Accountancy II

Text Book for
INTERMEDIATE
Second Year
ACCOUNTANCY
Telugu and Sanskrit Akademi

Andhra Pradesh
SRI. Y.S. JAGAN MOHAN REDDY
CHIEF MINISTER
ANDHRA PRADESH AMARAVATI
MESSAGE
I congratulate Akademi for starting its activities with printing of

Intermediate textbooksfrom the academic year 2021 – 22.
Education is a real asset which cannot be stolen by anyone and it is the
foundation onwhich children build their future. As the world has become a
global village, children willhave to compete with the world as they grow up. For
this there is every need for goodbooks and good education.
Our government has brought in many changes in the education system
and moreare to come. The government has been taking care to provide education
to the poorand needy through various measures, like developing infrastructure,
upgrading theskills of teachers, providing incentives to the children and parents
to pursue education. Nutritious mid-day meal and converting Anganwadis into
pre-primary schools with English as medium of instruction are the steps taken
to initiate children into educationfrom a young age. Besides introducing CBSE
syllabus and Telugu as a compulsorysubject, the government has taken up
numerous innovative programmes.
The revival of the Akademi also took place during the tenure of our
government as itwas neglected after the State was bifurcated. The Akademi,
which was started on August6, 1968 in the undivided state of Andhra Pradesh,
was printing text books, works of popularwriters and books for competitive
exams and personality development.
Our government has decided to make available all kinds of books required
for studentsand employees through Akademi, with headquarters at Tirupati.
I extend my best wishes to the Akademi and hope it will regain its past
glory.
Y.S. Jagan Mohan Reddy

Dr. Nandamuri Lakshmiparvathi
M.A. M.Phil., Ph.D.
Chairperson, (Cabinet Minister Rank)
Telugu and Sanskrit Akademi, A.P.
Message of Chairperson, Telugu and Sanskrit Akademi, A.P.
In accordance with the syllabus developed by the Board of Intermediate,

State Council for Higher Education, SCERT etc., we design high quality Text
books by recruiting efficient Professors, department heads and faculty members
from various Universities and Collegesas writers and editors. We are taking
steps to print the required number of these books ina timely manner and
distribute through the Akademi’s Regional Centers present acrossthe Andhra
Pradesh.
In addition to text books, we strive to keep monographs, dictionaries,
dialect texts,question banks, contact texts, popular texts, essays, linguistics texts,
school leveldictionaries, glossaries, etc., updated and printed and made available
to students fromtime to time.
For competitive examinations conducted by the Andhra Pradesh Public
Service Commission and for Entrance examinations conducted by various
Universities, thecontents of the Akademi publications are taken as standard.
So, I want all the studentsand Employees to make use of Akademi books of
high standards for their golden future.
Congratulations and best wishes to all of you.
Nandamuri Lakshmiparvathi
Chairperson, Telugu and Sanskrit Akademi, A.P.
J. SYAMALA RAO, I.A.S.,
Principal Secretary to Government Higher Educational Department
Government of Andhra Pradesh
MESSAGE
I Congratulate Telugu and Sanskrit Akademi for taking up the
initiative of printing and distributing textbooks in both Telugu and English
media within a short span of establishing Telugu and Sanskrit Akademi.
Number of students of Andhra Pradesh are competing of National

Level for admissions into Medicine and Engineering courses. In order
to help these students Telugu and Sanskrit Akademi consultation with
NCERT redesigned their Textbooks to suit the requirement of National
Level Examinations in a lucid language.
As the content in Telugu and Sanskrit Akademi books is highly

informative and authentic, printed in multi-color on high quality paper
and will be made available to the students in a time bound manner. I
hope all the students in Andhra Pradesh will utilize the Akademi textbooks
for better understanding of the subjects to compete of state and national
levels.
(J. SYAMALA RAO)

THE CONSTITUTION OF INDIA
PREAMBLE
WE, THE PEOPLE OF INDIA, having

solemnly resolved to constitute India into a
[SOVEREIGN SOCIALIST SECULAR
DEMOCRATIC REPUBLIC] and to secure to all
its citizens:
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith

and worship;
EQUALITY of status and of opportunity;

and to promote among them all
FRATERNITY assuring the dignity of the

individual and the [unity and integrity of the
Nation];
IN OUR CONSTITUENT ASSEMBLY this
twenty-sixth day of November, 1949 do HEREBY
ADOPT, ENACT AND GIVE TO OURSELVES
THIS CONSTITUTION.
Coordinating Committee of
Board of Intermediate Education, A.P.
Sri M.V. Seshagiri Babu, I.A.S.

Secretary
Board of Intermediate Education,
Andhra Pradesh
Educational Research & Training Wing (Text Books)
Dr. A. Srinivasulu
Professor
Sri. M. Ravi Sankar Naik

Assistant Professor
Dr. M. Ramana Reddy

Assistant Professor
Sri J.V. Ramana Gupta

Assistant Professor
Telugu and Sanskrit Akademi, Andhra Pradesh
Coordinating Committee
Sri V. Ramakrishna, I.R.S.

Director
Dr. M. Koteswaramma, M.Com., Ph.D.

Research Officer
Dr. S.A.T. Rajyalakshmi M.Sc., B.Ed., M.A., Ph.D.

Research Assistant
Dr. K. Glory Sathyavani, M.Sc., Ph.D., M.Ed.

Research Assistant
Foreword
The role played by the Akademi in stabilizing Telugu Medium at the level of
Higher Education since its inception (1968) is well known. The Akademi has rendered
needful services by publishing a number of Text Books, Reference Books, Translations,
Popular Series, Monographs, Dictionaries, Glossaries, Readings, etc., over the years.
Many among the above mentioned books were also reprinted as per the demand.
Sincere effort is being made to improve the quality of these books by conducting
workshops, refresher courses and also by taking suggestions given by the intellectuals
in general and the students and the teachers in particular.
Akademi has been revising and updating its publications in accordance with the
prescribed syllabi, as and when necessary. Akademi is publishing Text Books for
Intermediate in Telugu Medium since its inception. In addition, the Akademi has
entered a new phase of activity with the publication of language books from the year
1995, and preparation and publication of Intermediate Text books in English medium
from the year 1998, as entrusted by the Board of Intermediate education.
For the academic year 2014-15, the Board of Intermediate Education has revised
the syllabus of all Humanities Text Books for first year of Intermediate and entrusted
the preparation, printing and distribution of Text Books to Akademi. Accordingly,
Akademi prepared this Text Book strictly in accordance with the prescribed syllabus
for the academic year 2014-15.
We are indeed very much grateful to the Government of India, State Government,
State Universities, the Board of Governors of Telugu and Sanskrit Akademi. We also
thank the Commissioner, Intermediate Education and Secretary, Board of Intermediate
Education of Andhra Pradesh. We are also very much grateful to Text Book
Development Committee of the subject concerned for their valuable cooperation.
Constructive suggestions are solicited for the improvement of this book. The
suggestions received will be examined and incorporated in the subsequent editions.
Sri. V. Ramakrishna I.R.S.

Director
Telugu and Sanskrit Akademi,
Andhra Pradesh
Preface
This text book is written in accountancy with the new syllabus introduced w.e.f. 2015-
16 in Accountancy at Intermediate level. Service of experienced senior teachers have been
utilised in preparing this book. This text book is written in accoundance with the new syllabus
introduced w.e.f. 2015-16 in Accountancy at Intermediate level. Sevice of experience senior
teachers have been utilised in preparing this book.
This text book is divided into five units and 10 chapters. The authors of this text book
have been taking every care in simplifying and presenting the concepts in order to help even
non commerce students or other interested groups to understand and acquire the accounting
knowledge. This text book is divided into five units and 10 chapters. The authors of this text
book have been taking every care in simplifying and presenting the concepts in order to help
even non commerce students or other intrested groups to understand and accure the accounting
knowledge.
The adequate number of suitable institutions are given in each chapter to make the
reader to understand the subject matter. In addition to this summary to each topic is given at
the end of each chapter so as to enable the students to recollect the important points covered
reinforce the knowledge base. Constrictive suggestions are invited from subject experts, teachers
and students for further improvement of this book. We thanks the authors and officials of
the Board of Intermediate Education for there co-operation at every stage in bringing out
this book successfully.
Editors
Contents
Chapter - 1: Bills of Exchange 1 - 46

1.1 Meaning and Definition 1
1.2 Features of a Bill of Exchange 2
1.3 Parties to a Bill of Exchange 2
1.4 Advantages of a Bill of Exchange 3
1.5 Types of Bills of Exchange 4
1.5.1 Time and Demand Bills 4
1.5.2 Trade and Accommodation Bills 4
1.5.3 Inland and Foreign Bills 4
1.6 Difference between a Bill and a Promissory note 5
1.7 Difference between a Bill and a Cheque 5
1.8 Important Terminology 6
1.9 Accounting Treatment for Bills of Exchange 8
1.9.1 Methods of Dealing with a Bill of Exchange by Drawer 8
1.10 Honour of Bills of Exchange 11
1.11 Dishonour of Bills of Exchange 20
1.12 Renewal of a Bill 29
1.13 Retiring a Bill under Rebate 35
1.14 Insolvency of Drawee 37
Summary 40
Model Questions 41
Exercises 41
Chapter - 2: Depreciation 47 - 80
2.2 Need for Depreciation: 48
2.3 Causes of Depreciation 48
2.4 Accounting Treatment 49
2.4.1 Purchase of Asset 49
2.4.2 Use of Asset 49
2.4.3 Sale of Asset 49
2.5 Methods of providing depreciation 50
2.6 Straight Line Method 51
2.7 Reducing Balance Method 65
2.7.1 Difference Between Straight Line Method and Reducing Balance Method 66
Summary 75
Model Questions 75
Exercises 76
Chapter - 3: Consignment 81 - 110

3.1 Introduction 81
3.2 Characteristics/Features of Consignment 82
3.3 Difference between consignment and sale 82
3.4 Important Documents 83
3.4.1 Proforma Invoice 83
3.4.2 Account sales 83
3.5 Commission 84
3.5.1 Ordinary Commission 84
3.5.2 Del Credre Commission 84
3.5.3 Over- Riding Commission 85
3.6 Accounting Treatment in the Books of Consigner 85
3.6.1 Consignment Account 85
3.6.2 Consignee Personal Account 85
3.6.3 Goods sent on consignment Account 86
3.7 Accounting Treatment in the books of Consignee 89
3.7.1 Proforma of Consignors Account 90
3.8 Valuation of Unsold Stock 96
3.9 Loss of Stock-types 102
3.9.1 Normal Loss 102
Model Questions 104
Exercises 104
Chapter - 4: Not-For-Profit Organization 111 - 134

4.1 Introduction 111
4.2 Characteristics 112
4.3 Capital and Revenue Transactions 112
4.4 Distinction Between Profitable And Not-for-profit Organizations 113
4.5 Formation of Not-For-Profit organizations 113
4.6 Accounting Records to be maintained in Not-For-Profit Organizations 114
4.6.1 During the Accounting Period 114
4.6.2 At the end of the Accounting Year 114
4.7 Preparation of Receipts and Payments Account 115
4.7.1 Distinction between Receipts and Payments Account and Cash Book 115
4.7.2 Features of Receipts & Payment Account 115
4.7.3 Steps in Preparation of Receipts & Payments A/C 115
4.8 Preparation of Income and Expenditure Account 118
4.8.1 Features of Income and Expenditure Account 118
4.8.2 Distinction between Receipts and Payments Account and Income 119
and Expenditure Account
4.8.3 Proforma Of Income and Expenditure Account 120
4.8.4 Conversion of Receipts and Payments Account into Income and 121
Expenditure Account
4.9 Treatment of Important Items 121
4.10 Balance Sheet 123
Model Questions 124
Exercises 125
Chapter - 5: Partnership Accounts 135 - 158
5.3 Features of Partnership Firm 136
5.4 Partnership Deed 136
5.4.1 Rules Applicable in the Absence of an Agreement 137
5.5 Distribution of Profit/Loss among Partners 138
5.5.1 Profit and Loss Appropriation Account 138
5.6 Maintenance of Capital Accounts of Partners 139
5.7 Interest on Partner’s Loan 146
5.8 Interest on Capital 146
5.9 Interest on Drawings 149
Summary 154
Model Questions 155
Exercises 155
Chapter - 6: Admission of a Partner 159 - 202

6.2 New Profit Sharing Ratio 160
6.2.1 Sacrificing Ratio 163
6.3 Revaluation of Assets and Liabilities 164
6.4 Adjustments of Reserves and Accumulated Profit or Losses 170
6.5 Goodwill 172
6.5.1 Methods of Valuation of Goodwill 172
6.5.2 Treatment of Goodwill 174
6.6 Adjustment of Partners’ Capital 181
Summary 188
Model Questions 189
Exercises 190
Chapter - 7: Retirement/Death of a Partner 203 - 232
7.2 New Profit Sharing Ratio 204
7.2.1 Gaining Ratio 205
7.3 Revaluation of Assets and Liabilities 206
7.4 Adjustment of Accumulated Profits and Losses 207
7.5 Treatment of Goodwill 208
7.6 Adjustment of Capitals 211
7.7 Disposal of Amount Due to Retiring Partner 212
7.8 Share of Profits/Losses up to date of deceased Partner 218
Summary 223
Model Questions 224
Exercises 224
Chapter - 8: Company Accounts 233 - 250

8.2 Categories of Share Capital 234
8.2.1 Categories of share capital 234
8.2.2 Types of shares 235
8.3 Issues of shares 236
8.3.1 Shares issued at Par or Face value 236
8.3.2 Shares issued at Premium (Section 52) 241
8.3.3 Shares Issued at Discount (Section 53) 244
Summary 247
Model Questions 248
Exercises 249
Chapter - 9: Computerised Accounting System 251 - 262
9.2 Computers in Accounting 252
9.3 Process of Computerised Accounting System 253
9.4 Driving Forces for Computerised Accounting 254
9.5 Comparison of Manual and Computerized Accounting System 254
9.6 Advantages of Computerised Accounting System 256
9.7 Limitations of Computerised Accounting System 257
9.8 Sourcing of Accounting Software 259
9.9 Accounting Packages 259
Summary 261
Model Questions 262
Chapter - 10: Accounts from Incomplete Records 263 - 285

(Single Entry System)
10.2 Features of Accounts from Incomplete Records 264
10.3 Uses of Accounts from Incomplete Records 264
10.4 Limitations of Accounts from Incomplete records 265
10.5 Differences Between Single Entry System and Double Entry System 265
10.6 Preparing Statement of Affairs 266
10.7 Difference between Statement of Affairs and Balance Sheet 268
10.8 Ascertainment of Profit or Loss of Business 269
10.9 Application of Single Entry System to Partnership Firms 275
Summary 278
Model Questions 278
Exercises 278
Chapter
1
Bills of Exchange
1.1 Meaning and Definition
1.2 Features of Bills of Exchange
1.3 Parties to Bills of Exchange Goods can be sold or bought for cash or on
1.4 Advantages of Bills of Exchange credit. In case of cash transaction cash is paid to
1.5 Types of Bills of Exchange the seller and the goods are delivered to the buyer
1.6 Difference between a Bill and a at the same time. In case of credit transaction the
Promissory Note buyer promises the seller that he will pay the amount
1.7 Difference between a Bill and a of goods purchased after a certain period. The
Cheque person who purchased goods on credit becomes
1.8 Important Terminology the debtor. The buyer has to give a promise in
1.9 Accounting Treatment of Bills of written to pay the amount on a certain date. The
Exchange written promise may be in the form of a bill of
1.10 Honour of Bills of Exchange exchange or promissory note.
1.11 Dishonour of Bills of Exchange The bill of exchange contains an
1.12 Renewal of a Bill unconditional order to pay a certain amount on an
1.13 Retiring a Bill under Rebate agreed date. The promissory note contains an
1.14 Insolvency of Drawee unconditional promise to pay a certain amount on
a certain date. In India these instruments are governed by the Negotiable Instruments Act 1881.
Bills of Exchange are Instruments of Credit which facilitate the credit sale of goods.
“A Bill of Exchange is an instrument in writing containing an unconditional order signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument”.
Section 5 of the Negotiable Instruments Act, 1881.
2 Accountancy-II
1.2 Features of a Bill of Exchange

The features of a Bill of Exchange are as under.
1. A Bill of Exchange must be in writing.
2. It must contain an order and not a request to make payment.
3. The order of payment must be unconditional.
4. The amount of bill of exchange must be certain.
5. The date of bill of exchange should be clearly mentioned.
6. It must be signed by the maker or drawer of the bill.
7. It must be accepted by the drawee by signing on it.
8. The amount is payable either to a certain person or to his order or to the bearer of the
bill.
9. The amount in the bill of exchange is payable either on demand or on the expiry of a
fixed period.
10. It must be properly stamped as per legal requirements.
1.3 Parties to a Bill of Exchange

There are three parties to a Bill of Exchange.
1. Drawer : Drawer is the person who makes or writes the bill of exchange. In other
words he is the person who has granted credit to the person on whom the bill of exchange
is drawn.
2. Drawee: Drawee is the person on whom the bill of exchange is drawn for acceptance.
In other words he is the person to whom credit has been granted by the drawer.
3. Payee : Payee is the person who receives the amount of the bill on its maturity from the
drawee. Usually the drawer and the payee are the same person. Drawer and payee are
two different persons in the following cases.
(i) When the bill is discounted by the drawer from his bank- Payee is the bank.
(ii) When the bill is endorsed by the drawer to his creditor-Payee is the endorsee.
Bills of Exchange 3
Specimen of a bill of exchange

The usual form of a bill of exchange is given below:
U. Rama Rao sells goods to M. Thirupathi Naidu for Rs. 50,000 to be paid 3 months after
date.
Rs. 50,000 Vijayanagaram
25 January 2014
Stamp
Three months after date pay to me or my order, the sum of Rupees Fifty Thousand only, for
value received.
To
M. Tirupathi Naidu Accepted
P-15, Siri Apartments M. Tirupathi Naidu
M.V.P Colony
Vishakapatnam
A.P U. Rama Rao
1.4 Advantages of a Bill of Exchange

The bills of exchange as instruments of credit are used frequently in business because of the
following advantages.
1. It helps in purchases and sales of goods on credit basis.
2. It is a legally valid document in the eyes of Law. It assures a easier recovery to the
drawer if drawee fails to make the payments.
3. It acts as a source of finance since it can be discounted from the bank before the due
date.
4. It is written and signed acknowledgement of debt.
5. It can be easily transferred from one person to another by endorsement.
6. By drawing accommodation bills on one another, traders can raise money.
4 Accountancy-II
1.5 Types of Bills of Exchange
Bills of Exchange can be classified as follows:
1. Time and Demand Bills
2. Trade and Accommodation Bills
3. Inland and Foreign Bills
1.5.1 Time and Demand Bills
When payment of a bill of exchange is to be made after a particular period of time., the bill is
termed as a “Time Bill”. In such a case date of maturity is always calculated by adding three days of
grace. Time bill must be accepted by the drawee. In case of a “Demand Bill”, payment is to be
made on demand. Neither the acceptance of the drawee is necessary nor any days of grace are
allowed in this case.
1.5.2 Trade and Accommodation Bills
Where a bill of exchange has been drawn and accepted for a genuine trade transaction, it is
termed as a “Trade Bill”. For example, Rani sells goods worth Rs. 10,000 to Ravi on credit. Rani
draws a bill of exchange on Ravi for the said amount and the same is accepted by Ravi. This is trade
bill. This bill will become a bills receivable to Rani (sellar and Draweer of the bill) since the amount
of bill is receivable in future. The same bill will become bills payable to Ravi (purchaser and acceptor
of the bill) since he has to pay the amount of the bill in future.
Accommodation Bills refer to those bills which are drawn, accepted or endorsed without any
consideration. These bills are drawn and accepted to meet the financial needs of drawer/drawee/
both for temporary period by getting bills discounted at bank.
1.5.3 Inland and Foreign Bills

A bill is termed as an Inland Bill if (a) it is drawn in India on a person residing in India whether
payable in or outside India, or (b) it is drawn in India on a person residing outside India but payable
in India.
A bill which is not an Inland Bill is a Foreign Bill. A Foreign Bill is generally drawn up in
triplicate and each copy is sent by separate post, so that at least one copy reaches the concerned
party at the earliest. Of course, the Drawee or Acceptor will sign on a single set. It becomes the
actual bill and the payment will be made on such bill only.
Bills of Exchange 5
1.6 Difference between a Bill and a Promissory note

Promissory Note
“A Promissory Note is an Instrument in writing (not being a Bank note or Currency note)
containing an unconditional undertaking signed by the maker, to pay a certain sum of money only
to, or to the order of a certain person or to the bearer of the instrument”.
The differences between a Bill of Exchange and Promissory Note are as follows.
Basis of Difference Bill of Exchange Promissory Note
1. Drawer It is drawn by the creditor It is drawn by the debtor
2. Order or Promise It contains an order to make the It contains a promise to make the
payment payment
It has three parties namely It has two parties namely
3. No. of Parties
1. Drawer 2. Drawee 1. The maker (Drawer)
3. Payee 2. Payee
4. Acceptance It is valid only when it is accepted It does not require any
by the drawee acceptance
5. Payee Drawer and Payee can be the same Drawer cannot be the payee of it
person
In case of dishonour of bill noting Noting is not necessary in case of
6. Noting dishonour of promissory note
becomes important
1.7 Difference between a Bill and a Cheque

Cheque
“A Cheque is a Bill of Exchange drawn on a specified banker and payable on demand”.
A cheque is similar to a bill of exchange with the following two additional qualifications:
(i) It is always drawn on a specified banker.
(ii) It is always payable on demand.
Thus, all cheques are bills of exchange but all bills of exchange are not cheques.
6 Accountancy-II
The differences between a Bill of Exchange and Cheque are as follows.
Basis of Differene Bill of Exchange Cheque

1. Acceptance It requires an acceptance to It does not require any
become a valuable instrument acceptance
2. Stamp Duty It requires necessary stamp It does not require any stamp
as per act
3. Crossing It will not have any crossing on It may have crossing
the instrument
4. Due date for Payment The bill proceeds will be payable The cheque amount should
on the due date of instrument be paid immediately as and
when it is presented to the
bank for payment
5. Days of Grace Three days of grace are allowable Days of grace are not
after the due date of the bill for applicable in the case of
payment of bill amount cheques
6. Withdrawal Once accepted, the bill cannot It can be withdrawn by the
be withdrawn by drawee maker by giving stop
payment order to the bank
1.8 Important Terminology

1. Acceptance of Bill
The drawee has to accept the bill prepared by the drawer. Unless the drawee gives his
acceptance by writing the word “Accepted” and also putting his signature along with date, the bill
does not become a legal document. Before acceptance the bill is called “Draft”. After acceptance
the bill will be returned to the drawer. This is called acceptance of bill of exchange.
2. Term of Bill
It is the period after the expiry of which the sum mentioned in the bill is to be paid. The period
intervening between the date on which a bill is drawn and the date on which it becomes due for
payment is called “Term of Bill”.
3. Maturity of Bill
A bill payable on demand, at sight or presentment becomes due as soon as the bill is presented
for payment. A bill payable a certain period after date or after sight becomes nominally due on the
expiry of such period, but it becomes legally due 3 days after the nominally due date. These 3
additional days are known as “Days of Grace”.
Bills of Exchange 7
The date which comes after adding 3 days of grace to the nominally due date of a bill is
called “Date of maturity”.
4. Days of Grace
For making the payment of bill, the Drawee is allowed Three extra days after the normal due
date. Such 3 days are known as “Days of Grace”. If the due date is public holiday previous day is
due date. If the due date is sudden holiday next day is due date.
5. Holder
The person who is entitled to have the possession of the bill and who has a right to demand
and receive the amount due on the instrument is called the “Holder”. The holder may be the drawer
or the endorsee or the bank.
6. Discounting of Bill
When the bill is encashed from the bank before its due date, it is known as Discounting of
Bill. Bank deducts a small sum of money as discount from the amount of bill and disburses the
balance amount to the drawer of the bill.
7. Endorsement
The drawer may endorse or transfer the bill in favour of another person. Being a negotiable
instrument, the bill of exchange can be endorsed by the drawer in favour of his creditor by putting
his signature on the back of the bill. The person who makes the endorsement is called the “Endorser”
and the person to whom the endorsement of bill is made is called the “Endorsee”. The endorsee can
get the payment of the bill from the drawee. If the drawee fails to pay the amount the endorsee can
claim the amount from the drawer.
8. Dishonour of Bill
When the drawee (or acceptor) of the bill fails to make payment of the bill on the date of
maturity, it is called “Dishonour of Bill”.
9. Noting Charges
To obtain the proof of dishonour of a bill, it is re-sent to the drawee through a legally authorized
person called Notary Public. Notary Public charges a small fee for providing this service known as
Noting Charges.
Noting charges are paid to the Notary Public first by the holder of the bill but are ultimately
recovered from the drawee, because he is the responsible person for the dishonour.
10. Bill sent for Collection
It is a process when the bill is sent to the bank with instructions to keep the bill till maturity and
collect its amount from the acceptor on the date of maturity.
8 Accountancy-II
11. Renewal of a Bill
Some times the drawee of a bill finds himself unable to meet the bill on due date. To avoid
dishonouring of bill, he may request the holder of the bill to cancel the original bill and draw a new
bill in place of old one. If the holder agrees, the old bill is cancelled and a new bill with new terms is
drawn on the drawee and also accepted by him. this process is called “Renewal of a bill”.
12. Retirement of a Bill
When the drawee makes the payment of the bill before its due date it is called “Retirement of
bill”. In such a case, holder of the bill usually allows a certain amount as Rebate to the drawee.
13. Insolvency of Acceptor
When the drawee (or acceptor) of a bill is unable to meet his liabilities on due date, the
drawee becomes an insolvent. In other words, an insolvent is a person whose liabilities are more
than his assets.
1.9 Accounting Treatment for Bills of Exchange
For the convenience of accounting bills are classified into two. They are
(i) Bills receivable (ii) Bills payable
For the person who draws the bill of exchange and gets it back after its due acceptance, it is
bills receivable. For the person who accepts the bill, it is bills payable.
The same bill is both a Bill Receivable to the drawer who receives amount on date of maturity,
and Bill Payable to the drawee who has to pay the amount on date of maturity. Bills receivables are
assets and bills payables are liabilities.
Where more number of bills are drawn and accepted, subsidiary books called Bills Receivable
Book and Bills Payable Book are maintained to record the particulars of the bills. If number of bills
transactions are less, the bill transactions will be recorded in the journal.
1.9.1 Methods of Dealing with a Bill of Exchange by Drawer
The drawer has the following alternatives with the bill of exchange held by him.
1. He may retain or keep the bill in his own possession till the due date and realize the
amount against it on the due date, or
2. He may discount the bill with a bank before its maturity, when he is in need of money,
or
3. He may endorse (transfer) the bill to his creditor, or
4. He may send the bill to the bank for collection.
Bills of Exchange 9
The following journal entries are to be recorded in the books of drawer and drawee under
various situations.
Specimen Journal Entries
Transaction In the books of Drawer In the books of Drawee
(Acceptor)
Ia. When Goods are sold/ Debtor (drawee) A/c Dr Purchases A/c Dr
purchased on credit To Sales A/c To Creditor (drawer) A/c
(Being goods sold on credit) (Being goods purchased on
credit)
Ib. When the bill is drawn Bills Receivable A/c Dr Creditor (drawer) A/c Dr
/ accepted To Debtor (drawee) A/c To bills Payable A/c
(Being the bill drawn) (Being the bill accepted)
II. When Bill is retained
by the drawer Cash / Bank A/c Dr Bills Payable A/c Dr
a) Bill is honoured To Bills Receivable A/c To Cash / bank A/c
(Being bill amount received from (Being bill amount paid on
drawee on date of maturity) maturity)
b) Bill is dishonoured Drawee A/c Dr Bills Payable A/c Dr
To bills Receivable A/c To Drawer A/c
(Being the bill dishonoured on (Being the bill dishonoured on
the date of maturity ) the due date)
c) Noting charges are Drawee A/c Dr Noting Charges A/c Dr
paid by the drawer To Cash/ Bank A/c To Drawer A/c
(Being the noting charges paid (Being the Noting Charges
by the drawer) incurredby the drawer)
III) When Bill is discounted Bank A/c Dr
with a bank Discount A/c Dr
To Bills Receivable A/c No Entry
(Being the bill discounted
with a bank)
a) Bill is honoured Bills Payable A/c Dr
To Cash / bank A/c
No Entry (Being bill amount paid to bank
on date of maturity)
To Bank A/c To Drawer A/c
(Being the discounted bill (Being the discounted bill
dishonoured) dishonoured)
paid by the Bank To Bank A/c To Drawer A/c
(Being the noting (Being the Noting Charges
charges paid by the Bank) incurred by the drawer)
IV) When Bill is Endorsed Endorsee A/c Dr

to a creditor To Bills Receivable A/c No Entry
(Being the bill endorsed to a
creditor)
10 Accountancy-II
Transaction In the books of Drawer In the books of Drawee (Acceptor)
a) Bill is honoured No Entry Bills Payable A/c Dr
To Cash / bank A/c
(Being bill amount paid on
maturity)
To Endorsee A/c To Drawer A/c
(Being the endorsed bill (Being the endorsed bill
dishonoured) dishonoured)
paid by Endorsee To Endorsee A/c To Drawer A/c
(Being the noting charges (Being the Noting Charges incurred
paid by the Endorsee on by the drawer)
dishonour of bill)
V) When Bill is sent to the Bills Sent for Collection A/c Dr
bank for collection To Bills Receivable A/c No Entry
(Being the bill sent to bank for
collection)
a) Bill is honoured Bank A/c Dr Bills Payable A/c Dr
To Bills Sent for Collection A/c To Cash / bank A/c
(Being the bill amount collected (Being bill amount paid on
by the bank on maturity) maturity)
To Bills Sent for Collection A/c To Drawer A/c
(Being the bill sent to bank for (Being the bill dishonoured on the
collection dishonoured) due date)
paid by the Bank To Bank A/c To Drawer A/c
(Being the noting charges paid (Being the Noting Charges
by the Bank) incurred by the drawer)
VI) Retiring a Bill Cash / Bank A/c Dr Bills Payable A/c Dr
Under Rebate Rebate on Bill A/c Dr To Cash / Bank A/c
To Bills Receivable A/c To Rebate on Bill A/c
(Being the bill amount received (Being the bill amount paid
before maturity and rebate before maturity and rebate
allowed) received)
VII) Renewal of a Bill
a) For cancellation Drawee A/c Dr Bills Payable A/c Dr
of Old Bill To Bills Receivable A/c To Drawer A/c
(Being the old bill cancelled) (Being the old bill cancelled)
b) For charging interest for Drawee A/c Dr Interest A/c Dr
extended period To Interest A/c To Drawer A/c
(Being the interest charged for (Being the interest payable for
extended period) extended period)
c) For interest received/paid Cash A/c Dr Interest A/c Dr
in cash To Interest A/c To Cash A/c
(Being the interest received (Being the interest paid in cash
in cash for extended period) for extended period)
Bills of Exchange 11
Transaction In the books of Drawer In the books of Drawee (Acceptor)

d) For Part Payment Cash / Bank A/c Dr Drawer A/c Dr
Received / Made To Drawee A/c To Cash / Bank A/c
(Being the part payment received) (Being the part payment made)
e) For New Bill Bills Receivable A/c Dr Drawer A/c Dr
Drawn / Accepted To Drawee A/c To Bills Payable A/c
(Being a new bill drawn) (Being a new bill accepted)
VIII) Insolvency of Drawee
a) When Drwee is insolvent Drawee A/c Dr Bills Payable A/c Dr
To Bills Receivable A/c To Drawer A/c
(Being the bill dishonoured due to (Being the bill dishonoured due
insolvency of the drawee) to insolvency)
b) When Nothing could be Bad Debts A/c Dr Drawer A/c Dr
recovered To Drawee A/c To Deficiency A/c
(Being amount of bill written-off (Being the amount of bill
as bad debts) written -off )
c) When amount is received Cash / Bank A/c Dr Drawer A/c Dr
partially Bad Debts A/c Dr To Cash / Bank A/c
To Drawee A/c To Deficiency A/c
(Being partial amount received (Being partial amount paid in
and remaining written-off due to settlement of debt, due to
insolvency of drawee) insolvency)
1.10 Honour of Bills of Exchange

When the drawee (acceptor) of the bill makes payment of the bill on the date of maturity, it is
called "honour of a bill".
Illustrations on Bills of Exchange Honoured
I. When the bill is retained in the hands of Drawer till Due date
Illustration – 1
On 1st March 2014 Ravi sold goods for Rs. 10,000 to Vikas on credit and drew a bill for 3
months for the same amount. Vikas accepted the bill and returned it to Ravi. This bill is honoured on
the date of maturity.
Pass the necessary journal entries in the books of Ravi and Vikas.
12 Accountancy-II
Solution
Journal Entries in the Books of Ravi (Drawer)
Date Particulars L.F Dr (Rs) Cr (Rs)
2014 Vikas Account Dr 10,000

March 01 To Sales Account 10,000
(Being the goods sold on credit)
2014 Bills Receivable Account Dr 10,000
March 01 To Vikas Account 10,000
(Being the bill drawn for 3 months on vikas)
2014 Cash Account Dr 10,000
June 04 To Bills receivable Account 10,000
(Being the bill amount received on date of
maturity)
Journal Entries in the Books of Vikas (Drawee)

2014 Purchases Account Dr 10,000

March 01 To Ravi Account 10,000
(Being the goods purchased on credit)
2014 Ravi Account Dr 10,000
March 01 To Bills Payable Account 10,000
(Being the bill accepted for 3 months)
2014 Bills Payable Account Dr 10,000
June 04 To Cash Account 10,000
(Being the bill amount paid on date of maturity)
II. When the Bill is discounted with the Bank
If the drawer of the bill is in need of money, he may choose the option of discounting the bill
with his bank before maturity of the bill. The bank will deduct a small sum of money as discount and
pay the remaining amount to the drawer of the bill.
The discount will be calculated at a certain rate of percent per annum on the amount of bill for
its unexpired period from the date of discounting upto the date of maturity.
For example, if a Bill for Rs. 5,000 drawn on 1st March 2014 payable after 3 months is
discounted at 12% per annum on 1st March 2014, the discount will be calculated as under.
Discount = Amount of bill discounted × × unexpired period
Discount = = 150
Discount = Rs. 150

The remaining amount to be paid to the drawer is Rs. 4,850
If the above bill is discounted after one month i.e on 1st April 2014, then the discount will be
calculated as under
Discount = = 100
Discount = Rs. 100

In this case, the remaining amount to be paid to the drawer is Rs. 4,900
Illustration – 2
On 1st January 2013, Sankar sold goods worth Rs. 20,000 to Bhaskar on credit and drew a
bill for 3 months for the same amount. Bhaskar accepted the bill and returned it to Sankar. On the
same day Sankar discounted the bill with his bank at 10% per annum. On the due date, the bill is
honoured.
Pass the necessary journal entries in the books of Sankar and Bhaskar.
Solution
Journal Entries in the Books of Sankar (Drawer)
2013 Bhaskar Account Dr 20,000

January 01 To Sales Account 20,000
January 01 To Bhaskar Account 20,000
(Being the bill drawn for 3 months on
bhaskar)
2013 Bank Account Dr 19,500
January 01 Discount Account Dr 500
To Bills Receivable Account 20,000
(Being the bill discounted with the bank
Discount = 20,000 X 10/100 X 3 /12 = 500)
14 Accountancy-II
Journal Entries in the Books of Bhaskar (Drawee)

January 01 To Sankar Account 20,000
2013 Sankar Account Dr 20,000
January 01 To Bills Payable Account 20,000
April 04 To Bank Account 20,000
(Being the bill amount paid to the bank
on the due date)
Illustration 3
On 1st March 2014 Sumathi purchased goods for Rs. 8,000 from Lakshmi and accepted a
bill for the same amount drawn by Lakshmi payable after 3 months. Lakshmi discounted the bill
with her bank on 1st April 2014 at 12% per annum. Sumathi met her acceptance on the due date.
Pass the necessary journal entries in the books of Lakshmi and Sumathi.
Solution
Journal Entries in the Books of Lakshmi (Drawer)
2014 Sumathi Account Dr 8,000

March 01 To Sumathi Account 8,000
(Being the bill drawn for 3 months
on Sumathi)
April 01 Discount Account Dr 160
Discount = 8,000 X 12/100 X 2 /12 = 160)
Journal Entries in the Books of Sumathi (Drawee)


March 01 To Lakshmi Account 8,000
2014 Lakshmi Account Dr 8,000
June 04 To Bank Account 8,000
(Being the bill amount paid to the bank
on the due date)
III. When the Bill is endorsed in favour of a creditor

The drawer may endorse or transfer the bill in favour of another person. Being a negotiable
instrument, the bill of exchange can be endorsed by the drawer in favour of his creditor by putting
his signature on the back of the bill. The person who makes the endorsement is called the “Endorser”
and the person to whom the endorsement of bill is made is called the “Endorsee”. The endorsee can
get the payment of the bill from the drawee. If the drawee fails to pay the amount the endorsee can
claim the amount from the drawer.
The endorsee may retain the bill till the due date, discount the bill with the bank if he is in need
of money before due date or endorse the bill to his creditor.
The following Journal Entries are to be passed in the Books of Endorsee

Transaction In the books of Endorsee
1. When bill is Endorsed Bills Receivable Account Dr
To Endorser Account
(Being bill received from debtor through endorsement)
2. When bill is honoured on Cash / Bank Account Dr
date of maturity To Bills receivable Account
(Being the amount received on edorsed bill)
16 Accountancy-II
Illustration 4
On 1st January 2014 Venkatesh sold goods worth Rs. 5,000 to Nagarjuna and drew a bill
on Nagarjuna for 3 months for the same amount. Nagarjuna accepted the bill and returned it to
Venkatesh. On 1st February 2014, Venkatesh endorsed the bill in favour of his creditor Prabhakar
in settlement of his debt. The bill was honoured on due date.
Pass the necessary journal entries in the books of Venkatesh, Nagarjuna and Prabhakar.
Solution
Journal Entries in the Books of Venkatesh (Drawer)
2014 Nagarjuna Account Dr 5,000

January 01 To Nagarjuna Account 5,000
(Being the bill drawn for 3 months
on Nagarjuna)
2014 Prabhakar Account Dr 5,000
February 01 To Bills receivable Account 5,000
(Being the bill endorsed to the creditor
prabhakar )
Journal Entries in the Books of Nagarjuna (Drawee)


January 01 To Venkatesh Account 5,000
2014 Venkatesh Account Dr 5,000
April 04 To Cash Account 5,000
(Being the bill amount paid on date of maturity)
Journal Entries in the Books of Prabhakar (Endorsee)

2014 Bills receivable Account Dr 5,000

February 01 To Venkatesh Account 5,000
(Being the bill received on endorsement
from venkatesh)
April 04 To Bills Receivable Account 5,000
(Being the amount received on endorsed bill)
IV. When the bill is sent to the Bank for collection

When a bill is sent to the bank with instructions to keep the bill till maturity and collect its
amount from the acceptor on the date of maturity, it is known as “Bill sent for Collection”. The
Bank after charging this service, credits the net proceeds to the customer account. A large number
of bills are usually received by big business houses in the ordinary course of business. They may
forget to present the bills on the due date for payment. To avoid the risk they usually utilize the
services of a bank by sending all bills received to bank for collection purpose.
Illustration 5
On 1st July 2014 Parasuram sold goods to Rama krishna for Rs. 7,000 and drew a bill on
him for the same amount for two months. Rama krishna accepted the bill and returned the same to
Parasuram. Immediately after its acceptance, Parasuram sent the bill to his bank for collection. On
the due date bill is honoured.
Pass necessary journal entries in books of Parasuram and Rama krishna.
Solution
Journal Entries in the Books of Parasuram (Drawer)
2014 Rama krishna Account Dr 7,000

July 01 To Sales Account 7,000
July 01 To Rama krishna Account 7,000
(Being the bill drawn for 2 months on
Rama krishna)
18 Accountancy-II
2014 Bills sent for collection Account Dr 7,000
July 01 To Bills receivable Account 7,000
(Being the bill sent to bank for collection)
Sep 04 To Bills sent for collection Account 7,000
(Being the bill amount collected by bank)
Journal Entries in the Books of Ramakrishna (Drawee)


July 01 To Parasuram Account 7,000
2014 Parasuram Account Dr 7,000
July 01 To Bills Payable Account 7,000
Sep 04 To Bank Account 7,000
(Being the bill amount paid on due date)
Illustration 6
Ashok sold goods to Rajesh on 1st April 2014 for Rs. 10,000 on credit and drew upon him
a bill for the same amount payable after 3 months. Rajesh accepted the bill and returned it to Ashok.
On the date of maturity bill was presented to Rajesh for the payment and he honoured it.
Pass the journal entries in the books of Ashok and Rajesh when
Case I: Bill is retained by the Ashok till the date of maturity.
Case II: Bill is discounted by Ashok with his bank on the same date @12% p.a.
Case III: Bill is endorsed in favour of Santosh on 4th May 2014.
Case IV: Bill is sent to bank for collection on 1st June 2014.
Also record the journal entries in the books of Santosh.

Solution
Journal Entries in the Books of Ashok (Drawer)
First two Entries will be the same in all cases

2014 Rajesh Account Dr 10,000
April 01 To Sales Account 10,000
April 01 To Rajesh Account 10,000
(Being the bill drawn for 3 months on Rajesh)
Case – I When bill is retained by Ashok till the
date of maturity
(Being the bill amount received on due date )
Case – II When bill is discounted by Ashok
with his bank
April 01 Discount Account Dr 300
To Bills receivable account 10,000
(Being the bill discounted with bank)
Case –III When bill is endorsed in favour of Santosh
2014 Santosh Account Dr 10,000
May 04 To Bills receivable Account 10,000
(Being the bill endorsed in favour of santosh )
Case – IV When bill is sent to bank for collection
June 01 To Bills receivable account 10,000
(Being the bill sent for collection to bank)
July 04 To bills sent for collection Account 10,000
(Being the bill amount collected by bank)
20 Accountancy-II
Journal Entries in the Books of Rajesh (Drawee)
These 3 entries will be the same in all four cases

April 01 To Ashok Account 10,000
2014 Ashok Account Dr 10,000
April 01 To Bills Payable Account 10,000
July 04 To Bank/Cash Account 10,000
(Being the bill amount paid on due date)
Journal Entries in the Books of Santosh (Endorsee)

May 04 To Ashok Account 10,000
(Being the bill received on endorsement
from Ashok)
July 04 To bills receivable Account 10,000
(Being payment received on endorsed bill)
1.11 Dishonour of Bills of Exchange

A bill of exchange should be presented for payment on the date of its maturity. In case, the
drawee of the bill refuses or fails to make payment of the bill on the date of maturity, the bill of
exchange is said to be dishonoured. When a bill is dishonoured it is legally necessary to prove the
fact of dishonour. To obtain the proof of dishonour of a bill, it is re-sent to the drawee through a
legally authorized person called “Notary Public”.
Notary Public presents the bill to drawee for payment and if money is received ,he will hand
over the money to the concerned party. But if the bill is dishonoured, he will note the fact of dishonour
and returns the bill to his client along with a certificate to this effect. For rendering all these services,
Notary Public will charge some amount which is called as “Noting charges”. Noting charges are
paid to the Notary Public first by the holder of the bill but are ultimately recovered from the drawee,
because he is the responsible person for the dishonour.
Illustrations on Bills of Exchange Dishonoured
The following illustrations will enable to understand the accounting treatment of bills of exchange
dishonoured under various situations.
I. When the bill in the possession of the drawer is dishonoured
Illustration 7
On 15th March 2014 Suresh sold goods for Rs. 3,000 to Naresh on credit. Naresh accepted
the bill of exchange drawn upon him by Suresh payable after 2 months. On the due date the bill was
dishonoured and Suresh paid Rs. 40 as noting charges.
Pass the journal entries in the books of Suresh and Naresh.
Solution
Journal Entries in the Books of Suresh (Drawer)
2014 Naresh Account Dr 3,000

March 15 To Naresh Account 3,000
(Being the bill drawn for 2 months on Naresh)
2014 Naresh Account Dr 3,040
May 18 To Bills receivable Account 3,000
To Cash Account 40
(Being the bill dishonoured at maturity, noting
charges paid)
22 Accountancy-II
Journal Entries in the Books of Naresh (Drawee)

March 15 To Suresh Account 3,000
2014 Suresh Account Dr 3,000
May 18 Noting charges Dr 40
To Suresh Account 3,040
(Being the amount of the dishonoured bill and
noting charges credited to Suresh A/c)
II. When the bill Discounted with the Bank is Dishonoured

Illustration 8
Narayana purchased goods for Rs. 15,000 from Ravindra on 1st March 2013. Ravindra
drew upon Narayana a bill of exchange for the same amount payable after two months. The bill was
immediately discounted by Ravindra with his bank @ 6% p.a. On the due date the bill was dishonoured
and Bank paid Rs. 100 as noting charges.
Pass the necessary journal entries in the books of Ravindra and Narayana.
Solution
Journal Entries in the Books of Ravindra (Drawer)
2013 Narayana Account Dr 15,000

March 01 To Narayana Account 15,000
(Being the bill drawn for 2 months on Narayana)
March 01 Discount Account Dr 150
Discount = 15,000 X 6/100 X 2 /12 = 150)
2013 Narayana Account Dr 15,100

May 04 To Bank Account 15,100
(Being the amount of dishonoured bill and
noting charges debited to Narayana A/c)
Journal Entries in the Books of Narayana (Drawee)


March 01 To Ravindra Account 15,000
2013 Ravindra Account Dr 15,000
May 04 Noting charges Account Dr 100
To Ravindra Account 15,100
noting charges credited to Ravindra A/c)
III. When the bill endorsed in favour of creditor is dishonoured

When the bill is endorsed, the creditor becomes the endorsee and the drawer becomes
endorser. The endorsee will be the holder of the bill on the due date. He will present the bill to the
drawee for payment on the due date. If the drawee fails to pay the amount of the bill, he can claim
the amount of bill along with noting charges, if any, incurred by him from the drawer.
The following Journal Entries are to be passed in the Books of Endorsee
Transaction In the books of Endorsee
1. When bill is dishonoured Endorser Account Dr
on the date of maturity. To Bills receivable Account
(Being the endorsed bill dishonoured)
2. When noting charges are Endorser Account Dr
paid by endorsee. To cash Account
(Being noting charges paid on dishonour
of endorsed bill)
24 Accountancy-II
Illustration 9
On 1st January 2013 Leela purchased goods for Rs. 15,000 from Neela. She immediately
made a payment of Rs. 5,000 by cash and for the balance accepted the bill of exchange for 3
months drawn upon her by Neela. On 25th January 2013 Neela purchased goods worth Rs. 10,000
from Bala and endorsed the above bill to Bala. On the due date the bill was dishonoured and Bala
paid Rs. 50 as noting charges.
Pass the necessary journal entries in the books of Neela, Leela and Bala.
Solution
Journal Entries in the Books of Neela (Drawer)
2013 Leela Account Dr 15,000

January 01 To Leela Account 5,000
(Being the amount received from Leela)
January 01 To Leela Account 10,000
(Being the bill drawn for 3 months on Leela)
January 25 To Bala Account 10,000
(Being goods purchased on credit)
2013 Bala Account Dr 10,000
January 25 To Bills receivable Account 10,000
(Being the bill endorsed to the creditor Bala )
2013 Leela Account Dr 10,050
April 04 To Bala Account 10,050
(Being the endorsed bill dishonoured by the
drawee noting charges paid by Bala)
Journal Entries in the Books of Leela (Drawee)


January 01 To Neela Account 15,000
2013 Neela Account Dr 5,000
January 01 To Cash Account 5,000
(Being the amount paid)
April 04 Noting Charges Account Dr 50
To Neela Account 10,050
noting charges credited to Neela account)
Journal Entries in the Books of Bala (Endorsee)

January 25 To Neela Account 10,000
(Being the bill received on endorsement from Neela)
April 04 To Bills Receivable Account 10,000
To Cash Account 50
noting charges debited to Neela account )
IV. When the bill sent to bank for collection is dishonoured
Illustration 10
On 1st June 2014 Jaya sold goods to Surya for Rs. 8,000 on credit and drew a bill on Surya
for the above amount payable after 3 months. Immediately after its acceptance Jaya sent the bill to
26 Accountancy-II
her bank for collection. On the due date the bill was dishonoured and the noting charges amounted
to Rs. 70.
Pass the necessary journal entries in the books of Jaya and Surya.
Solution
Journal Entries in the Books of Jaya (Drawer)
2014 Surya Account Dr 8,000
June 01 To Sales Account 8,000
June 01 To Surya Account 8,000
(Being the bill drawn for 3 months on Surya)
2014 Surya Account Dr 8,070
Sep 04 To Bills sent for collection Account 8,000
To Bank Account 70
noting charges debited to Surya account)
Journal Entries in the Books of Surya (Drawee)


