Advanced Financial Accounting: Directorate of Distance & Continuing Education

DIRECTORATE OF DISTANCE
&
CONTINUING EDUCATION
ADVANCED FINANCIAL
ACCOUNTING
EDITED BY
Dr.B.JARINAA M.COM.,M.Phil.,Ph.D
ASSISTANT PROFESSOR (T)
DEPARTMENT OF COMMERCE
MANONMANIAM SUNDARANAR UNIVERISTY
TIRUNELVELI
II B. COM (III SEMESTER) UNDER CBCS
PART III-MAJOR CORE-5
ADVANCED FINANCIAL ACCOUNTING
Unit 1 :
Branch Accounting – Debtor’s system -Invoice Price Method (excluding stock and
Debtor’s system) – Departmental accounts -Department trading, profit and loss accounts –
Departmental transfers.
Unit 2 :
Partnership – Past adjustment and guarantee – admission of a partner – Revaluation
account – adjustment regarding goodwill -Adjustment regarding capital.
Unit 3
Retirement -Death of a Partner – Retirement and admission -Death of Partner – Retiring
Partner’s loan – joint life policy.
Unit 4
Dissolution of partnership – Accounting Procedure – Insolvency of a partner, two
partners and all partners – Garner Vs Murray rule
Unit 5
Amalgamation of firms – sale to a company – Gradual realisation of assets and piecemeal
Distribution – Maximum loss method -amalgamation of firms
Text &Reference Books

1. S.P Jain & K.L Narang ,Advance Accountancy ,Kalyani Publishers,New Delhi.
2. R.L Gupta and M.Radhaswamy ,Advanced Accountancy ,Sultan Chand &
Sons,New Delhi
3. M.C.Shukal and T.S.Grewal ,Advanced accountancy ,Himalaya Publishing House
,Mumbai
4. T .S Reddy & A.Murthy,Advance Accountancy ,Margham ,Publications,Chennai.
ACCOUNTING FOR BRANCHES
INTRODUCTION
A branch can be described as any establishment carrying on either the same or substantially the same
activity as that carried on by head office of the company. It must also be noted that the concept of a
branch means existence of a head office;for there can be no branch without a head office - the
principal place of business. From the accounting point of view, branches may be classified as
follows:
Inland Branches which can be further classified as:
Independent Branches which maintain independent accounting records
Dependent Branches for which whole accounting records are kept at Head Office
Foreign Branches
DISTINCTION BETWEEN BRANCH ACCOUNTS AND DEPARTMENTALACCOUNTS
DEPENDENT BRANCHES
When the business policies and the administration of a branch are wholly controlled by the head
office and its accounts also are maintained by it the branch is described as Dependent branch.
Branch accounts, in such a case, are maintained at the head office out of reports and returns
received from the branch. Some of the significant types of branches that are operated in this
manner are described below:
A branch set up merely for booking orders that are executed by the head office. Such a branch only
transmits orders to the head office;
A branch established at a commercial center for the sale of goods supplied by the head office, and
under its direction all collections are made by the H.O.; and
A branch for the retail sale of goods, supplied by the head office.
Accounting in the case of first two types is simple. Only a record of expenses incurred at the
branch has to be maintained.
But however, a retail branch is essentially a sale agency that principally sells goods supplied by
the head office for cash and, if so authorized, also on credit to approved customers. Generally, cash
collected is deposited into a local bank tothe credit of the head office and the head office issues
cheques thereon for meeting the expenses of the branch. In addition, the Branch Manager is provided
with a ‘float’ for petty expenses which is replenished from time to time on animprest basis. If,
1
however, the branch also sells certain lines of goods, directly purchased by it, the branch retains a
part of the sale proceeds to pay for the goods so purchased.
METHODS OF CHARGING GOODS TO BRANCHES
Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in caseof retail
branches, at wholesale price; or (4) arbitrage price.
Selling price method is adopted where the goods would be sold at a fixed price by the branch. It
is suitable for dealers in tea, petrol, ghee, etc. In this way, greater control can be exercised over the
working of a branch in as much as that the branch balance in the head office books would always
be composed of the value of unsold stock at the branch and remittances or goods in transit. The
arbitrary price method is usually adopted if the selling price is not known or when it is not considered
desirable to disclose to the branch manager the profit made by the branch.
ACCOUNTING FOR DEPENDENT BRANCHES
Dependent branch does not maintain a complete record of its transactions. The Head office may
maintain accounts of dependent branches in any of the following methods:
Methods of maintaining accounts of Dependent Branches
• If Goods are invoiced at cost or selling price: Debtors Method; Stock and Debtors
Method; Trading and profit and loss account method (Final Accounts method)
• If Goods are invoiced at wholesale price: Whole Sale branch method
When goods are invoiced at cost

If goods are invoiced to the branch at cost, the trading results of branch can be ascertained by following
any of the three methods: (i) Debtors Method, (ii)Stock and Debtors method, (iii) Trading and Profit and
Loss Account (Final Accounts) Method.
For finding out the trading results of branch, it is assumed that the branch is an entity separate from
the head office. On the basis, a Branch Account is stated in the head office books to which the
price of goods or services provided or expenses paid out are debited and correspondingly, the
value of benefits and cash received from the branch are credited.
Debtors method
This method of accounting is suitable for small sized branches. Under this method, separate
branch account is maintained for each branch to compute profit or loss made by each branch. The
opening balance of stock, debtors (if any), petty cash (if any), are debited to the Branch Account;
the cost of goods sent to branch as well as expenses of the branch paid by the head office,e.g.,
salaries, rent, insurance, etc., are also debited to it. Conversely, amounts remitted by the branch and
the cost of goods returned by the branch are credited. At the end of the year, the value of unsold
stock, the total of customers’ balances outstanding and that of petty cash are brought into the
branch accounton the credit side and then the branch account will reveal profit or loss; Debit ‘balance’
will be the loss suffered by the working of the branch and vice versa. If the branch is allowed to
make small purchases of goods locally as well as to incur expenses out of its cash receipts, it will be
necessary for the branch to supply tothe head office a copy of the Cash Account, showing details
2
of cash collections and disbursements. To illustrate the various entries which are made in the Branch
Account, the proforma of a Branch Account is shown below:
Proforma Branch Account
Particulars Amount Particular Amount

To Balance b/d By Bank A/c (Cash remitted)
Cash By Return to H.O.
Stock
Debtors By Balance c/d
Petty Cash Cash
Fixed Assets Stock
Prepaid Expenses Debtors
To Goods sent to Branch Petty Cash
To Bank A/c Fixed Assets
Salaries Prepaid Expenses
Rent
Sundry Expenses By Profit and Loss A/c—Loss
To Profit & Loss A/c—Profit (if debit side is larger)
(if credit side is larger)
Note:
1.Having credited the Branch Account by the actual cash received from debtors, it would
be wrong to debit the Branch Account, in respect of discount or allowances to debtors.
2.The accuracy of the trading results as disclosed by the Branch Account, so maintained, if
considered necessary, can be proved by preparing a Memorandum Branch Trading and Profit &
Loss Account, in the usual way, from the balances of various items of income and expenses
contained in the Branch Account.
Illustration 1
Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost totheir branch
at Nagpur. However, direct purchases are also made by the branch for which payments are made at head office.
All the daily collections are transferred from the branch to the head office.
From the following, prepare Nagpur branch account in the books of head office by Debtors method:
` `
Opening balance (1-1-20X1) Bad Debts 1,000
Imprest Cash 2,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (recd. by H.O.) 1,65,000
Cash Sales 45,000 remittances to H.O.

Credit Sales 1,30,000 (not recd. by H.O. so far) 5,000
3
Direct Purchases 45,000 Branch Exp. directly paid 30,000
by H.O.
Returns from Customers 3,000 Closing Balance (31-12-
20X1)
Goods sent to branch from 60,000 Stock: Direct Purchase 10,000
H.O.
Transfer from H.O. for Petty 4,000 Transfer from H.O. 15,000
cash expeses Debtor ?
Imprest cash ?
Petty cash expensed 4000
Solution
In the Books of Buckingham Bros, Bombay Nagpur Branch Account
` `
To Opening Branch By Bank –
Assets Remittances
received from
Stock branch
(24,000+16,000) 40,000 Cash Sales 45,000
Debtors 25,000 Cash from 1,20,000

Debtors
Imprest Cash 2,000 Cash from 5,000 1,70,000
Debtors in transit
To Goods sent to 60,000 By Stock: 15,000
Branch A/c Transfer from
To Creditors (Direct 45,000 H.O.
Purchases)
To Bank (Sundry exp.) 30,000 Direct Purchase 10,000
To Bank (Petty cash 4,000 By Sundry Debtors 24,000
exp.) (W.N. 2)
To Net Profit transferred By Imprest Cash 2,000
to General Profit & (W.N. 3)
Loss A/c 15,000
2,21,000 2,21,000
4
Working Notes:
Collections from debtors:
`
Total remittances (` 1,65,000 + ` 5,000) 1,70,000
Less: Cash sales (45,000)
1,25,000
Calculation of Sundry Debtors closing Balance:
`
Opening Balance 25,000
Add: Credit Sales 1,30,000
1,55,000
Less: Returns, Discount, Bad debts & collections (3,000 + 2,000 +
1,000 + 1,25,000) (1,31,000)
Closing balance 24,000
Calculation of closing balance of Imprest Cash
`
Opening Balance 2,000
Add: Transfer from H.O. 4,000
6,000
Less: Expenses (4,000)
Closing balance 2,000
When goods are invoiced at selling price

It would be obvious that if Branch Account is debited with the sales price of goods and
subsequent to the debit being raised there is a change in the sale price, the amount of debit either
has to be increased or reduced on aconsideration of the quantity of unsold stock that was there at
the branch at the time the change took place. Such an adjustment will be necessary as often as the
change in sale price occurs.
Moreover the amount of anticipatory profit, included in the value of unsold stockwith the
branch at the close of the year will have to be eliminated before the accounts of the branch are
incorporated with that of the head office. This will be done by creating a reserve.
It may also be necessary to adjust the value of closing stock on account of the physical losses
of stock due to either pilferage or wastages which may have occurred during the year. The last
5
mentioned adjustments are made by debitingthe cost of the goods to Goods Lost Account and the
amount of loading (included in the lost goods), to the Branch Adjustment Account.
Illustration 2
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20% above cost. The
branch makes both cash and credit sales. Branch expenses are met partly from H.O. and partly by the
branch. The statement of expenses incurred by the branch every month is sent to head office for
recording.
Following further details are given for the year ended 31st December, 20X1:
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-20X1 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
Cash Sales for the year @ invoice price 59,000
Cash Remitted to head office 2,22,500
Expenses paid by H.O. 12,000
Bad Debts written off 750
Balances as on 1-1-20X1 31-12-20X1
` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the Profit and Loss
of the Branch for the year ended 31st December, 20X1.
Solution
Books of Harrison Branch Stock Account
` `
To Balance b/d 30,000 By Branch Debtors 1,65,000
To Goods Sent to Branch A/c 2,40,000 By Branch Bank 59,000
To Branch Adjustment A/c 2,000 By Balance c/d
(Excess of sale Goods in Transit
over invoice price) (` 2,40,000 –` 2,20,000) 20,000
Stock at Branch 28,000
2,72,000 2,72,000
Branch Debtors Account
` `
To Balance b/d 32,750 By Bad debts written off 750
To Branch Stock 1,65,000 By Branch Cash- 1,71,000
collection (bal. fig.)
By Balance c/d 26,000
6
1,97,750 1,97,750
Branch Cash Account
` `
To Balance b/d 5,000 By Bank Remit to H.O. 2,22,500
To Branch Stock 59,000 By Branch profit & loss A/c 12,000
To Bank (as per contra) 12,000 (exp. paid by H.O.)
To Branch Debtors 1,71,000 By Branch profit & loss A/c 10,000
[Bal. fig. (exp. paid by
Branch)]
By Balance c/d 2,500
2,47,000 2,47,000
Branch Adjustment Account
` `
To Stock Reserve (on closing By Stock Reserve opening 5,000
stock (48,000 × 1/6) 8,000 (25000 × 20%)
To Gross Profit c/d 39,000 By Goods sent to Branch A/c 40,000
By Branch Stock A/c 2,000
47,000 47,000
Branch Profit and Loss Account
` `
To Branch Expenses (paid by 22,000 By Gross Profit b/d 39,000
HO: ` 12,000 and paid by
Branch ` 10,000)
To Branch Debtors-Bad debts 750
To Net Profit 16,250
39,000 39,000
Goods Sent to Branch Account
` `
To Branch Adjustment A/c 40,000 By Branch to Stock A/c 2,40,000
To Purchase A/c - Transfer 2,00,000
2,40,000 2,40,000
Debtors Method
Under this method, the principal accounts that will be maintained are:
The Branch Account;
The Goods Sent to Branch Account; and
The Stock Reserve Account.
Entries in these accounts will be made in the following manner:
7
Transaction Account debited Account credited
(a) Goods sent to Branch Branch A/c Goods Sent to Branch
at selling price A/c
(b) ‘Loading being the Goods Sent to Branch Branch A/c
difference between A/c
selling price and cost
of goods
(c) Returns to H.O. at Goods Sent to Branch Branch A/c
selling price A/c
(d) ‘Loading’ in respect of Branch A/c Goods Sent to Branch
goods returned to H.O. A/c
(e) ‘Loading’ included in Stock Reserve A/c Branch A/c
the opening stock to
reduce it
(f) Closing stock at selling Branch Stock A/c Branch A/c
price
(g) ‘Loading’ included in Branch A/c Stock Reserve A/c
closing stock to reduce
it to cost
It will be observed that entries in the Branch Account in respect of goods sent to a branch or
returned by it, as well as those for the opening and closing stock, will be at selling price. In
consequence, the Branch Account is maintained at selling price.
Hence the Branch Account will not correctly show the trading profit of the Branch unless
these amounts are adjusted to cost. Such an adjustment is effected by making contra entries in ‘Goods
Sent to Branch A/c’ and ‘Stock Reserve Account’. In respect of closing stock at branch for the
purpose of disclosure in the Balance Sheet, the credit balance in the ‘Stock Reserve Account’ at the
end of the year will be deducted from the value of the closing stock, so as to reduce it to close; it will
be carried forward as a separate balance to the following year, for being transferred to the credit of
the Branch Account.
Illustration 3
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20% above cost. The
branch makes both cash and credit sales. Branch expenses are met partly from H.O. and partly by
the branch. The statement of expenses incurred by the branch every month is sent to head office for
recording.
Following further details are given for the year ended 31st December, 20X1:
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-20X1 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
8
Cash Sales for the year @ invoice price 59,000
Cash Remitted to head office 2,22,500
Expenses paid by H.O. 12,000
Bad Debts written off 750
Balances as on 1-1-20X1 31-12-20X1
` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the Profit and Loss
of the Branch for the year ended 31st December, 20X1.
Solution
Books of Harrison New Delhi Branch Account
` `
To Balance b/d By Balance b/d
Stock 30,000 Stock Reserve 5,000
Debtors 32,750 By Goods Sent to Branch A/c 40,000
Cash 5,000 By Bank-Remittance
To Goods Sent to Branch A/c 2,40,000 received from the Branch:
(2,00,000 + 20% of
2,00,000)
To Bank (Exp. paid by 12,000 Cash sales 59,000
H.O.)
To Net Profit Transferred 16,250 Debtors Collection1,63,500 2,22,500
to H.O. Profit and Loss (W.N.1)
A/c (Net of expense)
To Balance c/d (Stock 8,000 By Balance c/d
reserve on closing Stock (including Transit) 48,000
stock) (W.N.2)
Debtors 26,000
Cash 2,500
3,44,000 3,44,000
Working Note:
Collection from debtors = Total collection – Cash sales
= 2,22,500 – 59,000 = 1,63,500

Closing stock = Stock at branch + Goods sent by H.O. – Goods received by Branch
= 28,000 +2,40,000 – 2,20,000 = 48,000
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DEPARTMENTAL ACCOUNTING
Department:
Department refers to activity center (profit or cost center) usually located in the same roof
but carrying distinct type of activities.
Departmental Accounting:
Department accounting or departmental accounting is a system of financial accounting which
is used in the organizations whose all works are done through their different departments or
departmental stores. Departmental accounts are prepared separately for each department and trial
balance will also be prepared. Departmental P&L Account is prepared to ascertain the profit or loss
of each department separately and at the end of the year it is transferred to General profit and loss
account of the whole organisation.
Objectives of departmental accounting
The main objectives of departmental accounting are:
a)To have comparison of the results of a particular department with previous year and also with the
other departments of
the same concern;
b)To help the proprietor in formulating policy to expand the business on proper lines so as to optimize
the profits of the
concern;
c)To allow departmental managers’ commission on the basis of the profits of their departments; and
d)To generate information, which may be helpful for planning, control, and evolution of performance
of each department and for taking various managerial decisions.
Advantages of Department Accounts:
The main advantages of Departmental accounting are as follows:
a)It provides an idea about the affairs of each department.
b)It helps to evaluate the performance of each department.
c) It helps to reward the Departmental mangers and staff on the basis of performance.
d)It facilitates control over the working of each department.
e)It helps to compare the result of one department with those of other departments.
f) It helps the management to formulate the right business policies for the various departments.
g) It will help in the preparation of departmental budgets.
h) It helps to calculate stock turnover ratio of each department.
There are two methods that are used in departmental accounting: –
1. Where a separate set of books is maintained for every department.
2. Where all departmental accounts maintain columnar-wise collectively.
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E. Methods of Departmental Accounting:
Where individual set of books is maintained
It is method under which every branch of an organization is regarded as separate unit and therefore
individual book of accounts are prepared and maintained for every unit. At the end, financial result
of every department is calculated and consolidated to find the overall performance and net result of
whole organization.
This method of departmental accounting involves huge costs and is preferred only by large scale
organizations or where is required by the law. Companies involved in insurance business are the one
which are compulsorily required to implement this system of accounting.
Where all departmental accounts are maintained columnar-wise collectively
Under this technique of departmental accounting, accounts of all branches are maintained collectively
in columnar form by central accounts department. In this method for every department a departmental
trading and profit and loss account is opened in columnar way altogether. There is a separate column
for “Total” for finding out the results of different departments both on individual and collective basis.
Balance sheet is however prepared in a combining form.
For incorporation of purchase and sale of goods, a subsidiary book of accounts is prepared with
different columns for different departments. Various subsidiary books prepared are Purchase book,
Sales book, Purchase return and Sales return book. Cash book with separate columns of cash purchase
and cash sale is also maintained in case of large volumes of purchase and sales done on cash basis.
INTER-DEPARTMENTAL TRANSFERS:
Inter-departmental transfers are made on the following basis:
INTER-DEPARTMENTAL TRANSFER AT COST PRICE
The price at which one department supplies goods to another department or when some services are
rendered by department to the another department is known as Transfer Price. It refers to the charge
made for goods and services sold internally. It may be market price if one is available. The transfer
price is adjusted with the following amounts:
• Cash discount
• Selling costs (not in internal transfers)
• Margin of profit
• Standard costs.
Recording inter-departmental transfers helps the management in setting up profit centres, fixing
responsibility on departmental managers and eventually, evaluates the performance and efficiency of
the concerned departments.
STANDARD COST BASED TRANSFER PRICE
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Under this method of pricing the prices may be based on the actual cost or total cost or standard cost
or marginal cost. Standard cost is preferred to actual cost as the efficiency of one department is not
allowed to pass to another department. When goods are transferred at cost, the fixed cost of supplying
department becomes the variable cost of the receiving department.
INTER-DEPARTMENTAL TRANSFER AT SALE OR INVOICE PRICE
The goods may also be transferred from one department to another at sale or invoice price. The
department which transfers the goods is known as Transferor department and the department to which
goods are transferred is known as Transferee department. In this case, the transferor department
retains the normal profit and does not allow the transferee department to increase its profit at the cost
of the transferor.
When the goods received are sold out, the load or profit retained by the transferor department becomes
the actual profit realized.
But if the goods remain unsold, then there will be unrealized profit in the closing stock. Unrealized
profit is the difference between transfer price and the cost price of unsold stock. These reserves are
created as follows:
FOR CLOSING STOCK
General Profit and Loss A/c Dr.
To stock reserve A/c
AT THE BEGINNING OF THE YEAR
Stock reserve A/c Dr.
To General profit and loss A/c
Illustration No 1
Z & Co. has two departments. They maintain separate records for each department. You are
requested to prepare the Trading A/c and Profit & Loss A/c of each department and a Balance Sheet
for the year ended on 31st March, 1989 on the basis of the following information
Dept.I Dept. II Other Balances
Opening Stock (1.4.88) , 25,000 20,000

