1. Chapter 1Not For Profit OrganisationsACCOUNTANCYClass XII

2. Index Chapter 1 Not for Profit Organisation Chapter 2 Partnership Fundamentals Goodwill Chapter 3 Comparative and Common Size Statements Chapter 4 Change In Profit Sharing Ratio Admission of a Partner Retirement of a Partner Retirement & Death Capital Adjustment Ratio Analysis Chapter 5 - Cash Flow Statements Chapter 6 Company Accounts Accounting for Share Capital Company Accounts Issues of Debenture Chapter 7 - Company Accounts Redemption of Debenture 3. Not For Profit OrganisationsOrganisations which are formed not for earning profits but for a charitable or social purpose are called as not for profit organisations. FEATURES:1) Separate legal entity 2) Service motive 3) Form 4) Profit- not a motivator 5) Funding 6) Accounts 4. Separate legal entity According to the principle of separate legal entity, a not for profit organisation is an separate entity independent of its members. These are the separate entity promoted by individuals or companies, but these are not owned by the promoters or managers. 5. Service Motive These organisations are formed For welfare of the society. For providing services to its members. Main motive is to provide services. 6. Form Charitable hospitals Schools Trusts Colleges Clubs Hospitals Societies 7. Profit not a motivator NPOs do not operate with the objective of earning profits. Their aim is to promote art, science, commerce, religion, culture, education, charity, sports etc. Some NPOs may involve in trading activities Main objective is not to earn the profit but tobenefit the members and society. Any excess of income over expenditure is termed as SURPLUS while any excess of expenditure over income is termed as DEFICIT. 8. Funding The main sources of income of such organisations are: Subscriptions from members, Donations, Legacies, Grant-in-aid, Income from investments, etc. 9. Accounts The Not-for-Profit Organisations are also required to prepare financial statements at theend of the each accounting period. They have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation. The final accounts of a not-for-profit organisation consist of the following: Receipt and Payment Account Income and Expenditure Account, and Balance Sheet. 10. Receipt and Payment A/c Features Summary of the cash book. Receipts are recorded on the debit side Payments are entered on the credit side. Records all cash transactions irrespective of the period. Includes all receipts and payments whether they are of capital nature or of revenue nature. No distinction is made in receipts/payments made in cash or through bank. No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this account. It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with the year end balance of cash in hand/ cash at bank or bank overdraft. 11. Steps: Receipt & Payment A/c Steps in preparation of Receipt & Payment A/c Take the opening balances of cash in hand and cash at bank & enter them on the debit side. In case there is a bank overdraft in beginning of the year, it will be recorded on credit side. Show the total amounts of all receipts on its debit side irrespective of their nature (whether capital or revenue) & whether they belong to past, present or future. Show the total amounts of all payments on its credit side irrespective of their nature & time period. None of the receivable income or payable expense is to be entered in this account. Find out the total of debit side & credit side of the account & enter the same on the credit side of cash/bank. If a balance comes out to be on debit side, take it as closing balance of bank overdraft. 12. Format Dr.Receipt & Payment A/c for the year ended _________Receipts To Bal b/d Cash xxx Bank xxx To Revenue Receipts To Capital Receipts To Bal c/d (Bank O/D)Amount PaymentsXxx Xxx Xxx xxxBy Bal b/d (Bank O/D) By Revenue Payments By Capital Payments By Bal Bank xxx Cash xxxA detailed & comprehensive Receipt & Payment A/c may appear as:Cr. Amount Xxx Xxx Xxx xxx 13. Format Receipts To Bal b/d Cash Bank To Revenue Receipts Subscription General Donations Sale of newspaper Sale of periodicals Sale of old sports material Locker rent Sale of scraps Proceeds of show Miscellaneous Receipts Entrance fee Grant in aid To Capital Receipts Legacies Life Membership fees Specific Donation Sale of Investment Sale of fixed assets Endowment Fund To Bal c/d (Bank O/D)Amount Payments By Bal b/d (Bank O/D) By Revenue Payments Wages & Salaries Rent, Rates & Taxes Insurance Printing & Stationary Postage Advertising Sundry Expenses Telephone charges Audit fees Honorarium Conveyance Newspapers Repairs By Capital Payments Purchase of fixed Assets Purchase of investments Fixed deposits By Bal Bank Cash Amount 14. Format A club has kept its accounts on cash basis and the figures for 2005 are given below. You are required to prepare receipts & payments A/c for the year 2005. Subscription Received5,90,600Entrance fee80,000Admission fee32,000Secretarys salary60,000Investment bought during the years2,22,000Expenses paid1,54,500Cash in hand (1.1.05)Solution:-94,700Locker rent received16,250General Donation1,50,000Receipts & payments A/c Receipts To balance b/d To subscription To Entrance fee To Admission fee To Lockers Rent To General DonationRs. 94,700 5,90,600 80,000 32,000 16,250 1,50,000Payments By Secretary Salary By Investment By Expenses By bal. c/d (balancing figure)Rs. 60,000 2,22,000 1,54,500 5,27,050 15. Class Practice Question Q. On 1/1/06, the opening balance was Rs. 18,000 of J. M. Trust, Delhi. The following transactions were held for the year ended 31/3/08. From these particulars, prepare a Receipts & payments account. Subscription received for current year8,50,000Subscription received for next year30,000Life Membership fees80,000Investments Furniture purchased2,50,000 30,000 16. Solution Dr Receipts To balance b/d To subscription Current Year 8,50,000 Next Year 30,000 To Life Membership feeReceipt & Payment A/c Rs.CrPaymentsRs.18,000 By Investment By Furniture By Sports Materials 8,80,000 By General Expenses 33,800 80,000 Less Unpaid Expenses 3,800 By bal. c/d (balancing figure)2,50,000 30,000 1,50,0009,78,0009,78,00030,000 5,18,000 17. Income & Expenditure A/c It is a nominal account. Debit all expenses & credit all incomes will be followed while preparing it. Opening & closing balance of cash at bank are not shown in it. It does not take into consideration both capital receipts & capital payments. Closing balance, if comes on debit side is known as surplus & on credit side, deficit. All non-cash adjustments like depreciation, outstanding or prepaid expenses & accrued or advance income, provision, etc. need to be adjusted through this account. It must be accompanied by Balance sheet in which personal & real accounts are recorded. 18. Steps Steps in preparation of Income & Expenditure A/c Pursue the Receipts & Payments Account thoroughly. Exclude opening & closing balance of cash & bank as they are not the income. Exclude the capital receipts & capital payments. Consider only revenue receipts to be shown on income side (credit side) of this account for the current year whether received or not. Take all revenue expenses of current year on debit side of this account whether paid or not. Non-Cash item like Deprecation, provisions profit / Loss on sale of assets etc. should be taken into consideration. Balance if any in debit side resembles surplus but on credit side it shows deficit. 19. Format Income & Expenditure A/c For the year ended Expenditures To all revenue payments (current year whether paid or not) To Depreciation To Bad debts To Loss on sale of fixed assets To Consumed part of medicine, stationery, spot equipments etc. To Surplus (Excess of income over Expenditure)AmountIncomes By all revenue receipts (current year whether received or not) By profit on sale of fixed assets By Deficit (Excess of expenditure over Income).Amount 20. Example Prepare an income & expenditure Account for the year ended 31st March, 2006 from Receipts & payments Account.Receipts Cash in hand Subscription Miscellaneous Income Sale of old furniture (Book value 390) Sale of old NewspaperAmount 9,600 2,48,000 14,800 6,300 500Payments Rent Honorarium to Clark Postage & stationary Printing charges Donation Cash in handAmount 42,400 61,200 5,300 61,200 11,000 98,100 21. Solution Income and Expenditure account Expenditure To Rent Add- O/s RentAmount Income 42,400 3,60046,000To Honorarium 61,200 Add Outstanding 9,80071,000To postage & stationery5,300To printing charges61,200To Donation11,000To loss on sale of furniture To Surplus (excess of income over expenditure)By Subscription 2,48,000 Less O/s subscription (04-05) 28,000 Add O/s Subscription (05-06) 20,000 By Income from Advertisement By Sale of old NewspaperAmount2,40,000 14,800 50070060,100 2,55,3002,55,300 22. DIFFERENCE BasisReceipt & Payment A/cIncome & Expenditure A/c1. NatureIt is the summary of cash BookIt is like profit & loss A/c2. Nature of ItemsIt records receipts & payments of revenue as well as capital natureIt records incomes & expenditures of revenue nature only.3. PeriodIt includes receipts & Its items relate to current Payments for preceding & year only. succeeding years4. Debit sideReceipts are recordedExpenditure are recorded 23. Balance Sheet The preparation of their Balance Sheet is on thesame pattern as that of the business entities. It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side. However, there will be a Capital Fund or General Fund in place of the Capital. The surplus or deficit as per Income and Expenditure Account shall be added to/deducted to this fund. It is also a common practice to add some of the capitalised items like legacies, entrance fees and life membership fees directly in the capital fund. 24. Balance Sheet Following procedure is adopted to prepare the Balance sheet. Take the capital fund as per opening balance sheet & add surplus or deduct deficit as per income & expenditure account. Further, add legacy, life membership fees, endowment fund received during the year. Take all fixed assets (not sold or destroyed) add additions made during the year les depreciation for assets used during the year. Compare items on receipt side of receipt & payment A/c with items on income side of income & expenditure A/c to determine advances & dues. Similarly, compare items of payments side of receipt & payment A/c with items of expenditure side of income & expenditure account to determine prepaid or outstanding expenses. Balance sheet resembles the position statement of the organization & is a true indicator of growth potential. 