June 01 To Jaya Account 8,000
2014 Jaya Account Dr 8,000
June 01 To Bills Payable Account 8,000
Sep 04 Noting Charges Account Dr 70
To Jaya Account 8,070
noting charges credited to Jaya account)
Illustration 11
Siva sold goods to Pradeep on 1st May 2014 for Rs. 6,000 on credit and drew upon him a
bill for the same amount payable after 2 months. Pradeep accepted the bill and returned it to Siva.
On the date of maturity, Pradeep failed to make payment of bill.
Pass the necessary journal entries in the books of Siva and Pradeep in the following cases:
Case I : When Siva retained the bill till the due date and paid noting charges of Rs. 100
Case II: When Siva discounted the bill with his bank on 4th June 2014 @12% p.a. and bank
paid noting charges of Rs. 100.
Case III: When Siva endorsed the bill in favour of his creditor Rahul on 1st June 2014 and Rahul
paid noting charges of Rs. 100.
Case IV: When Siva sent the bill to his bank for collection on 1st June 2014 and bank paid noting
charges of Rs. 100.
Solution
Journal Entries in the Books of Siva (Drawer)
First two Entries will be the same

in all cases
2014 Pradeep Account Dr 6,000
May 01 To Sales Account 6,000
May 01 To Pradeep Account 6,000
(Being the bill drawn for 2 months on Pradeep)
Case – I When bill is retained by Siva till date of maturity

To Cash Account 100
noting charges debited to Pradeep)
28 Accountancy-II
Case –II When bill is discounted by Siva with his bank
June 04 Discount Account Dr 60
To Bills receivable account 6,000
(Being the bill discounted with the bank)
July 04 To Bank Account 6,100
Case – III When bill is endorsed in favour of Rahul

2014 Rahul Account Dr 6,000
(Being the bill endorsed in favour of Rahul )
July 04 To Rahul Account 6,100
Case – IV When bill is sent to bank for collection

June 01 To Bills receivable account 6,000
July 04 To Bills sent for collection Account 6,000
To Bank Account 100
Journal Entries in the Books of Pradeep (Drawee)

These 3 entries will be the same in

all four cases
May 01 To Siva Account 6,000
2014 Siva Account Dr 6,000
May 01 To Bills Payable Account 6,000
July 04 Noting charges Account Dr 100
To Siva Account 6,100
noting charges credited to Siva account)
1.12 Renewal of a Bill

When the acceptor (drawee) of a bill fails or is unable to honour the bill on the due date he
may request the drawer to cancel the old bill and draw a new bill on him for another period. In such
a case the drawer may charge some interest for the delayed payment at a mutually agreed rate of
interest. Interest can be either paid in cash or may be included in the new bill. The process of
cancellation of the old bill and drawing a fresh bill for the extended period is known as renewal of a
bill.
A bill can be renewed in any one of the following ways
1. When the acceptor of a bill wants to make a partial payment at the time of renewal.
2. When the acceptor of the bill wants to pay only the interest component for the extended
period at the time of renewal.
3. The old bill is cancelled and a new bill is drawn in its place for the amount of the old bill
including interest thereon for the extended period of the new bill.
30 Accountancy-II
Case I : Partial payment is made by drawee at the time of renewal
Illustration 12
On 1st September 2014 Hari purchased goods for Rs. 12,000 from Sekhar and accepted a
bill for the same amount drawn by Sekhar payable after 3 months. On the date of maturity Hari
offered to pay Rs. 6,000 and requested Sekhar to draw new bill for 3 months for the balance
amount including interest at 12% p.a. Sekhar agreed to this proposal.
Pass the necessary journal entries in the books of Sekhar and Hari.
Solution
Journal Entries in the Books of Sekhar (Drawer)
2014 Hari Account Dr 12,000

Sep 01 To Sales Account 12,000
Sep 01 To Hari Account 12,000
(Being the bill drawn for 3 months on Hari)
2014 Hari Account Dr 12,000
Dec 04 To Bills receivable Account 12,000
(Being the original bill cancelled for renewal)
Dec 04 To Hari Account 6,000
(Beiong the partial amount received
from the Hari)
2014 Hari Account Dr 180
Dec 04 To interest Account 180
(Beiong the interest due @12% p.a.
on Rs. 6,000 for 3 months)
Dec 04 To Hari Account 6,180
(Being the new bill drawn for the balance
amount including interest for renewal)
Journal Entries in the Books of Hari (Drawee)


Sep 01 To Sekhar Account 12.000
2014 Sekhar Account Dr 12,000
Sep 01 To Bills payable Account 12,000
2014 Bills payable Account Dr 12,000
Dec 04 To Sekhar Account 12,000
(Being the original bill cancelled for the renewal)
Dec 04 To Cash Account 6,000
(Being the partial amount paid to Sekhar)
2014 Interest Account Dr 180
Dec 04 To Sekhar Account 180
(Being interest due @12% p.a. on Rs. 6,000
for 3 months)
Dec 04 To Bills payable Account 6,180
(Being the new bill accepted for 3 months)
Case II : Only interest is paid in cash by drawee at the time of renewal

Illustration 13
Viswanadh sold goods to Srinivas on 1st April 2014 for Rs. 4,000 and drew a bill for 3
months on srinivas for the same amount. Srinivas accepted the bill and returned it to Viswanadh. On
the due date Srinivas requested Viswanadh to draw a new bill for the period of 3 months. Srinivas
agreed to pay interest in cash @ 9%p.a. immediately. Viswanadh agreed to this proposal. The new
bill was honoured on due date.
Pass the necessary journal entries in the books of Viswanadh and Srinivas.
32 Accountancy-II
Solution
Journal Entries in the Books of Viswanadh (Drawer)
2014 Srinivas Account Dr 4,000

April 01 To Sales Account 4,000
April 01 To Srinivas Account 4,000
(Being the bill drawn for 3 months on Srinivas)
2014 Srinivas Account Dr 4,000
2014 Cash Account Dr 90
July 04 To interest Account 90
(Being interest received in cash)
2014 Bill Receivable Account Dr 4,000
July 04 To Srinivas Account 4,000
(Being the new bill drawn for 3 months on
Srinivas)
Oct 07 To Bills receivable Account 4,000
(Being the new bill amount received on due date)
Journal Entries in the Books of Srinivas (Drawee)


April 01 To Viswanadh Account 4,000
2014 Viswanadh Account Dr 4,000
April 01 To Bills payable Account 4,000
July 04 To Viswanadh Account 4,000

July 04 To Cash Account 90
(Being interest paid @9% p.a. on Rs.
4,000 for 3 months)
2014 Viswanadh Account Dr 4,000
July 04 To Bills payable Account 4,000
Oct 07 To Cash Account 4,000
(Being the new bill amount paid on the due date)
Case III : A new bill is drawn for the amount of old bill including interest
Illustration 14
On 1st March 2013 Jagannadham sold goods to Chidambaram for Rs. 24,000 and drew
upon him a bill for the same amount payable after 3 months. On the due date Chidambaram requested
Jagannadham to renew the bill for a further period of 3 months at 9% interest per annum. Jagannadham
agreed to this proposal. Chidambaram accepted a new bill drawn by Jagannadham for the amount
of old bill including interest payable after 3 months. On the due date new bill was dishonoured.
Pass necessary journal entries in the books of Jagannadham & Chidambaram.
Solution
Journal Entries in the Books of Jagannadham (Drawer)
2013 Chidambaram Account Dr 24,000
March 01 To Sales Account 24.000
March 01 To Chidambaram Account 24,000
(Being the bill drawn on Chidambram
for 3 months)
34 Accountancy-II
2013 Chidambram Account Dr 540
June 04 To interest Account 540
(Being interest charged @9% for renewal)
June 04 To Chidambaram Account 24,540
(Being the new bill drawn on Chidambram
for 3 months)
Sep 07 To Bills Receivable Account 24,540
(Being the new bill dishonoured on the due date)
Journal Entries in the Books of Chidambaram (Drawee)

March 01 To Jagannadham Account 24,000
2013 Jagannadham Account Dr 24,000
March 01 To Bills payable Account 24,000
June 04 To Jagannadham Account 24,000
June 04 To Jagannadham Account 540
(Being interest payable for the additional
period for renewal of a bill)
2013 Jagannadham Account Dr 24,540
June 04 To Bills payable Account 24,540
Sep 07 To Jagannadham Account 24,540
(Being the new bill dishonoured on the due date)
1.13 Retiring a Bill under Rebate

If the Acceptor (Drawee) of the bill gets sufficient funds to make the payment of a bill before
the date of maturity he may offer to honour the bill before its due date provided he is allowed some
rebate for the earlier payment. This concession on bill is called “Rebate”. The bill is said to have
been retired under rebate. The rebate is loss to the holder (drawer) and a gain to the drawee.
Illustration 15
On 1st March 2013 Prudhvi sold goods to Akbar for Rs. 6,000 and drew upon him a bill for
the same amount payable after 3 months. Akbar accepted the bill and returned it to prudhvi. On 4th
April 2013 Akbar retired the bill under rebate of 12% p.a.
Pass the necessary journal entries in the books of Prudhvi and Akbar.
Solution
Journal Entries in the Books of Prudhvi (Drawer)
2013 Akbar Account Dr 6,000

March 01 To Akbar Account 6,000
(Being the bill drawn for 3 months on Akbar)
April 04 Rebate on bill Account Dr 120
To Bills receivable Account 6,000
(Being the amount received on bill
before due date and rebate allowed)
Journal Entries in the Books of Akbar (Drawee)


March 01 To Prudhvi Account 6,000
2013 Prudhvi Account Dr 6,000
36 Accountancy-II
April 04 To Cash Account 5,880
To Rebate on bill account 120
(Being the amount paid on bill before due
date and rebate earned)
Illustration 16
On 1st January 2014 Revathi drew a bill for Rs. 4,000 on Savithri payable after 3 months.
Savithri accepted the bill and returned it to Revathi. On 4th February 2014 Savithri retired the bill
under rebate of 9%p.a.
Pass the necessary journal entries in the books of Revathi and Savithri.
Solution
Journal Entries in the Books of Revathi (Drawer)

January 01 To Savithri Account 4,000
(Being the bill drawn for 3 months on Savithri)
Feb 04 Rebate on bill Account Dr 60
To Bills receivable Account 4,000
(Being the amount received on bill before
due date and rebate allowed)
Journal Entries in the Books of Savithri (Drawee)

2014 Revathi Account Dr 4,000

Feb 04 To Cash Account 3,940
To Rebate on bill account 60
(Being the amount paid on bill before due
date and rebate earned)
1.14 Insolvency of Drawee

When the drawee (or acceptor) of a bill is unable to meet his liabilities on due date, the
drawee becomes an insolvent. In other words, an insolvent is a person whose liabilities are more
than his assets. When the bill is dishonoured due to insolvency of the drawee (or acceptor) of the
bill either nothing is recovered or a portion of the amount (called dividend) in full settlement of the
claim is recovered. The balance of the amount due from the insolvent which is not recovered should
be written-off as bad debts and debited in the books of the drawer. In the books of the drawee the
amount that cannot be paid to the drawer should be credited to deficiency account.
Case I : When nothing is recovered from the estate of drawee
Illustration 17
Damayanthi sold goods worth Rs. 9,000 to Jayanthi on 1st June 2014 and drew a bill for 2
months for the same amount. Jayanthi accepted the bill and returned it to Damayanthi. Before the
due date of the bill, Jayanthi became an insolvent and nothing could be recovered from her estate.
Pass the necessary journal entries in the books of Damayanthi and Jayanthi.
Solution
Journal Entries in the Books of Damayanthi (Drawer)
2014 Jayanthi Account Dr 9,000

June 01 To Sales Account 9,000
June 01 To Jayanthi Account 9,000
(Being the bill drawn for 2 months on Jayanthi)
2014 Jayanthi Account Dr 9,000
Aug 04 To bills receivable Account 9,000
(Being the bill dishonoured due to insolvency
of the drawee)
2014 Bad debts Account Dr 9,000
Aug 04 To Jayanthi Account 9,000
(Being nothing recovered and transferred to
bad debts)
38 Accountancy-II
Journal Entries in the Books of Jayanthi (Drawee)

June 01 To Damayanthi Account 9,000
2014 Damayanthi Account Dr 9,000
June 01 To Bills Payable Account 9,000
Aug 04 To Damayanthi Account 9,000
(Being the bill dishonoured on the due date
due to insolvency)
2014 Damayanthi Account Dr 9,000
Aug 04 To deficiency Account 9,000
(Being nothing paid and transferred to
deficiency Account)
Case II : When a portion of the amount of bill is recovered from the

estate of drawee
Illustration 18
Kumar sold goods worth Rs. 7,000 to Murali on 1st January 2014 and drew upon him a bill
for 3 months for the same amount. Murali accepted the bill and returned it to Kumar. On the due
date murali requested kumar to draw a new bill for the amount due. Kumar agreed to draw a new
bill for 2 months but he charged interest @12%p.a. Murali accepted the new bill which was drawn
by kumar. Before the due date of the bill, Murali became an insolvent and only 50 paise in a rupee
could be recovered from his estate.
Pass the necessary journal entries in the books of Kumar and Murali.
Solution
Journal Entries in the Books of Kumar (Drawer)
2014 Murali Account Dr 7,000
January 01 To Murali Account 7,000
(Being the bill drawn for 3 months on Murali)
Apr 04 To Bills receivable Account 7,000
2014 Murali Account Dr 140
Apr 04 To interest Account 140
(Being the interest charged for renewal of the bill)
Apr 04 To Murali Account 7,140
(Being the new bill drawn for 2 months)
June 07 To bills receivable Account 7,140
(Being the bill dishonoured due to insolvency
of the drawee)
June 07 Bad debts Account Dr 3,570
To Murali Account 7,140
(Being 50 paise per Rupee received from
Murali in full settlement of his debt and the
balance transferred to bad debts account)
40 Accountancy-II
Journal Entries in the Books of Murali (Drawee)

January 01 To kumar Account 7,000
2014 Kumar Account Dr 7,000
Apr 04 To Kumar Account 7,000
Apr 04 To Kumar Account 140
(Being interest due @12%p.a. on
Rs. 7,000 for 2 months)
Apr 04 To Bills Payable Account 7,140
June 07 To Kumar Account 7,140
(being the bill dishonoured on due date due
to insolvency)
June 07 To Cash Account 3,570
To deficiency Account 3,570
(Being 50 paise per rupee paid in full
settlement of the debt and the balance
transferred to deficiency Account)
Summary
Now a days a large number of business transactions take place on credit. In case of credit
transactions the buyer promises the seller that he will pay the amount of goods purchased after a
certain period. The buyer has to give a promise in written to pay the amount on a certain date. The
written promise may be in the form of a bill of exchange or promissory note. Bills of exchange and
promissory notes are the instruments of credit which facilitate the credit transactions.
The bills are of two types viz., Trade Bills and Accommodation Bills. Trade
bills will be drawn and accepted for genuine trade transactions. Accommodation bills will be drawn
and accepted to meet the financial needs of drawer / drawee / both for temporary period. The bills
of exchange maybe used for various business transactions as means of exchange.
Bills of exchange are governed by the Negotiable instruments Act 1881 in our country.
MODEL QUESTIONS
I. Short Answer type questions:
1. What is a bill of exchange?
2. State the three parties involved in a bill of exchange.
3. What is a Promissory Note?
4. What is due date of a bill?
5. What are days of Grace?
6. What do you mean by Noting Charges?
7. What is meant by acceptance of a bill of exchange?
8. What is meant by discounting of a bill?
9. What is retirement of a bill of exchange?
10. What do you mean by renewal of bill of exchange?
11. What is meant by ‘Dishonour of a Bill’?
II. Essay type questions
1. Define a bill of exchange. Explain the main features of a bill of exchange?
2. What are the advantages of a bill of exchange?
3. What are the different types of bills of exchange?
4. Explain the differences between a bill of exchange and a promissory note.
5. Explain the differences between a bill of exchange and a cheque.
Exercises
A) Bills of Exchange Honoured
1. On 1st July 2014 Madhu sold goods to Pavan for Rs. 5,000 on credit and drew a bill of
exchange for 3 months for the same amount. Pavan accepted the bill and returned it to
Madhu. Pavan met his acceptance on maturity.
42 Accountancy-II
Pass the necessary Journal entries in the books of Madhu and Pavan.
2. On 1st March 2013 Radhika sold goods to Harika worth Rs. 9,000 and drew a bill for
2 months for the same amount. Harika accepted the bill and returned it to Radhika. The
bill is honoured on the date of maturity.
Pass the necessary Journal entries in the books of Radhika and Harika.
3. On 25th March 2014 Vinod drew a bill for 3 months on Prakash for Rs.3,000. Prakash
accepted the bill and handed over the bill to Vinod. The bill is honoured on the date of
maturity.
Show the journal entries in the books of Vinod and Prakash.
4. On 1st January 2014 Rajendra sold goods to Narendra worth Rs. 4,000 and drew a bill
on Narendra payable after three months. After securing Narendra’s acceptance, Rajendra
discounted the bill with his bank at 12% p.a. on 1st February 2014. On the due date the
bill is honoured.
Pass necessary journal entries in the books Rajendra and Narendra.
[Discount Rs. 80]
5. Amar sold goods for Rs. 10,000 to Sunder on credit on 1st July 2014. Amar drew a bill
of exchange on Sundar for the same amount for three months. Sundar accepted the bill
and returned it to Amar. Amar discounted the bill with his bank at 10% per annum on the
same day. Sundar met his acceptance on maturity.
Pass necessary journal entries in the books of Amar and Sundar.
[Discount Rs. 250]
6. Sandhya sold goods for Rs 14,000 to Rajeswari on 1st march 2014 and drew upon her
a bill of exchange payable after 2 months. Rajeswari accepted the bill and handed over
the same to Sandhya. Sandhya immediately discounted the bill with her bank @12%p.a.
On the due date Rajeswari met her acceptance .
Pass the necessary journal entries in the books of Sandhya and Rajeswari.
[Discount Rs. 280]
7. Satyam sold goods to Sivam worth Rs. 9000 on 1st June 2013 and drew a bill for
2months for the same amount. Sivam accepted the bill and returned it to Satyam. Satyam
endorsed the bill to his creditor sundaram on 1st July 2013. The bill was honoured on
the due date.
Pass necessary Journal entries in the books of Satyam, Sivam and Sundaram.
8. On 1st July 2014 Ajay purchased goods worth Rs. 8,000 from Kiran and accepted the
bill which was drawn by kiran payable after three months for the same amount. Kiran
sent the bill to his bank for collection. The bill was honoured on the date of maturity.
Pass necessary journal entries in the books of Kiran and Ajay.
9. Jayaram sold goods for Rs. 20,000 to Sivaram on 15th march 2014 and drew upon him
a bill of exchange payable after two months. Sivaram accepted the bill and returned the
same to Jayaram. On the due date the bill was honoured.
Pass the necessary journal entries in the books of Jayaram and Sivaram in the following
circumstances.
I. When the bill was retained by Jayaram till the date of its maturity.
II. When Jayaram immediately discounted the bill @6%p.a. with his bank.
III. When the bill was endorsed immediately by Jayaram in favour of his creditor
Seetharam.
IV. When the bill was sent by Jayaram to his bank for collection on 25th April 2014.
[Discount Rs. 200]
B) Dishonour of bills of exchange
10. Kotireddy purchased goods worth Rs. 12,000 from Rajareddy on 25th March 2014
and accepted a bill of exchange drawn upon him by Rajareddy payable after two months.
On the date of maturity Kotireddy dishonoured the bill. Rajareddy paid Rs. 80 as noting
charges.
Pass the necessary journal entries in the books of Rajareddy and Kotireddy.
11. Parvathi sold goods worth Rs. 14,000 to Suneetha on 1st January 2014. Suneetha paid
Rs. 4000 immediately and for the balance she accepted a bill of exchange drawn upon
her by Parvathi payable after 3 months. Parvathi discounted the bill immediately with
her bank @10%p.a. On the due date Suneetha dishonoured the bill and the bank paid
Rs. 30 as noting charges.
44 Accountancy-II
Pass the necessary Journal entries in the books of Parvathi and Suneetha.
[Discount Rs. 250]
12. On 1st January 2014 Hari accepted 3 months bill for Rs 12,000 drawn on him by Raju.
Raju discounted the bill with his bank @9%p.a. on the Same day. On the due date Hari
dishonoured his acceptance.
Pass the necessary journal entries in the books of Raju and Hari.
[Discount Rs. 270]
13. On 25th April 2013 Bhagavan sold goods for Rs. 13,000 to Lakshman and drew upon
him a bill of exchange for 3 months for the same amount. Lakshman accepted the bill
and sent the same to Bhagavan. Bhagavan endorsed the bill in favour of his creditor
Raman. On the due date the bill was dishonoured and Raman paid Rs. 90 as Noting
charges.
Pass the necessary journal entries in the books of Bhagavan and Lakshman.
14. Manga purchased goods for Rs. 20,000 from Ganga on 1st February 2013 and accepted
a bill of exchange drawn by Ganga for the same amount payable after 2 months. On 20th
February 2013 Ganga sent the bill to her bank for collection. On the due date Manga
dishonoured the bill and the bank paid Rs. 100 as noting charges.
Pass the necessary journal entries in the books of Ganga and Manga.
15. Mohan sold goods for Rs. 15,000 to Vinod on 1st January 2014 and drew upon him a bill
of exchange for the same amount payable after two months. Vinod accepted the bill and
handed over the bill to Mohan. On the due date the bill was dishonoured.
Pass the necessary journal entries in the books of Mohan and Vinod in the following
cases.
I. When Mohan retained the bill till the due date and paid Rs. 150 as noting charges
II. When Mohan discounted the bill @12%p.a. on 4th February 2014 and the bank
paid Rs. 150 as noting charges.
III. When Mohan endorsed the bill immediately in favour of his creditor Amar and
Amar paid Rs. 150 as noting charges.
IV. When Mohan sent the bill to his bank for collection on 25th January 2014 and
bank paid Rs. 150 as noting charges. [Discount Rs. 150]
C) Renewal of a bill
16. On 1st July 2013 kalyan sold goods to Kapil for Rs. 24,000 and drew upon him a bill
for the same amount payable after 3 months. Kapil accepted the bill and returned it to
Kalyan. On due date kapil expressed his inability to honour the bill and offered to pay
Rs. 12,000 in cash and to accept a new bill for the balance amount including interest at
10% p.a. for 2 months. Kalyan agreed to this proposal. On the due date the new bill
was honoured.
Pass the necessary journal entries in the books of Kalyan and kapil.
[Interest Rs. 200]
17. Anasuya sold goods worth Rs 6000 to Padma on 1st March 2013 and drew upon her
a bill for the same amount payable after three months. Padma accepted the bill and sent
it back to Anasuya. On the due date, padma expressed her inability to honour the bill
and requested Anasuya to cancel the original bill and to draw a new bill for three months.
Anasuya agreed the proposal provided interest at 12% was paid immediately in
cash.Padma paid such interest in cash and accepted a new bill. The new bill was
dishonoured on the due date.
Pass necessary journal entries in the books of Anasuya and Padma.
[Interest Rs.180]
18. On 1st May 2014 Akhil sold goods to Nikhil for Rs. 6,000 on credit and drew a bill on
him for three months for the same amount. Nikhil accepted the bill and returned it to
Akhil. On 4th August 2014 Nikhil requested Akhil to draw a new bill for the amount
due. Akhil agreed to draw a new bill for 2 months but he charged interest @12% p.a.
This bill was honoured on its maturity.
Pass necessary journal entries in the books of Akhil and Nikhil. [Interest Rs. 120]
D) Retiring of a bill under rebate
19. On 1st January 2013 Nagababu sold goods for Rs. 10,000 to Damodhar and drew
upon him a bill of exchange payable after two months. Damodhar accepted the bill and
handed over the same to Nagababu. One month before the maturity of the bill Damodhar
approached Nagababu to accept the payment against the bill under rebate of 9%p.a.
Nagababu agreed to the request of Damodhar. Damodhar retired the bill under the
agreed rate of rebate.
Pass the necessary Journal entires in the books of Nagababu and Damodhar.
[Rebate Rs. 75]
46 Accountancy-II
20. On 1st June 2014 Meghana sold goods for Rs. 13,000 to Kaveri and drew upon her a
bill of exchange payable after 3 months. Kaveri accepted the bill and returned it to
Meghana. One month before the maturity of the bill Kaveri approached Meghana to
accept the payment against the bill under rebate of 12% p.a. Meghana agreed to the
request of Kaveri and kaveri retired the bill under the agreed rate of rebate.
Pass the necessary journal entries in the books of Meghana and Kaveri.
[Rebate Rs. 130]
E) Insolvency of Drawee
21. Jayababu purchased goods for Rs. 25,000 from Tatababu on 1st February 2014 and
accepted a bill of exchange drawn by Tatababu for the same amount. The bill was
payable after 2 months. Before the due date of the bill, Jayababu became an insolvent
and nothing could be recovered from his estate.
Write necessary journal entries in the books of Tatababu and Jayababu.
22. Anil sold goods worth Rs. 17,000 to Sunil on 1st March 2014 and drew upon him a bill
for three months for the same amount. Sunil accepted the bill and handed over it to Anil.
On the same day Anil discounted the bill @12%p.a. with his bank. Before the due date
of the bill, Sunil became an insolvent and only 50 paise in a rupee could be recovered
from his estate.
Pass necessary journal entries in the books of Anil and Sunil. [Discount 510]
Chapter
2
Depreciation
2.1 Meaning and Definition 2.1 Meaning and Definition

2.2 Need for Depreciation Business enterprises maintain two types of
2.3 Causes of Deprecition assets. They are Fixed Assets and Current Assets.
2.4 Accounting Treatment Fixed Assets are those assets which are used in
2.5 Methods of Depreciation business for more than one accounting year. Fixed
assets tend to reduce their value once they are put
2.6 Straight Line Method
to use.
2.7 Reducing Balance Method
Depreciation is the gradual reduction or loss in the
value of fixed assets like building, plant and
machinery, furniture etc… If a company purchases
a machine for Rs 80,000 with 10 years estimated
life, machine will lose value of Rs 8,000 per year.
This reduction or loss in the value of the machine
every year is called as depreciation.
The word “Depreciation” is derived from a
Latin word ''Depretium". ‘De’ means decline and
pretium means price. It means decline in price or value of asset. “Depreciation” means decline in
the value of a fixed asset due to use, passage of time, obsolescence or any other cause.
In order to have a clear understanding of the concept of depreciation it will be useful to go
through the definitions given by various experts in accounting.
“Depreciation is the measure of exhaustion of the effective life of an asset from any cause
during a given period” Spicer and Pegler
48 Accountancy-II
“Depreciation is the permanent and continuing diminution in the quality, quantity or the value
of an asset” Pickles
“Depreciation is the diminution in intrinsic value of the asset due to use and / or the lapse of
time” Institute of Cost and Management Accounting (ICMA, London)
From the above definitions, it can be said that depreciation is a permanent, continuous and
gradual decrease in the book value of an asset due to various causes.
2.2 Need for Depreciation:

The need for providing depreciation arises due to the following objectives.
a) To ascertain true profit or loss: The true profit or loss can be ascertained only when
the depreciation is debited to the Profit and Loss Account along with other revenue
expenses like salaries, postage and stationary etc. which are incurred for the purpose of
earning revenue.
b) To present true and fair financial position: If reasonable depreciation is not deducted
from the value of assets, the Balance Sheet will not reflect the true and fair financial
position of the business enterprise. Hence depreciation should be provided every year
to present true and fair financial position.
c) To have funds for replacement of assets: A portion of profits is set aside in the form
of depreciation every year. This amount accumulates and will be available for replacement
of the asset at the end of its life or when it is discarded.
d) To ascertain the true cost of production: For ascertaining the cost of production, it
is necessary to charge depreciation as an item of cost of production. If the depreciation
is not charged, the cost records would not present the true cost of production.
e) To fulfill the legal requirements: In case of joint stock companies, it is compulsory
to provide depreciation on Fixed assets. Without providing depreciation dividends cannot
be declared.
2.3 Causes of Depreciation

The main causes of depreciation include the following.
a) Wear and Tear: When the Fixed assets are put to use in the business operations for
earning revenue, the value of such assets may decrease. Such decrease in the value of
assets is said to be due to wear and tear.
b) Physical Forces: When the assets are exposed to the forces of nature like weather,
winds, rains etc. the value of such assets may decrease even if they are not being put
to any use.
Depreciation 49
c) Expiration of Legal Rights: When the use of assets like Patents, Copyrights,
Leases etc. is governed by a time bound agreement, the value of such assets may
decrease with the passage of time.
d) Obsolescence: Obsolescence implies an existing asset becoming out of date on
account of the availability of better type of asset due to technological changes or
improvements in production methods.
e) Accidents: Decline in the usefulness of the asset may be caused by accidents due to
fire, earthquake, floods etc.. Accidental loss is permanent.
f) Depletion: Assets of wasting character such as mines, quarries, oil wells etc. get
depleted with the extraction of raw-materials out of them.
2.4 Accounting Treatment

2.4.1 Purchase of Asset
If an Asset is purchased in the beginning of the year, depreciation is to be calculated for the
full year. If an Asset is purchased in the middle of the year, depreciation is to be calculated from the
date of purchase of such Asset.
For example, if the Asset is purchased on 1st July and the books are closed on 31st December,
depreciation is to be calculated for six months only in that year.
2.4.2 Use of Asset

The business enterprise may use the Asset from the date of its purchase or later. If the Asset
is used in the business, not from the date of purchase but later, depreciation is to be calculated from
the date of use only. For example, if the Asset is purchased on 01-01-2014 but started using from
01-04-2014, and the books are closed on 31st December, Depreciation is to be calculated for 9
months only from 01-04-2014.
2.4.3 Sale of Asset

When an Asset is sold in the middle of the year due to some reasons, depreciation is to be
calculated up to the date of sale of an Asset. For example, if the Asset is sold on 01-07-2014 and
the books are closed on 31st December, depreciation is to be calculated for 6 months only up to
01-07-2014. The profit or loss on sale of an Asset is to be transferred to profit and loss Account.
The following journal entries are required in this connection
50 Accountancy-II
a) For purchase of an Asset
Asset account Dr
To Bank/Creditor Account
b) For provision of depreciation
Depreciation Account Dr
To Asset Account
c) For transfer of Depreciation to Profit and Loss Account
Profit and Loss Account Dr
To Depreciation Account
d) For sale of an Asset
Cash / Bank Account Dr
To Asset Account
e) For transfer of profit on sale of an Asset
Asset Account Dr
To Profit and Loss Account
f) For transfer of loss on sale of an Asset
Profit and Loss Account Dr
To Asset Account
2.5 Methods of providing depreciation

There are several methods of providing depreciation. The following are the important methods
of providing depreciation.
1. Straight Line Method
2. Reducing Balance Method
3. Annuity Method
4. Depreciation Fund Method
5. Insurance Policy Method
6. Revaluation Method
7. Depletion Method
8. Machine Hour Rate Method
However, in this chapter, the first two methods i.e., Straight Line Method and
Reducing Balance Method only are discussed.
Depreciation 51
2.6 Straight Line Method

Straight Line Method is the simplest and one of the widely used methods of providing
depreciation. This method is also called as Fixed Installment Method or Equal Installment Method
or Original Cost Method. Under this method, depreciation is calculated at a fixed percentage on
original value of the asset in every year. Thus the amount of annual depreciation is uniform in every
year.
The annual depreciation amount and rate of depreciation is calculated as under.
Original cost of the Asset – Estimated Residual Value
(Purchase price + Crriage + Installation Expenses) (Scrap Value)
a) Annual Depreciation =
Estimated Useful life of the Asset (in years)
Annual depreciation
b) Rate of Depreciation = X 100
Original cost of the Asset
Merits of Straight Line Method
Straight Line Method has certain merits which are stated below.
a) It is very easy to understand.
b) It is very simple to calculate depreciation.
c) Asset can be depreciated up to the net scrap value or zero value.
d) This method is suitable for those assets whose useful life can be estimated accurately.
e) Depreciation will remain same throughout the life of the Asset.
Demerits of Straight Line Method
The important demerits of this method are as under
a) In this method, the depreciation amount will remain same throughout the life of the
Asset. But in reality depreciation and repairs will be lesser in the earlier years and gradually
increase in the later part of the life of the Asset.
b) It becomes difficult to ascertain the amount of depreciation if additions are made during
the year.
c) This method is not recognized by income tax authorities.
d) No provision is made for interest on amount invested in the Asset.
e) It is very difficult to estimate the life of the asset with accuracy.
52 Accountancy-II
Illustrations on Straight Line Method
Illustration 1
An Asset is purchased for Rs 40,000. The useful life of the asset is 10 years and the residual
value is Rs 4,000.Find out the annual depreciation and the rate of depreciation under straight line
method.
Solution
Original cost of the Asset – Estimated Residual Value (Scrap Value)
Estimated Useful life of the Asset (In years)
40,000 – 4,000
Annual Depreciation = = Rs. 3,600
10
Annual Depreciation
b) Rate of Depreciation = x 100
Original cost of the Asset
3600
Rate of Depreciation = x 100 = 9%
40, 000
Illustration 2
Radha & Company purchased machinery for Rs.45,000 on 01st Jan 2010. The estimated life
of the machinery is 8 years and residual value at the end of its life period is Rs.5,000. The books are
closed on 31st December every year.
Write journal entries and show the Machinery Account and Depreciation Account for 3 years
on Straight Line Method.
Solution
45,000 – 5,000
= = Rs. 5000
8
Annual Depreciation = Rs. 5,000

Depreciation 53
Journal Entries in the Books of Radha & Company
2010 Machinery Account Dr 45,000

45,000
January 01 To Bank Account 45,000
45,000
(Being the machinery purchased)
2010 Depreciation Account Dr 5,000
5,000
Dec 31 To Machinery Account 5,0000
5,000
(Being deprecation charged on machinery)
2010 Profit and Loss Account Dr 5,000
5,000
Dec 31 To Depreciation Account 5,000
5,000
(Being Depreciation transferred to P&L A/c)
5,000
Dec 31 To machinery Account 5,000
5,000
5,000
5,000
Dec 31 To machinery Account 5,000
5,000
5,0000
5,000
54 Accountancy-II
Machinery Account (Straight Line Method)
Dr Cr
Date Particulars JF Amount Date Particulars JF Amount
Rs. Rs.
2010 To Bank Account 45,000 2010
Jan 01 Dec 31 By Depreciation Account 5,000
Dec 31 By Balance c/d 40,000
45,000 45,000
2011 2011
Jan 01 To Balance b/d 40,000 Dec 31 By Depreciation Account 5,000
40,000 40,000
2012 2012
Jan 01 To Balance b /d 35,000 Dec. 31 By Depreciation Account 5,000
Dec. 31 By Balance c/d 30,000
35,000 35,000
2013
Jan 01 To balance b /d 30,000
Depreciation Account
Dr Cr
Rs. Rs.
2010 2010
Dec 31 To Machinery Account 5,000 Dec 31 By Profit & Loss Account 5,000
5,000 5,000
2011 2011
Dec 31 To Machinery Account 5,000 Dec. 31 By Profit & Loss Account 5,000
5,000 5,000
2012 2012
Dec 31 To Machinery Account 5,000 Dec 31 By Profit & Loss Account 5,000
5,000 5,000
Depreciation 55
Illustration 3
Vasavi & Co purchased machinery for Rs.80,000 on 1st January 2011. Depreciation is
provided annually at 10 % on the original cost every year. The books are closed on 31st December
every year.
Prepare Machinery Account for the first 3 years.
Solution
Rate of depreciation
Annual Depreciation = Original cost X
100
= 80,000x 10 = Rs. 8,000

100
Annual Depreciation = Rs.8,000
Books of Vasavi & Co

Machinery Account (Straight line method)
Dr Cr
Rs. Rs.
2011 2011
Jan 01 To Bank Account 80,000 Dec 31 By Depreciation Account 8,000
80,000 80,000
2012 2012
Dce 31 By Balance c/d 64,000
72,000 72,000
2013 2013
64,000 64,000
2014
Jan 01 To balance b/d 56,000
56 Accountancy-II
Illustration 4
Narayana and Bros purchased a plant for Rs. 2,00,000 on 01st January 2010 and spent Rs.
50,000 for its installation. The salvage value of the plant after its useful life of 10 years is estimated
to be Rs. 20,000. The Books are closed on 31st December every year.
Prepare plant account and Depreciation Account for the first 3 years using Straight Line Method.
Solution
Original cost of Plant = Purchase price + Installation expenses
= Rs.2,00,000 + Rs.50,000 = Rs.2,50,000

Annual depreciation =
2,50,000 − 2
=
10
Annual depreciation = Rs. 23,000
Books of Narayana and Bros

Plant Account (Straight Line Method)
Dr Cr
Rs. Rs.
2010 2010
Jan 01 To Bank Account 2,00,000 Dec 31 By Depreciation Account 23,000
Jan 01 To Bank Account 50,000 Dec 31 By Balance c/d 2,27,000
(Installation Expenses)
2,50,000 2,50,000
2011 2011
Jan 01 To Balance b/d 2,27,000 Dec 31 By Depreciation Account 23,000
Dec 31 By Balance c/d 2,04,000
2,27,000 2,27,000
2012 2012
Jan 01 To Balance b/d 2.04,000 Dec 31 By Depreciation Account 23,000
2,04,000 2,04,000
2013
Jan 01 To balance b/d 1,81,000
Depreciation 57
Dr Cr
Rs. Rs.
2010 2010
Dec 31 To Plant Account 23,000 Dec 31 By Profit & Loss Account 23,000
23,000 23,000
2011 2011
23,000 23,000
2012 2011
23,000 23,000
Illustration 5
Rama Rao and sons purchased a machine for Rs.1,40,000 on 01st July 2011, and spent
Rs.10,000 for its installation. The firm writes-off depreciation at the rate of 10% on original cost
every year. The books are closed on December 31st every year.
Prepare Machine Account and Depreciation Account for three years.
Solution
1. Original cost of Machine = Purchase price + Installation expenses
= Rs.1,40,000 + Rs.10,000 = Rs.1,50,000
10
2. Annual depreciation = 1,50,000 x = Rs. 15,000
100
3. Depreciation for the year 2011 = the Asset is used only 6 months from 01-07-2011.
Depreciation shall be provided only for 6months
i.e Rs.7,500
58 Accountancy-II
Books of Rama rao and sons
Machine Account (Straight Line Method)
Dr Cr
Rs. Rs.
2011 2011
Jul 01 To Bank Account 1,40,000 Dec 31 By Depreciation Account 7,500
(for 6 months)
Jul 01 To Bank Account 10,000 Dec 31 By Balance c/d 1,42,500
1,50,000 1,50,000
2012 2012
1,42,500 142,500
2013 2013
1,27,500 1,27,500
2014
Jan 01 To Balance b/d 1,12,500
Dr Cr
Rs. Rs.
2011 2011
Dec 31 To Machine Account 7,500 Dec 31 By Profit & Loss Account 7,500
7,500 7,500
2012 2012
15,000 15,000
2013 2013
15,000 15,000
Depreciation 59
Illustration 6
On 1st January 2010, Sahithi & Co purchased second hand machine for Rs.80,000 and
spent Rs.4,000 as carriage inwards, Rs.4000 as repair charges and Rs. 2,000 as installation expenses.
It is estimated that the machine will have a scrap value of Rs. 5,000 at end of its useful life which is
10 years. On 31st December 2012 The machine was sold for Rs. 50,000. The books are closed on
31st December every year.
Prepare Machine Account.
Solution
Books of Sahithi & Co
Dr Cr
Rs. Rs.
2010 2010
Jan 01 To Bank Account 10,000 Dec 31 By Balance c/d 81,500
(Installation & other
Expenses) 90,000 90,000
2011 2011
Jan 01 To Balance c/d 81,500 Dec 31 By Depreciation Account 8,500
81,500 81,500
2012 2012
Jan 01 To Balance c/d 73,000 Dec 31 By Bank Account 50,000
Dec 31 By Depreciation Account 8,500
Dec 31 By Profit & Loss A/c (Loss) 14,500
73,000 73,000
Working Notes
1. Calculation of original cost of machine Rs.
Purchase cost of second hand machine 80,000
Add : Carriage, repairs, installation expenses 10,000
Original cost of the Machine 90,000
2. Annual depreciation =
90,000 – 5,000
Annual depreciation = = Rs. 8,500
10
Annual depreciation = Rs. 8,500
60 Accountancy-II
3. Calculation of Profit or loss on the sale of Machine Rs.
Original cost of the machine 90,000
Less: Depreciation for three years
For the year 2010 8,500
For the year 2012 8,500 25,500
Book value of the machine as on 31-12-2012 64,500
Less: Sale proceeds of the machine 50,000

Loss on sale of machine (to be transferred to P&L A/c) 14,500
Illustration 7
Nagaraju & Co purchased a second hand machine on 1st January 2011, for Rs. 45,000 and
spent Rs. 5,000 on repairs and installated the same. Depreciation is provided at the rate of 10%p.a.
under Straight Line Method. On 1st July 2014 the machine was sold for Rs. 30,000. The books are
closed on 31st December every year.
Prepare the Machine Account
Solution
Books of Nagaraju & Co
Dr Cr
Rs. Rs.
2011 2011
Jan 01 To Bank Account(Repairs) 5,000 Dec 31 By Balance c/d 45,000
50,000 50,000
2012 2012
45,000 45,000
2013 2013
40,000 40,000
2014 2014
Jan 01 To Balance b/d 35,000 July 01 By Bank Account 30,000
Dec 31 By Profit & Loss A/c (Loss) 2,500
35,000 35,000
Depreciation 61
Working Notes
1. Calculation of Profit or loss on the sale of Machine Rs.
Original cost of the machine (Rs. 45,000 + Rs.5000) 50,000
Less: depreciation for four years
For the year 2014 (for 6 months only) 2,500 17,500
Book value of the machine as on 01-07-2014 32,500
Less: Sale proceeds of the machine 30,000
Loss on sale of machine (To be transferred to Profit & Loss Account) 2,500
2. Depreciation is calculated for 6 months only during the year 2014 up to 1st July
2014 ; 5,000 X 6/12 = Rs.2,500.
Illustration 8
Bhavani traders purchased a machine for Rs. 50,000 on 01-01-2010. Another machine was
bought on 01-01-2011 for Rs.60,000 and used from 1st July 2011 onwards. The depreciation is
provided at 10% per annum under Straight Line Method. The books are closed on 31st December
every year.
Prepare the machinery account for 3 years.
62 Accountancy-II
Solution
Books of Bhavani traders
Machinery Account (Straight Line Method)
Dr Cr
Rs. Rs.
2010 2010
50,000 50,000
2011 2011
(Rs.5,000+Rs.3,000 for 6months)
(Purchase of 2nd Machine)
1,05,000 1,05,000
2012 2012
(Rs.5,000+Rs.6,000)

97,000 97,000
2013
Jan 01 To Balance b/d 86,000
Working Notes
1. Annual depreciation is calculated as under.
10
1st Machine = 50, 000 x = Rs. 5000
100
10
2nd Machine = 60, 000 x = Rs. 6000
100
2. The second machine was purchased on 1st January 2011, but started working from 1st
July2011. Hence the depreciation is calculated for 6months only, i.e from the date of use to
the closing date of the year 2011.
6
Depreciation on 2nd machine for 6months = 60, 000 x = Rs. 3000
12
Depreciation 63
Illustration 9
On 1st July2011 Anupama Traders purchased a machine for Rs. 80,000. On 1st April 2012
the firm purchased another machine for Rs. 40,000. On 31st March 2014 the machine which was
purchased on 1st April 2012 was sold for Rs. 29,000. The firm writes off 10% depreciation on
original cost. The books are closed on 31st March every year.
Show the machinery account for three years.
Solution
Books of Anupama Traders
Machinary Account (Straight Line Method)
Dr Cr
Rs. Rs.
2011 2012
July 01 To Bank Account 80,000 Mar 31 By Depreciation Account 6,000
(for 9 months)
Mar 31 By Balance c/d 74,000
80,000 80,000
2012 2013
April 01 To Balance b/d 74,000 Mar 31 By Depreciation Account 12,000
(Rs.8000 + Rs.4000)
April 01 To Bank Account 40,000 Mar 31 By Balance c/d 1,02,000
1,14,000 1,14,000
2013 2014
April 01 To Balance b/d 1,02,000 Mar 31 By Bank Account 29,000
(Sale of second machine)
Mar 31 By Depreciation Account 12,000
(Rs. 8000 + Rs. 4000)
Mar 31 By Profit and Loss A/c (Loss) 3,000
Mar 31 By Balance c/d 58,000
1,02,000 1,02,000
2014
April 01 To balance b/d 58,000
Working Notes
1. Calculation of Profit or loss on sale of machine Rs
Original Cost of Machine 40,000
Less : Depreciation
For the year 2012-13 4,000
For the year 2013–14 4,000 8,000
Book value of machine as on 31st March 2014 32,000
Less : Sale Proceeds of the machine 29,000
Loss on sale of machine (to be transferred to Profit & Loss A/c) 3,000
64 Accountancy-II
Illustration 10
On 1st April 2011 Rajesh transport company purchased 4 trucks at Rs.6,00,000 each. The
company writes-off depreciation @ 10% per annum on original cost. On 1st July 2013 one of the
trucks is involved in an accident and completely destroyed. Insurance company paid Rs.3,00,000
in full settlement of the claim. The books are closed on 31st December every year.
Prepare trucks account for three years
Solution
Books of Rajesh Transport Company
Trucks Account (Straight Line Method)
Dr Cr
Rs. Rs.
2011 2011
Apr 01 To Bank Account 24,00,000 Dec 31 By Depreciation Account 1,80,000
(Purchase of 4 trucks@ (for 9 months)
Rs.6,00,000) Dec 31 By Balance c/d 22,20,000
24,00,000 24,00,000
2012 2012
Jan 01 To Balance b/d 22,20,000 Dec 31 By Depreciation Account 2,40,000
22,20,000 22,20,000
2013 2013
Jan 01 To Balance b/d 19,80,000 Jul 01 By Bank Account 3,00,000
(Insurance claim)
Dec 31 By depreciation Account 2,10,000
(Rs.1,80,000 + Rs.30,000)
Dec 31 By Profit and Loss A/c
(loss of truck destroyed) 1,65,000
19,80,000 19,80,000
2014
Working Notes
1. Calculation of loss on truck destroyed in an accident Rs
Original Cost of truck 6,00,000
Less : Depreciation
For the year 2011, 10% on Rs.6,00,000 for 9months 45,000
For the year 2012, 10% on Rs.6,00,000 60,000
For the year 2013, 10% on Rs.6,00,000 for 6 months 30,000 1,35,000
The Book value of truck as on 1st July 2013 4,65,000
Less : Insurance claim received for the truck destroyed 3,00,000
Loss on truck destroyed due to accident (To be transferred to profit and loss account) 1,65,000
Depreciation 65
2.7 Reducing Balance Method

This method is also known as “Diminishing Balance Method” or “Written Down Value
Method”. Under this Method, depreciation is charged at a fixed percentage on the book value of
the asset. Since book value keeps on reducing by the annual charge of depreciation, It is known as
“Reducing Balance Method”.
The amount of depreciation decreases year after year. Depreciation is calculated on diminishing
value of the Fixed Asset. Under this method, the amount of depreciation is larger in the earlier years
than in the later years.
Merits
The main merits of this method are as under
a) The total charge (i.e depreciation plus repairs) remains uniform year after year. Since in
earlier years the amount of depreciation is more and the amount of repairs is less, Whereas
in later years the amount of depreciation is less and the amount of repairs is more.
b) This method is logical in the sense that as asset grows older, the amount of depreciation
also goes on decreasing.
c) Income Tax Act 1961 accept this method for Tax purposes.
d) This method can be used where obsolescence rate is high.
e) This method is suitable for those assets which have a longer life
Demerits
The main demerits of this method are as under
a) It is difficult to calculate the rate of depreciation.
b) The book value of the asset doesn’t become Zero.
c) It doesn’t take into consideration the interest on amount invested in the asset.
d) It doesn’t provide for the replacement of the asset on the expiry of its life.
66 Accountancy-II
2.7.1 Difference Between Straight Line Method and Reducing
Balance Method
Straight Line Method differs from Reducing Balance Method in the following respects
Basis of Difference Straight Line Method Reducing Balance Method
1. Basis of Calculation Depreciation is calculated on Depreciation is calculated on the

the original cost. Book value. (i.e original cost less
depreciation charged till date).
2. Amount of Depreciation The amount of depreciation The amount of depreciation
remains constant. decreases year after year.
3. Total Charge against Total charge against profit & Depreciation charge declines in
Profit & Loss Account in loss account in respect of later years. Therefore total of
respect of depreciation depreciation and repair depreciation and repair expenses
and repairs expenses increases in later years remains similar or equal every
under this method. year.
4. Recognition by Income This method is not recognized This method is recognized by the
Tax Law by Income Tax Act. Income Tax Act.
This method is suitable for This method is suitable for assets
5. Suitability
assets in which repair charges which are affected by
are less, the possibility of Technological changes and require
obsolescence is low. more repair expenses with
passage of time.
Illustrations on Reducing Balance Method

