VARMECHA CLASSES

8989832300, 8839389003

ACCOUNTANCY
CLASS – 12

“50 HOURS”
COMPREHENSIVE CRASH COURSE

NEAR VRINDAVAN RESTAURANT, SCHEME NO. 78 MAIN ROAD, INDORE

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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INDEX
DAYS NAME OF CHAPTERS/ UNITS PAGE NO. STANDARDTIME
DAY -1 Accounting for Companies 03-13 3:00 HOURS
DAY -2 Accounting for Companies 14-24 3:00 HOURS
DAY -3 Accounting for Companies 25-32 3:00 HOURS
DAY -4 Accounting for Companies 33-43 3:00 HOURS
DAY -5 Accounting for Companies 44-47 4:00 HOURS
DAY -6 Accounting for Partnership 48-73 4:00 HOURS
DAY -7 Accounting for Partnership 74-90 4:00 HOURS
DAY -8 Accounting for Partnership 91-103 3:00 HOURS
DAY -9 Accounting for Partnership 104-113 3:00 HOURS
DAY -10 Accounting for Partnership 114-123 4:00 HOURS
DAY -11 Analysis of Financial Statement 124-128 3:00 HOURS
DAY -12 Analysis of Financial Statement 129-135 3:00 HOURS
DAY -13 Analysis of Financial Statement 136-151 4:00 HOURS
DAY -14 Analysis of Financial Statement 152-173 3:00 HOURS
DAY -15 Analysis of Financial Statement 174-182 3:00 HOURS
TOTAL EFFECTIVE HOURS 50:00 HOURS

(Modified according to latest syllabus & guidelines prescribed by

C.B.S.E.)

Compiled by :-
Pradeep Varmecha
[email protected]
Mobile No.+919425104917

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 2

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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ACCOUNTANCY - XII
Day - 1
ISSUE OF SHARES/ DEBENTURES FOR CONSIDERATION OTHER THAN CASH
It is not necessary to issue the shares only for cash. A Company may issue fully paid
shares for consideration other than cash, in the following circumstances:
Issue of Shares to Promoters/ Underwriters: Promoters/ Underwriters of a
Company may be issued shares in the Company for the services rendered by them.
Issue of Shares for Purchase of Assets: Sometimes, a Company purchases some
assets and instead of making the payment to the vendors in the form of Cash, it issues
fully paid shares to the vendors.

Issue of shares to Promoters:

Accounting Treatment (Journal entries)

Date Particulars L.F. Dr. (₹) Cr. (₹)

Incorporation Cost / Formation Expenses A/c Dr. --------
To Promoters A/c -------
(Being the amount due to Promoters )
Promoters A/c Dr. ---------
To Share Capital A/c (No. of Shares x F.V. of each share) ---------
To Securities Premium Reserve A/c (No. of Shares x --------
Premium)
(Being issue of ……. shares of ₹ ……. each to Promoters )

Issue of shares to Underwriters:

Accounting Treatment (Journal entries)

Date Particulars L.F. Dr. (₹) Cr. (₹)

Underwriting Commission A/c Dr. --------
To Underwriters A/c -------
(Being the Commission amount due to Underwriters )
Underwriters A/c Dr. ---------
To Share Capital A/c (No. of Shares x F.V. of each share) ---------
To Securities Premium Reserve A/c (No. of Shares x -------
Premium)
(Being issue of ……. shares of ₹ ……. each to Underwriters )

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 3

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Issue of shares to vendors / suppliers for purchase of Asset(s)/ Running Business:

Accounting Treatment (Journal entries)

Date Particulars LF Dr. (₹) Cr. (₹)
Sundry Assets (individual) A/c Dr. --------
Goodwill A/c (Excess of purchase price over the Net Worth) Dr. --------
To Sundry Liabilities (individual) A/c --------
To Vendor’s / Supplier’s A/c (Purchase Price ) --------
To Capital Reserve A/c (Net Worth > Purchase price ) ---------
(Being the assets/running business purchased )
Vendor’s A/c (Partial settlement of vendor’s) Dr. -------
To Bank A/c (Cheque/ Bank draft Issued) --------
To Bills Payable A/c (Bill accepted) -------
(Being partial payment made )
Vendor’s A/c ( Amount to be settled by issuing Shares ) Dr. -------

To Share Capital (No. of shares x face value of share) --------

To S.P.R. A/c (No. of shares x Premium value of share) -------
To Bank A/c (Settlement for fraction of share) -------
(Being … Shares of ……. Each issued at ….premium to
vendors)
No. of Shares = Amount to be settled / Offer value of each Shares

Issue of Debentures to vendors / suppliers for purchase of Asset(s)/ Running

Business:

Accounting Treatment (Journal entries)

Date Particulars LF Dr. (₹) Cr. (₹)
Vendor’s A/c (Amount to be settled by issuing Debentures) Dr.
Discount on issue of Debentures A/c (No. of Debentures x Discount)
Loss on issue of Debentures A/c
To % Debentures A/c (No. of Debentures x face value of share)
To S.P.R. A/c (No. of Debentures x Premium value of share)
To Bank A/c (Settlement for fraction of share)
To Premium on Redemption A/c (premium on Redemption)
(Being … Debentures of ……. Each issued at par/ premium/
discount , redeemable at par/premium/discount to vendors)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 4

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question- 1
ABC Ltd. purchased land from XYZ Ltd. The payment was made by issuing a cheque
for ₹ 20,00,000 and by accepting a bill of exchange for 6 months for ₹ 4,00,000. The
balance amount was paid by issuing 6,000, 10% Debentures of ₹ 100 each at 5%
premium, redeemable at 10% premium after 3 years. Pass entries in the books of ABC.
Solution
In the books of ABC Ltd.
JOURNAL

Date Particulars L.F. Dr. (₹) Cr. (₹)

Calculation of Purchase Consideration –

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 5

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question- 2
PQR Ltd. purchased assets of ₹ 8,20,000 and took over liabilities of ₹ 1,40,000 of RST
Ltd. at a value of ₹ 6,60,000. PQR Ltd. issued 10% Debentures of ₹ 100 each at a
discount of 10%, redeemable at a premium of 5%.
Pass the necessary journal entries in the books of PQR Ltd. for the above transactions.
Solution
In the books of PQR Ltd.
JOURNAL

Date Particulars L.F. Dr. (₹) Cr. (₹)

𝐴𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑠𝑒𝑡𝑡𝑙𝑒𝑑
No. of Debentures to be issued =
𝑂𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑑𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒𝑠

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 6

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question- 3
National Ltd. purchased furniture for ₹ 3,30,000 from India Furniture Mart. Half the
payment was made by cheque and the balance by issue 9% Debentures of ₹ 100
each. Pass necessary journal entries in the books of National Ltd. when debentures
were issued at 10% premium and redeemable also at 15% premium.

In the books of National Ltd.

JOURNAL
Date Particulars L.F. Dr. (₹) Cr. (₹)

𝐴𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑠𝑒𝑡𝑡𝑙𝑒𝑑
No. of Debentures to be issued =
𝑂𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑑𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒𝑠

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 7

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question- 4
Bharat Ltd. purchased Machinery for ₹ 5,40,000 from HMT Ltd. Half the payment was
made by cheque and the balance by issue 9% Debentures of ₹ 100 each. Pass
necessary journal entries in the books of Bharat Ltd. when debentures were issued at
10% discount and redeemable at 15% premium.

In the books of Bharat Ltd.

JOURNAL
Date Particulars L.F. Dr. (₹) Cr. (₹)

𝐴𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑠𝑒𝑡𝑡𝑙𝑒𝑑
No. of Debentures to be issued =
𝑂𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑑𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒𝑠

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 8

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Issue of Debentures with Consideration of Cash in Lump Sum

A company may issue Debentures for consideration cash in lump sum, here full offer
value of Debentures is payable in one instalment with application.
Accounting Treatment (Journal entries)
Date Particulars Dr. (₹) Cr. (₹)
I Bank A/c (No. of applied Debentures x full offer value) Dr. -----
To Debenture Application & Allotment A/c -----
(Being application money received on ----- Debentures @ ₹ ---- each)
II Debenture Application & Allotment A/c Dr.
-----
Discount on issue of Debentures A/c(Debentures x Discount) Dr.
-----
Loss on issue of Debentures A/c
-----
To Debenture A/c(No. of Debentures subscribed x face value) -------
To S.P.R. A/c (No. of Debentures subscribed x premium value ) -------
To Bank A/c (No. of Debentures rejected x full offer value ) -------
To Premium on Redemption A/c (premium on Redemption)
(Being the Debentures allotted and application money
transferred to Debenture account , securities premium
reserve account and excess application money refunded
back)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 9

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question- 5
KBC Ltd., issued 2,000 9% Debentures of ₹ 100 each on 1-4-2024. Pass necessary
Journal entries for the issue of debentures in the following situations:
(a) When debentures were issued at par redeemable at a premium of 10%.
(b) When debentures were issued at 6% discount redeemable at 5% premium.
Solution
In the books of KBC Ltd.,
JOURNAL

Date Particulars L.F. Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 10

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question- 6
SRK Ltd. issued 5,000, 9% debentures of ₹ 200 each on 1-1-2024. Pass necessary
journal entries for the issue of debentures in the following situations:
(a) When debentures were issued at a discount of 5% and were redeemable at a
premium of 8%.
(b) When debentures were issued at a premium of 6% and were redeemable at a
premium of 9%.
Solution
In the books of SRK Ltd.,
JOURNAL

Date Particulars L.F. Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 11

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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WRITING OFF LOSS ON ISSUE OF DEBENTURES

Discount/ Loss on issue of debentures must be written off in the same year by using
securities premium amount first.
Accounting Treatment (Journal entries)
Date Particulars Dr. (₹) Cr. (₹)
Securities Premium A/c … Dr. -----
Statement of P&L…. Dr. -----
To Loss/ Discount on Issue of Debentures -----
(Being Loss written off )

Question- 6
Indore Ltd. issued ₹ 20,00,000, 12% debentures of ₹ 100 each at a premium of 5% on
1st April, 2024. The issue was oversubscribed by 10,000 debentures. Allotment was
made on pro-rata basis. These debentures are redeemable at a premium of 10% after
5 years. Pass Journal entries.
Solution
In the books of Indore Ltd.,

JOURNAL
Date Particulars L.F. Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 12

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question- 7
Pass necessary journal entries and prepare Loss on issue of Debentures Account for
the issue of ₹ 25,00,000, 9% Debentures of ₹ 50 each at a discount of 6%,
redeemable at a premium of 10%. Balance of securities premium were appeared at
₹ 3,00,000.
Solution
JOURNAL

Date Particulars L.F. Dr. (₹) Cr. (₹)

Loss on Issue of Debentures A/c

Particulars Amount Particulars Amount

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 13

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

ACCOUNTANCY - XII
Day - 2
FORFEITURE OF SHARES
If any shareholder fails to pay the amount due on allotment or on any call within the
specified period, the Directors may cancel his shares. This is called Forfeiture of
Shares.
It may be noted that the shares can be forfeited only if the Articles of Association of
the Company allow them to be forfeited. In order to make the forfeiture valid, it is
essential to follow the rules laid down in the Articles. If no rules are given in Articles,
the provisions of Table F of Schedule I of the Companies Act, 2013 regarding forfeiture
apply. The usual procedure is that the defaulting shareholder must be given a
minimum of 14 days' notice requiring him to pay the unpaid amount on his shares
together with the accrued interest thereon. The notice must state that if the unpaid
amount is not paid within a certain period, his shares shall be forfeited. If, in spite of
this notice, the shareholder still does not pay the unpaid amount on his shares, his
shares may be forfeited by a resolution of the Board of Directors.
After the forfeiture, the name of the shareholder is removed from the Register of
Members. The amount already paid by him belongs to the Company and is not
returned to him and it will be credited to Share Forfeiture Account. For Example:
Gopal was holding 100 shares of ₹ 10 each of a Company on which he had paid ₹ 2 on
application and ₹ 2 on allotment, but could not pay ₹ 3 on first call and ₹ 3 on final
call. If the shares of Gopal are forfeited by the Directors, ₹ 4 (Paid up face value) will be
credited to Share Forfeiture Account.

Re-Issue of Forfeited Shares

Directors have the authority to reissue the forfeited shares on such terms as they
think fit. That is to say that they are at liberty to reissue the forfeited shares at par, at
premium or at discount. However, if the shares are re-issued at a discount the
amount of the discount cannot exceed the amount previously received on these
shares. For Example: if Gopal’s forfeited shares are reissued, minimum ₹ 6 must be
collected on its reissue. It means that maximum of ₹ 4 can be allowed as discount on
the reissue of such shares and it will be debited to Share Forfeiture Account. After the
reissue of forfeited shares, the credit balance left in the Share Forfeiture A/c is a
Capital Gain' to the Company and must be transferred to “Capital Reserve A/c.”

For Example: if Gopal’s forfeited shares are reissued at ₹ 7 each. It means that ₹ 3
each allowed as discount on the reissue of such shares against the maximum amount
₹ 4 and it will be debited to Share Forfeiture Account and balance of share forfeiture
a/c that is ₹ 100 (₹ 1on 100 share) will be transferred to Capital Reserve A/c.

It should be clearly understood that if all the forfeited shares are not re-issued,
only that proportion of share forfeiture account which belongs to the re-issued
shares should only be transferred to Capital Reserve Account.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 14

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Entry on Forfeiture of Shares

Accounting Treatment (Journal entries)
Date Particulars LF Dr. (₹) Cr. (₹)
I Share Capital A/c (No. of shares forfeited x Called up F.V.) Dr. -------
S.P.R. A/c (No. of shares forfeited x Premium in arrears) Dr. -------
To Calls-in-Arrears (Amount due but not received) --------
To Share Forfeiture A/c (F.V. received on Forfeited Shares) -------
(……… shares forfeited for non-payment of ………………)
Note: In case 'Calls in Arrears' account is not maintained by a company, 'Share
Allotment' and 'Share Call Accounts' would be credited in the above entry instead of
"Calls in Arrears A/c".
Entry on Reissue of Forfeited Shares
Accounting Treatment (Journal entries)
Date Particulars LF Dr. (₹) Cr. (₹)
I Bank A/c (No. of shares reissued x reissue price of each) Dr. -------
Share Forfeiture A/c(Shares reissued x Discount on reissue)Dr. -------
To Share Capital A/c(Shares reissued x Called up face value) --------
To S.P.R. A/c (Shares reissued x Premium on reissue ) -------
(………forfeited shares reissued …………………………...)
Note: Difference between the REISSUE PRICE and CALLED UP CAPITAL will be
transferred to Share forfeiture A/c or Securities Premium Reserve A/c

Entry on Transfer to Capital Reserve

Accounting Treatment (Journal entries)
Date Particulars LF Dr. (₹) Cr. (₹)
I Share Forfeiture A/c (Balance on Reissued Shares ) Dr. -------
To Capital Reserve A/c --------
(Transfer of Balance of Share Forfeiture A/c on reissued
shares to Capital Reserve A/c)

Forfeited amount on Forfeited shares = ₹ ……….

𝐴𝑚𝑜𝑢𝑛𝑡
Hence, Forfeited amount on Reissued shares =
𝑁𝑜 𝑜𝑓 𝐹𝑜𝑟𝑓𝑒𝑖𝑡𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠
x 𝑁𝑜 𝑜𝑓 𝑅𝑒𝑖𝑠𝑠𝑢𝑒𝑑𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠 =

Less : Loss on Re-issue : -------------------

Transferred to Capital Reserve = -----------

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 15

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question.1
Sandeep Ltd. forfeited 6,000 shares of ₹ 10 each issued at a premium of ₹ 2 per share
for the non-payment of final call of ₹ 3 per share. 3,000 of the forfeited shares were
reissued for ₹ 8 per share as fully paid up. Pass necessary journal entries for the
forfeiture and re-issue of shares. Also prepare share forfeited account.