25. Opening Balance Sheet Balance sheet as onLiabilitiesCurrent liabilities Outstanding expenses Incomes in Advances Capital fund (Balancing Figure)AmountAssetsCash Bank Fixed assets Current assets Accrued Incomes Prepaid ExpensesAmount 26. Balance Sheet: At End Closing balance sheet is prepared at the end of the year after preparing Income & expenditure account. It maybe shown as:-LiabilitiesCapital fund Add Surplus Less Deficit Add life Membership Fees, Legacy, Endowment Fund Income in advance Specific Donations Outstanding Expenses Incomes in Advance Specific FundsAmount AssetsClosing Balance Cash Bank Net Fixed Assets Current Assets (closing Balances) Investments Prepaid Expenses Accrued Incomes.Amount 27. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c.STEP 1Opening balance of Cash and Bank is transferred to Opening Balance Sheet and Closing balances of Cash and Bank are transferred to Closing Balance Sheet. 28. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c.STEP 2 Items on the receipt side of Receipt & Payment A/c give the Components for Income Side for Income & Expenditure A/c. 29. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c.STEP 3Items on the payment side of Receipt & Payment A/c give the components for Expenditure side for Income & Expenditure A/c. 30. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c.STEP 4 Items of revenue nature (recurring too) are carried from Receipt & Payment A/c and after analysing adjustments if any, total amount for the Current year is transferred to Income & Expenditure A/c. 31. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c.STEP 5Items of Capital nature are adjusted through Balance Sheet. 32. PROCEDURE How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c.STEP 6Adjustments on Capital Nature Items are not to be considered while preparing Income & Expenditure A/c. 33. PROCEDUREResult The balance on Debit Side of Income & Expenditure A/c will show SURPLUS while that on Credit Side will show DEFICIT. This will be transferred to Closing Balance Sheet and Added/Subtracted as the case may be. 34. PRACTICE QUESTION Following is Receipt & payment of Stanford trust, prepare Income & Expenditure and balance sheet for the year ended 31/12/06. Receipts Cash in hand Cash at bank Subscription 2005 : 5,000 2006 : 83,000 2007 : 3,000 Sale of Investment Interest on Investment Sale of furniture (book value 3,400)AmountPayments14,000 Rent 60,000 Salary Postage Electricity charges Purchase of Furniture 91,000 Books 90,000 Defence bonds 2,000 Charity Cash in Hand 3,200 Cash at bankAmount 6,000 12,000 300 6,000 20,000 3,000 1,50,000 22,000 10,900 30,000Adjustments: 1) Subscription for 2006 still owing were 7,000. 2) Interest due on defence bonds was Rs. 7,000. 3) Rent still owing was Rs. 1,000. 4) Investment sold valued Rs. 80,000, Rs. 30,000 of Investment were still in hand. 5) Salary paid for the year 2007 is Rs. 2,000. 35. Solution Income and Expenditure account Expenditure RentAmount 6,000Add O/s Rent 1,000 Salary 12,000 Less paid for 2007: 2,000 Postage Electricity charges Charity Loss on sale of furniture Surplus7,000Income Subscription 2006 : 83,000 Add O/s Subscription: 7,00010,000 300 6,000 22,000 200Amount90,000Interest on Investment2,000Interest on defence bonds7,000Profit on sale of investment10,00063,500 1,09,0001,09,000 36. Solution WORKING NOTES:Balance Sheet Liabilities Capital fundAmount 1,92,400AssetsAmountCash in Hand14,000Cash at bank60,000Subscription5,000Furniture3,400Investment 1,92,4001,10,000 1,92,400 37. Solution Balance Sheet LiabilitiesAmount63,500Outstanding rent Subscription for 2007AmountCash in HandCapital fund 1,92,400Add SurplusAssets2,55,900 1,000 3,00010,900Cash at bank30,000Subscription7,000FurnitureBooks Defence bonds Investment20,0003,000 1,50,000 30,000Accrued interestPrepaid salary 2,59,9007,0002,000 2,59,900 38. EXAMPLE Prepare Income and Expenditure Account and Balance Sheet for the year ended March 31, 2007 from the following information Dr. Particulars Balance b/d Subscriptions: 2005-06 42,000 2006-07 4,47,000 2007-08 52,000 Entrance fees Locker rent Revenue from refreshment Income from investmentsReceipts and payment A/c AmountParticulars81,000 Salaries and Wages 2005-06 14,800 2006-07 93,200 Sundry expenses 5,41,000 Freehold land 96,000 Stationery 73,000 Rates Refreshment expenses 84,000 Telephone charges Investments 3,65,000 Audit fee Balance c/d 12,40,000Cr. Amount1,08,000 43,000 5,00,000 6,000 22,000 63,000 9,000 3,50,000 9,000 1,30,000 12,40,000 39. EXAMPLE The following additional information is provided to you: 1. There are 2500 members each paying an annual subscription of Rs. 200, Rs. 18,000 were in arrears for 200506 as on April 1, 2006. 2. There was an outstanding telephone bill for Rs. 1,400 on March 31, 2007. 3. Outstanding sundry expenses as on March 31, 2006 totaled Rs. 12,800. 4. Stock of stationery as on March 31, 2006 was Rs. 2000; on March 31, 2007, it was Rs. 3,600. 5. On March 31, 2006 Building stood at Rs. 4,00,000 and it was subject to depreciation @ 2.5% p. a. 6. Investment on March 31, 2006 stood at Rs. 8,00,000. 7. On March 31, 2007, income accrued on investments purchased during the year amounted to Rs. 17,500. 40. EXAMPLE Dr.Income and Expenditure AccountParticulars Salaries and Wages Sundry Expenses 43,000 Less: O/s on 31.03.06 12,800 Stationery: (consumed) Opening stock 2,000 Add: Purchases 6,000 Less: Closing stock 3,600 Rates Telephone charges 9,000 Add: Outstanding 1,400 Audit fee Depreciation on building Surplus (excess of Income over expenditure)Amount Particulars 93,200 Subscriptions Entrance fees Locker rent 30,200 Income from refreshment Revenue from refreshment 84,000 Less: Refreshment 4,400 expenses 63,000 22,000 Income from investments 3,65,000 10,400 Add: Accrued income on 9,000 current year investment 18,000 17,500Cr. Amount 5,00,000 96,000 73,00021,0003,82,5008,85,300 5,02,00010,72,500 41. EXAMPLE Balance Sheet as on March 31, 2007 Liabilities Outstanding Telephone Expenses Subscription received in Advance General Fund 15,03,400 Add: Surplus 8,85,300AmountAssetsCash and Bank 1,400 Subscription in Arrears Stock of Stationery 52,000 Accrued Interest on investment 23,88,700 Investments 8,00,000 Additions 3,50,000 Building 6,00,000 Less: Dep. 18,000 Land 24,42,100Amount 1,30,000 59,000 3,600 17,50011,50,000 5,82,000 5,00,000 24,42,100 42. EXAMPLE Working Notes: Balance Sheet as on March 31, 2007Liabilities Outstanding Sundry Expenses Outstanding Salary and Wages General Fund (Balancing figure)AmountAssetsSubscription in arrears 12,800 Stock of stationery Cash and Bank balance 14,800 Investments Building 15,03,400 15,31,000Amount 48,000 2,000 81,000 8,00,000 6,00,000 15,31,000Subscription A/c Liabilities Balance b/d (Arrears for 2005-06) Income and Expenditure Balance c/d (Advance for 2007-08)AmountAssetsReceipt and Payment 48,000 Balance c/d (arrears) 5,00,000Amount 5,41,000 59,00052,000 6,00,0006,00,000 43. When Trial Balance is given From the following trial balance, prepare income & expenditure account and balance sheet using additional information. Particulars (Debit)AmountParticulars (Credit)Building Furniture Books Fixed deposit Salaries Stationery Sundry expenses Electricity Cash at bank Cash in hand2,50,000 40,000 60,000 2,00,000 2,00,000 16,000 7,200 6,000 20,000 800Entrance Fees Subscriptions Creditors Rent of hall Miscellaneous Receipts Grants General fund Donation for tournament Sale of old Furniture8,00,000 Additional information 1.Subscription outstanding Rs. 10,000 2.Salaries outstanding Rs. 12,000 3.Furniture sold was for Rs. 10,000 4.Depreciate building 5%, furniture 10% & books 15%.Amount 5,000 2,00,000 6,000 4,000 12,000 1,40,000 4,00,000 25,000 8,0008,00,000 44. EXAMPLE Income & expenditure A/c For the year ended 31/3/2006 ExpenditureAmount IncomesLoss on sale of furniture Entrance Fees (10,000 8,000) 2,000 Subscription 2,00,000 Salaries 2,00,000 Add outstanding 10,000 Add: outstanding 12,000 2,12,000 Rent for Hall Stationery 16,000 Miscellaneous Receipts Sundry Expenses 7,200 Grants Electricity 6,000 Depreciation Furniture 3,000 Building 12,500 Books 9,000 24,500 Surplus 1,03,300 3,71,000Amount 5,000 2,10,000 4,000 12,000 1,40,0003,71,000 45. EXAMPLE Balance sheet As on 31/3/2006 LiabilitiesAmountCreditors Outstanding salaries Donation for tournament General fund 4,00,000 Add surplus 1,03,3006,000 Building 2,50,000 12,000 Less Deprecation 12,500 25,000 Furniture 40,000 Less sold 10,000 5,03,300 Less Deprecation 3,000 Books 60,000 Less Depreciation 9,000 Fixed Deposit Cash at bank Cash in hand Subscription Outstanding 5,46,300AssetsAmounts 2,37,50027,000 51,000 2,00,000 20,000 800 10,0005,46,300 46. Incidental Trading Activities Sometimes, trading activities such as chemist shop, hospital, canteen, bar etc. also take place in such organizations to provide certain facilities to members or public in general. In such a situation a trading account is prepared to calculate profit or loss from that trading aspect. Procedure: It is very important to take into consideration following two points: Profit or loss calculated by preparing trading A/c must be transferred to Income & expenditure A/c. Incomes & expenses related to that incidental activity, which is not recorded in trading A/c, are also to be considered while preparing. Income & expenditure A/c. 47. EXAMPLE The assets and liabilities on the Millennium Cricket Club on April 1, 2007 were: Club house and ground Rs. 10, 00,000; Creditors for bar supplies Rs. 3,41,000; Equipment Rs. 3,45,000; Bank Rs. 1,34,500; Bar stocks Rs. 92,240. ReceiptsAmountPaymentsAmountBalance b/d Bar Takings Subscriptions1,34,500 8,85,000 9,15,000Equipment Ground maintenance Creditors for Bar supplies Sundry Expenses Balance c/d3,12,000 1,25,000 2,35,500 3,18,000 9,44,00019,34,50019,34,500At the end of March 2008, the following further information was available: (a)Subscriptions Rs. 35,000 received this year related to the next year. (b)Creditors for bar supplies Rs. 3,50,000. (c)Bar stocks Rs. 84,380. (d)Depreciate equipment by Rs. 65,000 Prepare for the Millennium Cricket Club: (i) the bar Trading Account for the year ended March 31, 2007; (ii) the Income and Expenditure Account for the year ended march 31, 2007; and (iii) the Balance Sheet as on March 31, 2007. 