Illustration 11
Nagarjuna & Co purchased plant and machinery for Rs. 70,000 on 1st January 2011 and
spent Rs.10,000 for installation expenses. Depreciation is to be provided at 10% on Reducing
Balance Method. Books are closed on 31st December every year.
Write the necessary journal entries and prepare Plant and Machinery Account and
Depreciation Account for three years.
Depreciation 67
Solution
Journal Entries in the Books of Nagarjuna & Co
2011 Plant &Machinery Account Dr 70,000
Jan 01 To Bank Account 70,000
(Being the Plant & machinery purchased)
2011 Plant & Machinery Account Dr 10,000
(Being installation expenses incurred)
Dec 31 To Plant & Machinery Account 8,000
(Being deprecation charged on Plant &
Machinery)
Dec 31 To Plant & machinery Account 7,200
(Being deprecation charged on Plant &
machinery)
Dec 31 To Plant & machinery Account 6,480
(Being deprecation charged on Plant & machinery)
68 Accountancy-II
Plant & Machinery Account (Reducing Balance Method)
Dr Cr
Rs. Rs.
2011 2011
80,000 80,000
2012 2012
72,000 72,000
2013 2013
64,800 64,800
2014
Dr Cr
Rs. Rs.
2011 2011
Dec 31 To Plant & MachineryAccount 8,000 Dec 31 By Profit & Loss Account 8,000
8,000 8,000
2012 2012
7,200 7,200
2013 2013
6,480 6,480
Depreciation 69
Working Note
Calculation of the amount of depreciation Rs
Original cost of the plant & machinery as on 01-01-2011 80,000
Less: Depreciation for the year 2011 (@10% on Rs. 80,000) 8,000
Book value of plant & machinery as on 01-01-2012 72,000

Less: Depreciation for the year 2012 (@10% on Rs.72,000) 7,200
Less : Depreciation for the year 2013 (@10% on Rs.64,800) 6,480
Illustration 12
Sujatha enterprises purchased machinery on 1st April 2011 for Rs. 4,00,000. Depreciation is
calculated @ 10% per annum on Reducing Balance Method. Books are closed on 31st December
every year.
Prepare Machinery Account for the first three years.
Solution
Books of Sujatha Enterprises
Machinery Account (Reducing Balance Method)
Dr Cr
Rs. Rs.
2011 2011
Apr 01 To Bank Account 4,00,000 Dec 31 By Depreciation Account 30,000
(for 9 months)
4,00,000 4,00,000
2012 2012
3,70,000 3,70,000
2013 2013
3,33,000 3,33,000
2014
70 Accountancy-II
Working Notes
Original cost of the machinery as on 01-04-2011 4,00,000
Less: Depreciation for the year 2011 30,000
(@10% on Rs. 4,00,000 for 9 months)
Book value of machinery as on 01-01-2012 3,70,000

Less: Depreciation for the year 2012 (@10% on Rs.3,70,000) 37,000
Less : Depreciation for the year 2013 (@10% on Rs.3,33,000) 33,300
Illustration 13
Kiran enterprises purchased a printing machine for Rs.80,000 on 1st July 2011 and spent Rs.
10,000 on its transport and installation expenses. Another machine for Rs. 70,000 was purchased
on 1st January2013. Depreciation is charged at the rate of 20% on Reducing Balance Method.
Books are closed on 31st March every year.
Prepare printing Machine Account for three years.
Solution
Books of Kiran Enterprises
Printing Machinery Account (Reducing Balance Method)
Dr Cr
Rs. Rs.
2011 2012
Jul 01 To Bank Account 80,000 Mar 31 By Depreciation Account 13,500
Jul 01 To Bank Account 10,000 (for 9 months@20%)
(Installation Expenses) Mar 31 By Balance c/d 76,500
90,000 90,000
2012 2013
Apr 01 To Balance b/d 76,500 Mar 31 By Depreciation Account 18,800
2013 (15,300+3,500 for 3 months)
Jan 01 To Bank Account 70,000 Mar 31 By Balance c/d 1,27,700
1,46,500 1,46,500
2013 2014
Apr 01 To Balance b/d 1,27,700 Mar 31 By Depreciation Account 25,540
Mar 31 By Balance c/d 1,02,160
1,27,700 1,27,700
2014
Apr 01 To Balance b/d 1,02,160
Depreciation 71
Working Notes
Original cost of the printing machine as on 01-07-2011
(Rs.80,000+Rs.10,000) 90,000
Less: Depreciation for the year 2011-2012 (for 9 months) 13,500
(@20% on Rs. 90,000 for 9 months)
Book value of printing machine as on 01-04-2012 76,500
Add: Original cost of new printing machine purchased on 01-01-2013 70,000
Less: Depreciation for the year 2012-2013 (15,300+3,500) 18,800
(@20% on Rs.76,500+ @20% on Rs.70,000 for 3 months)
Less : Depreciation for the year 2013-2014 (@20% on Rs.1,27,700) 25,540
Illustration 14
On 1st July 2010 Venkatesh & Co purchased a machine for Rs. 40,000. On 30th June 2013
the machine was disposed off for Rs. 26,000. The books are closed on 31st December every year.
Depreciation is to be calculated @10% per annum on Reducing Balance method.
Show the machine Account
Solution
Books of Venkatesh & Co
Machine Account (Reducing Balance Method)
Dr Cr
Rs. Rs.
2010 2010 By Depreciation Account 2,000
Jul 01 To Bank Account 40,000 Dec 31 (for 6 months)
40,000 40,000
2011 2011
38,000 38,000
2012 2012
34,200 34,200
72 Accountancy-II
Rs. Rs.
2013 2013
Jan 01 To Balance b/d 30,780 Jun 30 By Bank Account 26,000
(For 6 months)
Dec 31 By Profit & loss A/c (loss) 3,241
30,780 30,780
Working Notes
Calculation of Profit or loss on the sale of machine Rs
Original cost of the machine as on 01-07-2010 40,000
Less: Depreciation for the year 2010 (@10% on Rs. 40,000 for 6 months) 2,000
Book value of machine as on 01-01-2011 38,000
Less : Depreciation for the year 2013 (@10% on Rs. 30,780 for 6 months) 1,539
Book value of machinery as on 30-06-2013 29,241
Less: Sale proceeds of machine 26,000
Loss on sale of machine (to be transferred to profit & loss A/c) 3,241
Illustration 15
On 1st January 2011, Bhargava traders purchased machinery for Rs. 40,000. On 1st July in
the same year the firm purchased additional machinery for Rs. 20,000. On 1st July 2013, The
machinery purchased on 1st January 2011 having become obsolete, it was sold for Rs. 32,000. The
books are closed on 31st December every year.
Prepare Machinery Account for three years providing depreciation @10% p.a. on Reducing
Balance Method.
Depreciation 73
Solution:
Books of Bhargava Traders
Machinery Account (Reducing Balance Method)
Dr Cr
Rs. Rs.
2011 2011
( Rs.4,000 + Rs.1,000)
Jul 01 To Bank Account 20,000 Dec 31 By Balance c/d 55,000
(Additional Machinery)
60,000 60,000
2012 2012
Jan 01 To Balance b/d (36000 + 19000) 55,000 Dec 31 By Depreciation Account 5,500
(Rs.3600 + Rs.1900)
55,000 55,000
2013 2013
Jan 01 To Balance b/d (32400 + 17100) 49,500 Jul 01 By Bank Account 32,000
Dec 31 To Profit & Loss A/c (Profit) 1,220 Dec 31 By depreciation Account 3,330
(10%on 17100+ 10%on 32,400
for 6months = Rs.1710+Rs.1620)
50,720 50,720
2014
Working Notes
Calculation of Profit or loss on the sale of machinery Rs
Original cost of the machinery as on 01-01-2011 40,000
Less: Depreciation for the year 2013 (@10% on Rs. 32,400 for 6months) 1,620
Less: Sale proceeds of machinery 32,000
Profit on sale of machinery (to be transferred to profit & loss A/c) 1,220
74 Accountancy-II
Illustration 16
On 1st January 2010, Manjula & Co purchased a plant for Rs.30,000. The company
purchased another plant on 1st January 2011 for Rs. 28,000 and spent Rs.2,000 towards installation
expenses. The books are closed on 31st December every year.
Show the plant account for first three years providing depreciation at 10% on first plant and
15% on second plant on Reducing Balance Method.
Solution
Books of Manjula & Co
Plant Account (Reducing Balance Method)
Dr Cr
Rs. Rs.
2010 2010
(Purchase of 1st plant) (10% on Rs. 30,000)
30,000 30,000
2011 2011
(10% on Rs. 27,000 + 15% on
Rs. 30,000)
(Purchase of 2nd machine)
(Installation expenses)
57,000 57,000
2012 2012
(10%on Rs. 24,300 + 15%on
Rs. 25,500)
49,800 49,800
2013
Depreciation 75
Summary
Assets are classified as Fixed Assets and Current Assets. Depreciation is provided on Fixed
Assets only like plant & machinery, furniture and vehicles etc..Depreciation is permanent, continuous
and gradual decrease in the book value of an Asset due to various causes. Main causes of depreciation
are wear and tear, physical forces, expiration of legal rights, obsolescence and accidents.
We can ascertain the true profit or loss of business operations and know the true and fair
financial position of the firm by providing depreciation on Fixed Assets.
There are several methods of providing depreciation on the assets. Out of these methods
most commonly employed methods in industrial and commercial enterprises are the Straight Line
Method and Reducing Balance Method. Straight Line Method is simple and is suitable for those
assets in which repair charges are less and the possibility of obsolescence is low. Reducing Balance
Method is suitable for those Assets which are affected by technological changes and require more
repair expenses with passage of time. The Reducing Balance Method is recognized by the Income
Tax Authorities.
MODEL QUESTIONS
I. Short Answer type Questions
1. What is depreciation?
2. What are the causes of depreciation?
3. What is obsolescence?
4. What is depletion?
5. Write different methods of providing depreciation.
6. What is Straight Line Method?
7. What is Reducing Balance Method?
II. Essay type Questions
1. Define depreciation. What are the main causes of depreciation?
2. Define depreciation. Explain the need of providing depreciation.
3. Explain the meaning, merits and demerits of Straight Line Method.
4. Explain the meaning, merits and demerits of Reducing Balance Method.
5. What are the differences between Straight Line Method and
Reducing Balance Method?
76 Accountancy-II
Exercises
Straight Line Method or Fixed Installment Method
1. Praveen traders purchased machine for Rs. 80,000. The life of the machine is estimated at
10 years and the residual value is Rs. 10,000. Calculate the annual amount of depreciation
according to Straight Line Method. [Ans. Rs. 7,000]
2. A machine is purchased for Rs. 40,000. It is estimated that the useful life of the machine is 9
years and residual value is Rs.4,000. You are required to find out the annual amount of
depreciation and the rate of depreciation under the Straight Line Method.
[Ans. Rs. 4,000 and 10%]
3. A truck is purchased for Rs. 50,000. It is estimated that the useful life of the truck is 10 years
and residual value is Rs. 5,000. Calculate the annual amount of depreciation and the rate of
depreciation under the Straight Line method. [Ans. Rs. 4,500 and 9%]
4. On 1st April 2010 Anand traders purchased a machine for Rs. 2,60,000 and spent Rs.40,000
on its installation. It is estimated that working life is 10 years and after 10 years its scrap
value will be Rs. 20,000. Books are closed on 31st March every year.
Write necessary journal entries and prepare machine account for the first three years in the
books of Anand traders according to the Straight Line Method
[Ans. Balance Rs. 2, 16,000]
5. On 1st July 2011, Neeharika & Co purchased a printing machine for Rs. 2,16,000 and spent
Rs. 24,000 on its installation. It was estimated that the effective useful life of the printing
machine will be 12 years and its scrap value will be Rs. 24,000. The books are closed on
31st December every year.
Prepare printing machine account and depreciation account for first three years according to
the Straight Line Method [Ans. Balance Rs. 1, 95,000]
6. Madan & Company purchased machinery on 1st January 2011 for Rs. 80,000 and spent Rs.
4,000 for its installation. The estimated life of the machinery is 10 years with a scrap value of
Rs. 4,000. Books are closed on 31st December every year.
Depreciation 77
Calculate amount of annual depreciation under the straight line method and prepare machinery
account for first three years.
[Ans. Annual Depreciation Rs. 8,000: Balance Rs 60,000]
7. On 1st January 2011, Raghavendra traders purchased Furniture for Rs. 60,000. Depreciation
is to be calculated at the rate of 10% p.a. on Straight Line method. The books are closed on
31st December every year. Write necessary journal entries and prepare Furniture Account
for first four years. [Ans. Balance Rs. 36,000]
8. On 1st October 2011 Jagannadham & Sons purchased a machine for Rs. 90,000 and spent
Rs. 10,000 for its installation. The books are closed on 31st March every year. The firm
writes-off depreciation at the rate of 10% on original cost every year.
Prepare Machine Account and Depreciation Account for first three years.
[Ans. Balance Rs. 75,000]
9. Venugopal traders limited purchased machinery on 1st July 2010 for Rs. 50,000 and spent
Rs. 2,000 on its installation. Depreciation is to be provided @10%p.a. under Straight Line
Method. Books of account are closed on 31st December every year.
Show the machinery account for the first three years. [Ans. Balance Rs. 39,000]
10. On 1st January 2011 Suma purchased Furniture for Rs. 80,000. Depreciation is to be provided
annually at 10% under Straight Line Method. On 31st December 2013 furniture was sold for
Rs. 40,000.
Show the Furniture Account assuming that the books are closed on 31st December every
year. [Ans. Loss on sale of Furniture Rs. 16,000]
11. Suneetha traders purchased a second hand machine for Rs. 72,000 on 1st January 2011
and spent 8,000 on repairs and installed the same. Depreciation is written-off at 10% p.a. on
the Straight Line method. On 30th June 2013 the machine was sold for Rs. 50,000.
Prepare machinery account assuming that the accounts are closed on 31st December every
year.
[Ans. Loss on sale of Machine Rs. 10,000]

78 Accountancy-II
12. Ranadheer & Co purchased a machine for Rs. 60,000 on 1st January 2011. Depreciation is
calculated @10% on Straight Line Method. On 1st April 2013 the company sold the machine
for Rs. 36,000.
Prepare machine account assuming that the accounts are closed on 31st December every
year. [Ans. Loss on sale of Machine Rs. 10,500]
13. On 1st January 2011, Siva traders purchased a second hand machine for Rs. 40,000 and
spent Rs. 5,000 on repairs and installed the same. It is estimated that the working life of the
machine is 10 years and scrap value is Rs. 2,500. On 31st December 2013 the machine was
sold for Rs. 25,000.
Prepare machine account assuming that the books are closed on 31st December every year
according to Straight Line Method. [Ans. Loss on sale of Machine Rs. 7,250]
14. Manoj & Company purchased a second hand machine for Rs. 18,000 on 1st April 2011 and
spent Rs. 2,000 on repairs and installed the same. Depreciation is written-off at10% p.a. on
Straight Line Method. On 30th June 2013 it was sold for Rs.13,000.
Prepare machine account assuming that the accounts are closed on 31stDecember every
year. [Ans. Loss on sale of Machine Rs. 2,500]
15. Ramesh & Co purchased machinery on 1st January 2011 for Rs. 3,00,000. On 1st September
2011, another machine was purchased for Rs. 4,20,000. Depreciation is provided on
machinery at 10%p.a. on Straight Line method. Books are closed on 31st December every
year. Prepare machinery account for three years. [Ans. Balance Rs. 5,32,000]
16. Andhra sugars Ltd purchased a plant for Rs. 1,00,000 on 1st January 2011. On 1st July in the
same year additional plant was purchased for Rs. 50,000. On 1st October 2013 the plant
purchased on 1st January 2011 having become obsolete, was sold for Rs. 60,000. On the
same date a fresh plant was purchased for Rs.1,25,000. Depreciation is provided at 10%p.a.
on Straight Line Method.
Prepare plant account for three years assuming that the accounts are closed on 31st December
every year. [Ans. Loss on sale of plant Rs. 12,500; Balance Rs. 1,59,375]
Depreciation 79
17. On 1st July2010 Ganga & Co purchased second hand machine for Rs. 40,000, and spent
Rs. 6,000 on repairs. On 1st January 2011 a new machine was purchased for Rs. 24,000.
On 30th June 2012 the machine purchased on 1st January 2011 was sold for Rs. 16,000 and
another machine was installed at a cost of Rs. 30,000. The company writes-off depreciation
@ 10% p.a. on original cost every year on 31st March.
Show the machinery account for three years.
[Ans. Loss on sale of machine Rs. 4,400; Balance Rs. 61,100]
18. Rama transport company purchased 6 trucks at Rs. 5,00,000 each on 1st January2011.The
company writes-off depreciation @10%p.a. on original cost. The books of account are
closed on 31st December every year. On 1st July 2013 one of the trucks is involved in an
accident and completely destroyed. A sum of Rs. 2,50,000 is received from insurance company
in full settlement. Prepare Trucks Account for first three years
[Ans. Loss on truck destroyed Rs. 1,25,000; Balance Rs. 17,50,000]
Reducing Balance Method
19. Kushal textile mills purchased machinery on 1st April 2011 for Rs. 4,00,000 and spent Rs.
20,000 for its installation. Depreciation is provided @10% p.a. on Reducing Balance Method.
Books are closed on 31st March every year.
Write necessary journal entries and prepare Machinery Account and depreciation Account
for first three years
[Ans. Balance Rs. 3,06,180]
20. On 1st July 2010 Pradeep & Co purchased machinery for Rs. 50,000. Depreciation is written-
off at the rate of 10% p.a. under Reducing Balance Method. Show the Machinery Account
for 3 years assuming that the books are closed on 31st December every year.

80 Accountancy-II
21. On 1st January 2012 Siva & Co purchased a second hand machinery for Rs.34,000 and
spent Rs. 6,000 on its repairs and installed the same. On 31st December 2014 the machinery
was sold for Rs. 26,000. The books are closed on 31st December every year. Depreciation
is provided @10% p.a. on Reducing Balance Method. Show the Machinery Account
[Ans. Loss on sale of machinery Rs. 3,160]
22. On 1st January 2011 Geetha traders purchased a printing machine for Rs.3,00,000. On 1st
July 2013 the printing machine was sold for Rs. 1,30,000. Depreciation is provided @10%p.a.
on Reducing Balance Method. The books are closed on 31st December every year.
Prepare Printing Machine Account
[Ans. Loss on sale of Printing machine Rs. 1,00,850]
23. Sravanthi enterprises purchased a machine for Rs. 40,000 on 1st July 2011 and spent Rs.
5,000 on its installation. Another Machine for Rs. 35,000 was purchased on 1st January
2013. Depreciation is charged @20% p.a. on Reducing Balance Method. Books are closed
on 31st March every year.
Prepare Machinery Account for three years
24. On 1st January 2012 Swathi & Co purchased plant for Rs 3,00,000. On 1st October 2012
another plant was purchased for Rs. 1,00,000. Depreciation is charged @10% p.a. on
Reducing Balance Method. On 1st October 2013, the first plant was Sold for 2,20,000.
Prepare plant account for three years assuming that the accounts are closed on 31st December
every year.
[Ans. Loss on sale of Plant Rs. 29,750; Balance Rs. 78,975]

Consignment 81
Chapter
3
Consignment
3.1 Introduction 3.1 Introduction

3.2 Features
3.3 Difference between The word consignment is originated from
Consignment and Sale the French word ”consigner” which means “to
3.4 Proforma Invoice hand over or transmit”. “To consign” means “to
3.5 Account sales send” and therefore consignment means sending
36 Commission goods to another person.
3.7 Advance on consignment In case of consignment, goods are sent by
3.8 Accounting treatment along with the owner of goods to the agent for the purpose
illustrative problems and of sale. The ownership of these goods remains with
solutions the sender. The agent sells the goods on behalf of
3.9 Theoretical questions the sender, according to his instructions. The sender
3.10 Assignment problems with hints of goods is known as consignor and the agent is
known as the consignee.
Parties to the Consignment

There are two parties in the Consignment. They are
1. Sender of the Goods (Consignor): The person who sends the goods is known as the
Consignor. In other words, consignor is the person who “Consigns” the goods. He is
the owner of the goods. He sends goods where in the physical delivery is delivered to
the receiver without transfer of ownership. That means, even after sending the goods to
the recipient, he still continues to be the owner.
82
2. Recipient of the Goods (Consignee): The person who receives the goods sent by
the Consignor is known as the Consignee. In other words, Consignee is the person who
acts as an Agent of the Consignor. He receives the goods on behalf of the consignor,
stores them, incurs expenses and sells the goods as per the specifications of consignor
for a consideration called “Commission”. He remits the amount of sale proceeds after
deducting his expenses and commission.
3.2 Characteristics/Features of Consignment

1) Parties: There are two parties in consignment they are consignor and consignee
2) Relationship : Relationship between consignor and consignee is that of principal and
agent
3) Ownership: Ownership is vested with consignor only. In consignment only goods
transferred from consignor to consignee but consignor is always owner of such goods.
4) Risk: In consignment business all the risk borne by only consignor
5) Expenses : All the expenses related to consignment are borne by consignor only. Even
the expenses paid by consignee also reimbursed by consignor
6) Closing Stock: Any unsold stock left with consignee belongs to consignor only
3.3 Difference between consignment and sale
Basis Consignment Sale
1. Ownership of goods The ownership of goods remain with The ownership and possession of
the consignor and the possession is goods, both are transferred to the
transferred to consignee buyer immediately
2. Parties The two parties involved are known The two parties involved are
as consignors and consignee known as buyer and seller
3. Relation between The relation between them is that of The relation between them is of
parties a principal and agent which buyer and seller, which ends
continues for long period till it is immediately after the delivery and
ended payment for of the goods
4. Risk The risk of loss or damage is of the The risk passes with the
owner (consignor) ownership to the buyer
5. Consideration The consignee sells goods for The goods are sold for profit
commission against the price
6. Expenses The expenses are borne by the After sales, the expenses are
consignor borne by the buyer
Consignment 83
7. Account sales Consignee sends to consignor The buyer does not needs to send
account sales from time to time any account sales to seller
8. Profit or Loss The profit or loss on consignment The profit or loss on sales belongs
belongs to the consignor to the seller
3.4 Important Documents

3.4.1 Proforma Invoice
Along with the goods, a statement is usually forwarded by the consignor to the consignee,
giving a description of the goods consigned, the weight, quantity, price and other relevant details.
The statement is known as a proforma invoice. It resembles a sales invoice in appearance, but its
purpose is quite different. A sales invoice is a document sent by a seller to a buyer which charges the
buyer with the value of the goods. A pro-forma invoice sent by a consignor to the consignee, does
not charge the consignee with the value; it is intended as an evidence record of consignment and
also as an indication of the price at or above which the consignor intends the goods to be sold. The
price mentioned in the pro-forma invoice is called the pro-forma invoice price. The pro-forma
invoice price may be the cost price of the goods sent, though usually it represents the selling price or
the minimum price at which the consignee is expected to sell the goods sent to him.
3.4.2 Account sales
Account sales is a document or a statement sent by the consignee to the consignor from time
to time. Since the consignee sells the goods on behalf of the consignor, so he has to send a proper
statement either on sale of goods or at the end of a particular period. In account sales, the consignee
shows the details of the gross sales proceeds of the consignment. The various expenses, charges
incurred by him and the commission due to him is deducted. Any advance payment to the consignor
is deducted from the total amount due and the net amount payable is shown. The net amount
payable is sent to the consignor by a bank draft or bills of exchange, as agreed.
84
Chakravarthy & Co sent a account sales to Ganesh for receiving of 200 radios
Date Particulars Rs. Rs.
2015 March 31st Gross Proceeds from sale of 200 radios @
Rs.400 each 80,000
Less: Freight inwards 500
Insurance 2,000
Warehouse charges 1,000
Commission 10% on sales 8,000 11,500
68,500
Less: Advance (cash, bank are bills payable) 18,500
Balance remitted with bank draft 50,000
E & OE For Chakravarthy & Co
Manager
3.5 Commission
The consignee is remunerated by a commission which is usually calculated as an agreed
percentage of the gross proceeds of sale. Commission payable to consignee can be divided into 3
types.
a) Ordinary Commission
b) Del Credre Commission
c) Overriding Commission
3.5.1 Ordinary Commission
Ordinary commission is the commission generally paid by the consignor to the consignee. It
is calculated as a fixed percentage on the gross sales proceeds, such a commission does not provide
any security to the consigner from bad debts.
3.5.2 Del Credre Commission
The Consignee may sell some part of the goods on credit. When goods are sold on credit,
there is always a risk of some amount of bad-debts. In order to avoid the risk of Bad-debts the
consignor provides an additional commission known as “Del-credere commission to the consignee
who guarantees for the payment in case of credit sale. Del-Credere Commission is paid at pre-
determined percentage of Gross Sales proceeds.
Consignment 85
However, as regards to payment of del-credere there may be a separate agreement for its
payment.
When del-credere commission is given to consignee and he is unable to recover some amount
from the debtors, then the amount which is not realized by the consignee is treated as bad debts, No
record for this bad debts is made in the books of consignor, because he can recover the whole
amount from consignee. This bad debts is really loss to the Consignee. Consignee transfers this bad
debts to Commission Account in order to find out his real profit or loss. Debtors Account is opened
in consignee’s books.
3.5.3 Over- Riding Commission
It is an extra commission allowed over the normal commission. This commission is generally
offered when an agent is required to work hard either to introduce a new product in the market or
to handle the work of supervising the performance by other agents in a particular area. It is the
commission paid by the consignor to the consignee for executing sales on consignment on a price
higher than the price fixed by the consignor. In other words, it is the surplus commission allowed to
the consignee, calculated on the surplus price realized by him.
3.6 Accounting Treatment in the Books of Consigner

Generally in order to record each and every consignment transactions consignor maintains
the following accounts:
They are
1. Consignment Account
2. Consignee Personal Account
3. Goods Sent on Consignment Account
3.6.1 Consignment Account
This account is a nominal account. This account is opened to find out the profit or loss made
on each consignment. Generally consignor sent the goods on consignment to difference consignees
to different places. To find out profit or loss on each of such consignment, the consignor maintains
a separate consignment account for each consignment. For example if consignor send goods to
Guntur and Hyderabad then he will maintains Guntur Consignment Account and Hyderabad
Consignment Account.
3.6.2 Consignee Personal Account
This account is a personal account. This account is prepared in order to find out balance due
to or due from Consignee.
86
3.6.3 Goods sent on consignment Account

This account is a real account. This account is credited when goods are sent to the consignee
and is debited when goods returned by consignee. This account is closed by transferring the balance
to the trading account or purchases account.
Journal entries in the Books of Consignor
1 When goods are sent on consignment

Consignment A/c Dr xxxx
To Goods sent on Consignment A/c xxxx
(Being the goods sent on consignment)
2 When expenses are incurred by the consignment
Consignment A/c Dr xxxx
To Bank / Cash A/c xxxx
(Being the expenses met by Consignor)
3 When advance is Received
Cash / Bank / Bills receivable Account Dr xxxx
To Consignee’s Account xxxx
(Being the advance received)
4 When the bill is discounted with bank
Bank Account Dr xxxx
Discount Account Dr xxxx
To Bills receivable Account xxxx
(Being the Bill discounted with the Bank)
5 For expenses incurred by the consignee
Consignment Account Dr xxxx
(Being the expenses incurred by the consignee)
6 For sales reported by Consignee

Consignees Account Dr xxxx
To Consignment Account xxxx
(Being the sale Proceeds received)

Consignment 87
7 For commission payable to Consignee

(Being the commission paid to consignee)
8 For unsold stock remaining with Consignee
Consignment stock Account Dr xxxx
(Being the stock transferred to consignment A/c)
9 For transferring profit to Profit & Loss Account
To Profit & Loss Account xxxx
(Being the profit transferred to consignment A/c)
10 For transferring loss to Profit & Loss Account
Profit & Loss Account Dr xxxx
(Being the Loss transferred to consignment A/c)
11 For the settlement of account with the Consignee
Cash / Bank / Bills Receivable Account Dr xxxx
(Being the balance received from consignee)
12 For closing the Goods Sent on
Consignment Account
Goods sent on consignment Account Dr xxxx
To Trading Account / Purchase Account xxxx
(Being the goods sent on consignment
transferred to Trading / Purchases A/c)
88
Proforma of Consignment Account

Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
To Goods Sent on Consignment Xxxx By Consignee A/c

(value of goods sent to this (Sales made by him) xxx
particular consignment)
To Cash / Bank A/c
(Expenses incurred by Consignor) Xxxx By consignment Stock A/c xxxx
To Consignee A/c
(Expenses incurred by Consignee) Xxxx
To Consignee A/c (Commission) Xxxx
To Profit & Loss A/c (Profit) Xxxx By Profit & Loss A/c
(Loss) xxxx
Xxxx Xxxx
Proforma of Consignees Personal Account

Dr. Cr.
Rs. Rs.
To Consignment A/c
(For sales made by him) Xxx By Cash / Bank/ Bills xxx
Receivable A/c
(Advance paid by him)
By Consignment A/c xxx
(Expenses incurred by him)
By consignment A/c xxx
(Commission Payable)
By Cash / Bank / Bills xxx
Receivable A/c
(Payment received from
consignee for settlement of A/c)
Xxx xxx
Consignment 89
Goods sent on Consignment Account

Dr. Cr.
Rs. Rs.
To Trading A/c Xxx By consignment A/c xxx

Xxx Xxx
3.7 Accounting Treatment in the books of Consignee

Goods received by the consignee on account of consignment cannot be treated as purchases
because the legal ownership of the goods is not transferred to him. Thus, no entry is passed in his
books on the receipt of goods. He maintains only consignor’s account and a stock register.
Journal Entries in the books of Consignee
When the goods are received from Consignor

No Entry is made in the books of consignee
For the Expenses incurred by the Consignor
No Entry is made in the books of Consignee
For Advance sent to Consignor
Consignor Account Dr xxxx
To Cash / Bank / Bills Payable account xxxx
(Being the advance paid)
For the Expenses incurred by Consignee
Consignor Account Dr xxxx
To Cash / Bank
(Being the expenses incurred by Consignee) xxxx
When Consignee sells goods
a. For cash sales
Cash / Bank Account Dr xxxx
To Consignor’s Account
(being the sales made) xxxx
90
b. For Credit sales

Debtors Account Dr xxxx
To Consignor’s Account xxxx
(being the Credit sales made)
When the commission on Sales is due
Consignor’s Account Dr xxxx
To Commission Account xxxx
(Being the commission due)
For the final remittance sent to consignor
Consignor’s Account Dr xxxx
To Bank / Bills Payable A/c xxxx
(Being the Final balance remitted)
For unsold stock with the consignor
No Entry
3.7.1 Proforma of Consignors Account

Dr. Cr.
Rs. Rs.
To Cash /Bank/Bills Payable A/c xxx By Bank A/c

(Amount of sales realized) xxx
Payable A/c xxx By Debtors A/c xxx
(Advance paid to Consignor)
To Bank A/c xxx Credit Sales xxx
(Expenses incurred by Consignee)
To Commission A/c xxx
To Bank A/c (Balance remitted) xxx

xxx xxx
Consignment 91
Illustration 1:
When consignee sold total goods
Sri Manikanta of Guntur consigned goods of the value of Rs.1,00,000 to their agent Sri
Rama of Hyderabad. Sri Manikanta paid loading, insurance in transit Rs.5,000. On receiving the
consignment Sri Rama sent Rs.50,000 worth of Bank draft as advance.
Sri Rama sent account sales which shows the following particulars
Gross Sales Rs.2,00,000
Godown Rents Rs.1,000
Advertisements Rs.2,000
Commission 10% on sales
Sri Rama attached a bank draft for the balance due to Sri Manikanta your required to pass
journal entries and prepare necessary ledger accounts in the books of Sri Manikanta and Sri Rama.
Books of Sri Manikanta (Consignor)
Journal entries
Consignment to Hyderabad A/c Dr 1,00,000

To Goods sent on consignment A/c
(Being the goods sent on consignment) 1,00,000
Consignment to Hyderabad A/c Dr 5,000
To Cash / Bank A/c 5,000
(Being Expenses Paid)
Bank A/c Dr 50,000
To Sri Rama A/c 50,000
(Being Advance received)
Sri Rama A/c Dr 2,00,000
To Consignment to Hyderabad A/c 2,00,000
(Being goods sold by Sri Rama)
To Sri Rama A/c (Being the 3,000
expenses payable to Sri Rama)
92

To Sri Rama A/c 20,000
(Commission = 2,00,000 x 10/100)
(Being commission payable to Sri Rama)
To Profit & Loss A/c 72,000
(Being profit on Hyderabad consignment
transferred to General profit & loss A/c)
Bank A/c Dr 1,27,000
To Sri Rama A/c (Being full and final 1,27,000
settlement received from Sri Rama)
Goods Sent on consignment A/c Dr 1,00,000
To Trading A/c (Being balance in goods 1,00,000
sent on consignment A/c transferred to Trading A/c)
Dr. Hyderabad Consignment Account Cr.

Rs. Rs.
To Goods Sent on Consignment 1,00,000 By Consignee A/c 2,00,000
(value of goods sent to this (Sales made by him) xxx
particular consignment)
(Expenses incurred by Consignor)
To Consignee A/c 3,000
To Consignee A/c
(Commission) 20,000
To Profit & Loss A/c
(Profit) 72,000
2,00,000 2,00,000
Consignment 93
Dr. Sri Rama Account Cr.

Rs. Rs.
To Consignment A/c 2,00,000 By Cash / Bank/ Bills 50,000

(For sales made by him)
Receivable A/c
(Advance paid by him)
By Consignment A/c 3,000
(Expenses incurred by him)
By consignment A/c 20,000
(Commission Payable)
By Bank / (Payment 1,27,000
received from consignee
for settlement of A/c)
2,00,000 2,00,000
Dr. Goods sent on Consignment Account Cr.

Rs. Rs.
To Trading A/c 1,00,000 By consignment A/c 1,00,000

1,00,000 1,00,000
Books of Sri Rama (Consignee)

Journal Entries
Sri Manikanta A/c Dr 50,000

To Bank A/c
(Being advance send to Sri Manikanta) 50,000
94

To Sri Manikanta A/c 2,00,000
(Beinggoods sold on
behalf of Sri Manikanta)
To Cash/ Bank A/c 3,000
(Being expenses
paid on behalf of Sri Manikanta)
To Commission A/c 20,000
(Being commission receivable)
Sri Manikanta A/c Dr 1,27,000
To Bank A/c 1,27,000
(Being full and final settlement on
consignment send to Sri Manikanta)
Sri Manikanta Account

Dr. Cr.
Rs. Rs.
To Bank A/c (Advance paid to 50,000 By Bank A/c 2,00,000

Consignor) (Amount of sales realized)
To Bank A/c 3,000
(Balance remitted)
2,00,000 2,00,000
Consignment 95
Illustration 2:
Bhaskar of Rajahmundry consign 500 radio sets each at Rs.600 to Prasad of Tenali on
consignment. Bhaskar paid Rs.12,000 as freight and insurance in transit. Bhaskar drawn a bill on
Prasad for 3 months for Rs.1,00,000.
Prasad send account sales which shows the following particulars.
1) Gross sale proceeds are Rs.4,50,000
2) Unloading and godown rent Rs.10,000
3) Commission 5% on Gross sales
Prasad send a bank draft for the balance due to Bhaskar.
You are required to prepare necessary ledger accounts in the books of Consignor and Consignee.
Solution:
Books of Bhaskar (Consignor) Tenali Consignment Account
Dr. Cr.
Rs. Rs.
To Goods Sent on Consignment 3,00,000 By Prasad A/c 4,50,000
(500 radios each at Rs.600)
To Prasad A/c 10,000
To Prasad A/c (Rs.4,50,000 x 5%) 22,500
To Profit & Loss A/c (Profit) 1,05,500

4,50,000 4,50,000
Prasad Account
Dr. Cr.
Rs. Rs.
To Consignment A/c 4,50,000 By Bills Receivable A/c 1,00,000
By Consignment A/c 10,000
By Bank 3,17,500
4,50,000 4,50,000
96

Dr. Cr.
Rs. Rs.
3,00,000 3,00,000
Books of Prasad (Consignee)

Bhaskar Account
Dr. Cr.
Rs. Rs.
To Bills Payable A/c 1,00,000 By Bank A/c 4,50,000
To Bank A/c 10,000

4,50,000 4,50,000
3.8 Valuation of Unsold Stock

At the end of the accounting period the unsold goods left with the consignees, should be
valued properly. Otherwise, true profit cannot be ascertained. Unsold stock is valued either at
market price or cost price whichever is less. Cost price of the goods for this purpose does not mean
only the cost at which the consignor purchased the goods. But the proportionate nonrecurring or
direct expenses incurred by the consignor as well as by the consignee should be added to the cost
price. All expenses incurred to bring the goods to the godown of the consignee are treated as non-
recurring or direct expenses. These expenses will increase the value of the goods. Therefore, while
valuing the stock, they should be added to cost of the goods. Some Examples for het non-recurring
expenses incurred by the consignor and consignee are given below:
Consignment 97
Non-recurring expenses incurred Non recurring expenses incurred by

consignor consignee
1. Freight 1. Unloading Charges
2. Carriage or Cartage 2. Freight
3. Insurance 3. Dock Dues
4. Packing 4. Customs Duty
5. Dock Dues 5. Octroi
6. Loading Charges 6. Carriage to his Place
7. Customs Duty
All the expenses incurred by the consignee after the goods reach the godown are treated as
recurring expenses or indirect expenses. These expenses do not increase the value of goods.
Therefore, in the valuation of the unsold stock they should not be considered. Some of the non-
recurring expenses incurred by the consignor and consignee are given below:
Recurring expenses incurred Recurring expenses incurred by
consignor consignee
1. Bank charges for discounting the bills 1. Godown Rent
or cheque received
2. Expense incurred on damaged goods 2. Godown Insurance
3. Salary to salesmen
4. Advertisement Charges
5. Selling Expenses
6. Commission
If detail of expenses are not given, expenses incurred by the consignor should be included for
valuing the unsold stock and expenses incurred by the consignee should be ignored.
Illustration 3:
Kishore of Guntur send 200 bicycles costing Rs.1,20,000 to Pavan of Vijayawada on
consignment. Kishore spend Rs.6,000 towards freight and insurance in transit. Pavan spent unloading
charges Rs.1,200 godown rent Rs.800. consignee sold 180 bicycles at Rs.2,00,000. Calculate the
value of closing stock:
98
Solution:
Particulars Amount Amount
Cost of 200 bicycles 1,20,000
Add 1 : Non recurring expenses incurred by 6,000
Kishore (Consignor)
2: Non recurring expenses incurred by Pavan 1,200 7,200
(Consignee) (Unloading Charges)
Value of 200 bicycles 1,27,200
Total bicycles = 200
Less: Sold = 180
Unsold 20
1, 27, 200
Value of unsold bicycles = 20 × = Rs.12,720
200
Note: Godown rent paid by consignee is recurring expenses. Hence godown rent not included in
valuation of closing stock.
Illustration 4:
X send 500 radios costing Rs.1,000 each to Y on consignment. X spend Rs.50,000 towards
expenses. Y spent Rs.12,000 as advertisement. consignee sold 400 radios each at Rs.1,200.
Calculate the value of closing stock:
Solution:
Cost of 500 radios (500 x Rs.1,000) 5,00,000
Add 1 : Non recurring expenses incurred by X (Consignor) 50,000
2 : Non recurring expenses incurred by Y (Consignee) —— 50,000
Value of 500 radios 5,50,000
Total radios = 500
Less: Sold = 400
Unsold 100
5,50, 000
Value of unsold radios = 100 × = Rs.1,10,000
500
Consignment 99
Note: Advertisement paid by consignee is recurring expenses. Hence advertisement not included in
valuation of closing stock.
Illustration 5:
Murali and Co of Warangal consign 500 radio sets to Hari and Co of Hyderabad. The cost
of each radio Rs.500. Murali and Co paid insurance Rs.10,000 and freight Rs.15,000. Account
sales was received from Hari and Co showing the following particulars.
1. 400 radio sets sold each at Rs.600
2. Advertisement expenses Rs.20,000
3. Commission 10% on sales
Hari and Co send a bank draft for the balance due to consignor.
Show journal entries and ledger accounts in the books of Both the parties.
Solution:
Books of Murali & Co of Warangal (Consignor)
Journal Entries
Consignment to Hyderabad A/c Dr 2,50,000

To Goods sent on consignment A/c 2,50,000
(Being the goods sent on consignment)
To Cash / Bank A/c (Being Expenses Paid) 35,000
Hari & Co A/c Dr 2,40,000
To Consignment to Hyderabad A/c 2,40,000
(Being goods sold by Sri Rama)
To Hari & Co A/c 20,000
(Being the expenses payable to Sri Rama)
(Commission = 2,40,000 x 10/100)
(Being commission payable to Sri Rama)
100
Stock on consignment A/c Dr 57,000

To Consignment to Hyderabad A/c 57,000
(Being unsold stock taken into account)
Consignment to Profit & Loss A/c Dr 32,000
To Consignment to Hyderabad A/c 32,000
(Being Loss on Hyderabad consignment
transferred to General profit & loss A/c)
To Hari & Co A/c 1,96,000
(Being full and final settlement received from Sri Rama)
Goods Sent on consignment A/c Dr 2,50,000
To Trading A/c 2,50,000
(Being balance in goods sent on consignment
A/c transferred to Trading A/c)
Hyderabad Consignment Account

Dr. Cr.
Rs. Rs.
To Goods Sent on Consignment 2,50,000 By Hari A/c 2,40,000
To Cash / Bank A/c 35,000 By Stock on Consignment A/c 57,000
To Hari & Co A/c 20,000 By profit & Loss A/c 32,000
3,29,000 3,29,000
Hari & Co Account

Dr. Cr.
Rs. Rs.
To Consignment A/c 2,40,000 By Consignment A/c 20,000
By Bank A/c 1,96,000

2,40,000 2,40,000
Consignment 101

Dr. Cr.
Rs. Rs.
2,50,000 2,50,000
Working notes:
Computation of Closing stock
Cost of 500 radios (500 x Rs.500) 2,50,000
Add 1 : Non recurring expenses incurred by Murali & 35,000
Co (Consignor)
2: Non recurring expenses incurred by Hari & ——- 35,000
Co (Consignee)
Value of 500 radios 2,85,000
Total radios = 500

Less: Sold = 400
Unsold 100
2,85, 000
Value of unsold radios = 100 × = Rs.57,000
500
Note: Advertisement paid by consignee is recurring expenses. Hence advertisement not included
in valuation of closing stock.
Books of Hari & Co (Consignee)
Journal Entries

To Murali & Co A/c 2,40,000
(Being goods sold on behalf of Murali & Co)
102
Murali & Co A/c Dr 20,000

To Cash/ Bank A/c 20,000
(Being expenses paid on behalf of Murali & Co)
Murali & Co A/c Dr 24,000
(Being commission receivable)
Murali & Co A/c Dr 1,96,000
(Being full and final settlement on
consignment send to Murali & Co)
Murali & Co Account

Dr. Cr.
Rs. Rs.
To Bank A/c 20,000 By Bank A/c 2,40,000
2,40,000 2,40,000
3.9 Loss of Stock-types

Sometimes, losses may occur to the stock sent on consignment either in the transit or after
they reach the consignee. On the basis of their nature, losses can be classified into two categories,
namely:
1. Normal Loss
2. Abnormal Loss
3.9.1 Normal Loss
In the case of certain the goods, even after taking all precautions, some loss of quantity is
bound to take place. Therefore the loss which is unavoidable, natural and is due to the inherent
nature of goods is called as normal loss. For example if coal is consigned, a small portion of coal is
bound to be lost, while of loading and unloading. Similarly, in case of oil and petroleum products, a
portion may be lost due to evaporation and leakage when they are stored.
Consignment 103
Normal loss is unavoidable, therefore, forms part of the cost of the consignment. Since this
loss is usual, no separate journal entry is passed in the books of the consignor and consignee. But
normal loss is to be considered, while calculating the cost of unsold stock left with the consignee.
Normal loss has to spread over the remaining stock. Therefore, for calculating the value of unsold
stock, the following formula can be applied.
quantity of unsold stock
Value of unsold stock = Total cost of goods consigned x
total quantity of goods sent less
normal loss in quantity
Illustration 6
A dealer in apple consign 1,000 tonnes of apples at a cost of Rs.10,000 and paid Rs.2,000
towards freight and insurance. Consignee received 950 tonnes of apples. Consignee sold 500
tonnes of apples. 50 tonnes of apples treated as unavoidable loss. Calculate value of unsold stock.
Solution
Cost of 1,000 tonnes of apples = Rs.10,000
Add: Consignor expenses = Rs.2,000
Rs.12,000
Total quantity of goods less normal loss in quantity = 1,000 – 50 = 950 tonnes
Stock of unsold goods = 950 – 500 = 450 tonnes
quantity of unsold stock
Therefore value of unsold stock = Total cost of goods consigned x
total quantity of goods sent
less normal loss in quantity
450
Value of unsold stock = 12000 x = Rs. 5,684.21 = Rs.5,684.21 are 5684
950
104
MODEL QUESTIONS
Short Answers
1. What do you mean by consignment
2. Briefly explain about consignor and consignee
3. What is a proforma invoice
4. What is a Account sales
5. What is Commission
6. What is Del Credere Commission
7. What is over riding Commission
8. Briefly explain about recurring expenses and non recurring expenses
9. Explain the procedure for valuation of unsold stock in consignment
10. Explain the term of normal loss
11. Accounting treatment for normal loss
Essay Questions
1. What do you mean about consignment? Explain the difference between consignment and
sale
2. What is an account Sales? Give a specimen copy of account sales
3. What is meant by Commission? Explain different types of Commission
Exercises
1. On 1st January, 2009, Sudha of Srinagar consigned goods value of Rs.20,000 to Indira of
Warangal. Sudha paid cartage and other expenses Rs.1,500. On 1st April, 2009, Indira sent
on account sales with following information.
a) 1/2 of the goods sold for Rs.15,000
b) Indira incurred expenses of Rs.750
c) Indira is entitled to receive commission @5% on sales.
Consignment 105
Bank draft was enclosed for he balance due. Prepare necessary Ledger accounts in the
books of Sudha.
Hint:
Profit 750
Closing stock 10,750
Bank Drafts 13,500
2. On 1st January 2012, Gopi of Hyderabad consigned goods valued at Rs.30,000 to Sudheer
of Madras. Gopi paid cartage and other expenses Rs.2,000 on 1st April 2012. Sudheer sent
the account sales with the following information:
a) 50% of the goods sold for Rs.22,000
b) Sudheer incurred expenses amounting to Rs.1,200
c) Sudheer is entitled to receive commission @5% on sales.
Bank draft was enclosed for the balance due. Prepare the necessary ledger accounts in the
books of Gopi.
Hint:
Profit 3,700
Bank Draft 19,700
3. Sai and Co., of Chennai consigned 100 Radios to Deepthi and Co. of Hyderabad. The cost
of each Ratio was Rs.500. Sai and Co paid insurance Rs.500; Freight Rs.800. Account
sales was received from Deepthi and Co., showing the sale of 80 Radios at Rs.600 each.
The following expenses were deducted by them.
Carriage Rs.20
Selling expenses Rs.130
Commission Rs. 2,400
Sai and Co., received a bank draft for the balance due. Prepare important Ledger accounts
in the books of Deepthi and Co.,
Hint:
Profit 4,416
Bank Draft 45,450
106
4. Raj of Bandar sends 200 T.V. sets each costing Rs.15,000 to Rani of Guntur to be sold on
consignment basis. He incurred the following expenses. Freight Rs.2,000; Loading and
unloading charges Rs.2,000 and Insurance Rs.5,000.
Rani sold 185 TVs for Rs.30,00,000 and paid Rs.10,000 as shop rent which is to be borne
by Raj as per terms and conditions of consignment. Consignee is entitled for a Commission
of Rs.200 per T.V. sold. Assuming that Rani settled the account by sending bank draft to Raj.
Prepare the necessary Ledger Accounts in the books of Raj.
Hint:
Profit – 1,69,675
Closing stock 2,25,675
Bank Draft – 29,53,000
5. Vishnu of Vijayawada consigned goods value of Rs.50,000 to Shiva; of Secundrabad. Vishnu
paid transport charges Rs.4,000 and drew a bill of two months on Shiva for Rs.30,000 as
advance. The bill was discounted with bankers for Rs.29,500. Shiva sent the account sales
of the consignment stating that the entire stock was sold for Rs.72,000; Cartage 2,000;
Commission 3,000 and a Bank Draft for the balance.
Prepare necessary accounts in the books of Vishnu.
Hint:
Profit – 13,000
Bank draft – 37,000
6. Laxmi of Vijayawada consigned goods worth Rs.20,000 to his agent Saraswathi of Kodad
on consignment. Laxmi spent Rs.1,000 on transport, Rs.500 on insurance: Saraswathi sent
Rs.5,000 as advance. After two months, Laxmi received the account sales as follows:
a) Half of the goods were sold for Rs.24,000
b) Selling expenses were Rs.1,200.
c) 10% commission on sales
Give ledger accounts in the books of Laxmi.
Hint:
Profit – 9,650
Balance Due – 15,400
Consignment 107
7. Robert consigned goods to Rahim value at Rs.5,000 to be sold on 5% commission basis.

