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SEMESTER-V

ADVANCED ACCOUNTING

Unit -I: Self Balancing System:

Meaning, Advantages of Self Balancing System - Preparation of Sales Ledger

adjustment account, Purchase Ledger adjustment account and General Ledger
adjustment account (including problems).

Unit- II: Single Entry System:

Meaning and features of Single Entry System - Ascertainment of Profit or Loss

under single entry system - Statement of Affairs method only

Unit -III: Royalty Accounts :

Royalties - preparation of minimum Rent Account Royalties Account, short

working Account and land lord Accounts (Including Problems) Excluding Sub-
lease.

Unit -IV: Partnership Accounts :

Legal Provisions in the absence of partnership deed-fixed and fluctuating capitals

– Accounting treatment of goodwill – admission and retirement of a Partner
(including problems)

Unit -V: Liquidation :

Meaning - Liquidation Expenses - Liquidator's remuneration - preparation of

Liquidator's final Statement of Account. (including problems)

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Unit I
Self Balancing System
Self-balancing system is a system whereby separate Trial Balance can be taken out from each
ledger. It is a ledger prepared according to the principles of double entry system. A complete
trial balance can be prepared by taking the balances of ledger accounts. Under this system
ledgers are made self-balancing by opening adjustment accounts

Types of ledgers maintained: Three types of ledgers are maintained under this system. They
are:

1. General Ledger: “General Ledger Adjustment Account” will be maintained in each of the
sales and bought ledger. It is the reverse of the Total Debtors Account in Sales Ledger and Total
Creditors Account in Bought Ledger. In this

(a) Sales Ledger Adjustment Account (same as Total Debtors A/c)

(b) Purchase Ledger Adjustment Account (same as Total Creditors A/c) are prepared.

2. The Sales Ledger: Debtors Sold Ledger deals with (i) Accounts relating to trade debtors; and

(ii) General Ledger Adjustment Account. (Shadow of sales ledger adjustment account with the
sides transposed)

3. The Purchase Ledger: Creditors Bought Ledger deals with (i) Accounts relating to trade
creditors; and (ii) General Ledger Adjustment Account (shadow of purchases ledger adjustment
account with the sides transposed)

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1. At the end of Bought Ledger, a General Ledger Adjustment Account is opened, and whatever
has been debited in Bought Ledger in various accounts, is credited in General Ledger
Adjustment Account and whatever has been credited in Bought Ledger, is debited in General
Ledger Adjustment Account.

2. At the end of Sales Ledger, General Adjustment Account is opened and all debits of Sales
Ledger are recorded in the credit of General Ledger Adjustment Account.

3. At the end of General Ledger, two Adjustment accounts are opened i.e. Debtors’ Ledger Ad-
justment Account and Creditors’ Ledger Adjustment Account.

Advantages:

1. Speedy detection of errors is possible.

2. Balancing is done quickly and thus saves time, labour and money.

3. The system helps reducing fraud.

4. Final Accounts can be prepared easily and quickly.

5. It acts as an effective internal check.

6. It is very useful when there is a large number of debtors and creditors.

7. It is easy to prepare periodical final accounts.

8. Efficient office control is possible.

9. It promotes specialisation and increases efficiency.

10. It facilitates division of work among different employees.

11. Arithmetical accuracy can be proved by drawing a Trial Balance.

12. Ledger keeping can be decentralised.

Entries for Sales/Debtors Ledger:

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In Debtors Ledger
General Ledger Adjustment Account

Dr. Cr.

Date Particulars Amount Date Particulars Amount

2010 To Balance b/d (if any) **** 2012 By Balance b/d ****
Jan 1 To General ledger Jan 1 By General Ledger Adjustment
Dec 31 Adjustment A/C : Dec A/C :
Cash / Cheques received **** 31 Credit Sales ****
Bad Debts **** Carriage and Sundry
Returns inward **** Charges Debited to
Discount Allowed **** Customer ****
Other Allowances **** Bills Receivable
Bills Receivable **** Dishonoured ****
Transfer to or from other cheque Received and
ledgers **** Dishonoured ****
To balance c / d **** Interest and Charges etc. ****
Refund-cash paid to
customers ****
Refund-Cash paid to
customers ****
B/R discounted and
dishonoured ****
B/R endorsed and
dishonoured ****
Interest charged to overdue
account ****
By Balance c / d (if any) ****

***** *****

Entries for Purchases/Creditors Ledger:

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Problems
1. Prepare debtors account from the following information during the year 2017.
Debtors on 1.1.2017 Rs.10000
Credit sales Rs.35000
Credit purchases Rs.22000
Cash sales Rs.15000
Cash purchases Rs.9500
Cash received from debtors Rs.8500
Cash paid to creditors Rs.3000
Bills received Rs.4350.

2. Prepare debtors account from the following data:

Credit sales Rs. 35000; Debtors at beginning Rs.8000; Bad debts Rs.500;
Returns by customers Rs.5000; Cash received from customers Rs.30000.

3. Prepare debtors account from the following data:

Credit sales Rs. 70000; Debtors at beginning Rs.10000; Bad debts Rs.1500;
Returns by customers Rs.6000; Cash received from customers Rs.40000;
Bills received from customers Rs.12000.

4. Prepare debtors account from the following data:

Credit sales Rs. 60000; Debtors at beginning Rs.20000; Bad debts Rs.2500;
Returns by customers Rs.4000; Debtors at end Rs.5000;
Bills received from customers Rs.7000; discount allowed to customers Rs.1500.

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5. Prepare debtors account:

Credit sales Rs.35000; Credit purchases Rs.22000
Returns inwards Rs.400; Bad debts Rs.2500
Acceptance received from debtors Rs.8500

6. Mr.P has three ledgers in use like debtors ledger, creditors ledger & General ledger
which all kept on self balancing system. From the following particulars pass the
adjusting journal entries and write up the adjustment A/C as there will appear in each of
three ledgers.

1993 Date Particulars Rs.

Jan 1st Balance of sundry debtors 20,350
1st Balance of sundry creditors 15,600
31st Credits sales 10,400
31st Credit purchases 6,900
Cash received from debtors 8300
Discount allowed to them 350
Cash paid to Creditors 7375
Discount allowed by them 270
Bill Receivable received 3400
Bills payable accepted 2600
Returns outward purchase 800
Return inward (sales) 900
Bills receivable dishonored 430
Bad debts return off 600

7. From the following information & particulars prepare a sales ledger control A/C to be
maintained in the General ledger of a concern base self balancing ledger or kept.

Date Particulars Rs.

Opening balance (debit) 25,000

Opening balance (credit) 600

Sales during years 62,400

Returns by customers 6,340

Cash received from customers 40,100

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Discount allowed 2,600

Bad debts return off 7,420

Reserve for bad debts 10,000

Bad debts previously return off 600

Recovered in cash this year 600

Allowances to customers 840

Bill receivable from customers 2,600

Bills dishourned 500

Closing credits balance 1440

8. From the following particulars prepare purchase and sales ledger adjustment A/C as
would appear in the general ledger A/C?

Date Particulars Rs.

Jan1st 1990 Balances of purchase ledger (Debit) 174
“ Balances of purchase ledger (Credit) 2388
“ Balances of Sales ledger (Debit) 2924
“ Balances of Sales ledger (Credit) 48
Dec 31st Purchases 13036
“ Purchases returns 512
“ Cash paid to creditors 11686
“ Discount received from creditors 336
“ Sales 17442
“ Sales returns 234
“ Cash received from Debtors 15248
“ Discount allowed to Debtors 564
“ Discount allowed to debtors but later on discount allowed 36
“ Bills payable 450
“ Bills receivable 824
“ Payment to clear credit balance on sales ledger A/C 20
“ Transfer from purchase ledger to sales ledger 152
“ Purchase ledger balance (debit) 154
“ Sales ledger balance (Credit) 84

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9. From the following details prepare sales ledger adjustment and purchase ledger
Adjustment A/C to be maintained of a normal ledger of a concern where self balancing
ledger or kept.

Particulars Rs.
Total amount due to creditors suppliers on 31-3-1991 3250
Total amount due from debtors 31-3-1991 5284
Goods sold 36052
Cash paid to suppliers 21462
Goods purchased 34022
Discount received 320
Cash received from debtors 34240
Discount allowed 814
Goods returned to suppliers creditors 5700
Goods returned by debtors 296
Bad debts return off 88
Bills drawn on debtors 1120
Debtors bills dishourned 268
Debtors bills withdrawn upon renewal 300
Interest changed on renewal of bills 10
Amount received on bills discounted 234
Bank charges for discounting bills 6
Bills payable accepted 1300

The total of balances extracted on 30th September 1991 from sales & purchase ledger
Rs. 5356 & Rs.3720 respectively show whether or not these total are recorded with the
totals given.

10. Evergreen Ltd maintains two debtors ledgers. Atom debtors ledgers N to Z debtors
ledger under self balancing ledger. The following details have been extracted from the
books of the company for quarter ended 30-sept.

Particulars A to M N to Z
Opening debit balances 5400 30560
Opening credit balances 1300 750
Sales 875350 695280
Returns sales 20200 15430
Cash received from debtors 653500 472200
Cash received in respect of debts previously return of as 700 -
bad in the above
Discount allowed 7420 5290

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Bills receivable discounted 2400 2100

Bills receivable honoured - 4200
Bad debts return off 4300 2230
Credit balances 870 530
Bills receivable received 86500 42300

Miss.Choudary is A to M debtors ledger owing Rs.2650 had her name charged to Miss.
Roy chowdary after marriage and conquer account has been transferred to N to Z debtors
ledger during the period. prepare necessary adjustment A/C.

11. From the following figures relating April 2017. Prepare total debtors & total creditors A/C

Balances on 1st April 2017 Rs.

(a) Total debtors 21600
(b) Total creditors 8200
Credit purchase 25300
Credit sales 39400
Cash paid to creditors 19100
Cash received from customers 37200
Bills payable issued 5000
Bills receivable received 4000
Bills receivable dishourned 500
Bad debts return off 600
Cash sales 6300
Discount received from suppliers 900
Discount allowed to customers 1100

12. The following information figure for which 2017.

Balance on 1st March 2017 Rs.

a) Debtors 20600
b) Creditors 11500
Credit Sales 40,300
Credit purchases 19800
Cash received from customers 28400
Discount allowed to them 1400
Bad debts return off 700
Bills receivable received 9600
Charges debited to customers 150
Amount received from customers 400
Cash paid to suppliers 15600
Bills payable issued 6100
Discount received 400

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Prepare various adjustments A/C’s.

13. Dinesh and company had three ledgers in use debtors ledger & creditors ledger and
normal ledger which are all kept on the system of self balancing. From the following
prepare adjustment Accounts.

Date Particulars Rs.