Solution: Journal

Date Particulars Dr. (₹) Cr. (₹)

(Being 6,000 shares forfeited for non-payment of final call of

₹ 3 per share)

(Being 3,000 of the forfeited shares reissued @ ₹ 8 per share

as fully paid up)

(Being gain on reissue of 3,000 shares transferred to

Capital Reserve A/c)
Share Forfeited Account

Date Particulars J.F. Amount Date Particulars J.F. Amount

Forfeited amount on Forfeited shares =

Hence, Forfeited amount on Reissued shares =
Less : Loss on Re-issue : ------------------- =
Transferred to Capital Reserve = ----------- =

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 16

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question. 2
Pradeep Ltd. forfeited 6,000 shares of ₹ 10 each for non-payment of first call of ₹ 2 per
share. The final call of ₹ 3 per share was yet to be made. The final call was made after
forfeiture of these shares. Of the forfeited shares, 4,000 shares were reissued at ₹ 9
per share as fully paid up. Assuming that the company maintains 'Calls in Advance
Account' and 'Calls in Arrears Account' pass necessary journal entries for the
forfeiture and re-issue of shares. Also prepare share forfeited account. Solution:

Solution: Journal

Date Particulars Dr. (₹) Cr. (₹)

(Being 6,000 shares forfeited for non-payment of first call of

₹ 2 per share)

(Being 4,000 of the forfeited shares reissued @ ₹ 9 per share

as fully paid up)

(Being gain on reissue of 4,000 shares transferred to

Capital Reserve A/c)
Share Forfeited Account

Date Particulars J.F. Amount Date Particulars J.F. Amount

Forfeited amount on Forfeited shares = ₹ ……….

𝐴𝑚𝑜𝑢𝑛𝑡
Hence, Forfeited amount on Reissued shares =
𝑁𝑜 𝑜𝑓 𝐹𝑜𝑟𝑓𝑒𝑖𝑡𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠
x 𝑁𝑜 𝑜𝑓 𝑅𝑒𝑖𝑠𝑠𝑢𝑒𝑑𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠 =

Less : Loss on Re-issue : -------------------

Transferred to Capital Reserve = -----------
PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 17
SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question.3
Complete the following Journal Entries:

S. No. Particulars L.F. Debit (₹) Credit (₹)

(i) Dr.
To
To
(Being the forfeiture of 1,000 shares of ₹ 10 each, ₹ 8
called up, on which allotment money of ₹ 2 and first
call of ₹ 3 has not been received)
(ii) Dr.
To
To
(Being reissue of 1,000 forfeited shares fully paid up
at ₹ 11 per share)
(iii) Dr.
To
(Being gain on the reissue of shares transferred to
capital reserve account)
Question.4
Pass journal entries for the Forfeiture and Re-issue in the following cases:
Rajdeep Ltd. forfeited 200 shares of Raja (Who applied for 300 shares) of ₹ 10 each ₹ 8
called up, on which he had paid application and allotment money of ₹ 2 each per
share. Out of these, 100 shares were re-issued as fully paid up for ₹ 7 per share.
Solution: Journal

Date Particulars Dr. (₹) Cr. (₹)

(Being 200 shares forfeited for non-payment of ₹ 4 per

share)

(Being 100 of the forfeited shares reissued @ ₹ 7 per share

as fully paid up)

(Being gain on reissue of 100 shares transferred to Capital Reserve A/c )

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 18

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question.5
Aadeep Ltd. forfeited 100 shares of ₹ 10 each, ₹ 8 called up on which the shareholder
had paid application and allotment money of ₹ 5 per share. Out of these, 80 shares
were re-issued to Y for ₹ 8 per share as ₹ 8 paid up per share and 10 shares reissued
to Z at maximum discount as fully paid up. Record the journal entries for forfeiture
and re-issue of shares without opening call in arrear account.
SOLUTION:
JOURNAL

Date Particulars L.F. Dr. (₹) Cr. (₹)

Forfeited amount on 100 shares

Hence, Forfeited amount on 80 shares
Less : Loss on Re-issue : 80 shares
Transferred to Capital Reserve
Forfeited amount on 100 shares
Hence, Forfeited amount on 10 shares
Less : Loss on Re-issue : 10 shares
Transferred to Capital Reserve
Total Transferred to Capital Reserve

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 19

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question.6
On 1.4.2023, X Ltd. issued 5,00,000 8% Debentures of ₹ 100 each at a discount of 6%
redeemable at a premium of 10% after four years.. The amount was payable as follows:

On Application ……………… ₹ 50 per debenture

On Allotment ……………… Balance after discount

Record the necessary journal entries for the issue of debentures in the books of the
company.

Solution:

JOURNAL

Date Particulars Dr. (₹) Cr. (₹)

(Being application money received)

(Being application money transferred)

(Being allotment money due)

(Being allotment money received)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 20

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question.7
Alok Ltd. issued 7,000, 10% debentures of ₹ 500 each at a premium of ₹ 50 per
debenture redeemable at a premium of 10% after 5 years. According to the terms of
issue, ₹ 200 was payable on application and balance on allotment. Record necessary
journal entries at the time of issue of 10% debentures. Solution:

JOURNAL

Date Particulars Dr. (₹) Cr. (₹)

(Being application money received on 7,000 debentures

@ ₹ 200 each)

(Being application money transferred to 10%

debentures account)

(Being allotment money due)

(Being allotment money received)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 21

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question.8
Pass journal entries in the books of X Ltd. in the following cases:

(i) The company took a loan of ₹ 1,60,000 from SBI and issued 2,000, 12% debentures
of ₹ 100 each as collateral security.

(ii) Issued 1,000, 12% debentures of ₹ 100 each at 10% premium, redeemable at a
premium of 5%.

(iii) Purchased machinery for ₹ 4,60,000 from Beta Ltd. Payment was made by issue of
9% debentures of ₹ 100 each at a premium of 15% redeemable at par. (CBSE 2020)

Solution:.

Case (i)

JOURNAL

Date Particulars Dr. (₹) Cr. (₹)

(Being loan taken from SBI)

(Being issue of 2,000, 12% Debentures of ₹ 100 each as

collateral security in favour of SBI as per Board's
resolution dated _____)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 22

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Case (ii)

JOURNAL

Date Particulars Dr. (₹) Cr. (₹)

(Being application money received on 1,000 debentures

@ ₹ 110)

(Being application money transferred and premium on

issue of debentures as well as premium payable on
redemption recorded)
Case (iii)

JOURNAL

Date Particulars Dr. (₹) Cr. (₹)

(Being machinery purchased from Beta Ltd.)

(Being 4,000, 9% debentures issued to Beta Ltd. at a

premium of 15%)
*No. of debentures to be issued to the vendor

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 23

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Question.9

King Ltd. took over assets of ₹ 25,00,000 and liabilities of ₹ 6,00,000 of Queen Ltd.
King Ltd. paid the purchase consideration by issuing 10,000 equity shares of ₹ 100
each at a premium of 10% and ₹ 11,00,000 by Bank Draft. Calculate purchase
consideration and pass necessary journal entries in the books of King Ltd.
Solution:

Date Particulars Dr. (₹) Cr. (₹)

Calculation of Purchase Consideration

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 24

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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ACCOUNTANCY - XII
Day - 3
Disclosure of Debentures/ Long –term Borrowings in the Company's Balance Sheet:
As per Schedule III of the Companies Act, 2013, debentures is required to be
disclosed in a company's Balance Sheet in the following manner:
Balance Sheet
as at.............
BALANCE SHEET OF A LTD. as at...

Particulars Note No. ₹

1. EQUITY AND LIABILITIES

Non-Current Liabilities

Long-term Borrowings 1 -----------

Note to Accounts

1. Long-term Borrowings

----% Debentures

(------------- ---- % debentures of ₹ ------ each issued ) ----------

Less: Debentures Suspense A/c

(----------)
---------
( issued as Collateral Security)
--------
Loan from Bank
--------

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 25

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Disclosure of Share Capital in the Company's Balance Sheet:

As per Schedule III of the Companies Act, 2013, share capital is required to be
disclosed in a company's Balance Sheet in the following manner:
Balance Sheet
as at.............
Particulars Note Figures as Figures as
No. at the end at the end
of current of previous
year (₹) year (₹)
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital (Subscribed) 1 ---------------

Note: According to Schedule III of the Companies Act 2013, disclosure requirements pertaining to share
capital are to be provided in Notes to Accounts as given below:
Notes to Accounts
1. Share Capital
Particulars (₹) (₹)
Authorised Capital:
……………Equity Shares of ₹…….. each --------------
……………Preference Shares of ₹ ……………… each --------------
---------------
Issued Capital:
……………Equity Shares of ₹…….. each --------------
……………Preference Shares of ₹ ……………… each --------------
---------------
Subscribed Capital:
Subscribed and fully paid-up: (Fully Called up and Fully Paid up)
……………Equity Shares of ₹…….. each --------------
……………Preference Shares of ₹ ……………… each --------------
(of the above shares,………………… shares are allotted as fully paid-up -------------- -------------
pursuant to a contract without payments in cash)

Subscribed but not fully paid-up:

……Equity Shares of ₹… each, ₹……. per share called ………. --------------
Less: Calls-in-arrears (………)
……Pref. Shares of ₹… each, ₹……. per share called ……….
Less: Calls-in-arrears (………) -------------- -------------
Add: Forfeited Shares (Paid up face value on forfeited shares) -------------

Amount to be shown in the Balance Sheet ---------------

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 26

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Question.1

Willow Ltd. was registered with an authorized capital of ₹ 10,00,000 divided into
1,00,000 equity shares of ₹ 10 each. The company offered 80,000 shares for
subscription to the public, out of which 75,000 shares were subscribed. All amounts
were received except the final call of ₹ 2 per share on 3,000 shares. Present the Share
Capital in the Balance Sheet of Willow Ltd. as per the provisions of Schedule III, Part I
of the Companies Act and also prepare Noted to Account

Solution:

Balance Sheet of Willow Ltd, as at....

Particulars Note No. Current Year (₹) Previous Year (₹)

I. EQUITY AND LIABILITIES

(1) Shareholders' Funds

(a) Share Capital 1

Notes to Accounts:

1. Share Capital

Particulars Amount (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 27

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.2
On 1st April, 2014, New Ideas Ltd. was formed with an authorised capital of
₹ 20,00,000 divided into 2,00,000 equity shares of ₹ 10 each. The company issued
prospectus inviting applications for 1,50,000 shares. The share price was payable as
under:
On Application ₹ 3; On Allotment ₹ 4; On call ₹ 3
The issue was fully subscribed and the company allotted shares to all the applicants.
The company did not make the call during the year. The company also issued 5,000
shares of ₹ 10 each fully paid up to the vendor for purchase of building.
Show how the 'Share Capital' will be shown in the Company's Balance Sheet as at
31st March 2015. Also prepare 'Notes to Accounts' for the same.
Solution:

Balance Sheet of New Idea Ltd, as at....

Particulars Note No. Current Year (₹) Previous Year (₹)

I. EQUITY AND LIABILITIES

(1) Shareholders' Funds

(a) Share Capital 1

Notes to Accounts:

1. Share Capital

Particulars Amount (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 28

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.3
Kansa Ltd. offered 32,000 equity shares of ₹ 100 each to the public at a premium of ₹
20 per share. The amount was payable as: ₹ 20 on application; ₹ 40 (including
premium) on allotment; and the balance on first and final call. 30,000 shares were
subscribed by the public. All the money was duly received except from a shareholder
holding 4,000 shares who failed to pay the first and final call money. His shares were
forfeited. Show 'Share Capital' in the Balance Sheet of Kansa Ltd. Also prepare 'Notes
to Accounts'

Solution:

Balance Sheet of Kansa Ltd, as at....

Particulars Note No. Current Year (₹) Previous Year (₹)

I. EQUITY AND LIABILITIES

(1) Shareholders' Funds

(a) Share Capital 1

Notes to Accounts:

1. Share Capital

Particulars Amount (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 29

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.4
Suvidha Ltd. is registered with an authorised capital of ₹ 10,00,00,000 divided into
10,00,000 equity shares of ₹ 100 each. The company issued 1,00,000 shares for
public subscription. A shareholder holding 100 shares, failed to pay the final call of ₹
20 per share. His shares were forfeited. The forfeited shares were re-issued at ₹ 90 per
share as fully paid up. Present the ’Share Capital’ in the Balance Sheet of the
company. Also prepare ’Notes to Accounts'. (

Solution:

Balance Sheet of Suvidha Ltd, as at....

Particulars Note No. Current Year (₹) Previous Year (₹)

I. EQUITY AND LIABILITIES

(1) Shareholders' Funds

(a) Share Capital 1

Notes to Accounts:

1. Share Capital

Particulars Amount (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 30

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.5
Liva Ltd. issued 5,000, 10% Debentures of ₹ 100 each at par and also raised a loan of
₹ 8,00,000 from bank, collaterally secured by ₹ 10,00,000,10% Debentures. How will
it be shown in the Balance Sheet of the company assuming that the company has
passed the entry for the issue of debentures as collateral in the books? Also journalise.

Balance Sheet of Liva Ltd, as at....

Particulars Note No. Current Year (₹) Previous Year (₹)

I. EQUITY AND LIABILITIES

(3) Non-current Liabilities

(a) Long-term Borrowings 1

Notes to Accounts:

1. Long-term Borrowings

Particulars Amount (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 31

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.6
Hyatt Ltd. issued 6,000, 9% Debentures of ₹ 100 each at a premium of ₹10 each
redeemable also at a premium of 15 each. It took loan of ₹ 8,00,000 from State Bank
of India and issued 10,000; 9% Debentures of ₹ 100 each as collateral security. How
will debentures be shown in the Balance Sheet:

Balance Sheet of Hyatt Ltd, as at....