Purchases 2,30,000 1,90,000
Purchase Returns 2,000 1,000
Sales 6,33,000 4,92,000
Sales Returns 3,000 2,000
Wages & Salaries 1,80,000 1,60.000
Miscellaneous Charges 35,000 32,000
Closing Stock on 31.3.89 26,000 24,000
Sundry Debtors 1,90,000
Sundry Creditors 1.73,000
Plant & Machinery 2.40.000
Leasehold Land 80,000
12
Buildings 1,20,000
Furniture & Fittings 48,000
Selling Expenses and other 1,28,000
overheadexpenses
Cash in hand on 31.3.89 8,000
Cash at Bank on 31.3.89 1,10,000
Proprietors Capital A/c 5,00,000
Depreciate Plant & Machinery by 33— 3 %, Building by 5% and Furniture & Fittings by 10%. All
unallocated expenses are to be allocated on the basis of net sales of each department.
Solution 1
In the books of Z & Co

Departmental Trading and P&L Account for the year ended 31-03-1989
Dr Cr
Particulars Dept 1 Dept 2 Particulars Dept 1 Dept 2
To Opening Stock 25000 20000 By sales 630000 490000
To Purchases 228000 189000
To wages and
Salries 180000 160000
To Gross Profit 223000 145000 By Closing 26000 24000
Stock
Total 656000 514000 Total 656000 514000
By Gross Profit 223000 145000
To S&D Expense 72000 56000
To Misc. Expenses 35000 32000
To Depn on
Building 3375 2625
To Depn on P&M 45000 35000
To Depn on
Furniture 2700 2100
To General P&L 64925 17275
Total 223000 145000 223000 145000
In the books of Z & Co

Balance Sheet as on 31st March 1989
Amoun Amoun Amoun
Liabilities t (₹) Amount (₹) Assets t (₹) t (₹)
Capital 500000 Leasehold Land 80000
Add: Net Profit Building 120000
Dept-1 64925 Less: Depriciation 6000 114000
Dept-2 17275 582200
Plant & Macinery 240000
Less: Depriciation 80000 160000
Sundry Creditors 173000
Furniture & Fittings 48000
Less: Depriciation 4800 43200
13
Stock 50000
Sundry Debtors 190000
Cash-at-Bank 110000
Cash-in-Hand 8000
Total 755200 Total 755200
Question 2. S Brothers are leading paper merchants and book sellers. Their wholesale
business isin- paper and their retail show room -conducts business in stationery, books
and magazines. The following balances are abstracted from their books at the end of their
financial year, 3Ist March, 1997.
₹ ₹
Capital 300000 Rent 60000
Stock (1-4-
1996) Lighting 24000
Paper 200000 Showroom Maintenance 18000
Stationary 50000 Showroom Fittings 180000
Books 100000 Sundry Debtors (for Paper) 100000
Magazines 25000 Sundry Creditors 150000
Purchases: Salaries:
Paper 800000 showroom staff 36000
Stationary 300000 Wholesale Business Staff 12000
Books 350000 Showroom Cashier 12000
Magazines 300000 General Office Expenses 44000
Sales: General Office Salaries 11000
Paper 1000000 Cash and Bank Balances 8000
Stationary 360000
Books 420000
Magazines 420000
You arc requested by the firm to prepare their Departmental Trading and Profit & Loss
Account for the financial year under reference with help of the following additional
information:
Closing balance at the end of the year in the various departments were: Paper Z 1, 80,000;
Stationery Z 40,000; Books Z 1, 20,000 and Magazines T 30,000.
Rent and Lighting are for premises taken on lease, General Office accommodation is
negligible.Wholesale department uses 1,500 sq. ft. The balance of 1,500 sq., feet is occupied by the
showroomwith equal division among stationery, books and magazines.
Showroom fittings are to be depreciated by 10% p.a.
In the Books of S. Brothers
Departmental Trading and Profit & Loss
Particulars Paper Stationary Books Magazine Particulars Paper Stationary Books Magazine
To op Stock 200000 50000 100000 25000 By Sales 1000000 360000 420000 420000
To purchases 800000 300000 350000 300000 By cl. Stock 180000 40000 120000 30000
14
To Gross Profit 180000 50000 90000 125000
Total 1180000 400000 540000 450000 Total 1180000 400000 540000 450000
By Gross
180000 50000 90000 125000
Profit
To Rent (3:1:1:1) 30000 10000 10000 10000

To lighting (floor area) 12000 4000 4000 4000
To
6000 6000 6000
showro
omMaintenance
To depreciation 6000 6000 6000
To salaries showroom 10800 12600 12600
To Salaries Wholesale 12000
To salaries Cashier 3600 4200 4200
To General Office 5000 1800 2100 2100
To General
20000 7200 8400 8400
officeExpenses
To Net Profit 101000 600 36700 71700
Total 180000 50000 90000 125000 Total 180000 50000 90000 125000
Question 3. M/s ABC carried on business as Departmental Stores in Calcutta. The partners A, B, C
were in charge of Departments X, Y and Z respectively. The partners are entitled to aremuneration
equal to 50 % of the profits (without taking the partners remuneration into consideration) of the
respective departments of which they are in-charge and the balance of the profits are to be distributed
among A, B and C in the ratio of 5:3:2. The following are balance of the revenue items in the books
for the year 31.3.1994:
Departments
Particulars X (₹) Y (₹) Z (₹)
Opening Stock 151560 96000 80000
Purchases 562800 332400 177600
Sales 720000 540000 360000
Closing Stock 180320 69920 96360
Other Revenue Items:
Salaries and Wages 192000
Discount Allowed 5400
Advertising 9000
Discount Received 3200
Rent 43200
Sundry Expenses 48600
Depreciation on Furniture & Fittings 3000
Prepare the Departmental Trading and Profit & Loss Account for the year ended 31.3.94.
Show the distribution of profits amongst the partners after taking into account the following:
Goods having a transfer price of ₹42800 and ₹2400 were transferred from Department X and Y
respectively to department Z. The inter-departmental transfers are made at 125%of the cost.
15
The various items shall be apportioned amongst the three Departments in the followingproportions:
Departments
Particulars X Y Z
Rent 2 2 5
Salaries 1 1 1
Depreciation 1 1 1
Discount
Received 8 5 3
All other expenses: on the basis of sales (excluding inter-departmental transfers) of each department.
The opening stock of Department Z does not include goods transferred from other Department but
the Closing Stock include ₹34200 valued at the inter-departmental transfer prices.
Solution 4
In the books of M/S ABC

Departmental trading and Profit& Loss Account for the year 31-03-1994
Dr Cr
Dept. X Dept. Y Dept. Dept. X Dept. Y Dept. Z(₹)
Particulars Particulars
(₹) (₹) Z(₹) (₹) (₹)
To opening Stock 151560 96000 80000 By Sales 720000 540000 360000
To Purchases 562800 332400 177600 By Dept Z 42800
To Dept Z 42800 By Dept Z 2400
Dept X 2400
DeptY By Closing Stock 180320 69920 86360
To Gross Profit c/d 228760 183920 143560
Total 943120 612320 446360 Total 943120 612320 446360
By Gross Profit b/d 228760 183920 143560

By Discount
To Salaries & Wages 64000 64000 64000 Received 1600 1000 600
To Rent 9600 9600 24000

To Depreciation 1000 1000 1000
To Discount Allowed 2400 1800 1200
To Advertising 4000 3000 2000
To sundry Expenses 21600 16200 10800
To General P&L 127760 89320 41160
Total 230360 184920 144160 Total 230360 184920 144160
16
PARTNERSHIP FIRMS
According to Section -4 of the Indian Partnership Act, 1932:“Partnership is the relations between two
or more persons who have agreed to share the profits of a business carried on by all or any one of
them acting for all”
Kinds of Partners
Active Partners: These are the persons who actively take part in the business,i.e., they are involved in day-
to-day affairs of business. They take all the decisions.
Sleeping Partners: Sleeping partners are those partners who are not actively involved in the business, i.e., they
do not take part in the day-to-day affairs of the business. But they do contribute capital and share profits and
losses of the business-like other partners.
Nominal Partner: He neither contributes capital nor takes part in the conduct of the business. He is a person
with good reputation in the market and lends his name to the firm and makes outsiders believe that he is a
partner of the firm.
Partner in Profits Only: He only shares profit but not the losses. The objective of having such partner is to
make use of his capital and goodwill.
Partner by Estoppel: He is not a partner of a firm in actual. He neither contributesany capital nor share profits
or losses of the business. He also does not take partin the conduct of the business. His role is to make the
outsiders believe that he is a partner of the firm.
Secret Partner: As the name suggests, his name is not disclosed to the outsiders as a partner.
Minor Partners: According to Indian Partnership Act 1932, a minor, i.e., person below the age of 18 years
cannot be a partner of the firm. However, with the mutual consent of all the partners, he can be admitted into
the partnership for the benefits of the firm.
Rights and Obligations of Partners

All the rights and duties should be clearly defined in the Partnership Deed. If in anycase, Partnership
Deed is silent on some points, then in that case rights and obligations of the partners are governed by
Partnership Act’s provisions.
Rights of the Partners
1. Right to take part in the day-to-day affairs or management of the partnership. 2. If Partnership
Deed is silent on the rate of interest on partner’s loan, then the
partner is entitled to the interest @ 6%.
Every partner of the firm has the right to check the books of accounts andrecords of business.
A partner has the right to be indemnified for the expenditure incurred by himto protect the firm from the
loss.
A partner can use the property of the firm for the purpose of firm’s business. 6. Right to retire from the firm
in accordance with the terms and conditions of the Partnership Deed.
Every partner has the right to continue in the firm unless expelled according tothe provisions of the deed.
17
On retirement, right to share profits in the firm earned with the help of partner’sshare in the firm or interest @
6% p.a. until the amount due to retired partner is paid off.
Right to be consulted before taking important decisions.
Right to share the profits equally, in the absence of any agreement. 11. Right to receive interest on capital, if
there are sufficient profits.
Every partner is co-owner of the firm.
Right to act independently in emergency situation to protect the firm from loss.
Right to inspect the entry of new partner.
Right to dissolve the firm with the consensus, i.e., mutual consent of all the partners. But in case, if partnership
is at will, any partner can dissolve the firm by giving notice to other partners.
Duties and Obligations of Partners

Every partner of the partnership firm must act in the maximum interest of thefirm.
Every partner must have mutual trust and confidence in other partners andthey should act in faithful
manner to each other and the firm.
Duty to render true accounts to fellow partners.
Duty to compensate the firm for the loss arising out of breach of trust andwillful negligence.
A partner should not compete with the firm’s business by starting his ownbusiness.
Obligation to share the loss equally in the absence of any agreement betweenthe partners.
A partner must not apply firm’s property for the accomplishment of his personaltasks.
Every partner must act within the scope of their authority.
A partner must not transfer his share without the mutual consent of his fellowpartners.
Every partner must disclose any secret profit made by them.
A partner must not make secret profits by using firm’s property, if he does so,he must surrender it to the
firm.
In the absence of any previous contract between the partners, no partner isentitled to the salary.
Features of Partnership
1. Two or more persons: There must be at least two persons to form a valid partnership. The
maximum number of partners cannot exceed the number of partners prescribed by Companies Act,
2013 which is 50 in any business whether banking or non- banking.
2. Agreement: Partnership comes into existence by an agreement (either written or oral among the
partners. The written agreement among the partners is called Partnership Deed.
3. Existence of business and profit motive: A partnership can be formed for the purpose of carrying
on legal business with the intention of earning profits. A joint ownership of some property by itself
cannot be called a partnership.
4. Sharing of Profits: An agreement between the partners must be aimed at sharing the profits. If
some persons join hands to run some charitable activity, it will not be called partnership. Further, if
a partner is deprived of his right to share the profits of the business, he cannot be called as partner.
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5. Business carried on by all or any of them acting for all: It means that each partner can participate
in the conduct of business and each partner is bound by the acts of other partners in respect to the
business of the firm.
6. Relationship of Principal and Agent: Each partner is an agent ad well as a partner of the firm.
An agent, because he can bind the other partners by his acts and principal, because he himself can be
bound by the acts of the other partners.
Partnership Deed
Since partnership is the outcome of an agreement, it is essential that there must be some terms
and conditions agreed upon by all the partners. Such terms and conditions may be either written or
oral. The law does not make it compulsory to have a written agreement. However, in order to avoid
all misunderstandings and disputes, it is always the best course to have a written agreement duly
signed and registered under the Act.
The partnership deed is a written agreement among the partners which contains the terms of
agreement. It is also called ‘ Articles of Partnership’. A partnership deed should contain the following
points:
Name and address of the firm as well as partners.
Name and addresses of the partners.
Nature and place of the business.
Duration, if any of partnership.
Capital contribution by each partner.
Interest on capital.
Drawings and interest on drawings.
Profit sharing ratio.
Interest on loan.
Partner’s Salary/commission etc.
Method for valuation of goodwill and assets.
Accounting period of the firm and duration of partnership
Rights and duties of partners how disputes will be settled.
Decisions taken if some partner becomes insolvent.
Opening of Bank Account – whereas it will be in the name of firm or partners.
Rules to be followed in case of admission & Settlement of accounts or retirement or death of
partner.
Revaluation of assets & liabilities, if any to be done.
Method of recording of firm’s accounts
19
Auditing
Date of commencement of partnership
Benefits of Partnership Deed

(1) It regulates the rights, duties and liabilities of each partner.
(2) It helps to avoid any misunderstanding amongst the partners because all the terms and
conditions of partnership have been laid down beforehand in the deed.
(3) Any dispute amongst the partners may be settled easily as the partnership deed may be
readily referred to.
Hence, it is always best course to have a written partnership deed duly signed by all the
partners and registered under the Act.
Rules applicable in the absence of partnership deed
Profit sharing Ratio Equal, irrespective of capital contribution.
Interest on Capital No Interest on Capital is to be allowed to any Partner
Interest on Drawings No interest on Drawings is to be charged to any partner
Salary or Commission to a Partner Not allowed to any partner
Interest on loan by a Partner Interest is allowed @ 6% per annum.
Distribution of Profits among Partners

Transactions of the partnership firm are recorded according to the principles of Double-entry
book keeping system, and as in the case of a sole proprietorship concern a partnership firm will also
prepare Trading account, Profit & Loss account and Balance Sheet at the end of every year. The only
difference between accounting of a sole trader and partnership firm is that the profits of the
partnership firm are divided amongst the partners.
A Profit and Loss Appropriation Account is prepared to show the distribution of profits among
partners as per the provision of Partnership Deed (or as per the provision of Indian Partnership Act,
1932 in the absence of Partnership Deed). It is an extension of profit and Loss Account. It is nominal
account. It records entries for interest on capital, Interest on Drawings, Salary to the partner, and
division of profits among the partners.
The Journal Entries regarding Profit and Loss Appropriation Account are as follows:
1.For transfer of balance of Profit and Loss Account
Profit and Loss A/cDr.
To Profit and Loss Appropriation A/c
20
2.For Interest on Capital
For allowing Interest on capital
1. Interest on Capital A/c
To Partner’s Capital/Current A/cs
(Being interest on capital allowed @ % p.a.)
2. For transferring Interest on Capital to p&L appropriation A/c.