Jan 1st Balances of sundry debtors 16000
Jan 1st Balance of sundry creditors 18500
31st Credit purchases 4500
31st Credit sales 9800
31st Cash sales 1500
31st Paid to creditors 9875
31st Discount allowed by them 325
31st Cash receive from debtors 7800
31st Discount allowed 200
31st Bills payable accepted 1500
31st Bills receivable received 3000
31st Return inward 875
31st Return outwards 600
31st Rebate allowed to debtors 275
31st Rebate allowed by creditors 150
31st Provision for doubtful debts 320
31st Bad debts 450
31st Bills receivable dishourned 375

14. From the following particulars prepare adjustment seconds.

Particulars Rs.
Debtors balance on 01/01/12 91500
Creditors balance on 01/01/12 109800
Creditors purchase 41000
Credit sales 45400
Returns inwards 800
Returns outwards 1200
Cash received from customers 51000
Discount allowed to customers 900
Cash paid to creditors 61400
Discount received 1340
Acceptances received (Bills receivable 17000

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received)
Acceptances given (Bills payable paid) 24000
Bills received dishourned 2400
Bills payable dishourned 6000
Bad debts written off 5000
Sundry changes debited to customers 690
Allowance from creditors 550
Transfer frm debtors ledger 1290

15. Prepare debtors Accounts:

Credit purchase 20500

Credit Sales 22700
Return inwards 400
Bad debts 2500
Acceptance received from debtors 8500

16. From the following figure extracted from the books of a company who keeps a sales
ledger, brought ledger & a General ledger on the self balancing system. Show how the
various adjustment account will appear in reach of the ledger

Debtor balance 1-3-2005 45750

Creditors balance 1-3-2005 54900
Credit purchases 20500
Credit sales 22700
Return inwards 400
Return outwards 600
Cash received from customers 25500
Discount allowed 450
Cash paid to creditors A/C 30700
Acceptance received from debtors 8500
Creditors Bills accepted 12000
Bills receivable dishourned 1200
Bad debts 2500
Sundry charges debited to customers 345
Allowances from customers 275
Bills payable dishourned 3000

17. There are 3 self balancing ledgers in we purchase ledger sales ledger and general ledger.
From the following particulars write a necessary as would appear in the general ledger.

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Debtors balance in G.L.A 60,500

Creditors balance in G.L.A 38,500
Credit sales 40,000
Cash sales 12,800
Credit purchases 26,400
Cash Purchases 16,390
Creditors paid off during the year 32,500
Received to bank from Debtor 48,200
Discount allowed to the business 375
Discount allowed by the business 450
Returns inward (sale) 1225
Return outwards (purchases) 875
Accepted bills payable 3200
Accepted bills receivable 4800
Bills receivable dishourned 200
Interest charged for dishourned bill 15
Trade discount during the year 975
Bad debts 375
Transfer from sales ledger to purchase ledger 195

Goods of sales value Rs.300 were returned by a customer for which fresh goods were
issued. Go a credit note was issued for return of goods. The sales invoice was not
prepared for the issue of fresh goods.

18. The following particulars have been extracted from the books of J & com who kept they
books on self balancing system. You are required to pay the sales ledger & general
ledger adjustment A/C as on 31st – 12-2006.

Particulars Rs.
Debtors balance (opening) 56790
Sales to debtors 116844
Returns from debtors 1384
Cash received from debtors 82690
Discount allowed to debtors 3010
Acceptance received from debtors 8420
Acceptance returned dishourned 1100
Bad debts written off 1884
Sundry charges debited to debtors 58
Transfer from Sales ledger 152
Sundry credit balance in sales ledger 345

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19. From the following information available for a books of a trader from 1-jan-2011 to 31-
03-2011. You are required to drawn up the debtors adjustment A/C in general ledger.
a) Total sales amounted to Rs.180000 including the sale of old Xerox machine for
Rs.4800 (book value Rs.8000) The total cash sales were 80% less than total credit
sales.
b) Cash collection from debtors amounted to 70% of the agrated of the opening
balance and credit sales for the period. Debtors were allowed a cash discount of
Rs.20,000.
c) Bills receivable drawn during the 3 months totaled Rs.30000 of which bills
amounting to Rs.10,000 were endorsed in favour of suppliers, out of endroserd bills,
one bill for Rs.6000 was dishourned for non-payment has the party became
insolvent.
d) Check received from debtors Rs.8000 were dishourned a some of RS.2000/- was
irrecoverable bad debts return off in the earlier years realised Rs.11,000.
e) Sundry debtors has on 1-1-2-11 stood at Rs.50,000.

20. Prepare general ledger adjustment A/C in creditors ledger for the year ending 31-3-15
from the following information.
a) Sundry creditors as on 1-4-14 was Rs.2,30,000/-.
b) Total purchases amounted to Rs.8,25,00/- including purchase of trade investments
for Rs.45,000/- (Face value 50,000). The total cash purchases were 60% more than
the credit purchases.
c) Cash paid to creditors during the year was 50% of the aggregate of opening
creditors and credit purchases for the period. Creditors allowed a cash discount
RS.8000.
d) A cheque paid to creditors Rs. 7000/- was dishourned.
e) Goods returned to suppliers Rs.11,000/-
f) Bills receivable amounting to Rs.30,000/-endorsed in favour of a creditor.

21. A business concern maintain self balancing ledger on the basic of following information.
Prepare GLA in debtors ledger for the month of April 2012.

Particulars Rs.
Debit balances in debtors ledger on 1-4-12 358200
Credit balances in debtors ledger on 1-4-12 9400
Total sales (including cash sales Rs.1,00,000) 2095400
Sales returns 33100
Cash received from debtors 1725700

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Bills receivable received 95000

Bills receivable dishourned 7500
Cash paid to debtors for returns 6000
Transfer to creditors ledger 16000
Credit balance in debtors ledger A/C on 30-04-12 9800

22. On 1st October 2011 the debit balance of debtors A/C is Rs.77500. In the books of Z
limited.

Total sales (including cash sales 14,000) 84000

Payments received from debtors 38000
Bills receivable received 26000
Discount allowed 1000
Goods returned by customers 2550
Bills receivable endorsed to suppliers 5000
Bills receivable dishourned 8500
Nothing charges on bills dishourned 250
Bad debts recovered 900
Interest debited for delaying payment 1250

You are required to prepare D.L.A A/C in G.Ledger.

23. From the following particulars extracted from the books of a company who keeps a
sales ledger, a bought ledger and a general ledger on the self balancing system. Show
how the various adjustment account will appear in each of the ledgers.

Particulars Rs.
Debtor balance (1-3-2005) 457500
Creditors balance (1-3-2005) 549000
Transactions for the month of march – 2005
Credit purchases 205000
Credit Sales 227000
Returns inwards 4000
Return outwards 6000
Cash received from customers 255000
Discount allowed 4500

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Cash paid to creditors 307000

Acceptance received from debtors 85000
Creditors bill accepted 120000
Bills receivable dishonored 12000
Bad debts 25000
Sundry charges debited to customers 3450
Allowances from customers 2750
Bills payable dishonored 30000

24. The following particulars have been extracted from the books of Jones and co., who
keep their, books on self balancing system. You are required to prepare the sales ledger
and general) ledger adjustment A/C as on 31st Dec 2006.

Particulars Rs.
Debtors balances 30th june,2006 56790
Transactions for the half year
Sales to debtors 116844
Returns from debtors 1384
Cash received from debtors 82690
Discount allowed to debtors 3010
Acceptance received from debtors 8420
Bad debts written off 1884
Sundry charges debited to debtors 58
Transfer from Sales ledger 152
Sundry credit balances in Sales ledger 345

25. prepare debtors account from the following information

Particulars Rs.
Opening balance (Debtors) 10000
Credit sales 35000
Credit purchases 22000
Cash sales 15000
Cash purchases 9500
Cash received from debtors 8500

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Cash paid to creditors 3000

Bills received 4350

Unit-II
Single entry system
Single Entry System: Single entry system is an incomplete form of recording financial
transactions. It is the system, which does not record two aspects or accounts of all the financial
transactions. It is the system, which has no fixed set of rules to record the financial transactions
of the business. Single entry system records only one aspect of transaction. Thus, single entry
system is not a proper system of recording financial transactions, which fails to present
complete information required by the management. Single entry system mainly maintains cash
book and personal accounts of debtors and creditors. Single entry system ignores nominal
account and real account except cash account. Hence, it is incomplete form of double entry
system, which fails to disclose true profit or loss and financial position of a business
organization.

Features Of Single Entry System : The following are the main features of single entry system:

1. No Fixed Rules : Single entry system is not guided by fixed set of accounting rules for
determining the amount of profit and preparing the financial statements.

2. Incomplete System : Single entry system is an incomplete system of accounting, which does
not record all the aspects of financial transactions of the business.

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3. Cash Book : Single entry system maintains cash book for recording cash receipts and
payments of the business organization during a given period of time.

4. Personal Account : Single entry system maintains personal accounts of all the debtors and
creditors for determining the amount of credit sales and credit purchases during a given period
of time.

5. Variations In Application : Single entry system has no fixed set of principles for recording
financial transactions and preparing different financial statements. Hence, it has variations in its
application from one business to another.

Advantages of single entry system:

The following are the important advantages of single entry system:

Simple And Easy : Single entry system is simple to understand and easy to maintain as it has no
fixed set of principles to follow while recording financial transactions.

Economy : Single entry system is an economical system of recording financial transactions. It

does not require hiring skilled accounting personnel to record financial transactions of the
business. Further, it does not require large number of books to record the limited number of
financial transactions

Easy To Calculate Profit : Under single entry system, the amount of profit can be determined
easily. The amount of profit or loss of the period can be determined by making comparison
between the amounts of closing capital and opening capital.

Suitable For Small Business : The single entry system is simple, easy, and economical system. It
is suitable for small businesses because they cannot afford the cost of double entry system.
Besides, small business are not required to maintain their books of accounts under double
entry system.

Disadvantages of single entry system: The following are the notable disadvantages of single
entry system:

1.Unscientific And Unsystematic : The single entry system is unsystematic and unscientific
system of recording financial transactions. It does not have any set of fixed rules and principles
for recording and reporting the financial transactions.

2. Incomplete System : Single entry system is incomplete system because it does not record the
two aspects or accounts of all the financial transactions of the business. It does not maintain
any record of the transactions relating to the nominal account and real account except cash
account.

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3. Lack of Arithmetical Accuracy: Single entry system is not based on the principles of debit and
credit. It fails to provide the arithmetical accuracy of the books of accounts. Trial balance can
not be prepared under this system to check the arithmetical accuracy of books of accounts.

4. Does Not Reflect True Profit Or Loss : Under single entry system, the true amount of profit
or loss can not be ascertained because it does not maintain the nominal accounts.

5. Does Not Reflect True Financial Position: The single entry system does not maintain real
accounts except cash book. Therefore, it cannot reveal the true financial position of the
business.

6. Frauds and Errors: The single entry system of book-keeping is incomplete, inaccurate and
unscientific. It does not help to check the arithmetical accuracy of the books of accounts.
Therefore, there is always a possibility of committing frauds and errors in the books of
accounts.

7. Unacceptable For Tax Purpose: The single entry of book keeping has incomplete records of
the financial transactions of the business. Hence, the tax office cannot accept the account
maintained under this system for the purpose of assessment of tax.

Differences between single entry and double entry system: The following are the differences
between single entry and double entry system:

1. Meaning: Single entry system is an incomplete system of recording financial transactions.

Double entry system is a complete system of recording and reporting financial transactions.

2. Duality : Single entry system is not based on the concept of duality. Double entry system is
based on the concept of duality.

3. Accounts : Single entry system maintains only personal accounts of debtors and creditors
and cash book. Double entry system all personal, real and nominal accounts.

4. Trial Balance : Single entry system cannot prepare a trial balance and hence, arithmetical
accuracy of books of accounts cannot be checked. Double entry system prepares trial balance
and hence, arithmetical accuracy of the books of accounts can be checked.

5. Profit Or Loss : Single entry system cannot ascertain the true amount of profit or loss of the
business as it does not maintain nominal accounts. Double entry system ascertains true profit
or loss of the business as it maintains all nominal accounts.

