 15% in
2006. General expenses of the firm as a whole came to Rs.33, 000.
(Net Profit- Clothes – Rs.1, 68,000; Readymade clothes – Rs. 23,700; Total Net profit Rs.1,
57,148)
3. Sundaram Brothers are leading paper merchants and book sellers. Their wholesale business
is in paper and their retail show room conducts business in stationery, books and magazines.
The following balances are extracted from their books as at the end of their financial year
31st March 2007:
Capital 3, 00,000
Stock (1-4-2006)
Paper 2, 00,000
Stationery 50,000
Books 1, 00,000
Magazines 25,000
Purchases:
Paper 8, 00,000
Stationery 3, 00,000
Books 3, 50,000
Magazines 3, 00,000
Sales:
Paper 10, 00,000
Stationery 3, 60,000
Books 4, 20,000
Magazines 4, 20,000
Rent 60,000
Lighting 24,000
Showroom maintenance 18,000
Showroom fittings 1, 80,000
Sundry Debtors (for paper) 1, 00,000
Sundry Creditors 1, 50,000
Salaries:
Showroom staff 36,000
Wholesale business staff 12,000
Showroom cashier 12,000
General office salaries 11,000
General office expenses 44,000
Cash and bank balances 8,000
You are requested by the firm to prepare their Departmental Trading and Profit and Loss
Account for the financial year under reference with the help of the following additional information:
i) Closing stock at the end of the year in the various departments was:
Paper: Rs. 1, 80,000; Stationery: Rs. 40,000; Books; Rs.1, 20,000; Magazines: Rs.30,000.
ii) Rent and lighting are for premises taken on lease, General office accommodation is negligible.
Wholesale department uses 1,500 sq.feet. The balance of 1,500 sq.feet is occupied by the
showroom with equal division among stationery, books, and magazines.
iii) Showroom fittings are to be depreciated by 10% p.a.
(Net profits: Paper Rs.1, 01,000; Stationery Rs.600; Books Rs.36, 700; Magazines
Rs.71, 700).
4. Complex Ltd. has three departments A, B & C. The following information is provided:
A B C
Opening Stock 3,000 4,000 6,000
Consumption of direct materials 8,000 12,000 —
Wages 5,000 10,000 —
Closing stock 4,000 14,000 8,000
Sales —— —— 34,000
Stocks of each department are valued at cost to the department concerned. Stocks of A
department are transferred to B at a margin of 50% above departmental cost. Stocks of B
department are transferred to C department at a margin of 10% above departmental cost.
Other expenses were;
Salaries Rs.2, 000
Printing & Stationery Rs.1, 000
Rent Rs.6, 000
Interest paid Rs.4, 000
Depreciation Rs.3, 000
Allocate expenses in the ratio of departmental gross profits. Opening figures of reserves
for unrealized profits on Departmental Stocks were:
Department B – Rs.1, 000
Department C – Rs.2, 000
Prepare Departmental Trading and Profit and Loss Account.
(Net Loss Dept. A- Rs.2,000; Dept. B – Rs.1,000; Dept. C – Rs.1,000; Total Net loss after adjustment
for stock reserves Rs.4,918)
16.7: Summary:
When a firm consists of two or more departments and runs with separate type of products,
to know the profit or loss of each department, generally departmental accounts are prepared.
These types of accounts help in comparing performance of different departments and take proper
steps in correcting the low performance any department. Interdepartmental transfers are an
important aspect in departmental accounts. The transfer of goods from one department to another
is usually at cost. However, if such transfer is at a profit, the profit or loss of each department
should be ascertained on the basis of the transfer price itself.
16.8: Glossary:
Interdepartmental transfers: These are the transfers of goods or services of different departments
of the same firm.

1. Why departmental accounts are necessary?
2. How interdepartmental expenses are dealt with? What are various bases? Give with
examples.
Lesson - 17
COMPANY ACCOUNTS - FUNDAMENTALS

OBJECTIVES:
After going through this lesson the student can know what is a company ? What are its
features ? Different kinds of companies. Formation of company and Allotment of shares.
STRUCTURE:
17.1 Introduction
17.2 Meaning
17.3 Characteristics
17.4 Kinds of companies
17.5 Distinction between private & Public companies
17.6 Fromation of company
17.7 Allotment of shares
17.8 Summary
17.9 Model Questions
17.10 Reference Books
17.1 INTRODUCTION:
To overcome to limitations of 1) inadequacy of funds and 2) Unlimited liability which exists
in sole proprietorship concerns and partnership firms, a company type of organisation has been
grown. In India, Joint Stock companies are governed by provisions of the companies Act 1956.
17.2 MEANING :
A Company is a voluntary association of persons, with capital divided into shares, formed
to carry out a particular purpose in common. It is an artificial person created by law to achieve the
object for which it is formed.
The companies Act defines a company as “A company formed and registered under this
Act or an existing company” An “existing company” means a company formed and registered
under any of the former companies Act.
17.3. CHARACTERISTICS OF A COMPANY :
Following are the essential characteristics of a company -
1. Voluntary association :
It is a voluntary association of persons for attaining a common goal, usually of economic.
2. Separate legal entity :

A company is a artifical person created by law which enjoys a separate legal entity i.e. it is
distinct from its members. It can hold and deal with any type of property. It can enter into contracts.
It can sue and can be sued by others on its own name.
3. Perpectual existence:
A company has a perpectual existence. The existence of a company can be terminated
only by law. The shareholder can transfer their shares freely. Thus, members may come and go.
but the company can go on forever. Even, If all the shareholders die on a single day also, it cannot
affect the existence of the company.
4. Common seal :
A company being an artificial person cannot enter into contracts with third parties on its
own. The Board of directors act as agents to the company. All these acts of the company are
authorised by its “common seal “. The common seal is the official signature of the company. A
document not bearing the common seal of the company will not be binding on the company.
5. Limited liability :
The liability of the members of a company is generally limited to the extent of the unpaid
value of the share held by them.
6. Transferability of Shares :
The shares of a joint stock company are freely transferable, except private companies.
17.4. KINDS OF COMPANIES:

From the point of view of the formation, ownership and liabilities the companies can be
classified as follows :
From the point of view of formation, the companies are of three kinds :
1. Chartered companies :
Those companies which are incorporated by the chartered of a king or queen are known
as char-tered companies Ex: East India company.
FINANCIAL ACCOUNT -II 17.3 COMPANY ACCOUNTS -....
2. Statutory Companies:
A company formed by a special Act passed either by the central or state legislature is
called a statutory company. Such companies are governed by their respective acts. Ex: Reserve
Bank of India. State Bank of India. L.I.C. of India etc.
3. Registered Companies:
Companies formed by registration under the companies Act of 1956 are known as
Registered Companies. The working of such companies is regulated by the provisions of the
companies Act. From the view point ownership the companies are of four kinds.
From the viewpoint ownership the companies are of Four kinds.
1.Government Companies :
A company of which not less than 51 percent of the paid up share capital is held by the
central Government or by the State Government or by any two or more of them together shall be a
government company.
Foreign Companies: A company which is incorporated outside India but which has a
place of business in India, is termed as a foreign company.
2. Private company:
A Private Company is one which by its Articles of Association :
a) restrict the right of the members to transfer shares.
b) Limits the number of members to fifty excluding past and present employees of the
company who are the members of the company.
c) Prohibits any invitation to the public the subscribe for its shares or debentures.
A private limited company may, however, be registered with only two members. It is required
to add the words ‘Private Limited’ at the end of its name.
3. Public Company:
Public Company means a company which is not a private company. In other words a
company, the articles of association of which does not contain the requisite restrictions to make it
a private limited company, is called a public company. However, a public company is under no
legal binding to invite public to subscribe to its share or debentures. A public company need minimum
seven persons for its registration.
From the point of view of liability there are three kinds of companies:
1. Limited Companies:
In case of such companies, the liability of each member is limited to the extent of face
value of shares held by him. Suppose A takes a share of Rs. 100, he remains liable to the extent
of that amount. As soon as that amount is paid, he is no more liable.
2. Limited by guarantee :
The liability of the member of such a company is limited to the amount he has undertaken
to contrib-ute to the assets of the company in the event of its wound up. This guaranteed amount
is limited by fixed sum which is specified in the memorandum. Chambers of commerce, trade
associations and sports clubs are usually guarantee concerns. The object of such companies is
not to make profit and distribute dividend.
3. Unlimited Companies:
A company not having any limit on the liability of its members is an unlimited company. It
may or may not have share capital. Members are held liable for the deficiency of assets to the
liabilities of the company in proportion to their interests in the company. Liability in such a case
may extend to the personal property of the shareholders. Unlimited companies, though permitted
by the companies Act, are not popular in our country.
17.5. DISTINCTION BETWEEN PRIVATE AND PUBLIC COMPANIES :

Following are the main points of distinction between a private and a public company.
Private Company Public Company
1. The minimum number of members to 1. The minimum number of members to

form is two. form is seven.
2. The maximum number is restricted to 50. 2. No maximum limit.
3. It cannot invite public to subscribe its 3. It can invite public to subscribe its shares
shares or debentures. or debentures by issue of prospectus.
4. It can commence business after receiving 4. Until it receives the certificate of
incorporation certificate. commencement of business it cannot start
bussiness.
5. It has to observe less legal formalities 5. A public limited company has to observe a
when compared to public limited large number of legal formalities.
company.
6. The share cannot be transferred freely in 6. The shares of a public company are freely
the market. transferable.
7. A private Company which is not a 7. It should have at least three directors.
subsidiary of a public company should
have at least two directors. A private
company being subsidiary of a public
company should have maximum three
directors.
8. There are no legal restrictions on 8. Total managerial remuneration in a public
remuneration of directors. company cannot exceed 11 % of the net
Profits, and in the case of inadequacy of
profits an amount up to Rs.50,000 can be
paid.
9. Directors can borrow from the company 9. They must get the approval of the central
without the approval of central government.
Government.
10. It need not hold a statutory meeting nor 10. It must hold the statutory meeting and must
file a statutory report. file statutory report with the Registrar.
11. It cannot issue share warrants.. 11. It can issue share warrants.
12. It must have the words Private Limited 12. It must have only the word limited as the
in its name. last word in its name.
13. It can issue deferred shares even with 13. Since 1956. No public company can issue
disproportionate voting rights. deferred shares.
14. Written consent of directors to act as such 14. Written consent of directors to act as such
need not be filed with the registrar. must be filed with the registrar.
15. No qualification shares are prescribed for 15. Directors must take up qualification shares.
directors.
16. A single resolution is enough to appoint 16. Separate resolutions must be passed to
at the new directors. elect each directors.
17. There is no minimum subscription clause 17. Only after securing minimum subscription
to be satisfied before the allotment of allotment of shares can be made,
shares.
18. It need not keep the index of its 18. It must maintain the Index of its
members. members.
19. Directors need not retire by rotation. 19. Directors are subject to retirement by
rotation.
20. There is no need to file a prospectus or 20. Prospectus or the statement in liew of
a statement in liew of prospectus. prospectus should be filed with the
Registrar before allotment of shares.
21. Special privileges can be enjoyed by a 21. A public company enjoys no such
private company. privileges.
22. Quorum required for a meeting is two. 22. Quorum required in this case is five.
23. A director can vote on a contract in 23. They are not allowed.
which he is interested.
17.6. FORMATION OF COMPANY:
A company may be formed either to take over an existing business or to carry on a new
business. Whatever may be the objective the procedure for the formation of a company, from the
time the idea of forming a company is first conceived till the company is actually formed and
commences business, may be divided into three principal stages:
1. Promotion
2. Incorporation
3. Commencement of Business
Each of these stages are explained below:
6.1. Promotion:
The stage of conceiving an idea and its working up is termed as promotion. The person
involved in this task is termed as promoter. The promoter may work up the idea with the help of his
own resources, influence, if necessary, take the help of technical experts to find out the economic
and technical feasibility of the project that he has in his mind.
6.2. Incorporation:
It is the incorporation which brings a company into existence as a separate corporate
entity. The promoter has to take the following preliminary steps in this connection. He has to
prepare certain documents and filed with the registrar of the Joint Stock companies of the state in
which the registered office of the company is to be situated.
6.2.1 Memorandum of Association : Memorandum of Association is the main document
of the company, which defines its constitution and objects with which the company
is formed. It may rightly be termed as the charter or the constitution of the company
since it governs the relationship of the company with outside world.
The Memorandum of Association must have the following clauses.
a) Name clause : The clause contains the name of the company. A company
can have any name of its choice subject to the following two restrictions.
i) The name should not be similar with the name of the existing company,
ii) The name should not be undesirable.
The last word of the name must be ‘limited’ in the case of public companies
and ‘Private limited’ in the case of Private limited companies.
b) Situation clause :This clause contains the name of the state in which
registered office of the company is to be situated.
c) Objects clause: The clause explains the objectives for which the company
has been formed. The clause should state separately;
i) Main objects and
ii) The objects incidental to the main objects
iii) Other objects
d) Liability clause: The clause defines the liability of the members of the
company. In case of a company limited by shares the memorandum must
state that the liability of the members is limited to the extent of unpaid portion
of the shares held by him. Incase of a company limited by guarantee, it should
state the amount which each member undertakes to contribute to the assets
of the company in the event of its winding up.
e) Capital clause: The clause states the amount of share capital with which the
company is to be registered and its division into shares of a fixed amount.
f) Association clause : It is stated here that the persons putting their signatures
to the memorandum are desirous of forming themselves into an association
in pursuance of the memorandum of Association. The memorandum should
be signed by seven or more persons in case of a public company and two or
more in the case of a private company.
6.2.2. Articles of Association : Articles of Association contains the regulations and by-
laws for governing the internal affairs of the company. They may be described as
the internal regulations of the company governing its management. The Articles of
Association of a company usually deal with the following matters:
1) The exclusion, total or partial, of Table A.
2) Adoption or execution of preliminary contracts.
3) Definition of important terms and phases.

4) Share capital and rights attached to different classes of shares.
5) Procedure as to making of calls and forfeiture of shares.
6) Appointment of managerial personnel eg: directors, managing directors etc.
their rotation, powers, including borrowings and duties.
7) Rules as to: transfer and transmission of shares, issue of share warrants,
general meeting, common seal of the company dividend, reserves and
capitalisation of profits, accounts and audit, alteration of share capital, lien on
shares, remuneration of managerial personal, issue of redeemable preference
shares, paying commissions, paying interest out of capital, winding up of the
company.
6.3. Prospectus :
Prospectus is a document inviting deposits from public or offers public to subscribe for the
shares or debentures of a body corporate. Public company can only issue the prospectus. A
prospectus must contain the matter specified in the schedule II to the companies Act. These
matters relate to the objectives of the company, past history and future prospectus, managerial
personnel, material contracts, amount of minimum subscription etc. Neither any material information
should be omitted not it should be false and misleading otherwise the persons responsible for the
issue of the prospectus i .e. the directors, promoters etc, can be made liable for the loss suffered
by the shareholders.
6.4. Fixation of the underwriters, brokers, solicitors, auditors etc.
The promoter should file these documents with required fees to the Registrar of companies.
6.4.1 Certificate of incorporation : On receipt of the above documents and the requisite
fees, the Registrar will examine them and if satisfied with them issue a certificate of
incorporation. The certificate contains the name of the company, the date of its
issue and the signatures of the Registrar with his seal. The date mentioned in the
certificate will be taken, as the date of birth of the company.
6.5. Commencement of Business :
A private company can commence business soon after its incorporation but a public
company has to obtain another certificate for this purpose, which is known as certificate for
“Commencement of business”. This certificate is issued by the Registrar on company filing the
following documents.
1. A copy of the prospectus.
2. A statutory declaration duly verified by any one of the directors or the secretary of the
company that the directors have taken the qualifying shares and the minimum
subscription required by law have been received from the public.
17.7. ALLOTMENT OF SHARES :

Prospectus issued by a company is only an invitation to the general public to apply for the
company’s shares. Application for shares is the offer from the people to purchase shares. The
communication of acceptance of this offer by an allotment order or notice gives rise to a valid contract
between both the parties - the company and the shareholder.
Allotment of shares is usually done by a resolution of the board of directors. In case of over
subscription, the directors follow the basis given by the stock exchange a public company offering
shares or debentures to the public for subscription can proceed with allotment of shares only after
complying with following requirements.
1. The amount fixed as minimums subscription must have been subscribed for.
2. A sum equal to at lest 5 per cent of the nominal value of shares must have been
received in cash by the company as application money.
3. All money received from applicants for shares should be kept deposited in a
scheduled bank till the company obtains the certificate for commencement of
business.
4. In case a company has not issued a prospectus, a statement in Liew of prospectus
must be filed with the Registrar at least three days before allotment of shares
5. No allotment can be made before the beginning of the 5 th day after the date on
which the prospectus has been issued.
17.8. SUMMARY :
A company is a voluntary association of persons, with capital divided into shares, formed
to carry out a particular purpose in common. It is an artificial person created by law. It has a
common seal on its name. From the view point of formation, ownership and liabilities companies
can be classified into different categories. For incorporation of a Joint stock company certain
documents have to be submitted with the Registrar of company’s such as Memorandum of
Association, Articles of Association, prospectus etc. After verifying and satisfied himself the Registrar
issue a certificate of incorporation. After satisfying the legal obligations a company can allot shares
the shareholders.
17.9. MODEL QUESTIONS :

1. Define a company and state its essential characteristics.
2. Explain the documents that have to be filed with the Registrar of companies for getting
a company incorporated.
3. What is allotment of shares? Explain the statutory restrictions imposed on allotment
of shares.