48. EXAMPLE Income and Expenditure A/c Expenditure To Ground Maintenance To Sundry expenses To Depreciation To SurplusAmountIncome1,25,000 By Subscription 9,15,000 3,18,000 Less. For next year 35,000 65,000 By Surplus from bar Trading 8,04,640 12,82,640Amount 8,80,000 4,32,640 12,82,640Bar Trading A/cParticulars To Opening Stock To Purchases To Surplus on bar tradingAmountParticularsAmount92,240 By Bar Takings 4,44,500 By Closing Stock 4,32,6408,85,000 84,3809,69,3809,69,380Creditors for Bar A/c Particulars To Cash To Closing StockAmountParticularsAmount2,35,500 By Opening Stock 5,50,000 By Purchases (Bal. Fig.)3,41,000 4,44,5007,85,5007,85,500 49. EXAMPLE Balance Sheet (Closing) Liability Subscription in Advance Creditors for bar supplies Capital Fund 12,30,740 Add Surplus 8,04,640AmountAssetsAmount35,000 Bank 5,50,000 Sports equipments 3,45,000 Add Purchases 3,12,000 20,35,380 Less Depreciation 65,000 Bar stocks Club house and ground9,44,0005,92,000 84,380 10,00,00026,20,38026,20,380Balance Sheet (opening) LiabilityAmountAssetsAmountCreditors for bar supplies Capital Fund3,41,000 Bank 12,30,740 Sports equipments Bar stocks Club house and ground1,34,500 3,45,000 92,240 10,00,00015,71,74015,71,740 50. Class Practice Question Following balance have been extracted from the books of pleasure club for the year ended on March 31. 2007: DetailsAmount (Rs.)Restaurant receipts during the year Subscription received during the year Honorarium paid to secretary Purchases for restaurant Rent and rates Wages (restaurant 1,25,000) Repairs and Renewals Lighting Sundry expenses ParticularsCapital fund Restaurant stock Furniture Billiard Table Cash in hand Bank balance14,00,000 16,00,000 2,00,000 7,00,000 2,30,000 6,00,000 1,20,000 1,50,000 2,00,000As on 31 march 200610,40,100 1,25,000 3,00,000 2,50,000 4,35,000 6,00,000Provide 10% depreciation on furniture & billiard tableAs on 31st March 2007? 2,10,000 ? ? 3,19,600 8,45,500 51. SOLUTION Restaurant A/c Particulars To Opening Stock To Purchases To Wages for Restaurant To Surplus from RestaurantAmountParticulars1,25,000 By Restaurant Receipts 7,00,000 By Closing Stock 1,25,000 6,60,000 16,10,000Amount 14,00,000 2,10,00016,10,000Income and Expenditure A/cExpenditures To Honorarium To Rent and Rates To Wages To Repairs & Renewals To Lighting To Sundry Expenses To Depreciation Furniture 30,000 Billiard Table 25,000 To SurplusAmountIncomes2,00,000 By Surplus from Restaurant 2,30,000 By Subscription 4,75,000 1,20,000 1,50,000 2,00,000Amount 6,60,000 16,00,00055,000 8,30,000 22,60,00022,60,000 52. SOLUTION Balance Sheet LiabilityAmountCapital Fund 10,40,100 Add Surplus 8,30,000 18,70,00018,70,000Assets Bank Cash Stock Furniture 3,00,000 - depreciation 30,000 Billiard table 2,50,000 - depreciation 25,000Amount 8,45,500 3,19,600 2,10,000 2,70,000 2,25,00018,70,000 53. Class Practice Question Q. Abacus Trust provides their Receipts & Payment A/c & Income & Expenditure A/c For the year ended 31/3/07.Prepare opening and closing balance sheet. Receipts To bal b/d: Cash 23,000 Bank 57,000 To Subscription 2005-06 19,000 2006-07 3,40,000 2007-08 59,000 To Miscellaneous ReceiptsAmountPaymentsAmountBy Salaries 80,000 By Rent By Advertising By Books By Furniture 4,18,000 By bal C/d Cash 1,86,000 2,92,000 Bank 1,62,00098,000 72,000 62,000 80,000 1,30,0007,90,0007,90,0003,48,000The Trust had following balance in their books on 31/3/06. Books 48,000, Furniture 1, 07,000, Outstanding Salary Rs. 12,000 Expenditure Salaries Rent Advertising Depreciation: Books 8,000 Furniture 13,000 Audit fees SurplusAmountIncome80,000 Subscription 78,000 Miscellaneous receipts 62,000Amount 3,60,000 2,92,00021,000 38,000 3,73,000 6,52,0006,52,000 54. SOLUTION Balance Sheet (Opening) Liabilities Outstanding Salary Capital/General Fund (Balancing figure)Amount 12,000 2,42,000Assets Furniture Books Outstanding subscription Cash in hand Cash at bank2,54,000Amount 1,07,000 48,000 19,000 23,000 57,000 2,54,000Balance Sheet (Closing) Liabilities Subscription in Advance Audit Fees (Outstanding) Rent (Outstanding) Capital/General Fund 2,42,000 Add:- Surplus 3,73,000Amount 59,000 38,000 6,000 6,15,0007,18,000Assets 1,07,000 1,30,000 2,37,000 Less Depreciation 13,000 Books 48,000 Add Purchases 80,000 1,28,000 Less Depreciation 8,000 Outstanding subscription Prepaid Salary (98,000-12,000-80,000) Cash in hand Cash at bankAmountFurniture Add Purchases2,24,0001,20,000 20,000 6,000 1,86,000 1,62,000 7,18,000 55. Blue Star Education Trust provides the information in regard to Receipt & Payment Account and Income and Expenditure Account for the year ended March 31st 2008:Receipt and Payment Account For the year ending march 31, 2008CLASS ROOM QUESTIONReceipts Balance b/d Cash in hand Cash at bank Subscription: 2006 07 6,000 2007 08 23,000 2008 09 7,800 Entrance fees Tuition fees: 2007 08 40,000 2008 09 5,000 Interest on investment: 2006 07 2,000 2007 08 3,000 Miscellaneous receiptsAmount 1,500 7,50036,800 12,60045,000Payments Printing and Stationery Lighting & Water Rent Advertisement Miscellaneous Expenses Staff Salaries Furniture purchased Honorarium Books Balance c/ d Cash in hand Cash at bankAmount 3,000 1,300 10,500 1,410 2,200 42,500 14,000 7,500 2,500 4,590 22,5005,000 3,600 1,12,0001,12,000 56. CLASS ROOM QUESTION On March 31, 2007 the following balances appeared: Investments Rs. 80,000; Furniture Rs. 20,000; and Books Rs. 10,000 Expenditure Printing and Stationery Lighting & water Rent Staff salaries Advertisement Honorarium Misc. Expenses Depreciation on furniture Surplus (Excess of income over expenditure)Amoun t (Rs.) 3,600 1,300 12,000 42,000 1,600 7,500 2,200 2,000 2,800Income Subscription Interest on investment Miscellaneous incomes Tuition fees75,000Prepare opening and closing balance sheet.Amoun t (Rs.) 23,000 3,400 3,600 45,00075,000 57. SOLUTION LIABILITIESAMOUNTASSETSAMOUNTCapital Fund1,27,000Cash in hand1,500Cash At Bank7,500Subscription Outstanding6,000Accrued Interest on2,000investments Investments Furniture20,000Books1,27,00080,00010,0001,27,000 58. SOLUTION LIABILITIES Advance Tuition fees Entrance Fees Subscription in advance Outstanding Printing andAMOUNTASSETSAMOUNT5,000Cash in hand4,59012,6 00Cash At Bank22,5007,800 600Accrued Interest on investments Accrued Tuition fees400 5,000stationery Outstanding Rent Outstanding advertisement1,500 190Prepaid expenses Furniture500 32,000(20,000 + 14,000 2,000) Capital Fund (1,27,000+2,800)1,29,80012,500Investments1,57,490Books (10,000 + 2,500)80,0001,57,490 59. Chapter 2Partnership: FundamentalsACCOUNTANCYClass XII 60. Individual ClaimsIm running my business since 8 yearsI brought my present company at no.1 in sales and marketingManaging people is not a big deal for meIm an MCAIm an MBAI love Share trading and earning money of it Ive been working as a production manager since last 10 years with different companies 61. Concept of partnershipWHY NOT TO WORK TOGETHER AND LEAD THE WORLD 62. Partnership: Defined In India Partnership is governed byTHE INDIAN PARTNERSHIP ACT, 1932 Partnership is defined as: the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all. Section 4 of THE INDIAN PARTNERSHIP ACT, 1932 63. Partnership: Features Two or more persons AgreementWritten Oral Sharing of profits Business Mutual agency 64. Partnership: Features We need minimum 2 and maximum 10 partners (in banking) or 20 partners (in other businesses) IF DISPUTE ARISES: WE WILL REFER TO DEED Deed is a written agreement containing the terms and conditions as agreed upon while entering into partnership. 65. Partnership: FeaturesSharing of profits The Act says that the profits of the business should be divided in the agreed ratio else equally among the partners. The Act has not made it mandatory to share losses also, but it is the duty of the partners to share in losses too. For example there may be a partner in profit only, minor partners etc. 66. Partnership: Features BUSINESS There must be a business and that should be legal to have a partnership. Purchasing a building jointly do not form partnership.I have done my work/This is not my area or work : NO EXCUSE Partnership is the contract of mutual agency. Each partner is the agent as well as the principal. He binds everyone by his work. 67. Deed: Contents The Partnership Deed usually contains the following details: Names & Addresses of the firm, its main business & of all partners; Amount of capital to be contributed by each partner; The accounting period of the firm; The date of commencement of partnership; Rules regarding operation of Bank Accounts; Profit and loss sharing ratio; Rate of interest on capital, loan, drawings, etc; Mode of auditors appointment, if any; Salaries, commission, etc, if payable to any partner; The rights, duties and liabilities of each partner; Treatment of loss arising out of insolvency of one or more partners; Settlement of accounts on dissolution of the firm; Method of settlement of disputes among the partners; Rules to be followed in case of admission, retirement, death of a partner; and Any other matter relating to the conduct of business. Normally, the deed covers all matters affecting relationship of partners amongst themselves. 68. Deed: RulesIF DEED IS ORAL/ABSENT Profits and Losses are shared EQUALLY NO Interest on Capital NO Interest on Drawings NO Salary or any Commission to any partner Interest on Loan given by partner must carry @ 6% p.a. 69. Some Problems Mohan and Shyam are partners in a firm, State whether the claim is valid if the partnership agreement is silent in the following matters: a) Mohan is an active partner. He wants a salary of Rs. 10,000 per year: b)Shyam had advanced a loan to the firm. He claims interest @ 10% per annum: c) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan wants equal share in profits. d)Shyam wants interest on capital to be credited @ 6% per annum. 70. Some Problems State whether the following statements are true or false: a)Valid partnership can be formulated even without a written agreement between the partners: b)Each partner carrying on the business is the principal as well as the agent for all the other partners; c)Maximum number of partners in a banking firm can be 20: d)Methods of settlement of dispute among the partners cant be part of the partnership deed; e)If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the partner: f) Interest on partners loan is to be given @ 12% p.a. if the deed is silent about the rate. 71. Special aspectsAccounting treatment for partnership firm is similar to that of a sole proprietorship business with the following exceptions: a)Distribution of profits & losses b)Maintenance of capital accounts of partners c)Adjustment of wrong Appropriation of profit in part. d)Reconstitution of Partnership firm. e)Dissolution of partnership firm. 72. ACCOUNTING Profit & Loss Appropriation A/c Profit and Loss Appropriation Account is merely anextension of the Profit and Loss Account of the firm. It shows how the profits are appropriated ordistributed among the partners. All adjustments in respect of partners salary,partners commission, interest on capital, interest on drawings, etc. are made through this account. It starts with the net profit/net loss as per Profit andLoss Account . 