6. Financial Position : Single entry system cannot ascertain the true financial position of the
business because it does not maintain real accounts except cash book. Double entry system
ascertains financial position of the business as it maintains all personal and real accounts.

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7. Suitability : Single entry system is suitable to a small business where only limited number of
transactions are performed. Double entry system is suitable for a large business.

8. Tax Purpose : Single entry system is not acceptable for the purpose of assessment of tax.
Double entry system is acceptable for the purpose of assessment of tax.

Methods for ascertainment of profit or loss under single entry system: The following are the
two methods for ascertainment of profit or loss under single entry system. The methods are:
1. Statement of Affairs/Increase in Net Worth Method
2. Conversion Method.

1. Statement of Affairs/Increase in Net Worth Method: Profit is ascertained by comparing the

capitals between two accounting periods, viz., capital at the beginning and capital at the
closing, when double entry system is not followed. Here, capital represents the net assets of
the business.

Therefore, if closing capital is greater than the opening capital, the difference will simply
represent profit; and there will be a loss in the opposite case.

Now, the capitals either at the beginning or at the closing—can be ascertained by preparing a
Statement of Affairs as at the opening and also as at the closing date. But if there are any
adjustments or any drawings, these are also to be accounted for.

Statement of Affairs: A Statement of Affairs is a summarised statement of financial position

(i.e., a statement of assets and liabilities) at a particular date of a business which is very much
similar to the Balance Sheet. Care should be taken for different adjustments, like depreciation
on assets, outstanding and prepaid expenses etc. at the time of preparing a Statement of
Affairs.

Statement of Profit and Loss: Statement of Profit and Loss is to be prepared in order to find out
the profit or loss so made during the year. In this statement, the opening capital is to be
deducted from the closing capital, thereafter, the drawings of the proprietor will have to be
added and further capital, if any, will have to be deducted and the rest will represent profit or
loss as the case may be. But, if there are any adjustments, those are also to be adjusted.

How to prepare a Statement of Profit or Loss: The following steps should carefully be
considered while preparing a Statement of Profit or Loss:

Step 1: Ascertain the opening capital (if not given) by preparing an opening Statement of
Affairs;

Step 2: Ascertain the closing capital by preparing a closing Statement of Affairs;

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Step 3: Deduct the opening capital from the closing capital;

Step 4: Deduct the amount of further capital, if any, and add the amount of drawing, if any;

Step 5: Other adjustments, if any, are to be adjusted accordingly.

The result will represent the net profit or loss of the business.

Differences between statement of affairs and balance sheet :

Basis of Statement of Affairs

Difference Balance Sheet

1. Objective Main objective of making Main objective of making statement of

balance sheet is to show the affairs to find the opening and closing
financial position of any capital in single entry system and in the
organisation. liquidation of company, to find surplus
or deficiency on the basis of estimated
value of assets and liabilities of
company.
2.System of It follows double entry It follows the single entry system of
Book Keeping system of book keeping book keeping.

3.Arithmetical When balance sheet's both It does not prove the arithmetical
Correctness side are matched, it means, correctness because it is prepared just
it shows also the information of accounting record. It is
arithmetical correctness. not prepared on the basis of trial
Because it is prepared from balance.
trial balance and trial
balance is prepared from
the balance of ledger
accounts.

4. Actual and All assets and liabilities are All assets and liabilities are shown on

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Estimated shown on the actual value. the basis of estimation.

Value
5. Finding of If we forget to show any Because all the assets and liabilities are
Mistake asset or liability, our balance shown on our past estimation, so, if we
sheet will not match. With forget any asset or liability, we cannot
this, we can find the find from statement of affair because
mistake. due to wrong estimation, we can show
less or more value of asset or liability.
6. Proof in Court accepts balance sheet Court does not accept it as proof of
Court as proof of valid financial position of organisation
information. because there is chance of wrong
estimation of assets and liabilities.

PROBLEMS

1. Find out the profit from the following data:

Capital at the beginning of the year Rs.60000
Additional capital introduced during the year Rs.3750
Capital at the end of the year Rs.67500
Drawings during the year Rs.7500

2. Find out the profit/loss from the following data:

Capital at the beginning of the year Rs.100000
Additional capital introduced during the year Rs.5000
Capital at the end of the year Rs.72000
Drawings during the year Rs.9500

3. The capital of Ravi on 1-4-2016 was Rs.15000. during the year he introduced further capital
Rs.4000 and withdrawn for domestic expenses Rs.1500. on 31-03-2017 his assets were
Rs.32000 and creditors to be paid Rs.3500. find out his profit.

4. Calculate the profit earned by trader who keeps his books under single entry.
a) Excess of assets over liabilities on 31.12.2015 Rs.26150
b) Drawings during the year Rs.4800
c) Additional capital introduced Rs.7500
d) Excess of assets over liabilities on 31.12.2014 Rs.15000
e) Interest on drawings 5%

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5. Calculate the missing figure:

Drawings Rs.5600 ; capital at end Rs.36000 ; capital introduced Rs.9400 ;
Loss Rs.2800 ; capital at the beginning = ?

6. Calculate the opening capital:

Drawings Rs.3000 ; capital at end Rs.20400 ; additional capital Rs.5000 ;
Loss Rs.2000 ; capital at the beginning = ?

7. Calculate the missing figure:

Drawings Rs.11200; capital at beginning Rs.70800; capital introduced Rs.18800;
Profit Rs.5000; capital at the end =?

8. Mr.X , a trader does not follow double entry system. Calculate his capital as on 1.04.2016
and 31.03.2017.
Particulars 1.04.2016 31.03.2017
Debtors 20000 25000
Creditors 15000 20000
Bank overdraft 40000 5000
Furniture 8000 8000
Machinery 80000 80000
Cash 7000 20000
Bills payable 25000 10000
Prepaid rent 4000 5000

9. Mr.X , a trader does not follow double entry system. Calculate his profit or loss for the year
ended 31.03.2017 from the following information.
Particulars 1.04.2016 31.03.2017
Debtors 30000 40000
Creditors 25000 40000
Bank loan 60000 75000
Furniture 10000 10000
Investments 15000 40000
Machinery 100000 100000
Cash 5000 20000
Bills payable 45000 60000
Outstanding salaries 8000 10000

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During the year X withdraws Rs.6000 and introduced further capital Rs.8000. furniture
and machinery is depreciated by 5%. Provide 10% provision for bad debts.

10. Mr. K keeps books on single entry system and the following information is available.
Calculate his profit or loss.
Particulars 1.01.2016 31.12.2016
Furniture 200 200
Stock 2800 3050
Debtors 2100 3400
Cash 150 200
Creditors 1750 1900
Bills payable ----- 300
Loan ----- 500
Investments ----- 1000

He has drawn out of the business Rs.500. during the year he introduced further capital
Rs.1000. prepare a statement showing his net profit for the year ended 31.12.2016 after
writing off 10% depreciation on furniture and making a provision for baddebts of 10%
on sundry debtors.

11. Mr.Rajiv keeps his books by single entry and his position on 31.03.2016 was as follows:
Particulars Rs.
Furniture 5000
Stock 28600
Debtors 18400
Cash in hand 2400
Creditors for goods 18700
Outstanding expenses 2000
Cash at bank 25500

On 1st Oct 2016 he introduced Rs.10000 as further capital in the business and withdraw
on the same date Rs.7000, of which he spent Rs.5000 on purchase ofn a machine on the
business. On 31.03.2017 his position is s follows:

Particulars Rs.
Furniture 6000
Stock 31500
Debtors 24200
Cash in hand 2100
Creditors for goods 25200

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Prepaid insurance 200

Cash at bank 27500

Prepare the necessary statement showing the profit or loss after making the following
adjustments:

a) Depreciate furniture and machine @10% per anum.

b) Write off bad debts Rs.1200 and provide 5% for doubtful debts.
c) Goods taken for personal use Rs.1500.
d) Provide interest on capital @ 10% per anum.

12. Mr. Ramlal keeps books under single entry system. Calculate his net profit/loss.
Particulars 1.01.2016 31.12.2016
Bank overdraft 10000 12000
Furniture 20000 20000
Land and buildings 70000 70000
Investments ----- 10000
Debtors 20000 30000
Creditors 30000 40000
Stock 45000 50000
Motor car ------- 20000
Cash 10000 20000
Machinery 40000 40000

During the year he withdrew Rs.10000 for personal use. On 01.07.2016 he introduced further
capital of Rs.20000 by selling his private car.

Adjustments:

a) Appreciate land and buildings by 20%.

b) Debtors include Rs.1000 from a customer who is insolvent and is irrecoverable.
c) Maintain provision for doubtful debts at 5% on debtors.
d) Depreciate plant and machinery by 10% and furniture at 5% and motor car by 10%.
e) Allow interest on capital @ 5% per anum.

13. Siva sankar follows single entry and following information is disclosed from his books:
Particulars 31.12.2015 31.12.2016
Bank balance 2100 5600
Stock 15000 20000
Debtors 30000 28500

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Furniture 5000 5000

Investments 5000 5000
Cash 100 400
Creditors 25000 27000
Bills payable 1000 500
Loan from X ------- 3000

Sankar transfer Rs.250 each month during 1 st half year and Rs.200 each month for the
remaining period from the business to his private bank account. In addition he withdrew
Rs.5000 for his daughter marriage and Rs.1000 for charity. He also withdrew goods Rs.1000 for
domestic use. In September 2016, he received a lottery price of Rs.5000 of which he invested in
to business Rs.4000. he sold his private car for Rs.5500 and proceeds were utilized for business.

Furniture to be depreciated @ 10%and provision for bad debts at 5% be maintained. He

has not paid 2 months shop rent Rs.200 in total and 2 months salary to his clerk @ Rs.150 per
month. Commission earned but not received was Rs.2400. Calculate his business profit.

14. The following is the statement of affairs of Mr. Z as on 31 st Dec 2016, who kept his books
under single entry system.
Statement of affairs as on 31.12.2016

Liabilities Rs. Assets Rs.

Creditors 8000 Furniture 4000
Capital 62750 Stock 28000
Debtors 35600
Cash at bank 3150
70750 70750

His capital as on 31.12.2015 was Rs.42960. He transferred from his personal account to bank
account Rs.500 every month during the year and he took Rs.3000 stock for personal use. He
sold his house for Rs.100000 and introduced Rs.8000 in to business out of the sale proceeds.
Depreciate furniture at 5% and provide RBD @ 2.5%. Calculate the profit of Mr. Z by redrafting
the Statement of affairs as on 31st Dec 2016.

15. Mohan commenced business on 1st Jan 2008 with a capital of Rs.20000 and immediately
purchased furniture for Rs.4000. on 30 th June 2008 he borrowed Rs.10000 from his brother
@12% per anum (interest yet to be paid) and introduced in to business. He also introduced
Rs.3000 capital of his own. He withdrew Rs.600 per month at the end of each month for his
expenses. On 31st Dec 2008 his position is as follows:
Particulars Rs.

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Cash in hand 400

Cash at bank 5200
Debtors 9600
Stock 10000
Bills receivable 3200
Creditors 1000
Outstanding rent 300
Furniture to be depreciated by 10%. Ascertain his profit for the year 2008.