Particulars Note No. Current Year (₹) Previous Year (₹)

I. EQUITY AND LIABILITIES

(3) Non-current Liabilities

(a) Long-term Borrowings 1

Notes to Accounts:

1. Long-term Borrowings

Particulars Amount (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 32

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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ACCOUNTANCY - XII
Day - 4
ISSUE OF SHARES WITH CONSIDERATION OF CASH IN INSTALLMENTS
A company may issue shares for consideration cash in installments, here full offer
value of shares is will be payable with application, allotment and call(s). First
installment on a share is paid along with the application and is called Application
Money. Second installment is called by the company on allotment of the shares and is
called Allotment Money. After that remaining offer value of shares, when called up is
called Call Money.
Accounting Treatment (Journal entries)
ON APPLICATION
Date Particulars LF Dr. (₹) Cr. (₹)
I Bank A/c (No. of applied shares x Application money) Dr. -------
--------
To Share Application A/c
(Being application money received on …. Shares @ ₹ ….. each)
II Share Application A/c Dr. -------
-------
To Share Capital A/c(Shares subscribed x face value with App.)
-------
To S.P.R. A/c (Shares subscribed x premium value with App.) -------
-------
To Share Allotment A/c (Excess application money utilized)
-------
To Calls-in-Advance A/c (Surplus application money utilized)
To Bank A/c (No. of shares rejected x application value )
(Being the shares allotted and application money
transferred to share capital account , securities premium
reserve account and excess application money adjusted)

ON ALLOTMENT
Date Particulars LF Dr. (₹) Cr. (₹)
III Share Allotment A/c ( Subscribed shares x Allotment money) Dr. -------
To Share Capital A/c(Shares subscribed x F.V. with allotment) --------
To S.P.R. A/c (Shares subscribed x premium value with Allot.) --------
IV
(Being allotment money due on …. Shares @ ₹ ….. each)
Bank A/c (Net amount received with allotment) Dr. -------
Calls-in-Arrears A/c (Due allotment money not paid by holder)Dr. --------
To Share Allotment A/c (to be received after adjusting excess) -------
To Calls-in-Advance A/c (Call money received as advance) -------
(Being the allotment money received)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 33

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ON CALL
Date Particulars LF Dr. (₹) Cr. (₹)
V Share … Call A/c ( Subscribed shares x call money) Dr. -------
To Share Capital A/c(Shares subscribed x F.V. with call) --------
To S.P.R. A/c (Shares subscribed x premium value with call) --------
VI
(Being call money due on …. Shares @ ₹ ….. each)
Bank A/c (Net amount received with call ) Dr. -------

Calls-in-Arrears A/c (Due call money not paid by holder) Dr. --------

Calls-in-Advance A/c(Call money received previously as advance) Dr. --------

-------
To Share … Call A/c (Call money due )
-------
To Calls-in-Advance A/c (Next call money received as advance)
-------
To Calls-in-Arrears A/c (Previous arrears settled )
(Being the allotment money received)
Note: Accounting treatment for all the calls will be same

Calculation of Calls-in-Arrears
Particulars Allotment @ ₹-------- each
Applied Shares ---- Due amount on Allotted shares ---

Allotted Shares ---- Less: Allotment money that have already been received

as excess application money ----

Net Arrears on allotment/ call (to be debited) ----

Calculation of excess application money and utilization

Category No. Applied No. Allotted Excess Excess Surplus Surplus
Shares Shares Application Application Application Application
Money Received Money Utilized Money Money
to Share Transferred Refunded
Allotment to Calls Back
@ 4 each @ 4 each
I 10,000 10,000 -- ------- -------- --------
II 20,000 10,000 ₹ 30,000 ₹ 30,000 -------- -------
III 40,000 10,000 ₹ 90,000 ₹ 40,000 ₹ 40,000 ₹ 10,000

IV 10,000 NIL ₹ 30,000 ----------- --------- ₹ 30,000

TOTAL 80,000 30,000 ₹ 1,50,000 ₹ 70,000 ₹ 40,000 ₹ 40,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 34

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Alternatives of allotment of shares in case of oversubscription

In case of oversubscription shares can be allotted by company by using various
alternatives. For example applications were received for 1,50,000 shares against the
issue of 1,00,000 shares, Shares can be allotted by the company by any of the
following alternatives.
1. Some applications accepted in full and excess applications is rejected.
Category No. of Applied No. of Allotted/Subscribed Shares
Shares
Full Allotment 1,00,000 1,00,000
Rejection 50,000 NIL

2. All applicants are allotted shares in proportion (Pro rata Allotment).

Category No. of Applied No. of Allotted/Subscribed Shares
Shares
Pro rata Allotment 1,50,000 1,00,000
(2 shares allotted for
every 3 shares applied)

3. Some applications accepted in full and proportionate allotment made to

remaining.
Category No. of Applied No. of Allotted/Subscribed Shares
Shares
Full Allotment 50,000 50,000
Pro rata Allotment 1,00,000 50,000
(1 shares allotted for
every 2 shares applied)

4. Some applications accepted in full, some applications are rejected and

proportionate allotment made to remaining.
Category No. of Applied No. of Allotted/Subscribed Shares
Shares
Full Allotment 50,000 50,000
Pro rata Allotment 75,000 50,000
(2 shares allotted for
every 3 shares applied)
Rejection 25000 NIL
5. Some applications accepted in full, some applications are rejected and two or
more proportionate allotment made to remaining.
Category No. of Applied No. of Allotted/Subscribed Shares
Shares
Full Allotment 50,000 50,000
Pro rata Allotment (I) 40,000 30,000
(3 shares allotted for
every 4 shares applied)
Pro rata Allotment (II) 35,000 20,000
(4 shares allotted for
every 7 shares applied)
Rejection 25,000 NIL

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 35

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.1
Ganga Ltd. invited applications for issuing 10,000 equity shares of ₹ 10 each. The
amount per share was payable as follows: ₹ 2 on application, ₹ 3 on allotment, ₹ 3 on
first call and ₹ 2 on second and final call. Applications were received for 15,000
shares. The applications for 3,000 shares were rejected and application money
refunded. The shares were allotted on pro-rata basis to the applicants of 12,000
shares. Excess money received with applications was adjusted towards sums due on
allotment. All shareholders paid the allotment money except one shareholder who was
allotted 200 shares. These shares were forfeited. The first call was made thereafter and
duly received. The second and final call was not yet made. Pass Journal entries for the
above transactions in the books of Ganga Ltd. Open Calls-in-Arrears Account
wherever required.
Working Note
Calculation of excess application money and its utilisation
Category No. Applied No. Allotted Excess Excess Surplus Surplus
Shares Shares Application Application Application Application
Money Received Money Utilized Money Money
to Share Transferred Refunded
Allotment to Calls Back
@ @

Calculation of Calls-in-Arrears
Particulars Allotment @ ₹-------- each
Applied Shares ---- Due amount on Allotted shares ---

Allotted Shares ---- Less: Allotment money that have already been received

as excess application money ----

Net Arrears on allotment/ call (to be debited) ----

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 36

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Journal Entries
Date Particulars LF Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 37

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question.2
Mukund Ltd. invited applications for issuing 50,000 equity shares of ₹ 10 each at 10%
premium. The amount per share was payable as follows: ₹ 3 on application, ₹ 3
(including premium) on allotment and balance amount on first and final call.
Applications were received for 1,20,000 shares and shares were allotted on pro-rata
basis to all the applicants. The excess money received on application was adjusted
towards sums due on allotment only. Application money in excess to sums due on
allotment was refunded. A shareholder who had applied for 6,000 shares, could not
pay the call money and his shares were forfeited.

Working Note
Calculation of excess application money and its utilisation
Category No. Applied No. Allotted Excess Excess Surplus Surplus
Shares Shares Application Application Application Application
Money Received Money Utilized Money Money
to Share Transferred Refunded
Allotment to Calls Back
@ @

Calculation of Calls-in-Arrears
Particulars Allotment @ ₹-------- each
Applied Shares ---- Due amount on Allotted shares ---

Allotted Shares ---- Less: Allotment money that have already been received

as excess application money ----

Net Arrears on allotment/ call (to be debited) ----

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 38

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Journal Entries
Date Particulars LF Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 39

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question.3
Lotus Ltd. invited applications for issuing 80,000 equity shares of ₹ 10 each at a
premium of ₹ 4 per share. The amount was payable as follows:
On application ₹ 5 per share and
On allotment ₹ 9 per share (included premium).
Applications were received for 1,40,000 shares and allotment was made to all
applicants on pro-rata basis. Money overpaid on applications was adjusted towards
sums due on allotment. Rajiv, who had applied for 1,400 shares, failed to pay the
allotment money. His shares were forfeited. Later on, these forfeited shares were
reissued at ₹ 9 per share as fully paid up.
Pass necessary journal entries for the above transactions in the books of Lotus Ltd.
Working Note
Calculation of excess application money and its utilisation
Category No. Applied No. Allotted Excess Excess Surplus Surplus
Shares Shares Application Application Application Application
Money Received Money Utilized Money Money
to Share Transferred Refunded
Allotment to Calls Back
@ @

Calculation of Calls-in-Arrears
Particulars Allotment @ ₹-------- each
Applied Shares ---- Due amount on Allotted shares ---

Allotted Shares ---- Less: Allotment money that have already been received

as excess application money ----

Net Arrears on allotment/ call (to be debited) ----

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 40

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Journal Entries
Date Particulars LF Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 41

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question. 4
Tulip Ltd. invited applications for issuing ₹ 2,40,000 equity shares of ₹ 10 each at a
premium of ₹ 4 per share. The amount was payable as under:
On application ₹ 4 per share (including premium ₹2)
On allotment ₹ 4 per share
On first and final call-₹ 6 per share (including premium2)
Applications for 3,00,000 shares were received and pro-rata allotment was made to all
the applicants. Excess application money received with applications was adjusted
towards sums due on allotment. All moneys were duly received except from Rohini
who had applied for 7,500 shares, and failed to pay allotment and first and final call.
Pass the necessary journal entries for the above transactions in the books of Tulip Ltd.
Open Calls-in-arrears and Calls-in-advance account, wherever necessary.
Working Note
Calculation of excess application money and its utilisation
Category No. Applied No. Allotted Excess Excess Surplus Surplus
Shares Shares Application Application Application Application
Money Received Money Utilized Money Money
to Share Transferred Refunded
Allotment to Calls Back
@ @

Calculation of Calls-in-Arrears
Particulars Allotment @ ₹-------- each
Applied Shares ---- Due amount on Allotted shares ---

Allotted Shares ---- Less: Allotment money that have already been received

as excess application money ----

Net Arrears on allotment/ call (to be debited) ----

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 42

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Journal Entries
Date Particulars LF Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 43

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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SCALE YOUR PREPAREDNESS

SELF PRACTICE TEST
Topic Accounting for Share Capital and Debentures

Day - 5
Time Allowed 2:00 HOURS (MORRNING SESSION)
Question – 1
Sewak Ltd. issued ₹ 38,00,000, 9% Debentures of ₹ 100 each on 1st
April, 2017. The debentures were redeemable at a premium of 5% on 30th
June, 2019.
Pass Journal entries for issue of debentures and writing of loss on issue
of debentures.
Question – 2
On 1st June, 2018, Max Ltd. issued 6,000; 10% Debentures of ₹ 100 each
at a discount of 6% redeemable at a premium of 4%. It has a balance of
₹ 40,000 in Securities Premium Reserve. Pass the Journal entries for
issue of debentures and writing off loss and prepare Loss on Issue of
Debentures Account.
Question – 3
Spectrum Ltd. issued 2,000,10% Debentures of ₹ 100 each on 1st April,
2017. The issue was fully subscribed. According to the terms of issue,
interest on the debentures is payable half-yearly on 30th September and
31st March and the tax deducted at source is 10%. Pass necessary
Journal entries for issue of debentures and the debentures interest for the
half-year ending 31st March, 2019 and transfer of interest on debentures
of the year to the Statement of Profit and Loss.
Question – 4
Mohan Ltd. took over assets of ₹ 10,80,000 and liabilities of ₹ 80,000 of
Sohan Ltd. at a value of ₹ 9,60,000 payable as ₹ 2,40,000 by cheque and
the balance by issuing 10% Debentures of ₹ 100 each at a premium of
20%. Pass the Journal entries

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 44

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 5
A Ltd. purchased machinery from Y Ltd. and payment was made as follows:
(i) By issuing 10,000 equity shares of ₹ 10 each at a premium of 10%;
(ii) By issuing 200, 9% Debentures of ₹ 100 each at a discount of 10%;
redeemable at a premium of 5%.
(iii) Balance by accepting a bill of exchange of ₹ 50,000 payable after one
month. Journalise these transactions in the books of A Ltd.
Question – 6
Record the Journal entries for forfeiture and reissue of shares
A Ltd. forfeited 20 shares of ₹10 each, ₹ 7 called-up on which the shareholder
had paid application and allotment money of ₹ 5 per share. Amount not
received on call is transferred to Calls-in-Arrears Account. Out of these, 15
shares were reissued to Naresh as ₹ 7 per share paid-up for ₹ 8 per share.

Question – 7
Yash Ltd. invited applications for 50,000 equity shares of ₹10 each at a
premium of 10%. The amount was payable as follows:
On application ₹ 3 per share; on allotment (including premium) ₹ 3 per share
and on first and final call, the balance amount.
Applications were received for 1,20,000 shares and shares were allotted on pro-
rata basis to all applicants. The excess money received on application was to be
adjusted towards sums due on allotment. Application money in excess of sums
due on allotment was refunded. A shareholder who applied for 6,000 shares
could not pay the first and final call money and his shares were forfeited. The
forfeited shares were reissued for ₹ 60,000 fully paid up.
Pass necessary journal entries for the above transactions in the books of Yash
Ltd.
Question – 8
Sure Ltd. has an authorised capital of ₹ 20,00,000 divided into equity shares of
₹ 10 each. The company invited applications for 60,000 shares. Applications
were received for 58,000 shares. All calls were made and were duly received
except the final call of ₹ 3 per share on 2,000 shares. These shares were
forfeited. Present the share capital in the Balance Sheet of the company as per
Schedule III of the Companies Act, 2013.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 45

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

SCALE YOUR PREPAREDNESS

SELF ASSESSMENT TEST
Topic Accounting for Share Capital and Debentures

Day - 5
Time Allowed 2:00 HOURS (EVENING SESSION)
Question – 1
D Ltd. forfeited 500 shares of ₹ 100 each issued at 10% premium (₹ 90
called-up) on which the shareholders did not pay ₹ 30 on allotment
(including premium) and first call of ₹ 20 each. Out of these, 300 shares
were reissued as fully paid-up for ₹ 80 per share and 100 shares as fully
paid-up at ₹ 120 per share at different intervals of time. Pass necessary
Journal entries for forfeiture and reissue of shares and also, prepare
Forfeited Shares Account.
Question – 2
On 1st April, 2018 Linux Ltd. issued 500, 9% Debentures of ₹ 500 each at
a discount of 4% redeemable at a premium of 5% after three years.
Pass necessary Journal entries for issue of debentures and debenture
interest for the year ended 31st March, 2019, if interest is payable
annually on 31st March, and the rate of tax deducted at source is 10%.
The company closes its books on 31st March every year.

Question – 3
C India Ltd. purchased machinery from B India Ltd. Payment to B India
Ltd. was made as follows:
(i) By issuing 10,000 equity shares of ₹ 10 each at a premium of 20%.
(ii) By issuing 1,000, 9% Debentures of ₹ 100 each at a discount of 5%.
(iii) Balance by giving a bank draft of ₹ 37,000.
Pass necessary Journal entries in the books of C India Ltd. for the
purchase of machinery and payment to B India Ltd.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 46

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 4
Record the Journal entries for forfeiture and reissue of shares.
Z Ltd. forfeited 50 shares of ₹ 100 each issued at 10% premium (to be paid at
the time of allotment) for non-payment of first call of ₹ 30 per share. The second
and final call of ₹ 20 per share was not yet made. 20 of these shares were
reissued at ₹ 80 paid-up for ₹ 30 per share.
Question – 5
Jupiter Ltd. issued 10,000, 8% Debentures of ₹ 100 each at a discount of 10%
and redeemable at a premium of 10% after 5 years.
It had balance of ₹ 1,00,000 in Securities Premium Reserve.
Pass Journal entries for issue of debentures and prepare Loss on Issue of
Debentures Account.
Question – 6
The authorised capital of Mars Ltd. is ₹ 50,00,000 divided into Equity Shares of
₹10 each. The company invited applications for 2,00,000 shares. The issue was
fully subscribed. All calls were made and were duly received except the final call
of ₹ 2 per share on 5,000 shares. 2,500 of the shares on which final call was
not received were forfeited. Show how Share Capital will appear in the Balance
Sheet on the company as per Schedule III of the Companies Act, 2013.
Question – 7
Moon Ltd. issued 25,000, 10% Debentures of ₹ 100 each. Give Journal entries
in the following cases when:
(i) The debentures were issued at a premium of 20%.
(ii) The debentures were issued as a collateral security to bank against a loan of
₹ 20,00,000.
(iii) The debentures were issued at premium to a supplier of machinery costing
₹ 28,00,000 as full and final payment.
Question – 8
Ajanta Ltd. issued a prospectus inviting applications for issuing 5,00,000 equity
shares of ₹ 10 each issued at a premium of 10%. The amount was payable as follows:
On application- ₹ 3 per share; On allotment (including premium) - ₹ 5 per share; On
first and final call-₹ 3 per share. Applications were received for 6,00,000 shares and
pro-rata allotment was made to all applicants. Excess money received on application
was adjusted towards sums due on allotment. All amounts were duly received except
from Sumit, who was the holder of 1,000 shares, and failed to pay the allotment and
first and final call. His shares were forfeited. Pass journal entries for the above
transactions in the books of Ajanta Ltd. Open calls-in-arrears account wherever
necessary.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 47

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

ACCOUNTANCY - XII
Day - 6
1. Calculation of Sacrificing Ratio and New Profit Sharing Ratio at the time of
Admission of a partner
Meaning of Sacrificing Ratio
The ratio in which the old partners have agreed to sacrifice (reduce) their share of
profit in favour of new partner is known as sacrificing ratio. It is relation between
sacrifice profit shares of old partners.