73. JOURNAL ENTRIES JOURNAL DateParticulars Profit and Loss A/c Dr. To Profit and Loss Appropriation A/c (If profit is there) Profit and Loss Appropriation A/c Dr. To Profit and Loss A/c (If loss is there) Interest on Capital A/c Dr. To Partners Capital/Current A/cs (For providing interest on capital to partners) Profit and Loss Appropriation A/c Dr. To Interest on Capital A/c (For transferring interest on capital to profit and loss appropriation A/c)L.F.DebitCredit 74. JOURNAL ENTRIES JOURNAL DateParticulars Partners Capital/Current A/cs (individually) Dr. To Interest on Drawings A/c (For charging interest on drawings to partners) Interest on Drawings A/c Dr. To Profit and Loss Appropriation A/c (For transferring interest on drawings to profit and loss appropriation A/c) Salary to Partner A/c Dr. To Partners Capital/Current A/cs (For providing salary to partners) Profit and Loss Appropriation A/c Dr. To Salary to Partners A/c (For transferring salary to profit and loss appropriation A/c)Commission to Partner A/c Dr. To Partners Capital/Current A/cs (For providing commission to partners)L.F.DebitCredit 75. JOURNAL ENTRIES JOURNAL DateParticulars Profit and Loss Appropriation A/c Dr. To Commission to Partners Capital/Current A/c (For transferring commission to profit and loss appropriation A/c)If Profit: Profit and Loss Appropriation A/c Dr. To Partners Capital/Current A/cs (For transferring profit to capital A/c) If Loss: Partners Capital/Current A/cs (individually) Dr. To Profit and Loss Appropriation A/c (For transferring loss to capital A/c)L.F.DebitCredit 76. FORMAT Dr.Profit and Loss Appropriation Account For the year ended Cr.Particulars Profit and Loss (if there is loss) Interest on Capital Salary to Partner Commission to Partner Interest on Partners Loan Partners Capital A/c (distribution of profit)Amount XXX XXX XXX XXXParticulars Profit and Loss (if there is profit) Interest on Drawings Partners Capital Accounts (distribution of loss)Amount XXX XXXXXXXXX XXXXXXXXXXX 77. Question A, B & C set up a partnership firm on April 1, 2006. They contributed Rs. 50,000 Rs. 40,000 & Rs. 30,000, respectively as their capitals & agreed to share profits & losses in the ratio of 3:2:1. A is to be paid a salary of Rs. 1,000 per month and B, a Commission of Rs. 5,000. It is also provided that interest to be allowed on capital at 6% per annum. The drawings for the year were A Rs. 6,000, B Rs. 4,000 & C Rs. 2,000. Interest on drawings of Rs. 270 was charged on As drawings, Rs. 180 on Bs drawings & Rs. 90, on Cs drawings. The net profit as per Profit and Loss Account for the year ending March 31, 2006 was Rs. 35, 660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners. 78. Solution Dr.Profit and Loss Appropriation Account For the year endedParticulars Interest on Capital A 3,000 B 2,400 C 1,800Salary to A Commission to BAmountParticularsCr. AmountProfit and Loss35,660Interest on Drawings 7,200 12,000A 270 B 180 C 905405,000Partners Capital A/c (distribution of profit)Rs. 12,000 to be divided in 3:2:1 A 6,000 B 4,000 12,000 C 2,000 36,20036,200 79. PRACTICE QUESTION Reena & Raman are partners with capitals of Rs. 3,00,000 & Rs. 1, 00,000 respectively. The profit (as per profit & loss A/c) for the year ended March 31, 2007 was Rs. 1, 20,000. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of Rs. 30,000 p.a. The drawings of partners were Rs. 30,000 and 20,000. The interest on drawings to be charged to Reena was Rs. 1,000 and to Raman Rs. 500 Assuming that Reena and Raman are equal partners, state their share of profit after necessary appropriations. 80. SOLUTIONDr.Profit and Loss Appropriation Account For the year endedParticulars To Interest on Capital Reena 18,000 Raman 6,000 To Salary to Raman To Profit transferred to: Reena RamanAmountParticularsBy Profit for the Year By Interest on 24,000 drawings 1,000 30,000 Reena Raman 500Cr. Amount 1,20,0001,50067,500 1,21,5001,21,500 81. Capital Accounts All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts. This includes the amount of money brought in as capital, withdrawal of capital, share of profit, interest on capital, interest on drawings, partnerssalary, commission to partners, etc. There are two methods by which the capital accounts of partners can be maintained. These are: Fixed capital method, and Fluctuating capital method. 82. Fixed Capital Method Under the fixed capital method, the capitals of thepartners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners. All items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in a separate accounts, called Partners Current Account. The partners capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital. The partners current account on the other hand, may show a debit or a credit balance. Thus under this method, two accounts are maintained for each partner viz., capital account and current account, While the partners capital accounts shall always appear on the liabilities side in the balance sheet, the partners current accounts balance shall be shown on the liabilities side, if they have credit balance and on the assets side, if they have debit balance. 83. Format Format of capital account FIXED CAPITAL METHOD Partners Capital Account ParticularsABParticularsABTo drawings (permanent withdrawal) To balance c/dXXX XXXXXX XXXBy balance b/d By Cash/Bank (additional capital)XXX XXX XXX XXX 84. Format Partners Current Account ParticularsABParticularsATo balance b/d To drawings To Interest on drawings To profit & Loss Appropriation A/c (In case of Loss) To balance c/dXXX XXXXXX XXXBy balance b/d By interest on capital By salary By commission By profit & Loss Appropriation A/c (In case of Profit) By balance c/dXXX XXXXXXXXXXXXXXXXXX XXXXXX XXXBXXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX 85. Fluctuating Capital Under the fluctuating capital method, only oneaccount, i.e. capital account is maintained for each partner. All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners. This makes the balance in the capital account to fluctuate from time to time. Thats the reason why this method is called fluctuating capital method. In the absence of any instruction, the capital account should be prepared by this method. 86. Format Partners Capital Account ParticularsABParticularsABTo drawings To Interest on drawings To profit & Loss Appropriation A/c (In case of Loss) To balance c/dXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXBy balance b/d By interest on capital By salary By commission By profit & Loss Appropriation A/c (In case of Profit)XXXXXXXXX XXX XXX XXX XXX XXXXXX XXX XXX XXX 87. Salary to a partner If in the question profit is given after charging salary thenDo not show salary in profit and loss appropriation A/c Or Add salary to the profit given and then show salary on debit side of profit and loss appropriation A/c. 88. Question Show how the following items will appear in capital accounts of the partner S & M when: Capitals are fluctuating. Capitals are fixed. Particulars Capital on 1-1-2001 Additional capital introduced Drawings during the year Interest @ 6% on Capital Interest on Drawings at 5% Partners Salary Partners Commission Share of Profit for 2001SM80,000 16,000 4,800 400 7,200 8,40070,000 5,000 14,000 4,200 350 5,000 6,600 89. Fluctuating Method Partners Capital Account Particulars To Drawings To Interest on drawingsTo bal c/dABParticulars16,00014,00040035084,00076,450By balance b/d By Cash By interest on capital By salaryAB 80,0005,000 4,8004,2007,200By commission90,800 By balance b/d8,4005,000 6,6001,00,400By profit & Loss App. A/c1,00,40070,00090,80084,00076,450 90. Fixed Capital Method Partners Capital Account ParticularsATo bal c/dB 80,000Particulars 75,000AB 80,00070,000 5,00080,000By balance b/d75,000By Cash 80,00075,000Partners Capital AccountParticulars A To Drawings To Interest on drawings To bal c/dB 16,000Particulars14,00040035084,00076,4501,00,400By interest on capital By salary90,800AB 4,8007,200 5,000By commission By profit & Loss App. A/c By balance b/d4,2008,4006,6001,00,40090,80084,00076,450 91. PRACTICE QUESTION Prepare capital accounts of the partners A & B when:(i) Capitals are fluctuating. (ii) Capitals are fixed.Capital on 1-1-2006 Additional capital introduced Drawings during the year 2006 Interest on Capital Interest on Drawings Partners Salary Share of Profit for 2006A 8, 00,000 2,16,000 64,000 5,400 1,47,000 8,400B 6, 70,000 1, 50,000 1,14,000 45,200 3,300 1,32,000 6,600 92. Fluctuating Method Partners Capital Account Particulars To drawings To interest on drawingsTo bal c/dAB 2,16,000 5,4007,98,000Particulars1,14,000 By bal b/d By bank 3,300 By interest on capital 8,86,500 By salary By profit10,19,400 10,03,800AB8,00,000 -6,70,000 1,50,00064,000 1,47,000 8,40045,200 1,32,000 6,60010,19,400 10,03,800 93. Fixed Capital Method Partners Capital Account ParticularsABParticularsTo bal c/d8,00,0008,20,000By bal b/d By bank8,00,0008,20,000AB8,00,000 -6,70,000 1,50,0008,00,0008,20,000Partners Capital Account ParticularsATo drawings To interest on drawings2,16,000To bal c/dB5,400 2,21,400ParticularsAB1,14,000 By interest on capital 3,300 By salary By profit 66,500 By bal c/d64,000 1,47,000 8,400 2,00045,200 1,32,000 6,600 -1,83,8002,21,4001,83,800 94. EXERCISE TIME 95. Interest on Capital No interest is allowed on partners capitals unless it is expressly agreed among thepartners. When the Deed specifically provides for it, interest on capital is credited to the partners at the agreed rate with reference to the time period for which the capital remained in business during a financial year. Interest on capital is calculated with due allowance for any addition or withdrawal of capital during the accounting period. 