Robert has paid Rs.500 freight and Rs.550 towards insurance.
Robert received account sales and a draft for the balance from Rahim showing the following
particulars
Rs.
Gross Sales 7,500
Selling Expenses 450
Commission 375
Pass necessary entries journal in the and prepare ledger accounts in the books of both the
parties.
Hint:
Profit 625
Amount Due 6675
8. Krishna of Mumbai and Gopal of Chennai are in consignment business. Gopal sent goods to
Krishna Rs.10,000. Gopal paid freight Rs.500. Insurance Rs.1,500 Krishna met sales
expenses Rs.900, Krishna sold the entire stock for Rs.20,000 and he is entitled to a commission
of 5% on sales.
Write the necessary entries in the books of Gopal & Krishna
Hint:
Profit 6,100
Balance due 18,100
9. Manikanta of Vijayawada Consigned goods of value of Rs.20,000 to Ayyappa of Ahmedabad.
Manikanta paid forwarding charges Rs.1,000 and drew a bill of two months on Ayyappa for
Rs.10,000. The bill was discounted with bankers for Rs.9,500. Ayyappa sent received the
account sales of the consignment stating that the entire stock was sold for Rs.28,000 agents
commission Rs.2,000 and a bank draft for the balance. Prepare necessary accounts.
Hint:
Profit 5,000
Balance due : 16,000
108
10. Mrs. Murali sent 50 Bicycles on consignment to Mr.Deepthi invoiced at Rs.800 each on Jan
1st 2009. She has paid the following expenses Rs.1,350 freight, Rs.600 – Insurance Rs.1,500
other expenses. On 5th January, she received a bill from Deepthi for Rs.40,000. On Feb 20th
Deepthi sent an account sales showing that the bicycles have realized Rs.1,000 each: He
incurred expenditure on carriage Rs.500, warehousing Rs.460 and Rs.300 miscellaneous
expenses. He charged commission at 10% on sales. Prepare the books of consignor and
consignee.
Hint:
Profit 5,290
Balance Due: 8,740
11. M/s. Robert & Co. of Bangalore consigned 100 cases @ 50 each to Mahathi & Co., of
Calcutta. M/s. Robert & Co., spent Rs.700 Carriage and paid insurance Rs.250.
In due course account sales was received with the following details:
Rs.
Gross sale proceeds 100 x 75 7,500
Less : Cartage 10
Godown 40
Commission @ 5% 7,500 x 5/100 375 425
Bank draft enclosed for the balance 7,075
Pass necessary entries in the books of both of the parties
Hint:
Profit 3,865
Balance Due: 7,075
12. A & Co., of Hyderabad consigned 100 Video Games to B & Co., of Delhi to be sold on
consignment @ Rs.500 each. He paid transport Rs.2,000 warehouse charges Rs.3,000.
B & Co., sent account sales stating that
100 Video Games sold at100 x 700 Rs.70,000
Less: Cartage 200
Godown Rent 100
Insurance 300
Commission @10% 7,000 7,600
62,400
Consignment 109
(-) Bill accepted as advance 20,000

Bank draft enclosed for the balance 42,400
Prepare necessary ledger accounts of both the books
Hint:
Profit 7,400
Balance Due : 42,400
13. X of Chirala consigned 200 bales of Tobacco @ 250 per bale to V of Vijayawada. X paid
cartage of freight etc., Rs.1250. X drew a bill on V for 3 months for Rs.30,000. V sold the
entire consignment and rendered account sales showing that the goods realized Rs.60,000
out of which he deducted his charges amounting to Rs.400 and commission at 5% on sales.
Make entries in the journal and show necessary ledger accounts in the books of both the
parties.
Hint:
Profit 5,350
Balance Due 26,600
14. Amar consigned 100 bales of cloth to Akbar at Rs.5,000 per bale. Amar incurred the following
expenses:
Packing and Forwarding Charges Rs. 500
Insurance in Transit Rs.2,000
Akbar received the consignment and sold 80 bales at Rs.8,000 per bale. They incurred the
following expenses:
Freight and Cartage Rs.3,000
Insurance of godown Rs. 400
Salesmen’s Salary Rs.1,600
Ascertain the value of on consignment.
Hint:
Value of unsold Stock Rs. 1,01,100
110
15. On January 15, 2009 Dharani of Hyderabad sent 400 Bicycles to be sold on consignment to
Dheeraj of Warangal. The Bicycles were invoiced at Rs.1,000 per piece carriage and other
expenses amounted to Rs.6,000. Dharani received the following account sales.
15th March 100 Bicycles were sold at Rs.1,450 per piece on which 5% commission was
charged and Rs.3,750 were deducted as expenses.
10th April – 150 Bicycles were sold at Rs.1,400 per piece on which 5% commission was
charged and Rs.2,900 were deducted as expenses incurred after 15th March.
Prepare consignment Account and Account in the books of Dharani.
Hint:
Profit 76,850
Stock on consignment 1,52,250
Pass the necessary journal entries in the books of Bhagavan and Lakshman.
Not-For-Profit Organization 111
Chapter
4
Not-For-Profit Organization
4.1 Meaning and Definition of Not – 4.1 Introduction

For – Profit Organizations.
The sole trader concern, partnership firm and
4.2 Characteristics of Not – For –
Profit Organizations. other types of organizations commence business
4.3 Capital and Revenue Transactions with a view to earn profits. They are known as
4.4 Distinguish between profitable and trading concerns. But, there are certain
Not–For–Profitable Organizations. Organisations like schools, colleges, libraries,
4.5 Formation of Not-for-Profit athletic clubs, hospitals, charitable trusts, welfare
Organisations
societies, co-operative societies, clubs, etc. are
4.6 Accounting Records to be
established for providing service to its members
maintained
or to the public. The main objective of this type
4.7 Preparation of Receipts and
Payments Accounts of organizations is to do service rather than earning
4.8 Preparation of Income and profits by doing business. These organizations are
Expenditure Account: managed by trustees.
4.9 Treatment of Important Items
Not-For-Profit Organisations refer to the
4.10 Balance Sheet
organisations that are used for the welfare of the
society and are set up as charitable institutions
which function without any profit motive. Their main objective is to provide service to a specific
group or the public at large. Normally, they do not manufacture, purchase or sell goods and may not
have credit transactions. Hence they need not maintain many books of account like Trading and
Profit and Loss Account. The major sources of their income usually are subscriptions of their
members, donations, grants-in-aid, income from investments, etc. The main objective of keeping
records in such organisations is to meet the statutory requirement and help them in exercising control
over utilisation of their funds. They also have to prepare the financial statements at the end of each
112 Accountancy-II
accounting period (usually a financial year) and ascertain their income and expenditure and the
financial position, and submit them to the statutory authority called Registrar of Societies.
4.2 Characteristics
1. Working with out profit motive and service moto : Not-For-Profit organizations
are formed for providing service to a specific group or public at large such as education,
recreation, health and so on. Its sole aim is to provide service either free of cost or at
normal cost and not to earn profit.
2. Organized bodies: These are organized as charitable trusts; societies and subscribers
to such organizations are called Members.
3. Source of Income: The main source of income of such organizations are(1)Donations
(2)Legacies (3)Grant-in-aid (4)Subscriptions (5)Income from investments etc.
4. Elected management: These organization affairs are usually managed by Managing
committee or executive committee elected by members.
5. No diffusion of surplus: The surplus generated in the form of excess of income over
expenditure is not distributed amongst the members. It is added to capital fund.
6. Reputation by contribution: The Not-for-profit organizations earn their reputation on
the basis of their contribution to the welfare of the society.
7. Accounting Information: The accounting information provided by such organizations
is meant for present and potential contributors and to meet the statutory requirement.
4.3 Capital and Revenue Transactions

Transactions in Not-For-Profit organizations may be classified into Capital Transactions
and Revenue Transactions
1. Capital Transactions: The transactions which provide benefits or supply services to
the business in it for more than one year are known as capital transactions. These
transactions are known as Capital Expenditure and Capital Receipts.
a. Capital Expenditure: Capital expenditure is that expenditure which is generally
incurred for the acquisition of assets and to increase the earning capacity of the
business firm. The expenditure gives benefit for number of years. Example: Purchase
of tangible and intangible assets like machinery, furniture, buildings, patents, trade
marks, goodwill etc.
b. Capital Receipts: Any amount received as investment by owners, or raised by
the way of loans and sale of fixed assets are known as capital receipts. These
amounts lies in huge amounts. These are non-recurring in nature. All the items of
capital receipts are to be shown on the liabilities side of the balance sheet.
2. Revenue Transactions: The transactions which provide benefits to a business unit for
one accounting period only are called as Revenue transactions. The transactions are
classified into two, they are revenue expenditure and revenue receipts.
a. Revenue Expenditure: Any amount spent to earn revenue or profits is called
revenue expenditure. These expenses are having recurring in nature. Its useful
life also would be less than one year. Example: Salaries, rent, wages, electricity,
insurance, repairs etc.
b. Revenue Receipts: Any amount received in the normal course of business is
called as revenue receipts. Which is a recurring in nature. Like sales, interest,
discount, commission, rent received etc.
Distinction Between Profitable And Not-for-profit

4.4
Organizations
Basis of Profitable Organizations Not-For-Profit
Distinction Organizations
1. Motive The main motto is to earn profit The Main motive is to render service
to its members and society
2. Funds Funds are represented by capital Funds are represented by capital fund
contributed by proprietors Comprising in the form of surplus,
Legacies, life membership fees etc.,
3. Financial There include manufacturing They include Receipts and Payments
statements account Trading and Profit and Accounts, Income and Expenditure
Loss a/c and Balance Sheet. Account and Balance Sheet.
4. Surplus / Profit The balance of profit and loss a/c The balance in the income and
is either Net profit or Net Loss. expenditure a/c is either surplus or deficit.
4.5 Formation of Not-For-Profit organizations

Generally these organizations are registered under societies Registration act. But registration
is not compulsory. These organizations should prepare its Memorandum of Association and Articles
of Association and other necessary documents and submit these documents to Registrar of Societies
along with proscribed fees.
114 Accountancy-II
Accounting Records to be maintained in
4.6
Not-For-Profit Organizations
4.6.1 During the Accounting Period
The main source of their income is subscriptions from the members, donations, financial
assistance from governments and income from investments. Most of their transactions are in cash
or through bank. In order to avoid the chances of misappropriation of money they used to maintain
cash book in which all receipts and payments are duly recorded. At the end of the year the cash
book is summarized under suitable heads and the summary thus prepared is called Receipts and
Payments Account. They maintain stock register to keep complete record of all fixed assets and
consumables and maintain a ledger containing all incomes and expenses, assets and liabilities.
4.6.2 At the end of the Accounting Year
The trading organizations prepare Trading and Profit and Loss Account and Balance at the
end of the Accounting Period. The method of preparing final accounts of these organisations is
different from trading organisations. As these organizations are not dealing with goods like trading
organizations, they cannot prepare a trading and profit and loss account. At the end of the year
these organizations prepare Receipt and payments account, Income and expenditure account and a
balance sheet in order to ascertain cash in hand or at bank, surplus or deficit and various assets and
liabilities and capital fund respectively. The final accounts in not-for-profit organizations consist the
following:
1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance sheet
4.7 Preparation of Receipts and Payments Account

Receipts and payments account is a mere summary of Cash Book for a year. It is maintained
prepared by the not-for-profit organizations is lieu of cash book. Like cash book, receipts of cash
are written on debit side and payments on credit side. All receipts and payments whether they are
relating to current, proceeding, succeeding period or all the receipts & payments are capital or
revenue nature are written in this account. Closing balance of this account had shown the cash in
hand /at bank at the end of accounting period. No distinction is made whether the payment has
been made in cash or cheque. As all types of accounts i.e., Personal, Real and Nominal are written
in this account, it is not necessary to prepare Balance Sheet along with this account. No adjustments
are made in this account as it is presented on cash basis of accounting. Moreover, it does not
include any unpaid expenditure and any unrealized income relating to the period under review.
4.7.1 Distinction between Receipts and Payments Account and Cash Book
Basis of Distinction Receipts and payments a/c Cash book
1. Cash Transactions It is a summary of cash book all All cash transactions are recorded
cash transactions are recorded
2. Period It is prepared at the end of It is written daily
accounting year.
3. Chronological order Transactions are not written Transactions are written in
date wise. chronological order.
4.7.2 Features of Receipts & Payment Account

1. It is summary of cash book.
2. All the amounts of receipts & payments irrespective of period are recorded.
3. Irrespective of capital or revenue nature all the receipts and payments are recorded.
4. Non-cash items i.e., depreciations out standing expenses, etc., are not shown in this account.
5. It begins with opening balance of cash in hand and cash at bank or Bank Over Draft and
closes with the year end balance of cash in hand / cash at bank or Bank Over Draft
4.7.3 Steps in Preparation of Receipts & Payments A/C
1. Take the opening balances of cash in hand and cash at bank and enter them on the debit
side. In case of bank overdraft at the beginning of the year enter the same on credit side
of this account.
2. Show the total amounts of all receipts on debit side irrespective of their nature – whether
capital or revenue and whether they pertain to past, current and future periods.
3. Neither of the receivable income nor payable expense is to be entered in the account as
they do not involve in or outflow of cash.
4. Find out the difference between total debit side and total credit side of the account. If
the total of credit is more than the total of debit side, show the difference on the debit
side as bank or over draft and vice-versa and close the account.
116 Accountancy-II
Receipts and Payments Account (Format)
For the year ended
Dr. Cr.
Receipts Amount in Payments Amount in
Rs. Rs.
To balance b/d By salaries XXX
Cash XXX By Rent XXX
Bank XXX XXX By Office expenses XXX
To Subscriptions XXX By Sports material purchased XXX
To Entrance fee XXX By stationery XXX
To Life Membership XXX By games and sports expenses XXX
To Donation for Library Books XXX By entertainment expenses XXX
To Locker Rent XXX By investments XXX
To sale of entertainment tickets XXX By Postal Stamps Purchased XXX
To sale of old newspapers XXX By Scholarships paid XXX
To sale of old furniture XXX By Medicines XXX
By Books XXX
By Subscriptions to News Papers XXX
By Balance c/d XXX
XXXXX XXXXX
Illustrations – 01
From the following particulars, prepare Receipts and Payments Account.
Rs.
Cash in hand 2000
Cash at Bank 6000
Subscriptions 3000
Donations received 2400
Furniture purchased 1600
General Expenses 1000
Postage 400
Stationery 600
Lockers Rent Received 1800
Office Expenses 800
Closing balance of Cash 7000
Solution :
Receipts & Payments A/c
Dr. Cr.
Rs. Rs.
To balance b/d (Cash) 2000 By furniture 1,600
To balance b/c (Bank) 6000 By General Expenses 1000
To Subscriptions 3000 By Postage 400
To Donations 2400 By Stationery 600
To Locker Rent 1800 By Office Expenses 800
By Balance c/d (Cash) 7000
By Balance c/d (Bank) 3800
(Balance)
15200 15200
Illustrations – 02
Prepare Receipts and Payments Account of Kurnool Sports Club for the year ended on 31-
3-2015
Rs.
Opening Cash 2250
Bank Balance 750
Sports Material Purchased 1500
Ground Maintenance 250
Tournament Fund Received 1000
Tournament Expenses 450
Stationery 250
Subscriptions received 3000
Purchase of Prizes and Mementoes 1400
Sale of Entertainment Tickets 600
Entertainment Expenses 400
Sports day Function Expenses 500
118 Accountancy-II
Solution :
Receipts & Payments of Kurnool sports Club for the year ending 31-3-2015
Dr. Cr.
Rs. Rs.
To Balance b/d : By Sports Material 1500
Cash 2250 By Ground Maintained Charges 250
Bank 750 By Tournament Charges 450
To Tournament Fund 1000 By Stationery 250
To Subscriptions 3000 By Purchase of Prizes and
Mementoes 1400
To Sale of Entertainment Tickets 600 By Entertainment Expenses 500
By Sports day function Expenses 400
By Balance c/d (Cash & Bank) 2850
7600 7600
4.8 Preparation of Income and Expenditure Account

Income and expenditure is prepared in these institutions in lieu of profit and loss account.
The income and expenditure account is credited with all earnings i.e. both realized and unrealized
and debited with all expenses i.e. both paid and unpaid. There is no opening balance but closing
balance will show either surplus i.e., excess of income over expenditure. Only revenue items are
taken in to consideration i.e., capital items are totally excluded. The income and expenditure of the
current year are taken into consideration and income and expenditure relating to preceding and
succeeding periods are excluded while preparing this account. This account is prepared on accrual
basis of accountancy and this all adjustments relating to prepaid or outstanding expenses and
incomes, provisions for depreciation or doubtful debts will be made. Only nominal accounts are
taken into considerations for the preparation of this account and for personal and real accounts a
balance sheet must be prepared along with this account.
4.8.1 Features of Income and Expenditure Account

1. It is a nominal account
2. It is similar to profit & loss account.
3. Expenditures and losses recorded on credit side and earnings are recorded on debit
side.
4. Only revenue expenditure, revenue incomes are recorded, capital expenditure and
capital incomes are ignored in the preparation of this account.
5. Only expenses and incomes of current accounting year are taken into consideration.
6. Adjustments for prepaid, outstanding, provisions are made in this account.
7. Difference between two sides will be mentioned either surplus (excess of income over
expenditure) or deficit (excess of expenditure over income) such difference will be
transferred to capital fund on liabilities side of balance sheet.
4.8.2 Distinction between Receipts and Payments Account and

Income and Expenditure Account
Basis of Distinction Receipts and Payments Income and Expenditure
Account Account
1. Type of account Real account Nominal account
2 In lieu of It is prepared in lieu of cash It is prepared in lieu of profit
book and loss account
3. Sides Debit side receipts , payments Payments debit side, receipts
credit side credit
4. Opening balance There can be opening balance No opening balance
which represents cash in
hand/cash at bank
5. Closing balance This shows cash at bank or There is no closing balance but
cash in hand at the end of the the difference represents either
accounting year surplus or deficit
6. Capitial and revenue All items irrespective of capital Only revenue items are taken
or items revenue nature shown in this account
into consideration i.e., capital
nature items are totally excluded
7. Period All receipts and payments Only current period incomes
whether relating to current, and expenditures are taken
succeeding or preceding periods into consideration i.e.,
are taken into consideration. preceding and succeeding
periods are excluded
8. Balance sheet It is not necessary to prepare The balance sheet must be
balance sheet along this account prepared in order to accommodate
real and personal accounts along with this account
9. Adjustments No adjustments are required to All adjustment are made at the end
be made at the end of the year of the year
10. Non cash items It does not record non cash It records non cash items
items e.g., depreciation
11. Basis of accountancy It is prepared on cash basis of It is prepared on accrual basis of
accountancy accountancy.
120 Accountancy-II
4.8.3 Proforma Of Income and Expenditure Account
Revenue expenditure Amount Revenue income Amount
Rs. Rs.
To Salaries xxx By subscriptions xxx
To Rent, rates, taxes xxx By entrance fees xxx
To Printing & stationery xxx By general donations xxx
To General expenses xxx By rent of hall xxx
To Charities xxx By sale of news papers xxx
To Wages of ground men xxx By sale of grass xxx
To Honorarium xxx By grants from government xxx
To Postage xxx By interest received xxx
To Bank charges xxx By profit on sale of assets xxx
To Telephone charges xxx By fees from non members xxx
To Up keep of ground xxx By dividends received xxx
To News papers and periodicals xxx By annual dinner contributions xxx
To Entertainment expenses xxx By lockers rent xxx
To Repairs xxx By sports fees xxx
To Electricity Charges xxx By miscellaneous receipts xxx
To Car expenses xxx By deficit xxx
To Audit fees xxx (excess of expenditure over
To Refreshment expenses xxx income)
To Insurance xxx
To Miscellaneous expenses xxx
To Interest xxx
To Sports expenses xxx
To Loss on sale of assets xxx
To Depreciation on assets xxx
To Surplus xxx
(excess of income over
expenditure)
xxx xxx
4.8.4 Conversion of Receipts and Payments Account into
Income and Expenditure Account
1. Opening and closing balance of cash and bank given in receipts and payments account
should be excluded.
2. Consider only revenue items of income and expenditure and exclude the items of capital
receipts and payments.
3. Make all adjustments of outstanding or prepaid incomes orand expenses, provision for
depreciation and bad debts.
4. Take only items for current year period and exclude all items relating to preceding and
succeeding years.
5. Consider the following items not appearing in the receipts and payments accounts that
need to be taken into account for determination of the surplus /deficit for the current
year.
(a) Depreciation of fixed assets.
(b) Provision for doubtful debts.
(c) Profit or loss on the sale of fixed assets.
4.9 Treatment of Important Items

There are certain items which are peculiar to not for profit organization and require special
treatment while preparing the final accounts of not profit concerns.
1. Legacy: It is the amount which a not for profit concerns will receive as per will of a
deceased person. It should be capitalized being an item of non recurring nature and
should be shown on the liabilities side of balance sheet.
2. Donations: Donation are the amounts which are given to the organizations as gift by
public. The donations are two types.
(a) General Donations: when they do not does not lay down any specific condition
for using the amount of donation, then it is called general donation and treated as
revenue item and shown on credit side of income and expenditure all if the amount
is small, can be capitalized if the amount is huge.
(b) Specific Donations: It the donation is for a specific purpose it is called specific
donation e.g., donation for construction of building, room etc. It should be capitalized
and shown on the liabilities side of balance sheet.
122 Accountancy-II
3. Sale of Asset: If the asset is sold, the amount realized should be compared with book
value, to find out loss or profit on the sale of the asset. Loss on sale of asset will be
shown in debit side and profit on sale of asset shown in credit side of income and
expenditure account.
4. Entrance Fee/Admission Fee: In the absence of any specific instructions, this amount
should be treated as revenue income and be shown on income and expenditure a/c.
5. Life Membership Fees: It is paid only once in live of annual subscriptions, so it should
be capitalized and should be shown on the liabilities side of balance sheet.
6. Sale of old News Papers: Any amount realized from sale proceeds of old papers
should be treated as revenue nature and be show3n on credit side of income and
expenditure a/c.
7. Sale of Sports Material: The amount realized from sale proceeds of sports materials
are treated as revenue nature and be shown on the credit side of income and expenditure
account.
8. Fund Based Accounting: Generally there organizations establish funds for some specific
purpose say prize distribution fund or tournament fund tec. The payments are debited to
it incomes are credited to it. The accounting of incomes and expenses for which specific
fund exists in termed as fund based accounting which is exemption for general rule for
revenue nature.
If there is a specific fund, the expenses of that fund are deducted from that fund and
shown on liabilities side and incomes are added to that funds on liabilities side of balance
sheet
9. Endowment Fund: A fund which provides permanent support for any person or
organization is called endowment fund. A donation to cover expenditure on a particular
purpose is called endowment fund it is capitalized and shown on liability side
10. Honorarium: Any amount paid to outsider for rendering services to the concern in
called honorarium. It is revenue nature, and shown on debt side of income and expenditure
care.
11. Other Capital Payment: purchase of books, furniture, investments, buildings etc., on
treated on capital expenditure is shown on liability side of balance sheet.
12. Other Revenue Receipts: Proceeds from entertainment concerts, shown, lectures,
programmes, interest on investment are treated as revenue expenditure and shown on
credit side of income and expenditure account.
4.10 Balance Sheet

Balance Sheet is the statement of assets and liabilities of an accounting unit at a given data. It
is prepared at the end of an accounting period after the Income and Expenditure Account has been
prepared. It is called a Balance Sheet because it is a sheet of balances of ledger accounts which are
open even after the preparation of Income and Expenditure Account. In such organisations, the
excess of total assets over total outside liabilities is known as capital. While preparing the Balance
sheet, the excess of income over expenditure is added to the opening capital fund and the excess of
expenditure over the income is deducted from the Opening Capital Fund.
Proforma of a balance sheet of a Not-For-Profit Organizations

Balance sheet of _____________________ as on ___________________
Liabilities Rs. Assets Rs.

Capital fund opening balance XXX Cash in hand
Add Surplus (or) Cash at Bank
Less Deficit XXX Outstanding Income
XXX Prepaid expenses
Add Capitalised income of the Stock of consumable items
current year on account Previous balance XXX
of Legacies XXX Add Purchases in current period XXX
Life Membership Fee XXX XXX XXX
Special Funds/Donations XXX Less value consumed during the
Add Receipts for the item period XXX
during the period XXX Furniture XXX
XXX Investments XXX
Add income earned on fund/ Closing stock of stamps/ XXX
Donation/investment XXX stationery Sports material XXX
XXX Fixed Assets
Less Expenses paid out of Previous Balance XXX XXX
Fund / Donation XXX Add purchases during the
Creditors for purchasers XXX current period XXX
Balance over Draft. XXX Less Book value of Assets
Outstanding Expenses XXX sold on this period off XXX XXX
Income received in advance XXX Closing balance
XXX XXX
124 Accountancy-II
MODEL QUESTIONS
1. State the meaning of Not- for –profit organizations. Give suitable examples.
2. Write the characteristics of Non-for-Profit organizations
3. Distinguish between profitable organizations and Not-for–Profitable organizations.
4. List out the accounts prepared by Not-for-Profit organizations.
5. What do you mean by receipts and payment account?
6. What are the characteristics of receipts and Payments account and characteristics?
7. In what way receipts and payment account differ from cash book?
8. What is an income and expenditure account? And explain its features?
9. Difference between receipts and payments account and Income and Expenditure.
10. What do you mean by Revenue Expenditure? Give examples.
11. What do you mean by capital expenditure? Give examples.
12. How do you prepare receipts and payment account?
13. Explain the procedure to convent Receipts and payment account into Income and
Expenditure account.
14. What is capital income? Give two examples.
15. What is revenue income? Give two examples.
16. Distinguish between capital income and revenue income.
17. Distinguish between revenue expenditure and capital expenditure.
18. What is subscription?
19. What is the capital fund?
20. What is Legacy?
21. What is differed Revenue expenditure give examples
22. What is entrance fee
23. What is meant by life membership fee
24. What are Donations? Explain different types.
Excercises
1. From the following particulars, prepare Receipts and Payments A/c
Rs
Cash in hand 2,000
Cash at bank 4,000
Subscriptions received 30,000
Donations Received 5,600
Purchase of furniture 9,000
Rent Paid 5,000
General Expenses 2,000
Postage and Telegram 800
Sundry Expenses 100
Cash balance at close 200
(Ans: Cash at bank closing Rs.24,300)
2. Prepare a Receipts and Payments Accounts.
Rs.
Opening Cash Balance 2,000
Rent Paid 250
Stationary Expenses 540
Subscription received
Previous Year 1500
Current Year 4350
Insurance paid 800
Sale of old machinery 1,900
Electricity 684
News Papers purchase 756
(Ans: Cash in hand closing Rs.6,300)
126 Accountancy-II
3. From the following details prepare receipts and payments A/c
Rs. Rs.
Opening cash in hand 3,400 Tournament Expenses 3,000
Opening cash at bank 23,400 Purchase of Investments 10,000
Subscriptions received 25,000 Interest Received 600
Donations collected 5,000 Sundry Expenses 1,500
Salaries paid 6,000 Electricity Charges 500
Rent Paid 1,000 Cash in hand at the end 700
(Ans: Receipts and payments A/c Total Rs. 57,400)
4. From the following particulars Prepare Receipts and Payments A/c.
Rs. Rs.
Cash in Hand 100 Cash at Bank 500
Subscriptions Received 3,300 Rent Paid 400
Donations Received 260 Investments Purchased 1,000
General Expenses 210 Postage and Stationery 70
Sundry Expenses 30 Cash balance at end 20
(Ans: Cash at bank closing Rs.2430)
5. Following is the receipts and payments A/c of Gandhi cultural Club for the year ended
31-Dec-2014
Dr Cr
Receipts Rs Payments Rs
To Donations 20,000 By Salaries 2,900
To Life Membership Fee 7,000 By Investments 7,000
To Sports competitions Fund 4,000 By Cricket 400
To Subscriptions 2,600 By Tennis 170
(Including Rs.200 for 2015) By Insurance 150
To Locker Rent 200 By Garden Maintenance 85
To Interest on Investments 50 By Stationary 45
To Cricket 100 By Telephone 125
To Tennis 150 By Balance c/d 23,325
To Billiards 100
34,200 34,200
Subscriptions receivable for the year 2014 Rs. 600,
Outstanding Salaries Rs.400.
Half of the Donations are to be capitalized, accrued interest Rs.60,
Prepaid Insurance Rs.70
Prepare income and Expenditure A/c for the year ended 31-Dec-2014.
Ans: Excess of income over expenditure Rs. 9515
6. Prepare income and expenditure A/c of Tirupathi Club from the following receipts and
payments A/c, for the year ending 31-Dec-2014
Dr Cr
To Balance b/d 1,000 By Salaries 6,000
To Subscriptions By Rent and Taxes 1,700
(Including Rs.700, for 2015) 6,600 By Stationery 200
To Interest on investments 2,000 By Postage 30
To Bank interest 550 By Cycle Purchase 1,800
To Sale of Furniture 500 By Balance c/d 920
10,650 10,650
Adjustments: a) Rent paid included Rs.200 for December-2013,
b) Salaries Payable Rs.900
c) Subscriptions received included Rs.600 for the year 2013
d) Subscriptions Due for the year 2014, Rs.400
e) Cost of furniture sold Rs.800
7. From the following receipts and payments a/c of the Venkateswara Society for the year
ended 31-Dec-2014. Prepare income and expenditure a/c for the year ended 31-Dec-2014.
Dr Cr
To Balance 01-01-2014 3,485 By Books 6,150
To Entrance Fees 650 By Printing and stationary 465
To Donations 6,000 By News papers 1,110
To Subscriptions 6,865 By sports Materials 5,000
To Interest on bank deposits 1,900 By Repairs 650
To Sale of furniture 685 By Investments 2,000
To Sale of Old News Paper 465 By Furniture 1,000
To Proceeds from entertainments 865 By Salaries 1,500
To Sundry Receipts 125 By Balance (31-Dec-2014) 3,165
21,040 21,040
128 Accountancy-II
The entrance fees and donations are to be capitalized. Sports materials value Rs.4,000 as on
31-Dec-2014.
(Ans: Excess of income over expenditure Rs.5,495)
8. Visakha Sports Association extracts the following receipts and payments A/c for the year
ended 31-Dec-2014. From the particulars given, prepare income and expenditure a/c.
Dr Cr
To Balance b/d 1,125 By News Paper 750
To Subscriptions 2,900 By Rent 250
To Tournaments Fund 750 By S alaries 1,800
To Life Membership fee 1,000 By Office Expenses 1,200
To Entrance Fee 100 By Sports Equipments 1,150
To Donations for Building 1,500 By Tournament Expenses 450
To Sale of News Paper 50 By Balance c/d 1,825
7,425 7,425
Adjustments:
a) Subscriptions outstanding on 31-Dec-2013, Rs.450, and on 31-Dec-2014 Rs. 400.
Subscriptions received includes Rs.100 on account of the year 2015.
b) Sports equipments was valued on 31-Dec-2013, @ Rs. 550, and on 31-Dec-2014,
@ Rs.1090
c) Office expenses include Rs.150, for the year 2013 where as Rs.200 is still payable
on this account for 2014. (Ans: Surplus Rs.1,760)
9. From the following, Prepare income and expenditure A/c of Tirupathi Sports men Club for
the year ended 31-Dec-2010.
Dr Cr
To Balance b/d 2,100 By Rent 36,400
To Entrance Fee 3,850 By Stationery 21,476
To Subscriptions By Wages 37,310
2009 1,400 By Billiards table 27,300
2010 1,18,300 By Repairs 5,642
2011 2,100 By Interest 10,500
To Locker Rent 3,500 By Balance c/d 16,772
To Special Subscriptions 24,150
for Governer’s party
1,55,400 1,55,400
Adjustments:
Locker rent Rs.420 pertaining to 2009 and Rs.630 is still owing. Rent Rs.9,100
Pertaining to 2009 and Rs.9,100 is still due. Stationary expenses Rs.2,184 relating to
2009 and Rs.2,548 is still owing. Subscriptions receivable for the year 2010. Rs.3276.
(Ans: Surplus Rs.17,444)
10. Sri Hari Sports Club’s, Ongole receipts and payments for the year ending 31-Dec-2014.
Is given below.
Dr Cr
To Cash in hand 500 By Salary to gardener 1000
To Cash at bank 2000 By Grass Cutting Machine 2000
To Subscriptions 6750 By Rent 950
To Tournaments Fund 2500 By Tournament expense 3000
To Life membership fund 2000 By Insurance 2750
To Entrance fees 250 By Games Equipment By 2000
To Donations for computer 3500 Balance c/d
To Sale of Grass 200 Cash in hand 750
Cash at Bank 5250
17700 17700
Additional Information:
a) Subscription receivable for 2013 were Rs.1,000 and For 2014 Rs. 1,050.
Subscription already received including Rs. 400 for the year 2015.
b) Games equipment in the beginning was Rs.1000, and at the end Rs.1,250
c) Provide depreciation @ 10 % Grass cutting machine.
Prepare income and expenditure A/c for the year ending 31-Dec-2014. And opening,
closing balance sheet.
Ans: Excess of Income expenditure over income Rs. 50
11. from the following receipts and payments accounts of other information of Kadapa City
Club, Prepare income and expenditure A/c as on 31-Dec-2014 and balance sheet as on
that date.
Adjustments :
a) Subscriptions received included Rs.1,200 for the year 2013, and Rs.2,400 for the year
2015.
b) Subscriptions due for the year 2014 Rs.1,800.
c) Printing Charges payable for 2014 Rs.240.
d) Salaries payable for the year 2014 Rs.3,600
130 Accountancy-II
Dr Cr
1.1.2014
To balance By Salaries 39000
Cash 1800 By Rent 7200
Bank 5400 By Printing and Stationary 1100
31-12-2014
To Subscriptions 38400 By Postage 300
To Interest on investments 15000 By Purchase of cycle 1800
To Bank Interest 300 By Government Bonds 9000
To Sale of furniture 3000 31-12-2014
(Cost of furniture Rs. 3840) By Balance c/d
Cash 180
Bank 5320
63900 63900
(Ans: Deficit Rs.360), Capital fund on 1-1-2014 Rs. 12,240,
Balance Sheet total Rs.18,120)
12. From the following Receipts and payments a/c of Amaravathi Sports Club for the year
ended 31st Dec-2008, prepare income and expenditure account.
Dr Cr
To Balance b/d 300 By Rent 5200
To Entrance Fees 550 By Stationery Expenses 3068
To Subscriptions By Wages 5330
2007 200 By Billiards Table 3900
2008 16900 By Repairs 806
2009 300 By Interest 1500
To Lockers Rent 500 By balance c/d 2396
To Special Subscriptions for
Governer’s Party 3450
22200 22200
Lockers Rent Rs.60, Pertained to 2007 and Rs.90 is still owing. Rent Rs.1,300 pertained
to 2007 and Rs.1,300 is still due. Stationery Expenses Rs.312 relating to 2007 and
Rs.364 is still owing.
Subscription Receivable for 2008 is Rs.468.
13. From the following Receipts and Payments of Nethajee Sports Club , prepare income and
Expenditure A/c for the year ended on 31-Mar-2012.
Dr Cr
To Balance b/d 23000 By Salaries 16000
(01-04-2011) By Rent 3000
To Subscriptions 13000 By Stationery 1000
To Interest 1000 By Sports Material Purchased 12000
To Sale of old Furniture 1600 By Balance c/d 14600
( Book value Rs.2000) (31-03-2012)
To Entrance Fees 8000
46600 46600
Additional Information
a) Subscriptions Include Rs.1,000 Received for the last year.
b) Rent Includes Rs.600 paid for the last year
From the above particulars Prepare Income and Expenditure A/c for the year ending 31-
03-2012
14. Visakha Town Club provided Receipts and Payments A/c for the year ended 31-Mar-2013.
Prepare Income and Expenditure A/c.
Dr Cr
(01-04-2012) By Rent 1500
To Subscriptions 6500 By Stationery 500
To Interest 500 By Government Bonds 6000
To Sale of Old Furniture 800 By Balance c/d 7300
To Entrance Fees 4000 (31-03-2013)
23300 23300
Adjustments:
a) Subscriptions include Rs.500 received for last year.
b) Rent includes Rs.300 paid for last year
c) Book value of Furniture sold Rs.1,000
(Ans: Surplus Rs.600)
132 Accountancy-II
15. From the following Receipts and Payments A/c of Guntur Sports Club for the year ending
31-Mar-2012, Prepare income and Expenditure A/c.
Dr Cr
To Subscriptions By Repairs 600
(Including Rs.1,000 for By Purchase of Sports Equipment 2000
the Previous year) 18000 By Furniture 8000
To Legacies 2000 By Honorarium paid 5000
To Life Membership Fees 5000 By Books 2000
To Sale of Tickets 500 By Investments 10000
To Lockers Rent 1500 By Office Expenses 1200
To Entrance Fees 1000 By Balance c/d 12000
To Interest on Investments 200
42200 42200
a) Outstanding Salaries Rs.600
b) Opening value of sports equipments Rs.1,000, closing value Rs.500
c) Interest accrued on investments Rs.200
d) Subscription receivable for the year 2012 Rs.3,000.
(Ans: Surplus: Rs.12,100)
16. From the following Receipts and Payments A/c of Sai Charitable Trust , Anantapur,
Prepare Income and Expenditure A/c
Dr Cr
To Donations 25000 By Rent and Taxes 1300
To Membership Fees 1500 By Printing, Stationery 1200
To Entrance Fees 2400 By Scholarships 2000
To Subscriptions 1400 By Salaries 3000
2010 7500 By News papers and magazines 900
2011 1000 By Government Bonds 14000
2012 By Books 10000
To Sale of Furniture 650 By Balance c/d 7850
(Value Rs.1,000)
To Interest 800
40250 40250
Additional information:
a) Subscriptions Receivable for the year 2011 Rs.2,500
b) Prepaid Rent Rs.300
c) Outstanding Stationary Bill Rs.150
d) Capitalize donations
e) Half of the Entrance fees capitalized.
f) Interest Receivable for the year 2011 Rs.200.
Ans: Excess of income over expenditure Rs. 3,600
17. Nellore Sports Club started on 01-01-2010. Their Receipts and Payments A/c for the
year ended 31-Dec-2010.
Dr Cr
To Donations 50000 By Building 40000
To Entrance Fees 4000 By Tournaments Expenses 900
To Tournament Fund 10000 By Furniture 2100
Revenue Receipts Revenue Payments
To Subscriptions By Salaries 1800
(Including Rs.100 for 2011) 3200 By Cricket Expenses 1140
To Rent 100 By Insurance 360
To Other Receipts 700 By Garden Expences 600
To Cricket Fees 400 By Investments 18000
By Balance c/d 3500
68400 68400
Additional information:
a) Subscription receivable for the year 2010 –Rs.300
b) Salaries Unpaid- Rs.170
c) Entrance fees are to be capitalized
d) Insurance includes 9 months premium for 2011.
(Ans: Surplus Rs.800)
134 Accountancy-II
18. From the following Receipts and Payments A/c of Balaji Trust, prepare Income and
Expenditure A/c for the year ending 31-Dec-2008.
Dr Cr
To Opening Balance By Salaries 4800
In hand 200 By Rent 500
At Bank 1600 By Stationary and Postage 200
To Subscriptions By Bicycle Purchase 300
2007 500 By Government Bonds 3000
2008 8300 By Help to need students 2000
2009 600 By Balance
To Sale of Investments 2000 In Hand 300
To Sale of Old Furniture 300 At Bank 2400
(Book Value Rs.400)
13500 13500
Adjustments :
1. Subscriptions for the year 2008 still receivable were Rs.700
2. Interest due on Government Bonds Rs.100.
3. Rent outstanding Rs.60.
Partnership Accounts 135
Chapter
5
Partnership Accounts

Sole proprietorship is the oldest and simplest
5.3 Features of Partnership Firm
form of business organisation. It has so many limitations
5.4 Partnership Deed
like shortage of funds, unlimited personal liability,
5.5 Distribution of Profit and Loss
uncertainty about existence, limited skills, etc. In such
among the partners
a situation and to overcome the above limitations,
5.6 Maintenance of Partners’
people usually adopt the partnership form of
Capital Accounts
organisation. The partnership firm comes into existence
5.7 Interest on Partner’s Loan
when two or more persons come together to establish
5.8 Interest on Capital
business and share in its profits.
5.9 Interest on drawings
Persons who have entered into partnership with
one another are called individually, “partners” and
collectively “a firm”, and the name under which their
business is carried on is called the “firm’s name”. A
partnership firm has no separate legal entity, apart from the partners constituting it.
Section 4 of the Indian Partnership Act 1932 defines partnership as the ‘relation between
persons who have agreed to share the profits of a business carried on by all or any one of
them acting for all’.
136 Accountancy-II
5.3 Features of Partnership Firm
The essential features or characteristics of partnership are:
1. Two or More Persons: In order to form a partnership, there should be at least two
persons. In other words, the minimum number of partners in a firm should be two.
Section 11 of the Indian Partnership Act, 1932 restricts the maximum number of partners
to 10 for carrying on banking business and 20 for other kind of business.
2. Agreement: Partnership is the result of an agreement (either written or oral) among
the partners to do business and share its profits and losses. It is not necessary that such
agreement is in written form. An oral agreement is also equally valid. But in order to
avoid disputes in future, it is preferred that the partners have a written agreement.
3. Business: The agreement should be to carry on some business. For example, if Ramu
and Syam jointly purchase a bit of land, they become the joint owners of the property
and not the partners. But if they are in the business of purchase and sale of land for the
purpose of making profit, they will be called partners.
4. Mutual Agency: The business of a partnership concern may be carried on by all the
partners or any of them acting for all. Each partner carrying on the business is the
principal as well as the agent for all the other partners. Relationship of mutual agency is
so important that one can say that there would be no partnership, if the element of
mutual agency is absent.
5. Sharing of Profit: Another important element of partnership is that, the partners should
be shared profits and losses of a business. If some persons join hands for the purpose
of some charitable activity, it will not be termed as partnership.
6. Liability of Partnership: Each partner is liable jointly with all the other partners and
also severally to the third party for all the acts of the firm done while he is a partner.
Not only that the liability of a partner for acts of the firm but also unlimited. This implies
that his private assets can also be used for paying off the firm’s debts.
7. Transferability of share: No partner can transfer his/her share to any one including
his/her family members without the consent of all other partners.
8. Management: All the partners have a right to manage the business. However, they
may authorize one or more partners to manage the affairs of the business on their
behalf.
5.4 Partnership Deed

Partnership comes into existence as a result of agreement among the partners. The agreement
can be either oral or written. The Partnership Act does not require that the agreement must be in
writing. But wherever it is in writing, the document is there, which contains terms of the agreement,
is called ‘Partnership Deed’. It generally contains the details about all the aspects affecting the
relationship among the partners.
A partnership deed should contain the following points:
1. Name and address of the firm
2. Name and addresses of the partners
3. Nature and place of the business
4. Accounting period of the firm
5. Capital contribution by each partner
6. Interest on capital
7. Drawings and interest on drawings
8. Profit sharing ratio
9. Interest on loan
10. Partner’s salary/commission etc.
11. Method for valuation of goodwill
12. Rights and responsibilities of each partner
13. Procedures in the event of admission, death, retirement or insolvency of a partner
14. Rights and responsibilities upon dissolution and penalties for failing to comply
15. Methods for settlement of disputes
16. Any other matter relating to the conduct of business
Normally, the partnership deed covers all matters affecting relationship of partners amongst
themselves. However, if there is no agreement on any matters, the provisions of the Indian Partnership
Act, 1932 shall apply.
5.4.1 Rules Applicable in the Absence of an Agreement

When there is no agreement among the partners, the following rules will be applicable as per
Section 13 of the Partnership Act 1932;
1. Profits or losses of the firm will be shared equally by the partners.
2. Interest on capital will not be allowed.
3. No interest will be charged on the drawings of the partners.
4. If any partner has given some loan to the firm, he is entitled to get interest on such
amount @ 6% per annum.
5. No salary or commission will be allowed to any of the partners.
Special Issues of Partnership Accounts
Accounting treatment for partnership firm is similar to that of a sole proprietorship business
with the exception of the following aspects;
138 Accountancy-II
o Distribution of Profit and Loss among the partners;
o Maintenance of Partners’ Capital Accounts;
o Reconstitution of the Partnership Firm; and
o Dissolution of Partnership Firm.
The first two aspects mentioned above have been taken up in the following sections of this
chapter.
5.5 Distribution of Profit/Loss among Partners

The profits and losses of the firm are distributed among the partners in an agreed ratio.
However, if the partnership deed is silent, the firm’s profits and losses are to be shared equally by all
partners. In the case of sole proprietorship the profit or loss, as ascertained by the profit and loss
account is transferred to the capital account of the proprietor. In case of partnership, however,
certain adjustments such as interest on drawings, interest on capital, salary to partners, and
commission to partners are required to be made. For this purpose, it is customary to prepare a
Profit and Loss Appropriation Account.
5.5.1 Profit and Loss Appropriation Account

Profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account
of the firm. It shows how the profits are appropriated or distributed among the partners. All
adjustments in respect of partners are made through this account. It starts with the net profit/net loss
as per Profit and Loss Account is transferred to this account.
The Proforma of Profit and Loss Appropriation Account is given as follows:
Dr. Profit and Loss Appropriation Account for the year ended—————— Cr.
Particulars Amount Particulars Amount

(Rs.) (Rs.)
To Profit & Loss Account xxx By Profit & Loss Account xxx
(if there is net loss) (if there is net profit)
To Interest on capital xxx By Interest on Drawings xxx
To Salary to partner xxx By Partners’ Capital Accounts xxx
To Commission to partner (distribution of loss)
To Reserve Fund (transferred)
To Partners’ Capital Accounts
(distribution of profit)
xxx xxx
Illustration-1
A, B and C set up a partnership firm on January 1, 2014. They contributed Rs. 50,000, Rs.
40,000 and Rs. 30,000 respectively as their capitals and agreed to share profits and losses in the
ratio of 3:2:1. A is to be paid a salary of Rs. 1,000 per month and a Commission for B of Rs.
5,000.It is also provided that interest to be allowed on capital at 6% p.a. The drawings for the year
were A-Rs. 6,000, B-Rs. 4,000 and C-Rs. 2,000. Interest on drawings was charged of Rs. 270 on
A’s drawings, Rs. 180 on B’s drawings and Rs. 90 on C’s drawings. The net profit as per Profit and
Loss Account for the year ending December 31, 2014 was Rs. 35,660. Prepare the Profit and
Loss Appropriation Account to show the distribution of profit among the partners.
Solution
Dr. Profit and Loss Appropriation A/c for the year ended 31st December, 2014 Cr.
(Rs.) (Rs.)
To A’s salary (1000 x 12) 12,000 By Net profit 35,660

To B’s commission 5,000 By Interest on Drawings:
To Interest on capital: A - 270
A - 3,000 B - 180
B - 2,400 C - 90 540
C - 1,800 7,200
To Partners’ Capital Accounts:
A - 6,000
B - 4,000
C - 2,000 12,000
36,200 36,200
5.6 Maintenance of Capital Accounts of Partners

All transactions relating to partners are recorded in the books of the firm through their capital
accounts. This includes the amount of money brought in as capital, withdrawal of capital, share of
profit/loss, interest on capital, interest on drawings, partner’s salary, partner’s commission, etc.
There are two methods by which the capital accounts of partners can be maintained.
These are:
(i) Fixed capital method, and
(ii) Fluctuating capital method.
140 Accountancy-II
(i) Fixed Capital Method: Under the fixed capital method, the capitals of the partners shall remain
fixed unless additional capital is introduced or apart of the capital is withdrawn as per the agreement
among the partners. All items like share of profit or loss, interest on capital, drawings, interest on
drawings, etc. are recorded in a separate account, called Partner’s Current Account.
The partner’s capital account and the current account under the fixed capital method would
appear as shown below:
Dr. Partner’s Capital Account Cr.