The formula to calculate the sacrificing share is as follows:

Sacrificing Share = Old Ratio - New Ratio
The formula to calculate the New Ratio is as follows:
New Ratio = Old Ratio – Sacrificing Share
Example
A, B and C are partners in the ratio of 7:5:3. They decided to admit D into
partnership. A surrenders 2/7 of his share, B surrenders 1/15 share from his profit
and C surrenders 1/3 of combined sacrificing portion of A and B. Find New P.S.R. and
Sacrificing Ratio.

Calculation of New P.S.R. and Sacrificing Ratio

Particulars A B C D
Old PSR 7 5 3 -
15 15 15
Sacrifice Share 2 7 2 1 2 𝟏 1
(2:1:1) Ratio (7 x )= 1 ( + )= -
15 15 3 15 𝟏𝟓 15
15
New PSR 2 1 1 4
7 2 5
- 15 = 15 5
-
1
=
4 3
-
1
=
2 ( 15 + 15 + 15) 15
(5:4:2:4) 15 15 15 15 15 15 15
(Old- Sacrifice)
Example
A, and B are partners in the ratio of 3:2. From 1st April, 2020 they decided to admit C
into partnership. C’s share of profit will be ¼ of profit of the firm while A & B decided
to share future profit equally. Find new P.S.R. and Sacrificing Ratio.

Calculation of New P.S.R. and Sacrificing Ratio

Particulars A B C
Old P.S.R. 3 2 −
5 5
New P.S.R. 1 3 1 𝟑 1 3 1 𝟑 1 2 𝟐
(3: 3: 2) (1- )= x = (1- )= x = x =
4 4 2 𝟖 4 4 2 𝟖 4 2 𝟖

Sacrificing Portion 3 3
- 8 = 40
9 2 3
- 8 = 40
1
5
(Old P.S.R. – New P.S.R.) 5
(Sacrifice) (Sacrifice)
(9:1) Ratio

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 48

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Example
A and B were partners in a firm sharing profits and losses in the ratio 3:1. They
admitted C as a new partner for 1/3 share in the profits and losses. Calculate the new
profit sharing ration of A, B and C and sacrificing ratio.

Calculation of New P.S.R. and Sacrificing Ratio

Particulars A B C
Old P.S.R. 3 1 −
4 4
New P.S.R.
1 2 3 6 1 2 1 2
(6: 2: 4); (3:1:2) (1- )= x = (1- )= x = 1
x
4
=
𝟒
3 3 4 12 3 3 4 12 3 4 𝟏𝟐

Sacrificing Portion 3 3 3 1 1 1
- 6 = 12 - 6 = 12 ---
(Old P.S.R. – New P.S.R.) 4 4
(3:1) Ratio (Sacrifice) (Sacrifice)

2. Accounting Treatment of Goodwill

Goodwill is an intangible asset. It is the value of reputation of firm in respect of profits
expected in future over & above the normal profits earned by other firms belonging to
same industry. It arises due to efforts made by the existing partners in the past.
Goodwill plays an important role to compensate the sacrificing partner by the gaining
partner in term of money for reducing profit share. At the time of admission of a new
partner who is going to acquire the right to share in future profits must compensate
the existing partners by making payment to them. This payment is called premium
for goodwill or share of goodwill and it should be credited to sacrificing partners in
their sacrificing ratio. It shows purchase consideration to purchase of share of profit
by new partner from the existing partners.
Accounting Treatment for Goodwill according to AS- 26

For Existing Goodwill:

Date Particulars L.F. Dr.(₹ ) Cr. (₹ )
Old Partners Capital/Current A/c Dr -------
To Goodwill A/c -------
(Being goodwill written off in old profit sharing ratio )

For Revalued Goodwill/ Premium for Goodwill (Revalued Goodwill x share of New Partner)

(I) Premium for Goodwill is brought in cash/kind by the new partner and is
retained in business.
Date Particulars L.F. Dr.(₹) Cr. (₹)
Cash / Bank/ Asset A/c Dr. -----
To Premium for Goodwill A/c -----
(Amount brought by new partner for his/her share of
goodwill)
Premium for Goodwill A/c Dr. -----
To Sacrificing Partners Capital/Current A/c -----
(Goodwill brought by new partner distributed to
sacrificing partners in their sacrificing ratio)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 49

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

(II) Premium for Goodwill is brought in cash by the new partner and is withdrawn
by sacrificing partners fully or partly.
Date Particulars L.F. Dr.(₹ ) Cr. (₹ )
Cash / Bank A/c Dr. -----
To Premium for Goodwill A/c -----
(Amount brought by new partner for his share of
goodwill)
Premium for Goodwill A/c Dr. -----
To Sacrificing Partners Capital/Current A/c -----
(Goodwill brought by new partner distributed to
sacrificing partners in their sacrificing ratio)
Sacrificing Partners Capital/Current A/c Dr. -----
To Cash / Bank A/c -----
(Amount of Goodwill withdrawn by sacrificing partner)

(III) Premium for Goodwill is paid privately by the new partner to concern
partners.
Date Particulars L.F. Dr. (₹ ) Cr. (₹ )
NO JOURNAL ENTRY is passed in the books of
account.

(IV) Premium for Goodwill is not brought in cash and Kind/Assets by the new
partner
When goodwill account not to be opened
Date Particulars L.F. Dr.(₹ ) Cr. (₹ )
Incoming Partner Capital/ Current A/c Dr. -----
To Sacrificing Partners Capital/Current A/c -----
(share of goodwill of incoming partner distributed to
sacrificing partners in their sacrificing ratio)
(V) Hidden or Inferred Goodwill:
Sometimes, the value of goodwill of the firm is not given; it has to be inferred on the
basis of net worth of the firm.

Calculation of Hidden Goodwill

Particulars ₹
Net worth of the firm on the basis of capital contributed by new partner. --------
(Capital made by new partner/ Share of new partner)
Less: Net worth of the Reconstituted Firm --------
(Adjusted Capital of old partners +Capital of new partner)
Goodwill of the firm --------

For Hidden/ Inferred Goodwill

Date Particulars L.F. Dr.(₹ ) Cr. (₹ )
Incoming Partner Capital/ Current A/c Dr. -----
To Sacrificing Partners Capital/Current A/c -----
(share of hidden goodwill of incoming partner
distributed to sacrificing partners in their sacrificing
ratio)
PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 50
SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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3. Accounting Treatment of Reserves, Accumulated Profits/Losses and Deferred

Revenue Expenditure.
At the time of change in Profit Sharing Ratio, any reserves or accumulated
profits/losses exist in the books of the firm, these should be transferred to partners'
Capital Accounts or Current Accounts in their old profit sharing ratio since the
reserves, accumulated profits/losses up to the date of change in profit sharing ratio
belong to the old agreements. In this approach all existing balances of profits and
reserves will not be continue in new Balance Sheet
I. [When Partners want to distribute these items]
Date Particulars L.F. Dr.(₹) Cr.(₹)
For Accumulated Profits
Profit &Loss A/c Dr. -------
To Partners’ Capital A/c /Current A/c[individually] --------
(Being Profits distributed in old profit sharing ratio)
For General Reserve
General Reserve A/c Dr.
-------
To Partners’ Capital A/c /Current A/c
[individually] -------
(Being General Reserve distributed in old profit
sharing ratio)
For Contingency Reserve
Contingency Reserve A/c Dr. -------
To Partners’ Capital A/c /Current A/c -------
[individually]
(Being Contingency Reserve distributed in old profit
sharing ratio)
For Workmen’s Compensation Reserve
Workmen’s Compensation Reserve A/c Dr. -------
Revaluation A/c (Excess of claim over the reserve) Dr. -------
To Outstanding Claim A/c /Bank(Claim Paid)A/c -------
To Partners’ Capital A/c/Current A/c [individually] -------
(Being unclaimed Workmen’s Compensation Reserve
distributed in old profit sharing ratio)
For Investment Fluctuation Reserve
Investment Fluctuation Reserve A/c Dr. -------
Revaluation A/c (Excess of Loss over the reserve) Dr. -------
To Investment A/c [Loss on Investment] -------
To Partners’ Capital A/c/Current A/c -------
[individually]
(Being Excess investment fluctuation fund distributed
in old profit sharing ratio)
For Undistributed Losses
Partners’ Capital A/c/Current A/c [individually] Dr. -------
To Profit &Loss A/c -------
(Being Losses distributed in old profit sharing ratio)
For Deferred Revenue Expenditure
Partners’ Capital A/c Current A/c[individually] Dr. -------
To Deferred Revenue Expenditure A/c
-------
(Being Deferred Revenue Expenditure distributed in

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 51

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Example
A, B and C sharing profits and losses in the ratio of 4 : 3 : 2, decided to take D as a
partner for l/5th share in the firm with effect from 1st April, 2023. An extract of their
Balance Sheet as at 31st March, 2023 is:
Liabilities ₹ Assets ₹
Workmen Compensation Reserve 90,000
Show the accounting treatment of Workmen Compensation Reserve on the admission
of D under following alternative cases:
Case 1. If there is no other information.
Case 2. If a claim on account of workmen compensation is estimated at ₹ 54,000.
Case 3. If a claim on account of workmen compensation is estimated at ₹ 1,08,000.
Solution:
Date Particulars L.F. Dr.(₹) Cr.(₹)
Case 1 Workmen’s Compensation Reserve A/c Dr. 90,000
To A’s Capital A/c 40,000
To B’s Capital A/c 30,000
To C’s Capital A/c 20,000
(Being WCR distributed in old ratio)
Case 2 Workmen’s Compensation Reserve A/c Dr. 90,000
To Outstanding Claim A/c 54,000
To A’s Capital A/c 16,000
To B’s Capital A/c 12,000
To C’s Capital A/c 8,000
(Being unclaimed WCR distributed in old ratio)
Case 3 Workmen’s Compensation Reserve A/c Dr. 90,000
Revaluation A/c Dr. 18,000
To Outstanding Claim A/c 108,000
(Being outstanding workmen compensation claim written off)
Example
A, B and C sharing profits and losses in the ratio of 4 : 3 : 2, decide to admit D as a
new partner with effect from 1st April, 2023. An extract of their Balance Sheet as at
31st March, 2023 is:
Liabilities ₹ Assets ₹
Investment Fluctuation Reserve 18,000 Investment (At cost) 2,00,000
Show the accounting treatment of Investment Fluctuation Reserve under the following
alternative cases:
Case 1. If there is no other information.
Case 2. If the market value of Investment is ₹ 1,91,000.
Case 3. If the market value of Investment is ₹ 1,73,000.
Case 4. If the market value of Investment is ₹ 2,18,000.
Case 5. Partner A is agreed to take investment at ₹ 2,22,500.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 52

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Solution:
Date Particulars L.F. Dr.(₹) Cr.(₹)
Case 1 Investment Fluctuation Reserve A/c Dr. 18,000
To A’s Capital A/c 8,000
To B’s Capital A/c 6,000
To C’s Capital A/c 4,000
(Being Investment Fluctuation Reserve distributed in
old profit sharing ratio)
Case 2 Investment Fluctuation Reserve A/c Dr. 18,000
To Investments A/c (Loss) 9,000
To A’s Capital A/c 4,000
To B’s Capital A/c 3,000
To C’s Capital A/c 2,000
(Being unused Investment Fluctuation Reserve distributed
in old profit sharing ratio)
Case 3 Investment Fluctuation Reserve A/c Dr. 18,000
Revaluation A/c Dr. 9,000
To Investments A/c (Loss) 27,000
(Being loss on investment written off)
Case 4 Investment Fluctuation Reserve A/c Dr. 18,000
To A’s Capital A/c 8,000
To B’s Capital A/c 6,000
To C’s Capital A/c 4,000
(Being IFR distributed in old profit sharing ratio)
Investments A/c Dr. 18,000
To Revaluation A/c 18,000
(Being profit on investments accounted )
Revaluation A/c Dr. 18,000
To A’s Capital A/c 8,000
To B’s Capital A/c 6,000
To C’s Capital A/c 4,000
(Being profit on revaluation distributed in old ratio)
Case 5 Investment Fluctuation Reserve A/c Dr. 18,000
To A’s Capital A/c 8,000
To B’s Capital A/c 6,000
To C’s Capital A/c 4,000
(Being IFR distributed in old profit sharing ratio)
Investments A/c Dr. 22,500
To Revaluation A/c 22,500
(Being profit on investments accounted )
Revaluation A/c Dr. 22,500
To A’s Capital A/c 10,000
To B’s Capital A/c 7,500
To C’s Capital A/c 5,000
(Being profit on revaluation distributed in old ratio)
A’s Capital A/c Dr. 222,500
To Investments A/c 222,500
(Being investments taken over by partner A)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 53

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Example
P, Q and R were on partnership terms sharing profits and losses in the ratio of 6:3:1.
They decide to take S into partnership with effect from 1st April, 2023. The new profit-
sharing ratio between P, Q, R and S will be 3 : 3 : 3 : 1. They also decide to record the
effect of the following without affecting their book values, by passing a single
adjustment entry:

Book Value (₹)

General Reserve 1,80,000

Contingency Reserve 30,000
Profit and Loss A/c (Cr.) 90,000
Advertisement Suspense A/c (Dr.) 1,20,000

Pass the necessary single adjustment entry.