96. CalculationA & B entered into partnership in the ratio of 3:2 and have contributed Rs. 5,00,000 and Rs. 3,00,000 respectively on 1st January 2007. on 1st April A withdrew Rs. 1,00,000 and on 1st October he introduced 3,00,000 as additional capital. B introduced Rs. 2,00,000 on 30th April and withdrew 1,50,000 on 31st August. Calculate interest on capital if it calculated on 12% p.a. 97. Solution Interest on As Capital: Date Transaction Account Balance 1st Jan. (Introduced Rs. 5,00,000) 5,00,000 1st April (withdrew Rs. 1,00,000) 4,00,000 1st Oct. (Introduced Rs. 3,00,000) 7,00,00012 3 5,00,000 X X =15,000 100 12 12 6 4,00,000 X X =24,000 100 12 12 3 7,00,000 X X =21,000 100 12 Total interest on As Capital 15,000 + 24,000 + 21,000 = 60,000 98. Solution Interest on Bs Capital: Date Transaction Account Balance 1st Jan. (Introduced Rs. 3,00,000) 3,00,000 30th April (Introduced Rs. 2,00,000) 5,00,000 31st Aug. (withdrew Rs. 1,50,000) 3,50,00012 4 3,00,000 X X =12,000 100 1212 4 5,00,000 X X =20,000 100 12 12 4 3,50,000 X X =14,000 100 12Total interest on Bs Capital 12,000 + 20,000 + 14,000 = 46,000 99. Some Problems Q. A and B are partners sharing profits and losses in the ratio of 3 : 2. Their capital accounts showed balances of Rs. 1,50,000 and Rs. 2,00,000 respectively on Jan 01, 2006. Show the treatment of interest on capital for the year ending December 31, 2006 in each of the following alternatives: 1) If the partnership deed is silent as to the payment of interest oncapital and the profit for the year is Rs. 50,000; Sol. In the absence of a specific provision in the Deed, no interest will be paid on the capital to the partners. The whole amount of profit will however be distributed among the partners in their profit sharing ratio. 2) If partnership deed provides for interest on capital @ 8% p.a. and the firm incurred a loss of Rs. 10,000 during the year; Sol. As the firm has incurred losses during the accounting year, no interest on capital will be allowed to any partner. The firms loss will however be shared by the partners in their profit sharing ratio. 100. Some Problems (c) If partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 50,000 during the year; Sol. Interest to A @ 8% on Rs. 2,00,000 = 16,000 Interest to B @ 8% on Rs. 1,50,000 = 12,000 = 28,000 As the profit is sufficient to pay interest at agreed rate, the whole amount of interest on capital shall be allowed and the remaining profit amounting to Rs. 22,000 (Rs. 50,000 Rs. 28,000) shall be shared by the partners in their profit sharing ratio. (d) If the partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 14,000 during the year Sol. As the profit for the year is Rs. 14,000, which is less than the amount of interest on capital due to partners, i.e. Rs. 28,000 (Rs. 12,000 for A and Rs. 16,000 for B), interest will be paid to the extent of available profit i.e., Rs. 14,000. A and B will be credited with Rs. 6,000 and Rs. 8,000, respectively. Effectively this amounts to sharing the firms profit in the ratio of interest on capital. 101. PRODUCT METHOD EXAMPLE: A, B and C are partners sharing profits equally they have started business with capital of Rs. 3,00,000, Rs. 2,00,000 & Rs. 10,000 respectively on 1 Jan 2002. During the year they have made given additions & withdrawal of capital:-DateA AdditionB Withdraw alAdditionC Withdraw al1 Feb.50,000---1 May.-40,00060,000-1 Aug.30,000--70,0001 Sep.-20,00010,000-Calculate interest on capital @ 10% p.a.No Addition No Withdrawal 102. SOLUTION AIIII IIDateCapitalMonthProduct1 Jan.3,00,00013,00,0001 Feb.3,50,000310,50,0001 May.3,10,00039,30,0001 Aug.3,40,00013,40,0001 Sept.3,20,000412,80,000 39,00,000Interest on capital = 39,00,00010 1 =Rs.32,500 100 12 103. SOLUTION BIIII IIDateCapitalMonthProduct1 Jan.2,00,00048,00,0001 May2,60,00037,80,0001 Aug.1,90,00011,90,0001 Sept.2,00,00048,00,000 25,70,000Interest on capital =25,70,00010 1 =Rs.21,416.67 100 12 104. Interest on Drawings The partnership agreement may also provide forcharging of interest on money withdrawn out of the firm by the partners for their personal use. No interest is charged on the drawings if there is no express agreement among the partners about it. However if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period money remained outstanding from the partners during an accounting year. Charging interest on drawings discourages excessive amounts of drawings by the partners. 105. Interest on Drawings Interest on drawings is calculated as:-Rate Drawings TimeElement 100 Time Element can be calculated in different situations in different ways which are as follows: 106. Interest on Drawings Time Element is calculated by using the following formula:TimeLeft After 1st Drawing+TimeLeft After Last Drawing 2 Case 1 If partner withdrew equal amount at beginning of every month, interest will be calculated for:13 months +1month 2= 6 monthsCase 2 If partner withdrew equal amount at end of every month, interest will be calculated for:11months +0 month 2= 5 monthsCase 3 If partner withdrew equal amount in middle of every month, interest will be calculated for: 111/2 months + 21/2month= 6 months 107. Interest on Drawings Case 4 If partner withdrew equal amount in beginning of every quarter, interest will be calculated for: 12 months + 3month 2= 7 monthsCase 5 If partner withdrew equal amount at end of every quarter, interest will be calculated for: 9 months +0 month 2= 4 monthsCase 6 If partner withdrew equal amount in middle of every quarter, interest will be calculated for: 101 / 2 months +11 / 2 month 2= 6 months 108. Interest on Drawings Case 7 If partner withdrew equal amount in Beginning of every month for 6 months, interest will be calculated for: 6 months +1 month 2= 3 monthsCase 8 If partner withdrew equal amount at end of every month for 6 months, interest will be calculated for: 5 months +0 month 2= 2 monthsCase 9 If partner withdrew equal amount in middle of every month for 6 months, interest will be calculated for: 51 / 2 months + 1 / 2 month 2= 3 months 109. Interest on Drawings Case 10 If nothing is mentioned about dates, interest will be calculated for6 months Case 11 If per annum is not mentioned with the rate of interest on drawings in the question, interest will be calculated for complete year.Case 12 If unequal amounts are withdrawn on uneven dates, interest on drawings will be calculated using product method.PRODUCT METHOD In this method for each amount withdrawn by the partner, time is calculated for which that money is used during the year. 110. EXAMPLE Mr. X & Mr. Y started business on 1st Jan. 2003 with capitals of Rs 5, 00,000 & Rs 3, 00,000 respectively. Calculate the Interest on Drawings of Mr. X @ 10% p.a. in each of the following alternative cases: Case (a) If his drawings during the period were Rs 18,000 Case (b) If he withdrew Rs 2,000 p.m. in the beginning of every month Case (c) If he withdrew Rs 2,000 p.m. at the end of every month. Case (d) If he withdrew Rs 2,000 p.m. Case (e) If he withdrew Rs 6,000 in the beginning of every quarter. Case (f) If he withdrew Rs 6,000 at the end of every quarter. Case (g) If he withdrew Rs 6,000 per quarter. 111. SOLUTION CASE (a) Interest on drawings: Since nothing is mentioned for the period, therefore the time period is taken on average basis i.e. 6 months. = 18,000 x 10 6 = Rs 900 10012 112. SOLUTION CASE (b) Interest on drawings: Since the drawings have been evenly made in the beginning of the every month, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 12 Rs 1,300 1 6.5 210 6.5 100 12 113. SOLUTION CASE (c) Interest on drawings: Since the drawings have been evenly made in the end of the every month, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months 0 = 11 24,000 5.5 2 = Rs 1,100 10 5.5 10012 114. SOLUTION CASE (d) Interest on drawings: Since drawings have been made evenly every month, therefore the time period is taken on average basis i.e. 6 months. = 2,000 x 12 x 10 6 = Rs 1,200 100 12 115. SOLUTION CASE (e) Interest on drawings: Since the drawings have been evenly made in the beginning of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 = Rs 12 3 7.5 1,500 210 7.5 100 12 116. SOLUTION CASE (f)Interest on drawings: Since the drawings have been evenly made in the end of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 = Rs 900 0 9 2 4.510 4.5 100 12 117. SOLUTION CASE (g) Interest on drawings: Since the drawings have been evenly made in the middle of the every quarter, therefore the time period is taken as: (Time period left after first drawing + Time period left after last drawing)/2 = months = 24,000 10.5 1.5 = Rs 1,200 6 210 6 100 12 118. Interest on Drawings Product Method Calculate interest on As drawings @ 6% p.a. from following information A withdrew as follows: 1st March, 2007 Rs. 20,000 31st May 2007 Rs. 50,000 1st September 2007 Rs. 40,000 1st December 2007 Rs. 40,000DateAmountTime for which amount is usedProduct1st March20,00010 months2,00,00031st May50,0007 months3,50,0001st September40,0004 months1,60,0001st December40,0001 month40,0007,50,000Interest on drawings will be:7, 50, 000 1 6 12 100=3,750 119. Commission to a partner If commission is to be charged on divisible profits before charging such commission then following formula is applied: Profit R 100If commission is to be charged on divisible profits before charging such commission then following formula is applied: Profit R 100 R 120. Example X and Y are partners in a firm sharing profits and losses in the ratio of 3:2, with the capital of Rs. 10,00,000 and Rs. 8,00,000 respectively. Their deed provided as follows: a) Interest on capital is to be charged @ 6%. b) A will get a salary of Rs. 18,000 per month while B will get Rs. 40,000 as quarterly salary. c) A will get a commission of 3% on turnover. d) B will get a commission @ 5% after charging all above and such commission. Prepare profit and loss appropriation A/c for A and B. Net profit earned during the year was Rs. 9,00,000. the turnover amounted to Rs. 20,00,000. 121. Solution Profit and Loss Appropriation A/c Dr.For the year ended 31st March 2008ParticularsAmountTo Interest on CapitalX: 60,000 Y: 48,000 ToX: 10,00,000 X 6% Salary Y: X: 8,00,000 X 6% 2,16,000 Y: 1,60,000 To commission X: 60,000 3 Y: 00, 000 16,000 20, 100 To Profit 5Particulars By Net ProfitCr.Amount 9,00,0001,28,0003,76,00076,0003, 36,000 X: Y:105 1,92,000 1,28,000 3,20,0009,00,0009,00,000 122. Capital Ratio Sometimes, the partners may decide toshare in capital ratio. If capitals are fixed, the ratio is fixed If capitals are fluctuating, ratio will be calculated on average amount of capital Calculation of Average amount of capital can be explained with the help of this example. 