1. Advanced Accountancy - M. C. Shukla & T.S. Grawal
2. Advanced Accountancy - R.L. Gupta & M. Radha - Swami
3. Advanced Accountancy - S.P. Jain & K.L. Narang
4. Advanced Accountancy - Dr. S.N. Maheswari
6. Advanced Accountancy - K.R. Pall.
Dr. CH. Suravinda

Reader in Commerce
Lesson - 18
COMPANY ACCOUNTS
SHARE CAPITAL - ISSUE
OBJECTIVES:
After going through this lesson the student can know what is share capital ? How is its
division ? and how the joint stock companies issue shares to public and their accounting
treatment.
STRUCTURE:
18.1 Introduction
18.2 Types of Shares
18.3 Division of Share Capital
18.4 Shares issued for consideration other than cash - Accounting Entries
18.5 Shares issued for Cash - Accounting Entries
18.6 When both preference and equity shares are issued
18.7 Under Subscription
18.8 Over Subscription
18.9 Issue of Shares at Premium
18.10 Issue of Shares at a Discount
18.11 Calls in Arrears and calls in Advance
18.12 Summary
18.14 Exercises
18.1 INTRODUCTION:
The sum total of the nominal value of shares of a company is called as its share capital.
The capital of the company can be divided into different units with definite value called shares.
Holders of these shares are called shareholders or members of the company.
18.2 TYPES OF SHARES :
There are two types of shares which a company may issue i.e.
1. Preference shares, 2. Equity shares.
2.1 Preference shares :

Shares which enjoy the preferential rights as to dividend and repayment of capital in the
event of winding up of the company over the equity shares are called preference shares. The
holder of preference shares will get a fixed rate of dividend, preference shares may be :
a) Cumulative Preference shares : If the company does not earn adequate profit in any
year, dividends on preference shares may not be paid for that year. But if the preference
shares are cumulative such unpaid dividends are treated as arrears and can be carried
forward to subsequent years. Such unpaid dividends on these shares go on
accumulating and become payable out of the profits of the company, in subsequent
years. Only after such arrears have been paid off, any dividend can be paid to the
holder of equity shares.
b) Non - Cumulative Preference shares : The holders of non - Cumulative preference
shares no doubt will get a preferential right in getting a fixed dividend before it is distributed
to equity shareholders and as regards payment of capital is concerned. The fixed
dividend is to be paid only out of the divisible profits. But if in any particular year there is
no profit as to distribute it cannot be carry forward.
c) Redeemable Preference shares : Capital raised by issuing shares is not to be repaid
to the shareholders but capital raised through the issue of redeemable preference
shares is to be paid back by the company to such shareholders after the expiry of a
stipulated period.
d) Participating or Non Participating Perference Shares : The preference shares
which are entitled to a share in the surplus profit of the company in addition to the fixed
rate of preference dividend are known as participating preference shares. Thus
participating preference shareholders obtain return on their capital in two forms. 1)fixed
dividend 2) share in excess of profits: Those preference shares which donot carry the
right of shares in excess profits are known as non-participating preference shares.
2.2 Equity shares :

Equity shares will get dividend and repayment of capital after meeting the claims of
preference shareholders. There will be no fixed rate of dividend to be paid to the equity share
holders and this rate may vary from year to year. This rate of dividend is determined by directors.
In case of large profits, it may evern be more than the rate attached to preference shares and such
shareholders may go without any dividend if no profit is made.
18.3 DIVISION OF SHARE CAPITAL :

The main divisions of share capital are as follows :-
1. Nominal or Registered or Authorised Capital :

The amount of capital with which the company intends to be registered is called registered
capital. It is the maximum amount which the company is authorised to raise by way of public
subscription. There is no legal limit on the extent of the amount of authorised capital.
2. Issued Capital :
That part of the authorised capital which is offered to the public for subscription is called
issued capital.
3. Subscribed capital :
That part of the issued capital for which applications are received from the public is called
the subscribed capital.
4. Called up capital :
The amount on the shares which is actually demanded by the company to be paid is
known as called up capital.
5. Paid up capital :
The part of the called up capital which is offered and is actually paid by the members is
known as paid up capital. The sum which is still to be paid is known as calls in arrears.
6. Reserve capital :
A company may determine by a special resolution that any portion of its share capital
which has not been already called up shall not be capable of being called up except in the event of
winding up of the company. Such type of share capital is known as reserve capital. A note regarding
reserve capital is shown in the Balance sheet.
Terms of issue of shares :

The terms on which shares are to be issued by the company are given in the prospectus.
The issue price of the shares can be received in one instalment or it can be spread over different
instalments. The amount when received in different instalments may be paid on application,
allotment or in different calls. The amount which is received on application is called the application
money, the amount which becomes due on allotment is called allotment money. Rest of the amount
may be called in different calls according to the requirements and needs of the company.
18.4 SHARES ISSUED FOR CONSIDERATION OTHER THAN CASH

ACCOUNTING ENTRIES :
Shares may be issued by a joint stock company for two different considerations -
1. For consideration other than cash.
2. For cash.
A company may purchase a running business and pay to the vendors the purchase
consideration in the form of shares. The accounting entries will be as follows -
1. Sundry Assets Account Dr
( Dr. each Asset individually)
To Sundry Liabilities
( Cr. each liability individually)
To Vendor's Account
( Being Purchase of assets and liabilities as per agreement dated.....)
2. Vendors Account Dr
To share capital Account
( Being payment to the vendors)
If the shares have been allotted to any person or firm from whom the company has purchased
any asset, the following entries will be passed :
Assets Account Dr
( Being .... Shares allotted in consideration of purchase of an asset for the company)
Illustration 1 :
A company purchased a running business from m/s P.K.R Brothers for a sum of Rs.
3,00,000 payable as to Rs. 2,40,000 in fully paid shares of Rs. 10 each and balance in cash. The
assets and liabilities consisted of the following :
Rs.
Buildings 80,000
Sundry Debtors 60,000
Stock 80,000
Cash 60,000
You are required to pass the necessary journal entries in the company's books.
Solution :
Dr. Cr
Plant and Machinery A/c Dr 80,000
Buildings A/c Dr 80,000
Sundry Debtors A/c Dr 60,000
Stock A/c Dr 80,000
Cash A/c Dr 60,000
To P.K. R. Brothers 3,00,000
To Capital Reserve 20,000
( Being assets and liabilities taken over)
M/s P.K. R. Brothers A/C Dr 3,00,000
To Share Capital 2,40,000
To Bank 60,000
( Being payment to M/s P.K.R. Brothers)
18.5 SHARES ISSUED FOR CASH - ACCOUNTING ENTRIES :

Companies generally issue shares for cash. The procedure involved is as follows :
1. On receipt of application money
Bank Accont Dr
To Share Application A/C
( Being application money received )
2. On allotment of shares all application money on allotted shares is transferred to share
capital account by passing the following entry :
Share Application Account Dr
To Share capital Account
( Being the application money transferred to share capital Account )
3. To those applicants who could not be allotted any share their application money will be
returned. For this the following entry will be passed :
Share Application Account Dr
To Bank Account
( Being the application money of shares not allotted returned )
4. On the allotment of share's, the allotment money becomes due to the company, for
this the company will pass the following entry :
Share Allotment Account Dr
To Share capital account
( Being the allotment money due on ........shares )
5. On receipt of allotment money, the entry is :
Bank A/c Dr
To Share allotment A/C
( Being the receipt of allotment money )
6. On making the first call due from shareholders the entry is :
Share first call Account Dr
To Share capital account
( Being the first call money, due on .... Shares )
7. On receipt of the first call money the entry is :
Bank Account Dr
To Share first call Account
( Being share first call money .... shares received )
Similar entries will be passed for second and third calls.
Illustration 2 :
On Ist January 2008, a company offers 16,000 shares of Rs. 10 each. Applications are
received for full. Money payble is all follows :
On Application Rs. 3 Per share
On Allotment Rs. 2 Per share
On 1st call Rs. 3 Per share
On First call Rs. 2 Per share
The shares were duly allotted, calls made and money realised, you are required to pass
the necessary journal entries.
Solution :
JOURNAL
Dr Cr
Date Particulars Amount Amount
Rs. Rs.
1-1-2008 Bank A/C Dr 48,000
To share Application A/C 48,000
( Being Application money received on
16,000 shares @ Rs. 3. Per share)
Share Application A/C Dr 48,000

To share Capital A/C 48,000
( Being Application money transferred
to share capital account )
Share Allotment A/C Dr 32,000

( Being money due for allotment on
16000 shares @ Rs. 2 per share )
Bank A/C Dr 32,000

To share Allotment A/C 32,000
( Being money received on allotment )
Share 1st call A/C Dr 48,000

( Being money due for 1st call on
16000 shares @ Rs. 3 per share )
Bank A/C Dr 48,000

To share 1st call 48,000
( Being money received on 1st call)
Share Final Call A/C Dr 32,000
( Being money due on final call )
Bank A/C Dr 32,000

To share Final call A/C 32,000
( Being money received on final call)
18.6 WHEN BOTH PREFERENCE AND EQUITY SHARES ARE ISSUED :

When a company issues both preference and equity shares then it is desirable that the
entries for application money, allotment money and calls money should be separately passed for
each type of share capital. The word Equity or preference must be used in all the circumstances.
Illustration 3 :
A company was registered with an authorised capital consisting of 40,000 9% preference
shares of Rs. 100 each, payable Rs.25 per share on application, Rs. 25 per share on allotment
and Rs. 50 per share on first and final call. and 6,00,000 Equity shares of Rs. 10 each; payable
Rs.2.50per share on application, Rs. 2.50 per share on allotment and Rs. 5 per share on first and
final call. Applications were received for the whole of the preference and Equity shares. All the
money due on the shares was paid. Make the necessary entries and the Balance sheet of the
company :
Solution :
JOURNAL ENTIRIES
Dr Cr
Date Particulars L.f Amount Amount
Rs. Rs.
1-1-2008 Bank A/C Dr 10,00,000

To pref. share Application A/C 10,00,000
( Being pref. share application money
received on 40,000 shares @ Rs. 25.
Per share)
Bank A/C Dr 15,00,000

To Equity share application A/C 15,00,000
( Being Equity share application money
received on 6,00,000 shares @ Rs.
2.50 per share)
Pref. Share appliction A/C Dr 10,00,000

To pref. share Capital A/C 10,00,000
( Being pref. share application money
transferred to pre. share capital A/C)
Equity share application A/C Dr 15,00,000

To Equity share capital A/C 15,00,000
( Being equity share applictaion money
transferred to equity share capital
account)
Pref. Share Allotment A/C Dr 10,00,000

To pref share Capital A/C 10,00,000
( Being pref. share allotment money
due on 20,000 shares @ Rs. 25 per
share as per the resolution of the
Board of Directors)
Equity share Allotment A/C Dr 15,00,000

To Equity share capital A/C. 15,00,000
( Being Equity share allotment money
due on 6,00,000 shares @ Rs. 2.50
per share as per the resolution of the
Board of Director )
Bank A/C Dr 10,00,000

To pref. share Allotment A/C 10,00,000
( Being pref. share Allotment money
received on 40,000 shares @ Rs. 25
per share )
Bank A/C Dr 15,00,000

To Equity share allotment A/C 15,00,000
( Being Equity share Allotment money
2.50 per share )
Pref. Share 1st & Final call A/C Dr 20,00,000

To pref. share capital A/C 20,00,000
( Being pref. share 1st & Final call
money due on 40,000 shares @ Rs. 50
per share )
Equity share 1st & Final call A/C Dr 30,00,000

To Equityshare capital A/C 30,00,000
( Being Equity share 1st & Final call
money due on 6,00,000 shares @
Rs.5.per share )
Bank A/C Dr 20,00,000

To pref. share 1st & Final call 20,00,000
( Being pref. share 1st & Final call
money received on 40,000 shares @
Rs. 50 per share )
Bank A/C Dr 30,00,000

To Equity share 1st & Final call 30,00,000
money received
Balance Sheet ............................ co.

as on ..................................
Liabilities Rs. Assets Rs.

Authorised capital : Cash at Bank 1,00,00,000
40,000, 9% pref. shares of Rs. 100 each 40,00,000
6,00,000 Equityshares of Rs. 10 each 60,00,000
Issued and subscribed & Paid up capital :
40,000, 9% pref. shares of Rs. 100 each 40,00,000
6,00,000 Equity shares of Rs. 10 each 60,00,000 __________
1,00,00,000 1,00,00,000
18.7. UNDER SUBSCRIPTION :

Sometimes a company may not receive applications for the total shares issued to the
public. Then it is called under subscription.
Illustration 4 :
X ltd invited applications for 1,00,000 shares of Rs. 10 each payable as follows :
In application Rs. 3; on Allotment Rs. 4 and first and final call Rs. 3. 80,000 Applications
were received from the public and all of these were accepted. All money due was received.
Pass necessary entries in the Journal of company. Also show how these transactions
would appear in Balance sheet of the company.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
Bank A/C Dr 2,40,000

To pref. share Application A/C 2,40,000
( Being application money on 80,000
shares @ Rs. 3 per share received )
share Application A/C Dr 2,40,000

To share A/C 2,40,000
( Being share application money
transferred to share capital )
Share Allotment A/C Dr 3,20,000

To share Capital A/C 3,20,000
( Being allotment money on 80,000
shares @ Rs. 4 per share due)

To share allotment A/C 3,20,000
( Being allotment money received )
Share First & Final call A/C Dr 2,40,000

To pref. share Capital A/C 2,40,000
( Being first & Final call amount on
80,000 shares @ Rs. 3. per share due)

To share First & Final call A/C. 2,40,000
( Being First & Final call amount on
80,000 shares @ Rs. 3. per share
received )
Balance Sheet ............................ co.

As on ..................................

Authorised capital : Cash at Bank 8,00,000
1,00,000 Equity shares of Rs. 10 each 10,00,000
Issued capital :
1,00,000 Equity shares of Rs. 10 each 10,00,000
subscribed & Paid up capital :
80,000 Equity shares of Rs. 10 each _______ _______
8,00,000 8,00,000
18.8. OVER SUBSCRIPTION :

Sometimes a company may receive more applications than the issued capital to the public
which is known as over subscription. Because of over subscription, the company may not allot all
the shares for which applications have been received. Then the allotment is made on pro - rata
basis. For example, if the company offered 20,000 shares but applications for 40,000 shares were
received by the company. The directors sent letters of regret to applicants of 10,000 shares and
applicants of 30,000 shares were allotted the 20,000 shares on pro-rata basis. In such a case,
application money of 10,000 shares ( excess received) will be adjusted either on allotment and on
calls.
Illustration 5 :
A company issued Rs. 10,00,000 capital divided into Rs. 10 per share, payable as under:
On Application Re. 1 per share; on allotment Rs. 4 per share and on Final call Rs. 5 per
share.
Over payments on application were to be applied towards sums due on allotment. Where
no allotment was made, application money was to be returned in full. The issue was over
subscribed. Applicants for 1,20,000 shares were allotted 1,00,000 shares and applicants for 30,000
shares were sent letters of regret. All money due on allotment and final call was duly received.
Make the necessary entries in company's books.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
To share Application A/C 1,50,000
( Being Application money on 1,50,000
shares received )
Share Application A/C Dr 1,00,000

To share captial A/C 1,00,000
( Being share application money on
1,00,000 shares transferred to share
capital account.)