Profit and Loss Appropriation A/cDr.
To Interest on Capital A/c.
(Being interest on capital transferred to p&L Appropriation A/c)
3. For Salary or Commission payable to a partner
i. For allowing Salary or Commission to a partner:
Partners Salary/Commission A/cDr.
To Partner’s Capital/Current A/cs
(Being salary/commission payable to a partner)
ii. For transferring Partner’s Salary/Commission A/c to Profit and Loss
Appropriation A/s:
To Partner’s Salary/Commission A/c
4. For transfer of Reserves:
To Reserve A/c
(Being reserve created)
5. For Interest on Drawings:
1.For charging interest on a partner’s drawings:
Partner’s Capital/Current A/c.Dr.
To Interest on Drawings A/c
(Being interest on drawings charged @ % p.a.)
2. For transferring interest on drawings to Profit and Loss Appropriation A/c
Interest on Drawings A/cDr.
To Profit and Loss Appropriation A/c
(Being interest on drawings transferred to P&L appropriation A/c)
21
6. For transfer to Profit (i.e. Credit Balance of Profit and Loss Appropriation Account
To Partners Capital/Current A/cs
(Being profits distributed among partners)
SPECIMEN OF PROFIT AND LOSS APPROPRIATION ACCOUNT
Profit and Loss Appropriation Account
For the year ending on ___________________
Particulars Rs. Particulars Rs.
To Interest on Capital:
B
By Profit and Loss A/c (Net Profits transferred
To Partner’s from P & L A/c)
Salary/Commission By Interest on drawings:
To Reserves A
To Profits transferred to capital B

A/cs of:
Partner’s Capital Accounts

Partner’s Capital Accounts: It is an account which represents the partners interest in the business.
In case of partnership business, a separate capital account is mainted for each partner. The capital
accounts of partners may be maintained by any of the following two methods.
1. Fixed Capital Accounts

2. Fluctuating Capital Accounts
1. Fixed Capital Accounts
Under this method the original capitals invested by the partners remain constant, unless additional
capital is introduced by an agreement. All entries relating to drawings, interest on capitals, interest
on drawings, salary to partner, share of profits/losses are made in separate account whihc is called
as Current Account. Thus the following two accounts are maintained when capitals are fixed.
(i) Capital Account

This account will always show a credit balance: Balance of Capital account remains fixed, it does
not change every year that is why it is called fixed capital method and only the following two
transactions are recorded in the Fixed Capital Accounts:
Permanent·Additional Capital Introduced
22
·Permanent Capital Withdrawn or Drawings out of Capital only
Partner’s Capital A/Cs

Particulars X(Rs.) Y(Rs.) Particulars X(Rs.) Y(Rs.)
To Cash/Bank A/c By Balance b/d
(Capital Withdrawn) (Opening Cr. Balance)
To Balance c/d By Cash/Bank A/c
(Closing balance) (Additional Capital Introduced)
(ii) Current Account

The Current account may show a debit or credit balance. All the usual adjustments such as
interest on Capital, partner’s salary/commission, drawings (out of profits), interest on
drawings and share in profits or losses etc. are recorded in this account.All the Current
Year’s adjustments are recorded in this account, that is why it is called Current account.
Partner’s Current A/Cs

(Opening Dr. Balance) (Opening Cr. Balance)
To Drawings By Interest on Capital
(out of Profits) By Partner’s Salary or Commission
To Interest on Drawings By Profit and Loss
To Profit and Loss A/c Appropriation A/c
(Share in losses) (Share in Profits)
To Balance c/d By Balance c/d
(Closing credit Balance) (Closing Dr. Balance)
Note :
1. Debit balance of Current Account is shown in Assets side of Balance Sheet.
2. Credits balance of Current Account A/c is shown in Liabilities side of balance Sheet.
3.Balance of Fixed Capital Accounts are always shown in Liabilities side of Balance Sheet as it will
be always be credit balance.
23
Fluctuating Capital Accounts
In this method only one account i.e., Capital Account of each and every partner is prepared and all
the adjustment such as interest on capital interest on drawings etc, are recorded in this account
under this method, Capital account may show a debit or credit balance and the balance of this
account changes frequently from time to time therefore it is called fluctuating Capital Account.In
this method the capitals are not fixed.
In the absence of information, the Capital Accounts should be prepared by this method.
Partner’s Capital
(Opening Dr. Balance) (Opening Cr. Balance)
To Cash/Bank A/c By Cash/Bank A/c
(Capital Withdrawn) (Additional Capital Introduced)
To Drawings By Interest on Capital
(out of profits) By Partner’s Salary or Commission
To Interest on Drawings By Profit and Loss
To Profit and Loss A/c Appropriation A/c
(Share in losses) (Share in Profits)
To Balance c/d By Balance c/d
(Closing credit Balance) (Closing Dr. Balance)
INTEREST ON CAPITAL
Interest on partners capital will be allowed only when it has been specifically mentioned in
the partnership deed. If interest on capital is to be allowed as per the agreement, it should
be calculated with respect to the time, rate of interest and the amount of capital. Interest
on Capital can be treated as either:
a. An Appropriation of profit; or
b. A charge against profit.

A. Interest on Capital: An Appropriation of Profits:
In case of Losses Interest on Capital is NOT ALLOWED
In cases of
Interest on Capital is ALLOWED IN FULL
Sufficient Profits
24
In case of Interest will be restricted to the amount of profit. Hence, profit will be distributed
Insufficient Profits in the ratio of interest on capital of each partner.
B. Interest on Capital: As a Charge against Profits:

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

Add: 1. Drawingxxxxxx
2. Interest on Drawingsxxxxxx
3. Losses during the year xxxxxx
Less: 1. Additional Capital Introduced (xxxxxx)
2. Profits during the year (xxxxxx) ……………
3. Any salary/commission received
Opening Capital ……………
INTEREST ON DRAWINGS
Interest on drawing is charged by the firm only when it is clearly mentioned in Partnership Deed. It
is calculated with reference to the time period for which the money was withdrawn. There are two
cases in which calculation of interest on drawings may arise:
Case 1: When Rate of Interest on Drawings is given in %
Interest on Drawings is calculated on flat rate irrespective of period.
Case 2: When Rate of Interest on Drawings is given in % p.a.
1. When date of Drawing is not given
Interest on Drawing =
Note: Interest is calculated for a period of 6 months, we assume drawings have been done evenly during the
year, that is why we take average six months tenure.
2. When date of Drawings is given
Interest on Drawing =
Case 3: When different amount are withdrawn on different dates:
We have the following two methods to calculate the amount of interest on Drawing:
1. Simple Interest Method

In this method, interest on drawing is calculated for each amount of drawing individually on the basis of
periods for which it remained withdrawn till the close of accounting period.
2. Product Method
25
In this method, the amounts of drawings are multiplied by the period for which it remained withdrawn during
the period;Thereafter the products are added and interest is calculated on the total of products so arrived at
for one month. The advantage of this system is that separate calculations are not required each time.
We can explain the above mentioned two methods with the help of an example.
Month Date Drawings Amount
May 1 12000
July 31 6000
September 30 9000
November 30 12000
Janurary 1 8000
March 31 7000
Interest on drawings is to be charged @ 9% p.a
SIMPLE METHOD
DATE AMOUNT PERIOD INTEREST @9%
1 MAY 12000 11 990
31 JULY 6000 8 360
30 SEP 9000 6 405
30 NOV 12000 4 360
1 JAN 8000 3 180
31 MAR 7000 0 00
TOTAL 54000 2295
PRODUCT METHOD
26
DATE AMOUNT PERIOD PRODUCTS
1 MAY 12000 11 132000
31 JULY 6000 8 48000
30 SEP 9000 6 54000
30 NOV 12000 4 48000
1 JAN 8000 3 24000
31 MAR 7000 0 00
TOTAL 54000 306000
Interest = Total of products * 9/100* 1/12= 306000*9/100*1/12 = Rs 2295/-.
Case 4: When an equal amount is withdrawn regularly

Interest on Drawing can be calculated using either Product Method or Direct Method (i.e. Short Cut Method)
Direct Method will be used only if all the following three conditions are satisfied:
1. Amount should be same throughout the period

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

Monthly Drawings Half yearly Drawings for 12
Drawings for 12 06 Months (last 6
for 12 Months Months
Months months)
9
7.5
3.5(beginning of the
6.5(beginning of (beginning of every month for
(beginning of month for last six
the month) six month in the beginning of
every quater) month)
6 months)
6(middle of very 6(middle of 3(middle of the month

6
month) every quater) for last six month)
27
middle of every month for six
month in the beginning of 6
months)
3 (end of every month for six

5.5( end of every 4.5(end of every 2.5(end of the month for
month in the beginning of 6
month) quater) last six month)
months)
PAST ADJUSTMENTS
If, after preparation of Final Accounts of firm, it is found that some errors or commission in
accounts has occurred than such errors or omissions are rectified in the next year by passing an
adjustment entry.
A statement is prepared to ascertain the net effect of such errors or omissions on partner’s
capital/current accounts in the following manner.
Statement showing adjustment

Particulars A (Rs.) B (Rs.) C (Rs.)
A Amount to be given credited

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

* Interest on Capital
(If given at a higher rate)
* Interest on Drawings
(If not charged)
28
* Profits already distributed in wrong ratio
(debited now)
Total B
Net Effect (A-B) +/- +/- +/-
+ Indicates Amount to be Credited to Partner’s Capital Account – Indicates Amount to be

Debited to Partners Capital Account
Journal
Date Particulars LF. Debit(Rs.) Debit(Rs.)
Partners Capital A/C Dr.

(Amount to be Debited)
To Partners’ Capital A/c
(Amount to be Credited)
(Being adjustment entry passed)
During Past Adjustment it is not compulsory that capital accounts of all partners are affected. More
than one partners Capital Account may be debited or credited but amount of debit & credit should
be equal.
GUARANTEE OF PROFITS TO A PARTNER

Guarantee is an assurance given to the partner of the firm that at least a fixed amount shall be
given to him/her irrespective of his/her actual share in profits of the firm. If actual share in profits is
less than the guaranteed amount in that case the deficit amount shall be borne either by the firm or by
any partner as the case may be or as may have been decided by a n a agreement.
Note:
Guarantee to a partner is given for minimum share in profits. If the actual share in profits is more
than the minimum share in profits, then the actual profits will be allowed to the partner.
Case: 1. When guarantee is given by FIRM (i.e. by all the Partners of the firm)
1. If share in actual profits is less than the guaranteed amount then. Guaranteed
amount to a partner is first written off against the profits and then,
2. Remaining profits are distributed among the remaining partners in the remaining
ratio.
Case: 2. When guarantee is given by a partner or partners to another partner.
1. Calculate the share in profits for the partner to whom guarantee is given.
2. If share in profits is more than the guaranteed amount, distribute the profit as per
the profit and loss sharing ratio in usual manner.
3. If share in profits is less than the guaranteed amount, find the difference between
the share in profits and the guaranteed amount and the difference known as
deficiency.
29
Deficiency is contributed by the partner or partners who guaranteed in certain ratio and subtracted
from his or their respective shares.
30
ADMISSION OF A PARTNER
Admission of a Partner
A new partner can be admitted only with the concent of all the existing partners. A new partner is not
liable for any profit or loss occured before his admission. Such a partner is called a new partner or incoming
partner.
Purpose of Admission of a Partner:
1. For additional capital
2. For progress of the firm
3. For acquiring additional managerial skill4. For
reducing compitition
Effect of Admission of a Partner: Admission of a new partner is a major event in a partnership
business. A new admission can take place only with the unanimous consent of all the existing partners.
New partners are admitted for several reasons. Additional capital contribution, fresh ideas more contacts
etc. are some of the advantages in admittinga new partner. Following are the most important accounting
aspects to be considered at the time of admission of a new partner.
1. Change in profit sharing ratio,
2. Accounting treatment of Goodwill,3.
Revaluation of assets and liabilities,
4. Treatment of reserves and accumulated profits/losses and5. Adjustment
of Capital Accounts.
1. Change in Profit Sharing Ratio: When a new partner comes into the business, old partner have
to adjust his profit share from their portion. Thus, change in profit sharing ratio is the first accounting aspect
to be considered on admission of a new partner.In academic accounting, change in profit sharing ratio can
be presented in various ways:
The New Partner’s Share is Mentioned without Specifying the Old Partner’s Profit Sharing
Arrangement. In this case, it is to be assumed that the profit available after payingthe new partner’s share
is to be divided by the old partner’s share in their old profit sharing ratio. In other words, even though the
overall profit sharing ratio changes, the old ratio is still maintained between the old partners, within the
new ratio.
Sacrificing Ratio
The ratio in which the old partners agree to sacrifice their share of profit in favour ofthe incoming
partner is called sacrificing ratio. The sacrifice by a partner is equal to:
Old Share of Profit – New Share of Profit
2. Accounting Treatment of Goodwill: As stated earlier, the new partner is requiredto compensate
the old partners for their loss of share in the super profits of the firm for which he brings in an additional
amount known as premium or goodwill. This amountis shared by the existing partners in the ratio in which
they forego their shares in favour of the new partner which is called sacrificing ratio.
The ratio is normally clearly given as agreed among the partners which could be theold ratio, equal
sacrifice, or a specified ratio. The difficulty arises where the ratio in whichthe new partner acquires his
share from the old partners is not specified. Instead, the new profit sharing ratio is given. In such a situation,
the sacrificing ratio is to be worked out by deducting each partner’s new share from his old share.
3. Revaluation of Assets and Liabilities: Revaluation of assets and liabilities is another major step
prior to admission or retirement. Revaluation is important, as there are hidden profits or losses in the
difference between book value and actual market
value of assets or liabilities. Revaluation is necessary whenever there is a change in profitsharing ratio,
even without admission or retirement. The hidden profits or losses should be distributed in the ratio prior to
change (old ratio). Revised values of assets and liabilitiesare brought into books by opening a temporary
account called ‘Revaluation account’. The purpose of revaluation account is to summarise effect of
revaluation of assets and liabilities. Revaluation account represents the combined capital account of
partners. Anygain on revaluation of asset or liabilities, which are to be credited to partners, will be credited
in revaluation account. Similarly, any loss on revaluation will be debited in revaluation account instead of
capital accounts. The revaluation account is closed by transferring its net balance to partner’s capital
31
accounts in the profit sharing ratio.
4. Treatment of Reserves and Accumulated Profits: Accumulated profits such as general reserve,
credit balance in Profit & Loss account etc. will be transferred to the capital accounts of old partners in the
old profit sharing ratio. Similarly, accumulated losses shall be transferred to the debit side of old partner’s
capital accounts. Therefore, these items will not appear in the new balance sheet.
5. Adjustment of Capital Accounts: When the partners change their profit sharing ratio at
admission, retirement or any other reason, they also rearrange their capital accounts. Capital contribution
is not essentially the basis of profit sharing. However, in most partnerships, capital contribution is
considered as the major factor in determining profit sharing ratio. At the time of admission, capital
contribution will be raised as an important condition. When a new partner is admitted for a certain share
of profit for a certain amount of capital contribution, he would naturally expect the other also to maintain
a capital balance matching with their profit share. Admission of a partner is notthe only situation when a
capital rearrangement is considered. Retirement, death or any other change in profit sharing ratio would
prompt rescheduling the capital balances. The basic purpose of following ‘Fixed capital method’ is to
maintain a steady capital ratio.
When capital is readjusted on the basis of new partner’s capital contribution, the first step is to
determine the revised capital balances of each partner. Readjustment in capital account is usually done by
bringing in or taking out cash. Sometimes, in place of cash transactions, old partners may adjust their capital
balances by transferring the excessor deficit in the capital accounts to their current accounts as a temporary
measure. Once the capital balances are adjusted, current accounts can be settled in due course.
What are Partners and Their Kinds?

Meaning: Minimum of 2 persons are required to form a partnership and maximum of 10 persons in
case of banking and 20 in case of others. These persons are individually known as ‘Partners’ and
collectively known as ‘Firm’.
Kinds of Partners
1. Active Partners: These are the persons who actively take part in the business,i.e., they are
involved in day-to-day affairs of business. They take all the decisions.
2. Sleeping Partners: Sleeping partners are those partners who are not actively involved in the
business, i.e., they do not take part in the day-to-day affairs of the business. But they do
contribute capital and share profits and losses of the business like other partners.
3. Nominal Partner: He neither contributes capital nor takes part in the conduct of the business.
He is a person with good reputation in the market and lends his name to the firm and makes
outsiders believe that he is a partner of the firm.
4. Partner in Profits Only: He only shares profit but not the losses. The objective of having such
partner is to make use of his capital and goodwill.
5. Partner by Estoppel: He is not a partner of a firm in actual. He neither contributesany capital nor
share profits or losses of the business. He also does not take partin the conduct of the business.
His role is to make the outsiders believe that he is a partner of the firm.
6. Secret Partner: As the name suggests, his name is not disclosed to the outsiders as a partner.
7. Minor Partners: According to Indian Partnership Act 1932, a minor, i.e., person below the age
of 18 years cannot be a partner of the firm. However, with the mutual consent of all the partners,
he can be admitted into the partnership for the benefits of the firm.
Rights and Obligations of Partners
All the rights and duties should be clearly defined in the Partnership Deed. If in anycase, Partnership
Deed is silent on some points, then in that case rights and obligationsof the partners are governed by
Partnership Act’s provisions.
Rights of the Partners