123. Example X and Y started their partnership on 1st January 2007 with Rs. 50,00,000 and Rs. 45,00,000 respectively as capital. They agreed to share profits in capital ratio. They made following transaction during the year Capital Introduced Dates 1st April 1st June 30th September 1st DecemberX 8,00,000 6,00,000 -Y 9,00,000 8,00,000Capital Withdrawn X 7,00,000 9,00,000Y 5,00,000 7,00,000At the end of the year, they made a profit of 24,00,000. You are required to calculate amount of profits to be transferred to capital assuming that the fir closes its books on 31st December every year. 124. Solution Total Capital employed by XDate1.1.07 1.4.07 1.6.07 30.9.07 1.12.07Capital (Rs.)Months for Product which money is used50,00,000 58,00,000 (50,00,000+8,00,000) 51,00,000 (58,00,000-7,00,000) 57,00,000 (51,00,000+6,00,000) 48,00,000 (57,00,000-9,00,000)3 2 4 2 11,50,00,000 1,16,00,000 2,04,00,000 1,14,00,000 48,00,0006,32,00,000 125. Solution Total Capital employed by YDate1.1.07 1.4.07 1.6.07 30.9.07 1.12.07Capital (Rs.)Months for which money is used45,00,000 40,00,000 (45,00,000-5,00,000) 49,00,000 (40,00,000+9,00,000) 42,00,000 (49,00,000-7,00,000) 50,00,000 (42,00,000+8,00,000)3 2 4 2 1Product1,35,00,000 80,00,000 1,96,00,000 84,00,000 50,00,000 5,45,00,000Capital Ratio = 6,32,00,000:5,45,00,000 = 632:545 126. CLASS ROOM QUESTION A, B, and C are partners in a firm. According to the partnership deed, the partners are entitled to draw Rs. 7,000 per month. On the 1st day of every month A, B and C drew Rs. 7,000, Rs. 6,000 and Rs. 5,000 respectively. Interest on capitals and interest on drawings is fixed at 8 per cent and 10 per cent respectively. Profit during the year ended March 31, 2006 was Rs. 7, 55, 000 out of which Rs. 2, 00,000 are to be transferred to General Reserve. B and C are entitled to receive a salary of Rs. 30,000 and Rs. 45,000 per annum respectively and A is entitled to receive commission @10 per cent net distributable profit is after charging such commission. On 1st April, 2005 the balances of their Capital Accounts were Rs. 5, 00,000, Rs. 4,00,000 and Rs. 3, 50,000 respectively. You are required to show the Profit and Loss Appropriation Account for the year ended March 31, 2006 and the Capital Accounts of partners in the books of the firm. 127. SOLUTION AnsPROFIT AND LOSS APPROPRIATION ACCOUNT AMOUNT PARTICULARS AMOUNT 2,00,000 By P& L A/c 7,55,000PARTICULARS To General Reserve To Salary A/c: Bs Capital A/c Cs capital A/c30,000 45,000To Interest on capital A/c As capital A/c 40,000 Bs capital A/c 32,000 Cs capital A/c 28,00075,000By Interest on drawings: As Capital A/c 4,550 Bs Capital A/c 3,900 Cs capital A/c 3,25011,7001,00,000To As Capital A/c (Commission) (3,91,700 10 100 + 10)To Profit transferred to capital A/c As capital A/c 1,18,696 Bs capital A/c 1,18,697 Cs capital A/c 1,18,69735,6103,56,090 7,66,7007,66,700 128. SOLUTION PARTNERS CAPTIAL ACCOUNTS Dr. Particulars To interest on drawings A/c To Balance c/dA Rs.B Rs. 4,5506,89,7566,94,306C Rs. 3,9005,76,7975,80,697ParticularsBy Balance 3,250 b/d By Salary A/c By Commission 5,38,447 A/c By interest on capital A/c By P& L App A/c5,41,697A Rs. 5,00,000Cr B C Rs. Rs. 4,00,000 3,50,000 30,00045,00040,00032,00028,0001,18,6961,18,6971,18,69735,6106,94,3065,80,6975,41,697 129. PAST ADJUSTMENTS PAST ADJUSTMENTSFour types of errorsOmittedOver ChargedUnder ChargedWrongly distributed 130. PAST ADJUSTMENTS Omitted If partners have omitted any item which was agreed upon as per deed, then a single adjustment entry is passed to rectify the omission error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital @ 10% p.a. has been omitted. Pass a single adjustment entry to record the error. 131. PAST ADJUSTMENTS ParticularsA Dr.Interest on capital Loss (1:1)27,500DifferenceCr.B Dr. Cr.30,000 2,500 30,00025,000FIRM Dr. Cr. 55,000 55,00027,500 2,500 30,00027,50027,50055,00055,000Journal DateParticulars Bs Capital A/c Dr. To As Capital A/c (Being Adjustment entry passed)L.F. DebitCredit2,5002,500 132. PAST ADJUSTMENTS Over-Charged If partners have charged any item at more than agreed rate as per deed, then also a single adjustment entry is passed to rectify the error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital is charged @ 10% p.a. instead of 8%. Pass a single adjustment entry to rectify the error. 133. PAST ADJUSTMENTS ParticularsA Dr.Interest on capital charged (debited) Interest on capital to be charged Profit (1:1) DifferenceCr.30,000B Dr. Cr.FIRM Dr. Cr.25,00055,00028,00020,00048,0003,5003,500 1,5007,00025,00055,0001,500 31,50031,50025,00055,000Journal DateParticulars Bs Capital A/c Dr. To As Capital A/c (Being Adjustment entry passed)L.F. DebitCredit1,500 1,500 134. PAST ADJUSTMENTS Under-Charged If partners have charged any item at less than agreed rate as per deed, then also a single adjustment entry is passed to rectify the error. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After closing the books of accounts it was observed that interest on capital is charged @ 8% p.a. instead of 10%. Pass a single adjustment entry to rectify the error. 135. PAST ADJUSTMENTS ParticularsA Dr.Interest on capital charged debited Interest on capital to be charged Loss (1:1) DifferenceCr.28,000B Dr. Cr. 20,00030,000 3,50048,000 25,0001,500 31,500FIRM Dr. Cr.3,500 1,50031,50025,00055,000 7,00025,00055,00055,000Journal DateParticulars As Capital A/c Dr. To Bs Capital A/c (Being Adjustment entry passed)L.F. DebitCredit1,500 1,500 136. PAST ADJUSTMENTS Wrongly Distributed If partners have distributed profits either without charging or allowing any items as per deed, then also a single adjustment entry is passed to rectify such errors. It can be explained with the following example:A & B were partners with a capital of Rs. 3,00,000 and 2,50,000 respectively. After distributing the profits of 5,00,000 equally, it was noted that interest on capital is not charged @10%. Salary @ 7,000 to A & Rs. 5,000 to B was not charged. Profits were to be divided in ratio of 3: 2. Pass a single adjustment entry to rectify the error. 137. PAST ADJUSTMENTS ParticularsA Dr.Profit wrongly given debited Interest on capital Salary Profit (1:1) DifferenceB Cr.2,50,000Dr.FIRM Cr.Dr.2,50,000 30,000 84,000 1,80,60044,600Cr. 5,00,00025,000 55,000 60,000 1,44,000 1,20,400 3,01,000 44,6002,94,600 2,94,600 2,50,000 2,50,000 5,00,000 5,00,000Journal DateParticularsBs Capital A/c Dr. To As Capital A/c (Being Adjustment entry passed)L.F. DebitCredit44,600 44,600 138. Guarantee to a partner Guaranteed amount of money may be agreed to be given to any of the partner due to any of the reason by : The firm, By any specific partner, or By all partners in some some specific ratio. 139. Guarantee to a partnerGuarantee given by the firm Whenever the guarantee is given by the firm, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in their profit sharing ratio. 140. Guarantee to a partnerA, B and C were partners in the ratio of 5:3:2. However C was given a guarantee that his share will not be less than Rs. 3,00,000 in any year. The company earned a profit of Rs. 10,00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account. 141. Guarantee to a partner Profit and Loss Appropriation A/c Dr.For the year ended 31st March 2008ParticularsAmountCr.AmountBy Net ProfitTo Partners Capital A/cParticulars10,00,000A: 5,00,000 - Given to C 62,500 4,37,500 B 3,00,000 - Given to C 37,500 2,62,500 C 2,00,000 + From A: to be divided in 5:3 Rs. 1,00,000 62,500 + From B: 37,500 3,00,000 10,00,00010,00,000 142. Guarantee to a partnerGuarantee given by specific partner Whenever the guarantee is given by a specific partner, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be borne by that specific partner only. 143. Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee by A that his share will not be less than Rs. 3,00,000 in any year. The company earned a profit of Rs. 10,00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account. 144. Guarantee to a partner Profit and Loss Appropriation A/c Dr.For the year ended 31st March 2008ParticularsAmountParticularsAmountBy Net ProfitTo Partners Capital A/cA: 5,00,000 - Given to C 1,00,000 B 3,00,000Cr.10,00,0004,00,000 3,00,000C 2,00,000 + 1,00,000 1,00,000 Rs. From A:to be borne by A only 3,00,000 10,00,00010,00,000 145. Guarantee to a partnerGuarantee given in specific ratio Whenever the guarantee is given by the remaining partners in a specific ratio, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in that specified ratio. 146. CLASS ASSIGNMENTA, B and C were partners in the ratio of 3:2:5. However B was given a guarantee by C that his share will not be less than Rs. 1, 00,000 in any year. The company earned a profit of Rs. 4, 00,000 during the year 200708. Prepare profit & Loss Appropriation Account. 147. SOLUTION ParticularsAmountTo Partners capital A/cParticulars By P & L A/cAmount 4,00,000As Capital A/c1,20,000 Bs Capital A/c (+) Guarantee80,000 20,000Cs capital A/c 2,00,000 (-) Guarantee 20,0004,00,0004,00,0004,00,000 148. GUARANTEE GIVEN IN SPECIFIC RATIOWhenever the guarantee is given by the remaining partners in a specific ratio, after providing for all the expenses and allowing all agreed terms, Balance profit is divided among all partners in profit sharing ratio. If the partner to whom guarantee is given is getting lesser amount than the guaranteed amount then the deficiency will be divided among the remaining partners in that specified ratio. 149. Guarantee to a partner A, B and C were partners in the ratio of 5:3:2. However C was given a guarantee that his share will not be less than Rs. 3,00,000 in any year. Deficiency if any will be borne by A & B equally. The company earned a profit of Rs. 10,00,000 during the year. Prepare profit & Loss Appropriation Account. 150. Guarantee to a partner Profit and Loss Appropriation A/c Dr.For the year ended 31st March 2008ParticularsAmountCr.AmountBy Net ProfitTo Partners Capital A/cParticulars10,00,000A: 5,00,000 - Given to C 50,000 4,50,000 B 3,00,000 - Given to C 50,000 2,50,000 C 2,00,000 + From to divided Rs. 1,00,000A: be 50,000 in 1:1 (equally) + From B: 50,000 3,00,000 10,00,00010,00,000 151. CLASS ASSIGNMENT A, B and C were partners in the ratio of 2:2:1. However C was given a guarantee by C that his share will not be less than Rs. 3, 00,000 in any year. . Deficiency if any will be borne by A & B in 5:3.The Company earned a profit of Rs. 10, 00,000 during the year 2007-08. Prepare profit & Loss Appropriation Account. 152. SOLUTION Particulars To Partners Capital A/c A: 4,00,000 - Given to C 62,500 B 4,00,000 - Given to C 37,500 C 2,00,000 + From A: 62,500 + From B: 37,500AmountParticularsAmountBy P& L A/c10,00,0003,37,5003,62,5003,00,000 10,00,00010,00,000 153. Partnership: GoodwillACCOUNTANCYClass XII 154. GOODWILL 155. GOODWILL: DefinedGoodwill is nothing more than the probability that the old customers will resort to old place. By Lord Eldon 156. Characteristics An Intangible asset not a fictitious asset. Cannot have a separate existence from thatof the enterprise. Helps to earn higher profits. Attractive force that binds old customer to old place. Its value is determined by subjective judgment of the valuer. Fluctuates with the fortunes of the enterprise. Affected by various factors. 