Solution:
Date Particulars L.F. Dr.(₹) Cr.(₹)
Case 1 R’s Capital A/c (1,80,000 x
2
) Dr. 36,000
10
1
S’s Capital A/c (1,80,000 x ) Dr. 18,000
10
3
To P’s Capital A/c(1,80,000 x 10
) 54,000
(Being internal adjustment made)

Working
1. Amount to be adjusted internally

(Dr. Balances) ₹ (Cr. Balances) ₹

Advertisement Expenses 120,000 General Reserve 180,000
Contingency Reserve 30,000
Profit and Loss A/c (Cr.) 90,000
Undistributed Losses 120,000 Undistributed Profits & Reserves 300,000
NET AMOUNT TO BE ADJUSTED ₹ 1,80,000 (internally in their individual changes)

2. Calculation of Individual Changes

Particulars P Q R S
Old P.S.R. 6 3 1 -
10 10 10
New P.S.R. 3 3 3 1
10 10 10 10
(Gain)
1 3 −2
Change (Sacrifice / Gain) 6
-
3
=
3 3
-
3
=
0
- =
10 10 10 10 10 10 10 10 10
(Old PSR – New P.S.R.) (Gain)
( Sacrifice) ( Sacrifice)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 54

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

4. Treatment/Adjustment for Revaluation of Assets and Liabilities.

At the time of change in profit sharing ratio among existing partners, the assets &
liabilities are to be revalued for two reasons. Firstly, assets & liabilities must be shown
at actual values on the date of reconstitution so that financial position of the firm
should show true & fair view of the concern. Secondly, profit & loss arising due to
change in value of assets or liabilities till the date of change in P.S.R. must be divided
among partners in old ratio.
I. [When partners want to show the changes in the value of assets and liabilities
(With preparing Revaluation A/C)]
The assets are revalued and the liabilities are reassessed at the time of change in
profit-sharing ratio and the profit or loss arising from it is credited or debited in the
partners' capital accounts/current account in their old profit-sharing ratio. The
reason for revaluation and reassessment is that any increase or decrease in the value
of assets and liabilities up to the date of change in profit-sharing ratio should be
shared by the partners in their old profit-sharing ratio. For the revaluation of assets
and reassessment of liabilities, an account titled 'Revaluation Account' or 'Profit and
Loss Adjustment Account' is opened. An increase in the value of assets and decrease
in the amount of liabilities is credited to this account while decrease in the value of
assets and increase in the value of liabilities is debited to this account. Unrecorded
assets, if any, are credited and unrecorded liabilities are debited. The balance in the
account is either profit or loss. The profit or loss on revaluation and reassessment is
credited or debited to partners' capital/current accounts in their old profit-sharing
ratio.
For increasing Assets
Assets A/c Dr …………
To Revaluation A/c …………
(Being Assets Increased)
For increasing Liabilities/Provisions
Revaluation A/c Dr …………
To Liabilities A/c/Provisions A/c …………
(Being Liabilities Increased)
For Decreasing Assets
Revaluation A/c Dr …………
To Assets A/c …………
(Being Assets decreased)
For Decreasing Liabilities/ provisions
Liabilities A/c/Provision A/c Dr …………
To Revaluation A/c …………
(Being Liabilities/Provisions Decreased)
For Profit on Revaluation
Revaluation A/c Dr …………
To Partners’ Capital A/c ………….
(Being profit on revaluation credited to partners in OLD P.S.R.)
For Loss on Revaluation
Partners’ Capital A/c Dr ………….
To Revaluation A/c ………….
(Being loss on revaluation debited to partners in OLD P.S.R.)
PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 55
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… Experience in Action
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REVALUATION/PROFIT & LOSS ADJUSTMENT ACCOUNT

Particulars ₹ Particulars ₹
To Assets (Individually) -------- By Assets (Individually) --------
(Decrease in value on revaluation) (Increase in value on revaluation)
To Liabilities (Individually) -------- By Liabilities (Individually) --------
(Increase in value on reassessment) (Decrease on reassessment)
To Unrecorded Liabilities -------- By Unrecorded Assets --------
(Identified on reassessment) (Identified on reassessment)
To Partners' Capital A/cs* -------- By Partners' Capital A/cs* --------
(Gain on revaluation(in Old Ratio) (Loss on revaluation (in Old Ratio)
*Only one will appear at a time

Example:
Ajay and Vijay were partners in the ratio of 3:2. From 1st April 2020 they decided to
admit Sanjay as a new partner, they also decided to share future profits equally. On
this date assets and liabilities revalued as follows.
Pass Journal Entries and post them into Revaluation A/c
1. Machinery book value ₹ 50,000 was overvalued by 25%.
2. Building book value ₹ 80,000 was undervalued by 20%.
3. Furniture costing ₹ 40,000 is to be depreciated by 10%.
4. Unrecorded liability towards supplier is ₹ 5000, settled at ₹ 4,500.
5. Accrued commission of ₹ 3,000 is to be taken into accounts.
6. Creditors of ₹ 15,000 settled at ₹ 13,000.
7. A bill of ₹ 5,000 dishonoured.
8. Creditor of ₹ 10,000 written back.
9. Creditors included damages claim₹ 5,000 which is settled at ₹ 4,500.
10. Disputed damages claim of ₹ 5,000 now settled at ₹ 4,500.
11. Stock of ₹ 25,000 including a damaged item of ₹ 5,000 were taken over by a
creditor of ₹ 23,000 in full settlement.
12. Write off ₹ 1,000 as bad debts and provision for doubtful debts is to be created
on sundry debtors at 5 %. Debtors and Provision for Doubtful Debts was appeared
in the balance sheet at ₹ 51,000 and ₹ 2,500 respectively.
13. Write off ₹ 1,000 as bad debts and provision for doubtful debts is to be created
on sundry debtors at 5 %. Debtors and Provision for Doubtful Debts was appeared
in the balance sheet at ₹ 51,000 and ₹ 4,000 respectively.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 56

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Journal Entries in the books of Ajay and Vijay

Date Particulars ₹ ₹
1. Revaluation A/c Dr. 10,000
To Machinery A/c 10,000
25
(Being Machinery Revalued (50,000 x )
125
2. Building A/c Dr. 20,000
To Revaluation A/c 20,000
20
(Being Building Revalued (80,000 x )
80
3. 4,000
Revaluation A/c Dr.
To Furniture A/c 4,000
10
(Being Furniture Depreciated 40,000 x )
100
Revaluation A/c Dr. 4,500
4. 4,500
To Unrecorded Liability A/c
(Being Unrecorded liability Created)
Unrecorded Liability A/c Dr. 4,500
4,500
To Cash A/c
(Being Unrecorded liability Settled)
3,000
5. Accrued Commission A/c Dr. 3,000
To Revaluation A/c
(Being Accrued Commission Recorded ) 15,000
13,000
6. Creditors A/c Dr. 2,000
To Cash A/c
To Revaluation A/c 5,000
(Being Creditors Settled) 5,000
7. Debtors A/c Dr.
To Bill Receivable A/c 10,000
10,000
(Being Bill Dishonoured)
8. Creditors A/c Dr.
5,000
To Revaluation A/c 4,500
(Being Creditors Written Back) 500
9. Creditors A/c Dr.
To Cash A/c 4,500
To Revaluation A/c 4,500
(Being Disputed Claims Settled)
10. Revaluation A/c Dr. 4,500
To Disputed Claim A/c 4,500
(Being Unrecorded liability Created)
Disputed Claim A/c Dr. 23,000
To Cash A/c 2,000
(Being Unrecorded liability Settled) 25,000

11. Creditors A/c Dr.

Revaluation A/c Dr.
To Stock A/c
(Being Creditors Settled by giving Stock )

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 57

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Date Particulars ₹ ₹
12. Bad Debts A/c Dr. 1,000
To Debtors A/c 1,000
(Being Bad Debts Written Off)
Provision for Doubtful Debts A/c Dr. 1,000
To Bad Debts A/c 1,000
(Being Bad Debts Charged)
Revaluation A/c Dr. 1,000
To Provision for Doubtful Debts A/c 1,000
(Being Provision for Doubtful Debts Maintained)
13. Bad Debts A/c Dr. 1,000
To Debtors A/c 1,000
(Being Bad Debts Written Off)
Provision for Doubtful Debts A/c Dr. 1,000
To Bad Debts A/c 1,000
(Being Bad Debts Charged)
Provision for Doubtful Debts A/c Dr. 500
To Revaluation A/c 500
(Being Excess Provision for Doubtful Debts
Debited )

REVALUATION/PROFIT & LOSS ADJUSTMENT ACCOUNT

Particulars ₹ Particulars ₹
To Machinery A/c 10,000 By Building A/c 20,000
To Furniture A/c 4,000 By Accrued Commission A/c 3,000
To Unrecorded Liability 4,500 By Creditors A/c 2,000
To Disputed Claim 4,500 By Creditors A/c 10,000
To Stock 2,000 By Creditors A/c 500
To Provision for Doubtful Debts 1,000 By Provision for Doubtful Debts 500
To Partners Capital A/c 10,000
(Profit on Revaluation in OLD)
Ajay – 6,000
Vijay – 4,000
36,000 36,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 58

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… Experience in Action
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Example: A, B and C sharing profits and losses in the ratio of 2:2:1,decided to take D
as a partner for ¼ share with effect from 1st April, 2020. An extract of their balance
sheet as at 31st March, 2020 is:

Liabilities ₹ Assets ₹
Provision for doubtful debts 6,000 Debtors 1,00,000
Show the accounting treatment (journal entries and presentation on concern ledger
accounts) of Provision for doubtful debts on the admission of D under following
alternative cases:

(a) If all debtors are good.

Journal Entries
Date Particulars L.F. Dr.(₹) Cr. (₹)
Provision for D.D. A/c Dr. 6,000
To Revaluation A/c 6,000
(Being provision for D.D. cancelled)

(b) If bad debts amounted to ₹ 1,000 and they decide to maintain provision for
doubtful debts @ 2%.
Journal Entries
Date Particulars L.F. Dr.(₹) Cr. (₹)
Bad-debts A/c Dr. 1,000
To Debtors A/c 1,000
(Being bad debts accounted)
Provision for D.D. A/c Dr. 1,000
To Bad-debts A/c 1,000
(Being bad debts written off)
Provision for D.D. A/c Dr. 3,020
To Revaluation A/c 3,020
(Being provision for D.D. updated @ 2 % on debtors ₹ 99,000)
(c) If bad debts amounted to ₹ 2,000 and they decide to maintain provision for
doubtful debts @ 5%.
Journal Entries
Date Particulars l.F. Dr.(₹) Cr. (₹)
Bad-debts A/c Dr. 2,000
To Debtors A/c 2,000
(Being bad debts accounted)
Provision for D.D. A/c Dr. 2,000
To Bad-debts A/c 2,000
(Being bad debts written off)
Revaluation A/c Dr. 900
To Provision for D.D. A/c 900
(Being provision for D.D. updated @ 5% on debtors ₹ 98,000)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 59

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(d) If bad debts amounted to ₹ 10,000 and they decide to maintain provision for
doubtful debts @ 2%.
Journal Entries
Date Particulars l.F. Dr.(₹) Cr. (₹)
Bad-debts A/c Dr. 10,000
To Debtors A/c 10,000
(Being bad debts accounted)
Provision for D.D. A/c Dr. 6,000
Revaluation A/c Dr. 4,000
To Bad-debts A/c 10,000
(Being bad debts written off)
Revaluation A/c Dr. 1,800
To Provision for D.D. A/c 1,800
(Being provision for D.D. updated @ 2% on debtors ₹ 90,000)

(e) If bad debts amounted to ₹ 5,000 and they decide to maintain provision for
doubtful debts as existing rate. (6,000 / 100,000 x 100) = 6%
Journal Entries
Date Particulars L.F. Dr.(₹) Cr. (₹)
Bad-debts A/ Dr. 5,000
To Debtors A/c 5,000
(Being bad debts accounted)
Provision for D.D. A/c Dr. 5,000
To Bad-debts A/c
5,000
(Being bad debts written off)
Revaluation A/c Dr.
To Provision for D.D. A/c 4,700
4,700
(Being provision for D.D. updated @ 6% on debtors ₹ 95,000)
5700
(f) Half of the debtors are good, debtors amounted to 10,000 are bad and they
decide to maintain provision for doubtful debts @2½ %.
Journal Entries
Date Particulars L.F. Dr.(₹) Cr. (₹)
Bad-debts A/c Dr. 10,000
To Debtors A/c 10,000
(Being bad debts accounted)
Provision for D.D. A/c Dr. 6,000
Revaluation A/c Dr. 4,000
To Bad-debts A/c 10,000
(Being bad debts written off)
Revaluation A/c Dr. 1,000
To Provision for D.D. A/c 1,000
(Being provision for D.D. updated @ 2½ % on debtors ₹ 40,000)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 60

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Example
A and B were partners sharing profits and losses equally, having capital of ₹ 4,00,000 and
₹ 3,00,000 respectively. They decided to admit as a new partner for 1/5th share. The new
profit-sharing ratio is agreed at 2:2:1. The adjusted capitals of A and B (after all adjustments
of premium for goodwill, reserves accumulated profits and revaluation profit are ₹ 4,50,000
and ₹ 3,50,000 respectively Calculate the new capital of A, B and C and the amount of actual
cash to be brought in or to be paid to the partners in each case
1. When the new partner is required to bring proportionate capital
2. When the new partner has to bring capital on the basis of combined capitals of old partner
3. When the capital of the old partners be adjusted on the basis of new partner's capital. C
brings ₹1,80,000 for 1/5th share.
4. Total capital of reconstituted firm is given as ₹12,00,000, which is to be adjusted in new
ratio.

Solution
Case- 1
Total Adjusted Capitals of A and B = ₹ 4,50,000 +₹ 3,50,000 = ₹8,00,000
Combined New Share of A and B = 4/5
Total Capital of New Firm = 8,00,000×5/4 = ₹ 10,00,000
C's Capital 10,00,000×1/5 = ₹ 2,00,000.
C will bring ₹ 2, 00,000 as capital

Case- 2
Total Capital of New Firm Total Adjusted Capitals of A and B = ₹ 4,50,000 + ₹ 3,50,000 =
₹ 8,00,000
C's Capital Total Capital x C's Share = 8,00,000 x 1/5 = 1,60,000.
C will bring ₹ 1,60,000 as capital.

Case- 3
New Ratio 2:2:1
Total Capital on basis of C's Capital 1,80,000 × 5/1 = 9,00,000
A's New Capital ₹ 9,00,000 × 2/5 = 3,60,000.
8's New Capital ₹ 9,00,000 × 2/5 = 3,60,000
Present Adjusted Capitals: A = ₹ 4,50,000,and = ₹ 350,000
A will withdraw cash of ₹ 90,000, B will bring cash of ₹ 10,000 and C brought cash of
₹ 1,80,000

Case- 4
New Ratio = 2-2:1
Total Capital 12,00,000
A's New Capital 12,00,000× 2/5 = ₹ 4,80,000
B's New Capital₹12.00,000× 2/5 = ₹ 4,80,000
C's New Capital 12,00,000 x 1/5 = ₹ 2,40,000
Present Adjusted Capitals: A ₹4,50,000: B ₹ 3,50,000
A will bring ₹ 30,000, B will bring cash of ₹ 1,30,000 and C will bring ₹ 2,40,000 as his
capital

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 61

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Examples
A, B and C were partners sharing profits and losses in the ratio of 3:2 1, having capitals of
₹ 400,000 ₹ 3,00,000 and ₹ 2,00,000 respectively. C decides to retire from the firm. The
adjusted capitals of A and B (after all adjustments of reserves, accumulated profits and
revaluation profit) are ₹ 4,50,000 and ₹ 3,50,000 respectively. The total amount due to C on
his retirement is ₹ 2,50,000. It is given that firm a has cash balance of ₹ 6,000.
Calculate the following: Total Capital of the reconstituted frim, New Capitals of A and B and
cash to be introduced or withdrawn by A and B
1. When existing total capital of the remaining partners is to be in new ratio.
2. When total capital of the new firm is given as ₹10,00,000
3. When total capital of new firm is to be same as total capital before C's retirement
4. When C is to be paid through cash brought in by A and B in a manner to make their
capitals proportionate to new ratio.
5. When C is to be paid through cash brought in by A and B in a manner to make their capital
proportionate to new ratio and also leave a desired cash balance of ₹ 30,000.
Case- 1
Total Adjusted Capitals of A and B = ₹ 4,50,000 +₹ 3,50,000 = ₹8,00,000
A,s New Capital = 8,00,000 x 3/5 = ₹ 4,80,000
B,s New Capital = 8,00,000 x 2/5 = ₹ 3,20,000
A’s Deficit capital = 4,80,000 – 4,50,000 = ₹ 30,000 (to be Introduced)
B’s Surplus capital = 3,50,000 – 3,20,000 = ₹ 30,000 (to be withdrawn)

Case- 2
Total Capitals of new firm = ₹ 10,00,000
A,s New Capital = 10,00,000 x 3/5 = ₹ 6,00,000
B,s New Capital = 10,00,000 x 2/5 = ₹ 4,00,000
A’s Deficit capital = 6,00,000 – 4,50,000 = ₹ 1,50,000 (to be Introduced)
B’s Deficit capital = 4,00,000 – 3,50,000 = ₹ 50,000 (to be Introduced)