16. Trivikram keeps books under single entry. Calculate his profit/loss for the year.
Particulars 1.01.2014 31.12.2014
Investments 50000 80000
Furniture 15000 35000
Stock 35000 30000
Debtors 20000 22000
Bank 10000 15000
Creditors 16000 21000
Loan from kalyan (1.7.14 @12%) ----- 16000
Bills payable 5000 8000

Additions were made to the furniture on April 1 st 2014 in exchange of his car
valued at Rs.20000. furniture is depreciated at 10% per anum and Rs.2000 is provided
for doubtful debts. The interest on loan is still outstanding. Trivikram has drawn Rs.1000
per month for his expenses. He also spends Rs.5000 from business funds for his son
education. The rent of hi business cum residential building is rs.900 per month and 1/3 rd
of it is only used for his business, but the rent is paid from the business funds.

17. Mr. A does not maintain complete books of accounts. He furnishes the following
information. Prepare statement of affairs and ascertain his profit/loss.
Particulars 1.1.2012 31.12.2012
Stock 40000 60000
Debtors 30000 40000
Cash 2000 1000
Bank balance 10000 5000 (OD)
Creditors 15000 25000
Outstanding expenses 5000 8000
Furniture (cost) 3000 2000

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Bank balance on 1.1.2012 is as per cash book but the bank overdraft on
31.12.2012 is as per bank statement. As per bank statement Rs.2000 cheques drawn in
Dec 2012 have not been encashed with in the year.
On 1.1.2012 he sold the furniture costing Rs.1000 for Rs.5000 and depreciation
on furniture is charged at 10%. Mr. A has withdrawn Rs.1000 per month and Rs.2000
was invested by him during the year.

18. Mr.Jayakumar does not follow double entry system. Calculate his profit or loss for the year
ended 31.03.2018 from the following information.
Particulars 31.03.2017 31.03.2018
Cash 4300 2400
Bank balance 5300 2200
Stock 10400 15450
Creditors 9200 7200
Buildings 15000 15000
Debtors 8200 10300
Furniture 3000 4000
Bills receivable 6200 8400
Bills payable 7500 5000

During the year his drawings amounted to Rs.3000. of the debtors Rs.300 is bad
and a provision of 5% to be made for doubtful debts and 2% discount on debtors.
Provision for discount on creditors is to be maintained. Depreciation on buildings @5%
and on furniture @10%. Interest @ 6% per anum is to be calculated on capital at the
beginning.

19. Mr. Srihari keeps books under single entry system and gives the following information. His
capital on 31.03.2015 was Rs.22440 and on 1 st april 2004 was Rs.23040. he gave a loan of
Rs.4200 to his brother narahari on private account and withdraw Rs.360 per month for
personal purposes. The rent of his residential flat 2 Rs.120 per month and electrical charges
Rs.12 per month were paid from business account. He sold his 7% government bonds of
Rs.2400 at a premium of 3% and put that money in to business. Ascertain his profit.

20. Mr. Prasad had disclosed the following information from his records maintained by single
entry.
Particulars 31.03.2012 31.03.2013
Cash 2000 3000
Stock 19000 29000
Debtors 1000 2000

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Creditors 5000 3000

Machinery 200000 260000

On 1st Feb 2012 he began drawing Rs.800 per month for his personal expenses
from the cash box of the business. His account in bank has the following entries.

Details Deposits Withdrawals

1.1.2012 300000 -----

1.1.2012 to 31.3.2012 ----- 223000

1.4.2012 to 31.3.2013 230000 270000

Draw up his statement of affairs as at 31.03.2012 and 31.03.2013 and work out
his profit or loss.

21. Mahesh has not maintained proper books of accounts. Prepare his statement of affairs and
profit statement as on 31.12.2011.
Particulars 1.01.2011 31.12.2011
Cash 5350 5400
Bank overdraft 45000 40000
Stock 59350 62200
Creditors 38600 37200
Debtors 30200 29800
Bills receivable 42400 40800
Buildings 53000 53000
Furniture 4600 4600
Bills payable 62000 58000

Drawings during the year Rs.6400. depreciation on buildings at 4% and on

furniture at 5%. Reserve for doubtful debts at 5%. Charge interest on drawings at 6%
and interest on capital on beginning @ 5%.

22. The partnership firms P, Q, R kept their books under single entry. Their capital accounts on
1.1.2017 were: P: Rs.40000 ; Q: Rs.30000 and R: Rs.10000.

Each partner is entitled to 10% interest on capital standing at beginning of the year.
Q and R are entitled to a salary of Rs.200 and Rs.300 per month respectively. The net
profit to be shared by P, Q and R in the ratio 3:2:1. In the half year ending 30 th June
2017. Q and R had received their salaries and P, Q and R had drawn rs.1000, Rs.1500
and Rs.2000 respectively. On 30th June 2017 their assets and liabilities were as follows:

Particulars Rs.

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Stock 55000
Creditors 10500
Debtors 35000
Plant 15000
Bills receivable 3000
Cash at bank 2500
Bills payable 1000

Prepare statement of affairs and calculate their net profit and distribute in their ratio.

Unit III
Royalty Accounts
Royalty : The term 'Royalty' is used to denote the periodic payment made by one person called
lessee to another person called lessor for using the right by the lessee vested in the lessor. For
example, if X is the owner of coal mine, and instead of extracting the coal himself, he gives this
right to Y in return for amount calculated on the basis of coal extracted from the mine, such a
payment is called 'Royalty'.
Royalties are usually payable in the following cases:

(a) For the extraction of oil, coal, and minerals from the ground
(b) To an author for sale of his books.
(c) To holder of patent rights for the use of his patent by other manufacturer.

Lessor: The person who surrenders the right and receives the royalty is known as 'Lessor'. The
'Lessor' is the owner of assets. Author of a book, holder of patent, land lord of mine etc. are the
examples of Lessor.

Lessee: The person who makes payment and uses the assets is known as 'Lessee'.
The lessee acquires the right to use the lessor's property. For it, the lessee pays a certain
amount to the lessor, which is termed as royalty. Publisher, patent user, trade mark user,
licencee etc are the examples of lessee.

Minimum Rent or Dead Rent: Minimum Rent is also called 'Dead Rent' or 'Rock Rent' or Fixed
Rent. As the name suggests, this is the minimum amount of rent which the lessee is required to
pay to the lessor whether he has derived any benefit or not out of the right vested to him by

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the lessor. Thus, if in any year the actual royalty is less than the minimum rent, the landlord will
claim the minimum rent. But in the years when actual royalty exceeds Minimum Rent, the
landlord will claim the actual royalty. Moreover, Minimum Rent may be the same for each year
or may vary for different years according to the terms of agreement.

Short Working: The excess of Minimum Rent over the Actual Royalty is known as short-
working. Therefore short- working will only arise when the Actual royalty is less than the
Minimum Rent. Thus

Short working = minimum rent - royalty

Recoupment of short Working: - When the Royalty agreement contains the clause that lessee
can recover the short working of one year from the excess of Royalty as compared to Minimum
Rent in the coming years, it is known as Recoupment of short working.

Sub- Lease : Sometimes, there are instances that the original lease may empower the Lessee to
sublet, in whole or in part thereof, to a third party; Here Lessee has a dual role to play He is
both a Landlord and a Lessee. For instance, “A” obtains a lease from “B” to work in a mine. “A’
sublets a part of the land to “C”.

Thus, there are three parties – Owner (Lessor) is “B”, the Lessee is “A” and sub-lessee (sub-
tenant) is “C” Here “A” is a tenant to “B” and is a Landlord or a Sub-lessor in relation to “C”. In
such case, whatever the yield is taken out by Lessee and sub-lessee is totaled up and on this
total yield, Lessee has to pay Royalty to the Landlord. That is, Royalty payable by the Lessee (i.e.
first Lessee) to the Lessor (i.e. head Landlord) will be calculated on the full output i.e. on the
total output of both the lessee and the sub-lessee.

Journal entries in the books of lessee:

Stage 1: When minimum rent is higher than royalty(short workings arising stage)

a) When minimum rent payable:

Minimum rent a/c Dr
To lessor A/c.
b) When minimum rent transfer to royalty and short workings:

Royalty a/c Dr
Short workings a/c Dr
To minimum rent a/c.
c) When amount paid to landlord or lessor:
Lessor a/c Dr
To bank a/c.

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d) When royalty amount transfer to trading/ P&L a/c.

Trading and P&L a/c Dr
To Royalty account.
Stage 2: When short workings are recouped :
a) When royalty payable and short workings are recouped :
Royalty a/c Dr
To land lord a/c
To short workings a/c.
b) When amount paid to landlord or lessor:
Lessor a/c Dr
To bank a/c.
c) When royalty amount transfer to trading/ P&L a/c.
Trading and P&L a/c Dr
To Royalty account.
Stage 3: No short workings and no recoupment:
a) When royalty payable to land lord :
Royalty a/c Dr
To land lord a/c
b) When amount paid to landlord or lessor:
Lessor a/c Dr
To bank a/c.
c) When royalty amount transfer to trading/ P&L a/c.
Trading and P&L a/c Dr
To Royalty account.
Note: At any stage, if short workings are not recouped then they are transferred to
profit & loss account. Entry in this case :
Profit & Loss A/C Dr
To short workings account.

PROBLEMS
1. Mr. X took a lease of coal mine from Mr. y at a royalty of Rs. 5 per ton of coal raised, with
a minimum rent of Rs. 15,000/- per annum with the right to recoup short working with in
the first 3years of lease. The production is as follows.

Year 2006 2007 2008 2009 2010

Production (tons) 2000 2500 3700 5000 4500
Prepare journal entries and ledger A/C in the books of X.

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2. Mr. M took a lease of coal mine from Mr. N at a royalty of Rs. 4 per ton of coal raised,
with a minimum rent of Rs. 12,000/- per annum with the right to recoup short working
with in the first 3years of lease. The production is as follows.

Year 2008 2009 2010 2011 2012

Production (tons) 2500 2800 3500 4500 5000
Prepare journal entries and ledger A/C in the books of X.

3. Mr. Hari acquired a lease from Mr. Suman at a royalty of Rs. 2 per ton Subject to a
minimum rent at Rs. 10,000/- with a right to recover short workings with in the first
3years of lease. During the year of strike the minimum rent is to be taken at 75%. The
Production is as follows.

Year 2008 2009 2010 2011(strike) 2012

Production (tons) 4000 4800 7000 4200 6000
Prepare journal entries and ledger accounts in the books of lessee.

4. Mr. Charan acquired a lease from Mr. Siva at a royalty of Rs. 2 per ton Subject to a
minimum rent at Rs. 8,000/- with a right to recover short workings with in the first
3years of lease. During the year of strike the minimum rent is to be taken at 50%.

Year 2010 2011 2012 2013 2014(strike)

Production (tons) 3000 4000 4500 5000 6000
Prepare journal entries and ledger accounts in the books of lessee.

5. Aravindh took a lease from Anand at a royalty of Rs. 4 per tone subject to a minimum
rent of Rs. 20,000/- per annum. Any excess of minimum rent over royalty can be
recouped during the first 3years of lease. In the year of strike the minimum rent is to be
taken on prorata basis and in the event of look out minimum rent to be reduced by 20%.
The production details are as follows.

Year: 2011 2012 2013 2014(strike) 2015(lock out)

Production (tons) 4000 5000 6500 4000 3000
Prepare ledger A/c’s.

6. Himalaya publishers obtain publishing rights from K.L.Chopra of a royalty of RS.10 per
copy sold with a minimum rent Rs.40000 and the short working can be recovered during
the first 2years.The details are as follows:

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Year 1 2 3 4 5
Printed copies 4200 5000 5400 4000 5200
Closing Stock 700 500 900 1000 800

7. Mr. M took a lease from Mr. N at a royalty RS.1 per ton subject to a minimum rent of
RS.25000/- per year. Any excess of minimum over royalty can be recovered within the
next 2years.