1. Right to take part in the day-to-day affairs or management of the partnership.2. If Partnership
Deed is silent on the rate of interest on partner’s loan, then the
partner is entitled to the interest @ 6%.
3. Every partner of the firm has the right to check the books of accounts andrecords of
business.
32
4. A partner has the right to be indemnified for the expenditure incurred by himto protect the
firm from the loss.
5. A partner can use the property of the firm for the purpose of firm’s business. 6. Right to
retire from the firm in accordance with the terms and conditions of
the Partnership Deed.
7. Every partner has the right to continue in the firm unless expelled according tothe provisions
of the deed.
8. On retirement, right to share profits in the firm earned with the help of partner’sshare in the firm
or interest @ 6% p.a. until the amount due to retired partner is paid off.
9. Right to be consulted before taking important decisions.
10. Right to share the profits equally, in the absence of any agreement. 11. Right to
receive interest on capital, if there are sufficient profits.
12. Every partner is co-owner of the firm.
13. Right to act independently in emergency situation to protect the firm from loss.
14. Right to inspect the entry of new partner.
15. Right to dissolve the firm with the consensus, i.e., mutual consent of all the partners. But in case,
if partnership is at will, any partner can dissolve the firm by giving notice to other partners.
Duties and Obligations of Partners
1. Every partner of the partnership firm must act in the maximum interest of thefirm.
2. Every partner must have mutual trust and confidence in other partners andthey should act
in faithful manner to each other and the firm.
3. Duty to render true accounts to fellow partners.
4. Duty to compensate the firm for the loss arising out of breach of trust andwillful
negligence.
5. A partner should not compete with the firm’s business by starting his ownbusiness.
6. Obligation to share the loss equally in the absence of any agreement betweenthe partners.
7. A partner must not apply firm’s property for the accomplishment of his personaltasks.
8. Every partner must act within the scope of their authority.
9. A partner must not transfer his share without the mutual consent of his fellowpartners.
10. Every partner must disclose any secret profit made by them.
11. A partner must not make secret profits by using firm’s property, if he does so,he must
surrender it to the firm.
12. In the absence of any previous contract between the partners, no partner isentitled to the
salary.
33
GOODWILL
Goodwill is also one of the special aspects of partnership accounts which requires adjustment (also
valuation if not specified) at the time of reconstitution of a firm, viz., a change in the profit sharing ratio,
the admission of a partner or the retirement or death of a partner.
Meaning of Goodwill
Over a period of time, a well-established business develops an advantage of good name, reputation
and wide business connections. This helps the business to earn more profits as compared to a newly set up
business. In accounting, the monetary value of such advantage is known as “goodwill”.
It is regarded as an intangible asset. In other words, goodwill is the value of the reputation of a firm
in respect of the profits expected in future over and above the normal profits. It is generally observed that
when a person pays for goodwill, he/she pays for something, which places him in the position of being
able to earn super profits as compared to the profit earned by other firms in the same industry.
In simple words, goodwill can be defined as “the present value of a firm’s anticipated excess
earnings” or as “the capitalised value attached to the differential profit capacity of a business”. Thus,
goodwill exists only when the firm earns super profits. Any firm that earns normal profits or is
incurring losses has no goodwill.
Factors Affecting the Value of Goodwill
The main factors affecting the value of goodwill are as follows:
1. Nature of Business: A firm that produces high value added products or having a stable demand
is able to earn more profits and therefore has more goodwill.
2. Location: If the business is centrally located or is at a place having heavy customertraffic, the
goodwill tends to be high.
3. Efficiency of Management: A well-managed concern usually enjoys the advantage of high
productivity and cost efficiency. This leads to higher profits and so the value of goodwill will
also be high.
4. Market Situation: The monopoly condition or limited competition enables the concern to earn
high profits which leads to higher value of goodwill.
5. Special Advantages: The firm that enjoys special advantages like import licences,low rate and
assured supply of electricity, long-term contracts for supply of materials, well-known
collaborators, patents, trademarks.
Methods of Valuation of Goodwill
1. Average Profits Method2. Super
Profits Method
3. Capitalisation Method.
34
Average Profits Method: Under this method, the goodwill is valued at agreed number of years’
purchase of the average profits of the past few years. It is based on the assumption that a new business will
not be able to earn any profits during the first few years of its operations. Hence, the person who purchases
a running business must pay inthe form of goodwill a sum which is equal to the profits he is likely to
receive for the firstfew years. The goodwill, therefore, should be calculated by multiplying the past average
profits by the number of years during which the anticipated profits are expected to accrue.
For example, if the past average profits of a business works out at ` 20,000 and it is expected that
such profits are likely to continue for another three years, the value of goodwill will be ` 60,000 (` 20,000
× 3).
Super Profits Method: The basic assumption in the average profits (simple or weighted) method of
calculating goodwill is that if a new business is set up, it will not beable to earn any profits during the first
few years of its operations. Hence, the person who purchases an existing business has to pay in the form of
goodwill a sum equal to thetotal profits he is likely to receive for the first ‘few years’. But it is contended
that the buyer’s real benefit does not lie in total profits; it is limited to such amounts of profits which are
in excess of the normal return on capital employed in similar business. Therefore, it is desirable to value
goodwill on the basis of the excess profits and not the actual profits. The excess of actual profits over the
normal profits is termed as super profits.
Normal Profit: Capital Employed × Normal Rate of Return/100
Suppose an existing firm earns ` 18,000 on the capital of ` 1,50,000 and the normal rate of return is
10%. The Normal profits will work out at ` 15,000 (1,50,000 × 10/100). The super profits in this case will
be ` 3,000 (` 18,000 – ` 15,000). The goodwill under the super profit method is ascertained by multiplying
the super profits by certain numberof years’ purchase. If, in the above example, it is expected that the
benefit of super profits is likely to be available for 5 years in future, the goodwill will be valued
at ` 15,000 (3,000 × 5). Thus, the steps involved under the method are:
1. Calculate the average profit,

2. Calculate the normal profit on the capital employed on the basis of the normalrate of return,
3. Calculate the super profits by deducting normal profit from the average profits,and
4. Calculate goodwill by multiplying the super profits by the given number ofyears’
purchase.
Capitalisation Methods: Under this method, the goodwill can be calculated in twoways: (a) by
capitalising the average profits, or (b) by capitalising the super profits.
Capitalisation of Average Profits: Under this method, the value of goodwill is ascertained by
35
deducting the actual capital employed (net assets) in the business from the capitalised value of the average
profits on the basis of normal rate of return. This involves the following steps:
(i) Ascertain the average profits based on the past few years’ performance.
(ii) Capitalise the average profits on the basis of the normal rate of return to ascertainthe capitalised
value of average profits as follows:
Average Profits × 100/Normal Rate of Return
(iii) Ascertain the actual capital employed (net assets) by deducting outside liabilitiesfrom the total
assets (excluding goodwill). Capital Employed = Total Assets (excluding goodwill) – Outside
Liabilities.
(iv) Compute the value of goodwill by deducting net assets from the capitalised value of average
profits, i.e., (ii) – (iii).
Illustrations 1: A and B are partners is a firm sharing profit in the ration of 4 : 3.They admitted
‘C’ as a new partner. C brought ` 10,000 towards goodwill premium and ` 30,000 as capital. New Ratio for
profit sharing will be 3 : 2 : 2 for A, B and C respectively Pass necessary journal entries assuming that
goodwill is retained in Business.
Solution
Date Particulars Dr. ` Cr. `

Bank A/c Dr. 40,000
To C’s Capital A/c 30,000
To Premium for Goodwill A/c 10,000
(Being the amount of capital and goodwill/premium
brought in cash)
Premium for Goodwill A/c Dr. 10,000

To A's Capital A/c To B's Capital A/c 5,000
(Being the amount of goodwill transferred to old 5,000
partners in sacrificing ratio)
Working Note: Calculation of sacrificing ratio:

Sacrificing ratio = Old ratio – New ratio Thus, A’s
sacrifice ratio = 4/7 – 3/7 = 1/7 B’s sacrifice ratio =
3/7 – 2/7 = 1/7
36
As, C has not made any sacrifice, therefore he will not be entitled to any amount ofgoodwill brought
in by new partner.
A and B have sacrificed in equal proportion, therefore they will get equal share inthe goodwill
brought in by D.
Illustrations 2: The Balance sheet of Krishna and Suresh is given below. They shareprofits and losses in
the ratio of 3 : 2.
Liabilities ` Assets `
Capital: Plant 30,000
Krishna 30,000 Patent 5,000
Suresh 20,000 Furniture 3,000
General Reserve 5,000 Stock 16,000
Creditors 15,000 Debtors 15,000
Joint Life Policy 7,000 Joint Life Policy Investment 7,000
Cash 1,000
77,000 77,000
They take Mohan into partnership on following terms:

(i) Mohan shall bring ` 14,000 in cash for goodwill share and capital for future1/5th share in
profits.
(ii) Depreciation on plant and machinery amounted to ` 5,000.
(iii) Patents were appreciated by ` 8,000.
(iv) Valuation of goodwill of the firm was to be made at twice the average profit oflast 4 years
and profits were ` 10,000, ` 9,000, ` 8,000 and ` 13,000.
V)Prepare Revaluation Account, Partner’s Capital Account and Opening Balance Sheetfor the firm.
Solution:
Revaluation Account
Particulars Amt Particulars Amt

To Plant 5,000 By Patents 8,000
To Profit Transferred to
Capital Account:
Krishna 1,800
Suresh 1,200 3,000
8,000 8,000
Capital Account
Particulars Krishna Suresh Mohan Particulars Krishna Suresh Mohan
To Bal c/d 41,400 27,600 10,000 By Bal b/d 30,000 20,000 10,000
37
By Reserves 3,000 2,000
By Revaluation A/c 1,800 1,200
By Joint Life
Policy 4,200 2,800
By Cash A/c 2,400 1,600
(Goodwill)
41,400 27,600 10,000 41,400 27,600 10,000
Opening Balance Sheet

Liabilities Amount Assets Amount
Creditors 15,000 Plant & Machinery 25,000
Capital: Patents 13,000
Krishna 41,400 Furniture 3,000
Suresh 27,600 Stock 16,000
Mohan 10,000 79,000 Debtors 15,000
Joint Life Policy 7,000
Cash 15,000
94,000 94,000
Working Notes:
1. Valuation of Goodwill:
Average profit = (10,000 + 9,000 + 8,000 + 13,000)/4 = ` 10,000
Goodwill at 2 years purchase = 10,000 * 2 = ` 20,000Mohan’s share of
goodwill = 20,000 * 1/5 = ` 4,000 Mohan’s capital = 14,000 – 4,000 =
10,000
2. Entry for joint life policy:

Joint Life Policy A/c Dr. 7,000
To Krishna’s Capital A/c 4,200
To Suresh’s Capital A/c 2,800
Illustration 3: A and B are partners sharing in the ratio of 2/3 and 1/3. BalanceSheet of their
firm is as below:
Balance sheet
Liabilities ` Assets `
Capital: Debtors 40,000
A 40,000 Less: R.D.D. 3,600 36,400
30,000
38
B 70,000 Stock 20,000
Reserve Fund 12,000 Building 25,000
Creditors 20,000 Machinery 31,000
Bank Overdraft 15,000 Typewriter 2,600
Patent 2,000
1,17,000 1,17,000
Mr. C was admitted as partner on the following terms:
(i) He will get 1/6th share in future profit for which he brings goodwill in cash ` 10,000.
(ii) R.D.D. is reduced to ` 1,600 whereas machinery was appreciated by ` 2,600.
(iii) Patents were fully written off.
(iv) Discount on creditors were provided at ` 400.
Prepare Revaluation A/c, Partner's Capital A/c and Opening Balance Sheet for the firm.
Revaluation Account
Particulars Amt (` ) Particulars Amt (` )

To Patents 2,000 By Provision for 2,000
Doubtful Debts
To Profit Transferred to:A By Machinery 2,600
B 2,000 By Provision for 400
1,000 Discount on Creditors
5,000 5,000
Capital Account
Particulars A (` ) B (` ) C (` ) Particulars A (` ) B (` ) C (` )
By Balance b/d 40,000 30,000
By Reserve Fund 8,000 4,000
By Revaluation A/c 2,000 1,000
By Premium for 10,000
Goodwill A/c
To Balance c/d 60,000 35,000 19,000 By Bank 19,000
60,000 35,000 19,000 60,000 35,000 19,000
Opening Balance Sheet
Liabilities Amt (` ) Assets Amt (` )
39
Sundry Creditors 20,000 Bank 14,000
Less: Provision: 400 19,600 Sundry Debtors 40,000
Capitals: Less: Provision: 1,600 38,400
A 60,000 Stock 20,000
B 35,000 Building 25,000
C 19,000 Machinery 33,600
Typewriter 2,600
1,33,600 1,33,600
Working Notes:
1. Sacrifice Ratio = Old Ratio – New Ratio Sacrifice
by A = old 2/3 – new 3/6 = 1/6 Sacrifice by B = old
1/3 – new 2/6 = 0
Since B has not made any sacrifice, the ratio amount of premium for goodwill brought in by C will be
credited to A.
1. C’s capital is not given in the question. He will bring in capital proportionate to his share of
profits. C is given 1/6th share of profits, balance 5/6th is shared by A and B. Total capital of A
and B after all adjustments is ` 60,000 + 35,000
= 95,000.
Thus, for 5/6th share of profits, the capital = 95,000. Then total capital
of the firm = 95,000 * 6/5 = ` 1,14,000.
Therefore, C’s capital for 1/6th share profits = 1,14,000 * 1/6 = ` 19,000.
2. Calculation of balance at bank:
Amount of cash brought in by C as goodwill =10,000Amount of cash brought in
by C as capital = 19,000
29,000
(-) Bank overdraft 15,000
Balance at bank 14,000
Illustration 4: A, B, C and D are the partners sharing profits and losses in 6 : 5 : 3 ratio. Balance
Sheet is given as below

Bills Payable 6,300 Land & Building 45,150
General Reserve 10,500 Furniture 7,350
Capital: Stock 29,400
A 35,400 Cash 7,140
B 29,850
C 14,550
40
1,15,500 1,15,500
D was admitted as partner on the following terms:

(i) He shall get 1/8th share is business future profit for which he should bringgoodwill `
14,070 and capital ` 14,700 in cash.
(ii) Debtors are raised by ` 2,000 whereas provision for repairs were made at ` 1,320.
(iii) Furniture were depreciated by ` 920.
(iv) Partners decided to write of goodwill from book amounting to ` 5,250 as wellas to withdraw
cash amounting to ` 7,060.
Prepare Revaluation Account, Partner’s Capital Account and Opening Balance Sheetfor the firm. Also
pass necessary journal entries.
Journal
Particulars Amt. Dr. ` Amt. Cr. `
(i) General Reserve A/c Dr. 10,500
To A’s Capital A/cTo 4,500
B’s Capital A/cTo C’s 3,750
Capital A/c
2,250
(Being general reserve transferred to Old Partner’s
Capital A/cs)
(ii) Revaluation A/c Dr. 2,240

To Furniture A/c 920
To Provision for Repairs A/c 1,320
(Being reduction in the value of assets and a provision
made for o/s repair bills)
(iii) Debtors A/c Dr. 2,000
To Revaluation A/c 2,000
(Being amount receivable from an old customer)
(iv) Land & Building A/c Dr. 9,760
To Revaluation A/c 9,760
(Being increase in the value of land and building)
(v) Revaluation A/c Dr. 9,520
To A’s Capital A/cTo 4,080
B’s Capital A/cTo C’s 3,400
Capital A/c
2,040
(Being transfer of profit on revaluation to Old Partner’s
Capital A/cs)
41
(vi) A’s Capital A/c Dr. 2,250
B’s Capital A/c Dr. 1,875
C’s Capital A/c Dr. 1,125
To Goodwill A/c 5,250
(Being goodwill appearing in the books written off)
(vii) Cash A/c Dr. 28,770
To D’s Capital A/c 14,070
To Premium for Goodwill A/c 14,700
(Being the amount brought in cash by D being
` 14,700 for capital and ` 14,070 for goodwill)
(viii) Premium for Goodwill A/c Dr. 14,070

To A’s Capital A/c 6,030
To B’s Capital A/c 5,025
(Being goodwill brought in by ‘D’ credited to old
partners capital A/c)
(ix) A’s Capital A/c Dr. 3,660
B’s Capital A/c Dr. 3,400
To Cash A/c 7,060
(Being cash withdrawn by A and B)
(x) Cash A/c Dr. 1,320

(Being cash brought in by C)
Revaluation Account
Particulars Amt (` ) Particulars Amt (` )
To Furniture A/c 920 By Debtor’s A/c 2,000
To Provision for Repairs 1,320 By Land and Building A/c 9,760
To Profit Transferred to
Capital A/c:
A 4,080
B 3,400
C 2,040 9,520
11,760 11,760
42
Capital Account
Particulars A (` ) B (` ) C (` ) D (` ) Particulars A (` ) B (` ) C (` ) D (` )
To Goodwill 2,250 1,875 1,125 14,700 By Balance b/d 35,400 29,850 14,550 14,700
To Balance c/d 47,760 40,150 20,730 By General
Reserve A/c 4,500 3,750 2,250
By Revaluation
A/c 4,080 3,400 2,040
By Cash A/c 6,030 5,025 3,015
By Premium for
Goodwill A/c
50,010 42,025 21,855 14,700 50,010 42,025 21,855 14,700
To Cash A/c 3,660 3,400 22,050 14,700 By Balance c/d 47,760 40,150 20,730 14,700
To Balance c/d 44,100 36,750 By Cash A/c 1,320
(Balancing Fig.)
47,760 40,150 22,050 14,700 47,760 40,150 22,050 14,700
Balance Sheet as on
Creditors 18,900 Cash 24,920
Bills Payable 6,300 Debtors 28,460
Provision for Repairs 1,320 Stock 29,400
Capital: Furniture 6,430
A 44,100 Land and Building 54,910
B 36,750
C 22,050
D 14,700 1,17,600
1,44,120 1,44,120
New profit sharing ratio will be calculated as under:

Share given to D = 1/8
Balance of profits = 1 – 1/8 = 7/8 A’s
new share = 7/8 * 6/14 = 3/8 B’s new
share = 7/8 * 5/14 = 5/16 C’s new
share = 7/8 * 3/14 = 3/16 D’s share =
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1/8
A : B : C : D = 3/8 : 5/16 : 3/16 : 1/8 = 6/16 : 5/16 : 3/16 : 2/16
D brought in ` 14,700 as capital according to his 1/8th share of profit. Therefore,
according to D’s capital, the total capital of the new firm will be:
= 14,700 * 8/1 = ` 1,17,600
Therefore, A’s Capital in new firm = 1,17,600 * 6/16 = ` 44,100 B’s
Capital in new firm = 1,17,600 * 5/16 = ` 36,750
C’s Capital in new firm = 1,17,600 * 3/16 = ` 22,050 D’s
Capital in new firm = 1,17,600 * 2/16 = ` 14,700
Illustration 5 (Dr. Balance in P & L A/c: R.D.D. adjusted in General Reserve): The Balance
Sheet of Sohan and Madan as on 31st Dec. 2006 is set out below. They share Profits and Losses in the ratio
of 2 : 1.
Balance Sheet
Sohan’s Capital 40,000 Building 20,000
Madan’s Capital 30,000 Furniture 6,000
General Reserve 24,000 Stock 12,000
Cash 6,000
Profit & Loss A/c 6,000
1,10,000 1,10,000
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UNIT – III
RETIREMENT AND DEATH OF A PARTNER
If you look around, you must have noticed people in your relation and in your neighborhoods running
business in partnership. You must have seen people quitting partnership firm or a person dies while in
partnership. These are the events that take place during the lifetime of a partnership firm. Some issues arise
on the happening of these events involving finance. Some assets and liabilities may need revaluation,
goodwill is to be treated and amount of joint life policy is distributed and some accounting adjustment have
to be made. Whenever such events take place, the firm has to calculate the dues of a partner leaving the firm
or that of the deceased. In this lesson you will learn the accounting treatment in the books of the firm in these
two cases i.e. retirement of a partner and death of a partner.
RETIREMENT – MEANING, CALCULATION OF NEW PROFIT-SHARING RATIO AND

GAINING RATIO
When one or more partners leave the firm and the remaining partners continue todo the business of the
firm, it is known as retirement of a partner. Amit, Sunil and Ashu are partners in a firm. Due to some
family problems, Ashu wants to leave thefirm. The other partners decide to allow him to withdraw from
the partnership. Thus,due to some reasons like old age, poor health, strained relations etc., an existing
partner may decide to retire from the partnership. Due to retirement, the existingpartnership comes to
an end and the remaining partners form a new agreement andthe partnership firm is reconstituted with
new terms and conditions. At the time ofretirement the retiring partner’s claim is settled.
A partner retires either :

(i) with the consent of all partners, or
(ii) as per terms of the agreement; or
(iii) at his or her own will.
The terms and conditions of retirement of a partner are normally provided in thepartnership deed. If not,
they are agreed upon by the partners at the time of retirement.The old partnership comes to an end and a
new partnership is formed among theremaining partners. At the time of retirement the following accounting
issues are dealt with :
(a) New profit sharing ratio and gaining ratio.