Case- 3
Total Capitals of new firm = (₹4,00,000 + ₹3,00,000+ ₹2,00,000)₹ 9,00,000
A,s New Capital = 9,00,000 x 3/5 = ₹ 5,40,000
B,s New Capital = 9,00,000 x 2/5 = ₹ 3,60,000
A’s Deficit capital = 5,40,000 – 4,50,000 = ₹ 90,000 (to be Introduced)
B’s Deficit capital = 3,60,000 – 3,50,000 = ₹ 10,000 (to be Introduced)
Case- 4
Total Capitals of new firm = (₹4,50,000 + ₹ 3,50,000+ ₹ 2,50,000)₹ 10,50,000
A,s New Capital = 10,50,000 x 3/5 = ₹ 6,30,000
B,s New Capital = 10,50,000 x 2/5 = ₹ 4,20,000
A’s Deficit capital = 6,30,000 – 4,50,000 = ₹ 1,80,000 (to be Introduced)
B’s Deficit capital = 4,20,000 – 3,50,000 = ₹ 70,000 (to be Introduced)

Case- 5
Total Capitals of new firm = (₹4,50,000 + ₹ 3,50,000+ ₹ 2,50,000 + ₹ 30,000 – ₹ 6,000)₹ 10,74,000
A,s New Capital = 10,74,000 x 3/5 = ₹ 6,44,400
B,s New Capital = 10,74,000 x 2/5 = ₹ 4,29,600
A’s Deficit capital = 6,44,400 – 4,50,000 = ₹ 1,94,400 (to be Introduced)
B’s Deficit capital = 4,29,600 – 3,50,000 = ₹ 79,600 (to be Introduced)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 62

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 1
Amita and Sunita were partners in a firm sharing profits in the ratio of 3:2, On
1-4 2024, their Balance Sheet was as follows:
Balance Sheet of Amita and Sunita
as at 1.04.2024

Liabilities Amount (₹) Assets Amount (₹)

Creditors 18,000 Cash 3,000

General Reserve 10,000 Debtors 15,000

Workmen Compensation Fund 9,000 Investments 25,000

Investment Fluctuation Fund 10,000 Plant 14,000

Provision for bad Debts 3,000 Land and Building 38,000

Capitals: Advertisement Suspense 5,000

Amita 35,000 Goodwill 7,500

Sunita 25,000 60,000 P&L A/c (Loss) 2,500

1,10,000 1,10,000

On the above date, Vinita was admitted for 1/4th share in the profits of the firm on
the following terms:
 Vinita will bring ₹ 25,000 for her capital and ₹ 5,000 for her share of goodwill
premium.
 All debtors were considered good.
 The market value of investments was ₹ 20,000.Half of the investments taken
over by partners at market value.
 There was a liability of ₹ 6,000 for workmen compensation.
 Creditors of 10,000 paid in cash.
 Plant to be depreciated up to 90%. Land and Building was undervalued by 5%.
 Capital accounts of Amita and Sunita are to be adjusted on the basis of Vinita’s
capital by opening current accounts.
Prepare Revaluation Account and Partners’ Capital Accounts.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 63

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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SOLUTION:
Revaluation A/c

Particulars Amount Particulars Amount

Partners’ Capital A/c

Amita Sunita Vinita Amita Sunita Vinita

Calculation of Proportionate Capital

Amita Sunita Vinita
Particulars

New Profit Sharing Ratio

Basis of Capital -- --

Proportionate Capital --

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 64

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 2
Mayank and Kartik were partners in a firm sharing profits in the ratio of 3:2. On
1st April, 2024, they admitted Nandini as a partner in the firm. The Balance Sheet of
Mohan and Mahesh at that date was as under:
Balance Sheet of Mohan and Mahesh. as at 01.04.2024

Liabilities Amount (₹) Assets Amount (₹)

Creditors 2,38,000 Cash in hand 1,30,000

Workmen’s Compensation Fund 2,00,000 Debtors 1,60,000

General Reserve 1,60,000 Stock 1,20,000

Investment Fluctuation Fund 12,000 Investments 60,000

Capitals: Machinery 1,00,000

Mayank 1,50,000 Building 2,80,000

Kartik 1,00,000 2,50,000 Goodwill 10,000

8,60,000 8,60,000

It was agreed that:

 The value of Building and Stock be appreciated to ₹ 3,80,000 and ₹ 1,60,000
respectively.
 The liabilities of workmen’s compensation fund was determined at ₹ 2,30,000.
 Nandini couldn’t bring her share of goodwill in cash. Firm’s goodwill valued at
₹ 5,00,000
 Machine was overvalued by 25%.
 Nandini was to bring further cash as would make her capital equal to 20% of the
total capital of the firm after above revaluation and adjustments are carried out.
 The future profit sharing ratio will be Mayank 2/5th, Kartik 2/5th, Nandini 1/5th.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the
new firm. Also show clearly the calculation of Capital brought by Nandini.
Calculation of Sacrificing Ratio
Mayank Kartik Nandini
Particulars
Old Ratio

New ratio

Sacrifice (Old - New)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 65

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Revaluation A/c
Particulars Amount Particulars Amount

Partners’ Capital A/c

Mayank Kartik Nandini Mayank Kartik Nandini

Balance Sheet
Liabilities Amount (₹) Assets Amount (₹)

Calculation of Proportionate Capital of Nandini

Mayank Kartik Nandini
Particulars
New Profit Sharing Ratio
--
Basis of Capital
-- --
Proportionate Capital

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 66

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 3
Following is the Balance Sheet of Aruna, Karuna and Varuna as at 31st March, 2024,
who have agreed to share profits and losses in proportion of their capitals.
BALANCE SHEET OF ARUNA, KARUNA AND VARUNA as at 31st March, 2024

Liabilities Amount (₹) Assets Amount (₹)

Capitals A/cs: Land and Building 2,00,000

Aruna 2,00,000 Machinery 3,00,000

Karuna 3,00,000 Closing Stock 1,00,000

Varuna 2,00,000 7,00,000 Sundry Debtors 1,10,000

General Reserve 70,000 Less: P.F.D.D. 10,000 1,00,000

Workmen's Compensation Fund 15,000 Cash at Bank 1,00,000

Sundry Creditors 50,000 Goodwill 35,000

8,00,000 8,00,000

On 31st March, 2024 Aruna desired to retire from the firm and the remaining
partners decided to carry on the business. It was agreed to revalue the assets and
reassess the liabilities on the following basis:

 Land and Building to be appreciated by 30%.

 Machinery be depreciated by 20%.
 There were Bad Debts of ₹ 17,000.
 The claim on account of Workmen's Compensation was estimated at ₹ 18,500
 Goodwill of the firm was valued at ₹ 1,40,000 and Aruna's share of Goodwill be
adjusted against the Capital Accounts of the continuing partners Karuna and
Varuna who have decided to share future profits in the ratio of 4 : 3 respectively.
 Capital of the new firm in total will be the same as before the retirement of
Aruna and will be in the new profit-sharing ratio of the continuing partners.
 Amount due to Aruna be settled by paying ₹ 50,000 in cash and the balance by
transferring to her Loan Account which will be paid later on.

Prepare Revaluation Account, Capital Accounts of Partners and Balance Sheet of the
firm after Aruna's retirement.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 67

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Revaluation A/c

Particulars Amount Particulars Amount

Partners’ Capital A/c

Aruna Karuna Varuna Aruna Karuna Varuna

Balance Sheet
Liabilities Amount (₹) Assets Amount (₹)

Calculation of Proportionate Capital

Karuna Varuna
Particulars
New Profit Sharing Ratio

New Capital

Proportionate Capital

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 68

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 4
On 31st March, 2024, the Balance Sheet of A, B and C who were sharing profits and
losses in proportion to their capitals stood as:

Liabilities Amount (₹) Assets Amount (₹)

Creditors 10,800 Cash at Bank 13,000

Bills Payable 5,000 Debtors 10,000

Capital A/cs: Less: P.F.D.D. 200 9,800

A 45,000 Stock 9,000

B 30,000 90,000 Machinery 24,000

C 15,000 Freehold Premises 50,000

1,05,800 1,05,800

B retires and following readjustments of assets and liabilities have been agreed upon
before ascertainment of the amount payable to B:
 That out of the amount of insurance which was debited entirely to Profit and
Loss Account, ₹ 1,000 be carried forward for Unexpired Insurance.
 Freehold Premises be appreciated by 10%.
 Provision for Doubtful Debts are brought up to 5% on Debtors.
 Machinery be depreciated by 5%.
 Liability for Workmen Compensation to the extent of ₹ 1,500 would be created.
 That the goodwill of the entire firm be fixed at₹ 18,000 and B's share of the
same be adjusted into the accounts of A and C who are going to share future
profits in the proportion of 3/4th and 1/4th respectively.
 Entire capital of the firm as newly constituted be fixed at ₹ 60,000 between A
and C in the proportion of 3/4th and 1/4th after passing entries in their
accounts for adjustments, i.e., actual cash to be paid or to be brought in by
continuing partners as the case may be.
 B be paid ₹ 5,000 in cash and the balance be transferred to his Loan Account.

Prepare Capital Accounts of Partners and the Balance Sheet of the firm of A and C.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 69

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Revaluation A/c

Particulars Amount Particulars Amount

Partners’ Capital A/c

A B C A B C

Balance Sheet
Liabilities Amount (₹) Assets Amount (₹)

Calculation of Proportionate Capital

A B
Particulars
New Profit Sharing Ratio

New Capital

Proportionate Capital

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 70

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 5
P, Q and R were partners sharing profits and losses in the ratio of 4:3 :3. The Balance
Sheet of the firm as at 31st March, 2024 stood as:

Liabilities ₹ Assets ₹

Creditors 10,000 Cash and Bank 20,000

Employees' Provident Fund 20,000 Debtors 15,000

Reserves 10,000 Stock 17,000

Workmen Compensation Reserve 10,000 Fixed Assets 52,000

Capital A/cs: Drawings: R 6,000

P - 30,000

Q - 15,000
60,000
R - 15,000

1,10,000 1,10,000

R retired on the above date on the following terms and conditions:

 Fixed Assets are to be depreciated by ₹ 2,000 and ₹ 1,000 Provision for Doubtful
Debts is to be created.
 A liability of ₹ 4,000 for Workmen Compensation is to be created.
 Goodwill of the firm is valued at ₹ 50,000 and adjustment for goodwill is to be
done without opening the Goodwill Account.
 New profit-sharing ratio of P and Q is 2 :1.
 That the adjustment be made in the accounts to rectify a mistake previously
committed whereby Y was credited in excess by ₹ 5,000, while X and Z were
debited in excess of ₹ 3,000 and ₹ 2,000 respectively.
 Final balance payable to R is to be treated as loan carrying interest @10% p.a.

Pass Journal entries

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 71

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Journal Entries

Date Particulars LF Amount Dr. Amount Cr.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 72

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Journal Entries

Date Particulars LF Amount Dr. Amount Cr.

Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 73

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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ACCOUNTANCY - XII
Day - 7
Calculation of deceased partner’s benefits and charges for current year life time.
(From date of last balance sheet to date of death)
The deceased partner is entitled to receive the benefits of his life time in the firm. The
Benefits and charges must have been calculated on the closing date of the last
accounting year and the deceased partner must have received all the benefits and
charged charges for life time in current year, if the provisions of the agreement permit.
 Interest on his capital account at the agreed rate, if agreement provides.
 The amount of his salary, if any.
 Any other commission, fee or remuneration due to him.
 Interest on Drawings
 Share of profit/loss

I. Interest on Capital
Interest on Deceased = Amount of capital of x Rate x Time (life time)
Partner’s Capital Deceased partner 100 12/365

II. Salary to Deceased Partner

Annual amount of salary x Time (life time)

Salary to Deceased Partner = to Deceased partner 12/365

III. Commission to Deceased Partner

Annual amount of Commission x Time (life time)

Commission to Deceased Partner = to Deceased partner 12/365

IV. Interest on Drawings

Interest on Deceased = Amount of Drawings of x Rate x Time (Actual/Average)
Partner’s Drawings Deceased partner during life time 100 12/365

IV. Share of Profit to Deceased Partner

The deceased partner share of profit can be calculated on any one of the following
basis, depending upon the agreement among partners.
The two methods are as follows:
(a) On the Basis of Time
(b) On the Basis of Turnover or Sales.
(a) On the Basis of Time:

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(i) On the basis of last year's profit. In this case last year’s profit is given. On this
basis the profit of the period between the date of preparing last final accounts to the
date of death is calculated which will be based on last year’s profit and a share of this
profit is credited to deceased partners’ capital accounts.
Share of Profit Amount of Profit x Time (life time) x Share of Profit of
to Deceased Partner = of previous year 12/365 Deceased partner
(ii) On the basis of Average profit of last year’s profits. In this case certain years
profits are given. On this basis the profit of the period between the date of preparing
last final accounts to the date of death is calculated which will be based on average
profit of last certain years and a share of this profit is credited to deceased partners
capital accounts.
Share of Profit Average amount of Profit x Time (life time) x Share of Profit of
to Deceased Partner = of previous years 12/365 Deceased partner

(b) On the Basis of Turnover or Sales. . In this case last year’s profit and sales are
given together with the sale of the current year. On this basis the profit of the period
between the date of preparing last final accounts to the date of death is calculated
which will be based on turnover of current year and a share of this profit is credited to
deceased partners’ capital accounts.
Share of Profit Amount of Sale x Previous year’s Profit x Share of Profit of
to Deceased Partner = during the life time Previous year’s Sale Deceased partner

Date Particulars L.F. Dr.(₹) Cr.(₹)

For Share in Profit / Loss
When continuing partners carry the same profit sharing
ratio as before the death of a partner.
For Share in Profit to Deceased Partner for life time
Profit & Loss Suspense A/c Dr. ------
To Deceased Partners capital A/c /current A/c ------
(Being share in profit credited to Deceased Partner)
For Share in loss to Deceased Partner for life time
Deceased Partners capital A/c /current A/c Dr. -------
To Profit & Loss Suspense A/c -------
(Being share in loss debited to Deceased Partner)
When continuing partners change their profit sharing ratio
after the death of a partner.
For Share in Profit to Deceased Partner for life time
Gaining Partners Capital/Current A/c Dr. -----
To Deceased /Sacrificing Partners Capital/Current A/c -------
(Being internal Adjustment Entry passed)
For Share in loss to Deceased Partner for life time
Deceased/ Sacrificing Partners Capital/Current A/c Dr. ------
To Gaining Partners Capital/Current A/c -------
(Being internal Adjustment Entry passed)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 75

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Accounting Treatment at the time of Dissolution of Partnership Firm

1. For transfer of Assets
All asset accounts excluding cash, bank and the fictitious assets, if any are closed
by transfer to the debit of Realisation Account at their book values. It may be noted
that sundry debtors are transferred at gross value and the provision for doubtful debts
is transferred to the credit side of Realisation Account along with liabilities. The same
thing will apply to fixed assets, if provision for depreciation account is maintained.
Realisation A/c Dr.
To Assets (Individually) A/c Book Value
(Being assets transferred)

2. For transfer of Liabilities

All external liability accounts including provisions, if any, are closed by transferring
them to the credit of Realisation account.
Liabilities (individually) A/c Dr. Book Value
To Realisation A/c
(Being external liabilities transferred)

3. For transfer of Provisions

All Provision, if any, are closed by transferring them to the credit of Realisation
account.
Provision for -------- (individually) Dr. Book Value
To Realisation A/c
(Being provisions transferred)

4. For sale of Assets

Cash/ Bank A/c Dr. Realise
To Realisation A/c Value
(Being assets realised)

5. For an Asset taken over by a Partner

Partner’s Capital A/c Dr. Agreed
To Realisation A/c Value
(Being assets taken over by partner)

6. For payment of Liabilities

Realisation A/c Dr. Settlement
To Cash/ Bank A/c Value
(Being liabilities setteled)

7. For a Liability which a Partner takes responsibility to discharge

Realisation A/c Dr. Agreed
To Partner’s Capital A/c Value
(Being liabilities discharged by partner)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 76

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8. For settlement with the external liabilities through transfer of assets