( Being regreted Application money on
30,000 shares returned )
Share Allotment A/C Dr 4,00,000

To share capital A/C 4,00,000
( Being Allotment money due )
To share Allotment A/C 4,00,000
( Being Allotment money received and
excess amount in Application Account
adjusted )

To share capital A/C. 5,00,000
( Being share First & Final call due)

( Being share First & Final call
received)
18.9. ISSUE OF SHARES AT PREMIUM :

A company may issue shares at a premium, i.e. at a value greater than its face value.
Premium so received shall be credited to a separate account called securities premium account.
Section 78 of the companies Act, 1956 gives the purposes for which securities premium
account may be applied by the company.
These are :
1. For the issue of fully paid bonus shares to the members of the company;
2. For writing off priliminary expenses of the company.
3. For writing off the expenses of , or the commission paid or discount allowed, on any
issue of shares or debentures of the company; and
4. For providing premium payable on the redemption of any redeemable preference shares
or debentures of the company.
Journal Entries :
a. If the premium is paid with application money, the following entries will be passed :
1. Bank Account Dr
To share Application A/C.
( Being share application money along with premium received)
2. Share Application Account Dr
To share capital A/C
To securities premium A/C.
( Share application money transferred to share capital A/C and securities premium
A/C)
b. If the securities premium is received along with the allotment money, then the following
entries will be passed :
1. Share Allotment Account Dr
To share capital A/C
To Securities premium A/C
( Being the allotment money and securities premium money due on ......... shares)
2. Bank Account Dr
To Share Allotment Account.
(Being the receipt of allotment along with share premium account)
Illustration 6 :
A company offers 20,000 of shares of Rs 10 each to the public for subscription at Rs. 12
per share. Money is payable as follows :
Rs. 3. on application
Rs. 4. on allotment ( including Re. 1 as premium )
Rs. 5. on call ( including Re.1 as premium)
Applications are received for 30,000 shares. No allotment is made to applicants for
6,000 shares and their application money is refunded. Rest are allotted shares on a pro rata basis.
All allotees pay the money due on shares as and when called up.
Pass the necessary journal entries and show how the items will appear in the company's
balance sheet.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
Bank A/C Dr 90,000

( Being the application money received
on 30,000 shares @ Rs. 3 per share )

To share capital A/C 60,000
To Bank A/C 18,000
To Share Allotment A/C 12,000
( Being application money transferred
to share capital on 20,000 shares
application money on 6,000 shares
refunded and rest transferred to
allotment )

To Share premium A/C 20,000
( Being money due on allotment on
20,000 shares @ Rs 4 per share
including Re. 1. as share premium)
Bank Account Dr 68,000

To share allotment A/C 68,000
( Being money received on allotment )

To share premium A/C 20,000
( Being money due on call @ Rs. 5.
per share)

To share first & Final call 1,00,000
( Being money received on call )
............................ co Ltd.
Balance Sheet as on ..................................
Liabilities Rs Assets Rs.

Share capital : Current Assets :
Authorised ...... shares of Rs. each -------- Bank balance 2,40,000
Issued and subscribed capital :
20,000 shares of Rs. 10 each fully paid 2,00,000
Reserves and surplus :
share premium 40,000 _______
2,40,000 2,40,000
18.10. ISSUE OF SHARES AT DISCOUNT :

According to section 79 of the companies Act a company can issue shares at a discount
i.e; Value less than the face value subject to the following conditions :
1. The issue of shares at a discount is authorised by a resolution passed by the company
in general meeting and sanctioned by the central government.
2. The resolution must specify the maximum rate of discount which should not exceed 10
per cent of the nominal value of shares or such higher percentage as the central
government may permit.
3. One year must have been elapsed since the date at which the company was allowed to
commence business.
4. Issue must take place within two months after the date of the sanction by the court or
within such extended time as the court may allow.
5. Every prospectus relating to the issue of shares and every balance sheet after the issue
of shares contain particulars of the discount allowed and so much of the discount as
has not been written off.
The following journal entry is passed on the issue of the shares at a discount at the time of
allotment:
Share Allotment Account Dr
Discount on the issue of
shares Account Dr
Discount on the issue of shares will be shown under miscellaneous head on the assets
side of the balance sheet till it is completely written off from the profit and loss Account. Generally
such discount is spread over some period say five years and the amount written off each year is
debited to profit and loss account and the amount not yet written off is shown on the assets side of
the Balance sheet.
Illustration 7 :
Z Ltd. invited applications for 2,00,000 shares of Rs. 10 each at a discount of 6% payable
as follows :
On Application Rs. 2.50, on Allotment Rs. 3.40 and on First and Final call Rs. 3.50.
The applications received were for 1,80,000 shares and all of these were accepted. All
money due was received.
Pass necessary entries in the Journal of company. Also show how these transactions
would appear in Balance sheet of the company.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
To share Application A/C 4,50,000
( Being share Application money on
1,80,000 shares @ Rs. 2.50 per share
received )
Share Application A/C Dr 4,50,000
( Being share Application money on
1,80,000 shares @ Rs. 2.50 per share
transferred to share capital )
Share allotment A/C Dr 6,12,000

Discount on issue of shares A/C Dr 108,000
( Being share Allotment money due on
1,80,000 sahre @ Rs. 3.40 per share
and discount @ Re. 0.60 per share)

( Being share Allotment money
3.40 Per share )

( Being share First & Final call money
due on 1,80,000 shares @ Rs. 3.50
per share as per the resolution of the
Board of Directors )

( Being share First & Final call money
3.50 per share )
Balance sheet of Z Ltd. Co., as on ....................

Issued capital : Cash at Bank 16,92,000
2,00,000 shares @ Rs. 10 per share 20,00,000 Discount on issue
subscribed & Paid up capital : of shares 1,08,000
1,80,000 shares @ Rs. 10 per share 18,00,000 ________
18,00,000 18,00,000
18.11. CALLS IN ARREARS AND CALLS IN ADVANCE :

If any amount has been called by the company either as allotment or call money and a
shareholder has not paid that money, this is known as calls in arrears. On such arrears, the
company can charge interest @ 5 % if there is a provision in the Articles of Association for the
period for which such amount remained in arrear from the shareholders.
Similarly, if any call has been made, while paying that call, some shareholder, has paid the
amount of the rest of calls also, then such amount will be called as calls in advance and will be
credited to a separate account known as calls in advance account by passing the following entry.
Bank Account Dr
To callls in Advance A/C.
Calls in Advance Account is shown on the liabilities side of the Balance sheet separately
from the paid up capital, generally interest is paid on such calls according to the provisions of the
Articles of Association but such rate should not exceed 6% per annum.
Illustration 8 :
On 1 st March, 2008 sony Ltd. , makes an issue of 40,000 equity shares of Rs. 10 each
payable as follows :
On application Rs. 2. on allotment Rs. 3. and on first and final call Rs. 6. ( Three months
after allotment)
Applications were received for 52,000 shares and Directors made allotment in full to the
applicants demanding ten or more shares and returned money to the applicants for 12,000 shares.
One shareholder who was allotted 80 shares paid first and final call with allotment money and
another share holder allotted 120 shares did not pay allotment money on his shares, but which he
paid with the first and final call. Directors have decided to charge and allow interest, as the case
may be, on calls in arrears and calls in advance respectively according to the provisions of Table
A. Give the necessary journal entries in the books of the company.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
2008 March 1 Bank Account Dr 1,04,000

To share Application Account 1,04,000
( For Application money received on
52,000 shares @ Rs. 2 Per share )
2008 March 1 Share Application A/C Dr 1,04,000

To Bank A/C 24,000
(For application money of 40,000
shares transferred to share capital
account and application money of
12,000 shares refunded)
2008 March 1 Share allotment A/C Dr 1,20,000

To shares capital A/C 80,000
To securities premium A/C 40,000
( For allotment money and securities
premium due on 40,000 shares @
Rs.2. and Re.1. per share respectively
as per resolution of the Board of
Directors dated........)
2008 March 1 Bank Account Dr 1,20,120

To calls in Advance Account 480
( For the receipt of allotment money @
Rs. 3 on 39,880 shares and advance
call money on 80 shares @ Rs. 6.
each )
2008 June 1 Share First & Final call A/C Dr 2,40,000

( For the amount due in respect of first
and final call on 40,000 shares @ Rs.6
per share )

To share Allotment Account 360
( For the amount received on account
of first and final call on 39,880 shares
@ Rs. 6 and calls in arrears of
allotment )
Calls in Advance A/C Dr 480

To share First & Final call A/C. 480
( Adjustment of calls in advance
against the first and final call)
Interest on calls in advance A/C Dr 7.20

To Bank 7.20
( Interest Paid on calls in advance on
Rs. 480 for 3 months @ 6% p.a.)
Bank Account Dr 4.50

To Interest on calls in Arrears A/C 4.50
( Receipt of interest on calls in arrears
on Rs. 360 for 3 months @ 5 % p.a. )
18.12. SUMMARY :
The capital of the company is divided into different units with definite value called shares.
Holders of these shares are called shareholders. There are two types of shares. 1. Preferential
shares ; 2. Equity shares. The terms on which shares are to be issued by the company are given
in the prospectus. Joint stock companies may issue shares for two different considerations. 1.For
consideration other than cash.; 2. For cash shares may be over subscribed or undersubscribed.
A company may issue shares at a premium ; i.e. at a value greater than its face value. Similarly a
company can issue shares at a discount i.e, value less than the face value.

1. Give the main divisions of share capital of a company.
2. What is a share ? Discuss the types of shares which a company can issue.
3. What do you understand by issue of shares at par, at a premium and at discount?
4. Distinguish between calls in advance and calls in arrears.
5. Give the journal entries for issue of shares from application money to final call.
18.14 EXERCISES :
1. Vimal co. Ltd. issued 80,000 shares of Rs. 10 each at a premium of Rs. 2. Payable as
follows :
On application Rs. 2
On allotment Rs. 5 ( Including premium)
On 1st Call Rs. 2 and
On final Call Rs. 3
Applications were received for 60,000 shares and allotment was made in full.
The first call was made and the amount due there on was received
2. A & Co. Ltd. invited applications for 10,000 shares of Rs. 100 each at a discount of 5%
On allotment Rs. 34 and
On first and final Call Rs. 36 ( on call ).
The applications received were for 9,000 shares and all these applications were accepted
All the money due were received.
3. A company issued 30,000 fully paid up shares of Rs. 100 each for purchase of following
assets and liabilities from mohan brothers.
Rs.
Plant 7,00,000
Stock in trade 9,00,000
Sundry Creditors 2,00,000
You are required to pass the necessary journal entries
4. A company was registered with a share capital of Rs 1,00,000 divided into 5000 6
percent preference shares of Rs. 10 each. Out of these shares 1,000 preference shares
and 1,000 equity shares were issued as fully paid to the vendors for purchase of property.
The balance of the shares were offered to the public for subscription. The money was
payable as follows on both the classes of shares :
Rs. 3 on Application
Rs. 2 on Allotment
Rs. 3 on First call
Rs. 2 on second and final call
Applications were received for 6,000 equity shares and 5,000 preference shares.
Allotment was made on prorata basis. All the calls were made and the amount due
received. Pass necessary journal entries to record the above transcations.
5. Z Ltd. offered for public subscription Rs. 10, 000/- equity shares of Rs. 10/- each at a
premium of Rs. 2. per share payable as follows -
On application Rs. 2. per share
On allotment Rs. 5 ( Including premium)
On first Call Rs. 3 and
On final call Rs. 2
Applications were received for 12,000 shares. All the applications were considered the
excess application money is adjusted for allotment. Mr. Y to whom 500 shares were
allotted fail to pay final call money.
Prepare cash book, share capital account and balance sheet of the company.
6. A limited company issued a prospectus inviting applications for 2,000 shares of Rs.10
each at a premuim of Rs. 2 per share payable as follows :
On Application Rs. 2
On Allotment Rs. 5 ( including premuim)
On First call Rs. 3
On second and final call Rs. 2
Applications were received for 3,000 shares and allotments made pro-rata to the
applicants for 2,400 shares, the remaining applications being refused. Money overpaid
on applications was employed on account of sums due on allotment. All the calls were
made and the amount due was received. Pass necessary journal entries to record the
above transcations.
7. A company was registered with a share capital of Rs. 1,00,000 divided into 10,000
shares of Rs. 10 each. Out of these shares 2,000 shares of Rs. 10 each were issued,
at a premium of Rs. 2 per share, fully paid to the vendors as consideration for purchase
of Buildings, plant and machinery.
5,000 shares were offered to the public for subscription at Rs. 12 per share. The money
was payable as follows :
On Application Rs. 3 per share
On Allotment Rs. 4 per share ( including premuim)
On First call Rs. 2 per share ( 3 months after allotment)
On Final call Rs. 3 per share ( 3 months after first call)
Application were received for 8,000 shares. No allotment was made to applicants for
2,000 shares. Rest were allotted shares on a pro - rata basis. All calls were duly made
and received.
The company adopts Table A as its articles. You are required to pass the journal entries
and prepare the company balance sheet.
( Hint : Allow 6 percent p.a. as int0erest on call in advance and charge 5 percent interest
on call on arrears)
On First call Rs. 3
On Final call Rs. 2
Applications were recived for 3,000 shares and allotment made pro-rata to the applicants
of 2,400 shares. Money overpaid on applications was employed on account of sums
due on allotment.
Rajesh to whom 40 shares were allotted failed to pay allotment money. Manoj the holder
of 60 shares failed to pay the two calls.
Show Journal and cash book entries.
On First call Rs. 3 and On second call Rs. 2
Applications were received for 3,000 shares allotments made pro-rata to the applicants
for 2,400 shares, the remaining applications being refused. Money overpaid on
applications was employed on account of sums due on allotments. All calls were made
and the amount due was received. Pass neccessary journal entries to record the above
transcation.
10. Super max Ltd., invited applications for 10,000 of its equity shares of Rs. 10/- each
payable on application Rs. 5 /-, on allotment Rs. 3/- and on call Rs. 2/-
Applications were received for 15000 shares. The company allotted as follows - :
For 2000 shares applications Full
For 12000 shares applications 8000
For 1000 shares applications Nil
Surplus money received on application will be adjusted towards allotment. A holder of
200 shares who was alloted on prorata basis, failed to pay allotment and call money.
Give journal entries in the Books of the company and show the Balance sheet.
11. Blue moon company limited issued 50,000 share of Rs. 10/- each payable as under
Rs.2/- on application Rs. 2.50 on allotment Rs. 3 on 1st call and Rs. 2.50 on Final call.
The public applied for 90,000 shares. The allotment was made as follows on 1st August
1985.
To the applicants of 45,000 shares Full
To the applicants of 20,000 shares 25%
To the remaining applicants Nil
The First call was made on 1st November 2008 and final call on 1st February 2009.
According to the terms of issue, the surplus application money would be kept by the
company against the money due on allotment and against subsequent calls. One share
holder to whom 5,000 shares were allotted, paid on allotment the full amount due on
shares. The interest @ 5 % P.A. on calls in advance was paid on 1st Feb 2009.
Given cash book and Journal entries in the books of the company, assuming that all
money were duly received. Also prepare calls in advance account.
12. A limited company was formed with anominal capital of Rs. 6,00,000 in shares of Rs.100
each 3,000 of which were issued payable as to
Rs.10 on application,
Rs. 15 on allotment,
Rs. 25 three months after allotment and the balance to be called up when necssary. All
the money were received except on call by one shareholder holding 200 shares. Another
shareholder holding 150 shares paid the full amount on his holding. Make the cashbook
and journal entries to record these transcations. Also show how the share capital appears
in the Balance sheet of the company.
13. Harini company Ltd. issued 40,000 equity shares of Rs. 10 each, payable at
Rs.2 on application,
Rs. 4. on allotment and
Rs. 4. on first and final call
All the amount payable on allotment was duly received except in one case where the
share holders failed to pay the amount due on allotment on his 100 share and another
shareholder paid the shares in full at allotment on his 50 shares. The company was
registered with 50,000 equity shares of Rs. 10 each. Pass necessary journal entries
and prepare the Balance sheet of the company
14. Yellow limited offered for subscription 3,000 12% preference shares of Rs. 100 each at
a premuim of 20% on 1st January 2008. The amount was payable as follows -
On allotment Rs. 40 ( including premium - due on 1st Feb)
On First call Rs. 30 due on 1st march
On Second call Rs. 30 due on 1st may
All the shares were subscribed by the public and subscription list was closed on 25th
January, 2008. Money due on allotment and calls payable 15 days after the due dates..
All the amounts were duly received in times except the second call on 200 shares.
Prepare journal and cash book in the books of the company and show them in the
Balance sheet.