(b) Goodwill.
(c) Adjustment of changes in the value of Assets and liabilities.
(d) Treatment of reserve and accumulated profits.
45
(e) Settlement of retiring partners dues.
f) New capital of the continuing partners
New Profit Sharing Ratio and Gaining Ratio

As soon as a partner retires the profit sharing ratio of the continuing partners getchanged. The share
of the retiring partner is distributed amongst the continuingpartners. In the absence of information,
the continuing partners take the retiringpartner’s share in their profit sharing ratio or in an agreed ratio.
The ratio in which retiring partner’s share is distributed amongst continuing partners is known as gaining
ratio. Gain of a partner is
New Ratio – Existing Ratio
Gain of an exising partner = His New Share - His Existing (old) ShareVarious cases
of new ratio and gaining ratio are illustrated as follows :
Retiring Partner’s Share Distributed in Existing Ratio
In this case, retiring partner’s share is distributed in existing ratio amongst the remainingpartners. The
remaining partners continue to share profits and losses in the existingratio. The following example
illustrates this :
Tanu, Manu and Rena are partners sharing profits and losses in the ratio of4 : 3 : 2. Tanu
retires and remaining partners decide to take Tanu’s share in the existingratio i.e. 3 : 2. Calculate the
new ratio of Manu and Rena.
Existing Ratio between Manu and Rena = 3/9 and 2/9Tanu’s Share
(retiring partner) = 4/9
Tanu’s share taken by the Manu and Rena in the ratio of 3 : 2Manu’s Gain = 4/9 ×
3/5 = 12/45
Manu’s New Share = 3/9 + 12/45 = 27/45Rena’s Gain = 4/9
× 2/5 = 8/45
Rena’s New Share = 2/9 + 8/45 = 18/45
New ratio of Manu and Rena is 27/45 : 18/45 = 27 : 18 = 3 : 2.Gain of a
Partner = New Share – Existing Share
46
Retirement and Death of a Partner
Manu’s Gain = 27/45 – 3/9 = 12/45
Rena’s Gain = 18/45 – 2/9 = 8/45
Gaining Ratio = 12/45 : 8/45 OR 3 : 2
You may note that the new ratio is similar to existing ratio that existed between Manuand Rena
before Tanu’s retirement.
Note: In absence of any information in the question, it will be presumed that retiring partner’s
share has been distributed among the remains partners in existing (old) ratio.
Retiring partner’s share distributed in Specified proportion
Sometimes the remaining partners purchase the share of the retiring partner in specified ratio. The share
purchased by them is added to their old share and the new ratiois arrived at. The following example
illustrates this:
A, B and C are partners in the firm sharing profits in the ratio of 3 : 2 : 1. B retiredand his share was
divided equally between A and C. Calculate the new profit sharingratio of A and C.
B’s Share = 2/6
B’s share is divided between A and C in the ratio of 1 : 1.
A’s Gain 1/2 of 2/6 = 2/6 × 1/2 = 1/6
A’s New Share = 3/6 + 1/6 = 4/6
C’s Gain 1/2 of 2/6 = 2/6 × 1/2 = 1/6
C’s New share = 1/6+1/6 = 2/6
Thus new, ratio of A and C will be 2 : 1
Retiring Partner’s share is taken by one of the partners
The retiring partner’s share is taken up by one of the remaining partners. In this case,the retiring partner’s
share is added to that of existing partner’s share. Only his/her share changes. The other partners continue
to share profit in the existing ratio. An example illustrating this point is given below:
Anuj, Babu and Rani share profit in the ratio of 5 : 4 : 2. Babu retires and his shareis taken by Rani, So
47
Rani’s share is 2/11 + 4/11 = 6/11, Anuj share will remainunchanged i.e, 5/11. Thus, the new profit
sharing ratio of Anuj and Rani is 5 : 6.
Illustration 1
Neru, Anu and Ashu are partners sharing profit in the ratio of 4 : 3 : 2. Ashu retires. Find the
new ratio of Neru and Anu if terms for retirement provide the following :
(i) Ratio is not given

(ii) Equal distribution of Ashu’s share
(iii) Ashu’s share is taken by Neru and Anu in the ratio of 2 : 1
(iv) Anu takes over the share of Ashu.
Solution :
(i) New profit sharing ratio of Neru and Anu is 4 : 3.
(ii) Ashu’s share = 2/9

Neru’s Gain = 1/2 of 2/9 = 2/9 × 1/2 = 1/9Neru’s New
share = 4/9 + 1/9 = 5/9
Anu’s Gain = 1/2 of 2/9 = 2/9 × 1/2 = 1/9Anu’s New
Share = 3/9 + 1/9 = 4/9
New profit sharing ratio of Neru and Anu is 5/9 : 4/9 or 5 : 4Gaining ratio
is equal 1/9 : 1/9 = 1 : 1
(iii) Ashu’s Share = 2/9

Neru’s Gain = 2/3 of 2/9 = 2/9 × 2/3 = 4/27Neru’s new
share = 4/9 + 4/27 = 16/27 Anu’s Gain = 1/3 of 2/9 =
2/9 × 1/3 = 2/27 Anu’s new share = 3/9 + 2/27 =
11/27
New profit sharing ratio of Neru and Anu is 16 : 11.Gaining
ratio is 4/27 : 2/27 = 4 : 2 = 2 : 1
 16 − 4 = 4 ; 11 − 3 = 2 
i.e. 27 9 27 27 9 27 
48
(i) Anu takes over Ashu share fully.Ashu’s
share = 2/9
Retirement and Death of a Partner
Anu’s Gain = 2/9

Anu’s new share = 3/9 + 2/9 = 5/9
New profit sharing ratio of Neru and Anu is 4 : 5Only Anu
gains.
Illustration 2
Ashish, Barmon, and Chander are partners sharing profits and losses in the ratio of2 : 1 : 2 respectively.
Chander retires and Ashish and Barman decide to share theprofits and losses equally in future. Calculate
the gaining ratio.
Solution :
Gain of a Partner = New Share – Existing (old) Share
Hence, Ashish’s Gain = 1/2 – 2/5 = 1/10

Barman’s Gain = 1/2 – 1/5 = 3/10
Gaining ratio between Ashish and Barman is 1 : 3
TREATMENT OF GOODWILL
The retiring partner is entitled to his/her share of goodwill at the time of retirementbecause the
goodwill is the result of the efforts of all partners including the retiringone in the past. The retiring partner
is compensated for his/her share of goodwill. As per Accounting Standard 10 (AS-10), goodwill is
recorded in the books only when some consideration in money is paid for it. Therefore, goodwill is
recorded in thebooks only when it is purchased and the goodwill account cannot be raised on itsown.
Therefore, in case of retirement of a partner, the goodwill is adjusted through partner’s capital
accounts. The retiring partner’s capital account is credited with. his/her shareof goodwill and
remaining partner’s capital account is debited in their gaining ratio.The journal entry is made as
under:
Remaining Partners’ Capital A/c Dr. (individually)

To Retiring Partner’s Capital A/c
(Retiring partner’s share of goodwill adjusted toremaining
partners in the gaining ratio)
49
Illustration 3
Mitu, Udit and Sunny are partners sharing profit equally. Sunny retires and the goodwill of the firm is
valued at ` 54,000. No goodwill account appears in the books of thefirm. Mitu and Udit share future
profit in the ratio of 3 : 2. Make necessary journalentry for goodwill.
Solution :
Date Particulars L.F. Debit Amount Credit Amount

(`) (`)
Mitu’s Capital A/c Dr 14,400

Udit’s Capital A/c Dr. 3,600
To Sunny’s Capital A/c (Sunny’s share of 18,000
goodwill adjusted to remaining partners in their
gaining ratio 4 : 1]
Note : Sunny’s share of goodwill = ` 54,000 × 1/3 = `18,000 Gain of a Partner
= New Share – Existing Share
Mitu Gains = 3/5 – 1/3 = 9/15 – 5/15 = 4/15
Udit Gains = 2/5 - 1/3 = 6/15 – 5/ 15 = 1/15
Gaining Ratio between Mitu and Udit = 4 : 1
When the Goodwill Account already appears in the Books

Normally the goodwill is not shown in the books of the firm. If at the time of retirement/death of a
partner, goodwill appears in the Balance Sheet of the firm, it will be writtenoff by debiting all the partners’
capital accounts in their existing profit sharing ratio and crediting the goodwill account. In such a case, the
following journal entry is made:
Partners’ Capital A/c Dr (including retiring partner’s capital A/c)

To Goodwill A/c (Existing goodwill written-off)
50
Illustration 4
Tanu, Priya and Mayank are partners’ sharing profit in the ratio of3 : 2 : l. Priya
retires and on the date of Priya’s retirement goodwill is valued at `90,000. Goodwill already appears
in the books at a value of ` 48,000. New ratioof Tanu and Mayank is 3 : 2. Make the necessary
journal entries.
Solution :
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(`) (`)
Tanu’s Capital A/c Dr. 24,000
Priya’s Capital A/c Dr. 16,000
Mayank’s Capital A/c Dr. 8,000
To Goodwill A/c 48,000
(Existing goodwill written-off from the
books)
Tanu’s Capital A/c Dr. 9,000
Mayank’s Capital A/c Dr. 21,000
To Priya’s Capital A/c 30,000
(Priya’s share of goodwill adjusted to
remaining partners in their gaining ratio
3 : 7)
Note : Priya’s share of goodwill = `90,000 × 2/6 = `30,000

Gaining of a Partner’s = New Share – Existing Share,
Tanu’s Gain = 3/5 – 3/6 = 18/30 – 15/30 = 3/30 Mayank’s Gain = 2/5
– 1/6 = 12/30 – 5/30 = 7/30 Gaining Ratio between Tanu and
Mayank = 3 : 7
51
REVALUATION OF ASSETS AND REASSESSMENT OF LIABILITIES
At the time of retirement of a partner the assets of the firm are revalued and liabilities are reassessed.
Revaluation Account is prepared in the same way as in case of admission of a partner. This is done
to adjust the changes in value of assets and liabilities at the time of retirement/death of a partner. Any gain
or loss due to revaluation is divided amongst all the partners including retiring/deceased in their existing
profits haring ratio. Following journal entries are made for this purpose:
For increase in value of assets:

Assets A/c Dr. (Individually)
To Revaluation A/c
(Increase in the value of assets)
For decrease in value of assets:
Revaluation A/c Dr.
To Assets A/c (Individually)
(Decrease in the value of asset)
For increase in value of Liabilities:
Revaluation A/c Dr.
To Liabilities A/c (Individually)

(Increase in the value of liabilities)
For decrease in value of Liabilities:

LiabilitiesA/c Dr. (Individually)
To Revaluation A/c
(Decrease in the value of liabilities)
Revaluation account is prepared to record the change in the value of assets or liabilities. It will
reveal profit or loss on revaluation. This profit or loss is dividedamongst all partners including the
retiring/deceased partner in existing profit-sharing ratio.
For Profit on Revaluation:
Revaluation A/c Dr. (Individually)
To Partner’s Capital A/c
52
(Profit on revaluation divided amongst all partners in their existing profit-sharing ratio)
For loss on Revaluation:

Partner’s Capital A/c Dr. (Individually)
To Revaluation A/c
(Loss on revaluation borne by all partnersin their existing profit-sharing ratio)
Solution :
JOURNAL
Amount Amount
(`) (`)
Machinery A/c Dr. 25,000
Investments A/c Dr. 2,000
Provision for Outstanding Bill Dr. 1,000
To Revaluation A/c (Increase in value of 28,000
Assets i.e. Machinery and investment
and reduction in provision)
Revaluation A/c Dr. 12,000

To Land and Building A/c (Decrease in 12,000
value of assets)
Revaluation A/c Dr. 16,000
53
To Mudit’s Capital A/c To Mohit’s 8,000
Capital A/c To Sonu’s Capital A/c
5,333
(Gain on revaluation credited to all
2,667
partners capital A/c in old profit sharing
ratio i.e. 3 : 2 : 1)
Revaluation Account
Particulars Amount Particulars Amount
(`) (`)
Land and Building 12,000 Machinery 25,000
Profit transferred to : Investments 2,000
Mudit Capital 8,000 Provision for 1,000
Mohit Capital 5,333 Outstanding Bill
Sonu Capital 2,667 16,000
28,000 28,000
TREATMENT OF ACCUMULATED RESERVES AND UNDISTRIBUTED PROFIT
All the balances of Accumulated Reserves, funds and undistributed amount of Profitor Loss appearing in the balance
sheet of the firm on the date of retirement/death isdistributed amongst all partners including retiring/deceased partner
in their old profitsharing ratio, The following entries are made:
For distribution of undistributed profit and reserve.

Reserves A/c Dr
Profit & Loss A/c (Profit) Dr.
To Partners’ Capital A/c (individually)(Reserves and
Profit & Loss (Profit)
transferred to all partners capitals A/cin existing profit
sharing ratio)
54
For distribution of undistributed loss
Partners’ Capital A/c Dr. (individually)To Profit & Loss
A/c (Loss)
(Profit & Loss (loss) transferred to all partners
Capitals A/c in old profitsharing ratio)
DEATH OF A PARTNER
On the death of a partner, the accounting treatment regarding goodwill, revaluation of assets and reassessment
of liabilities, accumulated reserves and undistributed profitare similar to that of the retirement of a partner. On
the death of partner, the amount payable to him/her is paid to his/her legal representatives. The legal
representativesare entitled to the followings:
(a) The amount standing to the credit of the capital account of the deceased partner.
(b) Interest on capital, if provided in the partnership deed upto the date of death.
(c) Share of goodwill of the firm.
(d) Share of undistributed profit or reserves.
(e) Share of profit on the revaluation of assets and liabilities.
(f) Share of profit upto the date of death.
(g) Share of Joint Life Policy.
The following amounts are debited to the account of the deceased partner’s legalrepresentatives:
(i) Drawings
(ii) Interest on drawings
(iii) Share of loss on the revaluation of assets and liabilities;
(iv) Share of loss that have occurred till the date of his/her death.
The above adjustments are made in the capital account of the deceased partner and then the
balance in the capital account is transferred to an account opened in the nameof his/her executor.
The payment of the amount of the deceased partner depends on the agreement. Inthe absence
of an agreement, the legal representative of a deceased partner is entitledto interest @ 6% p.a. on
the amount due from the date of death till the date of finalpayment.
Calculation of Profit upto the Date of Death of a Partner
If the death of a partner occurs during the year, the representatives of the deceasedpartner are
entitled to his/her share of profits earned till the date of his/her death. Suchprofit is ascertained by
55
any of the following methods:
(i) Time Basis; (ii) Turnover or Sales Basis

Time Basis
In this case, it is assumed that profit has been earned uniformly through out the year.For
example:
The total profit of previous year is ` 2,25,000 and a partner dies three months afterthe close of
previous year, the profit of three months is ` 31,250 i.e. ` 1,25,000
× 3/12. If the deceased partner took 2/10 share of profit, his/her share of profit tillthe date of
death is ` 6,250 i.e. ` 31,250 × 2/10
Turnover or Sales Basis
In this method, we have to take into consideration the profit and the total sales ofthe last year.
Thereafter the profit upto the date of death is estimated on the basisof the sale of the last year.
Profit is assumed to be earned uniformly at the same rate.
Illustration 12
Arun, Tarun and Neha are partners sharing profits in the ratio of 3 : 2 : 1 Neha dieson 31st May
2014. Sales for the year 2013-2014 amounted to ` 4,00,000 and theprofit on sales is ` 60,000.
Accounts are closed on 31 March every year. Sales fromlst April 2014 to 31st May 2014 is `
1,00,000.
Calculate the deceased partner’s share in the profit up to the date of death.
Solution :
Profit from 1st April 2014 to 31st May 2014 on the basis of sales:If sales are `
4,00,000, profit is ` 60,000
If the sales are ` 1,00,000 profit is : ` 60,000/` 4,00,000 × ` 1,00,000

= `15,000
Neha’s share = ` 15,000 × 1/6 = ` 2,500
Alternatively, profit is calculated as
Rate of profit = 60000/400000*100 =15%
Sale up to date of death = 100000

56
Profit = 100000 * 15/100 = 150
Illustration 13
Nutan, Sumit and Shiba are partners in a firm sharing profits in the ratio 5 : 3 : 2.On 31st
December 2014 their Balance Sheet was as under:

(`) (`)
Creditors 52,000 Building 60,000

Reserve Fund 15,000 Plant 50,000
Capitals : Stock 27,000
Nutan 60,000 Debtors 25,000
Sumit 45,000 Cash 10,000
Shiba 30,000 1,35,000 Bank 30,000
2,02,000 2,02,000
Nutan died on 1 July 2015. It was agreed between her executor and the remaining partners that:
Goodwill to be valued at 2½ years purchase of the average profits of the lastFour years, which were:
2011 ` 25,000; 2012 ` 20,000; 2013 `40,000 and 2014 `35,000.
(i) Building is valued at ` 70,000; Plant at `46,000 and Stock at ` 32,000.