157. Factors Affecting Value Efficient management Location Favourable contracts Patent advantage Access to supplies Quality Others like after sales services, good customer relations, good labour relations etc 158. When to Valuate There is a need to valuate goodwill in following circumstances: Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner Amalgamation of two firms Conversion of firm into company. 159. ClassificationGOODWILLPurchasedSelf-generated 160. Purchased Goodwill When goodwill is acquired by making a payment, it will be termed as purchasedgoodwill like when a business purchases any brand which already has a market standing will be purchased goodwill. When a business is purchased, the excess of purchased consideration of its net assets (i.e. assets liabilities) is the purchased goodwill. 161. Self-Generated Goodwill This is the market standing which a business makes byworking over a number of years. It is not recorded in the books of accounts if AS 10 is followed. Its valuation depends on the subjective judgment of the valuer. 162. Methods of Valuation.Methods of GoodwillAverage Profit MethodSuper Profit MethodCapital-isation Method 163. Average Profit Method This method is based on the assumption that a new business will not be able to earn anyprofits during the first few years of its operations. Hence, the person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years. The goodwill, therefore, should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue. 164. Average Profit Method STEPS 1. Calculate normal past business profits for each year by deducting abnormal gains and non-business incomes and adding abnormal losses and non-business expenses. 2. Add the profits calculated above and divide their sum by number of years to get average profit. 3. Calculate goodwill as follows: Goodwill = Average Profits x Number of years Purchased 165. Average Profit Method Example The profit for the last five years of a firm were as follows Year 2003 Rs. 1,00,000; Year 2004 Rs. 1,98,000; Year 2005 Rs. 3,42,000; Year 2006 Rs. 4,60,000 and Year 2007 Rs. 6,00,000. Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits. 166. Average Profit Method Calculate Average Profit as:1,00,000 +1,98,000 + 3,42,000 + 4,60,000 + 6,00,000 5 17,00,000 = =3,40,000 5 To calculate Goodwill, Average Profit is multiplied by number of years Purchased as:=3,40,000 4 =13,60,000 167. Super Profit Method Capital employed in a business earnsreturns known as profits. Normally the average rate of the industry is considered as normal rate of return from that business. But if a business from same industry able to earn higher profits, then these excess profits are termed as super or abnormal profit. Goodwill is calculated by multiplying these super profits with number of agreed years purchased. 168. Super Profit Method STEPSCalculate average capital employed: opening capital employed + closing capital employed 2 capital employed = capital + free reserves - fictitious assets 2. Calculate actual expected profit i.e. average profits. 3. Calculate normal profits as: normal rate of return Average capital employed x 100 4. Calculate super profit i.e. 1.Average/actual profits normal profits5. Calculate goodwill asGoodwill = Super Profits x Number of years Purchased 169. Super Profit Method Example The average profit for the last five years of a firmwere Rs. 13,00,000. the normal rate of return on capital employed is 20%. The firm has assets worth of Rs. 65,00,000 and liabilities for Rs. 15,00,000 in the business. Calculate goodwill of the firm on the basis of 4 years purchase of super profits. 170. Super Profit Method Solution Actual/average profit = 13,00,000 Capital employed = assets liabilities = 65,00,000 15,00,000 = 50,00,000 Normal profit = 20% of 50,00,000 = 10,00,000 Super profit = average profit normal profit =13,00,000 10,00,000 = 3,00,000 Goodwill = super profit x number of years purchased = 3,00,000 x 4 = Rs. 12,00,000 171. Capitalisation Method Under Capitalisation method, goodwill iscalculated in two ways:Capitalisation of Average Profits, Capitalisation of Super Profits. 172. Capitalisation Method STEPS 1. Calculate average normal profits earned. 2. Calculate capitalised value of the firm as:-AverageProfit 100 Rate of NormalProfits 3. Determine the value of net tangible assets, i.e. assets other than fictitious assets 4. Calculate goodwill by deducting net tangible assets from the capitalised value, i.e., 5. Goodwill = Capitalised Value Net Tangible Assets. 173. Capitalisation Method Example A firm earns Rs. 6,00,000 as its annual profits, the rate of normal profit being 10%. The assets of the firm amount to Rs. 65,00,000 and liabilities for Rs. 35,00,000. Calculate goodwill of the firm by Capitalisation method. 174. Capitalisation Method SolutionAverage profit = 6,00,000 AverageProfit 100 Total Capitalised value = Rate of NormalProfits 6,00,000100 = = 60,00,000 10 Net assets of the firm=Total Assets Liabilities = 65,00,000-35,00,000 = 30,00,000 Goodwill = Total Capitalised Value-Net Assets = 60,00,000 30,00,000 = Rs. 30,00,000. 175. Capitalisation Method STEPS: Calculate capital employed of the firm as: Total Tangible Assets Outside Liabilities. Calculate normal profit on capital employed as:Profit =Capital Employed Requred rate of return100 Calculate Average Profits of past years Calculate Super Profits, i.e. Actual Average Profits-Normal Profits. Calculate Goodwill as Goodwill=Super Profit 100 Normal rate of return 176. Capitalisation Method Example A firm earns Rs. 6,00,000 as its annual profits, the rate of normal profit being 10%. The tangible assets of the firm amount to Rs. 75,00,000 and liabilities for Rs. 25,00,000. Calculate goodwill of the firm byCapitalisation method. 177. Capitalisation Method Solution: Capital Employed = tangible assets liabilities = 75,00,000 25,00,000 = 50,00,000 Normal Profit = 10% of capital i.e. 50,00,000 = 5,00,000 Super Profit = average profit normal profit Goodwill== 6,00,000 5,00,000 = 1,00,000 Super Profit 100Normal rate of return = Rs. 10,00,0001,00,000 100 = 10 178. Chapter 3Comparative & Common Size StatementsACCOUNTANCYClass XII 179. MEANING Comparative of financial statements involves the comparative study of the components of financial statements i.e. Profit and Loss A/c and Balance Sheet over a period of two or more years When the comparison is made for the data for the period of more than two years of the same firm then it is called Intra firm Comparison When the comparison is made for the data of the another firm then it is called Inter firm Comparison The change is depicted both in absolute and percentage terms 180. OBJECTIVES AND TOOLS OBJECTIVES It gives information about the nature of changes affecting the financial position of the firm It points out the weaknesses about the liquidity, solvency and profitability of the firm It helps in forecasting and planning TOOLS Comparative Balance Sheets Comparative Income statements 181. COMPARATIVE BALANCE SHEET PARTICULARSA. Fixed Assets B. Investments C. Current Assets TOTAL A. Equity Share Capital B. Preference Share capital C. Reserves & Surplus D. Secured Loans E. Unsecured Loans F. Current Liabilities G. Provisions TOTAL20072008Absolute Percentage change change 182. EXAMPLE 1 LIABILITIES20072008Share Capital60,000Preference Share Capital2007200860,000 Fixed Assets90,00010800015,00015,000 Investments15,00015,000Reserves & Surplus15,00018,000 Current assets40,00030,000Secured Loans30,00027,000 Misc Expenditure5,0001,500Unsecured Loans15,00018,000Current Liabilities12,00013,200Provisions3,0003,3001,50,000 1,54,500ASSETS1,50,000 1,54,500 183. 18,000 100 1,08,000 -90,000 90,000SOLUTION PARTICULARSA. Fixed Assets B. Investments C. Current assets TotalA. Equity Share Capital B. Preference Share capital C. Reserves & Surplus D. Secured Loans E. Unsecured Loans F. Current Liabilities G. Provisions Total20072008Absolute changePercentage change90,000 15,000 40,0001,08,000 15,000 30,00018,000 ---(10,000)20% ---(25%)1,45,0001,53,0008,0005.5%60,000 15,000 10,000 30,000 15,000 12,000 3,00060,000 15,000 16,500 27,000 18,000 13,200 3,300------(6,500) (3,000) 3,000 1,200 300------(65%) (10%) 20% 10% 10%1,45,0001,53,0008,0005.5% 184. CLASS ASSIGNMENT Prepare the comparative Balance Sheet of Apex Ltd from the following information for two years ended 31.03.07 and 31.03.08 PARTICULARS31.03.0731.03.08Fixed Assets30,00,00032,00,000Investments6,00,0008,00,000Stock in Trade3,50,0005,00,000Sundry Debtors80,00050,000Cash in Bank80,00080,000Miscellaneous Expenditure40,00030,00025,00,00025,00,000Reserves and Surplus8,00,00012,00,000Secured Loans4,00,0003,00,000Unsecured Loans3,00,0001,00,000Creditors1,50,0005,60,000Equity Share Capital 185. SOLUTION PARTICULARSA. Fixed Assets B. Investments C. Current assets20072008Absolute changePercentage change30,00,000 6,00,000 5,10,00032,00,000 8,00,000 6,30,0002,00,000 2,00,000 1,20,0006.67% 33.3% 23.5%Total41,10,00046,30,0005,20,00012.6%A. Equity Share Capital B. Reserves & Surplus C. Secured Loans D. Unsecured Loans E. Current Liabilities25,00,000 7,60,000 4,00,000 3,00,000 1,50,00025,00,000 --11,70,000 4,00,000 3,00,000 (1,00,000) 1,00,000 (2,00,000) 5,60,000 (1,30,000)--50% (25%) (66.6%) (86.6%)Total41,10,00046,30,0005,20,00012.6% 186. COMPARATIVE INCOME STATEMENT PARTICULARSSales Less: Cost of goods sold Gross Profit Less: Operating Expenses:Net Operating Profit + Other Income Profit before Interest and Tax Less: Interest paid Profit before Tax Income Tax Payable Profit after Tax20072008Absolute changePercentage change 187. EXAMPLE 2 PARTICULARSSales Cost Of Goods Sold2007 (Rs)2008(Rs)1,00,0002,00,00060% of Sales70% of SalesIndirect Expenses10% of Gross ProfitRate of Income Tax50% of Net Profit before Tax 188. 1,00,000 100 2,00,000 2,00,000 -1,00,000SOLUTION 2 PARTICULARS Sales Less: Cost of Goods sold Gross Profit Less: Indirect Expenses Net Profit before tax Less: Income Tax Net Profit after tax20072008Absolute Percentage change change1,00,000 2,00,0001,00,000100%60,000 1,40,000 40,000 60,00080,000 20,000133.3% 50%4,000 36,0006,000 54,0002,000 18,00050% 50%18,00027,0009,00050%18,00027,0009,00050% 189. CLASS ASSIGNMENT From the following data prepare a Comparative Income StatementPARTICULARS2007 (Rs)2008 (Rs)Sales14,00,00016,00,000Cost of goods sold10,00,00011,80,000Office and Administration Expenses90,0001,30,000Interest on Loan80,00080,000Income Tax40,00036,000 190. SOLUTION PARTICULAR20072008Absolute changePercentage changeSales Less: COGS14,00,000 10,00,00016,00,000 11,80,0002,00,000 1,80,00014.2% 18%Gross Profit (-) I. Exp4,00,000 90,0005,80,000 1,30,00020,000 40,0005% 44.4%Operating Profit (-) Int. on loan3,10,0004,50,0001,40,00045.1%80,00080,000------Net Profit before tax (-) tax2,30,0003,70,0001,40,00060.8%40,00036,000(4,000)(10%)Profit after Tax1,90,0003,34,0001,36,00071.5% 191. COMMON SIZE STATEMENTS MEANING Common size Statements are those statements in which the amounts of two years of Balance sheet or Income Statement are converted into percentages to some common base. When the comparison is made for the data for the period of more than two years of the same firm then it is called Intra firm Comparison When the comparison is made for the data of the another firm then it is called Inter firm Comparison In Balance sheet the Total Assets is assumed to be 100 & in Income Statements the Sales are assumed to be 100. 