5. Financial Accounting - S.P. Jain & K.L. Narang
6. Advanced Accounting - K.R. Pall.
Dr. CH. Suravinda

Reader in Commerce
Lesson - 19
FORFEITURE OF SHARES
OBJECTIVES:
After going through this lesson the student can know what is forfeiture of share ? and How
these shares are reissued and what is the accounting treatment ?
STRUCTURE:
19.1 Introduction
19.2 Journal Entries
19.3 Surrender of Shares
19.4 Re-issue of Forfeited shares
19.5 Partial Re-issue of forfeited shares
19.6 Forfeiture of shares when there is an over-subscription and pro-rata
Allotment
19.7 Summary
19.9 Exercises
19.1 INTRODUCTION:
When a shareholder fails to pay calls, the company, if empowered by its articles, may
forfeit the shares. If a shareholder has not paid any call on the day fixed for payment there of and
fails to pay it even after his attention is drawn to it by the secretary by registered notice, the Board
of Directors pass a resolution to the effect that such shares be forfeited. Shares once forfeited
become the property of the company and may be sold on such terms as directors think fit, upon
forfeiture, the original shareholder ceases to be a member and his name must be removed from
the register of members.
19.2 JOURNAL ENTRIES :

The following entry is passed at the time of forfeiture of shares.
Share capital Account Dr ( with called amount )
To unpaid calls A/C ( The amount not paid )
To Discount on issue of shares
To share forfeited A/C ( with the amount already received)
On forfeiture, share capital account has been debited as it reduces the share capital and
calls due but not received will be credited in order to cancel their debit balance standing in the
books. Discount on the issue of shares will be cancelled like share capital on forfeiture of shares.
Premium received on the original issue of shares cannot be cancelled on the forfeiture of
shares as once the premium is received it cannot be cancelled. But if securities premium is not
received on the issue of shares, then it will be cancelled by debiting the securities premium account
with the forfeiture entry.
Shares forfeited account balance will be shown on the liabilities side of the Balance sheet
till all shares are reissued.
Illustration 1 :
A limited company has an authorised capital of Rs. 5,00,000 in Rs. 10 shares of these
8,000 shares were issued as fully paid in payment of building purchased and 16,000 shares were
subscribed for by the public, and during the first year Rs. 5 per share was called payable Rs.2 on
application, Rs. 1 on allotment Re.1 on first call and Re. 1 on second call. The amounts received
in respect of these shares were as follows :
On 12,000 shares the full amount called
On 2,500 shares Rs. 4 per share
On 1,000 shares Rs. 3 per share
On 500 shares Rs. 2 per share
The Directors forfeited the shares on which less than Rs. 4 had been paid.
You are required to show journal entries in the books of the company, and to set out the
capital as it should appear in the company's Balance sheet at the end of the first year.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
Buliding Account Dr 80,000
( Being issue of 8,000 fully paid shares
of Rs. 10 each for the purchase of
building)
FINANCIAL ACCOUNT -II 19.3 FORFEITURE OF SHARES
to share captial account on allotment of
shares )
Share Application Account Dr 32,000

to share capital account on allotment of
shares)
Share Allotment Account Dr 16,000

To share captial Account 16,000
( Being allotment money due on 16,000
shares @ Re. 1 )

To share Allotment A/C. 15,500
( Being allotment money received on
15,500 shares @ Re. 1 per share )
19.3 SURRENDER OF SHARES :

After the allotment of shares sometimes a shareholder is not able to pay the further calls
and return his shares to the company for cancellation. Such voluntary return of shares to the
company by the shareholder himself is called surrender of shares. Surrender of shares has no
separate accounting treatment but it will be like that of forfeiture of shares. The same entires will
be passed in case of surrender of Shares.
19.4 REISSUE OF FORFEITED SHARES :

Forfeited shares may be reissued by the company directors for any amount but if such
shares are issued at a discount then the amount of discount should not exceed the actual amount
received on forfeited shares.
Accounting entries :
Bank A/C Dr ( with the amount received )
Forfeited shares A/C Dr ( with the discount allowed )
To share capital A/C ( with face value)
For example, if a company forfeits 200 shares of Rs. 10 each on which Rs. 600 had been
received, the company can allow a maximum discount of Rs. 600 on these shares. In case these
shares are reissued for Rs. 1800 fully paid, the following journal entry will be passed.
Bank A/C Dr 1,800
Share forfeited A/C Dr 200
( Being reissue of shares)
The balance standing to the credit of forfeited shares Account, is a capital profit and,
therefore it will be transferred to capital reserve. The journal entry will be
Share forfeited A/C Dr
To capital Reserve A/C
( Being Profit on reissue of forfeited shares transferred to capital reserve)
4.1 Reissue of forfeited shares originally issued at discount :

In case the forfeited shares were originally issued at discount, the maximum permissible
reissue discount is, the sum received on forfeited shares and original discount.
For example, if a share of Rs. 10 was originally issued at a discount Re.1 is forfeited, and
the amount received on it was Rs 2, the maximum discount on reissue of such a forfeited share
can be Rs. 3 ( i.e original discount Re.1 + Amount received Rs. 2) . The journal entry will be as
follows in case the share is issued for Rs. 7 per share, fully paid up.
Bank A/C Dr 7
Discount on issue of shares A/C Dr 1
Forfeited shares A/C Dr 2
To share capital A/C 10
4.2 Re-issue of forfeited shares originally issued at Premium :

It is not necessary that if the shares were originally issued at premium, their reissue after
forfeiture should also be at premium or the premium should be at the same rate.
Illustration 2 :
A company forfeits 200 shares of Rs. 10 each, originally issued at a premium of Rs. 2 per
share. The shareholder paid Rs. 4 per share on application but did not pay the allotment money of
Rs. 4 per share ( including premium ) and call of Rs. 4 per share. The shares are subsequently
reissued at Rs. 11 per share fully paid up.
Pass journal entries for forfeiture and re-issue of forfeited shares.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
Share capital A/C Dr 2000
Share premium A/C Dr 400
To share Allotment A/C 800
To share call A/C 800
To share forfeited A/C 800
( Being forfeiture of 200 shares on
account of non-payment of allotment
and call money)
Bank A/C Dr 2,200

To share capital A/C 2000
To share premium A/C 200
( Being reissue of forfeited shares )
Shares forfeited A/C Dr 800

To Capital Reserve A/C 800
( Being transfer of profit on shares
forfeited to capital reserve )
19.5 PARTIAL RE-ISSUE OF FORFEITED SHARES :
When all forfeited shares are not issued i.e, only a part of such shares is issued, it is
desirable to spread the amount of shares forfeited account on all such forfeited shares and of the
amount relating to that part of forfeited shares which has been reissued, discount on reissue of
shares should be deducted from such amount and the balance is transferred to captial reserve
being capital profit. The amount relating to that part of shares forfeited account which has not been
reissued should be shown on the liabilities side of Balance sheet as shares Forfeited Account.
Illustration 3 :
A company invited the public to subscribe for 20,000 Equity shares of Rs.100 each at a
premium of Rs. 10 per share payable on allotment. Payments were to be made as follows :
On Allotment Rs. 40
On First call Rs. 30
On Final call Rs. 20
Application were received for 26,000 shares. Applications for 4,000 shares were rejected
and allotment was made proportionately to the remaining applicants. Both the calls were made
and all the money were received except the final call on 600 shares.
Solution :
JOURNAL
Dr Cr
Rs. Rs.
Share First call Account Dr 16,000

( Being the amount due on first call on
16,000 shares @ Rs. 1. Per share)

To share first call A/C 14,500
( Being amount received on account of
first call on 14,500 shares @ Re. 1. per
share )
Share second call Account Dr 16,000

( Being the amount due on second call
on 16,000 shares @ Rs. 1 per share )

To share second call A/C 12,000
( Being amount received on account of
second call on 12000 shares @ Re.1
per share )
Share capital account Dr 7,500

To share allotment A/C 500
To share first call A/C 1,500
To share second call A/C 1,500
To share forfeited A/C 4,000
( Being forfeiture of 1500 shares on
which less than Rs. 4. had been paid)
Capital as it will appear in the balance sheet
Capital and Liabilities

Authorised Capital :
50,000 shares of Rs. 10 each 5,00,000
Issued and subscribed capital :
8,000 shares of Rs. 10 each issued
as fully paid up for the purchase of building 80,000
14,500 shares of Rs. 10 each Rs.5
per share called up 72,500
less calls in Arreas ( second call on
2,500 shares @ Re. 1) 2,500
70,000
Add share forfeited Account 4,000 _74,000
1,54,000
Which are forfeited after due notice. Later 400 of the forfeited shares were issued as fully
paid at Rs. 85 per share. Pass journal entries.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
To Equity share Application A/C 5,20,000
( Application money received for 26,000
shares @ Rs. 20 per share)
Equity share application A/C Dr 5,20,000

To bank A/C 80,000
( Application money of 20,000 shares
transferred to share capital A/C and
balance returned to applicants and
used for share allotment account)
Equity share allotment A/C Dr 8,00,000

To Equity share Capital A/C 6,00,000
To securities premium A/C 2,00,000
( Allotment money due on 20,000
shares )

To Equity share allotment A/C 7,60,000
( Receipt of amount due on allotment )
Equity share first call A/C Dr 6,00,000
( Amount of first call due )

To Equity share first call A/C 6,00,000
( Receipt of amount due on first call )
Equity share second call and final call A/C Dr 4,00,000

( Amount due on second & final call )

To Equity share second & final call A/C 3,88,000
( Receipt of amount due on second & final
call except on 600 shares )
Equity share capital A/C Dr 60,000

To Equity share second & final call A/C 12,000
To share forfeited A/C 48,000
( 600 shares forfeited )
Bank A/C Dr 34,000

Shares forfeited A/C Dr 6,000
To Equity share capital A/C 40,000
( Reissue of 400 shares @ Rs.
85 per share )
Shares forfeited A/C Dr 26,000
To capital reserve A/C 26,000
( Proportional balance relating to 400 shares
out of shares forfeited A/C transferred to
capital reserve)
Working Notes :
1. On 600 Forfeited shares, the total amount forfeited is Rs. 48,000
For 400 shares the amount will be
400
X Rs. 48,000 = Rs. 32,000.
600
Out of this Rs. 6,000 is allowed as discount on the reissue of shares and the balance
of Rs. 26,000 is transferred to Capital Reserve.
2. Rs. 16,000 i.e, that is the amount relating to 200 shares which are not reissued will be
shown on the liabilities side of the Balance sheet as shares Forfeited A/C and added to
the paid up capital.
19.6. PRO - RATA ALLOTMENT AND FORFEITURE OF SHARES :

It has already been discussed that in case of companies of repute, there is possibility of
over - subscription. Some applications are rejected altogether and others are allotted on pro - rata
basis. When shares allotted on pro - rata basis are forfeited, the problem arises about the amount
to be forfeited. In such cases, the following procedure is adopted.
1. Calculate the total number of shares applied for on the basis of alloted shares.
2. Calculate the total amount received on application by multiplying the number of shares
applied with application money.
3. Deduct the amount due on application on alloted shares and calculate balance, i.e;
money received in advance and to be adjusted on allotment.
4. Calculate the amount due on allotment on such shares and deduct the amount already
received as advance on application. This gives the amount in arrear on allotment and
credited to share allotment account at the time of forfeiture of shares.
Illustration 4 :
A company offered for public subscription 20,000 shares of Rs. 10 each at Rs. 11 per
share. Money was payable as follows :
Rs. 3 on application
Rs. 4 on allotment
Rs. 4 on first and final call.
Applications were received for 24,000 shares and the directors made pro-rata allotment.
a) an applicant for 240 shares, could not pay the allotment and call moneys.
b) a holder of 400 shares, failed to pay the call. All these shares were later on forfeited.
Out of the forfeited shares, 300 shares ( the whole of A's shares being included) were
issued at Rs. 9 per share.
Pass the journal entries for recording the above transactions.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
Bank A/C Dr 72,000
( Being application money received on
24,000 shares @ Rs. 3 per share )

To share Allotment A/C 12,000
( Being transfer of application money to
share capital account on 20,000
shares and the balance to allotment
account )

To share premium A/C 20,000
( Being money due on allotment @
Rs.4 per share on 20,000 shares
including Re. 1 on account of share
premium )
Bank A/C Dr 67,320

( Being money received on share
allotment )
Share call A/C Dr 80,000
( Being money due on call on 20,000
shares @ Rs. 4 per share )
Bank A/C Dr 77,600

To share call A/C. 77,600
(Being call money received on 19,400
shares )
Share capital A/C Dr 6,000

Share premium A/C Dr 200
To share allotment A/C. 680
To share first & final call A/C. 2,400
To share forfeited A/C. 3,120
(Being forfeiture of 600 shares )
Bank A/C Dr 2,700

Shares forfeited A/C Dr 300
To share capital A/C. 3,000
(Being reissue of 300 forfeited shares)
Share Forfeited A/C Dr 1,020

To Capital Reserve A/C. 1,020
(Being profit on forfeiture and reissue
of 150 forfeited shares transferred )
Working Notes :
1. Calculation of amount received on allotment :
Rs
Total money due 80,000
Less Amount not paid by an
applicant for 240 shares who
was allotted only 200 shares Rs. 800
Less Extra money paid with application 40x3 120 680
79,320
Less Amount received with application 12,000

67,320
2. Share premium has been debited only with Rs. 200 relating to A's shares. The premium
money has not been received on these shares.
In case of B, the premium has been received, the share premium account has not
been debited with the amount of premium on these 400 shares though they have been
forfeited.
3. Share forfeited account represents the money received on forfeited shares excluding
share premium. This can be verified as follows :
Rs.
A has paid @ Rs. 3 per share on an application for 240 shares 720
B has paid @ Rs. 6 per share on 400 shares 2,400
Total amount received. 3,120
4. Amount received from A on shares forfeited ( 200 in all
which has been reissued) 720
Amount received from B on shares forfeited ( 100 shares
which have been reissued ) 600
Total amount received on 300 shares which have been
forfeited and reissued. 1320
less : loss on reissue 300
1020
19.7. SUMMARY :
When a shareholder fails to pay calls, the company can forfeit these shares, if empowered
by its articles. Shares once forfeited become the property of the company and may be sold upon
forfeiture, the original shareholder ceases to be a member and his name must be removed from
the register of members. Sometimes if a shareholder is not able to pay the futher calls and return
his shares to the company for cancellation, it is called surrender of shares. Forfeited shares may
be reissued by the company but if such shares are issued at a discount then the amount of
discount should not exceed the actual amount received on forfeited shares. After reissued the
balance in share forfeited is a capital profit and transferred to capital reserve account.