(ii) Profit for the year 2015 be taken as having accrued at the same rate as thatof the
previous year.
(iii) Interest on capital is provided at 9% p.a.
(iv) On 1 July 2015 her drawings account showed a balance of `.20,000.
(v) ` 25,950 are to be paid immediately to her executor and the balance istransferred
to her Executors Loan Account.
Prepare Nutan’s Capital Account and Nutan’s Executor’s Account as on 1st July2015
Solution :
Valuation of Goodwill:
Total Profit = ` 25,000 + ` 20,000 + ` 40,000 + ` 35,000
= ` 1,20,000
Average Profit = ` 1,20,000/4 = ` 30,000
57
Hence, Goodwill at 2½ year’s purchase = ` 30,000 × 2½ = ` 75,000Nutan’s
share of goodwill = ` 75,000 × 5/10 = ` 37,500
It is adjusted into the Capital Accounts of Sumit and Shiba in the gaining ratioof 3 : 2 i.e.
` 22,500 and ` 15000 respectively.
(i) Share of Profit payable to Nutan [upto the date of death]

= ` 35,000 × 6/12 × 5/10
= ` 8,750
(ii) Nutan’s Share of Reserve Fund = ` 15,000 × 5/10

= ` 7,500
(iii) Interest on Nutan’s Capital = ` 60,000 × 9/100 × 6/12

= ` 2,700
Revaluation Account

(`) (`)
Plant 4,000 Building 10,000

Profit transferred to Stock 5,000
Nutan Capital 5,500
Sumit Capital 3,300
Shiba Capital 2,200 11,000
15,000 15,000
Nutan’s Capital Account

(`) (`)
Drawings 20,000 Balance b/d 60,000

Nutan’s Executor’s 1,01,950 Reserve fund 7,500
Sumit’s Capital (Goodwill) 15,000
Shiba’s Capital (Goodwill) 22,500
58
Profit & Loss (Suspense) 8,750
Revaluation A/c 5,500
Interest on Capital 2,700
1,21,950 1,21,950
Nutan’s Executor’s Accounts

(`) (`
Bank 25,950 Nutan’s Capital 1,01,950

Nutan’s Executor’s
Loan A/c (Transfer) 76,000
1,01,950 1,01,950
59
UNIT-V
DISSOLUTION OF PARTNERSHIP FIRM WITH INSOLVENCY
Dissolution of firm – The dissolution of partnership between all the partners of a firm is called
the dissolution of the firm. In the case of dissolution of a firm, the business of the firms is
closed down and its affairs are wound up. The assets are realized and the liabilities are paid
off.
Model of dissolution of firm –
Dissolution without the intervention of the court
a) Dissolution by agreement
b) Compulsory dissolution
c) Dissolution on the happening of certain contingencies.
d) Dissolution by notice Dissolution by the court
e) Insanity
f) Permanent incapacity
g) Misconduct
h) Breach of agreement
i) Transfer of interest
j) Loss in business
k) Just and equitable
Steps in the dissolution process –

Step 1 Prepare a balance sheet of the firm as on the date of the dissolution of the firm.
Step 2 Realize the non-cash assets which are not acceptable for distribution in their present form, pay
the debts of the firm to third parties. Realization account is prepared to calculate the loss or
profit on realization of assets and settlement of liabilities. Loss or profit on
realization of assets and settlement of liabilities is transferred to partners’ capital accounts.
Step 3 Pay the amount due to each partner ratably for advances (or Loan)
Step 4 Pay the available cash to the partners.
Accounting treatment on dissolution of firm –

In case of dissolution of firm the following accounts are prepared to close the books of the firm –
1) Realisation Account
2) Partners’ loan account
3) Parnters’ capital account
4) Cash or bank account
1) Realization account – This is a special type of account. It is a nominal account. The

purpose of preparing this account is to find out the result of realization of assets
and discharge of liabilities. The following steps involved in preparing this account.
Step 1. For Transfer of all accounts given in the balance sheet
For transfer of assets – All the assets except cash in hand, cash at bank,
60
debit balance of current accounts of partners and fictitious assets are
transferred to debit of this account at book values as under –
Realisation A/c Dr.
To Various assets (individually)
(For transfer of various assets to realization a/c)
a. For transfer of outside liabilities – All the external liabilities including
partners loan are transferred to the credit of realization account at book
value as under –
Various Liabilities A/c Dr.
To Realisation A/c
(For transfer of various liabilities to realisation a/c)
Note: Liabilities have got credit balance, so debiting to close them.

Step 2. Disposal of assets For sale of assets
Cash / Bank A/c Dr.
To Realisation A/c (For
assets realised in cash)
Asset taken over by partner
Partner's Capital A/c Dr.
To Relisation A/c
(For assets taken over by a partner)
Step 3. Entry for payment of dissolution expenses
a. For cash payment
Realisation A/c Dr.
To Cash / Bank A/c
(For payment of dissolution expenses)
b. For payment made by a partner
Realisation A/c Dr.
To Partner's Capital A/c
(For dissolution expenses paid by a partner)
Note : if any partner is to bear all expenses of realisation, no journal entry is required in the
books of the firm but in this case if the partner is paid the realisation expenses, the following
entry will be made :
Partner's Capital A/c Dr.
To Cash / Bank A/c
(For dissolution expenses paid on behalf of a partner.)
Step 4. Entry for payment of outside liabilities :
a. For cash payment
Realisation A/c Dr.
To Cash / Bank A/c
(For payment to outside liabilities)
b. For liabilities taken over by a partner
Realisation A/c Dr.
61
To Partner's Capital A/c
(For liabilities taken over by
a partner)
Step 5. Entry for closing realisation account
a. In case of profit
Realisation A/c Dr.
To Partners' Capital A/c
(For profit on realisation transferred to partner's capital a/cs in their profit sharing
ratio)
b. In case of loss
Partners' capital A/cs Dr.
To Realisation A/c
(For loss on realisation transferred to partners' capital a/cs in their profit sharing
ratio)
Note : (1) Intangible assets such as goodwill, patents, copyrights, prepaid expense are normally
value less in case of dissolution. So if a question is silent it should be presumed that nothing could
be realised from such assets. (2) If question is silent about the realisation of tangible assets it is
presumed that their book values have been realised.
2) Partner’s loan Account – This are transferred to the credit side of realization account and
the payments there of are shown on debit side of realization account. Alternatively the
payment can be credited directly to cash account.
3) Partner’s capital accounts – All the reserved and undivided profit or loss, realization
profit or loss, balance of current accounts. Now the difference is adjusted in cash if there is
credit balance it is surplus to be withdrawn by the concerned partner from their personal
resources. Entry for surplus withdrawn or deficiency brought in by the concerned partner
from their personal resources. Entry for surplus withdrawn or deficiency brought in are as
under –
a. Cash/Bank A/c Dr.
To Partner’s capital A/c
(For deficit amount of capital brought in cash)
Partner’s Capital A/c
To cash/Bank A/c
(For final payment made to a partners)
Cash account – At first opening balance is written. Then cash at bank is also transferred to this
account. Amount realized from assets and deficiency brought in by partners is debited to this account
and payment of liabilities, realization expenses and surplus withdrawn by partners are credited. Now
both side of cash account will be equal. The agreement of both the sides of cash account is the cross
checks of accounting and arithmetical accuracy.
62
Formate of Accounts Realisation A/c
To land and Building A/c By Creditors a/c
To Plant Machinery A/c By B/P A/c
To furniture A/c By Bad Debts Reserve A/c
To investment A/c By Bank Loan A/c
To stock A/c By Bank Overdraft A/c
To Debtors a/c By Loan A/c
To B/R A/c By Cash A/c (Assets Realised)
To cash A/c (Payment of Liabilities) By Capital A/c (Assets taken)
To Capital A/c (Liab. Taken by Partners) By Capital A/cs (Loss):
To Cash A/c (Realization Exps.)
To Capital A/cs (Profit):
Partner’s Capital A/cs

Particulars Particulars
To Balance b/d By Balance
To Current A/c b/d By current
To P & L A/c (Loss) A/c
To Realisation A/c By P & L A/c (Profit)
(Assets taken) By General Reserve
To Realisation A/c (Loss) A/c
To cash A/c (Surplus) (Bal. fig) By Realisation (Liab.
Taken) By Realisation A/c
(Profit)
By Cash A/c (Deficiency )
(Bal. fig)
Cash A/c
To Balance b/d (cash in hand) By Realisation A/c (Paymnet of Liab.)
To Bank A/c (Cash at bank) By Realisation A/c (Exp.)
To Realisation A/c (Assets Realised) By Capital A/c (Surplus Refund)
To Capital A/c (Deficiency brought)
Insolvency of Partners
At the time of dissolution of a partnership firm, the capital account of a partner may show a debit
balance after his share of realization loss or profit and accumulated profits or losses etc. have been
transferred to his capital account. In such a case, the partner is a debtor of the firm to the extent of
debit balance in his capital account and he has to bring in the necessary cash to make up the deficiency
in his capital account. If the partner is unable to bring in the necessary cash, e.g. when he cannot
pay in full the amount of debit balance in the capital account, he is said to be insolvent. The solvent
partners have to bear the capital deficiency of the insolvent partner. There is no provision in the Indian
63
Partnership Act., 1932 regarding this matter. Therefore, if there is a provision regarding this matter
in the partnership deed it would be decisive. The partners may provide in partnership deed that loss
due to insolvency of a partner will be shared by the solvent partners in their profit-sharing ratio or
any other ratio. But the problem arises when there is no provision in the partnership deed regarding
this matter.
Decision in Garner V/s Murray

In this case Garner, Murray and Wilkins were equal partners in England. Their capitals were
unequal. The Balance Sheet of the firm after satisfying all the liabilities were as follows:
Balance Sheet
Liabilities Rs Asset Rs
Capital Cash 1,916
Accounts: 2,500 Wilkins— Overdrawn 263
Garner 314 Deficiency (Realisation loss) 635
Murray 2,814 2,814
Wilkins was insolvent and unable to pay anything. Thus the assets of the firm were not sufficient to
repay the capitals in full. There was a dispute between the solvent partners regarding the method of
sharing of loss due to insolvency of Wilkings. Justice Joyce held in 1904 as follows:
"The solvent partners are only liable to make good their share of the deficiency, and that the
remaining assets should be divided among them in proportion to their capitals,"
In other words, the learned judge held as follows:
The solvent partners should bring in cash their share of the realisation loss.
The loss due to insolvency of a partner should be borne by the solvent partners in proportion to their last
agreed capitals.
It should noted that a partner having a debit balance or nil balance, will not have to bear the loss
due to insolvency of a partner.
The decision in the above case has taken into consideration only the book capital of the
partners. It ignores the private estate of the solvent partners.
Meaning of last agreed capitals

In case of fixed capital method, the expression, "Last Agreed Capitals" means the fixed capital. In
case of fluctuating capital method, it means the capitals after malting adjustment for accumulated
profits and losses, drawings, interest on capital, salary to a partner etc. to the date of dissolution but
before transferring realisation loss or profit.
64
Applicability of Garner V/s Murray to India
It is reasonable to assume that Garner v. Murray case will also apply to India as S. 48 of the Indian
Partnership Act., 1932 is almost identical with S.44 of the English Partnership Act and there has been
no case law which has examined the question of sharing of loss due to the insolvency of a partner.
However, some Accountants contend that the above decision is not inconformity with S.48 (a) of
the Indian Partnership Act., 1932. The students, in an examination problem, should indicate whether
or not the ruling in Garner v. Murray has been applied.
Piecemeal distribution of cash

It has been presumed so far that all the assets are realised on the date of dissolution and all the liabilities
are also simultaneously discharged on the same day itself. But usually this is not true in practice. In
actual practice, assets are realised gradually and liabilities are paid gradually depending upon the
amount realised from the sale of assets. Therefore, the realsiation loss or profit can be ascertained only
after the realisation of all assets and payment of all liabilities. Available cash is used in the following
order:
1. Payment of realisation expenses or a provision is made for realisation expenses.
2. Payment of outside liabilities i.e., bank loan, sundry creditors, bills payable, outstanding
expenses etc. It must be noted here that a secured creditor has priority whenever an asset
provided by way of security to the concerned creditor is realised. After satisfying the
claim of the secured creditor the surplus, if any, is paid to unsecured creditors. Amount
realised from an asset which is not charged or mortgaged is used to pay all the creditors,
whether secured or unsecured in the ratio of their claims.
3. Payment of partners' loan in the ratio of their respective loans.
4. Payment of partners capitals.
If there is any contingent liability an account of bills discounted, a provision should be made in the
beginning for the same and when provision is no longer required, the amount should be distributed.
Basis of distribution of cash among partners

The following are the two basis of distribution of cash among partners:
1. Proportionate or surplus capital method
2. Maximum loss method
Proportionate or surplus capital method

Under this method, the partner who have contributed more capital than his proportionate share
are paid off first. In other words, the partners who have surplus capital are given the payment
first. The following procedure should be adopted for calculation of surplus:
Step 1 Calculate adjusted capitals of all the partner after making adjustment for accumulated
65
profits and losses and transfer of balances of current accounts etc.
Step 2 Divide the adjusted capitals of all partners by their respective profit sharing ratio and
treat the smallest quotient as base capital.
Step 3 Calculate proportionate capitals by multiplying base capital and profit shaft ratio.
Step 4 Calculate surplus capitals by subtracting proportionate capital (step 3)from adjusted
capital (Step 1)
Step 5 If there is only one partner having surplus capital make payment to that partner first to
the extent of surplus capital. If there are two or more partner having surplus capitals and surplus
capitals are in profit sharing ratio, distribute cash among such partners to the extent of surplus
capitals in the profit sharing ratio. If there are two or more partners having surplus capitals and
the surplus capitals are not in profit sharing ratio, go to the next step.
Step 6 Divide surplus capital of the concerned partners (Step 4) by their profit sharing ratio
and treat the smallest quotient as revised base capital.
Step 7 Calculate the proportionate surplus by multiplying the revised base capital (Step 6).
Step 8 Calculate the excess surplus capital by subtracting revised proportionate surplus (Step
7) from surplus capital (Step 4)
Step 9 See step 5 and repeat the process until there is only one partner having excess surplus.
The partner or partners having excess surplus are paid off first to the extent of excess surplus
and after that payment is made to the partners having surplus capitals to the extent of surplus
capitals and lastly payment is made to all the partners in the profit sharing ratio.
Maximum Loss Method

Under this method, it is assumed that every installment realised is a final realisation, i.e., the
remaining assets will realise nothing. The following procedure is adopted for distribution of
cash among the partners after the payment has been made for outside liabilities and partners’
loan :
Step 1. Calculate the adjusted capitals of the partners after making adjustments for accumulated profits
and losses, transfer of balance of current accounts etc.
Step 2. Calculate the maximum possible loss assuming that the remaining assets are worthless.
Maximum possible loss is calculated by subtracting cash available from the total of the balances of
adjusted capital accounts.
Step 3. Distribute the maximum possible loss among the partners in their profit sharing ratio.
Step 4. Calculate the balances of capital accounts of partners after distribution of maximum possible
loss.
Step 5. If the balances of capital accounts of all the partners (Step 4) show positive balances, distribute
the available cash among the partners equal to their respective balances of capital accounts (Step 4).
On the other hand, if balance of capital account of any partner (Step 4) shows a negative balance,
transfer the negative balance of that partner to the capital accounts of other partners having positive
balances in the ratio of capitals just before dissolution assuming the partner having negative balance as
insolvent. If the capitals are fixed the negative balance should be transferred in the fixed capital ratio
and in case of fluctuating capitals after adjusting for accumulated profits and losses. This process is
repeated till the negative balance is completely transferred. Distribute the available cash to the partners
whose capital balances after transfer of negative balance, show positive balances and the amount paid
66
will be equal to their respective balances of capital accounts.
Step 6. Calculate the balances due after subtracting the amount paid (Step 5) from the adjusted capitals
(Step 2)
Step 7. Calculate the maximum possible loss at the time of next realisation. Maximum possible loss at
this stage will be calculated by subtracting the available cash at this stage from the balances due (Step
6)
Step 8. Go to Step 5.
Step 9. Calculate the balance due at this stage after subtracting the amount paid (Step 8) from the
balances due (Step 6) and repeat the process till the final realisation.
This method is suitable when a partner is insolvent or is likely to be insolvent.
Illustration 1
Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1 Their balance sheet
as on March 31, 2017 is as follows:
Balance Sheet of Sita, Rita and Meeta as on March 31, 2017

(Rs.) (Rs.)
General Reserve 2,500 Cash at bank 2,500
Creditors 2,000 Stock 2,500
Capitals: Furniture 1,000
Sita 5,000 Debtors 2,000
Rita 2,000 Plant and Machinery 4,500
Meeta 1,000 8,000
12,500 12,500
They decided to dissolve the business. The following amounts were realised: Plant and Machinery
Rs.4,250, Stock Rs.3,500, Debtors Rs.1850, Furniture 750. Sita agreed to bear all realisation paid
by the firm expenses. For the service
Sita is paid Rs.60.Actual expenses on realisation paid by the firm amounted to Rs.450.Creditors
paid 2% less. There was an unrecorded assets of Rs.250, which was taken over by Rita at Rs.200.
Prepare the necessary accounts to close the books of the firm.
Solution
Books of Sita, Rita and Meeta
D r. Realisation Account Cr.