Years 2001 2002 2003 2004 2005

Production 20000 22500 28000 30000 33000

Prepare necessary ledger A/c’s considering the following information.

8. Prepare short workings A/C when recoupment is done during the first 3years.

Minimum rent 20000 20000 20000

Royalty 17000 19000 23000

9. Mr. A has certain patent rights. He granted a license to Mr. B at a royalty of the details
was as follows.

Year 2009 2010 2011 2012 2013

Minimum rent 8000 10000 12000 14000 15000
Royalty 6000 9000 13000 16000 18000
The short workings raised can be written off during the subsequent 2years that has
arised. Show the necessary ledger A/C’s in the books of lessee.

10. Mr. Suresh took a lease from Mr. Raju with a royalty of RS.2 per ton raised subject to a
minimum rent of Rs.20000/- per annum with a right to recoup short workings within the
next 2years.During the year of strike the minimum rent to be reduced proportionately.
The details of lease are as follows.

Year 2001 2002 2003 2004

2005 (Strike 3
months)
Closing stock 1000 1500 2000 2500 3000
Sales (Tons) 8000 9000 10000 12000 15000
Prepare: Minimum rent A/C ; Landlord A/C; Royalty A/C; Short workings A/C.

11. Prepare short workings A/C

Year 2001 2002 2003

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Royalty 8000 9000 15000

Minimum rent 9000 10000 13000

12. Prepare short workings A/C.

Royalty 5000 7000 6000

Minimum 7000 9000 10000

13. The Bengal Coal Company are lessee of a mine on a royalty of 50 paisa per ton of coal
raised with a dead rent (minimum rent) of RS.40000/- per annum and power to recoup
short workings during the first 5years of lease. The output for the first 5years was as
follows:

1 2 3 4 5
10000 48000 80000 120000 150000

Prepare journal entries and Prepare necessary ledger A/C’s in the books of Bengal Coal
Company.
14. Mr. Sreedhar took a lease from Mr. Aravind at a royalty of RS.3 per ton raised subject to
minimum rent of RS.15000/- per annum. The short workings can be recovered within
next 2years .The details are:

Year 1 2 3 4 5

Production (tones ) 4000 4500 5200 6000 6500

Show necessary ledger A/C’s in the books of lessee without raising minimum rent
in the books.

15. Jaya limited published a book written by Rama. It was agreed that Rama will get a royalty
of RS.6 per copy sold subject to a minimum rent of RS.6000/- per annum , short workings
of each year could be recovered out of royalities for subsequent 3years.The number of
copies sold.

1985 1986 1987 1988 1989

1000 1200 1500 2000 2200

16. A owned certain patent rights . He granted a license In B to use such rights on
royalty Basis . The following are the relevant particular .

Year 1998 1999 2000 2001 2002

Minimum Rent (Rs) 1,750 2,000 2,250 2,500 2,500

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Royality (RS) 1500 1800 1900 2750 2600

The deficiency of any year is to be set , off against excess payable within the next two
years . Show minimum Rent A/c, Royalties A/c, Land lord A/c and short working A/C.

17. R K Collieries CO Ltd .took from Bengal brothers a lease of coal field for a
period of 30 years from 1 Jan . 2001 on a royality of 25 paisc per tone of coal got
with a Dead rent of 2200 a year and power to recouped shot workings during the
first five years of the lease . The annual out puts were as follows .

Year: 2001 2002 2003 2004 2005

tonnes : 2000 3000 9000 15000 25000

Give journal entries for each of 5 years in the books of colliery

company .

18. A company leased mine on 1.1.2009 at a minimum rent of Rs.40000 p.a. royalty at 1.50
ps per tone. Short workings are recouped in the first three years of lease. The output in
the four years was 18000, 24000, 32000 and 40000 tons respectively. Pass journal entries
in the books of the company.

19. Krishna mining company obtained a coal mine in the following conditions:
a) Minimum rent Rs.36000
b) Royalty at Rs.1.00 per tone.
c) Short workings of any year are recouped in the 3 years following the year of their
occurrence.
d) In the event of strike the minimum rent is reduced proportionately according to the
length of the period of strike in that year.
e) Output details:
Year : 2001 2002 2003 2004 2005 2006
Output( in tones): 10000 60000 66000 100000 64000 120000
(strike 4 mon)

Prepare ledger accounts in Krishna Mining co., under minimum rent method.

20. Rama publishers agreed to publish the book of accountancy written by Ramarao. Selling
price of each book is Rs.40. Royalty of 10%on each book sold subject to a minimum rent

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of Rs.8000 p.a. excess of minimum rent over royalty is recouped in the four years only.
Prepare ledger in the books of Ramarao from the details:

Year 2007 2008 2009 2010 2011

Sales 1600 3000 4000 3000 40000

Unit IV
Partnership Accounts
" Partnership is the relation between persons who have agreed to share profit of business
carried on by all or any of them acting for all."- INDIAN PARTNERSHIP ACT 1932.

Partnership is a mean of bringing together the persons who can contribute capital, skill for the
expansion of business. In the ordinary business number of partners shall exceed than twenty. In
case of banking business they may not exceed than ten. This type of business organization is
very popular in our country.

MAIN CHARACTERISTICS OR FEATURES OF PARTNERSHIP :

1. Agreement :- Without agreement partnership cannot be formed. The agreement may be

written or oral. But it must be written on settle the disputes.

2. Registration :- It is not necessary that a partnership may be registered. But in case of

registered firm many problems can be created.

3. Number of Partners :- In a partnership there should be at last two partners. In ordinary

business the partners must not exceed the twenty. In case of banking not more ten.

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4. Profit and Loss Distribution :- The basic aim of partnership is to earn profit. This profit is
distributed among the partners according their agreement. In case of loss also all the partners
share in it.

5. Business :- The object of the partnership it to carry on the business. It may be production or
trading. It should be according the laws of the state.

6. Unlimited Liability :- The liability of the partner is not limited to his invested amount. In case
of loss the private property of the partner also used to pay the business obligations.

7. Entity :- Law has not granted it any legal entity, it is not independent from the partners. It
has not separate entity from its members.

8. Share in Capital :- According to the agreement every partner contributes his share. It is not
necessary all the partners should contribute equally. Some people provide only skill and ability
to become a partner.

9. Management :- All the partners can participate actively in the business management.
Sometimes only few persons are allowed to handle the business affairs.

10. Payment of Tax :- Every partner pays the tax on his share of profit individually.

11. Co-Operation. :- For the successful partnership mutual co-operation and mutual confidence
is an important factor

12. No Audit :- In the partnership there is no restriction for the audit of accounts. So this type
of organization may operate freely.

13. Partners are Agent :- Every partner stand as an agent and principal to one another. In the
position of an agent one can do contract with other parties on behalf of the firm.

14. Transferability of Shares :- No one partner can transfer his share to any other person
without the consent of the existing partners.

Partnership Deed: Partnership is an agreement between persons to carry on a business. The

agreement entered into between partners may be either oral or written. But, it is always
desirable to have a written agreement so as to avoid misunderstandings and unnecessary
litigations in future. When the agreement is in written form, it is called ‘Partnership Deed.’ It
must be duly signed by the partners, stamped and registered. Any alteration in partnership
deed can be made with the mutual consent of all the partners.

CONTENTS OF PARTNERSHIP DEED:

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1. Name of the firm.

2. Nature of the business.
3. Names of partners.
4. Place of the business.
5. Amount of capital to be contributed by each partner.
6. Profit sharing ratio between the partners.
7. Loans and advances from the partners and the rate of interest thereon.
8. Drawings allowed to the partners and the rate of interest thereon.
9. Amount of salary and commission, if any, payable to the partners.
10. Duties, powers and obligations of partners.
11. Maintenance of accounts and arrangement for their audit.
12. Mode of valuation of goodwill in the event of admission, retirement and death of a
partner.
13. Settlement of accounts in the case of dissolution of the firm.
14. Arbitration in case of disputes among the partners.
15. Arrangements in case a partner becomes insolvent.

Accounts of a Partnership Firm:

Capital Accounts of Partners: A partnership organisation maintains accounts of its transactions

in the same manner as a Sole Trader ship. Since partnership has two or more partners, separate
capital account for each partner has to be maintained. Usually every partner contributes
something in cash or in kind to provide funds for the running of a business. The amount of
contribution is mutually settled and need not necessarily be equal.

The sum of the contributions represents the capital of the firm. The partnership deed usually
mentions the method of maintaining capital accounts of partners. There are two methods by
which capital accounts are maintained i.e.,
1. Fixed Capital and
2. Fluctuating Capital.

1. Fixed Capital : When the partners agree to keep their capital at their original figures, year
after year, they are said to have fixed capitals. They continue to appear at their original figures
unless contribution is made by way of additional capital or refund is allowed of the surplus
capital, if any. Under the fixed capital, separate CURRENT ACCOUNT of each partner is opened.

This current account will be credited at the end of every year with his (a) Share of profits, (b)
Interest on capital and (c) Salary or any other remuneration; and debited with his (a) Drawings
(b) Interest on Drawings and (c) Share of loss, if any.

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The current account may show credit and debit balance at the end of the year. If they show
Credit balances, they appear on the liability side of the Balance Sheet of the firm along with
Fixed Capitals. If the Current Accounts show Debit balances, they appear on the asset side of
the Balance Sheet.

2. Fluctuating Capital: Fluctuating Capital is one which changes from year to year. There is
only one account for each partner in case 6of fluctuating capital system. All entries relating to
introduction of fresh capital, interest on capital, salary, commission, share of profit etc. are
credited to the capital account and similarly capital account is debited with drawings, interest
on drawing, losses etc.

All entries for all items are passed through his capital accounts; as such, the amounts of his
capital at the end of the year will be different from what it was at the beginning of the year. The
balance of the capital goes on fluctuating year after year and is known as Fluctuating Capital.

In the absence of the contract to the contrary, capital accounts are fluctuating. Partner’s
drawings are, however, recorded in his Drawings Account which will be closed at the end of the
year, by transferring to the capital accounts.

ADMISSION OF A PARTNER
As per the 'Indian partner Act 1932', a person may be admitted as partner in the firm either
with consent of all existing partner or in an accordance with the contract already made
between the existing partners in the firm for the admission of new partners in the business
concern.

At the time of admission of partner, some of the point s to remember is as follows:

1. Calculate the new profit sharing ratio and sacrificing ratio.

2. Reevaluate the liabilities and assets.
3. Accumulation of profit or losses, resources distribution.
4. Calculation of goodwill.
5. Partners' capital A/c adjustments.

New profit sharing ratio : The ratio in which all partners including the incoming partner will
share the profit and losses in future is known as new profit sharing ratio.

Scarifying Ratio : At the time of admission of a partner, the existing partners share their profits
with the incoming partner by giving some part of their share . the ratio between the existing
partners in their respective sacrifice made is known as scarifying ratio. This is the difference
between old ratio and new ratio of the existing partners. Hence,.

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Scarifying ratio = Old ratio – New ratio.

Revaluation Account : The revaluation account is an account which prepared to revaluation of

liabilities and assets of the firm in order to find out net profit or net loss on revaluation of the
liabilities and assets of the firm. When the assets value decreases or liability value increases ,
they should be debited to revaluation account and if asset value increases or liability decreases
it should be credited to revaluation account. The profit or loss on revaluation is transferred to
partners in their profit sharing ratio.