1. What is meant by forfeiture of shares ?
2. Discuss the provisions of Indian companies act relating to share premium.
3. What are the conditions for reissue of shares at discount ?
19.9 EXERCISES :
1. Super max Ltd. invited applications for 20,000 of its Equity shares of Rs. 10/- each
payable on application Rs. 5/- on allotment Rs.3/- and on call Rs. 2/-
Application were received for 15000 shares. The company allotted as follows :
For 4,000 shares applications Full
For 24,000 shares applications 8,000
For 2,000 shares applications Nil
Surplus money received on application will be adjusted towards allotment. A holder of
400 shares who was alloted on proratabasis, failed to pay allotment and call money.
Give Journal entries in the Books of the company and show the Balance sheet.
2. A limited company issued a prospectus inviting applications for 4,000 shares of Rs. 10
each at a premium of Rs. 2 per share payable as follows -
On First call Rs. 3 and
On Final call Rs. 2
Applications were received for 6,000 shares and allotment made pro-rata to the
applicants of 4,800 shares. Money overpaid on applications was employed on account
of sums due on allotment.
Sunil to whom 80 shares were allotted failed to pay allotment money and on his
subsequent failure to pay the first call his shares were forfeited. Sridhar the holder of
120 shares failed to pay the two calls and his shares were forfeited after the second
call. Of the forfeited shares 160 shares were sold to kishore as fully paid for Rs. 9 per
share, the whole of sunil's shares being included.
Show journal and cash book entries.
3. Riddhima Co. Ltd. issued 1,60,000 shares of Rs. 10 each at a premium of Rs. 2 payable
as follows :
On Final call Rs. 3
Applications were received for 1,20,000 shares and allotment was made in full.
The first call was made and the amount due there on was received except the amount
on 4,000 shares. These 4,000 shares were forfeited and reissued at Rs. 7 each. Pass journal
entries and prepare Balance sheet.
4. A limited company issued a prospectus inviting applications for 6,000 shares of Rs. 10
each at premium of Rs. 2 per share payable as follows :
On second call Rs. 2
Applications were received for 9,000 shares and allotments made pro-rata to the
applicants for 7,200 shares, the remaining applications being refused. Money overpaid
on application was employed on account of sums due on allotment.
X to whom 120 shares were allotted, failed to pay the allotment money and on his
subsequent failure to pay the first call, his shares were forfeited. Y. the holder of 180
shares failed to pay the two calls, and his shares were forfeited after the second call
had been made of the shares forfeited, 240 shares were sold to Z, credited as fully paid,
for Rs. 9 per share, the whole of the X's shares being included.
Show journal and cash book entries and the Balance sheet.
5. Z & Co. Ltd. invited applications for 20,000 shares of Rs. 100 each at a discount of 5%
On allotment Rs. 34 and
On first & final Call Rs. 36 ( on call)
The applications received were for 18,000 shares and all these applications were
accepted. All the money due were received except the first and final call on 400 shares
which were forfeited. Of these 200 shares were reissued @ Rs. 90/- as fully paid. You
are required to pass journal entries in the books of Z Ltd. and prepare cash book, and
the Balance sheet.
6. Reddy Ltd. issued 1,00,000 equity shares of Rs. 100 each at a premium of Rs. 10 per
share payable as follows :
On second call Rs. 20
A member holding 2,000 shares failed to pay II call money and in consequence the
shares were forefeited. At a later data 1000 of these shares were reissued as fully paid
for a consideration of Rs. 80 per share write up ledger accounts.
7. Give the journal entries for the following -
X Ltd, forfeited 30 shares of Rs 10/- each, on which they called up Rs. 7 each, on which
Mr. X had paid application and allotment money of Rs. 5 per share, in total. Out of those
forfeited shares 20 shares were reissued to sagar as fully paid up for Rs. 6 share
8. Give Journal entries for the forfeiture and reissue of shares in the following cases :
a) S Ltd. forfeited 10 shares of Rs. 10 each issued at 10 percent premium to Gopalam
( Rs 9 ( called up ) on which he did not pay allotment ( including premium ) of
Rs.3 and first call of Rs 2. out of these, 6 shares were reissued to Madhu as fully
paid up for Rs. 8 per share. and one share to karthik as fully paid up for Rs. 12
and two share to Romeo as fully paid up for Rs. 6. at different intervals of time.
b) On 1may 2008 the directors of limited company forfeited 400 shares of Rs. 20
each, Rs. 15 per share called up, on which Rs. 10 per share has been paid by A,
the amount of the first call of Rs. 5 per share being unpaid. Ten days latter, the
directors reissued the forteited shares of B credited as Rs 15 per share paid
up. For payment of Rs 10 per share.
9. On 1 April 2008, excel Ltd. offered 2,00,000 equity shares of Rs. 10 each for public
subscription Rs. 4,80,000 was received along with the applications at the rate of Rs. 2
per share on 1st july 2008, the company allotted the shares proportionately among all
the applicants simultaneously making an allotment call of Rs. 2 per share.
By 10 July 2008 all share holders, except an allottee of 1000 shares had paid the balance
due on allotment. These shares were forfeited on 10 september 2008 the company
made another call of Rs 2 per share on 30 september 2008 and by 10 october 2008 the
amounts were received.
pass journal entries ( including cash/ bank transcations ) to record the above in the
books of excel Ltd.
10. A ltd. Company issued 4,000 shares of Rs. 10 each at a premium of Rs. 2 per share
On First call Rs. 3
Applications were received for 6,000 shares. Applications for 1200 shares were altogether
rejected and to the applicants of 4,800 shares, allotment was made prorata. Money
overpaid on application was adjusted on allotment.
Ram, to whom 160 shares were allotted, failed to pay the allotment money and on his
subsequent failure to pay first call, his shares were forfeited show journal entries.
11. A Co. ltd. offered to the public 40,000 equity shares of Rs. 100 each at a premium of
Rs.10 per share. The payment was to be as follows :
Applicantions were received for 10,000 shares. Applications for 20,000 shares were
rejected. Applicants for 30,000 shares were allotted 20,000 shares and remaining
applications were accepted in full. The directors made both the calls. One shareholder
holding 500 shares failed to pay the two calls and as a consequence his shares were
forfeited. 400 of these shares were reissued as fully paid at Rs. 80 per share expenses
of issue came to Rs. 10,000.
Prepare cash book, the journal and the Balance sheet on the basis of information given
above.
12. Wye Ltd. was formed with an authorised capital of 4,00,000 eqvity shares of Rs. 10
each. On 1st july 2008 2,00,000 shares were issued as fully paid to the vendors for
properties purchased.
On the same day the company offered 1,60,000 shares to the public. The issue was
fully subscribed. The amount on these shares was payable as follows :
On Application Rs. 2.50 per share
On Allotment Rs. 2.50 per share
On First call Rs. 2.50 per share ( due on 1st September )
On second call Rs. 2.50 per share ( due on 1st December )
On the shares subscribed for by the public there had been paid on 30 June 2008 the
following -
On 1,20,000 shares the full amount called
On 36,000 shares Rs 7.50 per share
On 1000 shares Rs 5.00 per share
On 3000 shares Rs 2.50 per share
On 30 June 2008 the directors forfeited the shares on which less than Rs. 7.50 had
been paid.The calls in arrears on 36,000 shares were collected on 31st July 2008 together
with the necessary interest. The forfeited shares were reissued on the same date at
price of Rs. 8 per share You are required to pass the necessary journal and cashbook
entries and show how the various items will appear in the company's Balance sheet as
on 31 December 2008.

Dr. CH. Suravinda

Reader in Commerce
Lesson - 20
DEBENTURES
OBJECTIVES:
After going through this lesson the student can know what are debentures? What are the
differences between debentures and shares ? classification of debentures and their issue.
STRUCTURE:
20.1 Introduction
20.2 Definition
20.3 Distinction between share & Debenture
20.4 Classification of Debentures
20.5 Issue of debentures
20.6 Different terms of issue of Debentures
20.7 Summary
20.9 Exercises
20.1 INTRODUCTION:
Companies require money from time to time for its extension and development. To raise
funds without increasing its share capital, the company may invite the public, to lend money for a
fixed period at a declared rate of interest. These are known as debentures. Debenture is an
instrument in writing given by a company acknowledging the liability for the total amount received
as a result of issue of debentures and agreeing thereby to pay the money raised after the expiry of
the stipulated period at a certain rate of interest per annum.
20.2 DEFINITION :
A debenture may be defined as a certificate issued by a company under its seal
acknowledging a debt due by it to it's holder.
The most essential characteristic of a debenture is the admission or record of indebtedness.

20.3 DISTINCTION BETWEEN SHARE AND DEBENTURE :
SHARE DEBENTURE
1. Shares are a part of the capital of the 1. Debentures constitute loan to the company
company
2. Shareholders are owners of the 2. Debenture holders are creditors of the

company company
3. Shareholder enjoys the voting right, 3. These rights are not available to the
and right to attend general meetings debenture holders.
4. No fixed payment on shares 4. Fixed interest is paid on debentures
5. Shareholders are the last persons to 5. Debenture holders have priority over
receive money at the time of shareholder for payment of principal amount.
insolvency or winding up.
6. Shares have no charge on the assets 6. Debentures usually have a charge on the
of the company assets of the company.
7. Dividends on shares are paid only 7. Interest on debentures is payable whether

when the company has earned profits. there are profits or not.
8. Dividend on shares can never be paid 8. Interest on debentures is a debt and may be
out of capital paid even out of capital.
9. No fixed dividend, it fluctuates from 9. Debentures carry a fixed rate of interest.

year to year
10. Shareholder can exercise control over 10. Debenture holders are not in a position to
the management of the company exercise any control on the affairs of the
company.
11. Shares cannot be purchased or 11. Debentures can be purchased and
redeemed by the company. redeemed by the company.
FINANCIAL ACCOUNT -II 20.3 DEBENTURES
20.4 CLASSIFICATION OF DEBENTURES :

A company may issue various kinds of debentures with different rights as given below -
4.1 From the point of view of security :

From security point of view debentures may be naked or mortgage debentures.
a. Naked debentures : Naked debentures are those which do not carry any charge on
the assets of the company. The holders of such debentures are not given any security
as to the payment of interest and repayment of capital.
b. Mortgage debentures : Debentures which are secured by a mortgage or charge on
the whole or a part of the assets of the company are known as mortgage debentures.
4.2. From the point of view of Redemption :

Form this point of view the debentures may be Redeemable or irredeemable debentures.
4.2.1 Redeemable debentures :
Redeemable debentures provide for the payment of the principal amount on the expiry of a
certain period. Redeemable debentures can be reissued even after they have been redeemed
until they have been cancelled.
4.2.2. Irredeemable debentures :
In the case of irredeemable or perpectual debentures the company does not give any
undertaking of repaying the money borrowed by issuing debentures. Company may repay
debentures at any time it may choose to do so, but the creditors cannot compel the company to
repay them at any certain time. They shall, however, be repaid when the company goes into
liquidation or makes a default in the payment of interest.
4.3. From the point of view of Transferability :

From this view point debentures may be Bearer or Registered debentures.
4.3.1 Registered debentures :
Registered debentures are made out in the name of a particular person, who is registered
as a debenture - holder in the books of the company. The names of the debenture-holders are
recorded in the companie's register of debenture holders. They are transferable in the same way
as shares or in accordance with the conditions endorsed on their back.
4.3.2 Bearer debentures :
Bearer debentures are treated as negotiable instruments and are transferable by delivery
alone. The name of the holders of such debentures are not required to be registered in the register
of debenture holders.
4.4. From priority point of view :

From this point of view the debentures may be first or second debentures.
4.4.1 First Debentures :
First debentures are those debentures which are paid first before any payment is made to
another type of debentures.
4.4.2 Second Debentures :
Second debentures are those debentures which are paid after making the payment of first
debentures.
4.5. From convertion point of view :

From this point of view debentures may be convertible or non - convertible.
4.5.1. Convertible Debentures :
Convertible debentures given an option to debenture holders to convert then into equity or
preference shares at a stated rate of exchange after a certain period.
4.5.2. Non - convertible Debentures :
Non - convertible debentures are not convertible into equity or preference shares afterwards.
20.5 ISSUE OF DEBENTURES :

The entries for issue of debentures are made on the same pattern as for issue of shares.
The topic issue of debentures can be studied from different angles which are given below :
5.1. From consideration point of view :

From this point of view, debenture can be issued either for consideration in cash or for
consideration other than cash or as colleteral security. The accounting treatment is discussed as
under :
5.1.1. For consideration in cash :
Debentures can be issued for consideration in cash either at par or at discount or at
premium. The journal entry will be :
Bank Account Dr
Discount on issue of shares A/C Dr ( If issued at discount )
To Debentures A/C
To Debenture premium A/C ( If issued at premium )
5.1.2. For consideration other than cash :
When debentures are issued to the vendors in lieu of purchase consideration, that is known
as issue of debentures for consideration other than cash. The journal entry will be :
i. For purchase of assets
Asset A/C Dr
To vendor A/C.
ii. For issuing debentures for payment of purchase consideration .
Vendor A/C Dr
To Debentures A/C
5.1.3. As colleteral security :
When debentures are issued as subsidiary or secondary security in addition to the principal
security against a loan or a bank overdraft. Such an issue of debentures is known as issue of
debentures as collateral security. The basic objective of such an issue is that if the company does
not repay the loan and the interest and the main security is not sufficient, the bank will be entitled
to sell the debentures in the market or the bank may keep the debentures with it. If the company
repays the loan, the bank will return the debentures issued as collateral security to the company.
Debentures issued as collateral security can be dealt in two ways -
First Method : No entry need to be passed in the books of the company when
debentures are issued as a collateral security. The fact of such an issue of debentures
must be clearly mentioned in the Balance sheet by way of a note under the loan and
debenture.
Second Method : The following journal entry can be passed for issue of debentures
as collateral security.
Debenture suspense A/C Dr
To Debentures A/C
As and when the loan is paid, the entry passed above is reversed. In this method entries in
the balance sheet will be shown as under :
Debentures and loan from bank will be shown on the liabilities side where as Debenture
suspense account will be shown on the assets side of the Balance sheet.
5.2. From price point of view :

From this point of view the debentures can be issued either at par or at discount or at
premium. When the amount collected on debentures issued is equal to the face value as issue of
a debenture of Rs. 100 for Rs. 100, it is said to be issued at par. When the amount collected is
more than the face value of debenture as issue of debenture of Rs. 100 at Rs. 105, it is said to be
issued at premium. Debentures is said to be issued at a discount when the amount collected is
less than the face value as issue of Rs. 100 debenture for Rs. 95.
The entries will be as under :
1. When debentures are issued at par :
Bank A/C Dr
To Debentures A/C
2. When debentures are issued at premium
Bank A/C Dr
To Debentures A/C
To Debenture premium A/C
3. When debentures are issued at discount .
Bank Account Dr
Debenture Discount A/C Dr
To Debentures A/C.
Illustration 1 :
Give journal entries in the books of a company
Company purchased assets of Rs. 35,00,000 and took over the liabilities of Rs. 3,00,000.
It agreed to pay the purchase price, Rs. 33,00,000 by issuing debentures of Rs. 100 each at a
premium of 10%
Solution :
JOURNAL
Dr Cr
Rs. Rs.
Sundry Assets A/C Dr 35,00,000
Good will A/C ( Bal. fig) Dr 1,00,000
To liabilities A/C 3,00,000
To vendor A/C 33,00,000
( Being the purchase of assets and
liabilities)
Vendor A/C Dr 33,00,000
To Debentures A/C 30,00,000
To premium on issue of Debentures A/C 3,00,000
( Being issue of debentures at a
premium of 10% )
Illustration 2 :
A ltd. took over assets of Rs. 28,00,000 and liabilities of Rs. 2,00,000 of B ltd. for a sum of
Rs. 27,00,000. Pass the necessary journal entries if the purchase consideration is satisfied by A
ltd. in the form of 6% percent debentures of Rs. 100 each.
a. issue at par
b. issued at a discount of 10%
c. issued at a premium of 35 percent.
Solution :
JOURNAL
Dr Cr
Rs. Rs.
Sundry Assets A/C Dr 28,00,000
Good will A/C Dr
( Rs.27,00,000 - Rs. 26,00,000) 1,00,000
To sundry liabilities A/C 2,00,000
To B Ltd 27,00,000
( Being assets and liabilities of A ltd
taken over )
a. B Ltd. A/C Dr 27,00,000

To 6 % Debentures A/C 27,00,000
( Being issue of debentures at par)
b. B Ltd. A/C Dr 27,00,000
Discount on issue of
Debentures A/C Dr 3,00,000
( Being issue of debentures at 10%
discount)
c. B Ltd. A/C Dr 27,00,000
To 6 % Debentures A/C Dr 20,00,000
To premium on issue of
debentures A/C 7,00,000
( Being issue of 20,000 debentures at a
premium of 35% )
llustration 3 :
In April 2008 sardar Ltd. offered for subscription of 10,000 7% percent debentures of
Rs.1,000 each at the issue price of Rs. 94% payable Rs. 50 per debenture on application, Rs. 500
on allotment and the balance on 1st Aug, 2008. Interest was payable half yearly on 30th september
and 31st march. The first coupon, payable on 30th sep. 2008, being for 2 percent. The issue was
fully taken up.
Journalise the transactions.
Solution :
JOURNAL OF A LTD.
Dr Cr
Rs. Rs.
2008 Apr Bank A/C Dr 5,00,000
To 7% Debenture Application A/C 5,00,000
( Being application money received on
10,000 debentures @ Rs. 50 each )
7% Debenture Application A/C Dr 5,00,000

( Being transfer of application money to
7% Debentures Account)
7% Debenture Allotment A/C Dr 50,00,000
Discount on issue of Deb. A/C Dr 6,00,000
To 7 % debentures A/C 56,00,000
( Being money due on allotment )
Bank A/C Dr 50,00,000

To 7 % Debenture allotment A/C 50,00,000
( Receipt of allotment money)
Aug1 7% Debenture First & Final call A/C Dr 39,00,000

To 7 % debentures A/C 39,00,000
( Being first and final call due on 10,000
debentures @ Rs. 390 per debenture )
Bank A/C Dr 39,00,000

To 7 % Debenture First & Final call A/C 39,00,000
( Being receipt of first & final call
money )
Sep1 Debenture Interest A/C Dr 2,00,000

To bank A/C 2,00,000
( Interest paid on debentures @ 2% on
Rs. 1,00,00,000)
Mar 31 Debenture Interest A/C Dr 3,50,000

To Bank A/C 3,50,000
( Payment of debenture interest for half
year ended 31st Dec. 2008)
Mar 31 Profit and loss A/C Dr 5,50,000