(Rs.) (Rs.)
To Bank xxx To Balance b/d xxx

(withdrawal of capital) (opening balance)
To Balance c/d xxx By Bank xxx
(closing balance) (additional capital)
xxx xxx
Dr Partner’s Current Account Cr

(Rs.) (Rs.)
To Balance b/d xxx By Balance b/d xxx

(in case of debit opening balance) (in case of credit opening balance)
To Profit & Loss Appropriation xxx By Profit & Loss Appropriation xxx
(for share of loss) (for share of Profit)
To Drawings xxx By Commission xxx
To Interest on drawings xxx By Salaries xxx
To Balance c/d xxx By Interest on capital xxx
(closing balance) By Balance c/d xxx
(closing balance)
xxx xxx
Illustration-2
Vijay and Kumar are partners in a firm. Following information is provided as on 31 December,
2014:
Vijay (Rs.) Kumar(Rs.)
Capital (as on 01.01.2014) 40,000 30,000
Drawings 3,000 2,000
Interest on Capital 2,000 1,500
Interest on Drawings 360 180
Share of Profit 5,000 4,000
Prepare necessary accounts of each partner if capital is fixed.
Solution
Dr. Partner’s Capital Accounts Cr.
Particulars Vijay Kumar Particulars Vijay Kumar

(Rs.) (Rs.) (Rs.) (Rs.)
To Balance c/d 40.000 30.000 To Balance b/d 40,000 30,000

(closing balance)
40.000 30.000 40,000 30,000
Dr. Partner’s Current Accounts Cr.
Particulars Vijay Kumar Particulars Vijay Kumar

(Rs.) (Rs.) (Rs.) (Rs.)
To Drawings 3.000 2,000 By Interest on Capital 2,000 1,500

To Interest on drawings 360 180 By P&L Appropriation A/c 5,000 4,000
To Balance c/d 3,640 3,320
7,000 5,500 7,000 5,500

142 Accountancy-II
(ii) Fluctuating Capital Method: Under the fluctuating capital method, only one account, i.e.
capital account is maintained for each partner. All the adjustments such as share of profit and loss,
interest on capital, drawings, interest on drawings, salary or commission to partners, etc. are recorded
directly in the capital accounts of the partners. This makes the balance in the capital account to
fluctuate from time to time. That’s the reason why this method is called fluctuating capital method.
In the absence of any instruction, the capital account should be prepared by this method.
The proforma of capital accounts prepared under the fluctuating capital method is given
below:
Dr. Partner’s Capital Account Cr.

(Rs.) (Rs.)
To Bank xxx By Balance b/d xxx

(withdrawal of capital) (opening balance)
To Drawings xxx By Bank xxx
To Interest on drawings xxx (additional capital introduced)
To Profit & Loss Appropriation xxx By Commission xxx
(for share of Loss) By Salaries xxx
To Balance c/d xxx By Interest on capital xxx
(closing balance) By Profit & Loss Appropriation xxx
(for share of Profit)
xxx xxx
Illustration-3
X,Y and Z entered into partnership on 1st April, 2013 to share profits & losses in the ratio of
4:3:3. Interest on Capital @ 5% p.a. The Capital contributions were: X -Rs. 3,00,000; Y -Rs.
2,00,000 and Z -Rs. 1,50,000and drawings were: X - Rs. 10,000, Y - Rs. 8000, and Z -Rs. 6,000
in this year. The profit for the year ended 31st March, 2014 amounted to Rs. 1,60,000. Show the
necessary Accounts.
Solution
Dr. Profit and Loss Appropriation A/c for the year ended 31st March, 2014 Cr.

(Rs.) (Rs.)
To Interest on capital: By Net profit 1,60,000

X - 15,000
Y - 10,000
Z - 7,500 32,500
To Partner’s Capital Accounts
X - 51,000
Y - 38,250
Z - 38,250 1,27,500
1,60,000 1,60,000
Particulars X Y Z Particulars X Y Z
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Drawings 10,000 8,000 6,000 By Cash 3,00,000 2,00,000 1,50,000

To Balance c/d 3,41,000 2,30,250 1,82,250 By P&L Appro A/c 51,000 38,250 38,250
3,51,000 2,38,250 1,88,250 3,51,000 2,38,250 1,88,250
Illustration-4
Amar and Kalesha commenced business as partners on April 1, 2013. Amar Rs. 40,000 and
Kalesha Rs. 25,000 contributed as their capital. The partners decided to share their profits in the
ratio of 2:1. Amar was entitled to a salary of Rs. 6,000 p.a. Interest on capital was to be provided
@ 6% p.a. The drawings of Amar and Kalesha for the year ending March 31, 2014 were Rs.
4,000 and Rs. 8,000 respectively. The profits of the firm after providing Amar’s salary and interest
on capital were Rs. 12,000.
Draw up the Capital Accounts of the partners; (i) When capitals are fixed, and (ii) When
capitals are fluctuating.
144 Accountancy-II
Solution
(i) When capitals are fixed

Particulars Amar Kalesha Particulars Amar Kalesha
(Rs.) (Rs.) (Rs.) (Rs.)
To Balance c/d 40,000 25,000 By Cash 40,000 25,000

(closing balance)
40,000 25,000 40,000 25,000
Dr. Partner’s Current Accounts Cr.

(Rs.) (Rs.) (Rs.) (Rs.)
To Drawings 4,000 8,000 By Profit & Loss 8,000 4,000

To Balance c/d 12,400 - Appropriation A/c
(2/3 & 1/3 of 12,000)
By Salaries 6,000 -
By Interest on capital 2,400 1,500
By Balance c/d - 2,500
16,400 8,000 16,400 8,000
(ii) When capitals are fluctuating

Dr. Partner’s Capital Accounts Cr
(Rs.) (Rs.) (Rs.) (Rs.)
To Drawings 4,000 8,000 By Cash 40,000 25,000

To Balance c/d 52,400 22,500 By Profit & Loss 8,000 4,000
Appropriation A/c
By Salaries 6,000 -
By Interest on capital 2,400 1,500
56,400 30,500 56,400 30,500
Illustration-5
A and B are partners sharing profits in the ratio of 3: 2 with capitals of Rs. 5,00,000 and Rs.
3,00,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary
of Rs. 25,000. During the year 2014, the profit prior to calculation of interest on capital but after
charging B’s salary amounted to Rs. 1,25,000. A provision of 5% of the profits is to be made in
respect of Manager’s commission.
Prepare an account showing the allocation of profits and partners’ capital accounts.
Solution
Dr. Profit and Loss Appropriation A/c for the year ended 31st Dec, 2014 Cr.

(Rs.) (Rs.)
To Interest on Capital: By Profit after B’s Salary but 1,25,000

A - 30,000 before other adjustments
B - 18,000 48,000
To Manager’s Commission 7,500
(5% of Rs. 1, 50,000)
To Profit transferred to:
A’s Capital A/c - 41,700
B’s Capital A/c - 27,800 69,500
1,25,000 1,25,000

Particulars Amar Kelasha Particulars Amar Kelasha
(Rs.) (Rs.) (Rs.) (Rs.)
To Balance c/d 5,71,700 3,70,800 By Balance b/d 5,00,000 3,00,000

By Interest on Capital 30,000 18,000
By salary - 25,000
By Profit and Loss
Appropriation A/c 41,700 27,800
5,71,700 3,70,800 5,71,700 3,70,800
146 Accountancy-II
5.7 Interest on Partner’s Loan
When a partner gives loan to the firm, it should be credited to a separate loan account and
calculate interest on it as per the interest rate in the agreement. In absence of agreement, Partnership
Act provides that interest @ 6% p.a. shall be allowed on such loan irrespective of the profit.
Interest on loan is an expenditure, so that, it has to be debited to Profit & Loss Account and
credited to Partner’s Loan A/c or Capital/Current A/c.
5.8 Interest on Capital

Interest on partners’ capital will be allowed only when it has been specifically mentioned in
the partnership deed. In absence of agreement among partners, no interest is allowed. The interest
on capital is loss or expense to the firm and thus debited to Profit &Loss Appropriation Account
and credited to Capital Account/Current Account as it is gain or income to the partners. Interest on
capital is generally provided for in two situations: (i) when the partners contribute unequal amounts
of capitals, and (ii) where the profit sharing is unequal. The interest on capital should always be
calculated on the time basis after considering the additional capital and withdrawal of capital. Interest
on Capital is always calculated on the opening balance.
The interest on capital is allowed only when the firm has earned profit during the accounting
year. Hence, no interest will be allowed during the year the firm has incurred net loss. In case of
insufficient profits, interest on capital is allowed only to the extent of profits in the ratio of interest on
capital of each partner.
Interest Rate
Interest on capital = Share Capital ×
100
The following Journal entries are to be passed to record the interest on capital;
Date Particulars L.F Dr Cr
Interest on Capital A/c Dr xxx

To Partners’ Capital/Current A/c xxx
(Being interest on capital credited to Capital/
Current A/c)
Profit & Loss Appropriation A/c Dr. xxx
To Interest on Capital A/c xxx
(Being interest on capital transferred to Profit
& Loss Appropriation A/c)
Illustration-6
P, Q and R entered into partnership, bringing capital in Rs. 3,00,000, Rs. 2,00,000 and
Rs.1,00,000 respectively into the business. They decided to share profits and losses equally and
agreed that interest on capital will be provided to the partners @10 per cent per annum.
Solution
The interest on capital
For P = Rs. 30,000 (10% on 3,00,000)
For Q = Rs. 20,000 (10% on 2,00,000)
For R = Rs.10,000 (10% on 1,00,000).
Illustration-7
M and N who are partners in a firm and their capital accounts showed the balance of
Rs.4,00,000 and Rs. 2,50,000 respectively on April 1, 2014. M introduced additional capital of
Rs. 1,00,000 on August 1, 2014 and N brought in further capital of Rs. 1,50,000 on October 1,
2014. Interest is to be allowed @ 6% p.a. on the capitals.
Solution:
Interest on capital shall be worked as follows:
For
= 24,000 + 4,000
= Rs. 28,000
For
= Rs. 15,000+Rs. 4,500

= Rs. 19,500
Illustration-8
Lal and Pal are partners in a firm. Their capital accounts as on April 01, 2013 showed a
balance of Rs. 4,00,000 and Rs. 6,00,000 respectively. On July 01, 2013, Lal introduced additional
capital of Rs. 1,00,000 and Pal, Rs. 60,000. On October 01,2013Lal withdrew Rs.50,000, and
on January 01, 2014 Pal withdrew, Rs. 25,000 from their capitals. Interest is allowed @ 8% p.a.
Calculate interest payable on capital to both the partners during the financial year 2013–2014.
148 Accountancy-II
Solution
Calculation of Interest on Capital
= 32,000 + 6,000 – 2,000

= Rs. 36,000
3
12
= 48,000 + 3600 – 500

= Rs. 51,100
Illustration-9
X and Y are Partners sharing Profit and Loss in the ratio of 2:3 with a capital of Rs. 20,000
and Rs. 10,000 respectively. Show distribution of Profit/losses for the year ended 31stMarch 2015
by preparing P & L Appropriation A/c in each of the alternative cases.
Case 1: If Partnership deed is silent as to the interest on capital and the profit for year ended is
Rs.2,000. 6
Case 2: If Partnership deed provides for the interest on capital @ 6% p.a. and loss for the year is 2
Rs. 1,500.
Case 3: If Partnership deed provides for interest on capital @ 6% p.a. and trading profit is
Rs.2,100.
Solution
Case 1:

(Rs.) (Rs.)
To Profit transferred to: By Net Profit 2,000

X’s capital A/c - 800
Y’s capital A/c - 1,200 2,000
2,000 2,000
Case 2:
(Rs.) (Rs.)
To Net loss 1,500 By Loss transferred to:

(Trading loss) X’s Capital - 600
Y’s Capital - 900 1,500
1,500 1,500
Note: No interest on capital will be allowed the firm has net loss, even though they have an agreement.
Case 3:

(Rs.) (Rs.)
To Interest on Capital: By Net Profit 2,100

X - 1,200
Y - 600 1,800
To Profit transferred to:
X’s capital A/c - 120
Y’s capital A/c - 180 300
2,100 2,100
5.9 Interest on Drawings

Partners may be allowed to draw either money or goods from the business to meet their
private needs. As stated earlier, no interest is charged on the drawings if there is no agreement
among the partners about it. If the partnership deed so provides for it, the interest is charged at an
agreed rate, for the period money remained outstanding from the partners during an accounting
year. Charging interest on drawings discourages excessive amounts of drawings by the partners.
Interest on drawings is an income to the firm and should be credited to profit & Loss Appropriation
Account and debited to partners’ Capital/Current Accounts being a loss to the partners.
150 Accountancy-II
Interest Rate Time left after drawings
= x
100 12
The calculation of interest on drawings under different situations is shown as hereunder
Case 1:- When Rate of Interest on Drawings is given in % without per annum, in this case Interest
on Drawings is calculated with a flat rate irrespective of date of drawings.
Case 2:- Amount, rate of interest and date of withdrawal is given:
Illustration-10
Johnson is a partner who withdrew Rs. 20,000 on October 1, 2014. Interest on drawings is
charged @ 10% per annum and the accounts were closed every year on December 31. Calculate
interest on drawings.
Solution
= Rs. 500
Case-3:- Amount and rate of interest are given but date of withdrawal is not specified:
Illustration–11
Ahmed is a partner who withdraws Rs. 30,000 and interest on drawings is charged @ 15%
per annum. Calculate interest on drawings.
Solution
= Rs. 2,250
Here, it is noted that in the absence of any particular date of withdrawal, it is assumed that
withdrawals are made evenly throughout the year. Hence, interest is charged for the average of the
period of the year, i.e., six months.
Case-4: Fixed amount is withdrawn every month
If withdrawn on the first day of every month, interest on total amount will be calculated
for 6½ months,
if withdrawn at the end at every month, it will be calculated for 5½ months, and
if withdrawn during the middle of the month, it will be calculated for 6 months.
Table showing the average period when withdrawals are made regularly
Date of Withdrawal Average Period in Months

1 Beginning of every month (12+1)/2 = 6.5
Middle of every month (11.5+0.5)/2 = 6
End of every month (11+0)/2 = 5.5

2 Beginning of every quarter (12+3)/2 = 7.5
End of every quarter (9+0)/2 = 4.5
3 Beginning of half year (12+6)/2 = 9

End of half year (6+0)/2 = 3
Illustration-12
Shanu withdrew Rs. 10,000 per month from the firm for her personal use during the year
2014. Find out the interest on drawings, in different situations @ 8% p.a.
Solution
(a) When the amount is withdrawn at the beginning of every month
Total drawings = 10,000 x 12 = Rs. 1,20,000
Interest on drawings =
= Rs. 5,200
(b) When the amount is withdrawn at the end of every month;
= Rs. 4,400
(c) When money is withdrawn in the middle of every month /date of Drawings is not
given;
= Rs. 4,800
Illustration-13
Ratna and Manikyam are partners in a firm, sharing profits and losses equally. During financial
year 2014–2015, Ratna withdrew Rs. 50,000 quarterly. If interest is to be charged on drawings
@10% per annum, calculate interest on drawings in different situations.
152 Accountancy-II
Solution
(a) If the amount is withdrawn at the beginning of each quarter;
Total drawings = 50,000 x 4 = Rs. 2,00,000
= Rs. 12,500
(b) If the amount is withdrawn at the end of every quarter;
= Rs. 7,500
Case-5: When different amounts are withdrawn on different dates:
The following are the two methods to calculate the amount of Interest on Drawings:
1. Simple Interest Method: in this method, interest on drawings is calculated for each amount of
drawings individually on the basis of periods.
2. Product Method: In this method, the amounts of drawings are multiplied by the period for which
it remained withdrawn during the period, Interest for 1 month is calculated on the sum of these
products.
Illustration-14
Vamshi and Krishna are partners in a firm. During the year ended 31st March 2015Vamshi
makes the drawings as under:
Date of Drawing Amount (Rs.)

01-08-2014 5,000
31-12-2014 10,000
31-03-2015 15,000
Partnership Deed provided that partners are to be charged interest on drawings @ 12% p.a.
Calculate the interest on Vamshi’s drawings by using Simple Interest Method and Product Method.
Solution
1. Simple Interest Method
Date Drawings Months till Interest @

(Rs.) March 31st 2015 12% p.a.
01-08-2014 5,000 08
31-12-2014 10,000 03
31-03-2015 15,000 00 00
Total Interest = 700
2. Product Method.
Date Drawings Months till Product

(Rs.) March 31st 2015 (Rs.)
01-08-2014 5,000 08 40,000

31-12-2014 10,000 03 30,000
31-03-2015 15,000 00 00
7,0000
Interest on Drawings = Sum of Productsx

12
= 70,000 x
100
= Rs. 700
Illustration-15
Thanvika withdrew the following amounts for her personal use from her firm during the year
ending March 31, 2014. Calculate interest on drawings with product method, if the rate of interest
to be charged is 7 % per annum.
April 1, 2013, Rs. 16,000, June 30, 2013, Rs. 15,000,

October 31, 2013, Rs. 10,000, December 31, 2013, Rs. 14,000, and
March 1, 2014, Rs. 11,000.
154 Accountancy-II
Solution
Statement Showing Calculation of Interest on Drawings
Date Amount Months till Product
(Rs.) March 31st 2015 (Rs.)
April 1, 2013 16,000 12 Months

1,92,000
June 30, 2013 15,000 9 Months
1,35,000
October 31, 2013 10,000 5 Months
50,000
December 31, 2013 14,000 3 Months
42,000
March 1, 2014 11,000 1 Month
11,000
4,30,000
Interest on Drawings = Sum of Products
7
= Rs. 4,30,000 x
100
= Rs. 2,508 (approx.)
Summary
Meaning and Definition: When two or more persons enter into an agreement to
carry on business and share its profits/losses is called partnership. Partnership is defined
as “Relation between persons who have agreed to share the profits of a business
carried on by all or any one of them acting for all”.
Features: The essential features of partnership are : (i) To form a partnership, there
must be at least two persons; (ii) It is created by an agreement; (iii) The agreement
should be for carrying on some legal business; (iv) sharing of profits and losses; and
(v) relationship of mutual agency among the partners.
Partnership deed: A document which contains the terms of partnership as agreed
among the partners is called ‘Partnership Deed’. It usually contains information about
all aspects affecting relationship among partners.
Rules applicable in the absence of Partnership Deed :
Profit sharing ratio will be equal
No Interest on Capital and Drawings
No Remuneration or Salary to the partners.
Interest on Loan advanced by the partner @ 6% p.a.
Profit and Loss Appropriation Account : After the preparation of Profit and Loss
Account, entries pertaining to partners like interest on capital, drawings, salaries among
the partners, etc. are shown separately in a newly opened Profit and Loss Appropriation
Account.
Fixed and Fluctuating Capital Accounts :
Under fixed capital method, the amount of capital remains fixed, the transactions
like interest on capital, drawings, interest on drawings, salary, commission, share
of profits/losses are recorded in a separate account called ‘Partner’s Current
Account’.
Under fluctuating capital method, all the transactions relating to a partner are
directly recorded in the capital account.
Interest on Capital:The interest on partner’s capital is not allowed unless it is specifically
mentioned in partnership deed. It should be calculated on the time basis after considering
the additional and withdrawal of capital.
Interest on Drawings: Interest on drawings 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.
MODEL QUESTIONS
Very Short Answer Questions
1. Define partnership.
2. What are the features of Partnership firm?
3. What is meant by partnership deed?
4. Why is it important to have a partnership deed in writing?
5. In the absence of partnership deed, what are the rules applicable to partnership firm?
6. Why is Profit and Loss Appropriation Account prepared? Explain
7. What do you understand by fixed capital of partners?
8. What do you understand by fluctuating capital of partners?
9. How will you deal with the following terms while preparing partnership accounts?
(i) Interest on capital
(ii) Interest on drawings
(iii)Interest on loan
Exercises
1. Ram and Shyam started a partnership firm on 1st January, 2014. Their capital
contributions were Rs. 2,00,000 and Rs. 1,00,000 respectively. The partnership deed
156 Accountancy-II
provided:
i. Interest on capitals @10% p.a.
ii. Ram to get a salary of Rs. 2,000 p.a. and Shyam Rs. 3,000 p.a.
iii. Profits are to be shared in the ratio of 1:2.
The profits for the year ended 31st December, 2014 before making above
appropriations were Rs. 2,16,000. Prepare Profit and Loss Appropriation Account.
(Ans: Profit transferred to Ram’s Capital Rs. 60,333 and Shyam’s Capital Rs. 1,20,667)
2. Lakshmi and Bhuvaneswari are partners with capitals of Rs.15,00,000 and Rs.
10,00,000 respectively. They agree to share profits in the ratio of 3:2. Show how the
following transactions will be recorded in the capital accounts of the partners in case
the capitals are fixed. The books are closed on March 31, every year.
Particulars Lakshmi (Rs.) Bhuvaneswari(Rs.)
Additional capital contributed on 3,00,000 2,00,000
July 1, 2014
Interest on capital 82,500 55,000
Drawings (during 2014) 30,000 20,000
Interest on drawings 1,800 1,200
Salary 20,000 -
Commission 10,000 7,000
Share in loss for the year 2014 60,000 40,000
(Ans: Capital Accounts of Lakshmi, Rs. 18,00,000 and Bhuvaneswari, Rs. 12,00,000;Current
Accounts of Lakshmi, Rs. 20,700 and Bhuvaneswari, Rs. 800 )
3. On March 31, 2013, after the close of books of accounts, the capital accounts of
Seenu, Prasad and Sudarsan showed balance of Rs. 24,000 Rs. 18,000 and Rs.
12,000 respectively. After all adjustments profit for the year ended March 31, 2014,
amounted to Rs. 36,000 and the partner’s drawings had been Seenu, Rs. 3,600;
Prasad, Rs. 4,500 and Sudarsan, Rs. 2,700. The interest on capital @ 8% and the
profit sharing ratio of Seenu, Prasad and Sudarsan was 3:2:1. Prepare Partners’ capital
Accounts.
(Ans: Capital Accounts of Seenu Rs. 40,320; Prasad, Rs. 26,940; Sudarasan, Rs. 16,260)
4. Venu and Subbu are partners sharing profits in the ratio of 3:2, with capitals of Rs.
1,00,000 and Rs. 60,000 respectively. Interest on capital is agreed @ 10% p.a. Subbu
is to be allowed an annual salary of Rs. 2,500. During the year 2014-15, the profits
prior to the calculation of interest on capital but after charging Subbu’s salary amounted
to Rs. 22,500.
Prepare Profit and Loss Appropriation Account and the partners’ capital accounts for
the year ending March 31, 2015.
(Ans: Profit transferred to capital A/c Rs. 6,500; Venu’s Capital A/c Rs. 1,13,900 and
Subbu’s Capital A/c Rs. 71,100)
5. A and B are partners sharing profits in the ratio of 3:2, with capitals of Rs. 50,000 and
Rs. 30,000 respectively. Interest on capital is agreed to be paid @ 6% p.a. calculate
interest on capital.
(Ans: Interest on capital of A, Rs. 3,000 and B, Rs. 1,800)
6. P and Q are partners sharing profits and losses in the ratio of 3:2. On 1st April 2014
their capital balances were Rs. 50,000 and Rs. 40,000 respectively. On 1st July 2014,
P brought Rs.10,000 as his additional capital, whereas Q brought Rs. 20,000 as
additional capital on 1st October 2014. Interest on capital was provided @ 10% p.a.
Calculate the interest on capital of P and Q on 31st March 2015.
(Ans:Interest on Capital for P is Rs. 5,750 and for Q is Rs. 5,000)
7. Rama and Krishna are partners sharing profits and losses in the ratio of 5:1. Their
capitals at the end of the financial year 2013-14 were Rs. 1,50,000 and Rs. 75,000.
On October 1st, 2014 Rama and Krishna had brought additional capitals of Rs. 16,000
and Rs. 14,000 respectively. On November 1st 2014 Rama withdrew Rs. 6,000 and
on December 1st 2014 Krishna withdrew Rs. 9,000 from their capitals. Calculate
interest on capital @ 15% p.a. for the year 2014-15.
(Ans: Interest on Capital for Rama is Rs. 23,325 and for Krishna is Rs. 11,850)
8. Priya and Mani are partners, sharing profits and losses in the ratio of 5:3. The balances
in their capital accounts as on April 1, 2013 were; Priya, Rs. 6,00,000 and Mani, Rs.
8,00,000. Calculate interest on capital; (a) when there is no agreement in respect of
interest on capital, and (b) when there is an agreement that the interest on capital will
be allowed @ 7% p.a.
(Ans:(a) No interest on Capital; (b) for Priya is Rs. 4,200 and for Mani is Rs. 5,600)
9. Mohith is a partner, who withdrew Rs. 5,500 at the end of June, 2014. The Partnership
deed provides for charging the interest on drawings @ 12% p.a. Calculate interest on
Mohith’s drawings for the year ending 31st December, 2014.
(Ans: Interest on Drawings Rs.330)
10. Amar and Gul are partners in a firm. They share profits in the ratio of 3:2. As per their
partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings
during 2014 were Rs. 24,000 and Rs. 16,000, respectively. Calculate interest on
drawings.
(Ans: Interest on Amar’s Drawings, Rs. 1,200 and Gul’s, Rs.800)
(Hint: If the date of Drawings is not given in the question, interest on drawings will be
charged and average period of 6 months)
158 Accountancy-II
11. Bose is a partner in a firm. He withdraws Rs. 3,000 at the starting of each month for 12
months. The books of the firm close on March 31 every year. Calculate interest on
drawings if the rate of interest is 10% p.a.
(Ans: Interest on Drawings, Rs.1,950)
12. Vishnu and Thomas are partners in a firm. They share profits equally. Vishnu’s monthly
drawings are Rs. 2,000. Interest on drawings is to be charged @ 10% p.a. Calculate
interest on Vishnu’s drawings for the year 2014, assuming that money is withdrawn: (i)
in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of
every month.
(Ans: Interest on Drawings(i) Rs.1,300; (ii) Rs.1,200; (iii) Rs.1,100)
13. A and B are partners sharing profits and losses in the ratio of 4:1. A withdraws Rs.
2,500 at the beginning of each month and B withdrew Rs. 1,500 at the end of each
month for 12 months period. Interest on drawings was charged @ 8% p.a. Calculate
the interest on drawings of A and B for the year ended 31st December 2014.
(Ans: Interest on Drawings for A is Rs. 1,300 and for B is Rs. 660)
14. Aparna is a partner in a firm. She withdrew the following amounts during the year
ended March 31, 2015.
May 01, 2014 Rs. 12,000
July 31, 2014 Rs. 6,000
September 30, 2014 Rs. 9,000
November 30, 2014 Rs. 12,000
January 01, 2015 Rs. 8,000
March 31, 2015 Rs. 7,000
Interest on drawings is charged @ 9% p.a. Calculate interest on drawings
(Ans: Interest on Drawing Rs. 2,295)
15. John, a partner in Kaveri Tours and Travels withdrew money for his personal use from
his capital account during the year ending March 31, 2015. Calculate interest on drawings
in each of the following alternative situations, if rate of interest is 9 per cent per annum.
(a) If he withdrew Rs. 3,000 at beginning of each month.
(b) If an amount of Rs. 3,000 per month was withdrawn by him at the end of each
month.
(c) If the amounts withdrawn were:
Rs. 12,000 on June 01, 2014, Rs. 8,000 on August 31, 2014
Rs. 3,000 on September 30, 2014, Rs. 7,000, on November 30, 2014, and
Rs. 6,000 on January 31, 2015.
(Ans:Interest on Drawings (a) Rs. 1,755, (b) Rs. 1,485, and (c) Rs. 1,755)
Admission of a Partner 159
Chapter
6
Admission of a Partner

6.2 New profit sharing ratio An existing partnership firm may take up
6.3 Revaluation of Assets and expansion/diversification of the business. In that case
Liabilities it may need managerial help or additional capital. An
6.4 Adjustment of option before the partnership firm is to admit partner/
undistributed profit partners. When a new partner is admitted in a running
6.5 Treatment of Goodwill business due to the requirement of more capital, to
6.6 Adjustment of Partners’ take advantage of the experience, technical skills and
capitals managerial ability of new partner or any other reason,
it is called admission of a partner in partnership
firm.New partner is admitted to the partnership if it
provided in the partnership deed or all the existing
partners unanimously agree to admit the new partner.
According to section 31(1) of Indian partnership
Act, 1932, ‘A new partner can be admitted only with
the consent of all the existing partners’
When a partner joins the firm, he gets the following two rights along with others:
i) Right to share future profit of the firm and
ii) Right to share the assets of the firm
When a new partner is admitted in the firm the agreement among the existing partners terminates
and a new agreement will come into force. It is due to this, certain adjustments must be made at the
time of admission. The following are the important points which require attention at the time of
admission of a new partner:
160 Accountancy-II
1. New profit sharing ratio;
2. Revaluation of assets and liabilities;
3. Distribution of accumulated profits/losses, and reserves;
4. Treatment of Goodwill; and
5. Adjustment of partners’ capitals.
6.2 New Profit Sharing Ratio

When a new partner is admitted, he acquires his share in profits from the old partners. The
calculation of new profit sharing ratio will depend on the agreement between the old partners and
the new partner.
New Share = Old Share – Sacrificing Share
The following situations may arise while calculating the new ratio;
Case-1: if the new partner share is given along with old ratio.
Illustration-1
Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted Sumit as a new
partner for 1/5 share in the future profits of the firm. Calculate new profit sharing ratio of Anil, Vishal
and Sumit.
Solution
If we assume the total share is 1
The new partner Sumit’s share = share out of 1
Rest of the share =
Old Ratio = 3:2

New Share = Rest of the share x old share
Anil’s new share =
Vishal’s new share =
New Ratio =
New profit sharing ratio of Anil, Vishal and Sumit = 12 : 8 : 5

Case-2: if the new partner gets his share equally from old partners.
Illustration-2
Akshay and Bharat are partners sharing profits in the ratio of 3:2. They admit Dinesh as a
new partner for 1/5th share in the future profits of the firm which he gets equally from Akshay and
Bharat. Calculate new profit sharing ratio of Akshay, Bharat and Dinesh.
Solution
New partner Dinesh’s share =
This share equally from Akshay and Bharat, i.e., 1/2 of the Dinesh share =
= from each partner.
Old Ratio = 3:2

New share = Old share – Sacrificing share
Akshay’snew share =
Bharat’s new share =
New Ratio =
New profit sharing ratio among Akshay, Bharat and Dinesh will be 5:3:2
Case-3: if profit share of a new partner takes particular ratio from old partners.
Illustration-3
Anusha and Nitu are partners sharing profits in the ratio of 3:2. They admitted Jyoti as a new
partner for 3/10 share, which she acquired 2/10 from Anusha and1/10 from Nitu. Calculate the
new profit sharing ratio of Anusha, Nitu and Jyoti.
Solution
New partner Jyoti’s share= (this acquired 2/10 from Anusha and 1/10 from Nitu)
Old Ratio = 3 : 2
New share = Old share – Sacrificing share
Anusha’s new share
Nitu’s new share

162 Accountancy-II
The new ratio
The new profit sharing ratio among Anusha, Nitu and Jyoti will be 4 : 3 : 3.
Case-4: if the old partners sacrifice a particular proportion of their shares to new partner.
Illustration-4
Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They admit Ganesh
as a new partner. Ram surrenders 1/4 of his share and Shyam1/3 of his share in favour of Ganesh.
Calculate new profit sharing ratio of Ram, Shyam and Ganesh.
Solution
New partner Ganesh’s profit share = 1/4 of Ram’s share + 1/3 of Shyam’s share
Old Ratio = 3 : 2
Ram’s new share = Old Share – Scarifying Share
Shyam’s new share =
New ratio =
New profit sharing ratio among Ram, Shyam and Ganesh will be 27:16:17
Case-5: if the new partner share takes entire from one partner.
Illustration-5
Das and Sinha are partners in a firm sharing profits in 3:2ratio. They admitted Pal as a new
partner for 1/4 share in the profits, which he acquired wholly from Das. Determine the new profit
sharing ratio of the partners.
Solution
New partner Pal’s share = 1/4
Das’s new share =
Sinha’s old and new share =
New ratio =
New profit sharing ratio among Das, Sinha and Pal will be 7 : 8 : 5
6.2.1 Sacrificing Ratio

The ratio in which the old partners agree to sacrifice their share of profit in favour of the
incoming partner is called sacrificing ratio.
Sacrificing Share of Profit = Old Share of Profit – New Share of Profit
Illustration-6
Rohit and Mohit are partners in a firm sharing profits in the ratio of 5:3. They admit Sarma as
a new partner for 1/7 share in the profit. The new profit sharing ratio will be 4:2:1. Calculate the
sacrificing ratio of Rohit and Mohit.
Solution
Rohit and Mohits’ old Ratio = 5:3
Rohit, Mohit and Sarmas’ New Ratio = 4:2:1
Rohit’s old share = 5/8
Rohit’s new share = 4/7
Sacrifice share =Old Share of Profit – New Share of Profit
Rohit’s sacrifice share =
Mohit’s old share = 3/8

Mohit’s new share = 2/7
Mohit’s sacrifice share =
Sacrificing ratio =
Sacrificing ratio of Rohit and Mohit will be 3:5.

Note: The old partners’ sacrificing ratio is equal to old ratio, if the new partner share is given along
with old ratio (i.e. case-1).
164 Accountancy-II
Illustration-7
R and S are partners, sharing profits in the ratio of 1:2. T admits for 1/5 share. State the
sacrificing ratio.
Solution
The new partner T’s share = share out of 1
Rest of the share =
Old Ratio = 1 : 2
New Share = Rest of the share x old share
R’s new share =
S’s New share =
Sacrifice share = Old Share of Profit – New Share of Profit
R’s sacrificing share =
S’s sacrificing share =
Sacrificing Ratio =
Sacrificing ratio of R and S= 1:2
6.3 Revaluation of Assets and Liabilities

On admission of a new partner, the firm stands reconstituted and consequently the assets
are revalued and liabilities are reassessed. It is necessary to show the true position of the firm at the
time of admission of a new partner. If the values of the assets are raised, i.e., gain, the capital of the
existing partners will increase. Similarly, any decrease in the value of assets, i.e. loss, the capital of
the existing partners will decrease. For this purpose a ‘Revaluation Account’ is prepared. It is a
nominal account. This account is credited with all increases in the value of assets and decrease in the
value of liabilities. It is debited with decrease in value of assets and increase in the value of liabilities.
The balance of this account shows a gain or loss on revaluation which is transferred to the existing
partner’s capital account in old profit sharing ratio. The following journal entries made for this
purpose are:
(i) For increase in the value of Assets:

Asset A/c Dr. xxx
To Revaluation A/c xxx
(ii) For decrease in the value of Assets:

Revaluation A/c Dr. xxx
To Asset A/c xxx
(iii) For increase in the value of Liabilities:

To Liabilities A/c xxx
(iv) For decrease in the value of Liabilities:

Liabilities A/c Dr. xxx
(v) For unrecorded Assets

Asset A/c Dr. xxx
(vi) For unrecorded Liability:

To Liability A/c [unrecorded] xxx
(vii) For transfer of gain on revaluation (as per old ratio):

To Old Partners’ Capital A/c xxx
(viii) For transfer of loss on revaluation (as per old ratio):

Old Partners’ Capital A/c Dr. xxx
166 Accountancy-II
Pro-forma of Revaluation Account is given as under;
Dr. Revaluation Account Cr.
(Rs.) (Rs.)
To Assets Account xxx By Assets account xxx

(if decrease in value) (if increase in value)
To Liabilities Account xxx By Liabilities Account xxx
(if increase in value) (if decrease in value)
To Liabilities Account xxx By Assets Account xxx
(if unrecorded liabilities) (if unrecorded assets)
To Old Partners’ Capital A/c xxx By Old Partners’ Capital A/c xxx
(if distribution of profit) (if distribution of loss)
xxx xxx
Illustration-8
Following is the Balance Sheet of Anusha and Pranusha sharing profit as 3:2.
Liabilities Amount Assets Amount

(Rs.) (Rs.)
Creditors 18,000 Debtors 21,000

Bills Payable 25,000 Land & Buildings 18,000
Workmen’s compensation fund 15,000 Plant &Machinery 12,000
Capitals: Stock 11,000
Anusha – 15,000 Bank 21,000
Pranusha – 10,000 25,000
83,000 83,000
On admission of Tanusha for 1/6th share in the profit it was decided that:
(i) Provision for doubtful debts to be created by Rs. 1,500.
(ii) Value of land and building to be increased to Rs. 21,000.
(iii) Value of stock to be increased to Rs. 13,500.
(iv) Tanusha was to bring further cash of Rs. 15,000 for her capital.
Prepare Revaluation A/c and Capital Accounts.
Solution

(Rs.) (Rs.)
To Provision for doubtful debts 1,500 By Land & Buildings 3,000

To Partners’ Capital A/c: By Stock 2,500
Anusha - 2,400
Pranusha- 1,600 4,000
5,500 5,500
Particulars Annusha Paranusha Tannusha Particulars Annusha Paranusha Tannusha
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Balance c/d 17,400 11,600 15,000 By Balance b/d 15,000 10,000 -

By Bank - - 15,000
By Revaluation A/c 2,400 1,600 -
17,400 11,600 15,000 17,400 11,600 15,000
Illustration-9
Following is the Balance Sheet of A and B who share profits in the ratio of 3:2.
Balance Sheet of A and B as on April 1, 2015
(Rs.) (Rs.)
Sundry Creditors 20,000 Plant &Machinery 30,000

Capitals: Furniture 10,000
A – 30,000 Stock 15,000
B – 20,000 50,000 Debtors 12,000
Cash in Hand 3,000
70,000 70,000
On that date C is admitted into the partnership on the following terms:

1. C is to bring in Rs. 15,000 as capital for 1/6 share.
168 Accountancy-II
2. The value of stock is reduced by 10% while plant and machinery is appreciated by 10%.
3. Furniture is revalued at Rs. 9,000.
4. A provision for doubtful debts is to be created on sundry debtors at 5%.
5. Investment worth Rs. 1,000 and electricity bills outstanding Rs. 200 (not mentioned in
the balance sheet) are to betaken into account.
6. A creditor of Rs. 100 is not likely to claim his money and is to be written off.
Record journal entries and prepare Revaluation Account, Partners’ Capital Accountand New
Balance Sheet of the firm.
Solution Journal Entries in the Books of A & B
Date Particulars L.F. Debit Credit
Amount (Rs.) Amount (Rs.)
April Cash A/c Dr. 15,000
2012, To C’s capital A/c 15,000
(Being cash brought in by C as capital)
1 Revaluation A/c Dr. 2,500
To Stock A/c 1,500
To Furniture A/c 1,000
(Being decrease in the value of assets
on revaluation)
1 Revaluation A/c Dr. 600
To Provision for Doubtful Debdts A/c 600
(Being 5% Provision for Doubtful Debdts)
1 Plant & Machinery A/c Dr. 3,000
To Revaluation A/c 3,000
(Being increase in the value of Assests on
(revaluation)
Investment A/c Dr. 1,000
(Being findout the unrecorded investments)
To Outstanding electricity bills A/c 200
(Being amount provided for outstanding
electricity bill)
1 Sundry creditors A/c Dr. 100
To Revaluation A/c 100
(Being the creditors amount written off)
To A’s capital A/c 480
To B’s capital A/c 320
(Being revaluation profit distributed between
old partners)
(Rs.) (Rs.)
To Stock 1,500 By Plant & Machinery 3,000

To Furniture 1,000 By Investments 1,000
To Provision for doubtful debt 600 By Sundry creditors 100
To Outstanding electricity bills 200
To Partners’ Capital A/c:
A - 480
B - 320 800
4,100 4,100
Particulars A B C Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

By Cash A/c - - 15,000
By Revluation A/c 480 320 -
30,480 20,320 15,000 30,480 20,320 15,000
New Balance Sheet as on April 1, 2015

(Rs.) (Rs.)
Sundry Creditors - 20,000 Pant &Machinery – 30,000

Less: Written off - 100 19,900 Add: Appreciation - 3,000 33,000
Electricity bills outstanding 200 Furniture (10,000 – 1,000) 9,000
Partners’ Capital A/c: Stock - 15,000
A – 30,480 Less: Decrease 10% - 1,500 13,500
B – 20,320 Debtors - 12,000
C – 15,000 65,800 Less: Provision - 600 11,400
Cash in Hand (3000 + 15,000) 18,000
Investment 1,000
85,900 85,900
170 Accountancy-II
Adjustments of Reserves and Accumulated
6.4
Profit or Losses
Any accumulated profit or reserve appearing in the balance sheet at the time of admission of
a new partner is credited to the existing partners’ capital account in the existing profit sharing ratio.
If there is any loss, the same will be debited to the existing partners in the existing ratio. For this
purpose the following journal entries are made as:
(i) For distribution of undistributed profit and reserves
(as per old ratio).
Reserves A/c Dr xxx
Profit & Loss A/c(Profit) Dr. xxx
To Partners’ Capital A/c xxx
(ii) For distribution of loss (as per old ratio)
Partners’ Capital A/c Dr. xxx
To Profit and Loss A/c [Loss] xxx
Illustration-10
Rajendra and Surendra are partners in a firm sharing profits in the ratio of 4:1. On April 1,
2015 they admit Narendra as a new partner. On that date there was a balance of Rs. 20,000 in
general reserve and a debit balance (loss) of Rs. 10,000 in the profit and loss account of the firm.
Pass necessary journal entries regarding adjustment of accumulated profit or loss.
Solution
Journals in the Books of Rajendra, Surendra and Narendra
(Rs.) (Rs.)
April, General Reserve A/c Dr. 20,000
1 To Rajendra’s capital A/c 16,000
To Surendra’s capital A/c 4,000
(Being General Reserve transferred to the
capital account of Rajendra and Surendra on
Narendra’s admission)
Rajendra’s Capital A/c Dr. 8,000
Surendra’s Capital A/c Dr. 2,000
To Profit and Loss A/c 10,000
(Being debit balance of Profit and Loss A/c
transferred to old partners’ capital A/c)
Illustration-11
A & B are partners in a firm, sharing Profits and Loss in the ratio of 5:3. On 31 Dec, 2014
their Balance sheet was as under;
Balance sheet as on 31st Dec, 2014
(Rs.) (Rs.)
Sundry Creditors 28,000 Machinery 1,20,000
General Reserve 32,000 Stock 80,000
Capitals: Sundry Debtors 70,000
A – 1,00,000 Cash at Bank 7,000
B – 1,20,000 2,20,000 Cash in Hand 3,000
2,80,000 2,80,000
On the above date they decided to admit C as a new partner on the following terms;
a) A,B and C’s new profit sharing ratio will be 7:5:4.
b) C will bring Rs. 1,00,000 as his capital.
c) Machine is to be valued at Rs. 1,50,000, Stock Rs. 1,00,000 and provision for doubtful
debt of Rs. 10,000 is to be created.
Prepare Revaluation A/C, Partners’ Capital A/C and new Balance Sheet of the firm.
Solution
(Rs.) (Rs.)
To Provision for doubtful debt 10,000 By Machine 30,000
To Partners’ Capital A/c: By Stock 20,000
A - 25,000
B - 15,000 40,000
50,000 50,000
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Balance c/d 1,45,000 1,47,000 1,00,000 By Balance b/d 1,00,000 1,20,000 -
By Cash A/c - - 1,00,000
By Revluation A/c 25,000 15,000 -
By General Reserve 20,000 12,000 -
1,45,000 1,47,000 1,00,000 1,45,000 1,47,000 1,00,000
172 Accountancy-II
New Balance Sheet as on 31stDec, 2014
(Rs.) (Rs.)
Capitals: Stock 1,00,000
A – 1,45,000 Sundry Debtors - 70,000
B – 1,47,000 Less: Provision - 10,000 60,000
C - 1,00,000 3,92,000 Cash at Bank 7,000
Cash in Hand 1,03,000
(3,000+1,00,000)
4,20,000 4,20,000
6.5 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.
Goodwill is also one of the special aspects of partnership accounts which require adjustment
at the time of reconstitution of a firm viz., a change in the profit sharing ratio, the admission of a
partner, retirement or death of a partner.
6.5.1 Methods of Valuation of Goodwill

Since goodwill is an intangible asset it is very difficult to accurately calculate its value. Various
methods have been advocated for the valuation of goodwill of a partnership firm. Goodwill calculated
by one method may differ from the goodwill calculated by another method. Hence, the method by
which goodwill is to be calculated may be specifically decided between the existing partners and the
incoming partner.
The important methods of valuation of goodwill are as follows:
1. Average Profits Method
2. Super Profits Method
3. Capitalisation Method
1. 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.
Goodwill = Average Profit x No. of Years’ Purchase
Ilustration-12
The profit for the five years of a firm are as follows – year 2009 Rs. 4,00,000;year 2010 Rs.
3,98,000; year 2011 Rs. 4,50,000; year 2012 Rs. 4,45,000 and year 2013 Rs. 5,00,000. Calculate
goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Solution
Average Profit =
= Rs. 4,38,600
Goodwill = Average Profit × No. of years’ purchase
= Rs. 4,38,600 × 4
= Rs. 17,54,400
2. Super Profit Method: Super Profit is the profit earned by the business that is in excess of the
normal profit. Goodwill is determined by multiplying the super profit by the number of years’
purchase.
Normal Profit = Capital Employed x Normal Rate of Return/100
Actual Profit = This is the profit earned by the firm during the year or it is also
taken as the average of the last few years profit.
Super Profit = Actual Profit – Normal Profit
Goodwill = Super Profit × No. of Years’ Purchase
Ilustration-13
A firm earns profit of Rs.65,000 on a capital of Rs.4,80,000 and the normal rate of return in
similar business is 10%. 3 years’ purchase value of super profit will be treated as goodwill.
Solution
Normal profit = Capital employed x normal rate of return/100
= 4,80,000 × 10/100
= Rs. 48,000
Actual Profit = Rs. 65,000
Super profit = Actual profit – Normal profit
= Rs.65,000 – Rs.48,000
= Rs.17,000
Goodwill = Super Profit × No. of Years’ Purchase
= 17,000 × 3
= Rs.51,000
174 Accountancy-II
3. Capitalisation Method: Under Capitalisation Method, capitalized value of the business is
determined by capitalizing the average profit by the normal rate return. Out of the value so determined,
value of net assets/capital employed is deducted, the balance amount is the value of goodwill.
Goodwill = Capitalised Value – Net Assets or Capital employed
Ilustration-14
A firm earned average profit during the last few years is Rs.40,000 and the normal rate of
return in similar business is 10%. The total assets is Rs.3,60,000 and outside liabilities is Rs.50,000.
Calculate the value of goodwill with the help of Capitalisation of Average profit method.
Solution
Capital employed = Total assets - Outside liabilities
= Rs.3,60,000 - Rs.50,000
= Rs.3,10,000
Capitalised value of average profit = Average Profit × 100/ Normal rate of profit
= Rs. 40,000 × 100/10
= Rs. 4,00,000
Goodwill = Capitalised value – Capital employed
= Rs. 4,00,000 – Rs. 3,10,000
= Rs. 90,000
6.5.2 Treatment of Goodwill

There are different situations relating to treatment of goodwill at the time of admission of a
new partner. Goodwill is credited to old partners’ in sacrificing ratio. These are discussed as under:
Case-1: when the amount of goodwill is paid privately by the new partner; no journal entries
are made in the books of the firm.
Case-2: when the new partner brings his/her share of goodwill in cash; the journal entries are
as follows:
(i) For bringing cash for Capital as well as for goodwill:
Cash/Bank A/c Dr. xxx
To Goodwill A/c xxx
To New partner’s Capital A/c xxx
(ii) For the goodwill transferred to old partners’ capital A/c
(as per sacrificing ratio):
Goodwill A/c Dr. xxx
To Old Partners’ Capital A/c xxx
(iii) For the amount of goodwill withdrawn by old partners:
Old Partner’s Capital A/c Dr. xxx
To Cash A/c xxx
Ilustration-15
Sunil and Gavaskar are partners in a firm sharing profits and losses in the ratio of 5:3. Sachin
is admitted in the firm for 1/5 share of profits. He is to bring in Rs. 20,000 as capital and Rs. 4,000
as his share of goodwill. Give the necessary journal entries,
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
Solution
(a) When the amount of goodwill is retained in the bunsiness.
(Rs.) (Rs.)
(i) Cash A/c Dr. 24,000
To Sachin’s Capital A/c 20,000
To Goodwill A/c 4,000
(Being the amount brought in by Sachin as
Capital and Goodwill)
(ii) Goodwill A/c Dr. 4,000
To Sunil’s Capital A/c 2,500
To Gavaskar’s Capital A/c 1,500
(Being goodwill transferred to Sunil and
Gavaskar A/c in the ratio of 5:3)
(Rs.) (Rs.)
(i) Cash A/c Dr. 24,000
(Being the amount brought in by Sachin
as Capital and Goodwill)
(ii) Goodwill A/c Dr. 4,000
176 Accountancy-II
(iii) Sunil’s Capital A/c Dr. 2,500
Gavaskar’s Capital A/c Dr. 1,500
To Cash A/c 4,000
(Being cash of goodwill withdrawn by
Sunil and Gavaskar)

(Rs.) (Rs.)
(i) Cash A/c Dr. 24,000
(Being the amount brought in by Sachin
as Capital and Goodwill)
Goodwill A/c Dr. 4,000
Sunil’s Capital A/c Dr. 1,250
Gavaskar’s Capital A/c Dr. 750
To Cash A/c 2,000
(Being cash withdrawn by Sunil and
Gavaskar equal to 50% of goodwill)
Case-3: when the new partner does not bring his/her share of goodwill in cash;
The journal entries are as under:
(i) For creation of goodwill in the books (as per sacrificing ratio)
Goodwill A/c Dr. xxx
To Old Partner’s Capital A/c xxx
(ii) If goodwill writing off in the books of the firm (as per new ratio)
All Partners’ Capital A/c Dr. xxx
To Goodwill A/c xxx
Illustration-16
Srikant and Ramana are partners in a firm sharing profits and losses in the ratio of 3:2. They
decide to admit Venkat into partnership firm with 1/3 share in the profits. Venkat brings in Rs
30,000 as his capital. On the date of admission, the goodwill has been valued at Rs 24,000. Record
the necessary journal entries in the books of the firm.
Solution

(Rs.) (Rs.)
(i) Cash A/c Dr. 30,000
To Venkat’s Capital A/c 30,000
(Being the amount brought in by Venkat
as Capital)

To Srikant’s Capital A/c 14,400
To Ramana’s Capital A/c 9,600
(Being goodwill transferred to old partners in
the ratio of 3:2)
Illustration-17
Dinesh and Ramesh are partners in a firm sharing profits and losses in the ratio of 3:2. They
decided to admit Vasu as a partner with 1/5 share in the profits. Their Balance Sheet as on March
31, 2015 was as follows:

(Rs.) (Rs.)
Sundry Creditors 1,50,000 Cash at Bank 40,000
General Reserve 80,000 Bills Receivables 50,000
Bank O.D 70,000 Debtors 60,000
Partners’ Capitals: Stock 1,20,000
Dinesh – 1,00,000 Fixed Assets 2,80,000
Ramesh – 1,50,000 2,50,000
5,50,000 5,50,000
178 Accountancy-II
It was also decide that:
1. The fixed assets should be valued at Rs. 3,31,000.
2. A provision of 5% on sundry debtors to be made for doubtful debts.
3. The value of stock be reduced to Rs. 1,12,000.
4. Vasu brings Rs. 75,000 as capital and Rs. 15,000 as goodwill.
Prepare the revised Balance sheet of the firm after admission of the partner.
Solution

(Rs.) (Rs.)
To Provision for Doubtful Debt 3,000 By Fixed Assets 51,000
To Stock 8,000
Dinesh - 24,000
Ramesh - 16,000 40,000
51,000 51,000

Particulars Dinesh Ramesh Vasu Particulars Dinesh Ramesh Vasu
(Rs.) Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

To Balance c/d 1,81,000 2,04,000 75,000 By Balance b/d 1,00,000 1,50,000 -
By Bank - - 75,000
By Goodwill 9,000 6,000 -
By Gen. Reserve 48,000 32,000 -
1,81,000 2,04,000 75,000 1,81,000 2,04,000 75,000
Dr. Bank Account Cr.