Treating Goodwill in Books of Firm (Admission of New Partner) : The various methods of
treating goodwill in the books of the firm at the time of admission of a new partner are:

(1) When Goodwill is valued by the firm: In this case the goodwill of the firm is valued by
the existing partners and shared by them in their profit sharing ratio. The entry in this
case is:

Goodwill account Dr
To Existing partners capital accounts.

(2) When the Goodwill is Received in Cash and Retained in the Business: The amount of
goodwill brought in by the incoming partner is taken to the books of account. The existing
partners apportion the goodwill among themselves in the sacrificing ratio. The amount is
retained in the business as additional working capital.

If the sacrificing ratio is not known, then the amount of goodwill is credited to the existing
partners’ Capital Accounts in the old profit sharing ratio. This is because the ratio of their
sacrificing coincides with their old profit sharing ratio.

WHEN GOODWILL AMOUNT BROUGHT BY BANK ACCOUNT DR

NEW PATRNER TO GOODWILL ACCOUNT.
WHEN GOODWILL IS CREDITED TO THE GOODWILL ACCOUNT DR
EXISTING PARTNERS CAPITAL ACCOUNT TO EXISTING PARTNERS CAPITAL
ACCOUNTS.

(3) When the Amount of Goodwill is received by the Firm and is withdrawn by the Old
Partners: The amount of goodwill brought in by the incoming partner is credited to the existing
partners with their respective share of goodwill and they may withdraw the amount fully or
partially.

In the previous method, the cash is retained in the business as an additional capital, but under
this method, the existing partners withdraw either full or partially the amount of goodwill.

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Thus, in addition to the above entries in (2) above, the following entry is needed to record the
withdrawals of the amount by the existing partners:

EXISTING PARTNERS CAPITAL ACCOUNTS DR

TO BANK ACCOUNT.

Retirement of a partner
The retirement of a partner extinguishes his interest in the Partnership firm and this leads to
dissolution of the firm or reconstitution of the Partnership. A partner, who goes out of a firm, is
called retiring partner or outgoing partner. Causes for the retirement may be that a retiring
partner may be too old or he may have better opportunity in a different line or he may dislike
the co-partners’ attitude or any other reasons.

A partner may retire-

a. with the consent of all the other partners,

b. in accordance with an express agreement by the partners, or
c. where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.

When a partner retires, the following adjustments must be made:

1. Adjustment of accumulated reserves and undistributed profit and losses.

2. Revaluation of assets and liabilities.
3. Adjustment for goodwill of the firm.
4. Calculation of the amount due to retiring partner and the mode of payment.

Gaining Ratio : Gaining Ratio is calculated at the time of retirement or death of partner. It is the
excess of new ratio over old ratio of old partners except retire or dead partner.

Gaining Ratio = New Ratio - Old Ratio

This ratio is the share of profit which is given by retired partner to the partners who are still
exist in partnership firm.

PROBLEMS

1. Prepare necessary accounts under (a) Fixed capital method and (b) Fluctuating capital
method.

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Particulars Partner A Partner B

Drawings 4000 5000
Capital 80000 60000
Interest on capital 10% p.a. 10% p.a.
Interest on drawings 6% p.a. 6% p.a.

The profit for the year was Rs.15000 and their profit sharing ratio is 3:2.

2. Prepare necessary accounts under (a) Fixed capital method and (b) Fluctuating capital
method.
Particulars Partner X Partner Y Partner Z
Drawings 10000 8000 7000
Capital 100000 80000 70000
Interest on capital 10% p.a. 10% p.a. 10% p.a.
Interest on drawings 6% p.a. 6% p.a. 6% p.a.
Salary 10000 ----- -----

The profit for the year was Rs.50000 and their profit sharing ratio is 2:2:1.

3. A and B are partners sharing profits and losses in the ratio 3:2.they admitted C in to
partnership for 1/5th profits. Calculate their new profit sharing ratio.
4. A, B and C are equal partners. They admitted D in to partnership for 1/4 th share in future
profits. Calculate their new profit sharing ratio.

5. X and Y are partners sharing profits and losses in the ratio 5:3. They admitted Z by giving
1/10th share of X and 1/10th share of Y in future profits. Calculate new profit sharing ratio.

6. A and B are partners sharing profits and losses in the ratio 5:3. They admitted C as a new
partner. A surrendered 1/5 of his share and B surrendered 1/3 rd of his share in favour of C.
Calculate new profit sharing ratio

7. Arun and Tharun are partners sharing profits and losses in the ratio 3:2. They admitted
Charan and their new profit sharing ratio is 2:1:2. Calculate sacrifying ratio.

8. A and B are partners sharing profits and losses in the ratio 5:3. They admitted C and their
profit sharing ratio becomes 2:2:1. Calculate sacrificing ratio.

9. The following is the balance sheet of Ajay and Bharath who share profits and losses in the
ratio of 3:2.
Liabilities Rs. Assets Rs.

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Creditors 30000 Cash 5000

Bills payable 20000 Furniture 20000
General reserve 50000 Machinery 40000
Capitals: Debtors 45000
Ajay 30000 Bills receivable 25000
Bharath 20000 Stock 15000
---------- ---------
150000 150000
----------- ----------
th
Mr. Chiru was admitted in to the firm for 1/4 share in future profits on the
following conditions:
a) C should bring Rs.20000 as capital
b) The firm goodwill is valued at Rs.10000
c) Furniture and Machinery was depreciated by 5% and 10%.
d) Create 5% reserve for bad debts.
Show necessary journal entries and prepare ledger accounts and balance sheet.

10. X and Y share profits and losses in the ratio 2:1. Their balance sheet as on 31.3.2017 was as
follows:
Liabilities Rs. Assets Rs.
Creditors 50000 Cash 5000
Bills payable 30000 Furniture 30000
General reserve 30000 Machinery 50000
Capitals: Debtors 35000
X 50000 Bills receivable 25000
Y 20000 Stock 35000
---------- ---------
180000 180000
----------- ----------

Mr. Z was admitted in to the firm for 1/4th share in future profits on the following conditions:

a) Z should bring Rs.25000 as capital

b) The firm goodwill is valued at Rs.12000
c) Furniture and Machinery was depreciated by 5% and 10%.
d) Create 5% reserve for bad debts.

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11. X and Y share profits and losses in the ratio 2:1. Their balance sheet as on 31.3.2017 was as
follows:
Liabilities Rs. Assets Rs.
Creditors 50000 Cash at bank 18000
Bills payable 20000 Furniture 8000
Reserve fund 30000 Machinery 22000
Capitals: Debtors 42000
X 40000 Buildings 50000
Y 20000 Stock 20000
---------- ---------
160000 160000
th
Mr. Z was admitted in to the firm for 1/4 share in future profits on the following
conditions:
a) Z should bring Rs.20000 as capital
b) The firm goodwill is created at Rs.15000
c) Create 5% reserve for bad debts.
d) The assets and liabilities are revalued as follows:
Stock Rs.18000; Buildings Rs.60000; Furniture Rs.7600;
Machinery Rs.20000 Creditors Rs.48000.
12. X and Y share profits and losses in the ratio 2:1. Their balance sheet as on 31.3.2017 was as
follows:
Liabilities Rs. Assets Rs.
Creditors 40000 Cash 5000
Bank OD 20000 Furniture 25000
Reserve fund 15000 Machinery 40000
Capitals: Debtors 20000
X 45000 Buildings 35000
Y 20000 Stock 15000
---------- ---------
140000 140000
----------- ----------

Mr. Z was admitted in to the firm for 1/4th share in future profits on the following conditions:

a) Z should bring Rs.10000 as capital

b) The firm goodwill is created at Rs.9000
c) Create 5% reserve for bad debts.
d) The assets and liabilities are revalued as follows:
Stock Rs.12000; Buildings Rs.42000; Furniture Rs.22000;

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Creditors Rs.38000
e) A liability of Rs.3000 was not shown in books.

13. A and B share profits and losses in the ratio 3:1. Their balance sheet as on 31.12.2017 was
as follows:

Liabilities Rs. Assets Rs.

Bank OD 25000 Land and buildings 60000
Creditors 60000 Cash 8000
Bills payable 15000 Furniture 20000
P&L A/c 40000 Machinery 40000
Capitals: Debtors 62000
A 60000 Stock 30000
B 20000
---------- ---------
220000 220000

They admitted C on the following conditions:

a) C should bring Rs.30000 as capital and Rs.20000 as goodwill.

b) Furniture and Machinery was depreciated by 5% and 10%.
c) Write off Rs.2000 as bad debts. Create 5% reserve for bad debts.
d) Appreciate land and buildings by 20%.
e) Stock to be valued at Rs.27000.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
C admission.

14. Satyam and Sivam are in partnership sharing profits and losses in the proportion of 2/3 and
1/3 respectively. Their balance sheet as on 31.12.2017 was as follows:

Liabilities Rs. Assets Rs.

Bank loan 50000 Land and buildings 100000
Creditors 100000 Cash 40000
Bills payable 40000 Furniture 35000
General reserve 60000 Machinery 80000
Capitals: Debtors 90000
Satyam 100000 Stock 40000
Sivam 50000 150000 P&L A/c 15000
---------- ---------

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400000 400000
----------- ----------
rd
On the above date Surya was admitted for 1/3 share on the following
conditions:
a) He should bring Rs.80000 of which Rs. Rs.30000 was for goodwill.
b) Investments of Rs.10000 were not shown in books.
c) Provide 5% RBD and 2% reserve for discount on creditors.
d) Furniture, stock and Machinery was depreciated by 5% .
e) Appreciate land and buildings by 15%.

15. Seed and Plant are in partnership sharing profits and losses in the proportion of 3/5and 2/5
respectively. Their balance sheet as on 31.12.2017 was as follows:

Liabilities Rs. Assets Rs.

Bank loan 70000 Land and buildings 100000
Creditors 100000 Cash 25000
Bills payable 50000 Furniture 30000
General reserve 30000 Machinery 80000
Capitals: Debtors 90000
Seed 100000 Stock 40000
Plant 50000 150000 P&L A/c 20000
Cash at bank 25000
---------- ---------
400000 400000

On the above date Flower was admitted for 1/3rd share on the following conditions:

a) He should bring Rs.60000 of which Rs. Rs.20000 was for goodwill.

b) Investments of Rs.8000 were not shown in books.
c) Provide 5% RBD and 2% reserve for discount on creditors.
d) Furniture, stock and Machinery were depreciated by 10%.
e) Appreciate land and buildings by 20%.

16. A and B share profits and losses in the ratio 3:1. Their balance sheet as on 31.12.2017 was
as follows:
Liabilities Rs. Assets Rs.
Bank OD 25000 Land and buildings 60000
Creditors 60000 Cash 8000
Bills payable 15000 Furniture 20000

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P&L A/c 30000 Machinery 40000

Workmen compensation Debtors 62000
Fund 10000 Stock 30000
Capitals:
A 60000
B 20000
---------- ---------
220000 220000

They admitted C on the following conditions:

a) C should bring Rs.30000 as capital and Rs.20000 as goodwill. The goodwill amount to be
retained in the firm.
b) Furniture and Machinery was depreciated by 5% and 10%.
c) Work men compensation fund is fixed at Rs.8000
d) Write off Rs.2000 as bad debts. Create 5% reserve for bad debts.
e) Appreciate land and buildings by 20%.
f) Stock to be valued at Rs.27000.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
C admission.