To Debenture Interest A/C 5,50,000
( Being transfer of debenture interest to
profit & loss account )
The money was received on debentures on different dates. Instead of calculating interest
on different amounts received on different dates, the question provides for a flat rate of 2 percent
on the entire amount for the first six months.
5.3. From the redemption point of view :

When debentures are issued with certain conditions at which redemption can be made,
there are five cases which are given as follows :
a. Issued at par, repayable at par.
b. Issued at premium, repayable at par.
c. Issued at discount , repayable at par
d. Issued at par, repayable at premium
e. Issued at discount , repayable at premium
The journal entries to be passed at the time of issue and redemption of debentures in the
five cases are as follows :
a. When debentures are issued at par and repayable at par :
i. On issue of Debentures :
Bank A/C Dr
To Debentures A/C
ii. On Redemption of debentures :
Debentures A/C Dr
To Bank A/C
b. When debentures are issued at premium and repayable at par :
i. On issue of debentures, the entry will be :
Bank A/C Dr
To Debentures A/C
To premium on the issue of Debentures A/C
ii. On Redemption of debentures :
Debentures A/C Dr
To Bank A/C
c. When debentures are issued at discount and repayable at par :
i. On issue of debentures :
Bank A/C Dr
Discount on issue of Debentures A/C Dr
To debentures A/C
ii. On redemption of debentures :
Debentures A/C Dr
To Bank A/C
d. When debentures are issued at par and repayable at premium :
Bank A/C Dr
Loss on issue of Debentures A/C Dr
To debentures A/C
To premium on redemption of debentures A/C
Debentures A/C Dr
Premium on the redemption of debentures A/C Dr
To Bank A/C
e. When debentures are issued at a discount but repayable at a premium :
Bank A/C Dr
Loss on issue of Debentures A/C Dr
( For discount & premium on redemption )
To debentures A/C
To premium on redemption of debentures A/C
Debentures A/C Dr
Premium on the redemption of debentures A/C Dr
To Bank A/C
Loss on issue of Debentures and Discount of issue of Debentures are capital losses and
will be shown on the assets side of the Balance sheet under the head Miscellaneous expenditure
until these are written off. These accounts are to be written off either against profit and loss account
or securities premium account.
Premium on debentures account is a capital profit and is shown on the liabilities side under
the head reserve and surplus.
Illustration 4 :
Journalise the following transactions at the time of issue of debentures :
a) Debentures issued at Rs. 95, repayable at Rs. 100
b) Debentures issued at Rs. 95, repayable at Rs. 105
c) Debentures issued at Rs. 100, repayable at Rs. 100
d) Debentures issued at Rs. 105, repayable at Rs. 100
The face value of debenture is Rs. 100.
Pass the journal entries for recording the above transactions.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
At the time of issue
a. Bank A/C Dr 95
Discount on issue of debentures A/C Dr 5
To debentures A/C 100
( For issue of Debentures of Rs. 100 at
95 at a discount of 5% )
b. Bank A/C Dr 95
Loss on issue of debentures A/C Dr 5
To premium on redenption of 5
debentures A/C
( For issue of debentures of Rs. 100 at
a discount of 5% and repayable at
premium of 5%)
c. Bank A/C Dr 100
Loss on issue of debentures A/C Dr 5
To premium on redemption
of debentures A/C 5
( For issue of debentures of Rs. 100
repayable at premium of 5%)
d. Bank A/C Dr 105
To Debenture A/C 100
To premium on issue of debentures A/C 5
( For issue of debentures of Rs. 100 at
premium of 5% and repayable at par )
20.7. SUMMARY :
To raise funds without increasing share capital, sometimes the companies issue debentures
to the public. Debentures are long term loans also known as loan capital. From the point of view of
security debentures may be naked or Mortgage. From the point of view of redemption, debentures
may be Redeemable or irredeemable debentures. From the point of view of transferability debentures
may be bearer or Registered debentures. From the priority point of view debentures may be first or
second debentures. From convertion point of view debentures may be convertible or non - convertible.
Issue of debentures can be studied from different angles i.e
1.From consideration point of view
2. From price point of view
3. From the redemption point of view
20.8 . MODEL QUESTIONS :

1. What do you understand by a debenture ? Describe briefly the different types of
debentures.
2. Distinguish between a debenture and a share
3. Give different considerations for which debentures may be issued.
20.9 EXERCISES :
1. A limited company issued 2000 debenture bonds of Rs. 100 each at a permium of 10
percent repayable at par at the end of the 10th year. The debenture Bonds were payable
25 percent on application 35 percent on allotment ( including the premium ) and the
balance on first and final call. All the moneys were received by the company in due
course.
You are asked to journalise the above transcations in the books of the company.
2. A limited company issued Rs. 2,00,000 debentures, which were issued as follows :
Rs
1. To sundry persons for cash at 90 percent 1,00,000 nominal
2. To a creditor for Rs. 20,000 capital expenditure
in satisfaction as collateral security 50,000 nominal
3. To bankers as collateral security 50,000 nominal
The issue (1) and (2) are redeemable at the end of 10 years at par. How should the
debentures be dealt with in preparation of the balance sheet of the company ?
3. Anil Ltd. issued Rs. 2,00,000 10 percent debentures on 1st january, 2008 at discount of
5 percent repayable in annual drawings of Rs. 50,000 commencing from 31st December
following. The company's year ends on 31st December.
Journalise the above transcations for four years ending 31st December, 2011 assuming
the company decided to write off debenture discount account during the life of the
debentures.
4. A company issues Rs. 3,00,000 10 percent debentures on 1st April, 2008 at a discount
of 5 percent repayable in annual drawing of Rs. 75,000 each on 31st march every year.
Calculate the amount of discount to be written off each year. The financial year of the
company ends on 31st December each year.
5. a) A limited co. issued 4,000 10 % debentures of Rs. 100 each at Rs. 95 on 1-1-08. As
per the terms of issue, debentures are to be redeemed at the end of 5 years.
b) A company purchases assets of Rs. 5,20,000 and liabilities of Rs. 1,00,000 for a
sum of Rs. 4,00,000. The purchase consideration is satisfied by the issue of 9%
debentures of Rs. 100 each at par. journalise.
c) A company issued 40,000 10 % debentures of Rs. 100 each at a discount of 5%
repayable after 10 years at a premium of 5 % pass necessary journal entries.
6. XYZ Ltd. issued at par Rs. 60 lakhs, 15% non - convertible debentures of Rs. 1,000
each, payable 20% on application, 20% on allotment, 30 % on first call and the balance
after three months from the date of first call. Except the allotment money on 400
debentures and call money on 600 debentures which were in arrears the debenture
money was duly received. The company also received Rs. 14,000 towards interest on
late payment of final call money on certain debentures.
Pass Journal entries to reflect the above transcations.
7. A company purchased assets of the book value of Rs. 99,000 from another firm. It was
agreed that the purchase consideration be paid by issuing 11% Debuntures of Rs. 100
each. Assume debentures have been issued
i) at par
ii) at discount of 10% and
iii) at a premium of 10% .
Pass necessary journal entries.
8. Make journal entries for the following transcations :
X ltd purchased plant and machiney for Rs. 2,00,000 payable as to Rs. 65,000 in cash
and the balance by an issue of 16% debentures of Rs. 1,000 each at a discount of
10percent.
9. Kamala. Ltd. Purchased building for Rs. 2,20,000. Half the payment was made in cash
and the remaining half by issue of 12% debentures at a premium of 10% pass the
necessary journal entries.
10. A company took a loan of Rs. 10,00,000 from Canara Bank and issued 15% debentures
of Rs. 15,00,000 of Rs. 100 each as a collateral security. Explain how will you deal with
the issue of debentures in the books of the company.
11. Raju Ltd. acrquired assets of Rs. 2,50,000 and took over liabilities amounting to Rs.25,000
at an agreed value of Rs 2,00,000 of Rani Ltd. issued 9% Debentures at a discount of
20% in full satisfaction of the purchase price. Show the entries in the books of Raju Ltd.
12. On 1st march 2008, a limited company allotted 100, 13% debentures of Rs, 1000 each,
at a discount of 5 percent, payable Rs. 500 on application, Rs. 150 on allotment, Rs.150
on 1st June and balance a month later. All money were duly received
Give journal and cash book ( Bank column) entries to record these transcations.
13. The quest company Ltd. took over assets of Rs. 3,50,000 and liabilities of Rs. 30,000 of
Rajesh company for the purchase consideration of Rs. 3,30,000. The quest company
Ltd. paid the purchase consideration by issuing debentures of Rs. 100 each at 10%
premium. Give journal entries in the books of the quest company Ltd.
14. Give journal entries
A limited company bought a building for Rs.9,00,000 and the consideration was paid by
issuing debentures at a discount of 10%.
15. Rani industries Ltd. issued 1,000 12% debentures of Rs. 100 each, at a premium of
Rs.10 per debenture payable as follows :
On allotment Rs. 45 ( including premium)
On call Rs. 40
The debentures were fully subscribed and the money was duly received.
Pass the necessary cash book and journal entries in the books of the company.

Dr. CH. Suravinda

Reader in Commerce
Lesson - 21
FINAL ACCOUNTS OF COMPANIES

OBJECTIVES:
After going through this lesson the student can know how the final accounts of the companies
prepared ? What are the legal provisions regarding final accounts of companies.
STRUCTURE:
21.1 Introduction
21.2 Preparation and presentation of the final accounts
21.3 Form and contents of profit & loss account
21.4 Features of profit & loss appropriation account of companies
21.5 Form and contents of Balance sheet
21.6 General Instructions for preparation of Balance sheet
21.7 Horizontal and Vertical form of Balance sheet
21.8 Illustrations
21.9 Summary
21.11 Exercises
21.1 INTRODUCTION:
There is no statutory obligation upon sole proprietorship or partnership firm to prepare final
accounts, but companies have a statutory obligation to prepare final accounts required by sec.
210 of the companies Act. A joint stock company must confirm to certain legal provisions as given
in the companies Act, 1956 in respect of forms and contents of the final accounts.
21.2 PREPARATION AND PRESENTATION OF THE FINAL ACCOUNTS:

Sections 210 and 211 of the companies Act govern the preparation of final accounts of a
company. Important provisions are as follows :
1. At every annual general meeting of the company, the Board of Directors of the company
shall lay before the company :
a) The balance sheet as at the end of the accounting period, and
b) a profit and loss account for the period.
2. The profit and loss account and the balance sheet of a company must give a true and
fair view of the state of affairs of the company. The balance sheet should be in the form
as given in part I of schedule VI. The profit and loss account should comply with the
requirements of part II of schedule VI to the companies Act.
21.3 FORM AND CONTENTS OF PROFIT & LOSS ACCOUNT :

The following special points should be kept in mind while preparing the profit and loss
account of a company.
1. In case of companies, it is not necessary to split the profit and loss account into three
sections Viz, trading account, profit and loss account and profit and loss appropriation
account. The profit and loss account may be prepared under the following two headings
i) profit and loss account
ii) profit and loss appropriation account.
2. Items which are of abnormal nature, Viz. loss on account of fire, profit or loss on sale of
machinery, penalty imposed by the government etc, should be disclosed separately
and not mixed up with any other item.
3. Any adjustment which related to previous years should preferably shown in the profit
and loss appropriation account.
4. In case of companies certain tax adjustments are required such as :
a. Tax deducted at source : A company is required to deduct tax from any amount
paid by it by way of interest, dividends, salaries to its employees. The following journal
entry is passed :
Interest on Debentures / Salaries A/C Dr
To Bank A/C
To Tax Deducted at source A/C
The profit and loss account is debited with the gross amount of salaries or interest. The
tax deducted is shown on the liabilities side of the balance sheet till it is finally paid by
the company to the government.
FINANCIAL ACCOUNT -II 21.3 Final Accounts of Companies
b. Advance payment of tax : The following entry is passed when tax is paid in advance.
Tax paid in Advance Account Dr
To Bank Account
c. Provision for taxation : A company makes provision for taxation in respect of profit
made during a particular accounting year. It is shown in the profit and loss Appropriation
account as it is an appropriation of profit. However, it has become customary these
days to show it in the profit and loss account.
The following entry is made :
profit & loss Account Dr
To provision for taxation
Provision for taxation appears as a liability till assessment in respect of that year is
finalised.
Illustration 1 :
The following are the extracts from the trial balance of a company on 31. December 2008:
Dr Cr
Rs Rs
Provision for taxation 20,000
Advance Tax paid for 2007 16,000
Advance Tax paid for 2008 20,000
Tax deducted at source 2008 2,000
Provision for tax 2007 4,000
Profit & loss Account Balance 2007 40,000
Assessment for the year 2007 was finalised during the year 2008. The final total tax liability
for that year was fixed at Rs. 24,000. The net profit earned by the company during 2008 before tax
amounts to Rs. 60,000. The company is in 50 percent tax bracket.
You are required to pass the necessary journal entries and show how the various items will
appear in the company's final accounts.
Solution :
JOURNAL ENTRIES
Dr Cr
Rs. Rs.
Profit and loss Appropriation A/C Dr 4,000

To provision for Taxation (2007) A/C 4,000
(Extra provision made for 2007)
Provision for Taxation (2007) A/C Dr 24,000

To Advance Tax (2007) A/C 16,000
To Tax payable (2007) A/C 8,000
( Advance tax paid for 2007 adjusted
against provision for tax for 2007 )
Profit and loss Account Dr 30,000

To provision for Taxation Account 30,000
( Provision for tax made for 2008)

for the year ending 31st Dec. 2008
Particulars Rs. Particulars Rs.
To provision for Taxation 30,000 By net profit before Tax 60,000
To Net profit after Tax 30,000 ______
60,000 60,000
Profit and loss Appropriation account

for the year ending 31st Dec. 2008
To provision for Taxation 2007 4,000 By Balance b/d 40,000
To Balance of profit taken to B/s 66,000 By Net profit after tax for 2008 30,000
70,000 70,000
Balance sheet
as on 31st Dec. 2008
Reserves & Surplus : Loans and Advances :
Profit & loss Account 66,000 Advance Tax paid 2008 20,000
Current liabilities and
provisions :
Provision for taxation 2008 30,000 Tax deducted at source (2008) 2,000
Tax deducted at source 2008 4,000
Tax payable 2007 8,000
5. Dividends : The term dividend refers to that part of the profits of a company which is
distributed among its shareholders. It may be of two types :
i. Interim Dividend : It is the dividend declared by the directors during the course of
the accounting year in respect of the same accounting year.
ii. Final Dividend : It is the dividend declared by the shareholders at " The annual
general meeting of the company which is recommended by the Board of Directors. On
declaration of dividend a company is required to deposit the amount of dividend payable
in a separate Dividend Bank Account.
The following are the accounting entries in respect of dividends :
Final Dividend :
1. On recommendation :
Profit & loss Appropriation A/C Dr
To proposed Dividend A/C
2. On declaration of dividend :
Profit Dividend A/C Dr
To Dividend payable A/C
To Income Tax / Tax deducted at source A/C.
3. On opening a separate bank account :
Dividend Bank A/C Dr
To Bank A/C
( with the net amount payable as dividend )
4. On payment of dividend :
Dividend payable A/C Dr
To Dividend Bank A/C
5. On payment to tax deducted at source :
Income Tax/ Tax Deducted at source A/C Dr
To Bank A/C
Interim Dividend :
On declaration of Interim dividend :
Interim Dividend Account Dr
To Interim dividend payable A/C
To Income Tax/ Tax deducted at source A/C
Other entries are same as explained above in case of final dividend.
At the end of the accounting year the amount of interim dividend will be transferred to
profit and loss appropriation account by means of the following entry.
Profit & loss appropriation A/C Dr
To Interim Dividend A/C
6. Transfer to reserves. The entry will be :
Profit & loss Appropriation A/C Dr
To general / Specific Reserve A/C
21.4 FEATURES OF PROFIT & LOSS APPROPRIATION A/C OF