(Rs.) (Rs.)
To Balance b/d 40,000 By Balance c/d 1,30,00
To Vasu’s capital A/c 75,000
To Goodwill 15,000
1,30,000 1,30,000
st
Revised Balance Sheet as on 31 March, 2015

(Rs.) (Rs.)
Sundry Creditors 1,50,000 Cash at Bank 1,30,000
Bank O.D 70,000 Bills Receivable 50,000
Partners’ Capitals: Debtors - 60,000
Dinesh – 1,81,000 Less: provision - 3,000 57,000
Ramesh – 2,04,000 Stock 1,12,000
Vasu - 75,000 4,60,000 Fixed Assets 3,31,000
6,80,000 6,80,000
Illustration-18
M and N were partners in a firm sharing profits in 5:3 ratios. They admitted O as a new
partner for 1/3rd share in the profits. O was to contribute Rs. 20,000 as his capital. The Balance
Sheet of M and N as on 1.4.2015 was as follows:
(Rs.) (Rs.)
Creditors 27,000 Land and Building 25,000
Capitals: Plant and Machinery 30,000
M - 50,000 Stocks 15,000
N - 35,000 85,000 Debtors - 20,000
General Reserve 16,000 Less: Provision - 1,500 18,500
Investments 20,000
Cash 19,500
1,28,000 1,28,000
Other terms agreed upon were:

(i) Goodwill of the firm was valued at Rs. 12,000.
(ii) Land and Building were to be valued at Rs. 35,000 and Plant and Machinery at Rs.
25,000.
(iii) The provision for doubtful debts was found to be in excess by Rs. 400.
(iv) A liability for Rs. 1,000 included in sundry creditors was not likely to arise.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance sheet of the new
firm.
180 Accountancy-II
Solution

(Rs.) (Rs.)
To Plant & Machinery 5,000 By Land & Buildings 10,000
To Old Partners’ Capital A/c: By Provision for bad debts 400
M - 4,000 By Creditors 1,000
N - 2,400 6,400
11,400 11,400

Particulars M N O Particulars M N O
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
By Cash A/c - - 20,000
By Revluation A/c 4,000 2,400 -
By General Reserve 10,000 6,000 -
71,500 47,900 20,000 71,500 47,900 20,000
New Balance Sheet as on 1-4-2015

(Rs.) (Rs.)
Creditors - 27,000 Land and Building 35,000
Less: written off - 1,000 26,000 Plant and Machinery 25,000
Stocks 15,000
Capitals: Debtors - 20,000
M - 71,500 Less: Provision - 1,100 18,900
N - 47,900 Investments 20,000
O - 20,000 1,39,400 Cash 39,500
(19,500 + 20,000)
Goodwill 12,000
1,65,400 1,65,400
6.6 Adjustment of Partners’ Capital

Sometime, at the time of admission, the partners’ agree that their capitals be adjusted in
proportion to their profit sharing ratio. For this purpose, the capital accounts of the existing partners
are to be made all adjustments like, on account of goodwill, general reserve, revaluation of assets
and liabilities, etc., and then the partner whose capital falls short, will bring in the necessary amount
to cover the shortage and the partner who has a surplus, will withdraw the excess amount of capital.
The journal entries will be:
(i) For withdrawal of excess capital
Partners’ Capital A/c Dr. xxx
To Cash A/c xxx
(ii) For bringing the shortage of capital
Cash A/c Dr. xxx
To Partners’ Capital A/c xxx
Illustration-19
A and B are partners in a firm who are sharing profits in the ratio of 2:1. C is admitted into the
firm for 1/5 share in profits and he is to bring in cash of Rs. 40,000 amount as his capital. The
capitals of other partners are to be adjusted according to the new partner. The capitals of A and B
after all adjustments are Rs. 1,00,000 and Rs. 70,000 respectively. Calculate the new capitals of A
and B, and record the necessary journal entries.
Solution
Calculation of new profit sharing ratio;
The new partner C’s share = share out of 1
Rest of the share =
A’s new share =
B’s new share =
New partner C’s capital for 1/5thshare= 40,000
The total capital of the firm = 40,000 = Rs. 2,00,000

182 Accountancy-II
A’s new capital = 2,00,000 = 1,06,667
B’s new capital = 2,00,000 = 53,333
Hence, A will bring in Rs. 6,667 (Rs. 1,06,667 –Rs. 1,00,000),

B will withdraw Rs. 16,667 (Rs. 70,000 – Rs. 53,333)
The journal entries in this regard will be recorded as follows:
Journal Entries in the Books of A, B & C

Cash A/c Dr. 40,000
To C’s capital A/c 40,000
(Being the amount brought in by C as capital)
Cash A/c Dr. 6,667

To A’s capital account 6,667
(Being shortage of capital brought by A )
B’s Cpital A/c Dr. 16,667

To Cash A/c 16,667
(Being excess capital withdrawn by B)
Illustration-20
A and B share profits in the proportions of 3/5 and 2/5. Their Balance Sheet on Dec. 31,
2014 was as follows;
(Rs.) (Rs.)
Sundry creditors 41,500 Cash in hand 26,500
Bills Payable 4,000 Bills receivables 3,000
Capitals: Debtors 16,000
A – 30,000 Stock 20,000
B – 16, 000 46,000 Fixtures 1,000
Land & buildings 25,000
91,500 91,500
On that date C was admitted into partnership on the following terms:
(a) That C pays Rs. 10,000 as his capital and Rs. 5,000 as goodwill for his 1/6th share in
profits.
(b) That stock and fixtures be reduced by 10% and 5% provision for doubtful debts be
created on Sundry Debtors and Bills Receivables.
(c) That the value of land and buildings be appreciated by 20%.
Prepare necessary Accounts and the new Balance Sheet on the admission of C.
Solution

(Rs.) (Rs.)
To Stock 2,000 By Land & Buildings 5,000
To Fixtures 100
To Provision for doubtful debts 800
To Provision on Bills receivable 150
A - 1,170
B - 780 1,950
5,000 5,000

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
By Cash A/c - - 10,000
By Revluation A/c 1,170 780 -
34,170 18,780 10,000 34,170 18,780 10,000
184 Accountancy-II
New Balance Sheet as on Dec 31, 2014

(Rs.) (Rs.)
Sundry creditors 41,500 Cash in hand 41,500
Bills Payable 4,000 (26,500+10,000+5,000)
Capitals Accounts: Bills receivables - 3,000
A – 34,170 2,850
Less: Provision - 150
B – 18,780
Debtors - 16,000
C – 10,000 62,950
Less: Provision - 800 15,200
Stock - 20,000
Less: Decrease - 2,000 18,000
Fixtures - 1,000
Less: Decrease - 100 900
Land & buildings – 25,000
Add: Appreciation - 5,000 30,000
1,08,450 1,08,450
Illustration-21
On 31st March, 2014, the Balance sheet of P and Q shared profits in 3:2 ratio was as follows:

(Rs.) (Rs.)
Creditors 40,000 Cash 10,000
Profit and loss A/c 30,000 Sundry Debtors 40,000
Capital Accounts: Less: Provision 1,400 38,600
P - 80,000 Stock 50,000
Q - 60,000 1,40,000 Plant and Machinery 70,000
Patents 41,400
2,10,000 2,10,000
On that date, R was admitted as a partner on the following conditions:

(a) R will get 4/15th share of profits. R had to bring Rs. 60,000 as his capital.
(b) The assets would be revalued as under:
Sundry debtors at book value less 5% provision for bad debts. Stock at Rs. 40,000, plant
and Machinery at Rs. 80,000.
Prepare Revaluation A/c, Partner’s Capital A/c and the Balance Sheet of the new firm.
Solution

(Rs.) (Rs.)
To Provision for doubtful debts 600 By Plant and Machinery A/c 10,000
To Stock A/c 10,000 By Capitals A/c:
P - 360
Q - 240 600
10,600 10,600

Particulars P Q R Particulars P Q R
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Revluation A/c 360 240 - By Balance b/d 80,000 60,000 -
To Balance c/d 97,640 71,760 60,000 By Cash A/c - - 60,000
By P&L A/c 18,000 12,000 -
98,000 72,000 60,000 98,000 72,000 60,000
Balance Sheet as on 31st March 2014

(Rs.) (Rs.)
Capital Accounts: (10,000+60,000)
P - 97,640 Sundry Debtors - 40,000
Q - 71,760 Less: Provision - 2,000 38,000
R - 60,000 2,29,400 Stock 40,000
Plant and Machinery 80,000
Patents 41,400
2,69,400 2,69,400
186 Accountancy-II
Illustration-22
Sanjay and Ramaswamy were partners in a firm sharing the profits in the ratio of 2:3. On 31-
03-2015 they admitted Mehra as a new partner for 1/5th share in the profits. Their balance sheet
was as follows;
(Rs.) (Rs.)
Capitals: Land & Buildings 3,00,000
Sanjay – 2,00,000 Stock 1,00,000
Ramaswamy – 3,00,000 5,00,000 Debtors 1,50,000
Creditors 1,05,000 Bank 1,55,000
Workmen Compensation Fund 1,00,000
7,05,000 7,05,000
On Mehra’s admission it was agreed that;

1. Mehra will bring Rs. 4,00,000 as his capital and Rs. 16,000 for his share of goodwill,
half of which was withdrawn by Sanjay and Ramaswamy.
2. A provision of 5% for bad and doubtful debts was to be created.
3. A provision was to be made for an outstanding telephone bills Rs. 3,000.
4. Land & Buildings are valued at Rs. 3,50,000.
After the above adjustments prepare necessary accounts and the new balance sheet.
Solution

(Rs.) (Rs.)
To Provision for bad debts 7,500 By Building 50,000
To Outstanding Telephone bill 3,000
To Old Partners’ Capital A/c:
Sanjay – 15,800
Ramaswamy – 23,700 39,500
50,000 50,000
Particulars Sanjay R.Swamy Mehra Particulars Snajay R. Swamy Mehra
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

To Bank A/c 3,200 4,800 - By Balance b/d 2,00,000 3,00,000 -
To Balance c/d 2,19,000 3,28,500 4,00,000 By Bank - - 4,00,000
2,22,200 3,33,300 4,00,000 2,22,200 3,33,300 4,00,000
Dr. Bank Account Cr.

(Rs.) (Rs.)
To Balance b/d 1,55,000 By Sanjay’s capital A/c 3,200
To Mehra’s Capital A/c 4,00,000 By Ramaswamy’s capital A/c 4,800
To Goodwill A/c 16,000 By Balance c/d 5,63,000
5,71,000 5,71,000
New Balance Sheet as on Dec 31st, 2014

(Rs.) (Rs.)
Capitals: Land & Buildings 3,50,000
Sanjay - 2,19,000 Stock 1,00,000
Ramaswamy - 3,28,500 Debtors - 1,50,000
Mehra - 4,00,000 9,47,500 Less: Provision - 7,500 1,42,500
Creditors 1,05,000 Bank 5,63,000
Workmen Compensation Fund 1,00,000
Outstanding telephone bill 3,000
11,55,500 11,55,500
188 Accountancy-II
Summary
Admission of a partner – Meaning: When a partner so admitted to the existing partnership firm,
it is called admission of a partner.
On the admission of a new partner, the following adjustments become necessary:
1. Adjustment in profit sharing ratio;
2. Adjustment for revaluation of assets and reassessment of liabilities;
3. Distribution of accumulated profits and reserves;
4. Adjustment of Goodwill; and
5. Adjustment of partners’ capitals.
Adjustment in Profit sharing Ratio: When new partner is admitted he/she acquires his/her share
in profit from the existing partners. As a result, the profit sharing ratio in the new firm is decided
mutually between the existing partners and the new partner.
Sacrificing Ratio: At the time of admission of a partner, existing partners have to surrender some
of their share in favour of the new partner. The ratio in which they surrender their profits is known as
sacrificing ratio.
Revaluation of assets and liabilities: On admission of a new partner, the firm is reconstituted
and the assets are revalued and liabilities are reassessed. It is necessary to show the true position of
the firm at the time of admission of a new partner.
Adjustments of reserves and accumulated profit or losses: Any accumulated profit or reserve
appearing in the balance sheet at the time of admission of a new partner, are credited in the existing
partner’s capital account in old profit sharing ratio. If there is any loss, the same will be debited to
the existing partners’ capital account in the old ratio.
Meaning of Goodwill: An established firm develops wide business connections. This helps the
firm to earn more profits as compared to a new firm. The monetary value of such advantage is
known as Goodwill .
Methods of valuation of Goodwill
(i) Average Profit Method
(ii) Super Profit Method
(iii) Capitalisation Method
Adjustment of partners’ capital: Sometimes, at the time of admission, the partners’ agreed that
their capitals are adjusted to the proportionate of their profit sharing ratio. The partners may decide
to calculate the capitals which are to be maintained in the new firm either on the basis of new
Partner’s Capital and his profit sharing ratio or on the basis of the existing partner‘s capital accounts.
MODEL QUESTIONS
Very Short Answer Questions:

1. What are the aspects that need adjustment at the time of admission of a new Partner
2. Sacrificing Ratio.
3. Revaluation Account
4. Goodwill
5. What are the methods of goodwill valuation
190 Accountancy-II
Exercises
1. M and N are partners sharing profit and losses in the 1:2 ratio. They have decided to
admit ‘O’ by giving him 1/4th share in future profits. Calculate the New profit sharing
ratio.
(Ans: New profit sharing ratio is 1:2:1)
2. P & Q are partners sharing in the ratio of 2:3. They admit R for 1/4th share and he gets
this share equally from P & Q. Calculate new ratio.
(Ans: New Profit sharing Ratio is 11:19:15)
3. X and Y share profits and losses in the Ratio of 4:3, they admit Z with 3/7th share;
which he gets 2/7th from X and 1/7 from Y. What is the new profit sharing ratio?
4. A & B are partners sharing in the ratio of 3:2. C is admitted and he gets 3/20th from A
and 1/20th from B. calculate new ratio.
(Ans: New Profit sharing Ratio is 9: 7: 4)
5. X & Y are partners share profits in the ratio of 5:3. Z the new partner gets 1/5 of X’s
share and 1/3rd of Y’s share. Calculate new ratio.
6. If Tarun and Nisha are partners sharing profits in the ratio of 5:3. What will be their
sacrificing ratio if Rahul is admitted for 1/8 share of profit in the firm?
(Ans: Sacrificing Ratio – 5:3)
7. Amar and Bahadur are partners in a firm sharing profits in the ratio of 5:2. They admitted
Mary as a new partner for 1/4 share. The new profit sharing ratio of the partners will
be 2:1:1. Calculate their sacrificing ratio.
(Ans: Sacrificing Ratio – 6:1)
9. Vijay and Sanjay are partners in a firm sharing profits and losses in the ratio of 1:2.
They decide to admit Ajay into partnership with 1/4 share in profits. Ajay brings in Rs.
30,000 for capital and Rs. 15,000 for goodwill. Give necessary journal entries,
(a) When the amount of goodwill is retained in the business.
10. A and B are partners sharing profits and losses equally. They admit C into partnership
and the new ratio is fixed as 4:3:2. C is unable to bring anything for goodwill but brings
Rs 25,000 as capital. Goodwill of the firm is valued at Rs 18,000. Give the necessary
journal entries assuming that the partners do not want goodwill to appear in the Balance
Sheet.
11. Rahul and Gandhi are partners sharing profit in the ratio of 4:5. On 1st April 2015 they
admit Sonia as a new partner for 1/6 share in profits. On that date the balance sheet of
the firm shows a balance of Rs.60,000 in general reserve and debit balance of Profit
and Loss A/c of Rs.25,000. Make the necessary journal entries.
12. A and B are equal partners in a firm. They decide to admit C as a new partner for 1/5th
share in profit. On the date of admission the balance sheet of firm was as follows:
(Rs.) (Rs.)
Creditors 60,000 Cash at Bank 40,000
Bills Payable 30,000 Debtors 30,000
Capitals: Buildings 50,000
A – 45,000 Machinary 25,000
B – 25,000 70,000 Furniture 15,000
1,60,000 1,60,000
The terms of agreement on C’s admission were as follows:-

(a) Building will be valued at Rs. 65,000 and machinery at Rs. 20,000
(b) Creditors included Rs. 1,000 no longer payable.
Pass necessary Journal entries for revaluation of assets and liabilities.
(Ans: Revaluation Profit-Rs. 11,000)
192 Accountancy-II
13. Karna and Balaram are partners sharing profit and losses in the ratio of 4 : 1. Their
Balance Sheet was as follows:
Balance Sheet of Karna and Balaram as on December 31st, 2014

(Rs.) (Rs.)
Creditors 10,000 Cash in hand 7,000
Bills Payable 7,000 Sundry debtors 26,000
Karna – 40,000 Buildings 20,000
Balaram – 30,000 70,000 Machinery 13,000
Investments 15,000
87,000 87,000
Nikhil is admitted as a partner and assets are revalued and liabilities reassessed as follows:
(i) Create a Provision for doubtful debt on debtors at Rs.800.
(ii) Building and investment are appreciated by 10%.
(iii) Machinery is deprecated at 5%
(iv) Creditors were overestimated by Rs.500.
Make journal entries and Prepare revaluation account before the admission of Nikhil.
(Ans: Revaluation Profit-Rs. 2550)
14. Balance Sheet of A and B as on 31.03.2014

(Rs.) (Rs.)
Sundry Creditors 36,000 Cash 10,000
Bills Payable 20,000 Debtors 34,000
General reserve 24,000 Stock 24,000
Capitals: Machinery 42,000
A – 1,50,000 Buildings 2,00,000
B – 80,000 2,30,000
3,10,000 3,10,000
The other terms of agreements on C’s admission were as follows :

(i) C will bring Rs. 12,000 for his share of capital.
(ii) Building will be valued at 1,85,000 and Machinery at Rs. 40,000.
(iii)A provision of 6% will be created on debtors for bad debts.
Prepare Revaluation Account and Partners Capital Accounts.

(Ans: Loss on Revaluation -Rs. 19,040)
15. The following is the balance sheet of Ram and Shyam, who are sharing profit as 2/3
and 1/3 on 31st March 2014.
(Rs.) (Rs.)
Capitals: Buildings 25,000
Ram – 15,000 Plant & Machinery 17,500
Syam – 20,000 35,000 Stock 10,850
Creditors 32,950 Debtors 4,000
Cash at Bank 10,600
67,950 67,950
They agree to admit Mohan into partnership on the following terms:-

(a) Mohan was to be given 1/3 share in the profit and to bring Rs. 7,500 as his capital
and 3000 as his share of goodwill.
(b) That the value of stock and plant & Machinery were to be reduced by5%.
(c) That a reserve of 10% was to be created in respect of Sundry Debtors.
(d) The buildings were to be depreciated by 10%.
Pass Journal Entries and necessary Accounts.
(Ans: Loss on Revaluation -Rs.;4,318)
16. A and B are partners in a firm, sharing profits and losses in the ratio of 5:3, on31st
December, 2014 their Balance sheet was as under :
(Rs.) (Rs.)
Bills Payable 30,000 Stock 80,000
A – 1,00,000 Cash at Bank 7,000
B – 1,20,000 2,20,000 Cash in hand 3,000
2,80,000 2,80,000
On the above date they decided to admit C as a partner on the following terms:
(a) C will bring Rs. 90,000 as his capital and Rs. 24,000 for his share of goodwill for
1/4th share in the profit.
194 Accountancy-II
(b) Machinery is to be valued at Rs. 1,50,000, stock 1,00,000 and provision for bad
debts of Rs. 10,000 is to be created.
Prepare Revaluation A/C, partners’ capital A/C and new Balance Sheet.
(Ans: Revaluation Profit-Rs. 40,000; Balance Sheet –Rs. 4,34,000)
17. Rashmi and Pooja are partners in a firm. They share profits and losses in the ratio of
2:1. They admit Santoshi into partnership firm on the condition that she will bring Rs.
1,50,000 for capital and she will be given 1/3 share in future profits. At the time of
admission the Balance Sheet of Rashmi and Pooja was as under:
(Rs.) (Rs.)
Bills Payable 10,000 Cash 90,000
Creditors 30,000 Machinery 1,20,000
Capitals Accounts: Furniture 10,000
Rashmi - 1,35,000 Stock 50,000
Pooja - 1,25,000 2,60,000 Debtors 30,000
3,00,000 3,00,000
It was decided to:

a. Revaluate stock at Rs. 45,000.
b. Depreciate furniture by 10% and machinery by 5%.
c. Make provision of Rs. 3,000 on sundry debtors for doubtful debts.
Prepare Revaluation Account, Partners Capital Accounts and Balance Sheet of the new firm.
(Ans :Loss on Revaluation Rs. 15,000 and Balance Sheet Total Rs. 4,35,000)
18. Venu &Venkat are partners in a business sharing profits and losses equally. Their Balance
Sheet on 31-3-2014 stood as under;

(Rs.) (Rs.)
Creditors 12,000 Cash at Bank 11,000
Capitals Accounts: Sundry Debtors 35,000
Venu 1,40,000 Stock 80,000
Venkat 1,28,000 Plant & Machinery 78,000
Buildings 71,000
Furniture 5,000
2,80,000 2,80,000
st
They decided to admit Naidu into firm on 1 April, 2014 on following terms and conditions.
a. Naidu has to pay Rs. 1,25,000/- for ¼ share in future profits.
b. Naidu has to pay Rs.38,000/- for goodwill.
c. Plant and Machinery to be depreciated by 10%.
d. Buildings to be appreciated by 20%.
e. 5% reserve for doubt full debts to be created on debtors
Prepare necessary accounts in the books of the firm after admission of Naidu with new
Balance Sheet.
(Ans :Gain on Revaluation Rs. 4,650 and Balance Sheet Total Rs. 4,47,650)
19. Rao and Raju are carrying on business in a partnership, sharing profit & loss in the
ratio of 2:3. Their Balance sheet as on 31-12-2014 was as under.

(Rs.) (Rs.)
Sundry creditors 10,000 Cash at bank 10,000
Capital Accounts: Debtors 50,000
Rao - 1,40,000 Stock 1,00,000
Raju - 2,10,000 3,50,000 Furniture 25,000
Buildings 1,75,000
3,60,000 3,60,000
On that day they admitted Reddy into partnership and gave him 1/6thshare in the future profits
on the following terms.
a) Reddy is to bring in Rs. 1,50,000 as his capital and Rs.50,000 as good will, which sum
is to remain in the business.
b) Stock and furniture are to be reduced in value by 5%.
c) Buildings are to be appreciated by Rs. 25,000.
d) A provision of 5% to be created on sundry debtor for doubtful debts.
Write Journal entries to record the above arrangement and show the opening Balance
sheet of the new firm.
(Ans: Revaluation Profit-Rs. 16,250; Balance Sheet –Rs.5,76,250)
196 Accountancy-II
20. Bhanu and Prasad are partners sharing profit and losses in the ratio of 3:2 respectively.
Their Balance Sheet as on March 31, 2015 was as under:
(Rs.) (Rs.)
Capitals: Cash at bank 23,000
Bhanu – 70,000 Debtors 19,000
Prasad – 70,000 1,40,000 Buildings 65,000
Furniture 15,000
Machinery 13,000
Stock 30,000
1,68,000 1,68,000
On that date, they admit Deepak into partnership for 1/3 share in future profit on the following
terms:
(i) Furniture and stock are to be depreciated by 10%.
(ii) Building is appreciated by Rs.20,000.
(iii) 5% provision is to be created on Debtors for doubtful debts.
(iv) Deepak is to bring in Rs.50,000 as his capital and Rs.30,000 as goodwill.
Make necessary Ledger Account and Balance Sheet of the new firm.
21. The following is the Balance Sheet of Arun and Tarun sharing profit and losses in the
ratio of 2:1.
(Rs.) (Rs.)
Capitals: Sundry debtors 50,000
Arun – 50,000 Stock 12,000
Tarun – 40,000 90,000 Furniture 6,000
Buildings 30,000
1,10,000 1,10,000
They agreed to admit Varun into partnership on the following terms:

(i) Varun to pay Rs.9,000 as Goodwill.
(ii) Varun brings Rs. 11,000 as Capital for 1/4 share of profit in the business.
(iii) Building and furniture to be depreciated at 5%. Stock is reduced by Rs. 1,600 and
Bad Debt Reserve Rs.1,300 to be provided for.
Prepare necessary ledger account and balance sheet after admission.
(Ans: Revaluation Loss -Rs. 4,700; Balance Sheet –Rs. 1,25,300)
22. A and B are partners in a firm sharing profits in the ratio 2:1. C is admitted into the firm
with 1/4 share in profits. He will bring in Rs. 30,000 as capital and capitals of A and B
are to be adjusted in the profit sharing ratio. The Balance Sheet of A and B as on
March 31, 2014 (before C’s admission) was as under:
(Rs.) (Rs.)
Bills Payable 4,000 Cash at bank 10,000
General Reserve 6,000 Sundry debtors 8,000
A – 50,000 Furniture 5,000
B – 32,000 82,000 Machinery 25,000
Buildings 40,000
1,00,000 1,00,000
Other terms of agreement are as under:

1. C will bring in Rs. 12,000 as his share of goodwill.
2. Building was valued at Rs. 45,000 and Machinery at Rs. 23,000.
3. A provision for bad debts is to be created @ 6% on debtors.
4. The capital accounts of A and B are to be adjusted.
Record necessary journal entries, show necessary ledger accounts and prepare Balance
Sheet after C’s admission.
(Ans: Revaluation Profit-Rs. 2520; Balance Sheet –Rs. 1,44,520)
23. Ashish and Pankaj are partners sharing profit in the ratio of 5:2, their Balance sheet on
March 31, 2015 was as follows:
198 Accountancy-II
(Rs.) (Rs.)
Bills Payable 40,000 Cash at Bank 62,000
Salaries outstanding 5,000 Debtors 58,000
Profit & Loss A/c 40,000 Stock 85,000
Capital: Machinery 1,45,000
Ashish – 1,50,000 Goodwill 38,000
Pankaj – 1,30,000 2,80,000
4,03,000 4,03,000
They admitted Gurudeep into partnership on the following terms on March 31, 2015.
(a) New profit sharing ratio is agreed as 3 : 2 : l.
(b) He will bring in Rs.1,00,000 as his shared capital and Rs.30,000 as his share of goodwill.
(c) Machinery is appreciated by 10%
(d) Stock is valued at Rs. 87,000.
(e) Creditors are unrecorded to the extent of Rs.6,000.
(f) A provision for doubtful debts is to be created by 4% on debtors.
Prepare Revaluation account, Capital Accounts, Bank account and Balance Sheet of the
new firm after admission of Gurdeep.
(Ans :Gain on revaluation Rs. 8,180; Balance Sheet Total Rs. 5,47,180)
24. The Balance Sheet of Sarath and Sindhu as on 31.12.2014 who are sharing profits
and losses in the ratio of 4:1 is as follows:
(Rs.) (Rs.)
Creditors 3,50,000 Cash at bank 3,00,000
General Reserve 1,00,000 Debtors 2,00,000
SarathCapital 3,00,000 Stock 1,50,000
Sindhu Capital 2,00,000 Land & Buildings 2,00,000
Furniture
1,00,000
9,50,000 9,50,000
They have agreed to admit Sameer under the following conditions:
a) Sameer has to bring a capital of Rs.2,00,000 for his 1/5th share of profits.
b) Furniture and stock have to be depreciated by 10% and a reserve of 5% has to be
created on debtors for bad and doubtful debts.
c) Land and Buildings has to be appreciated by 20%
d) Goodwill has to be raised by Rs.80000
Prepare necessary ledger A/c and the balance sheet of the new firm.
(Ans: Revaluation Profit-Rs.5,000; Balance Sheet –Rs.12,35,000)
25. Given below is the Balance Sheet of A and B, who are carrying on partnership business
on 31.12.2014. A and B are sharing profits and losses in the ratio of 2:1.

(Rs.) (Rs.)
Bills Payable 10,000 Cash in hand 10,000
Creditors 58,000 Cash at bank 40,000
Outstanding Expenses 2,000 Sundry debtors 60,000
A – 1,80,000 Plant 1,00,000
B – 1,50,000 3,30,000 Buildings 1,50,000
4,00,000 4,00,000
C is admitted as a partner on the date of the balance sheet on the following terms:
(i) C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of goodwill for
1/4 share in the profits.
(ii) Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated
by 10%.
(iii) Stock is found over valued by Rs. 4,000.
(iv) A provision for bad and doubtful debts is to be created at 5% of debtors.
(v) Creditors were unrecorded to the extent of Rs. 1,000.
Pass the necessary journal entries, prepare the revaluation account and partners’ capital
accounts, and show the Balance Sheet after the admission of C.
(Ans :Gain of Revaluation Rs. 27,000. Balance Sheet Rs. 5,88,000)
200 Accountancy-II
26. Following is the Balance Sheet of Satyam and Murthi sharing profit as 3:2.
(Rs.) (Rs.)
Creditors 18,000 Debtors – 22,000
General reserve 25,000 Less: provision – 1,000 21,000
Bills receivables 15,000 Land & Buildings 18,000
Capitals: Plant & machinery 12,000
Stock
Satyam – 15,000 11,000
Bank
Murthi – 10,000 25,000 21,000
83,000 83,000
On admission of Tayaru for 1/6th share in the profit it was decided that:
(i) Provision for doubtful debts to be increased by 1,500.
(ii) Value of land and building to be increased to 21,000.
(iii) Value of stock to be increased by 2,500.
(iv) The liability of workmen’s compensation fund was determined to be 12,000.
(v) Tayaru brought in as her share of goodwill 10,000 in cash.
(vi) Tayaru was to bring further cash of 15,000 for her capital.
Prepare Revaluation A/c, Capital A/c and the Balance Sheet of the new firm.
27. Ramesh, Suresh and Naresh are partners sharing profits and losses in the ratio of
1:2:3. On 31st March 2014, their Balance Sheet was as follows;

(Rs.) (Rs.)
Bills Payable 32,000 Bills receivable 24,000
P & L Account 14,000 Furniture 28,000
Ramesh - 30,000 Debtors 42,000
Suresh - 40,000 Investments 52,000
Naresh - 62,000 1,32,000 Machinery 34,000
2,42,000 2,42,000
They admit Dinesh into partnership on the following terms:
(i) Furniture and Machinery to be depreciated by 5%.
(ii) Stock is revaluated at 48,000.
(iii) Outstanding rent amount to 1,800.
(iv) Dinesh to bring 32,000 towards his capital for 1/6th share.
Prepare Revaluation Account, Partners Capital Accounts and Balance Sheet of the new firm.
(Ans: Revaluation loss -Rs. 900; Balance Sheet –Rs. 2,74,900)
28. Ashish and Dattu were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2014
they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dattu
as on Jan. 01, 2014 was as follows:
Balance Sheet of A and B as on 1.1.2014

(Rs.) (Rs.)
Bills Payable 10,000 Land &Buldings 35,000
Creditors 15,000 Plant 45,000
Capitals Accounts: Debtors – 22,000
Ashish – 80,000 Less: Provision – 2,000 20,000
Dattu- 35,000 1,15,000 Stock 35,000
Cash 5,000
1,40,000 1,40,000
It was agreed that:

i) The value of Land and Buildings be increased by Rs. 15,000.
ii) The value of plant be increased by 10,000.
iii) Goodwill of the firm be valued at Rs. 20,000.
iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm.
Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s
admission.
(Ans :Gain on Revaluation Rs. 25,000. Balance Sheet Total Rs. 2,25,000).
202 Accountancy-II
29. The following was the Balance Sheet of Arun, Babu and Charan sharing profits and
losses in the ratio of 6: 5: 3 respectively.

(Rs.) (Rs.)
Bills Payable 3,000 Cash in hand 900
Creditors 9,000 Sundry debtors 12,600
Capitals Accounts: Stock 14,000
Arun – 19,000 Land & Buildings 24,000
Babu – 16,000 Furniture 3,500
Charan - 8,000 43,000
55,000 55,000
They agreed to take Deepak into partnership and give him a share of 1/8 on the
following terms: (a) that Deepak should bring in Rs. 4,200 as goodwill and Rs. 7,000
as his Capital; (b) that furniture be depreciated by 12%; (c) that stock be depreciated
by 10% (d) that a Reserve of 5% be created for doubtful debts; (e) that the value of
land and buildings having appreciated be brought upto Rs. 31,000;(f) that after making
the adjustments the capital accounts of the old partners be adjusted on the basis of the
proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid
off, or brought in by the old partners as the case may be.
Prepare Necessary Accounts and the Opening Balance Sheet of the new firm.
(Ans :Gain on revaluation Rs. 4,550. Balance Sheet Total Rs. 68,000)
Retirement/Death of a Partner 203
Chapter
7
Retirement/Death of a Partner
7.1 Introduction
7.1 Introduction
7.2 New Profit Sharing Ratio On the retirement or death of a partner, the
7.3 Revaluation of Assets and existing partnership deed comes to an end, and in its
Liabilities place, a new partnership deed needs to be framed
7.4 Treatment of Undistributed whereby, the remaining partners continue to do their
Profits& Losses business on changed terms and conditions. There is
7.5 Treatment of Goodwill no much difference in the accounting treatment at the
7.6 Continuing Partners’ time of retirement or in the event of death. In both the
Capital Adjustment cases, we are required to determine the amount due
7.7 Settlement of total Amount to the retiring partner (in case of retirement) and to the
Due to the Retiring Partner legal representatives (in case of deceased partner) after
7.8 Share of Profits/Losses up to making necessary adjustments in respect of goodwill,
date of deceased partner revaluation of a assets and liabilities and transfer of
accumulated profits and losses. In addition, we may
also have to compute the new profit sharing ratio among
the remaining partners and also their gaining ratio.
Ascertaining the Amount Due to Retiring/Deceased Partner

The amount due to the retiring partner (in case of retirement) and to the legal representatives/
executors (in case of death) includes:
(a) Credit balance of his capital account;
(b) Credit balance of his current account (if any);
(c) His share of goodwill;
(d) His share of accumulated profits (reserves);
204 Accountancy-II
(e) His share in the gain of revaluation of assets and liabilities;
(f) His share of profits up to the date of retirement/death;
(g) Interest on his capital; and
(h) Salary/commission, if any, due to him up to the date of retirement/death.
The following deductions, if any, may have to be made from his share:
(a) Debit balance of his current account (if any);
(b) His share of goodwill to be written off; if necessary;
(c) His share of accumulated losses;
(d) His share of loss on revaluation of assets and liabilities;
(e) His share of loss up to the date of retirement/death;
(f) His drawings up to the date of retirement/death;
(g) Interest on drawings, if involved, up to the date of retirement/death.
Thus, as in the case of admission, the various accounting aspects involved on retirement or
death of a partner are as follows:
1. New profit sharing ratio and gaining ratio;
2. Revaluation of assets and liabilities;
3. Distribution of accumulated profits/losses, and reserves;
4. Treatment of Goodwill;
5. Adjustment of partners’ capitals; and
6. Settlement of the amounts due to retired/deceased partner;
7.2 New Profit Sharing Ratio

New profit sharing ratio is the ratio in which the remaining partners will share future profits
after the retirement or death of any partner. The new share of each of the remaining partner will
consist of his own share in the firm plus the share acquired from the retiring /deceased partner.
The following are the various situations where the remaining partners will continue the
partnership firm and share the future profits:
Case-1: Normally, the continuing partners acquire the share of retiring or deceased partner in the
old profit sharing ratio, and there is no need to compute the new profit sharing ratio among them, as
it will be same as the old profit sharing ratio among them. In fact, in the absence of any information
regarding profit sharing ratio in which the remaining partners’ share the future profits in their old
ratio.
For example: Asha, Deepti and Nisha are partners in a firm sharing profits and losses in the ratio
of 3:2:1. If Deepti retires, the new profit sharing ratio between Asha and Nisha will be 3:1.
Case-2: The continuing partners may acquire the share in the profits of the retired/deceased partner
in a proportion other than their old ratio. In that case, there is a need to compute the new profit
sharing ratio among them.
New share of Continuing Partners’ = Old Share + Gaining Share
Illustration-1
Naveen, Suresh and Tarun are partners sharing profits and losses in the ratio of 5:3:2. Tarun
retires from the firm and his share was acquired by Naveen and Tarun in the ratio of 2:1. In such a
case, calculate the new profitsharing ratio.
Solution
Old ratio of Naveen, Suresh and Tarun = 5:3:2
Gaining ratio of Naveen and Suresh after retirement of Tarun = 2:1
New share of Continuing Partner = Old Share + Acquired share from the Outgoing Partner
Share acquired by Naveen
Naveen’s new share
Share acquired by Suresh
Suresh’s new share
New ratio
Thus, the new profit sharing ratio of Naveen and Suresh will be = 19 : 11.
Case-3: The continuing partners may agree on a specified new profit sharing ratio, in that case the
ratio so specified will be the new profit sharing ratio.
7.2.1 Gaining Ratio
The ratio in which the continuing partners have acquired the share from the retiring/deceased
partner is called the gaining ratio.
Gaining share of continuing partners = New share – Old share
Illustration-2
Anil, Dinesh and Ganga are partners sharing profits in the ratio of 6:5:4. Dinesh retires. Anil
and Ganga decide to share the profits of the new firm in the ratio of 3:2. Calculate the gaining ratio.
Solution
Old ratio of all partners = 6:5:4
206 Accountancy-II
New ratio of continuing partners = 3:2
Anil’s Gaining Share
Ganga’s Gaining Share
Gaining ratio
Thus, the gaining ratio of Anil and Ganga = 3 : 2
7.3 Revaluation of Assets and Liabilities

At the time of retirement/death of a partner, Revaluation Account is prepared in order to
ascertain net gain/loss on revaluation of assets and liabilities and bringing unrecorded items into
firm’s books and the same is transferred to the capital account of all partners including retiring/
deceased partners in their old profit sharing ratio. Revaluation account is done on the same basis as
was done in case of admission of a partner.
Illustration-3
M, I and G are partners sharing profits and losses in the ratio of 2:2:1 respectively. On March
31, 2015, their Balance Sheet was as under:

(Rs.) (Rs.)
Sundry Creditors 55,000 Furniture 25,000

Reserve Fund 30,000 Buildings 1,00,000
Capital Accounts: Patents 30,000
M - 1,50,000 Machinery 1,50,000
I - 1,25,000 Stock 50,000
G - 75,000 3,50,000 Debtors 40,000
Cash 40,000
4,35,000 4,35,000
G retires on the above date. It was agreed that Machinery be valued at Rs.1,40,000; Patents
at Rs. 40,000; and Buildings at Rs. 1,25,000. Record the necessary journal entries and prepare the
Revaluation Account.
Solution
Journal Entries
2015
March, Revaluation A/c Dr. 10,000
31 To Machine A/c 10,000
(Being decrease in the value of machinery)
31 Patents A/c Dr. 10,000
Buildings A/c Dr. 25,000
(Being increase in the value of Patents and
Buildings)
31 Revaluation A/c Dr 25,000
To M’s Capital A/c 10,000
To I’s Capital A/c 10,000
To G’s Capital A/c 5,000
(Being revaluation profit transferred to old
partners’ capital A/c)

(Rs.) (Rs.)
To Machinery 10,000 By Patents 10,000

To Capital Accounts: By Buildings 25,000
M - 10,000
I - 10,000
G - 5,000 25,000
35,000 35,000
7.4 Adjustment of Accumulated Profits and Losses

Sometimes, the Balance Sheet of a firm may show accumulated profits/losses in the form of
general reserve and profit and loss account. The retiring/deceased partner is entitled to his share in
the accumulated profits and is also liable to share the accumulated losses, if any. These accumulated
208 Accountancy-II
profits or losses belong to all the partners and should be transferred to the capital accounts of all
partners in their old profit sharing ratio.
7.5 Treatment of Goodwill

The partner is entitled to his share of goodwill at the time of retirement/death because the
goodwill has been earned by the firm with the efforts of all the existing partners. Hence, at the time
of retirement/death of a partner, goodwill is valued as per agreement among the partners the retiring/
deceased partner compensated for his share of goodwill by the continuing partners in their gaining
ratio.
The accounting treatment for goodwill in such a situation depends upon whether or, not
goodwill already appears in the books of the firm.
Case-1: When Goodwill does not appear in the Books
When goodwill does not appear in the books of the firm there are four ways in which the
retiring partner can be given the necessary credit for loss of his share of goodwill, these are as
follows:
(a) Goodwill is raised at its full value and retained in the books;
(b) Goodwill is raised at its full value and written off immediately;
(c) Goodwill is raised to the extent of retired/deceased partner’s share and written off
immediately;
(d) No goodwill account is raised at all in firm’s books; in that case it is adjusted discretely
through partners’ capital accounts by recording the following journal entry.
Continuing partners’ capital A/c’s Dr. xxx

To Retiring/Deceased Partner’s Capital A/c xxx
(Retiring/deceased partner’s goodwill amount should adjust with the remaining partners’
capital accounts into their gaining ratio)
Illustration-4
A, B and C are partners in a firm sharing profits in the ratio of 3:2:1. B retires. The goodwill
of the firm is valued at Rs. 60,000 and the remaining partners A and C continue to share profits in
the ratio of 3:1. Pass the journal entries under various alternatives:
(a) If goodwill is raised at full value and retained in books
(b) If goodwill is raised at full value and written off immediately
(c) If goodwill is raised to the extent of retiring partner’s share and written off immediately
(d) If goodwill is not to after in firm’s books at all
Solution
(a) If goodwill is raised at full value and retained in books

To A’s Capital A/c 30,000
To B’s Capital A/c 20,000
To C’s Capital A/c 10,000
(Being goodwill raised at full value and
distributed in old ratio)
(b) If goodwill is raised at full value and written off immediately

To A’s Capital A/c 30,000
(Being goodwill raised at full value and
distributed in old ratio)
A’s Capital A/c Dr. 45,000
C’s Capital A/c Dr. 15,000
(Being goodwill written off in the new profit
sharing ratio)
(c) If goodwill is raised to the extent of retiring partner’s share and written off immediately

To B’s capital A/c 20,000
(Being goodwill raised to the extent of B’s
share)
210 Accountancy-II
C’s Capital A/c Dr 5,000
(Being goodwill written off in the gaining ratio)
(d) If goodwill is not to after in firm’s books at all

C’s Capital A/c Dr. 5,000
(Being B’s goodwill written off in the gaining
ratio)
Working Note: Calculation of gaining Ratio

Old ratio of all partners = 3:2:1
New ratio of continuing partners = 3:1
A’s Gaining Share
C’s Gaining Share
Gaining ratio
Thus, the gaining ratio of A and C =3 : 1
Case-2: When Goodwill is already appeared in the Books

If value of goodwill is already appeared in the books of the firm equals with the present value
of goodwill, normally no adjustment is required. In case the present value of goodwill is different
from its book value, an adjustment entry is required. In such a situation, there are two possibilities:
(a) The book value of goodwill is lower than its current value, and
(b) The book value is greater than its current value. These are discussed as follows.
Illustration-5
D, P and R are partners sharing profits in the ratio of 5:3:2. Goodwill appears in the books at
a value of Rs. 20,000. P retires from the business. Pass the necessary journal entries in the following
cases;
a) On the day of P’s retirement, goodwill is valued at Rs. 24,000, and
b) At the time of retirement goodwill is valued Rs. 18,000.
Solution
a) On the day of P’s retirement, goodwill is valued at Rs. 24,000.
To D’s capital A/c 2,100
To P’s capital A/c 1,200
To R’s capital A/c 800
(Being Increase in the value of goodwill
distribute among old partners in their old
profit sharing ratio of 5:3:2)
b) At the time of retirement goodwill is valued Rs. 18,000.