(Rs.) (Rs.)
Creditors 2,000
Stock 2,500 Rita’s capital 200
Furniture 1,000 [Unrecorded assets]
Debtors 2,000 Bank [assets realised]:
Plant and Machinery 4,500 Plant and Machinery 4,250
Bank [Creditors] 1,960 Debtors 1,850
Sita’s capital 60 Stock 3,500
67
(realisation expenses] Furniture 750 10,350
Profit transferred to:
Sita’s capital 212
Rita’s capital 212
Meeta’s capital 106 530
12,550 12,550
Date Particulars J.F. Sita Rita Meeta Date Particulars J.F. Sita Rita Meeta
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)
Mar. Bank 450 Mar. Balance b/d 5,000 2,000 1,000
31 Realisation 200 31 Reserve fund 1,000 1,000 500
(asset)
Bank 5,822 3,012 1,606 Realisation
[profit] 212 212 106
Realisation
(expenses) 60 — —
6,272 3,212 1,606 6,272 3,212 1,606
Bank Account
Date Particulars J.F. Amount Date Particulars J.F. Amount

2017 (Rs.) 2017 (Rs.)
Mar. Balance b/d 2,500 Mar. Realisation (Creditor) 1,960

31 Realisation 31 Sita’s Capital 450
(assets realised) 10,350 [expenses]
Sita’s Capital 5,822
Rita’s Capital 3,012
Meeta’s capital 1,606
12,850 12,850
68
Illustration 3
Record journal entries at the time of dissolution of a partnership firm of Vibha,
Shobha and Anubha in the following cases:
a) Dissolution expenses amounted to Rs. 6,500.
b) Dissolution expenses Rs. 7,800 were paid by Anubha.
c) Vibha was appointed to look after the dissolution process for which she was
given a remuneration of Rs. 12,000
d) Shobha was appointed to look after the dissolution work for which she was
allowed a remuneration of Rs.15,000. She agreed to bear dissolution expenses.
Actual dissolution expenses paid by her amounted to Rs. 11,800.
e) Anubha was to look after the dissolution process for which she was allowed a
remuneration of Rs. 12,000 she also agreed to bear dissolution expenses.
Actual expenses Rs. 9,500 were paid by the firm.
f) Anubha looked after the dissolution work for remuneration of Rs. 8,500 and
agreed to bear dissolution expenses upto Rs. 6,000. Actual expenses paid by her
were Rs. 7,600.
g) Vibha was appointed to look after the dissolution work for which she was
allowed a remuneration of Rs. 14,000. She agreed to take over investment
h) of the book value of Rs. 13,000 towards payment of her remuneration.
Investments have already been transferred to realisation Account.
Book of Vibha, Shobha and Anubha

201 Amount Amoun
7 (Rs.) t
(Rs.)
(a) Realisation A/c Dr. 6,500
To Cash / Bank A/c 6,500
(Dissolution expense paid by the firm)
(b) Realisation A/c Dr. 7,800
To Anubha's Capital A/c 7,800
(Dissolution Expenses paid by Anubha)
(c) Realisation A/c Dr. 12,000
To Vibha's Capital A/c 12,000
(Remuneration given to
Vibha)
(d) Realisation A/c Dr. 15,000
To Shobha's Capital A/c 15,000
(Remuneration allowed to Shobha
for looking after dissolution work)
(e) (i) Realisation A/c Dr. 12,000
(Remuneration allowed to
Anubha)
(ii) Anubha's Capital A/c Dr. 9,500
69
To Cash /Bank A/c 9,500
(Dissolution expenses paid by the
firm and borne by Annubha)
(f) (i) Realisation A/c Dr. 8,500
(Remuneration payable to
Anubha)
(ii) Realisation A/c Dr. 1,600
(Dissolution expenses paid by
Anubha on behalf of the firm)
(g) No Entry
llustration 4
Nayana and Arushi were partners sharing profits equally Their Balance Sheet as on March 31, 2020
was as follows:
Balance Sheet of Nayana and Arushi as on March 31, 2017

(Rs.) (Rs.)
Capitals: Bank 30,000
Nayana 1,00,000 Debtors 25,000
Arushi 50,000 1,50,000 Stock 35,000
Creditors 20,000 Furniture 40,000
Arushi’s current account 10,000 Machinery 60,000
Workmen Compensation e 15,000 Nayana’s current account 10,000
Reserv
Bank overdraft 5,000
2,00,000 2,00,00
0
The firm was dissolved on the above date:

1. Nayana took over 50% of the stock at 10% less on its book value, and the
remaining stock was sold at a gain of 15%. Furniture and Machinery realised for
Rs.30,000 and Rs.50,000 respectively;
2. There was an unrecorded investment which was sold for Rs. 34,000;
3. Debtors realised 90% only and Rs.1,200 were recovered for bad debts written-off
last year;
4. There was an outstanding bill for repairs which had to be paid for Rs.2,000.
Record necessary journal entries and prepare ledger accounts to close the books
of the firm.
70
Books of Nayana and Arushi Journal

201 Amount Amount
7 (Rs.) (Rs.)
Realisation A/c Dr. 1,60,000
To Debtors 25,000
To Stock A/c 35,000
To Furniture A/c 40,000
To Machinery A/c 60,000
(Assets transferred to Realisation Account)
Creditors A/c Dr. 20,000
Bank overdraft A/c Dr. 5,000
To Realisation A/c 25,000
(Liabilities transferred to Realisation
Account)
Realisation A/c Dr. 27,000
To Bank A/c 27,000
(Creditors, Bank overdraft, Outstanding
repair bill paid)
Bank A/c Dr. 1,57,825
To Realisation A/c 1,57,825
(Assets sold and bad debts recovered)
Nayana’s Current A/c Dr. 15,750
To Realisation A/c 15,750
(Half stock take over by Nayana at 10% less)
Realisation A/c Dr. 15,575
To Nayana’s Current 5,788
A/c To Arushi’s 5,787
Current A/c
(Realisation profit transferred to partner’s
current account)
Workman Compensation Reserve Dr. 15,000
A/c To Nayana’s Current A/c 7,500
To Arushi’s Current A/c 7,500
(Compensation fund transfered to
partners’ Current account)
Arushi Current A/c Dr. 23,287
To Arushi’s Capital A/c 23,287
(Current account balance transferred
to Capital account)
Nayana Capital A/c Dr. 12,462
To Nayana’s Current A/c 12,462
(Current account balance transferred to
Capital account)
Nayana’s Capital Dr. 87,538
A/c Arushi’s Capital Dr. 73,287
A/c To Bank A/c 1,60,825
(Final amounts due to partners paid)
71
Realisation Account
(Rs.) (Rs.)
Creditors 20,000
Debtors 25,000 Bank 5,000
Stock 35,000 overdraft
Furniture 40,000 Bank: 34,000
Machinery 60,000 1,60,000 30,000
Investment
Bank: 50,000
Furniture
Creditors 20,000 22,500
Bank overdraft 5,000 Machinery
20,125
Outstanding bill 2,000 27,000 Debtors
Profit transferred to (90%) Stock : 1,57,825
: 1,200
Bad debts
Nayana’s capital 5,788 recovered
Arushi’s capital 5,787 11,575 Nayana’s capital 15,750
1,98,57 (stock taken 1,98,57
5 over) 5
Partners’ Current Accounts

Dat Particulars J.F. Nayan Arush Date Particulars J.F. Nayan Arush
e a i 201 a i
201 (Rs.) (Rs.) 7 (Rs.) (Rs.)
7
Balance b/d 10,000 Balance b/d 10,000
Realisation 15,750 Workmen 7,500 7,500
Arushi’s capital 23,287 Compensation
Reserve
Realisation 5,788 5,787
(profit)
Nayana’s Capital 12,462
25,75 23,28 25,75 23,28
0 7 0 7
Particulars J. Nayana Arushi Particulars J. Nayana Arushi
F. (Rs.) (Rs.) F. (Rs.) (Rs.)
Nayana’s 12,462 Balance b/d 1,00,000 50,000
current
account Arushi’s 23,287
Bank 87,538 73,287 current
account
1,00,000 73,287 1,00,000 73,287
Bank Account
Dat Particulars J.F. Amount Date Particulars J.F. Amount

e (Rs.) (Rs.)
Balance b/d 30,000 Realisation 27,000
Realisation 1,57,825 Nayana’s capital 87,538
Arushi’s capital 73,287
1,87,82 1,87,825
5
72
UNIT V
Amalgamation of Partnership Firms
Meaning of Amalgamation of Partnership Firms :
Amalgamation means to merge or to combine two or more business units carrying on same type of
business and form a new business unit. Amalgamation of partnership firms means merger of two or more
partnership firms withone another and form a new partnership firm. When two or more existing partnership
firms, carrying on same type of business, come together end their separate entity and form a new firm it is
called as amalgamation of partnership firms.
Amalgamation may be formed with any one of the following ways :
• Merging of two or more existing sole proprietors into each another and form a newpartnership firm.
• Merging one existing partnership firm with one existing sole proprietor and form a new partnership firm.
• Absorbing one existing partnership firm by another existing partnership firm.
• Merging two or more existing partnership firms with one another and form a newpartnership firm.
Objectives of Amalgmation of Partnership firms :
Amalgamation of partnership firm is done to achive the following objectives :
• To avoid the cut-throat competition.
• To minimize the common expenses of business.
• To get advantage of large scale business.
• To strengthen the capital position.
• To get advantage of expertise of different people, etc.
Accounting Procedure for Amalgamation of Partnership Firms :

Accounting for amalgamation of partnership firms includes closing the books of accounts of
amalgamating / old firms and opening the books of accounts of amalgamated / new firm. There
are two methods used for closing the books of accounts
1. Revaluation Method, and 2. Realization Method.

In Revaluation Method, a Revaluation or Profit & Loss Adjustment A/c is prepared to record
the effect of increase or decrease in the value of assets and liabilities. In Realisation Method, the
purchase price is calculated and all assets and outsider liabilities are transferred to Realisation A/c at
book values. In this unit the Revaluation Method is followed. As per this method, for closing the books of
accounts of old firms journal entries are to be passed taking into consideration the following points :
73
i) Revaluation of Assets and liabilities.
ii) Creation of Goodwill.
iii) Close Reserves and other Profit Accounts.
iv) Close Loss Account.
v) Close Assets and Liabilities Accounts which are not taken over by the new firm.
vi) Transfer / close Assets and Liabilities Accounts which are taken over by the new firm.
vii) Close Capital Accounts of the partners.
To open the books of accounts of the New Firm the journal entries are to be passed takinginto
consideration the following points :
i) Assets of the old firm taken over by the new firm.
ii) Liabilities of the old firm taken over by the new firm.
iii) Capitals of the partners of the old firm taken over by the new firm.
iv) Adjustment of Goodwill.
v) Adjustment of Capitals of the Partners.
1.2 Journal Entries and Ledger Accounts for Amalgamation of Partnership Firms :In the
amalgamation of partnership firms closing entries and opening entries are to be passed. The closing
entries are to be passed to close the books of accounts of amalgamating /
old firms and the opening entries are to be passed to open the books of accounts of amalgamated/
new firm.
Journal Entries in the Books of Old Firms (Closing Entries) :
i) For Revaluation of Assets and Liabilities : Assets and Liabilities of the old firms may be
revalued at the time of amalgamation. There may be increase or decrease in the valuesof assets and liabilities
which shows profit or loss. To record this profit or loss a Profit & Loss Adjustment A/c or Revaluation A/c
is to be opened. The net profit or loss on this account is tobe transferred to Partner's Capital A/c in the old
profit sharing ratio. For this purpose following journal entries are to be passed.
a) For increase in the value of asset and decrease in the value of Liability, which shows revalution
profit.
Particular Asset / Liability A/c ............. Dr.
To Profit & Loss Adjustment A/c / Revaluation A/c
b) For decrease in the value of asset and increase in the value of liability which shows revaluation
74
losss.
Profit & Loss Adjustment A/c / Revaluation A/c.......... Dr.
Particular Asset / Liability A/c
c) For closing the Profit & Loss Adjustment A/c / Revaluation A/c and transferring profit. Profit &
Loss Adjustment A/c / Revaluation A/c. ....................... Dr.
To Partner's Capital A/cs
(If there is a loss, a reverse entry will be passed)
ii) For Creation of Goodwill : If there is no goodwill account in the books of the old firmand if it is to
be created the following entry will be passed,
Goodwill A/c........................ Dr.
(Goodwill is to be transferred in the old profit sharing ratio)
iii) For closing Reserves and Profit Accounts : The balance on these accounts is to be transferred
to Partiner's Capital A/cs in the old profit sharing ratio.
Reserves A/c ................... Dr.
Profit & Loss A/c (Cr. Balance) ............ Dr.
iv) For closing Loss Account : The Profit & Loss A/c showing Dr. balance is a loss account It appears
on the asset side of the Balance sheet. The balance on this account also transferred to Partner's Capital A/cs
in the old profit sharing ratio.
Partner's Capital A/cs ............. Dr.
To Profit & Loss A/cs
v) For closing Assets and Liabilities A/cs which are not taken over by the NewFirm : Those
assets and Liabilities which are not taken over by the new firm will be either sold
away / paid off by the old firm or transferred to Partner / Partner's Capital A/cs in the capital ratio. The
profit or loss on such transaction will be transferred to P & L Adjustment A/c or directly to Partner's Capital
A/cs in the old profit sharing ratio. For this purpose following journal entries are to be passed.
a) If an asset is sold away for cash
Cash / Bank A/c .................... Dr.
To Particular Asset A/c
75
b) If an asset is taken over by the partner / partnersPartner/s
Capital A/c .................................... Dr.
To Particular Asset A/c
c) If a liability is paid off
Particular Liability A/c ............... Dr.
To Cash / Bank A/c
d) If a liability is taken over by the partner/ partnersParticular
Liability A/c ................................ Dr.
To Partner/s Capital A/c
vi) For closing Assets and Liabilities which are taken over by the New Firm : The accounts of assets
and liabilities which are taken over by the new firm will be closed by transferring them to the New Firm
A/c at agreed values.
a) For closing Assets
New Firm A/c...................Dr
To Assets A/c
b) For closing Liabilities
Liabilities A/c ..................... Dr
To New Firm A/c
vii) For closing Partner's Caital A/cs : Partner's Capital A/cs of the old firm are to be closed with the
net balance by transferring them to the New Firm A/c
Partner's Capital A/c .................. Dr
To New Firm A/c

Ledger Accounts if the Books of the Old Firms :
Form the above journal entries the follwing important ledger accounts will be prepared inthe books of
old firms.
i) Profit & Loss Adjustment A/c / Revaluation A/c
ii) Partner's Caital A/cs
iii) New Firm A/c
iv) Good will A/c
v) Partner's Current A/c, etc.
76
Journal Entries in the Books of the New Firm (Opening Entries) :
i) For Assets, Liabilities and Capitals of the Partners of the old firm taken over by the New
Firm :
Assets A/c .............. Dr. (at agreed values)To Labilities
A/c (at agreed values)

To Partner's Capital A/cs (at transferred balance)
ii) For Adjustment of Goodwill : The good will transferred from the old firm to the new firm may be
maintained as it is or may be written off or may be reduced by the New Firm. If the goodwill is written off
or reduced the entry will be as follows :
All Partner's Capital A/cs ................. Dr.
To Goodwill A/c
(All partner's capital A/c are debited in the new profit sharing ratio)
iii) For Adjustment of Capitals : If the capitals of the partners in the nw firm are changed as per the
new profit sharing ratio or as per the agreement, there is a need to pass journal entries for the adjustment
of capitals. The adjustments of capital may be made in cashor through current A/cs.
a) For cash brought in or through current A/c for adjustment of shortage of capitalCash / Bank
A/c ....................................... Dr.

Particular Partner Current A/c. ........... Dr.
To Particular Partner Capital A/c

b) For cash paid or through current a/c for adjustment of excess capitalParticular
Partner Capital A/c. ............................Dr.
To Cash / Bank A/c
To Particular Partner Current A/c
Ledger Accounts in the Books of New Firm : From the above journal entries the Opening Balance
Sheet of the new firm is to be prepared. Also, the Partner's Capital A/s, Cash/Bank A/c may be prepared.
Illustrations :
Illustration 1 : The following were the Balance Sheets of two firms M/s P and Q and M/s R and
S.
77
Balance Sheets as at 31/03/2012
Liabilities P&Q R&S Assets P&Q R&S

Rs. Rs. Rs. Rs.
Sundry Creditors 20000 25000 Cash at Bank 5600 6700
Mrs. P's Loan 5000 - Stock 20400 18300
Capitals - P 40000 - Debtors 15000 20000
Q 20000 - Furniture 4000 5000
R - 24000 Premises 40000 -
S - 16000 Investment - 15000
85000 65000 85000 65000
The two firms decided to amalgamate their business as from 1st January, 2013 under the name Bharat
Traders. For this purpose, it was agreed that Mrs. P's Loan should be repaid and the Investment of M/s. R
& S be not taken over by the new firm.
Goodwill of P & Q was fixed at Rs. 8000 and that of R & S at Rs. 10000. Premises wererevalued at
Rs. 50000, but the stock of P & Q was found overvalued by Rs. 4000. The stock ofR & S was undervalued
by Rs. 2000. A reserve for bad debts was created at 5% of both firms.
The total capital of Bharat Traders was to be 80000 and it was shared by the P, Q, R & Sin their new
profit sharing ratio which was 3 : 2 : 3 : 2 respectively.
Pass necessary journal entries to close the books of M/s P & Q and M/s R & S also pass opening
entries in the books of Bharat Traders. Prepare necessary accounts in the books of all the firms.
Solution :
Journal Entries in the Books of M/s P & Q (old Firm)(Closing
Entries)
Date Particulars L.F. Dr. Cr.
No. Rs. Rs.
1-1-2013 Premises A/c Dr. 10000 -
To Profit & Loss Adjustment A/c - 10000
78
or
To Revaluation A/c
(Being increase in value of premises)
Profit & Loss Adjustment A/c Dr. 4750
or
Revaluation A/c Dr.
To Stock A/c 4000
To Provision for Bad Debts A/c 750
(Being decrease in value of stock & debtors)
Goodwill A/c Dr. 8000
To P's Capital A/c 4000
To Q's Capital A/c 4000
(Being creation of goodwill)
Mrs. P's Loan A/c Dr. 5000
To Bank A/c 5000
(Being Mrs. P's Loan A/c paid)
or
Revaluation A/c Dr.
(Being revaluation profit transferred)
Bharat Traders A/c Dr. 94000
To Cash at bank A/c 600
To stock A/c To 16400

15000
79
Debtors A/c 4000
To Premises A/c 8000
To Goodwill A/c
(Being assets transferred to new firm) 20000
Sundry Creditors A/c Dr. 750
Provision for Bad Debts A/c Dr.
20750
To Bharat Traders A/c
(Being Liabities transferred to new firm) 46625

P's Capital A/c Dr. 26625
Q's Capital A/c Dr. 73250
To Bharat Traders A/c
(Being partners capital a/cs closed)
Ledger Accounts in the Books of M/s P & Q (old firm)

(Closing Accounts)
Profit & Loss Adjustment A/cor
Dr. Revaluation A/c Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.