COMPANIES :
The profit and loss appropriation section of the profit and loss account shows the
appropriation of profit and is popularly known as " below the line " It is prepared as follows :
To Transfer to reserve By Last year's Balance b/d
To Income tax for previous year By Net profit for the year b/d
year not provided for
To Interim Dividend By Amount with drawn form general
Reserve or any other Reserve.
To corporate dividend Tax By provision such as Income Tax
To surplus carried to Balance sheet By provision No longer required.
Dividend paid or declared are subject to corporate dividend tax @ 10% w.e.f from 1st june
1997.
Illustration 2 :
Pratima Ltd. carried forward balance of Rs. 2,05,000 in the profit and loss account for the
year ended on 31st March 2008. During the year 2008 - 09 it made a profit of Rs. 5,24,000 before
charging depreciation and manager's commission. Depreciation for the year 2008 - 09 amounted
to Rs. 84,000 and a commission of 5% on net profit before charging such commission was to be
paid to the manager. It is decided that following decisions be carried out.
a. Transfer Rs. 1,25,000 to the General Reserve
b. Tansfer Rs. 50,000 to the Dividend Equalisation Reserve.
c. Pay the year's dividend on Rs 5,00,000, 11% cumulative preference shares.
d. Pay 20% dividend on Rs. 6,00,000 Equity share capital.
e. Pay Rs. 7,700 dividend on tax - free pref. shares ( tax rate is 23 %)
f. Transfer Rs. 75,000 to Debenture Redemption Fund.
Prepare the profit and loss appropriation account showing the above appropriations.
Solution :
Profit and loss account of pratima Ltd.
for the year ending 31st March. 2009
To Depreciation 84,000 By profit for the year 5,24,000
To Managers commission
(5% of Rs. 5,24,000 - Rs 84,000 22,000
To Net profit C/d 4,18,000 _______
5,24,000 5,24,000
Profit and loss Appropriation account of Pratima Ltd.
for the year ending 31st March. 2009
To General reserve 1,25,000 By Balance b/d (Last year bal.) 2,05,000
To Dividend Equalisation By Net profit as per profit &
Reserve A/C 50,000 loss A/c 4,18,000
To proposed preference
share dividend A/c 55,000
To tax free proposed
preference dividend A/c
100
(7700 x ) 10,000
77
To proposed Equity dividend 1,20,000
To tax on dividend @ 10% 12,000
To debenture Redemption
fund account 75,000
To surplus carried to Balance
sheet 1,76,000 _______
6,23,000 6,23,000
21.5 FORM AND CONTENTS OF BALANCE SHEET :

Section 210 of the companies Act requries that at every annual general meeting of the
shareholder, the Board of Directors of the company shall lay before the company a balance sheet
as at the end of each trading period. It is laid down in section 211 (1) that every Balance sheet of a
company shall be prepared in the form given in part of the schedule VI of the companies act, 1956.
The objective of prescribing the form for the balance sheet in schedule VI is to make sure that
balance sheet exhibits a true and fair view of the state of affairs of the company.
The Balance sheet of a company shall be either in a horizontal form or a vertical form.
SCHEDVLE VI - PART I
( Sec 211)
A. Horizontal Form
Balance Sheet of ..................... as on .........................
Figures Figures Figures Figures
For the For the For the For the
Previous Liabilities Current Previous Assest Current
year year year year
Rs. Rs. Rs. Rs.
FINANCIAL ACCOUNT -II
Share Capital Fixed assets :

Authorised ....... shares of
Rs...... each Distinguishing as far as
possible between expenditure
Issued : ( Distinguishing upon :
between the various classes of a. good will
captial and stating the particulars
b. land
specified below, in respect of
21.9
c. buildings
each class).... shares of Rs......
each. d. leaseholds
e. railway sidings
Subscribed : ( Distinguishing f. plant and machinery
between the various classes of g. furniture and fittings
capital and stating the particulars
h. development of property
specified below in respect of
i. patents, trade marks
each class)..... .......... shares of
and designs
Rs.......... each ........ Rs.
.............. called up. j. live stock, and
k. vehicles etc.
( of the above shares ...... shares ( Under each head the original
are allotted as fully paid up cost and the additions there to
pursuant to a contract without and deductions there from
payments being received in during the year, and the total
cash). depreciations written off or
Final Accounts of Companies
provided up to the end of the

(of the above shares......... year is to be stated.
shares are allotted as fully paid Depreciation written off or
up by way of bonus shares). provided shall be allotted
under the different assets
( Specify the source from which heads and deducted in arriving
bonus shares are issued. e.g : at the value of fixed assets.
Capitalisation of profits or
In every case where
reserves or from shares
the original cost cannot be
premium account)
ascertained, without
Less : Calls Unpaid : unreasonable expense or
delay, the valuation shown by
i By Directors the books is to be given. For
Centre for Distance Education
ii By others the purpose of this paragraph,

such valuation shall be the net
Add : Forfeited shares : amount at which an asset
stood in the company's books
( amount originally paid up ) at the commencement of this
( any capital profit on reissue of Act after deduction of the
21.10
forfeited shares should be amounts previously provided

transferred to capital reserve). or written off for depreciation
or diminition in values and
Notes : where any such asset is sold,
the amount of sale proceeds
1. Terms of redemption or
shall be shown as deduction.
conversion ( if any )
redeemable preference W here sums have
capital are to be stated been written off on a reduction
together with earliest date of capital or a revaluation of
of redemption or assets, every balance sheet,
conversion. (after the first balance sheet)
subsequent to the reduction or
2. Particulars of any option
revaluation shall show the
on unissued share capital
reduced figures with the date
are to be specified.
of the reduction in places of
the original cost.
Acharya Nagarjuna University
Each balance sheet
3. Particulars to the different for the first five years
classes of preference subsequent to the date of the
share are to be given. reduction, shall show also the
amount of the reduction made.
These particulars are to be
given along with share capital. Similarly, where sums
have been added by writing up
In the case of subsidiary
the assets,every balance
companies, the number of
sheet subsequent to such
shares held by the holding
writing up shall show the
company as well as by the

increased figures with the
ultimate holding company and its
date of the increase in place
subsidiaries shall be separately
of the original cost. Each
stated in respect of subscribed
balance sheet for the first five
share capital. The auditor is not
years subsequent to the date
required to certify the correctness
of the writing up shall also
of such share holdings as
show the amount of increase
certified by the management )
made.
21.11
Reserves and surplus :

Investments :
1. Capital Reserve
Showing nature of
2. Capital Redemption investments and mode of
reserve. valuation, for example, cost or
market value, and
3. Share premium account distinguishing between :
(showing details of its
utilisation in the manner 1. Investments in
provided in section 78 in government or trust
the year of utilisation ) securities.
4. Other reserves specifying 2. Investments in shares,

the nature of each reserve debentures or bonds.
and the amount in respect
3. Immovable properties
there of .
4. Investments in the
less: Debit balance in profit
capital of partnership
and loss account (if any).
firm
( The debit balance in the
profit and loss account shall 5. Balance of unutilised
be shown as a deduction money raised by
from the uncommitted issues.
reserves, if any) Current assets, loans and
5. Surplus i.e. balance in Advances :
profit and loss account
A. Current assets:
after providing for
proposed allocations 1. Interest Accurued on
namely : Investments
Dividend, Bonus or
2. stores and spare parts
reserves.
6. Proposed additions to 3. Loose Tools.
reserves. 4. Stock - in - Trade
21.12
7. Sinking Fund.
5. Work - in - Progress
Secured loans :
6. Sundry Debtors.
1. Debentures.
a. Debts outstanding
2. Loans and Advances from
for a period exceeding
banks
six months
3. Loans and Advances for
Subsidiaries b. Other debts
4. Other loans and Less provision

Advances.
In regard to sundry
( Loans from directors or debtors particulars to be given
manager should be separately of :
shown separately)
a. debts considered good
The Nature of security
and in respect of which

should be specified.
Unsecured Loans : the company is fully
secured
1. Fixed Deposits
2. Loans and Advances from b. debts considered good
subsidiaries for which the company
holds no security other
3. Short - term loans and than the debtor's
Advances : personal security and
a. From banks.
c. debts considered
b. From others. doubtful or bad.
4. Other loans and 7. A. cash balance on

Advances : hand
a. From banks.
7. B. Bank Balance
b. From others.
a. W ith scheduled
Current Liabilities and banks
provisions :
b. With others.
21.13
A. Current Liabilities :
1. Acceptances B. Loans and Advances :
2. Sundry creditors. 8. A. Advances and loans
i) Total outstanding dues to subsidiaries.
of small scale industrial 8. B. Advances and loans
undertakings to partnership firm in
ii) Total outstanding dues which the company or
of creditors other than any of its subsidiaries
small scale industrial is a partner.
undertakings
9. Bills of exchange
3. Subsidiary companies
10. Advances recoverable
4. Advance payments and in cash or in kind or for
un expired discounts for value to be received.
the portion for which value
has still to be given i.e. in 11. Balances with
the case of the following customs, port trust etc.
companies :Newspaper,
Fire Insurance, clubs Miscellaneous Expenditure
banking etc. 1. Preliminary expenses
5. Unclaimed Dividends
2. Expenses including
6. Other liabilities ( if any ) commission or
7. Interest accrued but not brokerage, under
due on loans writing
B. Provisions : 3. Discount allowed on

the issue of shares or

8. Provision for Taxation
debentures.
9. Proposed Dividends
4. Interest paid out of
10. For contingencies capital during
11. For providend fund construction
scheme
21.14
5. D e v e l o p m e n t
12. For Insurance, pension expendiutre not
and similar staff benefit adjusted
schemes.
6. Other sums
13. Other provisions.
profit and loss account.
A foot note to the balance
sheet may be added to
show separately.
1. Claim against the
company not
acknowledged as debts.
2. uncalled liability on
shares partly paid.
3. Arrears of fixed
cumulative dividends.
VERTICAL FORM OF BALANCE SHEET

Name of the company_________________________________________________
Balance sheet as at _____________________________________________________
(I) Sources of Funds Shedule Figures as Figures as

No. at the end at the end
of current of previous
Year Year
1. Shareholder's Funds
(a) Capital __________ ___________ __________
(b) Reserves and surplus __________ ___________ __________
2. Loan Funds
(a) Secured loans __________ ___________ __________
(b) Unsecured loans __________ ___________ __________
(II) Application of Funds

1. Fixed Assets
(a) Gross Blocks __________ ___________ __________
(b) Less Depreciation __________ ___________ __________
(c) Net Block __________ ___________ __________
(d) Capital work in progress __________ ___________ __________
2. Investments
3. Current Assets,
Loan & Advances
(a) Inventories __________ ___________ __________
(b) Sundry debtors __________ ___________ __________
(c) cash and bank balances __________ ___________ __________
(d) other current Assets __________ ___________ __________
Less : Current Liabilities
and Provisions
(a) Liabilities __________ ___________ __________
(b) Provisions __________ ___________ __________
Net current Assets
3. (a) Miscellaneous expenditure
to the extent not written off or adjusted __________ ___________ __________
(b) Profit & Loss Account __________ ___________ __________
TOTAL _________________________________________________________________
Notes :
1. Details under each of the above items be given in seperate schedules. The schedules
shall incorporate all the information required to be given under part 1A of schedule VI
read with notes containing general instruction for preparation of balance sheet
2. The schedules referred to above, accounting policies and explanatory notes that
may be attached shall form an integral part of the balance sheet.
3. The figures in the balance sheet may be rounded off to the nearest '000 or '00 as
may be convinient or may be expressed in letters of decimals of thousands.
4. A footnote to the balance sheet may be added to show seperately contingent liabilities.
21.8. ILLUSTRATIONS :
The following is the trial balance of suraj Co. Ltd. as at 30th June 2008:
Rs Rs
Stock, 30 - 06 - 2008 1,50,000
Sales 7,00,000
Purchases 4,90,000
Wages 1,00,000
Discount 10,000
Furniture and Fittings 34,000
Salaries 15,000
Rent 9,900
Sundry expenses 14,100
Profit and loss appropriation
Account ( 30 - 06 - 2007) 30,060
Dividend Paid 18,000
Share capital 2,00,000
Debtors & Creditors 75,000 35,000
Plant & Machinery 58,000
Cash and Bank 32,400
Reserve 31,000
Patents and Trade Marks 9,660 ________
10,06,060 10,06,060
Prepare trading account, profit and loss account, profit and loss appropriation account for
the year ended 30-06-2008 and balance sheet as on that date. Take into consideration the following
adjustments.
1. Stock on 30 - 06 - 2008 was valued at Rs. 1,64,000
2. Depreciation on fixed assets @ 10%
3. Make a provision for income - tax @ 50 %.
Solution :
SURAJ Co., Ltd.
Trading and profit and loss account
Rs. Rs.
To opening stock 1,50,000 By sales 7,00,000
To purchases 4,90,000 By closing stock 1,64,000
To wages 1,00,000
To gross profit c/d 1,24,000 _______
8,64,000 8,64,000
To salaries 1,500 By gross profit b/d 1,24,000
To rent 9,900 By Discount 10,000
To sundry expenses 14,100
To Depreciation on :
Plant & Machinery 5,800
Patents & Trade marks 966
Furniture & fittings 3,400
To Pro. for income Tax 42,417
To Net profit c/d 42,417 _______
1,34,000 1,34,000
Balance sheet of Suraj Co. Ltd.
as on 31-06-2008
LIabilities Rs. Assets Rs.
Share capital 2,00,000 Fixed Assets
Reserves & Surplus : Plant and Machinery 58,000
Reserve 31,000 less : Depreciation 5,800 52,200
Profit & loss Account 54,476 Furniture & fittings 34,000
Current Liabilities and less : Depreciation 3,400 30,600
Provisions :
Creditors 35,000 Patents & Trade marks 9,660
Provision for tax 42,417 less : Depreciation 966 8694
Current Assets :
Stock 1,64,000
Debotrs 75,000
_______ Cash at bank 32,400
3,62,894 3,62,894
Illustration 4 :
The following balances have been extracted from the books of sai and sreya limited as on
31st March, 2008 :
Rs. Rs.
Freehold land 4,00,000 Income from investments 4,000
Buildings 1,50,000 Provision for
doubtful debt (1-4-2007) 4,000
Debtors 1,00,000 creditors 60,000
Stock (31-3-2008) 80,000 Provision for Depreciation
(1-4-2007)
Furniture 40,000
Cash at bank 10,000
Cash in hand 2,000
Cost of goods sold 6,00,000 Buildings 10,000
Salaries and wages 30,000 Furniture 8,000
Mis. Expenses 16,000 Suspense 5,000
Investments in shares 3,60,000 Equity share capital 7,35,000
Interest 6,000 6% cum.pref. share cap. 1,60,000
Bad debts 2,000 Share premium 20,000
Repairs 3,000 Bank over draft 1,00,000
Advance payment of income tax 12,000 sales 3,50,000
________ P & L A/C ( 1-4-2007) 5,000
18,11,000 18,11,000
The following further particulars are available :
1. The land was revalued on 1st jan. 2008 at Rs. 6,00,000 by an expert valuer but no effect
has been given in the books although the directors have decided to adjust the revalued
amount.
2. Provision for doubtful debt is to be adjusted to 5% on the amount of debtors.
3. Equity share capital is composed of Rs.1 shares 72,800 fully paid and 1000 on which
final call of Rs. 3 remains unpaid.
4. Suspense amount represents money received from the new allottee for re-issue of
1000 shares forfeited during the year for non payment of the final call, but no entry for
adjustment there of has been passed.
5. Provision for taxation is to be made at 45 percent.
6. Market value of investment was Rs. 3,70,000 on 31st March 2008.
7. The company is managed by the directors who are entitled to a remuneration calculated
at 3 percent of the annual net profits.
8. Depreciation is to be charged on
Building at 2 percent
Furniture at 10 percent
9. The land and buildings of the company are mortgaged in favour of the bank as security
for overdraft sanctioned upto a limit of Rs. 5,00,000
10. Dividend on cum. pref. shares were in arrears for 5 years upto 31st March 2008. The
directors have recommended payment of dividend for two years.
You are required to prepare the profit and loss account for the year ended 31st March 2008
and a balance sheet as on that date after making such assumptions as may be considered
necessary. Ignore previous year's figures.
Solution :
Sai and Sreya limited
Rs. Rs.
To cost of goods sold 6,00,000 By sales 7,00,000
To gross profit c/d 1,00,000 _______
7,00,000 7,00,000
To salaries & wages 30,000 By gross profit b/d 1,00,000