D’s capital A/c Dr. 1,000
P’s capital A/c Dr. 600
R’s capital A/c Dr. 400
(Being decrease in the value of goodwill
distribute among old partners in their old
profit sharing ratio of 5:3:2)
7.6 Adjustment of Capitals

Sometimes after the retirement/deceased of a partner, the continuing partners decide to adjust
their capital according to their new profit sharing ratio. After all adjustments in the continuing
partners’ capital accounts, if surplus, the amount will be withdrawn by the partners and if shortage,
the required amount will be supplied by the partners. The process of adjustments in capital accounts
is same in the admission of a partner.
212 Accountancy-II
Illustration–6
John, Sundar and Rao are partners in a firm sharing profits in the ratio of 2:1:1. John retires
from the firm and Sundar and Rao decided that the capital of the new firm will be fixed at Rs.
1,20,000. The capital accounts of Sundar and Rao show a credit balance of Rs. 82,000 and Rs.
41,000 respectively after making all the adjustments. Calculate the actual cash to be paid off or to
be brought in by the continuing partners and pass the necessary journal entries.
Solution:
The New Profit Sharing Ratio between Sundar and Rao = 2 : 1
Total capital of the firm = Rs. 1,20,000
New Capital based on new ratio of Sundar = 1,20,000 x 2/3 = 80,000
Existing Capital (after adjustments) = 82,000
Cash to be Paid off =Rs. 2,000
New Capital based on new ratio of Rao = 1,20,000 x 1/3 = 40,000

Existing Capital (after adjustments) = 41,000
Cash to be Paid off = Rs. 1,000
Journal Entries in the Books of Sundar and Rao
Sundar’s Capital A/c Dr. 2,000
Rao’s Capital A/c Dr. 1,000
To Cash A/c 3,000
(Being excess capital withdrawn by Sundar
and Rao)
7.7 Disposal of Amount Due to Retiring Partner

The outgoing partner’s account is settled as per the terms of partnership deed i.e., in lumpsum
immediately or in various instalments with or without interest. In the absence of any agreement,
Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner
has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits
which has been earned with his/her money (i.e., based on capital ratio). Hence, the total amount
due to the retiring partner which is ascertained after all adjustments have been made is to be paid
immediately to the retiring partner. In case the firm is not in a position to make the payment immediately,
the amount due is transferred to the retiring Partner’s Loan Account.
The necessary journal entries recorded are as follows;
1. For retiring partner is paid cash in full.

Retiring Partner’s Capital A/c Dr. xxx
To Cash/Bank A/c xxx
2. For retiring partner’s total amount is treated as loan.

To Retiring Partner’s Loan A/c xxx
3. For retiring partner is partly paid in cash and the remaining amount treated as loan.
4. For Loan account is settled by paying in instalment includes principal and interest.
a) For interest on loan
Interest A/c Dr. xxx
b) For payment of instalment

Retiring Partner’s Loan A/c Dr. xxx
Note:
1. The balance of the retiring partner’s loan account is shown on the liabilities side of the
Balance Sheet till the last instalment is paid to him.
2. Entry numbers 4 (a) and (b), above will be repeated till the loan is paid off.
Illustration-7
Geethika, Rishitha and Pravalika are partners in a firm. Geethika retires from the firm. On her
date of retirement, Rs. 50,000 becomes due to her. Prepare necessary entries in the following
cases:
1. When payment is made immediately;
2. When payment is not made immediately
3. When they agree to pay 50% immediately;
214 Accountancy-II
Solution
1. When payment is made immediately

Geethika’s capital A/c Dr. 50,000
To Cash A/c 50,000
(Being paid the entire amount due on the date
of retirement)
2. When payment is not made immediately

To Geethika’s Loan A/c 50,000
(Being the entire amount due transfer to
Geethika’s Loan account)
3. When they agree to pay 50% immediately

To Cash A/c 25,000
To Geethika’s Loan A/c 25,000
(Being paid 50% of amount due on the date
of retirement)
Illustratio-8
X, Y and Z were partners in a firm sharing profits in 3:2:1 ratio. On 31.03.2015 Z retires from
the firm. On the date of Z’s retirement the balance sheet of the firm was as follows:

(Rs.) (Rs.)
Creditors 54,000 Bank 55,200

Bills Payable 24,000 Debtors - 12,000
Outstanding Rent 4,400 Less: Provisions - 800 11,200
Capitals: Furniture 8,000
X - 92,000 Premises 1,94,000
Y - 60,000
Z - 40,000 1,92,000
2,86,400 2,86,400
On Z’s retirement it was agreed that;

i. Premises will be appreciated by 5% and furniture will be appreciated by Rs. 2, 000.
ii. Stock will be depreciated by 10%.
iii. Provision for bad debts was to be made at 10% on debtors
iv. Goodwill of the firm is valued at Rs. 48,000.
v. Z’s amount will be paid by cheque.
Prepare Revaluation A/C, Partners’ Capital A/Cs and New Balance Sheet.
Solution

(Rs.) (Rs.)
To Stock 1,800 By Premises 9,700

To Provision for bad debts 400 By Furniture 2,000
To Capital Accounts:
X - 4,750
Y - 3,167
Z - 1,583 9,500
11,700 11,700
216 Accountancy-II
Particulars X Y Z Particulars X Y Z
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Bank - - 51,583 By Balance b/d 92,000 60,000 40,000

To Balance c/d 1,26,750 83,167 - By Revluation A/c 4,750 3,167 1,583
By General Reserve 6,000 4,000 2,000
By Goodwill 24,000 16,000 8,000
1,26,750 83,167 51,583 1,26,750 83,167 51,583
New Balance Sheet as on 31stMarch, 2015

(Rs.) (Rs.)
Creditors 54,000 Bank (55,250-51,583) 3,617
Bills Payable 24,000 Debtors - 12,000
Outstanding Rent 4,400 Less: Provisions - 1200 10,800
Stock (18,000-1,800) 16,200
Capitals: Furniture (8,000+2,000) 10,000
X - 1,26,750 Premises (1,94,000+7000) 2,03,700
Y - 83,167 2,09,917 Goodwill 48,000
2,92,317 2,92,317
Illustration-9
Sai, Suresh and Naresh who were sharing profits in the ratio of 2:3:5.Balance Sheet of Sai,
Suresh and Nares has on March 31, 2015.
(Rs.) (Rs.)
Capitals: Land 4,00,000
Sai – 7,20,000 Buildings 3,80,000
Suresh – 4,15,000 Plant & Machinery 4,65,000
Naresh – 3,45,000 14,80,000 Furniture & Fittings 77,000
Reserve Fund 1,80,000 Stock 1,85,000
Sundry Creditors 1,44,000 Debtors 1,92,000
Outstanding Expenses 16,000 Cash in hand 1,21,000
18,20,000 18,20,000
Suresh retires on the above date and the following adjustments are agreed upon his retirement.
1. Stock was valued at Rs. 1,80,000.
2. Furniture and fittings were valued at Rs. 90,000.
3. An amount of Rs. 12,000 was doubtful and a provision for the same was required.
4. Goodwill of the firm was valued at Rs. 2,00,000.
5. Suresh was paid Rs. 40,000 immediately on retirement and the balance was transferred
to his loan account.
6. Sai and Naresh were to share future profits in the ratio of 3:2.
Prepare Revaluation Account, Capital Account and Balance Sheet of the reconstituted firm.
Solution

(Rs.) (Rs.)
To Stock 5,000 By Furniture & Fittings 13,000

To Provision for bad debts 12,000 By Capital Accounts:
Sai – 800
Suresh – 1,200
Naresh – 2,000 4,000
17,000 17,000

Particulars Sai Suresh Naresh Particulars Sai Suresh Naresh
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
To Revaluation a/c 800 1,200 2,000 By Balance b/d 7,20,000 4,15,000 3,45,000
To Cash c/d - 40,000 - By Reserve Fund 36,000 54,000 90,000
To Suresh a/c - 4,87,800 - By Goodwill 40,000 60,000 1,00,000
To Balance c/d 7,95,200 - 5,33,000
7,96,000 5,29,000 5,35,000 7,96,000 5,29,000 5,35,000
218 Accountancy-II
New Balance Sheet as on 31st March, 2015
(Rs.) (Rs.)
Capitals: Land 4,00,000
Sai – 7,95,200 Buildings 3,80,000
Naresh – 5,33,000 13,28,200 Plant & Machinery 4,65,000
Sundry Creditors 1,44,000 Furniture & Fittings 90,000
Outstanding Expenses 16,000 Stock 1,80,000
Suresh Loan A/c 4,87,800 Debtors – 1,92,000
Less: Provision – 12,000 1,80,000
Cash in hand 81,000
(1,21,000 – 40,000)
Goodwill 2,00,000
19,76,000 19,76,000
7.8 Share of Profits/Losses up to date of deceased Partner

As stated earlier, the accounting treatment in the event of death of a partner is similar to that
in case of retirement of a partner, and that in case of death of a partner his claim is transferred to his
executors and settled in the same manner as that of the retired partner. However, there is one major
difference that, while the retirement normally takes place at the end of an accounting period, the
death of a partner may occur any time. Hence, in case of a partner, his claim shall also include his
share of profit or loss, interest on capital, interest on drawings (if any) from the date of the last
Balance Sheet to the date of his death.
The main problem relates to the calculation of profit for the intervening period (i.e., the period
from date of the last balance sheet to the date of the partner’s death). Since, it is considered
burdensome to close the books and prepare final account, for the period, the deceased partner’s
share of profit may be calculated on the basis of last year’s profit (or average of past few years) or
on the basis of sales.
The journal entry will be recorded as follows:
(1) For transfer of profit to a deceased partner
Profit & Loss Suspense A/c Dr. xxx
To Deceased Partner’s Capital A/c xxx
(ii) For transfer of deceased partner’s amount due to the Executers A/c
Deceased Partner’s Capital A/c Dr. xxx
To Deceased Partner’s Executers A/c xxx
Illustration-10
B, C and D were partners in a firm sharing profits in the ratio of 5:4:1. The profit of the firm
for the year ending on March 31, 2014 was Rs.1,00,000. C dies on June 30, 2014. Calculate C’s
share of profit and pass journal entry.
Solution
Profit for the period from April 1 to June 30, 2014, shall be calculated as follows:
Total profit for the year ending on 31st March, 2014 = Rs.1,00,000
C’s share of profit = Preceding Year’s Profit × Proportionate Period Share of Deceased Partner
= Rs. 1,00,000
= Rs. 10,000
The journal entry will be recorded as follows:
Profit & Loss Suspense A/c Dr. 10,000
×
(C’s share of profit transferred to his capital account)
Illustration 11
Anil, Bhanu and Chandu were partners in a firm sharing profits in the ratio of 5:3:2. On
March 31, 2014, their Balance Sheet was as under:

(Rs.) (Rs.)
Creditors 11,000 Buildings 20,000
Reserve Fund 6,000 Machinery 30,000
Anil’s Capital 30,000 Stock 10,000
Bhanu’s capital 25,000 Patents 11,000
Chandu’s Capital 15,000 Debtors 8,000
Cash 8,000
87,000 87,000
Anil died on October 1, 2014. It was agreed between his executors and the remaining partners
that:
220 Accountancy-II
(a) Goodwill to be valued at 2½ years’ purchase of the average profits of the previous
four years which were:
2010-11 – Rs.13,000, 2011-12 – Rs. 12,000,
2012-13 – Rs.20,000, 2013-14 – Rs.15,000.
(b) Patents be valued at Rs.8,000; Machinery at Rs.28,000; and Building at Rs.25,000.
(c) Profit for the year 2014-15 to be taken as having accrued at the same rate as that of
the previous year.
(d) Interest on capital provided at 10% p.a.
(e) Half of the amount due of Anil to be paid immediately.
Prepare Anil’s Capital Account and Anil’s Executor’s Account as on October 1, 2014.
Solution
Dr. Revaluation A/c Cr.
(Rs.) (Rs.)
To Patents A/c 3,000 By Buildings 5,000

To Machinery A/c 2,000
5,000 5,000
Dr. Anil’s Capital A/c Cr.

(Rs.) (Rs.)
To Anil’s Executers A/c 57,000 By Balance b/d 30,000
By Reserve Fund 3,000
By Interest on capital 1,500
By Profit & Loss (suspense) 3,750
By Bhanu’s capital(goodwill) 11,250
By Chandu’s capital(goodwill) 7,500
57,000 57,000
Dr. Anil’s Executers A/c Cr.

(Rs.) (Rs.)
To Cash A/c 28,500 By Anil’s Capital A/c 57,000
To Balance b/d 28,500
57,000 57,000
Working Note:
1. Goodwill = Average Profit x 2½ years’ purchase
Average Profit for 4 years = Rs. 60,000 / 4
= Rs. 15,000
Goodwill = 15,000
= Rs. 37,500
Anil’s Share of Goodwill = 37,500
= Rs. 18,750
This goodwill amount will adjust with 3:2 ratio between Bhanu and Chandu.
2. Profit from the date of last balance sheet to date of death (April 1, 2014 to October
1, 2014) = 6 months
Profit for 6 months = Rs. 15,000
= Rs. 7,500
Anil’s share of profit = Rs. 7,500
= Rs. 3,750
3. Interest on Anil’s Capital (April 1, 2014 to October 1, 2014)
= Rs. 30,000
= Rs. 1,500
Illustration-12
You are given the Balance Sheet of Mohit, Sohan and Rahul who are partners sharing profits
in the ratio of 2:2:1, as on March 31, 2014.
(Rs.) (Rs.)
Creditors 40,000 Goodwill 30,000
Reserve Fund 25,000 Fixed Assets 60,000
Mohit - 30,000 Debtors 20,000
Sohan - 25,000 Cash at Bank 15,000
Rahul -15,000 70,000
1,35,000 1,35,000
222 Accountancy-II
Sohan died on June 15, 2014. According to the Deed, his legal representatives are entitled to:
(a) Balance in Capital Account;
(b) Share of goodwill valued on the basis of thrice the average of the past 4 years’ profits.
(c) Share in profits up to the date of death on the basis of average profits for the past 4
years.
(d) Interest on capital account @ 12% p.a.
Profits for the year ending on March 31 of 2011, 2012, 2013 and 2014 were Rs. 15,000,
Rs. 17,000, Rs. 19,000 and Rs. 13,000 respectively.
Mohit and Rahul continued as partner by taking over Sohan’s share equally. Work out the
amount payable to Sohan’s legal representatives.
Solution
Dr. Sohan’s Capital A/c Cr.

(Rs.) (Rs.)
To Goodwill A/c 12,000 By Balance b/d 25,000
To Sohan’s Executers A/c 44,158 By Reserve Fund 10,000
By Interest on capital 625
By Profit & Loss (suspense) 1,333
By Mohit’s capital (goodwill) 9,600
By Rahul’s capital (goodwill) 9,600
56,158 56,158
Working Notes;
1. Goodwill = Average Profit x 3 years’ purchase
Average Profit for 4 years = Rs. 64,000 / 4
= Rs. 16,000
Goodwill = 16,000 x 3
= Rs. 48,000
Sohan’s Share of Goodwill = 48,000
= Rs. 19,200
2. Profit from the date of last balance sheet to date of death (April 1, 2014 to June 15,
2014) = 2½ months
Profit for 2.5 months = Rs. 16,000
= Rs. 3,333
Sohan’s share of profit = Rs. 3,333
= Rs. 1,333
3. Interest on Sohan’s Capital (April 1, 2014 to June 15, 2014)
= Rs. 25,000
= Rs. 625
Summary
Retirement of a Partner: Retirement of a partner is one of the modes of reconstituting the firm
under which an old partnership deed comes to an end and a new one between the continuing
partners (i.e. partners other than the outgoing partner) comes into existence. However, the firm
continues its business.
New Profit sharing ratio after retirement/death: New profit sharing ratio is the ratio in which
the remaining partner will share future profits after the retirement or death of any partner.
New Share = Old share + Gaining share.
Gaining ratio of remaining partners: Gaining ratio is the ratio in which the continuing partners
have acquired the share from the retiring/deceased partner.
Gaining ratio = New ratio – Old Ratio
The basic rule is that gaining partner share compensates the sacrificing partner to the extent of their
gain for the respective share of goodwill.
Revaluation of Assets and Liabilities: At the time of retirement/death of a partner, there may be
some assets/liabilities which may not have been shown at their current values.
Adjustment of Accumulated Profits and Losses: The reserves (Accumulated profits) or losses
belong to all the partners and should be transferred to capital account of all partners on retirement/
death.
Adjustment of Goodwill: If goodwill already appears in the books, it will be written off by debiting
all partners’ capital account in their old profit sharing ratio.
224 Accountancy-II
Give credit for outgoing partners’ (i.e. retiring/deceased partner) share of goodwill to outgoing
partner capital account.
Computation of amount due to retiring/deceased partner: Retiring partner/deceased partner

may be paid in one lumpsum or instalments with interest.
Adjustment of Capital: At the time of retirement/death of a partner, the remaining partners may
decide to keep their capital contributions in their profit sharing ratio. For this purpose the continuing
partners will be adjusted their share capital in new profit-sharing ratio.
MODEL QUESTIONS
Very Short Answer Questions

1. What is meant by retirement of a partner
2. What do you understand by ‘Gaining Ratio
3. What are the adjustments required on the retirement or death of a partner?
4. How is the account of deceased partner settled
5. Explain the modes of payment to a retiring partner.
Exercises
1. Madhu, Nehra and Tina are partners sharing profits in the ratio of 5:3:2. Calculate new
profit sharing ratio if
1. Madhu retires
2. Nehra retires
3. Tina retires
(Ans: New Profit Sharing Ratio: 1= 3:2, 2 = 5:2 and 3 = 5:3)
2. Hari, Prasad and Anwar are partners sharing profits in the ratio of 3:2:1. Hari retires
and his share is taken up by Prasad and Anwar in the ratio of 3:2. Calculate the new
profit sharing ratio.
(Ans: New Profit Sharing Ratio of Prasad and Anwar= 19:11)
3. Ranjana, Sadhna and Kamana are partners sharing profits in the ratio 4:3:2. Ranjana
retires, Sadhna and Kamana decided to share future profits in the ratio of 5:3. Calculate
the Gaining Ratio.
(Ans: Gaining ratio = 21:11)
4. Murali, Naveen and Omprakash are partners sharing profits in the ratio of 3:4:1 Murali
retires and surrenders 2/3rd of his share in favour of Naveen and the remaining share
in favour of Omprakash. Calculate new profit sharing and the gaining ratio of the
remaining partners.
(Ans: New Profit Sharing Ratio= 3:1 and gaining ratio= 2:1)
5. Vasu, Dasu and Bosu are partners sharing profits in the ratio of 1:2:3. Dasu retires and
at the time of retirement, goodwill is valued at Rs. 84,000. Vasu and Bosu decided to
share future profits in the ratio of 2:1. Record the necessary journal entries.
6. Rama, Krishna and Reddy are partners in a firm sharing profits and losses in the ratio
of 2:2:1. On Rama’s retirement, the goodwill of the firm is valued at Rs. 46,000.
Krishna and Reddy decided to share future profits equally. Record the necessary journal
entry for the treatment of goodwill without opening’ Goodwill Account’.
7. Shanu, Nicee and Jwalitha are partners sharing profits in the ratio of 1:3:5. Goodwill is
appearing in the books at a value of Rs. 60,000. Nicee retires and goodwill is valued
at Rs. 90,000. Shanu and Jwalitha decided to share future profits equally. Record
necessary journal entries.
8. Asha, Deepa and Lata are partners in a firm sharing profits in the ratio of 3:2:1. Deepa
retires. After making all adjustments relating to revaluation, goodwill and accumulated
profit etc., the capital accounts of Asha and Lata showed a credit balance of
Rs.1,60,000 and Rs. 80,000 respectively. It was decided to adjust the capitals of
Asha and Lata in their new profit sharing ratio. They decided that the requirement of
capital is Rs. 2,50,000. You are required to calculate the new capitals of the partners
and record necessary journal entries for bringing in or withdrawal of the necessary
amounts involved.
(Ans: Asha’s capital brought – Rs. 27,500 & Lata’s capital withdrew – Rs. 17,500)
9. A, B, and C are partners in a firm. B retires from the firm on 1st Jan 2015.On the date
of his retirement Rs. 55,000 were due to him. It was decided that the payment will be
done in 3 equal yearly instalments together with interest @ 10% p.a. on the unpaid
balance. Prepare necessary entries.
226 Accountancy-II
10. The Balance Sheet of Mohit, Neeraj and Sohan who are partners in a firm sharing
profits according to their capitals as on March 31, 2015 was as under:
(Rs.) (Rs.)
Creditors 21,000 Buildings 1,00,000
Mohit’s capital 80,000 Machinery 50,000
Neeraj’s capital 40,000 Stock 18,000
Sohan’s capital 40,000 Debtors - 20,000
General reserve 20,000 Less: Provision - 1,000 19,000
Cash at Bank 14,000
2,01,000 2,01,000
On that date, Neeraj decided to retire from the firm and was paid for his share in the
firm subject to the following:
1. Buildings to be appreciated by 20%.
2. Provision for Bad debts to be increased to 15% on Debtors.
3. Machinery to be depreciated by 20%.
Prepare necessary accounts and new Balance Sheet after retirement.
(Ans: Gain on Revaluation – Rs. 8,000; Mohit’s capital A/c – Rs. 94,000, Sohan’s capital
A/c – Rs. 47,000; Neeraj’s loan A/c – Rs.47,000; New Balance Sheet – Rs. 2,09,000).
11. Siva, Rama and Krishna were partners in a firm sharing profits in the ratio of 2:2:1.
Their Balance Sheet as on March 31, 2015 was as follows:

(Rs.) (Rs.)
Reserve Fund 18,500 Debtors 19,000
Siva’s Capital 82,000 Stock 42,000
Rama’s Capital 60,000 Buildings 2,07,000
Krishna’s Capital 75,500 Patents 9,000
2,85,000 2,85,000
Rama retired on March 31, 2015 on the following terms:

(i) Goodwill of the firm was valued at Rs. 70,000 and was not to appear in the books.
(ii) Bad debts amounting to Rs. 2,000 were to be written off.
(iii) Patents were considered as valueless.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet
(Ans: Loss on Revaluation-Rs. 11,000; Siva’s capital A/c – Rs. 66,333, Krishna’s capital
A/c – Rs. 67,667; Rama’s loan A/c – Rs.91,000, Balance Sheet Total Rs. 2,74,000).
12. Radha, Krishna and Satya were in partnership sharing profit and losses in the ratio of
4:2:1. On April 1, 2015, Krishna retires from the firm. On that date, their Balance
Sheet was as follows:
(Rs.) (Rs.)
Bills Payable 4,500 Cash at Bank 7,500
Expenses Owing 4,500 Debtors 15,000
Capitals: Premises 22,500
Radha - 15,000 Machinery 8,000
Krishna - 15,000 Loose Tools 4,000
Satya - 15,000 45,000
70,500 70,500
The terms were:

a) Goodwill of the firm was valued at Rs. 13,000.
b) Expenses owing to be brought down to Rs. 3,750.
c) Machinery and Loose Tools are to be valued at 10% less than their book value.
d) Factory premises are to be revalued at Rs. 24,300.
Prepare: 1. Revaluation account
2. Partner’s capital accounts and
3. Balance sheet of the firm after retirement of Krishna
(Ans: Profit on Revaluation Rs. 1,350; Radha’s capital A/c – Rs. 30,914, Satya’s capital
A/c – Rs. 18,979; Krishna’s loan A/c – Rs. 22,957, Balance Sheet Total = Rs. 81,100).
13. Suresh, Naresh and Ramesh are partners sharing profits in the ratio of 3:2:1. Naresh
retired from the firm due to his illness. On that date the Balance Sheet of the firm was
as follows:
228 Accountancy-II
Books of Suresh, Naresh and Ramesh Balance Sheet as on March 31, 2015

(Rs.) (Rs.)
General Reserve 12,000 Bank 7,600
Sundry Creditors 15,000 Debtors - 6,000
Bills Payable 12,000 Less: Provisions - 400 5,600
Outstanding Salary 2,200 Stock 9,000
Provision for Legal Damages 6,000 Furniture 41,000
Capitals: Premises 80,000
Suresh – 46,000
Naresh – 30,000
Ramesh – 20,000 96,000
1,43,200 1,43,200
(i) Premises have appreciated by 20%, stock depreciated by 10% and provision for
doubtful debts was to be made 5% on debtors.
(ii) Goodwill of the firm valued at Rs. 42,000.
(iii)Rs. 46,000 from Naresh’s Capital account be transferred to his loan account and
balance be paid through bank.
(iv) New profit sharing ratio of Suresh and Ramesh is decided to be 5 : 1.
Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.
(Ans: Profit on Revaluation Rs. 15,200; Suresh’s capital A/c – Rs. 80,600, Ramesh’s capital
A/c – Rs. 31,533; Paid to Naresh – Rs. 7,067; Balance Sheet -Rs. 1,93,333).
14. R, S and T were carrying on business in partnership sharing profits in the ratio of 3:2:1
respectively. On March 31, 2015, Balance Sheet of the firm stood as follows:
(Rs.) (Rs.)
Sundry Creditors 16,000 Buildings 23,000
Capital: Debtors 7,000
R – 20,000 Stock 12,000
S – 7,500 Patents 8,000
T – 12,500 40,000 Bank 6,000
56,000 56,000
S retired on the above mentioned date on the following terms :
(a) Buildings to be appreciated by Rs.8,800.
(b) Provision for doubtful debts to be made @ 5% on debtors.
(c) Goodwill of the firm to be valued at Rs.9,000.
(d) Rs.5,000 to be paid to S immediately and the balance due to him to be treated as
a loan carrying interest @ 6% per annum.
Prepare the balance sheet of the reconstituted firm.
(Ans: Profit on Revaluation Rs. 8,450; R’s capital A/c – Rs. 28,725, T’s capital A/c – Rs.
15,408; S’s Loan A/c – Rs. 8,317; Balance Sheet - Rs. 68,450)
15. The Balance Sheet of A, B and C who were sharing the profits in proportion to their
capitals stood as on March 31, 2015.
Balance Sheet as on March 31, 2015

(Rs.) (Rs.)
Bills Payable 6,250 Land & Buildings 12,000
Sundry Creditors 10,000 Debtors - 10,500
Reserve Fund 2,750 Less: Provisions - 500 10,000
Capitals: Bills Receivables 7,000
A – 20,000 Stock 15,500
B – 15,000 Plant & Machinery 11,500
C – 15,000 50,000 Cash at Bank 13,000
69,000 69,000
B retired on the date of Balance Sheet and the following adjustments were to be made:
(a) Stock was depreciated by 10%.
(b) Factory building was appreciated by 12%.
(c) Provision for doubtful debts to be created up to 5%.
(d) Provision for legal charges to be made at Rs.265.
(e) The goodwill of the firm to be fixed at Rs.10,000.
(f) The capital of the new firm to be fixed at Rs.30,000.
The continuing partners decide to keep their capitals in the new profit sharing ratio of
3:2.Work out the final balances in capital accounts of the firm, and the amounts to be
brought in and/or withdrawn by A and C to make their capitals proportionate to then
new profit sharing ratio.
230 Accountancy-II
(Ans: Loss on Revaluation - Rs. 400; A’s capital A/c – Rs. 18,000, C’s capital A/c –
Rs. 12,000; cash withdrawn by A - Rs. 6,940 & C – Rs. 6,705; B’s Loan A/c –
Rs. 18,705; Balance Sheet - Rs. 65,220)
16. N, S and B are partners in a firm sharing profits and losses in ratio of 3:1:2. The
Balance Sheet on April 1, 2015 was as follows:

(Rs.) (Rs.)
Bills Payable 12,000 Freehold premises 40,000
Creditors 28,000 Machinery 30,000
Reserves 12,000 Furniture 12,000
Capital Accounts: Stock 22,000
N - 30,000 Debtors - 20,000
S - 20,000 Less: Provisions -1,000 19,000
B - 28,000 78,000 Cash 7,000
1,30,000 1,30,000
B retires from the business and the partners agree to the following:
a) Freehold premises and stock are to be appreciated by 20% and 15%respectively.
b) Machinery and furniture are to be depreciated by 10% and 7% respectively.
c) Bad Debts reserve is to be increased to Rs. 1,500.
d) Goodwill is valued at Rs. 21,000 on B’s retirement.
e) The continuing partners have decided to adjust their capitals in their new profit
sharing ratio after retirement of B. Capital requirement to continue the firm is
Rs. 72,000. Surplus/deficit, if any, in their capital accounts will be adjusted.
Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.
(Ans: Profit on Revaluation, Rs. 6,960; N’s Capital A/c - Rs. 54,000, S’s Capital A/c -
Rs.18,000; Cash supplied by N – Rs. 4,020, Cash withdrawn by S – Rs. 8,660; B’s
Loan A/c-Rs. 41,320; Balance Sheet – Rs. 1,53,320).
17. On December 31, 2014, the Balance Sheet of P, Q and R showed as under:

(Rs.) (Rs.)
Sundry creditors 25,000 Buildings 26,000
Reserve Fund 20,000 Investments 15,000
P- 15,000 Bills Receivable 6,000
Q- 10,000 Stock 12,000
R- 10,000 Cash 6,000
80,000 80,000
The partnership deed provides that the profit be shared in the ratio of 2:1:1 and that in
the event of death of a partner, his executors entitled to be paid out:
(a) The capital of his credit at the date of last Balance Sheet.
(b) His proportion of reserves at the date of last Balance Sheet.
(c) His proportion of profits to the date of death based on the average profits of the
last three completed years.
(d) By way of goodwill, his proportion of the total profits for the three preceding years.
The net profits for the last three years were:
2012- 16,000; 2013 -16,000; 2014 - 15,400
R died on April 1, 2015. He had withdrawn Rs.5,000 to the date of his death.
Prepare R’s Capital Account that of his executors.
(Ans: R’s share in profits – Rs. 988; R’s Executers A/c – Rs. 14,938)
18. Following is the Balance Sheet of P, Q and R as on March 31, 2014.

(Rs.) (Rs.)
Creditors 16,000 Bills Receivables 16,000
General Reserve 16,000 Furniture 22,600
Capital Accounts: Stock 20,400
P – 30,000 Debtors 22,000
Q – 20,000 Cash in Hand 18,000
R – 20,000 70,000 Cash at Bank 3,000
1,02,000 1,02,000
232 Accountancy-II
Q died on June 30, 2014. Under the terms of the partnership deed, the executors of a
deceased partner were entitled to:
a) Amount standing to the credit of the Partner’s Capital account;
b) Interest on capital at 5% per annum;
c) Share of goodwill on the basis of twice the average of the past three years’ profit;
d) Share of profit from the closing date of the last financial year to the date of death on
the basis of last year’s profit.
Profits for the year ending on March 31, 2012, 2013 and 2014 were Rs. 12,000, Rs. 16,000
and Rs. 14,000 respectively. Profits were shared in the ratio of capitals.
Pass the necessary journal entries and draw up Q’s capital account to be rendered to his
executor.
(Ans: Q’s Executor Account is Rs. 33,821)
Company Accounts 233
Chapter
8
Company Accounts
8.1 Introduction
8.1 Introduction
A company form of organisation it is third state
8.2 Categories of Share Capital
in the evolution of forms of organisation. Its capital is
8.3 Issue of Shares
contributed by a large number of persons called
8.3.1 Issue of Share at Par
shareholders who are the real owners of the company.
8.3.2 Issue of Shares with
But neither it is possible for all of them to participate in
Premium
the management of the company nor considered
8.3.3 Issue of Shares with
desirable. Therefore, they elect a Board of Directors
Discount
as their representative to manage the affairs of the
company. In fact, all the affairs of the company are
governed by the provisions of the Companies Act,
1956. A company means a company incorporated or
registered under the Companies Act. According to
Chief Justice Marshal, “a company is a person, artificial.
Invisible, intangible ad existing only in the eyes of law.
Being a mere creation of law it possesses only those
properties which the charter of its creation confers upon it, either expressly or as incidental to its
very existence”.
A company usually raises its capital in the form of shares (called share capital) and debentures
(debt capital). This chapter deals with the accounting for share capital of companies
234 Accountancy-II
8.2 Categories of Share Capital
A company, being an artificial person, cannot generate its own capital which has necessarily
to be collected from several persons. There persons are known as shareholders and the amount
contributed by them is called share capital. Since the number of shareholders is very very large, a
separate capital account cannot be opened for each one of them. Hence, innumerable streams of
capital contribution merge their identities in a common capital account called as ‘share capital account’.
8.2.1 Categories of share capital

From accounting point of view the share capital of the company can be classified as follows:
Authorized share capital
Issued capital Unissued capital
Subscribed capital Unsubscribed capital
Called-up-capital Uncalled capital
Paid-up-capital Calls-in-capital Unreserved capital Reserved capital
1) Authorised capital: Authorised capital is the amount of share capital which a company
is authorised to issue to the public by the Memorandum of Association. It is also called
nominal or registered capital.
2) Issued Capital: Issued capital is that part of the authorised capital which is actually
issued to the public for subscription. A company may issue its entire authorised capital
or may issue in parts from time to time as per the needs of the company.
3) Subscribed Capital: It is the part of the issued capital which has been actually
subscribed by the public. This capital can be equal to or less than the issued capital.
4) Called-up capital: It is the part of the subscribed capital which is called-up by the
company to pay on the allotted shares. The company may decide to call the entire
amount or part of the face value of the shares.
5) Un called Capital: Uncalled capital is that portion of the issued/ subscribed capital
that is not called up by the company on the shares allotted.
6) Paid-up Capital: It is the portion of the called up capital which is actually paid by the
share holders.
7) Unpaid-Capital: That part of the called up capital which is called but not paid by the
shareholders is called unpaid capital, ie: calles – in-arrears.
8) Reserve Capital: A company may reserve a portion of its uncalled capital to be

called only in the event of winding up of the company. Such uncalled amount is called’
Reserve-capital” of the company.
8.2.2 Types of shares

Shares, as applied to the capital of a company, refer to the units into which the total share
capital of a company is divided. Thus, a share is a fractional part of the share capital and forms the
basis of ownership interest in a company. The persons who contribute money through shares are
called shareholders.
The amount of authorised capital, together with the number of shares in which it is divided, is
stated in the Memorandum of Association but the classes of shares in which the company’s capital
is to be divided, along with their respective rights and obligations, are prescribed by the Articles of
Association of the company. A per Section 86 of The Companies Act, a company can issue two
types of shares (1) preference shares, and (2) equity shares (also called ordinary shares).
1) Preference shares: According to section 85 of the companies Act, 1956, a preference
share is one which fulfils the following conditions
a) That it carries a preferential right to dividend, to be paid wither as a fixed amount
payable to preference share holders or an amount calculated by a fixed rate of
the nominal value of each share before any dividend is paid to the equity share
holders.
b) That with respect to capital it carries or will carry, on the winding up of the
company, the preferential right to the repayment of capital before anything is
paid to equity share holders.
236 Accountancy-II
2) Equity Shares or ordinary Shares: The equity shares are also called as ordinary
shares .According to section 85 of the companies Act, 1956, an equity share is a share
which is not a preference share. In other words, shares which do not enjoy any
preferential right in the payment of dividend or repayment of capital are called as
equity shares. The equity shareholders are entitled to share the distributable profits of
the company after satisfying the dividend rights of the preferences share holders. The
dividend on equity shares is not fixed and it may vary from year to year depending
upon the amount of profits available for distribution.
8.3 Issues of shares

A salient feature of the share capital of a company is that the amount on its shares can be
gradually collected in easy installments spread over a period of time depending upon its growing
financial requirement. The first installment is collected along with application and is known as
application money, the second on allotment (termed as allotment money), and the remaining money
is collected in installment are termed as first call, second call and final call. The word final is suffixed
to the last installment. However, this in no way prevents a company from calling the full amount on
shares right at the time of application.
Accounting Treatment
Normally the shares of a company are issued at par value. However, the shares of a company
can be issued at a premium or at a discount. The following is the accounting treatment for issue of
shares.
8.3.1 Shares issued at Par or Face value

When a company issues its shares at their face value, the shares are known to have been
issued at par.
Example: The face value of the share is Rs. 100 and it is issued for Rs. 100.
The following journal entries are required.

1) For Receipt of application money.
Bank A/c Dr
To share Application A/c.
(Amount received on Application for …….. shares @Rs……per share)
2) For Transfer of Application money to share capital A/c
Share application A/c Dr
To share capital A/c
(Application many on….shares is transferred to share capital A/c)
3) For amount due on allotment.
Share allotment A/c
To share Capital A/c
(Share allotment money due on….. shares @Rs……per share)
4) For receipt of allotment money

Bank A/c Dr
To share Allotment A/c.
(Allotment money received on ….. shares @ Rs……per share)
When call is made and the amount of the same is received, the journal entries are required.
5) For call amount due

Share first call A/c
To share Capital A/c
(Call money due on……shares @ Rs…..per share)
6) For Receipt of call amount.

Bank A/c Dr
To Share first call A/c
(Call money received on….shares)
Note:- If a company makes more than one call the same accounting treatment is followed for
recording the second call or third call money due and their receipts the last call made is known as
final call.
Illustration 1
Pavithra Ltd issued 10,000 shares of Rs. 10 each for the subscription. Payable at Rs.3 per
share on application, Rs.4 per share on allotment and the balance on first and final call. All the
amounts were duly received. Make journal entries in the books of the company.
Books of Pavithra Ltd Journal.

Bank A/c Dr 30,000
To share Application A/c. 30,000
(Amount received on Application for
10000 shares @Rs 3 per share)
238 Accountancy-II
Share application A/c Dr 30,000
To share capital A/c 30,000
(application many on 10000 shares
transferred to share capital A/c)
Share allotment A/c Dr 40,000

To share Capital A/c 40,000
(Share allotment money due on10000
shares @Rs 4 per share)
Bank A/c Dr 40,000

To share Allotment A/c. 40,000
(Allotment money received on 10000
shares @ Rs 4 per share)
Share first & final call A/c Dr 30,000

(Call money due on 10000 shares @
Rs 3 per share)
Bank A/c Dr 30,000

To Share first & final call A/c 30,000
(call money received on 10000 shares)
Illustration 2
Bhavani Ltd issued 20,000 shares of Rs. 20 each to the public for subscription as follows,
Payable Rs. 5 on application, Rs. 10 on allotment and the remaining balance on first and final call.
Give the Journal entries in the books of the company.
Books of Bhavani Ltd Journal.
To share Application A/c. 1,00,000
Share application A/c Dr 1,00,000
To share capital A/c 1,00,000
Share allotment A/c Dr 2,00,000

To share Capital A/c 2,00,000

To share Allotment A/c. 1,00,000
Share first & final call A/c Dr 1,00,000

(Call money due on 20000 shares @ Rs
5 per share)

To Share first & final call A/c 1,00,000
Illustration 3
Siva Ltd issued 30000 shares of Rs 30 each to the public for subscription as follows, payable
Rs 5 on application, Rs 10 on allotment, and the remaining balance on first call Rs 5,second call
Rs5, and final call Rs 5.Give the journal entries in the books of the company.
Books of Siva Ltd Journal.
To Share Application A/c. 1,50,000
(Amount received on Application for 30000
240 Accountancy-II
Share first call A/c Dr 1,50,000
5 per share)

To Share first call A/c 1,50,000
Share second call A/c Dr 1,50,000

5 per share)
To Share second call A/c 1,50,000
Share final call A/c Dr 1,50,000
5 per share)
To Share final call A/c 1,50,000
(Call money received on 30000 shares)
8.3.2 Shares issued at Premium (Section 52)

When a company issues its shares at a price of more than the face value, it is said to be an
issue at a premium. The money collected more than the face value is “Premium”.
For example:-If the face value of the share is Rs100 and issued at Rs 110. The excess
amount Rs. 10 is treated as capital income. It is transferred to securities premium account and will
be shown in the liabilities side of the balance sheet under the head “Reserves and Surplus”.
When the issue of shares is at a premium, the amount of premium may technically be called at
any stage of the issue of shares. However, premium is generally called with the amount due on
allotment, sometimes with the application money and rarely with the call money
The journal entries required issues of shares at a premium are as follows
1) For premium amount called with application money.

a) Bank A/c Dr
To Share application A/c
(Money received on application for ….shares @Rs….per share including premium)
b) Share application A/c Dr

To Share capital A/c
To securities premium A/c
(Transfer of application money to share capital and premium account)
2) Premium amount called with allotment money
a) Share allotment A/c Dr

To securities premium A/c
(Amount due on allotment of shares @ Rs…..per share including premium)
b) Bank A/c Dr
To Share allotment A/c
(Allotment money received including premium)
Illustration 4
Sarojanamma Ltd issued 20,000 shares of Rs 10 each at a premium of Rs 5 per share,
payable as follows, on application ,Rs 5(including Rs 2 Premium) per share, on allotment Rs 7
(including premium Rs3) per share, and the balance on first and final call Rs 3. Applications were
received for 20000 shares and allotment was made to all, make journal entries.
242 Accountancy-II
Books of Sarojanamma Ltd Journal.

20000 shares @Rs 5 per share including
premium Rs 2)

To securities premium A/c 40,000
(application money on 20000 shares
transferred to share capital A/c and
premium A/c)

To securities premium A/c 60,000
shares @Rs 7 per shares including
premium Rs 3)

shares @ Rs 7 per share including
premium)

3 per share)
Bank A/c Dr 60,000

Illustration 5
Ramaiah Ltd issued 50,000 shares of Rs 10 each at a premium of Rs 5 per share, payable
as follows, on application Rs 5(including premium Rs 2) per share, on allotment Rs 6 (including
premium Rs3) per share, the remaining balance Rs 4 on first and final call, the issue was fully
subscribed .All the money was duly received.
Make Journal entries.
Books of Ramaiah Ltd Journal.
50000 shares @Rs 5 per share including
premium Rs 2)

To securities premium A/c 1,00,000
transferred to share capital and premium
A/c)

To securities premium A/c 1,50,000
shares @Rs 6 per share including
premium Rs 3)

shares @ Rs 6 per share including
premium Rs 2)
244 Accountancy-II
Share first & final call A/c Dr 2,00,000
4 per share)

To Share first & final call A/c 2,00,000
8.3.3 Shares Issued at Discount (Section 53)

When a company issues its shares at a price less than the face value, it is said to be an issue
at a discount. The difference between the face value and issue price is called “Discount”. It is a
capital loss. It will be shown in the asset side of the balance sheet under the head “Miscellaneous
Expenditure”. Maximum rate of discount is 10 per cent only.
For example:-If the face value of the share is Rs100 and issued at Rs 90.
Whenever shares are issued at a discount, the amount of discount is brought into the books
at the time of allotment by debiting an account called ‘Discount on the issue of shares account’
The journal entries required issues of shares at a discount are as follows
a) Share allotment A/c Dr

Discount on the issue of shares A/c
(Amount due on allotment of …..shares @ Rs…..per share and discount on issue
brought into account)
b) Bank A/c Dr
To Share allotment A/c
(Allotment money received on ….shares)
Illustration 6
Suguna motors Ltd issued to the public for subscription of 10,000 shares of Rs 10 each at a
discount of 10% per share , payable at Rs 4 on application, Rs 3 on allotment and Rs 2 on first and
final call, the issue was fully subscribed .All the money was duly received.
Write the Journal entries in the books of the suguna motors Ltd
Books of Suguna Motors Ltd

Journal
Bank A/c Dr 40,000
To share Application A/c. 40,000


Discount on issue of shares A/c Dr 10,000
(Amount due @ Rs 3 per share on
allotment and discount Rs 1 per share on
10000 shares)
Bank A/c Dr 30,000

shares @ Rs 3 per share )

(Call money due on 10000 shares
@ Rs 2 per share)
Bank A/c Dr 20,000

246 Accountancy-II
Illustration 7
Ravi Tractor Ltd issued to the public for subscription of 20,000 shares of Rs 10 each at a
discount of 10% per share , payable at Rs 2 on application, Rs 3 on allotment and Rs 4 on first and
final call, the issue was fully subscribed .All the money was duly received.
Prepare the Journal entries in the books of the company
Books of Ravi tractor company Ltd Journal.
Bank A/c Dr 40,000
To share Application A/c 40,000.
20000 shares @Rs 2 per shares)
(application money on 20000 shares
Discount on issue of shares A/c Dr 20,000
( Amount due @ Rs 3 per share on
allotment and discount Rs 1 per share on
20000 shares)
Bank A/c Dr 60,000

4 per share)
Bank A/c Dr 80,000
Summary
Company is an organisation consisting of individuals called ‘shareholders ‘by virtue of their holding
the shares of a company, who can act as one legal person as regards its business through an elected
board of directors.
Share is a Fractional part of the capital, and form the basis of ownership in a company; shares are
generally of two types, viz., equity shares and preference shares, according to the provisions of The
Companies Act, 1956. Preference shares again are of different types based on vary shades of
rights attached to them.
Share capital of a company is collected by issuing shares to either a select group of persons
through the route of private placements and / or offered to the public for subscription. Thus, the
issue of shares is basic to the capital of a company. Shares are issued either for cash or for
consideration other than cash, the former being more common. Shares are said to be issued for
consideration other then cash when a company purchases business, or some asset/ assets, and the
vendors have agreed to receive payment in the form of fully paid shares of a company.
Stages of Share Issue are The issue of shares for cash is required to be made in strict conformity
with the procedure laid down by law for the same. When shares are issued for cash, the amount on
them can be collected at one or more of the following stages:
(i) Application for shares
(ii) Allotment of shares
(iii) Call/ calls on shares.
Calls in arrears as the full amount called on allotment and/ or call (calls) is not received from
the allottees/ shareholders. The amount not so received are cumulatively called unpaid calls or calls-
in-Arrears. However, it is not mandatory for a company to maintain a separate calls in arrears to
pay a part or whole of the amount not yet called up on the shares allotted to them. Any amount paid
by a shareholder in the excess of the amount due from him on allotment/call (calls) is known as Calls
in Advance or which a separate account is maintained. A company has the power to charge interest
on calls in arrears and is under an obligation to pay interest on calls in advance if it accepts them in
accordance with the provisions of Articles of Association.
248 Accountancy-II
MODEL QUESTIONS
Short Answer Questions.
1) What is authorized capital?
2) What is a preference share?
3) What is an Equity share?
4) Explain the issue of shares at par.
5) Explain the issue of shares at premium.
6) Explain the issue of shares at discount.
Essay type Questions.