No. No.
To Stock A/c 4000 By Premises A/c 10,000

To Provision for Bad 750
Debts A/c
10,000 10,000
80
Dr. Partner's Capital A/c Cr.
Particulars P Q Particulars P Q
Rs. Rs. Rs. Rs.
To Bharat Traders A/c 46625 26625 By Balance b/d 40000 20000
By P & L Adjustment A/c 2625 2625
By Goodwill A/c 4000 4000
46625 26625 46625 26625
Bharat Traders A/c (New Firm) Cr.
To Cash at Bank A/c 600 By Sundry Creditors A/c 20000
To stock A/c 16400 By Provision for Bad Debts A/c 750
To Debtors A/c 15000 By P's Capital A/c 46625
To Furniture A/c 4000 By Q's Capital A/c 26625 73250
To Premises A/c 50000
To Goodwill A/c 8000
94000 94000
Dr. Cash at Bank A/c Cr.
To Balance bid 5600 By Mrs P's Loan A/c 5000
By Bharat Traders A/c 600
5600 5600
81
Dr. Mrs P's Loan A/c Cr.
To Cash at Bank A/c 5000 By Balance bld 5000
5000 5000
Dr. Goodwill A/c Cr.
To P's Capital A/c 4000 By Bharat Traders A/c 8000
8000 8000
Journal Entries in the Books of M/s R & S (old firm)(Closing
Entries)

No. Rs. Rs.
Stock A/c Dr. 2000
To Profit & Loss Adjustment A/c 2000
(Being increase in value of stock)
Profit & Loss Adjustmennt A/c Dr. 1000
(Being decrease in value of debtors)
To R's Capital A/c 500
To S's Capital A/c 500
82
(Being profit transferred)
(Being goodwill created)
Bank A/c Dr. 15000
To Investment A/c 15000
(Being investment sold)
Bharat Traders A/c Dr. 77000
To Cash at Bank A/c 21700
To Stock A/c 20300
To Debtors A/c 20000
(Being assets transferred)
Sundry Creditors A/c Dr. 25000
Provision for Bad Debts A/c Dr. 1000
To Bharat Traders A/c 26000
(Being Liabilities transferred)
R's Capital A/c Dr. 29500
S's Capital A/c Dr. 21500
To Bharat Traders A/c 51000
(Being Partners Capital A/cs closed)
83
Ledger Accounts in the Books of M/s R & S (old firm)
(Closing Accounts)
Dr. Profit & Loss Adjustment A/c Cr.
To Provision for Bad Debts A/c 1000 By Stock A/c 2000
2000 2000
Particulars R S Particulars R S
Rs. Rs. Rs. Rs.
To Bharat Traders A/c 29500 21500 By Balance bld 24000 16000
By Profit & Loss
Adjustment A/c 500 500
29500 21500 29500 21500
Dr. Bharat Traders A/c (New Firm) Cr.
To Cash at Bank A/c 21700 By Sundry Creditors A/c 25000

To Stock A/c 20300 By Provision for Bad Debts A/c 1000
To Debtors A/c 20000 By R's Capital A/c 29500
To Furniture A/c 5000 By S's Capital A/c 21500 51000
77000 77000
84
Dr. Cash at Bank A/c Cr.
To Balance bld 6700 By Bharat Traders A/c 21700

To Investment A/c 15000
21700 21700
Dr. Investment A/c Cr.
To Balance bld 15000 By Bank A/c 15000
15000 15000
Dr. Goodwill A/c Cr.
To R's Capital A/c 5000 By Bharat Traders A/c 10000

10000 10000
Note : Investment of M/s R & S is not taken over by the new firm. It is treated as soldby the old
firm at book value.
85
Journal Entries in the Books of Bharat Traders (New Firm)(Opening Entries)

No. Rs. Rs.
Cash at Bank A/c Dr. 600
Stock A/c Dr. 16400
Debtors A/c Dr. 15000
Furniture A/c Dr. 4000
Premises A/c Dr. 50000
To Sundry Creditors A/c 20000
(Being assets, Liabilities & Partners Capitals
of M/s P & Q taken over)
Cash at Bank A/c Dr. 21700
Stock A/c Dr. 20300
To Sundry Creditors A/c 25000
29500
86
To S's Capital A/c
(Being assets, Liabilities & partners capitals
of M/s R & S taken over)

P's Capital A/c Dr. 22625
Q's Capital A/c Dr. 10625
R's Capital A/c Dr. 5500
S's Capital A/c Dr. 5500
To cash at Bank A/c 44250
(Being extra capital amount paid in cash)
Note : The total capital of Bharat Traders (New Firm) is fixed at Rs. 80000 and shared by all
partners in the ratio 3 : 2 : 3 : 2 . It is treated as the extra capital is paid in cash.
Ledger Posting in the Books of Bharat Traders (New Firm)
Balance Sheet of Bharat Tradersas on 1st
January, 2013 (Opening Balance Sheet)
Liabilites Rs. Assets Rs.
Capital A/cs Stock A/c 36700
P 24000 Debtors A/c 35000

Less - Provision for Bad Debts 1750 33250
Q 16000 Furniture A/c 9000
R 24000 Premises A/c 50000
S 16000 Goodwill A/c 18000
Sundry Creditors A/c 45000
Bank Loan A/c 21950
(44250 - 600 + 21700)
146950 146950
Dr.
87
Partner's Capital A/c Cr.
Particulars P Q R S Particulars P Q R S
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Cash at Bank A/c 22625 10625 5500 5500 By M/s P & Q 46625 26625 - -
(Bank Loan) By M/s R & S - - 29500 21500
To Balance cld 24000 16000 24000 16000
(New Capital)
44625 26625 29500 21500 46625 26625 29500 21500
By Balance bld 24000 16000 24000 16000
Illustration 2 : The Balance Sheets of M/s A & B and M/s C & D as on 31st December,2012 were as
follows :
Liabilities A&B C&D Assets A&B C&D

Rs. Rs. Rs. Rs.
Capital A/cs Land & Building 10000 12000

A 10000 - Machinery 7000 8000
B 10000 - Furniture 3000 3500
C - 10000 Debtors 6000 8500
D - 10000 Stock 8000 10000
Creditors 15000 10000 Cash & Bank 3000 1000
Loan - 10000
Outstanding Expenses 2000 3000
37000 43000 37000 43000
88
The two firms decided to amalgmate and form into A B & Co. with effect from 1st January, 2013.
Partners would share profit and losses equally between themselves as they were doing prior to amalgamation
and they agreed to following revaluation of assets and Liabilities.
Particulars A&B C&D

Rs. Rs.
Land & Building 10000 10000

Machindry 7000 8000
Furniture 2500 2500
Debtors 5500 7000
Stock 8000 8000
Outstanding Expenses 2000 3500
In addition to above it was decided :
a) That the new firm would not take over the loan of C and D.
b) That the goodwill of A and B and C and D were valued at Rs. 10000 and Rs. 5000 respectively in
the first instant but for the purpose of the Balance Sheet of the new firm, the combined goodwill would be
valued at Rs. 12000, and
C) The reconstructed capitals of partners should be Rs. 14000 each, partners introducing cash if
necessary.
You are required to prepare : Journal entries in the books of A & B
89
i) Profit & Loss Adjustment A/c, Partners Capital A/c and A B & Co. A/c in the books ofC & D.
ii) Journal entries and Opening Balance Sheet in the books of A B & Co.
Solution :
Journal Entries in the Books of A & B (Old Firm)(Closing
Entries)
Particulars Debit Credit

Rs. Rs.
1. Profit & Loss Adjustment A/c Dr. 1000
To Debtors A/c 500
(Being decrease in value of assets)
2. A's Capital A/c Dr. 500
B's Capital A/c Dr. 500
To Profit & Loss Adjustment A/c 1000
(Being loss transferred)
3. Goodwill A/c Dr. 10000
To A's Capital A/c 5000
To B's Capital A/c 5000
(Being goodwill created)
4. A B & Co. A/c Dr. 46000
To Land & Building A/c 1000
To Machinery A/c 7000
To Debtors A/c 5500
To Stock A/c 8000
To Cash & Bank A/c 3000
(Being assets transferred)
5. Creditors A/c Dr. 15000
90
Outstanding Expenses A/c Dr. 2000
To A B & Co. A/c 17000
(Being Liabilities transferred)
To A B & Co. A/c 29000
(Being Partner's Capital A/cs closed)
Ledger Accounts in the Books of C & D (Old Firm)(Closing

Accounts)
Particulars Rs. Particulars Rs. Rs.
To Land & Building A/c 2000 By C's Capital A/c 3500

To Furniture A/c 1000 By D's Capital A/c 3500 7000
To Debtors A/c 1500
To Stock A/c 2000
To Outstanding Expenses A/c 500
7000 7000
Particulars C D Particulars C D
Rs. Rs. Rs. Rs.
To Profit & Loss Adju- 3500 3500 By Balance bld 10000 10000
stment A/c By Goodwill A/c 2500 2500
By Loan A/c 5000 5000
To A B & A/c 14000 14000
17500 17500 17500 17500
91
Dr. A B & Co. A/c (New Firm) Cr.
To Land & Building A/c 10000 By Creditors A/c 10000
To Machinery A/c 8000 By Outstanding Expenses A/c 3500
To Furniture A/c 2500 By C's Capital A/c 14000
To Debtors A/c 7000 By D's Capital A/c 14000
To Stock A/c 8000
To Cash & Bank A/c 1000
41500 41500
Note : Loan of the C & D is not taken over by the new firm. It is treated as taken over bypartners in the
old firm.
Journal Entries in the Books of A B & Co. (New Firm)(Opening

Entries)
Particulars Debit Credit

Rs. Rs.
1. Land & Building A/c Dr. 10000

Machinery A/c Dr. 7000
Stock A/c Dr. 8000
Cash & Bank A/c Dr. 3000
To Creditors A/c 15000

(Being assets, liabilities and Capitals taken over)
2. Land & Building A/c Dr. 10000

Machinery A/c Dr. 8000
92
Stock A/c Dr. 8000
Cash & Bank A/c Dr. 1000
To Creditors A/c 10000
To C's Capital A/c 14000
To D's Capital A/c 14000
(Being assets, liabilities & Capitals tavenover)

C's Capital A/c Dr. 750
D's Capital A/c Dr. 750
(Being goodwill reduced)
4. Cash & Bank A/c Dr. 2000

To C's Capital A/c 750
To D's Capital A/c 750
(Being Cash brought in by partners)
Dr. Balance Sheet of AB & Co. Cr.
Liabilities Rs. Assets Rs.
Capitals - A 14000 Land & Building 20000
B 14000 Machinery 15000
C 14000 Furniture 5000
D 14000 Debtors 12500
Creditors 25000 Stock 16000
Outstanding Expenses 5500 Cash & Bank 6000
Goodwill 12000
93
86500 86500
Illustration 3 : Ajay and Vijay were in partnership sharing profits & loses in the ratio 3 : 2. They agreed to
amalgamate their business with that of Sanjay and form a new firm on March 31, 2011. As on that date their
Balance Sheets were as follows :
Liabilities Ajay & Sanjay Assets Ajay & Sanjay

Vijay Rs. Rs. Vijay Rs. Rs.
Capitals - Ajay 100000 - Freehold Premises 80000 -

Vijay 80000 - Furniture 24000 15000
Sanjay - 60000 Investments - 30000
Current A/cs Stock 60000 45000
Ajay 34000 - Debtors 24000
Vijay 28000 - Provision 2000 22000 18000
Sanjay - 8000 Bank 82000 -
Loan from Mahesh - 20000
Creditors 26000 16000
Bank Overdraft - 4000
268000 108000 268000 108000

The two firms were amalgamated on the following terms :
i) Profits & losses were to be shared : Ajay 2/5, Vijay 2/5 & Sanjay 1/5.
ii) An account for goodwill is to be maintained in the books of new firm, agreed values of goodwill of
each firm being : Ajay & Vijay Rs. 120000 and Sanjay Rs. 40000.
iii) Assets of Ajay & Vijay were valued as Freehold Premises Rs. 110000, FurnitureRs.21000,
Stock Rs. 69000, Debtors Rs. 23200.
iv) Investment of Sanjay was sold by him for Rs. 46000 and out of this sum he dischargedthe loan to
Mahesh and bank overdraft, the balance being taken over by the new firm.
You are required to prepare important accounts in the books of Ajay & Vijay and also inthe books of
Sanjay and prepare Balance Sheet in the books of New Firm assuming that capitalof new firm was to be Rs.
400000 countribted in their new ratio and any difference being adjusted through their current accounts.
Solution : Ledger Accounts in the Books of Ajay & Vijay.
To Furniture 3000 By Freehold Bemises A/c 30000

To Ajay's Capital A/c 22320 By Stock A/c 9000
To Vijay's Capital A/c 14880 By Debtors A/c 1200
94
37,200
40,200 40,200
Dr. Partner's Current A/c Cr.
Particulars Ajay Vijay Particulars Ajay Vijay

Rs. Rs. Rs. Rs.
To Partner's Capital 128320 90880 By Balance bld 34000 28000

A/c By P & L Adjustment A/c 22320 14880
128320 90880 128320 90880
Dr. New Firm A/c Cr.
To Freehold Premises A/c 110000 By Creditors A/c 26000

To Furniture A/c 21000 By Ajay's Capital A/c 228320
To Stock A/c 69000 By Vijay's Capital A/c 170880
To Bank A/c 82000
425200 425200
Particulars Ajay Vijay Particulars Ajay Vijay

Rs. Rs. Rs. Rs.
To New Firm A/c 228320 170880 By Balance bld 100000 80000
By Partner's Current A/c 128320 90880
228320 170880 228320 170880
95
Ledger Accounts in the Books of Sanjay
To Sanjay's Current A/c 16000 By Investment A/c 16000
16000 16000
Dr. Sanjay's Capital A/c Cr.
To New Firm A/c 124000 By Balance bld 60000
By Sanjay's Current A/c 64000
124000 124000
Dr. Sanjay's Current A/c Cr.
To Sanjay's Capital A/c 64000 By Balance bld 8000
By P & L Adjustment A/c 16000
By Goodwill A/c 40000
64000 64000
Dr. New Firm A/c Cr.
To Furniture A/c 15000 By Creditors A/c 16000
To Stock A/c 45000 By Sanjay's Capital A/c 124000
To Bank A/c 22000
140000 140000
96
Dr. Bank A/c Cr.
To Investment A/c 46000 By Loan From Mahesh A/c 20000

By Bank Overdraft A/c 4000
By New Firm A/c 22000
46000 46000
Dr. Investment A/c Cr.
To Balance bld 30000 By Bank A/c 46000

To P & L Adjustment A/c 16000
46000 46000
In the Books of New FirmBalance

Sheet
Capital A/cs Freehold Premises 1,10,000

Ajay 160000 Furniture 36000
Vijay 160000 Stock 114000
Sanjay 80000 Debtors 41200
Current A/cs Bank 104000
Ajay 68320 Goodwill 160000
Vijay 10880
Sanjay 44000
Creditors 42000
565200 565200
Illustration 4 : Two firms P & Q and R & S agreed to amalgamate their businesses. Their
positions as on 31st December 2012 were as follows :
97
Liabilities P&Q R&S Assets P&Q R&S
Rs. Rs. Rs. Rs.
Creditors 104000 52000 Bank 156000 65000
General Reserve 62000 6000 Debtors 130000 104000
Capitals stock 42000 26000
P/R 150000 90000 Office Building 78000 -
Q/S 100000 60000 Furniture 10000 13000
416000 208000 416000 208000
Creditors and Debtors of both the firms were not taken over by the new firm P Q R S. Office Building
was taken over by P & Q. Goodwill created Rs. 40000 and Rs. 20000 respectivelyof P & Q and R & S.
Prepare necessary accounts to close the books of P & Q and R & S and open Balance Sheet in the
books of P Q R S.
Solution : In the Books of P & Q.
Rs. Rs. Rs. Rs.
To Office Building A/c 46800 31200 By Balance bld 150000 100000
To PQRS A/c 154200 119800 By General Reserve 31000 31000
(New Firm) By Goodwill A/c 20000 20000
201000 151000 201000 151000
Dr. P Q R S A/c (New Firm) Cr.
To Stock A/c 42000 By P's Capital A/c 154200

To Furniture A/c 10000 By Q's Capital A/c 119800
To Bank A/c 182000
274000 274000
98
Dr. Bank A/c Cr.
To Balance bld 156000 By Creditors A/c 104000

To Debtors A/c 130000 By PQRS A/c 182000
286000 286000
Notes :
1. There is no need to prepare P & L Adjustment A/c because no change in the values ofassets &
liabilities.
2. Office Building is taken over by P & Q. It is in the capital ratio.
3. Creditors and Debtors are not taken over by the new firm. It is treated that thesetransactions
are made in cash.
In the Books of R & S

Rs. Rs. Rs. Rs.
To P Q R S A/c 103000 73000 By Balance bld 90000 60000

(New Firm) By General Reserve bld 3000 3000
103000 73000 103000 73000
Dr. Bank A/c Cr.
To Balance bld 65000 By Creditors A/c 52000
To Debtors A/c 104000 By PQRS A/c 117000
169000 169000
Dr. P Q R S A/c (New Firm) Cr.
To Stock A/c 26000 By R's Capital A/c 103000
To Furniture A/c 13000 By S's Capital A/c 73000
99
To Bank A/c 117000
176000 176000
In the Books of P Q R S (New Firm)Balance Sheet
Capital A/cs Stock 68000
P 154200 Furniture 23000
Q 119800 Bank 299000
R 103000 Goodwill 60000
S 73000
450000 450000
100

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DIRECTORATE OF DISTANCE

account – adjustment regarding goodwill -Adjustment regarding capital.

Partner’s loan – joint life policy.

partners and all partners – Garner Vs Murray rule

Distribution – Maximum loss method -amalgamation of firms

Text &Reference Books

Methods of maintaining accounts of Dependent Branches

When goods are invoiced at cost

Particulars Amount Particular Amount

Cash Sales 45,000 remittances to H.O.

Debtors 25,000 Cash from 1,20,000

Calculation of Sundry Debtors closing Balance:

When goods are invoiced at selling price

Branch Debtors Account

Entries in these accounts will be made in the following manner:

= 2,22,500 – 59,000 = 1,63,500

= 28,000 +2,40,000 – 2,20,000 = 48,000

Opening Stock (1.4.88) , 25,000 20,000

In the books of Z & Co

In the books of Z & Co

Total 755200 Total 755200

To Rent (3:1:1:1) 30000 10000 10000 10000

In the books of M/S ABC

By Gross Profit b/d 228760 183920 143560

To Rent 9600 9600 24000

Rights and Obligations of Partners

Duties and Obligations of Partners

Benefits of Partnership Deed

Profit sharing Ratio Equal, irrespective of capital contribution.

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

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

Salary or Commission to a Partner Not allowed to any partner

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

Distribution of Profits among Partners

2. For transferring Interest on Capital to p&L appropriation A/c.

To Profits transferred to capital B

Partner’s Capital Accounts

1. Fixed Capital Accounts

(i) Capital Account

Partner’s Capital A/Cs

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

(Capital Withdrawn) (Opening Cr. Balance)

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

(Closing balance) (Additional Capital Introduced)

(ii) Current Account

Partner’s Current A/Cs

To Balance b/d By Balance b/d

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

To Drawings By Interest on Capital

(out of Profits) By Partner’s Salary or Commission

To Interest on Drawings By Profit and Loss

To Profit and Loss A/c Appropriation A/c

(Share in losses) (Share in Profits)

To Balance c/d By Balance c/d

(Closing credit Balance) (Closing Dr. Balance)

To Balance b/d By Balance b/d

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

To Cash/Bank A/c By Cash/Bank A/c

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