17. A and B share profits and losses in the ratio 3:1. Their balance sheet as on 31.12.2017 was
as follows:

Liabilities Rs. Assets Rs.

Bank OD 25000 Land and buildings 60000
Creditors 60000 Cash 8000
Bills payable 15000 Furniture 20000
P&L A/c 30000 Machinery 40000
Workmen compensation Debtors 62000
Fund 10000 Stock 30000
Capitals:
A 60000
B 20000
---------- ---------
220000 220000
----------- ----------

They admitted C on the following conditions:

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a) C should bring Rs.30000 as capital and Rs.20000 as goodwill. The goodwill amount to be
retained in the firm.
b) Furniture and Machinery was depreciated by 5% and 10%.
c) Work men compensation fund is fixed at Rs.8000
d) Write off Rs.2000 as bad debts. Create 5% reserve for bad debts.
e) Appreciate land and buildings by 20%.
f) Stock to be valued at Rs.27000.

Prepare necessary ledger accounts in the books of the firm and also balance
sheet after C admission.

18. A and B share profits and losses in the ratio 2:1. Their balance sheet as on 31.12.2017 was
as follows:
Liabilities Rs. Assets Rs.
Bank OD 25000 Land and buildings 60000
Creditors 60000 Cash 8000
Bills payable 15000 Furniture 20000
P&L A/c 30000 Machinery 40000
Debtors 52000
Stock 30000
Capitals:
A 60000
B 20000
---------- ---------
210000 210000
----------- ----------

They admitted C on the following conditions:

a) C should bring Rs.30000 as capital and Rs.20000 as goodwill. The goodwill amount to be
withdrawn by old partners.
b) Furniture and Machinery was depreciated by 5% and 10%.
c) Write off Rs.2000 as bad debts. Create 5% reserve for bad debts.
d) Appreciate land and buildings by 20%.
e) Stock to be valued at Rs.25000.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after C
admission.

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19. A, B and C share profits and losses in the ratio 2:2:1. Their balance sheet as on 31.12.2015
was as follows:
Liabilities Rs. Assets Rs.
Bank loan 20000 Land and buildings 120000
Creditors 200000 Cash 40000
Bills payable 40000 Furniture 20000
Reserve fund 30000 Machinery 100000
Workmen compensation Debtors 90000
Fund 10000 Stock 30000
Capitals: Patents 20000
A 40000 P&L A/c 20000
B 50000
C 30000
---------- ---------
420000 420000

They admitted D on the following conditions:

a) D should bring Rs.35000 as capital and Rs.25000 as goodwill.

b) The goodwill amount to be withdrawn by old partners.
c) Machinery was depreciated by 5% .
d) Work men compensation fund is determined at Rs.7000
e) Write off Rs.2000 as bad debts.
f) Value stock and buildings at Rs.26000 and Rs.170000 respectively.
g) A bank OD of Rs.4000 not shown in books.

20. A, B and C share profits and losses in the ratio 2:2:1. Their balance sheet as on 31.12.2015
was as follows:

Liabilities Rs. Assets Rs.

Loan 20000 Land and buildings 100000
Creditors 180000 Cash 30000
Bills payable 42000 Furniture 30000
Reserve fund 50000 Machinery 100000
Workmen compensation Debtors 92000
Fund 8000 less: RBD 2000 90000
Stock 30000

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Capitals: Trade marks 20000

A 50000 P&L A/c 30000
B 50000
C 30000
---------- ---------
430000 430000
----------- ----------

They admitted D on the following conditions:

a) D should bring Rs.45000 as capital and Rs.20000 as goodwill.

b) The goodwill amount to be withdrawn by old partners.
c) Machinery and furniture was depreciated by 5% .
d) Work men compensation fund is determined at Rs.5000
e) Increase RBD to Rs.5000
f) Value stock and buildings at Rs.28000 and Rs.160000 respectively.

21. Suresh and Vamsi share profits and losses in the ratio 3:2. Their balance sheet as on
31.12.2017 was as follows:

Liabilities Rs. Assets Rs.

Bank OD 10000 Land and buildings 60000
Creditors 28000 Cash 3000
Bills payable 12000 Furniture 10000
General reserve 20000 Investments 25000
Capitals: Debtors 15000
Suresh 40000 Stock 20000
Vamsi 30000 Patents 7000
---------- ---------
140000 140000

They admitted Naveen on the following conditions:

a) He should bring Rs.30000 of which Rs.10000 is for goodwill.

b) The goodwill amount to be withdrawn by old partners.
c) Furniture depreciated by 10% and patents written off by Rs.1000.
d) Write off Rs.1000 as bad debts. Create 5% reserve for bad debts.
e) Land and buildings to be valued at Rs.75000.

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f) Stock to be valued at Rs.25000.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
admission.

22. Ram and Lakhi share profits and losses in the ratio 2:1. Their balance sheet as on 31.12.2017
was as follows:
Liabilities Rs. Assets Rs.
Creditors 25000 P&L A/c 15000
Bills payable 15000 Cash 5000
General reserve 9000 Furniture 20000
Ram current A/c 21000 Debtors 30000
Capitals: Stock 15000
Ram 40000 Trade marks 20000
lakhi 20000 Lakshman
Current A/c 25000
---------- ---------
140000 140000

They admitted Bharath on the following conditions:

a) He should bring Rs.18000 for capital.

b) The goodwill of the firm valued at Rs.6000
c) Furniture to be valued at Rs.18000 and trade marks to be amortised by 10%.
d) Create 10% reserve for bad debts.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
admission.

23. Ramesh and Suresh share profits and losses in the ratio 5:3. Their balance sheet as on the
date of admission of Harish was as follows:

Liabilities Rs. Assets Rs.

Creditors 150000 Machinery 100000
Bills payable 50000 Cash 40000
General reserve 160000 Furniture 60000
Bank loan 200000 Debtors 250000
Stock 80000
Patents 30000
Capitals: Buildings 300000
Ramesh 200000 P&L A/c 40000

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Suresh 140000
---------- ---------
900000 900000

a) He should bring Rs.100000 for capital and Rs.40000 for goodwill.

b) The new profit sharing ratio of Ramesh, Suresh and Harish is 3:3:2.
c) Furniture and Machinery was depreciated by 10%.
d) Write off Rs.5000 as bad debts. Create 10% reserve for bad debts.
e) Appreciate land and buildings by 20%.
f) Create a reserve for discount on debtors and creditors @ 2%.
g) Stock is valued at Rs.72000.
h) Investments of Rs.20000 not appear in books.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
admission.

24. A and B share profits and losses in the ratio 3:2. Their balance sheet as on 31.12.2017 was
as follows:
Liabilities Rs. Assets Rs.
Bank(Cr bal) 23000 Land and buildings 80000
Creditors 50000 Cash 20000
Bills payable 27000 Furniture 15000
General reserve 30000 Investments 30000
Book debts 50000
Stock 40000
Capitals: Machinery 65000
A 100000
B 70000
---------- ---------
300000 300000

They admitted C and their new profit sharing ratio becomes 2:2:1.

a) He should bring Rs.45000 for capital and Rs.20000 for goodwill.

b) Half of the goodwill amount to be withdrawn by old partners.
c) Furniture and Machinery was depreciated by 5% and 10%.
d) Write off Rs.1000 as bad debts. Create 10% reserve for bad debts.

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e) An unrecorded liability of Rs.2000 not appears in books.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
admission.

25. A, B and C are partners sharing profits and losses in the ratio 2:2:1. Their balance sheet is
given below:
Liabilities Rs. Assets Rs.
Loan 20000 Land and buildings 100000
Creditors 180000 Cash 30000
Bills payable 20000 Furniture 30000
Reserve fund 50000 Machinery 100000
Capitals: Debtors 90000
A 50000 Stock 30000
B 50000 Trade marks 20000
C 30000
---------- ---------
400000 400000
----------- ----------
C retires from the firm on the following conditions:
a) Goodwill is valued at Rs.25000
b) Machinery and furniture was depreciated by 5% .
c) Stock is valued at Rs.28000
d) Create RBD at 5% on debtors.
e) Value land and buildings at Rs.160000.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
retirement of C.

26. X, Y and Z share profits and losses in the ratio 1:3:1. Their balance sheet as on 31.3.2017
was as follows:
Liabilities Rs. Assets Rs.
Creditors 50000 Cash 5000
Bills payable 30000 Furniture 30000
General reserve 30000 Machinery 50000
Capitals: Debtors 35000
X 50000 Bills receivable 25000
Y 20000 P&L a/c 30000
Z 30000 Stock 35000
---------- ---------

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210000 210000
----------- ----------
Mr. X retires from the firm on the following conditions:
a) Stock is valued at Rs.30000.
b) The firm goodwill is valued at Rs.12000
c) Furniture and Machinery was depreciated by 5% and 10%.
d) Create 5% reserve for bad debts.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
retirement of X.

27. A, B,C and D are partners sharing profits and losses in the ratio 4:3:2:1. Their balance sheet
is given below:
Liabilities Rs. Assets Rs.
Loan 100000 Land and buildings 400000
Creditors 200000 Cash at bank 70000
Bills payable 50000 Furniture 75000
Machinery 250000
Debtors 250000
Stock 75000
Capitals: Patents 30000
A 400000 goodwill 50000
B 300000 investments 120000
C 200000 P&L A/c 30000
D 100000
---------- ---------
1350000 1350000
----------- ----------

C retires from the firm on the following conditions:

a) assets are revalued as follows:

Furniture Rs.70000; stock Rs.68000 ; plant and machinery Rs.225000;
land and buildings Rs.500000
b) Bad debts to be written off Rs.5000
c) An unrecorded liability of Rs.7000 not recorded in books.
d) Goodwill of the firm is to be eliminated or written off.
e) The amount paid to Mr.C to be paid Rs.50000 by cheque.
f) Investments are valued 10% below cost.

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Prepare necessary ledger accounts in the books of the firm and also balance sheet after
retirement of C.

28. Naveen , Vamsi and Ravi share profits and losses in the ratio 3:2:1. Their balance sheet as
was as follows:
Liabilities Rs. Assets Rs.
Creditors 120000 Cash 60000
Bills payable 80000 Furniture 30000
General reserve 30000 Machinery 100000
Bank OD 50000
Capitals: Debtors 70000
Naveen 120000 Buildings 200000
Vamsi 80000 goodwill 40000
Ravi 40000 Stock 20000
---------- ---------
520000 520000
----------- ----------

Mr. Vamsi retires from the firm on the following conditions:

a) The amount due to retiring partner was to be paid Rs.30000 in cash and remaining
transfer to his loan account.
b) The goodwill amount valued at Rs.28000.
c) Furniture and Machinery was depreciated by 5% and 10%.
d) Write off Rs.2000 as bad debts. Create 10% reserve for bad debts.
e) An outstanding wages of Rs.2000 not recorded in books.
.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
retirement of Vamsi.

29. X, Y and Z share profits and losses in the ratio 3:2:1. Their balance sheet was as follows:
Liabilities Rs. Assets Rs.
Creditors 80000 Cash 30000
Bills payable 20000 Investment 25000
Bank loan 50000 Machinery 100000
Capitals: Debtors 80000
X 90000 Buildings 75000
Y 60000 Stock 20000

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Z 30000
---------- ---------
330000 330000
----------- ----------

Mr. Z retires from the firm on the following conditions:

a) The goodwill amount valued at Rs.30000 without opening goodwill A/c.

b) Stock and Machinery was depreciated by 10% and 5%.
c) Write off Rs.2000 as bad debts. Create 10% reserve for bad debts.
d) An amount payable to workers Rs.2000 not appears in books.
e) The amount due to retiring partner was to be paid Rs.15000 in cash and remaining
transfer 6% Z loan account.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
retirement of Z.