To Mis. expenses 16,000 By Income from investments 4,000
To interest 6,000
To Bad debts 2,000
Add Provision 5,000
7,000
less existing provision 4,000 3,000
To Repairs 3,000
To Directors remuneration 1,230
To Depreciation :
Builidng 2,800
To provision for tax 17,460
To Net profit c/d 21,310 _______
1,04,000 1,04,000
Profit and loss Appropriation A/C
Rs. Rs.
To proposed dividend By balance b/d 5,000
(preference shares ) 19,200 By Net profit 21,310
To Balance c/d 7,110 _____
26,310 26,310
Sai and Sreya limited
Balance sheet
as on 31- 03-2008
Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital Authorised Fixed Assets
6% cumulative pref. land at cost 4,00,000
shares of Rs. 100 each XXXX Add Appreciation 2,00,000 6,00,000
issued, subscribed and Buildings at cost 1,50,000
and paid up less depreciation 12,800 1,37,200
73,800 equity shares furniture at cost 40,000
of Rs. 10 each fully Less : Depreciaton 11,200 28,800
paid up 7,38,000
1600,6% cum. pref
shares of Rs.100 Investments (at cost)
each fully paid up 1,60,000 In fully paid shares
8,98,000 (Market value
Reserves & surplus : Rs. 3,70,000 ) 3,60,000
Share premium 20,000 Current assets,
Capital reserve : Loans and advances:
Profit on reissue of A. current Assets
Forfeited shares 2,000 stock valued at cost 80,000
Appreciation in land 2,00,000 2,02,000 Debtors (unsecured)
profit and loss exceeding 6months) 1,00,000
Account 7,110
Secured loan : Less : provision
Bank overdraft for doublful debts 5,000 95,000
Secured by mortgage Cash at Bank 10,000
of co's land & Buildings 1,00,000 Cash in hand 2,000 8,000
Current Liabilities B. Loans & advances
& provisions:
A. current liabilities Income tax paid in
sundry creditors 6,1230 in advance 12,000
B. Provisions
Provisions for
taxation 17,460
Proposed dividend 19,200 36,660 ________
13,25,000 13,25,000
Contingent liability arrears of cummulative preference dividend for 3 years Rs. 28,800.
Working Notes :
1. Calculation of Net profit for director's remuneration :
Profit before provision for taxation, provision for bad debts but after writing off
Bad debts Rs. 4,000
Director's remuneration 3 % thereof 1,230
2. Depreciation has been calculated on written down value.
3. Calls in arrear on 1000 shares @ Rs. 3 per share amounts to Rs. 3,000, amount
received against these shares from new allottee is Rs. 5,000. The difference has
been credited to capital reserve.
21.9 . SUMMARY :
Companies have a statutory obligation to prepare final accounts. Sections 210 and 211 of
the companies Act govern the preparation of final accounts. The balance sheet of a company shall
be either in a horizontal form or a vertical form.
21.10 . MODEL QUESTIONS :

1. Give a specimen form of balance sheet and profit and loss account of a company
according to companies Act.
2. Give an imaginary form of the profit and loss appropriation account of a limited
company.
3. Write short notes on :
a. provisions for taxation and dividends.
b. corporate dividend tax
4. Write down the important provisions of sec 210 and 211 of companie's Act for
preparation and presentation of final accounts.
5. Breifly explain the terms Interim dividend and final dividend.
21.11 EXERCISES :
1. Following balances are extracted on 31st march 2008 from the books of Rao company ltd :
Rs. Rs.
Factory premises at cost 4,50,000 Share capital
Plant & Machinery at cost 3,49,160 30,000 7% preference shares
Motor lorries at cost 73,000 Shares of Rs. 10 each 3,00,000
Sundry Debtors 1,21,780 60,000 shares (equity)
Bad debts written off 2,850 of Rs. 10 each 6,00,000
Rent, Rates and taxes 28,400 Profit and loss A/C 16,240
Advertisment 19,500 Gross profit for the year 2,46,640
Cash in hand and at Bank 68,500 Provision for doubtful debts 9,000
Directors fees 3,600 Sundry creditors 1,29,640
Audit fees 10,000 Transfer fees 110
Stock on 31-3-2002 1,14,600 Accrued wages 12,840
Rent & taxes paid in advances 7,980 staff benevolent fund 17,900
Salaries and wages 32,000
Dividends paid on preference
shares 21,000
Dividend on equity shares 15,000
Discount on issue of shares 15,000 ________
13,32,370 13,32,370
The provision for doubtful debts is to be made upto Rs. 10,200. The factor premises, plant
and Machinery and motor lorries are to be depreciated by 3%, 15% and 20% respectively. Authorised
capital of the company is Rs. 10,00,000 divided into 1,00,000 shares of Rs. 10 each. You are
required to prepare.
i. profit & loss account for the year and 31 - 3- 2008.
ii. A balance sheet as at 31 -3-2008 in the form prescribed under the companies Act,
1986. previous years figures are not required and also ignore taxation.
2. The following trial balance has been extracted from the books of ZYX Ltd. as on 31st march
2008. You are required to prepare profit and loss account and balance sheet as on that date.
Debit Rs. Credit Rs.
Land & building 34,000 Share capital 1,00,000
Furniture 6,000 General Reserve 5,000
Plant & Machinery 15,000 10 % debentures 40,000
stock on 31st March 2008 75,000 Sundry creditors 4,000
Salaries 25,000 Gross profit 75,000
Debtors 10,000 Interest on Investments 1,000
5% Investments 20,000 Profit & loss A/C on 1st April 35,000
Bank 5,000
Advance income tax 2,000
Debentures interest 2,000
Directors fees 7,000
Rent, Rates and insurance 24,000
Good will 35,000 _______
2,60,000 2,60,000
Depreciate the following assets :
Land & Building at 10% p.a, plant & Machinery 8% p.a, provision for bad debts at 6%
The directors have recommended :
a. Transfer Rs. 3,000 to general reserve A/C
b. Equity dividend at 10% on teh paid up capital
c. Provision for income tax for Rs. 4,000
3. The following information is extracted from lakshmi ltd. on 31st march, 2008. You are required
to prepare profit and loss account and Balance sheet as on that date.
Factory premises 4,50,000 Share capital (9000 shares) 9,00,000
Plant & Machinery 3,60,000
Motor lorries 1,40,000 Profit & loss A/C 24,000
Sundry debtors 1,20,000 Gross profit for the year 2,60,000
Bad debts written off 4,000 Provision for doubtful debts 5,000
Rent & Taxes 25,000
Advertisment 10,000 Sundry creditors 75,000
Bank 20,000 Transfer fee 8,000
Director's fee 5,000 Out standing salaries 5,000
stock 31st march 2008 1,40,000 General Reserve 33,000
Salaries , wages 30,000
Dividend paid interim 6,000
13,10,000 13,10,000
The provision for doubtful debts is to be made upto Rs. 15,000/- factory premises and
plant and machinery are to be depreciated at 10% p.a. Provide for income tax Rs. 20,000/- final
dividend at Rs. 5/- per share is payable.
4. From the following trial balance of Naidu company ltd. prepare profit and loss appropriation
account and balance sheet after making the following adjustment, as per compaines Act-
land & Building 50,000 Profit & loss appropriation A/C 7,000
Machinery 40,000 Profit & loss A/C (for the
Current year 31,000
Interim dividend 6,000
stock 34,000 Share capital 1,00,000
Debtors 25,000 Creditors 10,000
Bank 15,000 Reserve fund 17,000
Calls in arrears 10,000 Employes provident fund 8,000
Investments 50,000 Share premium account
Debentures 50,000
2,30,000 2,30,000
Transfer Rs. 10,000 to reserve fund, Rs. 5,000 to employees provident fund and provide
Rs. 5,000 towards dividend on equity shares.
5. The following balances are extracted from the books of Tirupathi earth movers ltd. as on
31-3-2008.
stock 1-4-2007 3,77,000 Profit and loss Account 66,170
Fuel and power 13,390 Sales 4,74,500
Salaries and wages 2,82,100 Share capital 6,50,000
Purchases 3,01,860 provision for tax 19,500
Rent and taxes 9,750 Provision for bad debts 8,190
Insurance 13,000 Bank loan (secured)
Prepaid expenses 35,750 on fixed assets 1,62,500
Repairs to Buildings 3,900 General Reserve 1,30,000
Repairs to Machinery 23,400 Unclaimed dividends 2,080
Managerial commission 13,650 sundry creditors 1,31,300
Directors fees 780 Bills payable 41,600
Land and Buildings 6,17,500 Out standing expenses 97,500
Machinery & plant 4,55,000 Managerial commission
outstanding 2,340
Furniture 11,050 Depreciation Account 8,11,200
Office equipment 5,200 Mis. Receipts 780
Motor vehicles 29,250
sundry debtors 3,77,000
Cash in hand 4,225
Cash at Bank 23,855 ________
23,97,660 23,97,660
Prepare trading and profit and loss Account for the year ended 31-3-2008 and a balance
sheets as on that date in the prescribed form, taking the following into consideration -
i. stock at cost on 31 - 3- 2008 was Rs. 6,60,400
ii. Provide Rs. 26,000 for further taxation
iii. Depreciation written off was as follows as on 31 - 3- 2007 land and buildings Rs.
3,75,960. Machinery & plant Rs. 4,02,090, Furniture Rs. 9,750 office equipment Rs.
4,550 and Motor vehicles Rs. 18,850.
iv. No depreciation should be provided for 2007 - 08
v. All amounts due to the company by the debtors are unsecured. Debts for Rs. 8,190
are over six months old of which Rs. 2,600 are bad and to be written off now, the rest
are doubtful. All other debts are considered good.
vi. The directors transfered Rs. 78,000 to general reserve and recommended a dividend
of Rs.750/- per share for the year ended 31-3-2008.
vii. The nominal capital of the company is 13,000 shares of Rs. 100 each all of which have
been issued and subscribed for and Rs. 50 per share paid up.
6. The following is the trial balance of Pavan and Pavani co. Ltd. as at 30th June 2008. Prepare
trading and profit and loss account and balance sheet.
Rs. Rs.
Authorised capital 5,00,000
50,000 shares of Rs. 10 share
Subscribed capital
10,000 shares of Rs. 10 per share 1,00,000
Call in arrears 6,400
Land 10,000
Buildings 25,000
Furniture and fixtures 3,200
Carriage inwards 2,300
Wages 21,400
Salaries 4,600
Bad debt provision 1.7.07 1,400
Sales return and sales 1,700 80,000
Bank Charges 100
Coal, gas and water 700
Rates and taxes 800
Preliminary expenses 500
Purchases and purchases returs 50,000 3,400
Bills receivable and bills payable 1,200 1,000
Discount on issue of debenture 1,000
Sundry debtors and creditors 42,800 13,200
Stock 1.7.2007 25,000
Fire insurance 400
Cash in hand and at bank 15,500
Share premium 6,000
General reserve 24,000
Discount 500
_______ _______
2,30,000 2,30,000
Adjustments :
1. Charge depreciation on buildings at 2 1/2%, plant and machinery at 10% and furniture
and fixtures @ 10%
2. Make a provision of 5% on sundry debtors for bad debts.
3. Unexpired fire insurance Rs. 120
4. Provide the following outstanding liabilities, wages Rs. 3,200, Salaries Rs. 500, Rent,
rates and taxes Rs. 235
5. Write off preliminary expenses
6. The value of stock as on 30th june 2008 was Rs. 30,000.
7. The following is the trial balance of Raji and co. as on 31.12.2008 prepare profit and loss
account and balance sheet of the company.
Particulars Dr. Cr.
Rs. Rs.
Stock (1.1.2002) 7,500
Sales 25,000
Purchases 24,500
Wages 5,000
Discounts 700
Salaries 750
Rent 495
General expenses (Including insurance) 1,705
Profit and loss Account (1.1.2002) 1,503
Dividend paid 900
Capital 1,000 shares of Rs. 10 each 10,000
Debtors and creditors 3,750 1,750
Machinery 2,900
Cash in hand 1,620
Reserves 1,550
Bad debts 483 ______
50,303 50,303
a. Stock on 31.12.2008 Rs. 8,200
b. Depreciate machinery at the rate of 10% per annum
c. provide 5% discount on debtors
d. Allow 2 1/2% discount on creditors
e. One month rent at the rate of Rs. 550 per annum was due on 31.3.2009
f. Six months insurance was unexpired at Rs. 75 per annum
g. Provide managing Directors commission at 15% on the net profits before deducting
his commission.
8. Radha co. ltd. is a company with an authorised capital of Rs. 5,00,000 divided into 5,000 equity
shares of Rs. 100 each on 31 - 3 - 2008, 2,500 shares were fully called up. The following are
the balances extracted from the ledger of the company as on 31 - 3-2008.
Rs. Rs.
Stock 50,000 Advertising 14,300
Sales 4,25,000 Debtors 38,700
Purchases 3,00,000 Creditors 35,200
Wages (productive) 70,000 Plant and Machinery 80,500
Discount allowed 4,200 Furniture 17,100
Discount Received 3,150 Cash & Bank 1,34,700
Insurance upto 30-6-08 6,720 Reserve 25,000
Salaries 18,500 Loan from
Rent 6,000 managing Director 15,700
General expenses 8,950 Bad debts 3,200
profit and loss account 6,220 Call in Arrears 5,000
Printing and stationary 2,400
You are required to prepare trading and profit and loss account for the year ended 31-3-
2008 and balance sheet as on that date of the company.
The following further information is given :
1. Closing stock Rs. 91,500.
2. Depreciation to be charged on plant and Machinery and funiture at 15% and 10%
respectively.
3. Outstanding liabilities - wages Rs. 5,200 ; salaries Rs. 1,200 and Rent Rs. 600.
4. Dividend @ 5% on paid up share capital to be provided.
10. The following is the trial balance of vanaja and co as on 31.12.2008 prepare profit and loss
account and balance sheet of the compnay.
Particulars Rs. Rs.
Stock (1.1.2001) 7,500
Sales 25,000
Purchases 24,500
Wages 5,000
Discounts 700
Salaries 750
Rent 495
General expenses (Including insurance) 1,705
Profit and loss Account (1.1.2001) 1,503
Dividend paid 900
Capital 1,000 shares of Rs. 10 each 10,000
Debtors and creditors 3,750 1,750
Machinery 2,900
Cash in hand 1,620
Reserves 1,550
Bad debts 483
______ ______
50,303 50,303
a. Stock on 31.12.2008 Rs. 8,200
b. Depreciate machinery at the rate of 10% per annum
c. provide 5% discount on debtors
d. Allow 2 1/2% discount on creditors
e. One month rent at the rate of Rs. 550 per annum was due on 31.3.2008
f. Six months insurance was unexpired at Rs. 75 per annum
g. Provide managing Director's commission at 15% on the net profits before deducting
his commission.

2. An introduction to Accountancy - Dr. S.N. Maheswari & Sk. Maheswari
3. Financial Accounting - R.L. Gupta & V.K. Gupta
6. Advanced Accounting - S.P. Jain & K.L. Narang
Dr. CH. Suravinda
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DBC22 Financial Accounting - II

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Financial Accounting - II 1.

1.2 Explanation of Terms :

1. Minium Rent or Dead Rent or Fixed Rent :

3. Recouping short workings :

The short working clause thus may permit the lessee :

a. to carry forward the short workings indefinitely or

1.3 Lease premium in addition to Royalty :

1.4. Accounting treatment :

1.5 Accounting Entries in the Books of Lessee :

1. If minimum Rent account is not opened in the books.

i. When production is less than the minimum rent.

Royalty account Dr (with actual royalty)

short working account Dr (with the shortage)

To Landlord account (with minimum rent)

(Being minimum rent payable)

ii. When royalty paid :

Land lord account Dr (with minimum rent)

(Being minimum rent paid)

iii. When Royalty is transferred :

Profit and loss account

To Royalty account (with actual Royalty)

(Being Royalty transferred to P&L A/c.)

2. If minimum Rent account is opened in the books :

i.. Minimum Rent account Dr

To Land lord account.

(Being minimum rent payable to Landlord)

short workings account Dr.

To Minimum Rent account.

(Being actual Royalties and short workings recorded)

iii. Landlord account Dr.

(Being Minimum rent paid).

iv. Profit and loss or production account Dr

(Being Royalties amount transferred to P&L A/c.)

These entries will be repeated every year.

Year Production Royalty Minimum Short Surplus S.W. S.W. C.V.K.

In tonnes Rs. Rent Workings Recouped not co

2002 6,000 3,000 20,000 17,000 ----- --- ----- 20,000

2003 36,000 18,000 2,000 ----- ----- ----- 20,000

2004 48,000 24,000 ----- 4,000 4,000 ----- 20,000

2005 60,000 30,000 ------ 10,000 10,000 3,000 20,000

2006 64,000 32,000 ----- 12,000 2,000 ----- 30,000

In the books of visu coal co. Ltd.

1st Method : When there is no ‘Minimum rent’ Account

Date Particulars L.F. Debit Credit

2002 Royalty Account Dr 3,000

Short workings Account Dr 17,000

To M/s C.V.K. Company 20,000

(Being Minimum rent payable

as Royalty is less than Minimum rent)

M/s C.V.K. Company Account Dr 20,000

To Bank account 20,000

(Being minimum Rent paid)

Production Account Dr 3,000

To Royalty Account. 3,000

(Being Royalty transferred to

Production Account) 18,000

Short working Account Dr.

(Being Minimum rent payable as

Royalty is less than minimum Rent)