192. COMMONSIZE STATEMENTSOBJECTIVES To analyze change in individual item of Income Statement and Balance Sheet To study the trend of items in Balance sheet and Income statement It helps in forecasting and planning TOOLS Common Size Balance Sheet Common Size Income statement 193. COMMON SIZE BALANCE SHEET PARTICULARSAMOUNT 2007 (Rs)ASSETS Fixed Assets Investments Current Assets TOTALLIABILITIES Equity Share Capital Preference Share Capital Reserves and Surplus (after Misc. expenditure) Secured Loans Unsecured Loans Current Liabilities Provisions TOTAL2008 (Rs)PERCENTAGE 2007 (Rs) 2008 (Rs) 194. EXAMPLE 3 LIABILITIES20072008ASSETS20072008Current Liabilities2,00,0004,00,000 Current Assets6,00,000 10,00,000Reserves3,50,0003,00,000 Fixed Assets10,00,000 16,00,00012% Loan5,50,0009,00,000Share Capital5,00,000 10,00,000 16,00,000 26,00,00016,00,000 26,00,000 195. 6,00,000 10,00,000 100 100 16,000,000 26,00,000SOLUTION 3 PARTICULARSAMOUNT 2007 (Rs)PERCENTAGE2008 (Rs)2007 (Rs)2008 (Rs)ASSETS Current Assets6,00,00010,00,00037.5%38.4%Fixed Assets10,00,00016,00,00062.5%61.5%TOTAL16,00,00026,00,000100%100%Current Liabilities2,00,0004,00,00012.5.%15.38%Reserves3,50,0003,00,00021.8%11.53%12% Loans5,50,0009,00,00034.3%34.6%Share capital5,00,00010,00,00019.2%62.5%16,00,00026,00,000100%100%LIABILITIESTOTAL 196. CLASS ASSIGNMENT LIABILITIES20072008ASSETSEquity Share Capital7,50,0009,00,000 Fixed AssetsGeneral Reserve1,50,0002,25,000 Current Assets12% Debentures2,70,0001,80,000 Preliminary ExpensesUnsecured Loans1,80,000 3,75,0004,20,000Profit & Loss A/c1,80,00020081,20,000Current Liabilities20071,35,00019,05,000 19,80,00012,45,000 11,55,000 6,15,0007,95,00045,00030,00019,05,000 19,80,000 197. SOLUTION PARTICULARSAMOUNTPERCENTAGE2007 (Rs)2008 (Rs)2007 (Rs)2008 (Rs)ASSETS Fixed Assets Current Assets12,45,000 6,15,00011,55,000 7,95,00066.9% 33%59.2% 40.7%TOTAL18,60,00019,50,000100%100%7,50,000 2,85,0009,00,000 3,30,00040.3% 15.3%46.1% 16.9%2,70,000 1,80,000 3,75,0001,80,000 1,20,000 4,20,00014.5% 9.6% 20.1%9.2% 6.1% 21.5%18,60,00019,50,000100%100%LIABILITIES Equity Share Capital Reserves and Surplus (after Miscellaneous expenditure) Secured Loans Unsecured Loans Current Liabilities TOTAL 198. COMMON SIZE INCOME STATEMENT PARTICULARSAMOUNT 2007 (Rs)Net Sales Less: Cost of goods sold Gross Profit Less: Operating Expenses Net Profit before tax Less: Tax Net Profit after tax2008 (Rs)PERCENTAGE 2007 (Rs)2008 (Rs) 199. EXAMPLE 4 PARTICULARSSales Gross Profit Indirect Expenses Income Tax2007200820,00,00030,00,00040%30%50% of G.P40% of G.P.50%50% 200. 30,00,000 20,00,000 100 100 20,00,000 30,00,000SOLUTION 4 PARTICULARSAMOUNT 2007 (Rs)Net Sales Less: Cost of goods sold2008 (Rs)PERCENTAGE 2007 (Rs)2008 (Rs)20,00,000 12,00,00030,00,000 21,00,000100% 60%100% 70%Gross Profit Less: Operating Expenses8,00,000 4,00,0009,00,000 3,60,00040% 20%30% 12%Net Profit before tax Less: Tax4,00,000 2,00,0004,50,000 2,25,00020% 10%15% 7.5%Net Profit after tax2,00,0002,25,00010%7.5% 201. CLASS ASSIGNMENT PARTICULARSSales Cost Of Goods Sold2007 (Rs)1,00,0002008(Rs)2,00,00060% of Sales 70% of SalesIndirect Expenses10% of Gross ProfitRate of Income Tax50% of Net Profit before Tax 202. SOLUTION PARTICULARSAMOUNT 2007Net Sales Less: COGSPERCENTAGE2008200720081,00,000 60,0002,00,000 1,40,000100% 60%100% 70%Gross Profit Less: Operating Expenses40,00060,00040%30%4,0006,0004%3%Net Profit before tax Less: Tax36,000 18,00054,000 27,00036% 18%27% 13.5%Net Profit after tax18,00027,00018%13.5% 203. Chapter 4Change in Profit Sharing RatioACCOUNTANCYClass XII 204. Concept Old ratio 1:1AProfit is like a cakeA will loose of the cake while B will gain of cakeA New ratio 1:3BB 205. Numerical Presentation Old ratio of A and B 1:1 New ratio of A and B 1:3 Difference = old share new share As Share Bs Share1 1 2-1 1 = = As sacrifice 2 4 4 4 1 3 2 - 3 1 = = Bs gain 2 4 4 4 206. CLASS ASSIGNMENT Q1 A, B and C were partners in the firm in the ratio of 3:2:1. Now they decided to share profits in the ratio of 5:3:2. Calculate gaining/sacrificing ratio of each partner. Q2 A, B and C were partners in the firm in the ratio of 4:3:2. Now they decided to share profits in the ratio of 2:2:1. Calculate gaining/sacrificing ratio of each partner. Q3 A, B and C were partners in the firm in the ratio of 6:4:5. Now they decided to share profits equally. Calculate gaining/sacrificing ratio of each partner. 207. SOLUTION Q1 Sacrifice/ Gain = Old Share - New ShareA= 35 NIL 6 10 B= 2 3 2 (Sacrifice) 6 10 60 C= 1 2 2 (Gain) 6 10 60 208. SOLUTION Q2 Sacrifice/ Gain = Old Share - New ShareA=4 2 2 (sacrifice) 9 5 45B = 3 2 3 9 5C=45(Gain)2 1 1 (Sacrifice) 9 5 45 209. SOLUTION Q3 Sacrifice/ Gain = Old Share - New ShareA=B= C=6 1 1 (sacrifice) 15 3 154 1 1 (Gain) 15 3 155 1 NIL 15 3 210. Effects on Goodwill When partners agree to change their profit sharing ratio, their share in goodwill also changes. To take into account such change, an adjustment entry among the partners is passed, debiting the gaining partner andcrediting the sacrificing partner. It can be represented as: JOURNALDateParticularsGaining Partner A/c Dr. To Sacrificing Partner A/cL.F.DebitCredit 211. Example A & B are partners in the ratio of 3:2. now they decided to share in the ratio of 5:3. for this purpose goodwill is valued at Rs. Rs. 4,00,000. Partners decided to pass a adjustment entry to give this effect. Journalise. 212. Solution Calculation of sacrificing and gaining ratio Old ratio of A and B 3:2 New ratio of A and B 5:3 Difference = old share new share3 5 24 - 25 1 A's Share = - = = Gain 5 8 40 40 2 3 16 - 15 1 B's Share = - = = Sacrifice 5 8 40 40 213. Journal Entry Amount to be adjusted1 40 4,00,000 =10,000JOURNAL DateParticularsBs Capital A/c Dr. To As Capital A/c (Being adjustment entry Passed)L.F.DebitCredit10,000 10,000 214. Previous Goodwill If Goodwill Already Appears in books If goodwill already appears in the books of accounts, it has to be written off among the partners in the old ratio. The journal entry would be:JOURNAL DateParticularsAll Partners (old ratio) A/c Dr. To Goodwill A/cL.F. DebitCredit 215. Reserves/Past Profits When partners agree to change their profitsharing ratio, their share in reserves, accumulated profits, provisions, funds etc. also changes. To take into account such change, an adjustment entry among the partners is passed, debiting the gaining partner and crediting the sacrificing partner. It can be represented as: JOURNAL DateParticularsGaining Partner A/c Dr. To Sacrificing Partner A/cL.F.DebitCredit 216. Example A & B are partners in the ratio of 3:2. now they decided to share in the ratio of 5:3. The reserves stood at Rs. Rs. 2,00,000. Partners decided to pass a adjustment entry to give this effect. Journalise. 217. Solution Calculation of sacrificing and gaining ratioOld ratio of A and B 3:2 New ratio of A and B 5:3 Difference = old share new share3 5 24 - 25 1 A's Share = - = = Gain 5 8 40 40 2 3 16 - 15 1 B's Share = - = = Sacrifice 5 8 40 40 218. Journal Entry Amount to be adjusted1 40 2,00,000 =5,000JOURNAL DateParticularsBs Capital A/c Dr. To As Capital A/c (Being adjustment entry Passed)L.F.DebitCredit5,000 5,000 219. Example X, Y and Z are partners sharing profits and losses in the ratio of 7: 5: 4. Their balance Sheet as on 31st March 2003 was:LiabilitiesCapital Accounts: X 4,00,000 Y 2,70,000 Z 1,80,000 General Reserve Profit & Loss A/c CreditorsRs.AssetsRs.Sundry Assets10,26,0008,50,000 80,000 32,000 64,000 10,26,00010,26,000Partners decided that with effect from 1st April 2003, they will share profits and losses in the ratio of 3: 2: 1. For this purpose goodwill of the firm was valued at Rs. 3, 20,000. The partners do not want to record the goodwill and also do not want to distribute the general reserve and profits. Pass a single journal entry to record the change and prepare a revised balance sheet. 220. Solution 7 3 21- 24 3 X's Share = - = = Gain 16 6 48 48 5 2 15 - 16 1 Y's Share = - = = Gain 16 6 48 48 4 1 12 - 8 4 Z's Share = - = = Sacrifice 16 6 48 48 Amount to be adjusted: Goodwill 3,20,000 3 X'sGain= 4,32,000 =27,000 Reserves 80,000 48 Profit 32,000 1 Total 4,32,000 Y'sGain= 4,32,000=9,000 48 4 Z's Sacrifice = 4,32,000 =36,000 48 221. Solution JOURNAL DateParticularsL.F.DebitXs Capital A/c Dr. Ys Capital A/c Dr. To Zs Capital A/c (Being adjustment entry Passed)Credit27,000 9,000 36,000 (27,000 + 9,000)Partners Capital A/c ParticularsTo Z To bal c/dXYZXYZBy bal b/d By X 3,73,000 2,61,000 2,16,000 By Y4,00,000 2,70,000 1,80,000 27,000 9,0004,00,000 2,70,000 2,16,0004,00,000 2,70,000 2,16,00027,0009,000Particulars 222. Solution Liabilities Capital Accounts: X 3,73,000 Y 2,61,000 Z 2,16,000 General Reserve Profit & Loss A/c CreditorsBalance Sheet Rs. Assets Sundry AssetsRs. 10,26,0008,50,000 80,000 32,000 64,000 10,26,00010,26,000 223. Revaluation/Reassessment The value of assets may be different from the one statedin the books because with the passage of time the value of some assets fall while of some other rise In the case of liabilities, it is possible that the amount payable is different from the value stated in the books. It is also possible that some assets or liabilities are not recorded in the books. The value of assets and the amounts payable need to be brought to their correct values. It may be done through revaluation A/c when such changes are agreed to be shown in the books of accounts whereas if partners decide not to reveal and record the changed figures in books of accounts, in that case to give effect of such changes a statement for calculation of profit/loss from revaluation of assets and reassessment of liabilities is prepared and its effect is passed through the same gaining-sacrificing entry. 224. Journal Entries i) for a increase in the value of assetsAssets A/c (Individually) To Revaluation A/cDr.ii) for a decrease in the value of assetsRevaluation A/c To Assets A/c (Individually)Dr.iii) For an increase in the amount of liabilitiesRevaluation A/c To Liability A/c (Individually)Dr.iv) For a decrease in the amount of liabilitiesLiability A/c (individually) To Revaluation A/cDr.v) For accounting unrecorded assetsAssets A/c (Indi