1) Explain the categories of share capital.
2) Explain the classes of shares.
3) Explain the types of issue of shares.
Exercises
1) Dhana Ltd issued 20,000 shares of Rs. 100 each for the subscription. Payable at
Rs.40 per share on application, Rs.40 per share on allotment and the balance Rs 20
on first and final call. All the amounts were duly received. Make journal entries in the
books of the company
2) Charan Ltd decided to issue 10,000 shares of Rs. 200 each for the subscription.
Payable at Rs.50 per share on application, Rs.100 per share on allotment and the
balance Rs 50 on first and final call. All the money was duly received. Write journal
entries in the books of the company
3) Gayatri cloths Ltd issued 15,000 shares of Rs. 150 each, Payable at Rs.50 per share
on application, Rs.50 per share on allotment and the balance Rs 20 on first call, Rs 20
on second call and Rs 10 final call. All the money was duly received. Prepare journal
entries in the books of the company
4) Jayaram Furniture’s Ltd issued 20,000 shares of Rs 100 each at a premium of Rs 10

per share payable as follows, on application Rs 40(including premium Rs 5 per share),
on allotment Rs 40 (including premium Rs 5 per share) the remaining balance Rs 30 on
first and final call, the issue was fully subscribed .All the money was duly received.
Make the Journal entries in the books of the company.
5) Anusha Ltd having an authorized capital of Rs 100,00,000 in share of 10 each issued

10,000 at a premium of Rs 2 per share payable at Rs4 on application(including premium
Rs 1 per share), Rs 5 on allotment (including premium Rs 1 per share) the remaining
balance Rs 3 on first and final call, the issue was fully subscribed .All the money was
duly received. Prepare the Journal entries in the books of the company.
250 Accountancy-II
6) Karthik Ltd issued 50,000 shares of Rs 100 at a premium of Rs 10 per share, payable
at Rs40 on application(including premium Rs 5 per share), Rs 40 on allotment (including
premium of Rs 5 per share) the remaining balance Rs 30 on first and final call, the issue
was fully subscribed .All the money was duly received. Record the Journal entries in
the books of the company.
7) Padmavati Ltd issued to the public for subscription of 10,000 shares of Rs 100 each at
a discount of 10% per share, payable at Rs30 on application, Rs 40 on allotment and
Rs 20 on first and final call, the issue was fully subscribed .All the money was duly
received. Write the Journal entries in the books of the company.
8) Abishek Ltd issued 20,000 shares of Rs 100 each at a discount of 10% per share , the
shares were payable at Rs. 40 on application, Rs 30 on allotment and Rs 20 on first
and final call, the issue was fully subscribed .All the money was duly received. Record
the Journal entries in the books of the company.
9) Venkat Ltd issued 50,000 shares of Rs 10 each at a discount of 10% per share , the
shares were payable at Rs3 on application, Rs 3 on allotment and Rs 3 on first and
final call, the issue was fully subscribed .All the money was duly received. Give Journal
entries in the books of the company.
Computerised Accounting System 251
Chapter
9
Computerised Accounting System
9.2 Computers in Accounting
9.3 Process of Computerised Manual system of accounting has been the most
Accounting System popular method of maintaining records of financial
9.4 Driving Forces of transactions of an organisation, which requires
Computerised Accounting maintaining books of accounts such as Journal, Cash
System
Book, Special Purpose Books, Ledger, etc., so as to
9.5 Comparison of Manual and
prepare a summary of transactions and final accounts
Computerized Accounting
manually. Gradually, with the development of
System
9.6 Advantages of Computerized technology, machine ware started to be used in
Accounting System accounting process. Billing machine is a popular
9.7 Limitations of Computerized example in this regard. This machine is capable of
Accounting System computing discount, adding net total and posting
9.8 Sources of Accounting requisite data to relevant accounts. The customer’s
Software bill is generated automatically once the operator has
9.9 Accounting Packages
entered the necessary information. These machines
combine the features of a typewriter and various kinds of calculators. With the development of
technology, not only computer started playing an important role in accounting process but the newer
versions of these machines have also started operating through computers.
The success of a growing organisation with a complexity of transactions trends to depend on
resource optimisation, quick decision-making and control. Traditional, periodic accounting takes
252 Accountancy-II
place over regular intervals, during which financial statements are prepared. Since traditional reporting
provides a company’s financial position, results of operations, cash flows, and other financial
information of several weeks or even months after the reporting period has ended, the information
reported is not as relevant as it could be. The sooner a company issues its financial statements for a
particular period, the more useful it would be to users, as long as accuracy is not compromised in
order to issue statements quickly.
As a result, the maintenance of accounting data on a real-time (or spontaneous) basis became
almost essential. Maintaining real-time accounting records is possible only through accounting system
under a computerised environment.
Real-Time Accounting: In real-time accounting system once a transaction is entered and saved,
the information is immediately posted to all appropriate journals, ledger and financial statements.
Real-Time accounting allows management to quickly adapt to opportunities and address problems.
Daily reporting greatly eases the stress involved in preparing quarterly and year-end financial
statements. Rather than spending long hours in preparing periodic financial statements, management
executives, accountants and other business professionals are allowed more time for other tasks, such
as financial management, product development a and customer relations. Businesses are becoming
increasingly reliant on financial information that is reported as transactions and events occur.
9.2 Computers in Accounting

Accounting refers to identifying transactions and events of financial nature and recording
them in the books of accounts and producing meaningful information for the users. Thus, the foremost
function of accounting is to identify transactions and events of financial nature and record them in the
books of accounts.
Accounting process means preparing vouchers for the transactions, writing them in the Journal,
posting the recorded transactions in the Ledger Accounts, drawing Trial Balance and thereafter
preparing Financial Statements, i.e., Trading Account, Profit and Loss Account and Balance Sheet.
Accounting process, whether carried out manually or by use of computers, generates
accounting records such as Cash Book, Bank Book, Journal, Purchases Book, Sales Book, Ledger
and Tail Balance. Besides the accounting records, certain reports such as Payroll, Stock Report,
Statutory Returns (VAT, CST, etc), Debtors Report, Creditors Report and Exception Report, etc.,
are also prepared under both the methods.
9.3 Process of Computerised Accounting System

Accounting software is used to perform the function of accounting. The software functions on
the concept of database. As discussed above, accounting software eliminates the process of posting
a transaction into the Ledger account, that is, when a transaction is entered in the computer system,
the function of posting in the ledger amount is automatic due to instructions in the software. The
software is so designed that a transaction, once entered, is automatically transported or transferred
or posted to the Ledger account also. Computerised accounting can be explained as a processing
function. Data processing has three distinct stages.
INPUT PROCESSING OUTPUT
Transaction Data Computer Financial Statement

& Or &
Amendments to Data Accounting System Management Information
Input
The input to a computerised accounting system is the accounting data, which is obtained from
the details of each transaction. In practice, the data originates from a source document. A source
document is the document, which is produced as a result of the happening of a transaction and is
kept as a proof of the transaction. In fact, source documents are used to trace the transactions later
on. The examples of source documents include invoices, cheques received, sales order form, credit
note, debit notes etc. In a computerised accounting system, computers are used to produce source
documents and the data is automatically inputted to the system for storage and further processing.
Another input to the computerised accounting system is the set of accounting rules and
procedures, which are programmed to process the accounting data as per the accounting theory
and conventions. These accounting rules and procedures are coded in the accounting software,
which is loaded and run by the computer, when the transactions are to be processed by the system.
Processing
Computers are the fastest computing machines available to the mankind. The computerised
accounting systems are built to take advantages of the fast processing capabilities of the modern
day computers. In this stage, the accounting data is processed as per the accounting rules of double
entry book keeping. The only addition here is that unlike manual accounting systems, computerised
accounting systems are very fast and error free.
Output
The basic output of computerised accounting system is the Trading and Profit & Loss account
and the Balance Sheet. Computerised accounting system produces these final accounts automatically
and on the user’s request. The most interesting thing to note is that in computerised accounting,
these statements can be produced as often as desired but in the manual system of accounting the
254 Accountancy-II
production of final accounts is a very tedious and time consuming activity and sometimes takes as
long as two or three months to finalise the accounts. Also the computers automatically transfer the
output of one component of computerised accounting to another component as input. That is, data
sharing is possible.
9.4 Driving Forces for Computerised Accounting

When the computers were first put to use by the business communities the accounting function
was the first application for computerization. Organizations intending to use computers invariably
make the computerization of the accounting function their first priority because of the following
reasons.
1. Computers can process numeric data more easily than the textual data and the very
nature of accounting work is numeric. Therefore, it is a simple task for computer
programmers to codify numeric calculations.
2. Computers can take up a job if the same can be solved by a precise step by step
procedure, i.e., if the task is algorithmic. And the accounting system is algorithmic
because it has a set of standards, clearly defined and unambiguous rules and procedures
to prepare books of accounts. This factor makes accounting easy to be explained in a
precise step by step sequence, using tools like Flowcharts etc., and programmers can
easily convert a Flowchart into a source code.
3. The basic method of recording transactions, irrespective of the natures of the firm, is
almost the same. Therefore, the programmers can develop general purpose accounting
packages. This can be used by any kind of business firm with minor modifications. This
factor also became a temptation for amateur programmers to write software for
accounting, which can be run on any computer without any difficulty.
4. The volume of accounting data is always very high, especially in large size organizations.
Thus it becomes difficult and error-prone to process manually thousands of transactions
every day. Introduction of computers in accounting assured speedy processing of
voluminous data and that too without errors in calculations.
Comparison of Manual and Computerized

9.5
Accounting System
Aim of both manual and computerized accounting is to record, classify and summarize the
accounting transactions. Both are used for preparing financial statements but the difference in the
system. We can write the difference between manual accounting and computerized accounting on
the following basis.
256 Accountancy-II
9.6 Advantages of Computerised Accounting System
Computerised accounting offers several advantages vis-a-vis manual accounting, these are
summarized as follows;
1. Speed: Accounting data is processed faster by using a computerised accounting system
than it is achieved through manual efforts. This is because computers require far less
time than human beings in performing a task.
2. Accuracy: The possibility of error is eliminated in a computerised accounting system
because the primary accounting data is entered once for all the subsequent usage and
processes in preparing the accounting reports. Normally, accounting errors in a manual
accounting system occur because of repeated posting of same set of original data by
several times while preparing different types of accounting reports.
3. Reliability: The computer system is well-adapted to performing repetitive operations.
They are immune to tiredness, boredom or fatigue. As a result, computers are highly
reliable compared to human beings. Since computerised accounting system relies heavily
on computers, they are relatively more reliable than manual accounting systems.
4. Up-to-Date Information: The accounting records, in a computerised accounting system
are updated automatically as and when accounting data is entered and stored. Therefore,
latest information pertaining to accounts get reflected when accounting reports are
produced and printed. For example, when accounting data pertaining to a transaction
regarding cash purchase of goods is entered and stored, the cash account, purchase
account and also the final accounts (trading and profit and loss account) reflect the
impact immediately.
5. Real Time User Interface: Most of the automated accounting systems are inter-
linked through a network of computers. This facilitates the availability of information to
various users at the same time on a real time basis (that is spontaneously).
6. Automated Document Production: Most of the computerised accounting systems
have standardised, user defined format of accounting reports that are generated
automatically. The accounting reports such as Cash book, Trial balance, Statement of
Accounts are obtained just by click of a mouse in a computerised accounting
environment.
7. Scalability: In a computerised accounting system, the requirement of additional
manpower is confined to data entry operators for storing additional vouchers. The
additional cost of processing additional transactions is almost negligible. As a result the
computerised accounting systems are highly scalable.
8. Legibility: The data displayed on computer monitor is legible. This is because the
characters (alphabets, numerals, etc.) are type written using standard fonts. This helps
in avoiding errors caused by untidy written figures in a manual accounting system.
9. Efficiency: The computer based accounting systems ensure better use of resources
and time. This brings about efficiency in generating decisions, useful information and
reports.
10. Quality Reports: The inbuilt checks and untouchable features of data handling facilitate
hygienic and true accounting reports that are highly objective and can be relied upon.
11. MIS Reports: The computerised accounting system facilitates the real time production
of management information reports, which will help management to monitor and control
the business effectively. Debtors’ analysis would indicate the possibilities of defaults
(or bad debts) and also concentration of debt and its impact on the balance sheet. For
example, if the company has a policy of restricting the credit sales by a fixed amount to
a given party, the information is available on the computer system immediately when
every voucher is entered through the data entry form. However, it takes time when it
comes to a manual accounting system. Besides, the results may not be accurate.
12. Storage and Retrieval: The computerised accounting system allows the users to
store data in a manner that does not require a large amount of physical space. This is
because the accounting data is stored in hard-disks, pendrive, CD/DVD-ROMs,
floppies that occupy a fraction of physical space compared to books of accounts in the
form of ledger, journal and other accounting registers. Besides, the system permits fast
and accurate retrieval of data and information.
13. Motivation and Employees Interest: The computer system requires a specialised
training of staff, which makes them feel more valued. This motivates them to develop
interest in the job. However, it may also cause resistance when we switch over from a
manual system to a computer system.
9.7 Limitations of Computerised Accounting System

The main limitations emerge out of the environment in which the computerised accounting
system is made to operate. These limitations are as given below;
1. Cost of Training: The sophisticated computerised accounting packages generally
require specialised staff personnel. As a result, a huge training cost is incurred to
258 Accountancy-II
understand the use of hardware and software on a continuous basis because newer
types of hardware and software are acquired to ensure efficient and effective use of
computerised accounting systems.
2. Staff Opposition: Whenever the accounting system is computerised, there is a significant
degree of resistance from the existing accounting staff, partly because of the fear that
they shall be made redundant and largely because of the perception that they shall be
less important to the organisation.
3. Disruption: The accounting processes suffer a significant loss of work time when an
organisation switches over to the computerised accounting system. This is due to changes
in the working environment that requires accounting staff to adapt to new systems and
procedures.
4. System Failure: The danger of the system crashing due to hardware failures and the
subsequent loss of work is a serious limitation of computerised accounting system.
However, providing for back-up arrangements can Inability to Check Unanticipated
Errors: Since the computers lack capability to judge, they cannot detect unanticipated
errors as human beings commit. This is because the software to detect and check
errors is a set of programmes for known and anticipated errors.
5. Breaches of Security: Computer related crimes are difficult to detect as any alteration
of data may go unnoticed. The alteration of records in a manual accounting system is
easily detected by first sight. Fraud and embezzlement are usually committed on a
computerised accounting system by alteration of data or programmes. Hacking of
passwords or user rights may change the accounting records. This is achieved by
tapping telecommunications lines, wire-tapping or decoding of programmes. Also, the
people responsible for tampering of data cannot be located which in a manual system
is relatively easier to detect.
6. Ill-effects on Health: The extensive use of computers systems may lead to
development of various health problems: bad backs, eyestrain, muscular pains, etc.
This affects adversely the working efficiency of accounting staff on one hand and
increased medical expenditure on such staff on the other. Obviate this limitation.
Software damage and failure may occur due to attacks by viruses. This is of particular
relevance to accounting systems that extensively use Internet facility for their online
operations. No foolproof solutions are available as of now to tackle the menace of
attacks on software by viruses.
9.8 Sourcing of Accounting Software

Accounting software is an integral part of the computerised accounting system. An important
factor to be considered before acquiring accounting software is the accounting expertise of people
responsible in organisation for accounting work. People, not computers, are responsible for
accounting. The need for accounting software arises in two situations:
a. When the computerised accounting system is implemented to replace the manual system
or
b. When the current computerised system needs to be replaced with a new one in view of
changing needs.
9.9 Accounting Packages

Every Computerised Accounting System is implemented to perform the accounting activity
(recording and storing of accounting data) and generate reports as per the requirements of the user.
From this perspective the accounting packages are classified into the following categories:
(a) Ready to use
(b) Customised
(c) Tailored
Each of these categories offers distinctive features. However, the choice of the accounting
software would depend upon the suitability to the organisation especially in terms of accounting
needs.
Ready-to-Use
Ready-to-Use accounting software is suited to organisations running small/ conventional
business where the frequency or volume of accounting transactions is very low. This is because the
cost of installation is generally low and number of users is limited. Ready-to-Use software is relatively
easier to learn and people (accountant) adaptability is very high. This also implies that level of
secrecy is relatively low and the software is prone to data frauds. The training needs are simple and
sometimes the vendor (supplier of software) offers the training on the software free. However,
these software offer little scope of linking to other information systems.
Customised
Accounting software may be customised to meet the special requirement of the user.
Standardised accounting software available in the market may not suit or fulfil the user requirements.
For example, standardised accounting software may contain the sales voucher and inventory status
as separate options. However, when the user requires that inventory status to be updated immediately
upon entry of sales voucher and report be printed, the software needs to be customised. Customised
software is suited large and medium businesses and can be linked to the other information systems.
260 Accountancy-II
The cost of installation and maintenance is relatively high because the high cost is to be paid to the
vendor for customisation. The customisation includes modification and addition to the software
contents, provision for the specified number of users and their authentication, etc. Secrecy of data
and software can be better maintained in customised software. Since the need to train the software
users is important, the training costs are therefore high.
Tailored
The accounting software is generally tailored in large business organisations with multi users
and geographically scattered locations. This software requires specialised training to the users. The
tailored software is designed to meet the specific requirements of the users and form an important
part of the organisational MIS. The secrecy and authenticity checks are robust in such softwares
and they offer high flexibility in terms of number of users.
To summarise, the following table represents the comparison between the various categories
of accounting software:
Summary
Computerised Accounting is accounting done with the aid of computer. It trends to involve
dedicated accounting software and digital spreadsheets to keep track of a business or client’s
financial transaction. computerised accounting is benificial use of current technological advances.
Not only has it revolutionised the traditional paper methods of accounting, but it has also created
new types of accounting applications for business. Computerised Accounting System have replaced
mannual based accounting in virtually all businesses and organisations, providing accountants,
managers, employees and stakeholders access to vital accounting information at the touch a button.
Computerised accounitn systems automate the accounting process, improving efficiency and cutting
down costs. Computerised accounting has many advantages like Speed, Accuracy, Reliability, Up-
to-Date Information, Real Time User Interface, Automated Document Production, Scalability,
Legibility, Efficiency, Quality Reports, MIS Reports, Storage and Retrieval.Limitations of
Computerised Accounting System:Cost of Training, Staff Opposition, Disruption, System Failure,
Breaches of Security, and Ill-effects on Health. The Accounting Packages are broadly classified
into three categories viz.,Ready-to-Use, Customized, and Tailored.
262 Accountancy-II
MODEL QUESTIONS
Very Short Questions

1. What is Computerised Accounting?
2. What is MIS?
3. Ready to Use accounting software.
4. Customised accounting software.
5. Tailored accounting software.
Long answer Questions

1. Define a computerised accounting system. Distinguish between a manual and
computerised accounting system.
2. Discuss the advantages of computerised accounting system over the manual accounting
system.
3. Explain the limitations of a Computerised accounting system
4. Explain the various categories of accounting package.
Accounts from Incomplete Records (Single Entry System) 263
Chapter
10
Accounts from Incomplete Records
(Single Entry System)
10.1 Meaning and definition of 10.1 Introduction

accounts from incomplete
We have so for studied accounting records of
records.
firms, which follow the double entry system of book
10.2 Features of Accounts from
keeping. This gives us an impression that all business
incomplete records.
units follow this system. However, in practice all firms
10.3 Uses of Accounts from
do not maintain accounting records strictly as per the
incomplete records
double entry system. Many small size enterprises keep
10.4 Limitations of Accounts from
incomplete records of their transactions. But, they also
incomplete records.
have to ascertain the profit or loss for the year and the
10.5 Differences between Single
financial position of the firm as at the end of the year.
Entry System and Double
This chapter deals with the ascertainment of profit or
Entry System
loss and financial position of the firm that have not
10.6 Preparation of statement of
been maintaining records as per double entry book
affairs
keeping or whose records are otherwise incomplete.
10.7 Differences between
statement of affairs and a
balance sheet
10.8 Ascertainment of profit or Accounting records, which are not strictly kept
loss of sole trading concerns according to double entry system are known as
10.9 Application of Single Entry Accounts from Incomplete Records. It simply means
System to partnership firm that principles of the double entry system are not being
followed for all transactions. Under this method, usually
the personal accounts of the debtors and creditors are kept and impersonal accounts (i.e. real and
nominal accounts) may not be maintained in the books. Usually only one aspect of every transaction
264 Accountancy-II
is recorded under this system. This system is named as Accounts from Incomplete records or single
entry system. It should be noted that the system which does not totally follow the principles of
double entry system, is called Accounts from Incomplete records or single entry system.
Definition : According to R.N. Carter, single entry cannot be termed as a system, as it is not
based on any scientific system like Double Entry System, for this purpose, single entry is now-a-
days known as preparation of accounts from incomplete records.
Generally, the Single Entry System can be classified into the following three categories.
1. Pure Single Entry system: Under this type of single entry system, the dual aspect of
each transaction is ignored. Only personal accounts of debtors and creditors are kept.
No records are kept for real and nominal accounts. This type of single entry is not
popular because even cash book which is a very important book is not maintained.
2. Simple single entry system: Under this system, personal accounts and cashbook
are maintained.
3. Quasi Single Entry System: Under this system personal accounts, cash book and
some subsidiary books are also maintained.
10.2 Features of Accounts from Incomplete Records

a) It is unsystematic method of recording transactions.
b) It is very common to keep only personal accounts.
c) It avoids real and nominal accounts.
d) It is very common to keep a cash book to record all cash receipts and cash payments
e) This system lacks uniformity as it differ from firm to firm.
f) It is mostly suitable and used by sole traders and partnership concerns.
10.3 Uses of Accounts from Incomplete Records

a) Single entry is a simple method of recording transaction.
b) It is less expensive when compared to double entry system of book keeping.
c) It is mainly suitable to small business concerns with limited number of transactions.
d) It is very easy to follow, a person without any adequate knowledge of principles of
accounting can also understand it.
e) Ascertainment of profit or loss is very easy.
10.4 Limitations of Accounts from Incomplete records

1. It is not scientific method of accounting because it does not record the two-fold aspect
of each transaction.
2. No trail balance can be prepared as it does not record the dual aspect of each transaction,
so the arithmetical accuracy of the books cannot be checked.
3. In the absence of nominal accounts, trading and profit and loss account cannot be
prepared.
4. In the absence of real accounts, it is not possible to know the exact financial position of
the business on any particular day by preparing a balance sheet.
5. Internal check is not possible, so the possibility of fraud or misappropriation is greater
in case of single entry than in the case of double entry system.
6. Accounts prepared on the basis of the single entry do not inspire confidence in the
outsiders owing to the lack of any test for their arithmetical accuracy.
7. It is to difficult to ascertain the value of the business, specially of good will if the proprietor
wishes to sell his business.
Differences Between Single Entry System and

10.5
Double Entry System
266 Accountancy-II
10.6 Preparing Statement of Affairs

Under this method, statements of assets and liabilities as at the beginning and at the end of
the relevant accounting period are prepared to ascertain the amount of change in the capital during
the period. Such a statement is known as statement of affairs, shows assets on one side and the
liabilities on the other just as in case of a balance sheet. The difference between the totals of the two
sides (balancing figure) is the capital. Though statement of affairs resembles balance sheet , it is not
called a balance sheet because the data is not wholly based on ledger balances. The amount of
items like fixed assets, outstanding expenses, bank balances, etc., are ascertained from the relevant
documents and physical count.
Proforma statement of affairs as at ……………
(Rs.) (Rs.)
Creditors *** Land and Building ***
Bills Payable *** Plant and Machinery ***
Bank overdraft *** Furniture ***
Outstanding expenses *** Stock ***
Capital (Balancing Figure) *** Debtors ***
Bills receivables ***
Cash at Bank ***
Prepaid Expenses ***
*** ***
Illustration 1 : From the following information prepare statement of affairs and find out the capital
at the beginning.
Cash in Hand 10,000 Building 40,000
Cash at Bank 40,000 Plant 60,000
Debtors 60,000 Creditors 30,000
Stock 30,000 Bills payable 10,000
Solution :
Statement of affairs at the beginning
(Rs.) (Rs.)
Creditors 30,000 Cash in Hand 10,000
Bills payable 10,000 Cash at Bank 40,000
Debtors 60,000
Stock 30,000
Capital (Balancing figure) 2,00,000 Building 40,000
Plant 60,000
2,40,000 2,40,000
Illustration 2 : Prepare statement of affairs from the following information and find out the capital
at the end of the year
Stock 95,000 Bank over draft 6,000
Debtors 1,30,000 Creditors 37,000
Cash 8,000 Machinery 15,000
Bills receivables 1,000 Furniture 1,000
Solution :
Statement of affairs at the end of the year
(Rs.) (Rs.)
Bank over draft 6,000 Stock 95,000
Creditors 37,000 Bills receivables 1,000
Debtors 1,30,000
Cash 8,000
Capital (Balancing figure) 2,07,000 Machinery 15,000
Furniture 1,000
2,50,000 2,50,000
268 Accountancy-II
Difference between Statement of Affairs and
10.7
Balance Sheet
Both statement of affairs and balance sheet show the assets and liabilities of a business
entity on a particular date. However, there are some fundamental differences between the two.
10.8 Ascertainment of Profit or Loss of Business

Under Accounts from incomplete records of book keeping, it is not possible to prepare a
trading and profit and loss account as no record is kept of the nominal accounts and the exact profit
or loss for the period cannot be ascertained. However, the net profit can be calculated by any two
of the following methods:
i) Statement of Affairs method and ii) Conversion Method)
i) statement of Affairs Method (capital comparison method)
Under this Method, the net profit for a particular period can be calculated by comparing
the opening capital with the closing capital.
Opening and closing capitals can be the ascertained by preparing two statements of
affairs, one at the beginning and the other at the end of the period and comparison of
the capitals at the two dates will reveal either profit or loss.
Then adjustments are to be made in respect of drawings and additions to capital during
the period under consideration. If there are withdrawals during the period, these must
be added to the capital at the end for the reason that the closing capital would have
been more if these drawings have not been made.
Similarly the additional capital should be deducted from the capital at the end for the
reason that the closing capital would have been less if the additions to capital have not
been made.
Proforma statement of profit or loss for the period……
Particulars Amount
(Rs.)
Capital as at the end of year(computed from statement of affairs at the ****
end of the year)
Add Drawings during the year ****
****
Less Additional capital introduced during the year ****
Adjusted capital at the end of year ****
Less Capital as at the beginning of year (computed from statement of affairs ****
as at the beginning of the year)
Profit or loss made during the year ****

270 Accountancy-II
The above statement can also be shown as under:
Net profit or net loss = Capital at the end + Drawings – additional capital = Adjusted Capital –
capital at the beginning
Note: When adjusted capital is less than the capital at the beginning, it indicates net
loss. If the closing capital is more than the opening capital, it shows a profit, if the closing
capital is less than the opening capital it indicates a loss.
Illustration:3
From the following information compute the net profit of a trader under single entry
Capital at the beginning of the year 100000

Capital at the end of the year 150000
Solution :
Particulars Amount
(Rs.)
Capital at the end of the year 1,50,000
Less Capital at the beginning of the year 1,00,000
Net profit for the year
50,000
Illustration4:
Compute the net profit for the year ending 31-03-2014 from the information given below.
Capital as on 1-4-2013 Rs 80000
Capital as on 31-3-2014 Rs 75000
Statement of profits or loss
Particulars Amount
(Rs.)
Capital at the end of the year(31-3-2014) 75,000
Less Capital at the beginning of the year 80,000
Net loss for the year 2013-2014
(-) 5,000
Note: The above calculation indicates only the initial figures of income. Any fresh amount is
introduced as capital during the period by the trader or any drawings made by him will affect the
amount of the profit. Therefore, if any amounts are given for additional capital or for drawings, than
the profit can be calculated as follows.
Illustration5:
The following information is given below prepare the statement of profit or loss
Capital at the beginning of year, i.e. April 01,2013 Rs 7,50,000
Capital at the end of year, i.e. on March 31,2014 Rs 5,00,000
Capital brought in by the proprietor during the year Rs 50,000
Withdrawals by the proprietor during the year Rs 3,75,000
Solution :
Statement of profit or loss for the year ended on march 31, 2014
Particulars Amount
(Rs.)
Capital as on March 31, 2014 5,00,000
Add Drawings during the year 3,75,000
8,75,000
Less Additional capital introduced during the year 50,000
Adjusted capital at the end i.e. March 31,2014 8,25,000
Less Capital in the beginning i.e. April 01, 2013 7,50,000
Profit made during the year 75,000
Illustration6:
Find out the missing value?
Capital at the beginning of the year 30,000
Capital at the end of the year 45,000
Drawings 5,000
Profit 4,000
Additional capital brought in ?
Particulars Amount
(Rs.)
Capital at the end of the year 45,000
Add Drawings 5,000
Adjusted capital 50,000
Less Capital at the beginning 30,000
20,000
Less Net profit 4000
Additional capital brought in 16,000
272 Accountancy-II
Illustration7:
Gopal started his business on January 01, 2014 with a capital of Rs 4,50,000 on December
31, 2014 his position was as under
Rs.
Cash 99,000
Bills Receivables 75,000
Plant 48,000
Land and building 1,80,000
Furniture 50,000
Creditors 30,000
He owned Rs 45000 from his friend Sukumar on that date. He withdrew Rs.8000 per month
for his household purposes. Ascertain his profit or loss for this year ended December 31, 2014.
Solution :
Books of Mr. Gopal statement of affairs as on December 31, 2014.
(Rs.) (Rs.)
Capital (Balancing figure) 4,22,000 Bills Receivables 75,000
Plant 48,000
Land and Building 1,80,000
Furniture 50,000
4,52,000 4,52,000
Statement of profit or loss for the year ended December 31, 2014
Particulars Amount
(Rs.)
Capital as on December 31, 2014 4,22,000
Add Drawings Rs 8,000 ×12 months 96,000
5,18,000
Less Additional Capital introduced 45,000
Adjusted capital at the end of the year i.e. December 31, 2014. 4,73,000
Less Capital as on January 01, 2014 4,50,000
Note: drawings per month Rs. 8000x12 months = 96000 per year
Illustration 8:
Mr. Ashok keeps his books on incomplete records following information is given below.
April 01 2013 March 31 2014
Rs Rs
Cash in hand 1,000 1,500
Cash at bank 15,000 10,000
Stock 1,00,000 95,000
Debtors 42,500 70,000
Business premises 75,000 1,35,000
Furniture 9,000 7,500
Creditors 66,000 87,000
Bills payable 44,000 58,000
During the year he withdrew Rs. 45,000 and introduced Rs. 25000 as further capital in the
business compute the profit or loss of the business.
Solution :
Books of Mr. Ashok statement of affairs as on
April 01, 2013 and as on March 31, 2014
Liabilities April 01, March 31, Assets Amount Amount
2013 2014 (Rs.) (Rs.)
Rs. Rs.
Creditors 66,000 87,000 Cash in hand 1,000 1,500
Bills Payable 44,000 58,000 Cash at Bank 15,000 10,000
Capital (Balancing 1,32,500 1,74,000 Stock 1,00,000 95,000
figure) Debtors 42,500 70,000
Business premises 75,000 1,35,000
2,42,500 3,19,000 2,42,500 3,19,000
274 Accountancy-II
Statement of profit or loss for the year ended on March 31, 2014.
Particulars Amount
(Rs.)
Capital as on March 31, 2014 1,74,000
Add Drawings during the year 45,000
2,19,000
Less Additional Capital introduced during the year 25,000
Adjusted capital at the end of the year(31.03.14) 1,94,000
Less Capital as on April 01, 2013 1,32,500
Illustration 9:
Mr. Shankar keeps his books under single entry system and the following information is
available from his records.
31-3-2014
Rs.
Plant 1,35,000
Furniture 37,500
Stock 60,000
Outstanding expenses 7,500
Creditors 1,05,000
Bank balance 82,500
st
Sankar commenced business 1 April 2013 with a capital of Rs 1,27,500. During the year
he withdrew Rs 750 per month for his personal use. Charge depreciation on plant at 10% and on
furniture at 5% you are required to prepare a statement showing profit or loss for the year ended
31.3.2014
Solution :
Statement of affairs as on 31-03-2014 (Before adjustments)
(Rs.) (Rs.)
Sundry creditors 1,05,000 Plant 1,35,000
Outstanding expenses 7,500 Furniture 37,500
Capital(balancing figure) 2,02,500 Stock 60,000
Bank balance 82,500
3,15,000 3,15,000
Statement of profit or loss for the year ended 31-03-2014.
Particulars Amount
(Rs.)
Capital at the end of the year (31.03,2014) 2,02,500
Add Drawings (Rs. 750x12 months) 9,000
Less Capital at the beginning of the year (01.4.2013) 2,11,500
Net profit for the year i.e. 31.03.2014 (before adjustments) 1,27,500
Less Depreciation on plant Rs. 13,500 84,000
Depreciation on furniture Rs. 1,875 15,375
Net profit for the year after adjustments 68,625
Application of Single Entry System to

10.9
Partnership Firms
When the accounts of a partnership firm are maintained under single entry system, the
calculation of profit or loss is made along the lines indicated earlier. The statement of affairs of
partnership firms are prepared to ascertain the amount of combined capitals of the partners at the
beginning and at the end of the period. A statement of profit and loss is prepared to show the profit
made during the period, which should be divided among the partners in agreed proportions. The
profit is ascertained by comparing the combined capitals of the partners at the beginning and at the
end of the period, after taking into account drawings made by the partners during the year and the
additional capitals introduced.
Therefore, a statement of profit or loss in a partnership firm will be prepared as follows.

276 Accountancy-II
Statement of profit and loss for the period ended…………

(Rs.) (Rs.)
Combined capital at the end of the period ****
Add Combined drawings for the period ****
*****
Less Combined additional capital ****
Less Combined capital at the beginning of the period **** ****
Profit before adjustments ****
Less Adjustments:
Depreciation ****
Provision for Bad debts **** ****
Net profit for the period ****
Less Appropriations: Interest on capital salary of the partners ****
Add Interest on drawings **** ****
Divisible profit ****
Illustration 10:
Suresh and Ramesh are equal partners in a business in which the books of accounts are kept
by single entry system. Their combined capitals stood at the beginning of the year at Rs 1,25,000
and the combined capital at the end of the year stood at Rs 1,75,000. During the year they have
withdrawn Rs 50000 equally for their personal use and introduced Rs 37,500 as fresh capital.
Compute the profit for the year by preparing a statement of profit.
Solution :
Statement showing profit or loss
Particulars Amount
(Rs.)
Combined Capital at the end of the year 1,75,000
Add Drawings (combined) 50,000
2,25,000
Less Additional Capital 37,500
Adjusted combined closing capital 1,87,500
Less Combined capital at the beginning of the year 1,25,000
Divisible profit for the year of the partners 62,500
Suresh share of profit 62500 x 1 / 2 = 31250
Ramesh share of profit 62500 x 1 / 2 = 31250
Illustration 11:
X and Y are partners sharing profits and losses in the ratio of 3:2 who keep their books on
single entry system on 1st April 2013. Their capital accounts show a balance of Rs 60,000 and
70,000 respectively. During the year they have withdrew Rs 2000 and 3000 for their personal use.
Find out the capitals at the end of the year. Also calculate the divisible profit for the year ending 31-
03-2014.
31-3-2014
Rs.
Stock in trade 50,000
Debtors 1,30,000
Furniture 40,000
Cash 80,000
Sundry creditors 1,10,000
Solution:
Statement of affaires as on 31-3-2014
(Rs.) (Rs.)
Sundry creditors 1,10,000 Sundry Debtors 1,30,000
Combined Capital 1,90,000 Closing stock 50,000
(balancing figure) Cash 80,000
Furniture 40,000
3,00,000 3,00,000
Statement of profit or loss as on 31-03-2014
Particulars Amount
(Rs.)
Combined capital at the end of the year 31-03-2014 1,90,000
Add Drawings (2000+3000) 5,000
Adjusted capital at the end 1,95,000
Less Capital at the beginning of the year 01-04-2013 (60,000+70,000) 1,30,000
Net profit for the year 2013-2014 65,000
X’s Share of profit (65,000 x 3 / 5) 39,000
Y’s share of profit (65,000 x 2 / 5) 26,000
278 Accountancy-II
Summary
Single entry system is an incomplete system and crude form of book keeping under this
accounting, only one aspect of every business transaction is recorded. In this system scientific
principles of double entry are not followed. Single entry system may be implemented by the traders
who are not well-versed with accounting principles.
MODEL QUESTIONS
Short Answer questions.

1) What is meant by accounts from Incomplete records ?
2) Define accounts from Incomplete records
3) What are the uses of Incomplete records?
4) Write briefly the salient features of Incomplete records.
5) Give two main differences between a statement of affairs and a balance sheet.
6) How to ascertain profit under Incomplete records?
7) Write in brief the limitations of Incomplete records of book keeping.
8) Write any differences between double entry system and single entry system.
Excercises
1. From the following find the profit earned by a trader.
Capital at the beginning of the year Rs 7,500
Capital at the end of the year Rs 10,000
[Ans: Profit Rs 2,500]
2. Calculate the profit or loss of a concern
Capital at the beginning of the year Rs 15,000
Capital at the end of the year Rs 14,000
[Ans: Net Loss Rs 1,000]
3. Calculate the missing figure
Capital at the beginning ?
Capital at the end Rs 36,000
Capital introduced Rs 9,400
Drawings Rs. 5,600
Loss Rs. 2,800
[Ans: 35,000]
4. Find out the profit from the following data:
Capital at the beginning for the year Rs. 40,000
Capital at the end of the year Rs. 45,000
Drawings during the year Rs. 5,000
Capital introduced during the year Rs. 2,500
5. Find out the profit from the following data:
Capital at the beginning for the year Rs. 60,000
Capital at the end of the year Rs. 67,500
Additional capital introduced during the year Rs. 3,750
6. Ascertain profit earned by a trader who keeps this books under single entry system.
(i) Excess of assets over liabilities as on 31-12-2014 Rs. 26,150
(ii) Additional capital introduced during the year Rs. 7,500
(iii) Drawings during the year Rs. 4,800
(iv) capital as on 01-01-2014 Rs. 15,000
7. Following information given below prepare this statement of profit or loss
(i) Capital at the end of the year Rs.2,00,000
(ii) Capital in the beginning of the year Rs.1,20,000
(iii) Drawings made during the period Rs. 30,000
(iv) Additional capital introduced Rs. 50,000
8. Mr. Gopal maintains his books on single entry method he gives the following
information :
Capital on 01-04-2013 Rs. 38,000
Capital on 31-3-2014 Rs. 44,000
You are required to calculate profit or loss
280 Accountancy-II
9. Mr Jeevan maintains his books in the single entry system he gives the following
information:
Capital on 01-04-2013 Rs. 48,000
Capital as on 31-03-2014 Rs. 54,000
You are requested to prepare a statement of profit or loss for the 31-03- 2014
10. Mr. Ramesh commenced business on 1st April 2013 with a capital of Rs 35000. On
31st March 2014 his position was as follows.
Furniture Rs. 2,000
Cash in hand Rs. 10,000
Machinery Rs. 18,000
Creditors Rs. 5,000
Debtors Rs. 20,000
Bills payable Rs. 3,000
During the year he withdrew Rs. 12,000 for his personal use and introduced additional
capital Rs 6,000 find out profit or loss made by Mr. Ramesh during the year.
[Ans: Capital on 31-3-2014 Rs 42,000
Profit Rs 13,000]
11. Mr Harsha maintains his books on single entry system he gives you the following
informations.
Capital on 01-04-2013 Rs. 8,000
Capital on 31-03-2014 Rs. 9,500
Drawings for the year Rs. 2,000
Capital introduced during the year Rs. 1,500
You are required to calculate the profit that Harsha earned.
[Ans: Net profit Rs 2,000]
12. Mr Ganesh maintain his books on single entry method. He gives you the following
information.
Capital on 01-01-2013 Rs. 40,000
Capital on 31-12-2014 Rs. 45,000
Fresh capital during the year Rs. 6,000
Prepare the statement of profit or loss.
[Ans: Net profit Rs 14,000]
13. Mr. X keeps books in the single entry system. Find the profit from the following
particulars.
Capital on 31-03-2014 Rs. 80,000
Capital on 1-04-2013 Rs. 70,000
Additional capital as on 2013 -2014 Rs. 4,000
Drawings made during the year Rs. 3,000
[Ans: profit Rs 9,000]
14. From the following details, ascertain Raju's capital as on 01-01-2014.
Cash in hand Rs. 20,000
Building Rs. 80,000
Cash at Bank Rs. 80,000
Plant Rs. 1,20,000
Debtors Rs. 1,20,000
Creditors Rs. 60,000
Stock Rs. 60,000
Bills payable Rs. 20,000
[Ans: Capital as on 1-1-14 RS 4,00,000]

15. Mr. Mehta started his readymade garments business on April 1, 2013 with a capital of
Rs 50,000. He did not maintain his books according to double entry system. During
the year he introduced fresh capital of 15,000. He withdrew Rs 10,000 for personal
use. On March 31, 2014, his assets and liabilities were as follows:
282 Accountancy-II
Total creditors Rs 90,000; Total Debtors Rs 1,25,600;Stock Rs 24,750; cash at bank
Rs 24,980
Calculate profit or loss made by Mr. Mehta during the first year of his business using
the statement of affairs method.
[Ans: Capital as on March 31, 2014 Rs 85,330, Profit Rs 30,330]
16. Mr. J.Keeps his books by single entry. He started business on 1st January 2014 with
Rs. 20,000 on 31st December, 2014 his position was as under:
Assets: cash in hand Rs. 500; cash at bank Rs 1,000; Furniture Rs 2,500; plant Rs
10000; sundry debtors Rs. 5,000; stock Rs 9,000 and bills receivables Rs 1,000.
Liabilities: sundry creditors Rs 4,000; bills payable Rs 500 and outstanding expenses
Rs. 500 Ascertain the profit or loss made by J.
[Ans: Profit Rs 4,000; capital on 31-12-2014 Rs 24,000]
17. Mr. Ravikumar keeps his books on single entry his position on 31st December, 2013
was as follows cash at bank Rs. 3,000, stock Rs. 20,000; Debtors Rs 30,000
Machinery Rs 50,000 and creditors Rs 25,000, His position on 31st December, 2014
was as follows. Cash at bank Rs.4,000; stock Rs.25,000 ; (over draft)
debtors Rs.45,000;
Machinery Rs.50,000 and creditors Rs 25,000. During the year he introduced Rs
10,000 as further capital and withdrew from business Rs. 3,000 per month.
From the above information ascertain the profit or loss made by Mr. Ravikumar for the
year ended 31st December 2014.
[Ans: profit Rs.47,000;capital on 31-12-2013 Rs.78,000, 31-12-2014 -99,000]
Note: Drawings 3,000 per month, per year 36,000 (3,000x12 months)
18. From the following particulars prepare a statement of profit and loss for the year ended
31st December 2014.
Opening Closing
1-1-2014 31-12-2014
Rs Rs
Cash 4,000 3,000
Bank 10,000 5,000
Debtors 80,000 75,000
Stock 30,000 28,000
Creditors 42,000 37,000
Machinery 10,000 15,000
The proprietor drew at the rate of Rs 750 per month he introduced Rs. 3,000 as fresh
capital.
[Ans: Loss Rs 7,000; Capital on 1-1-2014 Rs 93,000 on 31-12-2014,
Rs. 80,000, Drawings 750x12=9,000]
19. A Trader keeps his books by the single entry method. His position on 31st December,
2013 was follows. Cash at bank Rs 9,000, stock Rs. 60,000 Debtors Rs 90,000,
Machinery Rs 1,50,000 and creditors Rs 69,000. His position on 31st December
2014 was as follows. Cash at bank Rs 12,000 stock Rs. 75,000, Debtors Rs 1,35,000,
Machinery Rs 1,35,000 and creditors Rs. 75,000
During the year the trader introduced Rs 30,000 as further capital in business and
withdrew Rs 900 per month. From the above you are required to ascertain the profit
or loss made by the trader for the year ended 31-12-2014.
[Ans: Capital as on 31-12-2013 Rs 2,40,000;Capital as on 31- 12 – 2014
Rs 2,82,000;Net profit Rs. 22,800]
20. The assets and liabilities of Mr. well on 01-01-14 and on 31-12-2014 were as follows
01-01-2014 31-12-2014
Rs. Rs.
Cash in hand and at bank 4,005 3,000
Bills receivable 2,000 3,500
Sundry debtors 15,000 25,000
Stock in trade 3,700 3,800
Fixed assets 60,000 65,400
Creditors 5,705 6,700
Calculate the profit after charging interest on capital in the beginning at 5 percent per
annum after providing interest on drawings 6 percent. Drawings were Rs 14.000
[Ans: Profit Rs 25,890; capital on 1-1-2014 Rs 79,000;
Capital on 31-12-2014 Rs 94,000]
21. Mr Vijay starts his business with Rs 30,000 in cash as his capital on 1st April 2013. At
the end of the year his position was as follows. Creditors Rs 7,500; Debtors Rs
6,000; Cash at Bank Rs 12,750; Stock Rs 7,500; and Machinery Rs 15,000. During
284 Accountancy-II
the year he withdrew Rs 1,125 every month. on 1st October 2013 he introduced a
further capital of Rs 7,500. You are required to ascertain profit or loss made by him
during the year after considering the following adjustments. Machinery was to
depreciated at 12% and a reserve of 2% was to be raised against Debtors. Also
prepare a statement of affairs as at 31 March 2014.
[Ans: Capital at the end Rs 31,830 Net profit Rs 7,830]
22. Gopal and Krishna kept their books of accounts under single entry system. Their
capital accounts on 1st April 2013 show a balance of Rs 2,00,000 and 1,00,000
respectively. The net profits are to be shared as Gopal 2/3 and Krishna 1/3. During
the year they have withdrawn Rs 10,000 and Rs 7,500. On March 2014 their assets
and liabilities were as follows.
Assets: Furniture Rs 75,000; stock Rs 1,75,000; Debtors Rs 1,25,000; Bills
Receivable Rs 25,000; cash at bank Rs 10,000.
Liabilities: Sundry creditors Rs 25,000; Bills payable Rs 12,500
Prepare a statement of affairs on 31st March 2014 and calculate the divisible profits of
the partners.
[Ans: Combined capital of the partner at the end of the year Rs 3,72,500.
Net profit Rs 90,000; Gopal’s share of profit Rs 60,000 and
Krishna‘s share of the profit Rs 30,000]
23. Ramesh and Rajesh are partners sharing the profit and losses in the ratio of 4:1 on 31st
March 2013, their capital accounts show a credit balance of Rs 1,00,000 and Rs
25,000 respectively. During the year they have introduced a fresh capital of Rs. 25,000
and 6,250 respectively. Also they have withdrawn Rs 1,875 and Rs 625 each month
respectively for their personal use. On 31st March 2014. Their business position was
as follows:
Assets: Machinery Rs 58,750; stock Rs 61,500; sundry debtors Rs 33,125; Bills
Receivable Rs 5,375; cash in hand Rs 3,750
Liabilities: sundry creditors Rs 25,000. You are asked to prepare a statement of
affairs and statement of profit on 31st March 2014 and calculate the divisible profits or
losses of the partners.
[Ans: Combined capital of the partners at the end of the year Rs 1,37,500; Net profit
for the year Rs 11,250; Ramesh share Rs 9,000; Rajesh share Rs 2,250]
24. Anil and Sunil are partners sharing the profit and losses in the ratio of 3:2 on 31 March
2013, their capital accounts show a credit balance of Rs 12,000 and Rs 8,000
respectively. On 31st March 2014 their business position was as follows.
Assets: Machinery Rs 15,000; stock Rs 4,000; Bills Receivables Rs. 5,000; sundry
debtors Rs 7,000;
Liabilities: sundry creditors Rs 8,000; Bills payable Rs 3,000
You are required to prepare a profit and loss statement of affairs as at the date after
taking into the following.
a) Drawings made during the year by Anil Rs 3,000 sunil Rs 2,000
b) Interest on capital is to be allowed at 6%.
[Ans: combined capital at the end of the year Rs 20,000; Divisible profit Rs 3,800;
Anil’s share of profit 2,280; Sunil share of profit 1,520]

Accountancy II

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Text Book for

Telugu and Sanskrit Akademi

I congratulate Akademi for starting its activities with printing of

Y.S. Jagan Mohan Reddy

Message of Chairperson, Telugu and Sanskrit Akademi, A.P.

In accordance with the syllabus developed by the Board of Intermediate,

Congratulations and best wishes to all of you.

Number of students of Andhra Pradesh are competing of National

As the content in Telugu and Sanskrit Akademi books is highly

(J. SYAMALA RAO)

WE, THE PEOPLE OF INDIA, having

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith

EQUALITY of status and of opportunity;

FRATERNITY assuring the dignity of the

Sri M.V. Seshagiri Babu, I.A.S.

Educational Research & Training Wing (Text Books)

Sri. M. Ravi Sankar Naik

Dr. M. Ramana Reddy

Sri J.V. Ramana Gupta

Sri V. Ramakrishna, I.R.S.

Dr. M. Koteswaramma, M.Com., Ph.D.

Dr. S.A.T. Rajyalakshmi M.Sc., B.Ed., M.A., Ph.D.

Dr. K. Glory Sathyavani, M.Sc., Ph.D., M.Ed.

Sri. V. Ramakrishna I.R.S.

Chapter - 1: Bills of Exchange 1 - 46

Chapter - 3: Consignment 81 - 110

Chapter - 4: Not-For-Profit Organization 111 - 134

Chapter - 6: Admission of a Partner 159 - 202

Chapter - 8: Company Accounts 233 - 250

Chapter - 10: Accounts from Incomplete Records 263 - 285

1.2 Features of a Bill of Exchange

1.3 Parties to a Bill of Exchange

Specimen of a bill of exchange

1.4 Advantages of a Bill of Exchange

1.5.3 Inland and Foreign Bills

1.6 Difference between a Bill and a Promissory note

1.7 Difference between a Bill and a Cheque

Basis of Differene Bill of Exchange Cheque

1.8 Important Terminology

IV) When Bill is Endorsed Endorsee A/c Dr

Transaction In the books of Drawer In the books of Drawee (Acceptor)

1.10 Honour of Bills of Exchange

2014 Vikas Account Dr 10,000

Journal Entries in the Books of Vikas (Drawee)

2014 Purchases Account Dr 10,000

Discount = Amount of bill discounted × × unexpired period

Discount = Rs. 150

Discount = Rs. 100

2013 Bhaskar Account Dr 20,000

2013 Purchases Account Dr 20,000

2014 Sumathi Account Dr 8,000

Journal Entries in the Books of Sumathi (Drawee)

2014 Purchases Account Dr 8,000

III. When the Bill is endorsed in favour of a creditor

The following Journal Entries are to be passed in the Books of Endorsee

2014 Nagarjuna Account Dr 5,000

Journal Entries in the Books of Nagarjuna (Drawee)

2014 Purchases Account Dr 5,000

Journal Entries in the Books of Prabhakar (Endorsee)