30. Anand, Bharath and Charith share profits and losses in the ratio 3:2:1. Their balance sheet
was as follows:
Liabilities Rs. Assets Rs.
Creditors 40000 Bank 15000
Capitals: Furniture 15000
Anand 60000 Buildings 85000
Bharath 45000 Debtors 25000
Charith 30000 Stock 35000

---------- ---------
175000 175000
----------- ----------

Bharath retires from the firm on the following conditions:

a) The goodwill amount valued at Rs.30000 and adjustment in this respect be made
without raising the goodwill account.
b) Buildings are appreciated by Rs.15000.

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c) Create 3% reserve for bad debts.

d) Rs.15000 to be paid immediately and balance due to him treated as a loan carrying
interest at 6% per anum.

Prepare necessary ledger accounts in the books of the firm and also balance sheet after
retirement of Bharath.

Unit V
Liquidation

A company is a creation of law and it comes to an end only through the process of law. A
company ceases to exist when it is dissolved. One of the ways to dissolve the company is to
resort the process of winding up (or) liquidation.
When therefore winding up commences the company is said to be in liquidation. The
companies act 2013 lays down the procedure by which companies can be wound up. Winding
up is generally two types.
(a) When a court order to a company to wind up (compulsory winding up).
(b) When the numbers of a company. Alone (or) jointly with creditors takes steps to wind up
the company (voluntary winding up).
WINDING UP BY COURT:
A winding up by the court (or) compulsory winding up, as it is often called, is initiated by
an application by way of petition prevented to the court for a winding up order.
VOLUNTARY WINDING UP :

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A company may be wound up voluntary.

(a) When the period (if any fixed for it duration as expire, (or) an event on the having of
which the company is to be wound up has happen).
(b) If a company pass a special resolution to wound up voluntary.
LIQUIDATOR:
(a) COMPULSORY WINDING UP:
The official liquidator attracted to each high court will become the liquidator on a winding
up order being passed. He may also be appointed as a provisional liquidator with the same
powers.
POWERS OF LIQUIDATOR:
As soon as winding up order is made, (or) A provisional liquidator is appointed the
liquidator will take into his custody (or) under his control all the properties of the company and
its efforts and actionable claims. For the purpose he can make a request to the chef presidency
magistrate (or) the district Magistrate concerned.
The liquidator may, the sanction the court:
1. Institute (or) defend any suit, proseution (or) other legal proceedings in the name of the
company.
2. Carry on the bussiness of the company for its beneficial winding up.
3. Cell companies properties.
4. Raise money on the security of the companies assets.
5. Do all other things necessary for the winding up.
He may without sanction of the court:
1. Do all acts and execute in the name of the company all deeds, receipts and other
documents.
2. Inspect the records and returns of the company on the files of the registor without
payment of any fee.
3. Prove, rank and claim in the insolvency of an any contributor and to receive dividents
there form.
4. Draw accept make endrosed any negotiable instrument in the name of the company.
5. Take out in his official name letters of administration to any diseased contributory and to
other necessary things to obtain payment.
6. Appoint an agent.

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The liquidator may with the sanction of the court (or) special resolution.
1. Pay any class of creditors in full.
2. Make compromise (or) arrangement with creditors.
3. Compromise with a contributory or debtor.
LIQUIDATORS FINAL STATEMENT OF ACCOUNTS:
The liquidators task is to realise assets and disburse the amount among those who have a
rightful claim to it. In each case the liquidator has to prepare a statement showing how much
he realised and how the amount was distributed.
The following is the order in which disbursement will be made by the liquidator.
1. Secured Creditors.
2. Legal charges.
3. Remuneration to the liquidator.
4. Cost of winding up (or) Liquidation expenses.
5. Preferencial creditors.
6. Debenture holders (or) Other creditors having a floating charge on the assets of the
company.
7. Unsecured creditors.
8. Preferencial share holders.
9. Equity share holders.
While preparing the liquidators statement of account it should be remembered that there
is no double entry involved. It is only a statement although presented in the form of an account.
NOTE:
It is a summary of cash back (Receipts and Payments) after the start of the liquidation.

1. The Altra limited went into liquidation. Its assets required Rs.3,50,000 excels among
released by sale of securities held by secured creditors. The following was the position.

Share capital 10,000 shares of Rs.10 each 1,00,000

Secured creditors (securities realized Rs.40,000) 35000

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Preferences are creditors 6000

Unsecured creditors 140000
Debentures holders having floating changes on the 250000
assets of the company
Liquidation expences 5000
Liquidators remuneration 7500

2. A company went into liquidation on 31/03/2016. When the following balance sheet was
prepared

Liabilities Rs. Rs. Assets Rs

Share capital 1,95,000 Goodwill 50,000
Sundry Creditors : Lease hold property 48000
Preferential 24200 Plant & Machinery 65500
Partly secured 55310 Stock 56800
Unsecured 99790 1,79,300 Debtors 64,820
Bank O.D. (unsecured) 12000 Cash 2500
P & L A/C 98680
3,86,300 3,86,300
The liquidator realized the assets as follows:
Leasehold property which was used in the first instance to pay partly secured
creditors(pro-rata) Rs.35000.

Plant & Machinery 51000

Stock 390000
Debtors 58500
Cash 2500
The expenses of liquidator amounted to Rs.1000 and the liquidator remuneration was
agreed @ 2.5% on the amount realized, including cash and 2% on the amount paid to
unsecured. You are required to prepare liquidator final account.

3. The following particulars related to a company which has gone into voluntary liquidation. You
are required to prepare liquidator final statement of Alc’s allowing for his remuneration at
2% on the amount realized and 3% on the amount distributed to unsecured creditors

Assets realized 79300

Liquidation expenses 2000
Preferential creditors 15000
Unsecured creditors 48000
Debentures 15000

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4. The following particulars related to a company which has gone into voluntary liquidation.
You are required to prepare liquidator final statement of Alc’s allowing for his remuneration
at 2% on the amount realized and 3% on the amount distributed to unsecured creditors

Assets realized 45300

Liquidation expenses 1000
Preferential creditors 10000
Unsecured creditors 38000
Debentures 10000

5. A liquidator is entirely to received remuneration at the rate 2% of assets realized and 3% of

among distributed among unsecured creditors the assets realized to Rs. 25,00,000 against
which payment was made as follows.

Unsecured creditors 13,08,495

Liquidation expenses 25000
Preferential creditors 75000
Secured creditors 10,00,000
Calculate remuneration payable to liquidator.

6. The balance sheet of B Hd as on 31-12-2006 was as follows:

Liabilities RS. Assets Rs.

Share capital : Land & Building 25000
8000 pref. shares of Rs.10 each 80000 Other fixed assets 200000
12000 equity shares of Rs.10 each 1,20,000 Stock 5,25,000
Bank loan 400000 Debtors 100000
8% Debentures 100000 P & L A/C 58000
Interest o/s on debentures 8000
Creditors 200000
9,08,000 9,08,000

The company went into liquidation on that data. Prepare liquidators final statement.
i) Liquidation expenses and liquidator’s remuneration amounted to Rs.3000 and
Rs.10000 respectively.
ii) Bank loans are secured by pledge of stock
iii) Debenture and interest there on secured by floating charges
iv) Final assets were realized @ book value and current assets @ 80% of book value.

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7. The following particulars relates to a limited company which has gone into voluntary
liquidation. You are required to prepare liquidator final A/C allowing for his remuneration at
@ 2% on the amount realized and 2% on the amount distributed among unsecured
creditors other than preferential creditors.

Preferential creditors 10000

Unsecured creditors 32000
Debentures 10000
The assets realized
Land & building 20000
Plant & Machinery 18650
Furniture 1000
The liquidation expenses amounted to Rs.1000

8. A company went into voluntary liquidation. Your are required to prepare liquidator final A/C
allowing remuneration at @ 4% on the assets realized and 3% on the amount distributed
among unsecured creditors other than preferential creditors.

Secured creditors (Secured by land) 100000

Preferential creditors 20000
Unsecured creditors 64000
Debentures 100000
The assets realized
Land 200000
Plant & Machinery 40000
Furniture 5000
Liquidation expenses amounted to 2000

9. A company went into voluntary liquidation. Your are required to prepare liquidator final A/C
allowing remuneration at @ 4% on the assets realized and 3% on the amount distributed
among unsecured creditors other than preferential creditors.

Secured creditors (Secured by land) 200000

Preferential creditors 40000
Unsecured creditors 128000
Debentures 200000
The assets realized
Land 400000
Plant & Machinery 80000

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Furniture 10000
Liquidation expenses amounted to 4000

10. The following particulars relate to ‘R’ company limited as on 31-3-2017 which has gone into
voluntary liquidation on solid date. You are required calculate liquidator remuneration in
required to prepare liquidator final A/C allowing remuneration at @ 20% on asset realized &
2% on amount distributed among unsecured creditors other than preferential creditors.

Preferential creditors 20000

Unsecured creditors 64000
Debentures 20000
The assets realized
Land & Building 40000
Plant & Machinery 37300
Furniture 2000
Liquidation expenses amounted to 2000

11. The liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on

the amount distributed to unsecured creditors. The assets realized Rs.10,00,000/- Amount
available for distribution to unsecured creditors before paying liquidator remuneration is Rs.
4,12,000/-. Calculate liquidator remuneration if The surplus Is insufficient to pay unsecured
creditors in total.

12. A liquidator is entitled to receipts remuneration at 2% on assets realized, 3% on amount

distributed to preferential creditors and 3% on payment made to unsecured creditors. The
assets were realized Rs.25,00,000/- against which payment was made as follows.

Secured creditors (Secured by land) 100000

Liquidation expenses 25000
Secured creditors 1000000
Preferential creditors 75000
The amount due to unsecured creditors was 1500000
You are asked to calculate total remuneration payable to liquidator.

13. The liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on

the amount distributed to unsecured creditors. The assets realized Rs.6,00,000/- Amount
available for distribution to unsecured creditors before paying liquidator remuneration is Rs.
2,10,000/-. Calculate liquidator remuneration if the surplus Is insufficient to pay unsecured
creditors in total.

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14. The following particulars related to a limited company which has gone into voluntary
liquidation, you are required to prepare liquidator statement of account allowing for his
remuneration at the @ 2.5% on all assets realized excluding call money received and 2% on
the amount paid to unsecured to creditors including preferential creditors.

Share capital Issued:

a. 10000 preferential shares of Rs.100 each fully paid up.

b. 50000 equity shares of Rs each fully paid up.
c. 30000 equity shares of Rs.10 eachRs.8 paid up.

Assets realized Rs.2000000/- excluding the amount realized by sale of securities held by
partly secured creditors.

Particulars Rs.
Preferential creditors 50000
Unsecured creditors 1800000
Partly secured creditors (assets realized Rs.320000) 350000
Debentures holders having floating charge on all assets of the company 600000
Expenses of liquidation 10000
A call of Rs. 2 per share on partly paid up equity shares was duly received except in
case of one share holders owning 1000 shares. Also calculate the Y of amount paid to
unsecured creditors to the unsecured creditor’s total.

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