When a liability accepts an asset in full and final settlement of his account, NO
JOURNAL ENTRY needs to be recorded. But, if the liability accepts an asset only as
part payment of his/her dues, the entry will be made for cash payment only. For
example, a liability to whom ₹ 50,000 was due accepts office equipment worth ₹
45,000 and is paid ₹ 5,000 in cash, entry shall be made for the payment of ₹ 5,000
only.
Realisation A/c Dr. 5,000
To Bank / Cash A/c 5,000
(Being paid to liability)
However, when a liability accepts an asset whose value is more than the amount due
to him, he/she will pay cash to the firm for the difference. For example, a liability to
whom ₹ 50,000 was due accepts office equipment at an agreed value of ₹. 55,000, in
such condition liability will pay ₹ 5,000 in cash, entry shall be made for the received
amount of ₹ 5,000.
Bank / Cash A/c Dr. 5,000
To Realisation A/c 5,000
(Realised from Asset )

9. For payment of Realisation Expenses

(a) When some expenses are incurred and paid by the firm in the process of realisation
of assets and payment of liabilities:
Realisation A/c Dr. Expenses
To Bank/Cash A/c Value
(Being realisation expense paid)

(b) When realisation expenses are paid by a partner on behalf of the firm:
Realisation A/c Dr. Expenses
To Partner’s Capital A/c Value
(Being realisation expense paid by partner)

(c) When a partner has agreed to undertake the dissolution work for an agreed
remuneration and bear the realisation expenses:
Remuneration to such Partner
Realisation A/c Dr. Remuneration
To Partner’s Capital A/c
(Being remuneration credited to partner)

(ii) if payment of Realisation Expenses is made by the Firm

Partner’s Capital A/c Dr. Expenses
To Bank A/ Value
(Being expense paid by firm on behalf of partner)

(iii) if the Partner himself pays the Realisation Expenses,

NO ENTRY IS REQUIRED

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 77

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(d) When a Partner has agreed to undertake the dissolution work for an agreed
Remuneration and does not bear the Realisation Expenses:

(i) For agreed Remuneration to such Partner

Realisation A/c Dr. Remuneration
To Partner’s Capital A/c
(Being remuneration credited to partner)

(ii) if payment of Realisation Expenses is made by the Firm

Realisation A/c Dr. Expenses
To Bank A/c Value
( Being expense paid)

(iii) if the Partner himself pays the Realisation Expenses,

Realisation A/c Dr. Expenses
To Partner’s Capital A/c Value
(Being expenses paid by partner on behalf of firm)

10 For transfer of Profit and Loss on Realisation

(a) In case of Profit On Realisation

Realisation A/c Profit on
Dr. Realisation
To Partners’ Capital A/c (individually)
(Being profit on realisation credited to partners)

(b) In case of Loss On Realisation

Partners’ Capital A/c (individually) Dr.
To Realisation A/c Loss on
(Being Loss on realisation debited to partners) realisation

11. For transfer of Accumulated Profits, Reserve Fund, Unclaimed W.C.R.

General Res./ Contingency Res. A/c Dr. Accumul
To Partners’ Capital A/c (individually) ated
(Being accumulated profits credited to partners) Profits

12. For transfer of Fictitious Assets/ Undistributed Losses/ Deferred Revenue

Exp.
Partners’ Capital A/c (individually) Dr.
To Fictitious Asset/ P&L / D.R.E. A/c Book Value
(Being undistributed losses debited to partners)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 78

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13. For payment of Loans due to Partners

Partner’s Loan A/c Dr. Book Value
Excess payment
Realisation A/c Dr. Discount value
To Realisation A/c Final Payment

To Bank A/c
(Being partner’s loan settled)

14. For settlement of Loans due from Partners

Bank A/c Dr. Settlement value
Discount value
Realisation A/c Dr. Excess value
To Realisation A/c Book Value

To Partners loan A/c

(Being advanced to partner recovered)

15. For settlement of Partners’ Accounts

(a)If the Partner’s Capital Account shows a debit balance, he brings in the necessary
cash for which the entry will be:
Bank A/c Dr. Final
To Partner’s Capital A/c settlement
(Being deficiency introduced by partner)

(b)The balance is paid to Partners whose Capital Accounts show a credit balance and
the following entry is recorded.
Partners’ Capitals A/cs (individually) Dr.
To Bank A/c Final
(Being surplus paid to partners) settlement
It may be noted that the aggregate amount finally payable to the partners must equal
to the amount available in bank and cash accounts. Thus, all accounts of a firm are
closed in case of dissolution.

1. Realisation Account
When the firm is dissolved, its books of account are to be closed and the profit or loss
arising on realisation of its assets and discharge of liabilities is to be computed. For
this purpose, a Realisation Account is prepared to ascertain the net effect (profit or
loss) of realisation of assets and payment of liabilities which may be is transferred to
partner’s capital accounts in their profit sharing ratio. Hence, all assets (other than
cash in hand bank balance and fictitious assets, if any), and all external liabilities are
transferred to this account. It also records the sale of assets, and payment of liabilities
and realisation expenses. The balance
in this account is termed as profit or loss on realisation which is transferred to
partners’ capital accounts in their profit sharing ratio.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 79

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Realisation Account
Particulars Amount Particulars Amount
To Sundry Assets ---------- By Sundry Liabilities ----------
Goodwill ------- (Book Bank Loan ------- (Book
Building ------- Value) Outsiders’ Loan ------- Value)
Machinery ------- Creditors -------
Furniture ------- Bills Payable -------
Investments ------- Provident Fund -------
Stock ------- W.C.R. Claim -------
Debtors -------
Bills Receivable ------ By Sundry Provisions ---------
Prepaid Exp. ------- Investment Fluc. Res. --- (Book
Accrued Income ------ Provision for D.D. ----- Value)
Provision for Depr. -----

To Cash A/c --------- By Cash A/c --------

(Payment of liabilities) (Settlement (Sale of assets) (Realised
Creditors ------- Value) Building ------ Value)
Bills Payable ------- Machinery -------

To Partners Capital A/c -------- By Partners Capital A/c ---------

(liability assumed by the (Agreed (Assets taken by the Agreed
partner) Value) partner) Value)
Loan ------- Investments -------
Outstanding Exp. ------- Stock -------

To Cash A/c --------

(Realisation Exp.)

To Partners Capital A/c --------

(Remuneration to Partners)
Or
(Paid by partner on behalf of Firm)

To Partners loan A/c -------- By Partners loan A/c --------

(Excess payment) (Discount on settlement)

To Partners Capital A/c -------- By Partners Capital A/c -------

(Profit on Realisation ) B/F (Loss on Realisation ) B/F
A ----- A -----
B ----- B -----
C ----- C -----

------------ ------------

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 80

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 1
Sonia and Rohit were partners in a firm sharing profits and losses in the ratio of 3 : 2.
On 31st March, 2023 their Balance Sheet was as follows :
Balance Sheet of Sonia and Rohit as at 31st March, 2023

Liabilities Amount Assets Amount

(₹) (₹)
Capitals : Building 2,00,000

Sonia 70,000 Machinery 1,40,000

Rohit 90,000 1,60,000 Furniture 80,000

General Reserve 80,000 Debtors 1,20,000

Sonia’s Loan 1,30,000 Stock 60,000

Bank Loan 2,20,000 Cash at Bank 60,000

Creditors 70,000

6,60,000 6,60,000

The firm was dissolved on the above date on the following terms:
 Building, machinery and furniture realised ₹ 3,44,000.
 Debtors realised 90% only.
 Creditors took away half of the stock in full settlement of their account.
 Remaining stock realised ₹ 72,000.
 Realisation expenses amounting to ₹ 14,000 were paid by Rohit.
Prepare Realisation Account.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 81

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Realisation A/c
Particulars Amount Particulars Amount

Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 82

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 2
Ram and Shyam were partners sharing profits as 3:2, agreed upon the dissolution as
on 31.12.2024. On that date Balance Sheet was:

BALANCE SHEET

as at 31st December, 2024

Liabilities ₹ Assets ₹

Creditors 1,05,000 Cash 36,000

Mrs. Shyam Loan 24,000 Goodwill 26,000

Stock Reserve 25,000 Stock 60,000

Bills Payable 26,000 Debtors 88,000

Capitals: Less: Provision 8,000 80,000

Ram 57,000 Plant 63,000

Shyam 38,000 95,000 Investments 10,000

2,75,000 2,75,000

It was agreed that:

 Ram to take 80% of Stock at 10% less.

 Shyam to take remaining Stock at a discount of ₹2,000 less than the book value.
 Debtors realised ₹ 84,000
 Trade Creditors were paid out at a discount of 15%
 Shyam took responsibility of settling Mrs. Shyam's Loan and took Plant costing
₹ 33,000 at ₹ 30,000
 Bills Payable were settled by giving the remaining plant at book value in full
settlement of their claim.
 Investments were sold for ₹ 9,500.

Prepare Realisation Account, Partners' Capital Accounts and Cash Account.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 83

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Realisation A/c
Particulars Amount Particulars Amount

Partners’ Capital A/c

Particulars Ram Shyam Particulars Ram Shyam

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 84

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Cash A/c
Particulars Amount Particulars Amount

Question – 3

Manu, Naresh and Paras were partners in a firm sharing profits and losses equally.
Their Balance Sheet as at 31st March, 2023 was as follows:
Balance Sheet of Manu, Naresh and Paras as at 31st March, 2023

Amount (₹) Amount (₹)

Liabilities Assets
Creditors General 60,000 Bank 60,000
Reserve Capitals : 60,000 Stock 90,000
Manu 90,000 Debtors 1,10,000
Naresh 80,000 Fixed Assets 1,00,000
Paras 70,000

2,40,000

3,60,000 3,60,000
Paras died on 31st January, 2024. It was agreed between his executors and
remaining partners that:
 Goodwill be valued at ₹ 1,08,000 at 3 years purchase of average profits of the
previous three years.
 Share of profit up to the date of death on the basis of average profits of the
previous three years.
 Interest on capital is to be provided @ 12% p.a.
 Half the amount due to Paras is to be paid immediately.
Prepare Paras’s Capital Account and Paras’s Executor’s Account

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 85

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Paras’s Capital A/c

Particulars Amount Particulars Amount

. Paras’s Executors A/c

Particulars Amount Particulars Amount

Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 86

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 4
A, B and C were partners in a firm sharing profit in the ratio of 3 : 2 : 1. On December
31, 2022, their balance sheet was as under:
BALANCE SHEET as at December 31, 2022

Liabilities ₹ Assets ₹

Creditors 10,000 Cash 8,000

General Reserve 7,500 Debtors 12,000
Capitals: Stock 3,000
A 20,000 Patents 500
B 10,000 Machinery 16,000
C 10,000 40,000 Buildings 18,000

57,500 57,500

A died on 26th May, 2023. It was agreed between his executors and the remaining
partners that:
 Goodwill to be valued at 2 year's purchase of the average profits of the previous
four years which were:
 Year 2019 -₹ 5,200 Year 2020 -₹ 6,000 Year 2021-₹ 8,000 Year 2022-₹ 1,800
 Patents be valued at ₹ 300; Machinery at ₹ 14,000; and Buildings at ₹ 20,200.
 Interest on capital be provided at 8% p.a.
 Profit for the year 2023 be taken as accrued at the same rate as that of the
previous year.
 Half of the amount due to A be paid immediately.

Prepare A's Capital Account and A's Executor's Account.

Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 87

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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A’s Capital A/c

Particulars Amount Particulars Amount

. A’s Executors A/c

Particulars Amount Particulars Amount

Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 88

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 5
Total capital of A and B is ₹ 2,50,000 and the market rate of interest is 10%. Partners
are entitled to receive remuneration of ₹ 10,000 each. Profits (before partners'
remuneration) for the years 2020, 2021, 2022, 2023 and 2024 were ₹ 70,000,
₹ 80,500, ₹ 90,200, ₹ 71,500 and ₹ 1,05,000 respectively.
Goodwill is to be valued at 3 years' purchase of the last 5 years' super profits.
Calculate the goodwill of the firm.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 89

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 6
Piyush and Rishabh were partners in a firm with a combined capital of ₹ 4,00,000.
The normal rate of return was 15%. The profits of the last four years were:
₹

2019 – 20 60,000
2020 – 21 90,000

2021 – 22 80,000

2022 – 23 60,000
The closing stock for the year 2022 – 23 was undervalued by ₹ 10,000. Calculate
goodwill of the firm based on capitalisation of average profit.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 90

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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ACCOUNTANCY - XII
Day - 8
Question – 1
X, Y and Z are partners carrying business in the name of Ms. P. G. Traders. They
decide to dissolve the firm.
Give journal entries for realization expenses in the following alternative eases:
i. X was to bear realisation expenses of ₹ 3,000 which was paid by the firm.
ii. X was to bear realization expenses and for this a sum of’ ₹ 3,000 was to be paid
to him.
iii. X was to be paid ₹ 3,200 towards realization expenses. Actual expenses were
₹ 4,000 which were withdrawn by X.
iv. Realisation expenses of ₹ 3,000 paid by X and also borne by him.
v. Realisation expenses of ₹ 3,000 paid by X and borne by Y.
JOURNAL

Date Particulars L.F. Debit (Rs.) Credit (Rs.)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 91

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question – 2
Aaeesha and Aafreen are partners sharing profits and losses equally. They decided to
dissolve their firm. Give journal entries for settlement of creditors through assets in
the following alternative cases:
(i) Abeer a creditor (already transferred to Realisation Account) for ₹ 25,000 accepted
furniture (already transferred to Realisation Account) at ₹ 36,000, in full settlement
of his claim.
(ii) Azarya, a creditor (already transferred to Realisation Account) for ₹ 25,000
accepted furniture (already transferred to Realisation Account) at ₹ 20,000 in
settlement of her claim.
(iii) Ayaan a creditor (already transferred to Realisation Account) for ₹ 30,000 agreed to
take Machinery (already transferred to Realisation Account) at ₹ 48,000 (book
value ₹ 50,000) in settlement of his claim.
(iv) Aabidah a creditor of’ ₹ 20,000 (unrecorded in the books) agreed to accept
computer (unrecorded in the books) at ₹ 15,000 plus ₹ 2,000 in full settlement of
her claim.
JOURNAL
Date Particulars L.F. Debit (₹) Credit (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 92

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 3
Pass necessary Journal Entries for the following transactions at the time of dissolution
of the firm.
(a) Loan of ₹ 10,000 advanced by a partner to the firm on dissolution of the firm.
(b) X, a partner takes over an unrecorded asset (Typewriter) at ₹ 300.
(c) Undistributed Balance (Debit) of P & L A/c ₹ 30,000. The firm has three partners X,
Y & Z.
(d) The assets of the firm realised ₹ 1,25,000.
(e) Y who undertakes to early out the dissolution proceedings is paid ₹ 2,000 for the
same.
(f) Creditors paid ₹ 28,000 in full settlement of their account of ₹ 30,000.
JOURNAL

Date Particulars L.F. Debit (₹) Credit (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 93

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 4
What Journal Entries would be passed for the following transactions on the
dissolution of a firm, after various assets (other than cash) and third parties' liabilities
have been transferred to Realisation Account?
(i) A took over the Machinery worth ₹ 70,000.
(ii) Firm paid ₹ 35,000 as Compensation to Employees.
(iii) Sundry Creditors amounted to ₹ 36,000 which was settled at a discount of 10%.
(iv) There was an Unrecorded Bike of ₹ 40,000 which was taken over by B at ₹ 25,000.
(v) Profit on Realisation of ₹ 30,000 was to be distributed between A and B in the ratio
of 3:2.
JOURNAL

Date Particulars L.F. Debit (₹) Credit (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 94

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 5
X, Y and Z were partners sharing profits and losses in the ratio of 5:3:2 respectively.
On 31st December 2023 their Balance Sheet stood as under:

Liabilities ₹ Assets ₹

Sundry Creditors 27,500 Goodwill 12,500

Reserve Fund 15,000 Buildings 50,000
Capital Accounts: Patents 15,000
X 75,000 Machinery 75,000
Y 62,500 Stock 25,000
Z 37.500 1,75,000 Debtors 20,000
Cash at Bank 20,000

2,17,500 2,17,500

Z died on 1st May 2024. It was agreed that:

 Goodwill be valued at 2 ½ years purchase of the average profits of the last four
years, which were: 2020- ₹ 32,500; 2021- ₹ 30,000; 2022- ₹ 40,000 and 2023 –
₹ 37,500.
 Machinery be valued at ₹ 70,000; Patents at ₹ 20,000; Building at ₹ 62,500.
 For the purpose of calculating Z's share in the profits of 2024, the profits in 2024
should be taken to have been earned on the same scale as in 2023.
 A sum of ₹ 10,500 is to be paid immediately to the executors' of Z and the balance
to be paid in four equal half-yearly instalments together with interest @10%p.a.
Give the necessary journal entries to record the above transactions and prepare Z's
Executor's account for 2024.
Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 95

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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JOURNAL
Date Particulars L.F. Debit (₹) Credit (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 96

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Z’s Capital A/c

Particulars Amount Particulars Amount

Z’s Executors’ A/c

Date Particulars Amount Date Particulars Amount

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 97

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 6
P, Q and R were partners sharing profits in the ratio of 3:1:1. The Balance Sheet of the
firm is given below as at March 31, 2024.
Balance Sheet of P, Q and R as at March 31, 2024

Liabilities Amount Assets Amount

Capitals: Land 2,80,000

P 6,03,300 Buildings 3,40,000
Q 4,12,800 Plant & Machinery 2,48,000
R 2.01.900 12,18,000 Furniture & Fitting 48,000
General Reserve 10,000 Stock 1,09,000
Sundry Creditors 62,000 Sundry Debtors 1,32,000
Cash in Bank 1,33,000

12,90,000 12,90,000

Q died on 1st July 2024. Partnership deed provides for the settlement of claim on
death of a partner in addition to his capital as under:
(i) The share of profit of deceased partner to be computed on the basis of average
profits of the past four years for the period from the last balance sheet to date of death
of the partner.
(ii) His share in profit/loss on revaluation of assets and reassessment of liabilities.
(iii) His share of Goodwill valued on the basis of two years purchases of last four years
average profits.
(iv) Profit of last four years as follows: 2021- ₹ 20,000; 2022 – ₹ 30,000; 2023- ₹ 45,000
and 2024 – ₹ 65,000.
(v) Furniture to be depreciated up to ₹ 40,000, Plant to be appreciated by ₹ 12,000 and
Land revalued at ₹ 3,00,000.
Pass the Journal entries to give effect to the transactions relating to death of Q in the
books of the firm.
Working

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JOURNAL
Date Particulars L.F. Debit (₹) Credit (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 99

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Question – 7
A and B were partners sharing profits and losses in the ratio of 1 : 1. They admit C as
third partner. New profit sharing ratio of A, B and C would be 3 : 1 : 1. C was required
to bring ₹ 20,000 for his share of capital and ₹ 10,000 for his share of goodwill. C
brings the necessary amount for his share of capital but for his share of goodwill he
could bring only ₹ 7,000. It was decided not to open current account. Record these
transactions in the books of A, B and C.
JOURNAL

Date Particulars L.F. Debit (₹) Credit (₹)

Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 100

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Question – 8
Ram, Shyam and Hari were in partnership sharing profits in the ratio of 3:2:1. Their
Balance Sheet as at 31.3.2024 was as follows:
BALANCE SHEET

Liabilities ₹ Assets ₹

Bills Payable 20,000 Cash 40,000

Creditors 20,000 Bill Receivables 5,000

General Reserve 30,000 Debtors 15,000

Capitals: Stock 50,000

Ram 50,000 Furniture 20,000

Shyam 30,000 Machinery 30,000

Hari 25.000 1,05,000 Goodwill 15,000

1,75,000 1,75,000

On 1.4.2024 partners decided to share profits equally. For this purpose it was further
agreed that.
(i) Goodwill of the firm should be valued at ₹ 30,000;
(ii) Furniture and Machinery is to be revalued at ₹ 25,000 and ₹ 35,000 respectively;
(iii) Value of Stock is to be reduced by ₹ 4,000.
You are required to give necessary journal entries to give effect to the above
arrangement and prepare Revaluation Account, Partners' Capital Accounts and
Balance Sheet of the firm after reconstitution.
Working

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 101

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JOURNAL

Date Particulars L.F. Debit (₹) Credit (₹)

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Revaluation A/c

Particulars Amount Particulars Amount

Partners’ Capital A/c

Particulars Ram Shyam Hari Particulars Ram Shyam Hari

Balance Sheet

Liabilities Amount Assets Amount

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 103

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ACCOUNTANCY - XII
Day – 9
Profit and Loss Appropriation Account
(For the year ended__________)
Dr. Cr.
Particulars ₹ Particulars ₹
To Interest on Capital By Net Profit (Adjusted)
A Capital/Current A/c xx Or
B Capital/Current A/c xx xx By P&L Adjustment A/c xx
(Adjusted profit)
To Partners' Salaries
A Capital/Current A/c xx By Interest on Drawings
B Capital/Current A/c xx xx A Capital/Current A/c xx
B Capital/Current A/c xx xx
To Partners' Commission
A Capital/Current A/c xx
B Capital/Current A/c xx xx

To Partners' Bonus
A Capital/Current A/c xx
B Capital/Current A/c xx xx

To General reserve
(Transfer from Net Profit) xx

* To Net divisible profit (B/F)

transferred to:
A Capital/Current A/c xx
B Capital/Current A/c xx xx

* Net Divisible Profit to be distributed in Profit Sharing Ratio of the partners.

WORKING NOTE:
Net profit for the year -----
Less: Interest on partners loan (if not charged/ Not Debited) (-----)
Rent to Partner (if not charged / Not Debited) (-----)
Any other compulsory charge (if not charged / Not Debited) (-----)
Add: Any appropriation item (wrongly debited to P & L A/c) -----
Add: Any other Income (if not credited) -----
ADJUSTED NET PROFIT
-----

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 104

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Distribution of Profit under the clause of Guarantee

Guarantee is assurances that an existing partner or an incoming partner will not get
his share of profit less that the guaranteed amount. When such an agreement exists,
first profit should be divided as if no guarantee has been given. Then, the amount by
which the actual share falls short of the guaranteed share should be credited to the
partner to whom the guarantee has been given and debited to other partners in their
mutual sharing ratio.
Such a guarantee may be given either by:
(i) All other partners in their present profit sharing ratio.
(ii) Two or more of the remaining partners in mutual agreed ratio.
(iii) Any one of the remaining partner to full extent.
Example 1: A, B and C are partners sharing profits in the ratio 5:3:2. According to the
partnership agreement C is to get a minimum amount of ₹ 10,000 as his share of
profits every year. The net profit for the year ended 31st March, 2019 amounted to
₹40,000.Show the distribution of profit
Statement showing the distribution of net divisible profit under guarantee
Name of Share of profit to be Effect of deficiency of Final share of profit
Partners credited before applying guarantee to be to be credited to
guarantee credited/ debited partners
A 5 5 ₹ 18,750
40,000 X10 = ₹ 20,000 2,000 × 8= ₹ 1,250 (Dr.)
B 3 3 ₹ 11,250
40,000 x = ₹ 12,000 2,000 × = ₹ 750 (Dr.)
10 8
C 2
40,000 ×10 = ₹ 8,000 ₹ 2000 (Cr.) ₹ 10,000

Since the minimum amount guaranteed to C is ₹ 10,000; The excess of guaranteed

amount is ₹ 2,000 (i.e., ₹ 10,000 – ₹ 8,000). It will be borne by A and B in their profit
sharing ratio, i.e., 5:3.
Example 2: A, B and C are partners sharing profits in the ratio 5:3:2. According to the
partnership agreement C is to get a minimum amount of ₹ 10,000 as his share of
profits every year. Deficiency, if any ,would be borne by A and B equally. The net
profit for the year ended 31st March, 2019 amounted to ₹40,000.Show the distribution
of profit
Statement showing the distribution of net divisible profit under guarantee
Name of Share of profit to be Effect of deficiency of Final share of profit
Partners credited before applying guarantee to be to be credited to
guarantee credited/ debited partners
A 5 1 ₹ 19,000
40,000 X10 = ₹ 20,000 2,000 × 2= ₹ 1,000 (Dr.)
B 3 1 ₹ 11,000
40,000 x = ₹ 12,000 2,000 × 2= ₹ 1,000 (Dr.)
10
C 2
40,000 ×10 = ₹ 8,000 ₹ 2000 (Cr.) ₹ 10,000

Since the minimum amount guaranteed to C is ₹ 10,000; The excess of guaranteed

amount is ₹ 2,000 (i.e., ₹ 10,000 – ₹ 8,000). It will be borne by A and B equally.
PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 105
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Appropriations are more than available Profit (Insufficient Profits)

It is also possibility that total amount of appropriation as per the deed is more than
the amount of profit available for appropriation. In this situation, profit available for
distribution among the partners is distributed in the Ratio of Appropriation to be
made.

Ratio of Appropriation: Ratio of amount of benefits (I.O.C., Salary, Commission, and

Bonus) for which partners were entitled according to partnership deed/mutual
agreement.

For Example: Amit and Sumit are partners in the ratio of 3:2 with capital of
₹1,00,000 and ₹2,00,000 respectively. As per the Partnership Deed the Amit and
Sumit are to get salary of ₹ 50,000 and ₹ 60,000 p.a. respectively and interest on
capital @ 10% p.a. on their capitals. Net Profit for the year ₹ 1,05,000.

Here, amount of appropriation (Salary ₹1,10,000 + I.O.C. ₹30,000= ₹1,40,000) is more

than the amount of profit (₹1,05,000),hence partners cannot get the benefits to full
extent, available profit will be distributed in the ratio of appropriation in the following
manner;

Particulars Amit Sumit

Salary as per deed ₹50,000 ₹60,000
I.O.C. as per deed ₹10,000 ₹20,000
Total Appropriation/ Benefits ₹60,000 ₹80,000
Ratio of Appropriation / Benefits 3 4

Distribution of insufficient profits in the ratio of appropriation

Amit’s share of Profit= (Available amount of Profit x Ratio of appropriation)
3
Amit’s share of Profit= (1,05,000 x 7 ) = ₹45,000
Sumit’s share of Profit= (Available amount of Profit x Ratio of appropriation)
4
Sumit’s share of Profit= (1,05,000 x 7 ) = ₹60,000
Profit & Loss Appropriation A/c
(For the year ended ----------------------)
Particulars ₹ Particulars ₹
To Partners’ Capital A/c 1,05,000 By P&L A/c (net profit) 1,05,000
(Share in insufficient profit)
Amit’s Capital- 45,000
Sumit’s Capital- 60,000
1,05,000 1,05,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 106

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Past Adjustments
Sometimes, after the Final Accounts (P & L Appropriation A/c , and Balance Sheet)
and Partners’ Capital /Current Accounts have been prepared, it is found that certain
items have been omitted by mistake (error of omission ) or have been wrongly treated
(error of commission)while distributing profits/losses among the partne₹
Generally, the following types of errors are made:
• Interest on capitals may be omitted or allowed at a higher or lower rate.
• Interest on drawings may be omitted or charged at a higher or lower rate.
• Salary, commission to partners may be omitted or allowed in absence of deed.
• Profits and losses have been distributed in the wrong proportion.

Analytical table (Statement) showing the net amount which to be adjusted

Particulars X Y Z Firm

Dr Cr Dr Cr Dr Cr Dr Cr

 Amounts which were to be    

actually credited to Partners
(I.O.C., Salaries, Commission)
 Amount which was to be    
actually debited to Partners
(I.O.D.)
   
 Amount which has been
wrongly credited by mistake    
 Amount which has been
wrongly debited by mistake
# * # * # * B/F* B/F#
 Amount of net divisible profit
credited excess or less now
rectified in P.S.R.
Amount to be debited & credited        
Net amount to be debited/credited   

After preparing above analytical table we will pass an adjustment entry with net
amount by using partner’s capital or current account and other related accounts.
Adjustment Entry
Date Particulars L.F. Dr. (₹) Cr. (₹)
Partners Capital / Current A/c Dr. -------
To Partners Capital A/c / Current A/c -------
(Being adjustment entry passed)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 107

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Question – 1
On 01.04.2022, Ravi, Kavi and Avi started a partnership firm with fixed
capitals of ₹ 6,00,000, ₹ 6,00,000 and ₹ 3,00,000 respectively. The
partnership deed provided for the following:
(i) Interest on capital @ 10% per annum.
(ii) Interest on drawings @ 12% per annum.
(iii) An annual salary of ₹ 1,20,000 to Avi.
(iv) Profits and losses were to be shared in the ratio of their capitals.
The net profit of the firm for the year ended 31.03.2023 was ₹ 3,08,000.
Interest on partners' drawings was Ravi ₹4,800, Kavi ₹ 4,200 and Avi ₹
3,000.
Prepare Profit and Loss Appropriation Account of Ravi, Kavi and Avi for
the year ended 31.03.2023,
Profit and Loss Appropriation Account
(For the year ended__________)
Dr. Cr.
Particulars ₹ Particulars ₹

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Question – 2
P and Q were partners in a firm sharing profits and losses in the ratio of
2:1. On 01.04.2022, they admitted R as a new partner for 1/10th share of
profits with a guaranteed minimum of ₹ 50,000 P and Q continued to
share profits as before but agreed to share any deficiency on account of
guarantee to R in the ratio of 3: 2 The net profit of the firm for the year
ended 31.03.2023 was ₹ 3,00,000
Pass necessary journal entries in the books of P and Q for the above
transactions.
Working Note

Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 109

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Question – 3
Akhil and Nikhil were partners sharing profits and losses in the ratio of
3: 2. Their fixed capitals were ₹ 1,00,000 and ₹ 80,000 respectively.
Interest on capital was agreed @ 6% pa. Nikhil was to be allowed an
annual salary of ₹ 9,200. During the year 2021-22, the net profit prior to
the calculation of interest on capital but after charging Nikhil's salary
amounted to ₹ 1,20,000.
Prepare Profit and Loss Appropriation Account of the firm for the year
ending 31 March, 2022
Profit and Loss Appropriation Account
(For the year ended__________)
Dr. Cr.
Particulars ₹ Particulars ₹

Working Note

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 110

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Question – 4
Asha, Disha and Raghav were partners in a firm sharing profits in the
ratio of 2:3:1. According to the partnership agreement, Raghav was
guaranteed an amount of ₹ 10,000 as his share of profits. The net profit
for the year ended 31 March, 2022 amounted to ₹1,20,000.
Prepare Profit and Loss Appropriation Account of the firm for the year
ended 31 March, 2022.
Profit and Loss Appropriation Account
(For the year ended__________)
Dr. Cr.
Particulars ₹ Particulars ₹

Working Note

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 111

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question – 5
Ananya. Bhavi and Chandni wore partners in a firm with capitals of
₹ 3,00,000, ₹ 2,00,000 and ₹ 1,00,000 respectively
According to the provisions of the partnership deed
(i) Ananya and Chandni were each entitled to a monthly salary of ₹ 1,500.
(ii) Bhavi was entitled to a salary of ₹ 4,000 per annum
The profit for the year onded 31 March, 2022, ₹ 280,000 was divided
between the partners in their profit sharing ratio of 3:3:2 without
providing for the above adjustments.
Pass the necessary adjustment entry to rectify the above omissions in the
books of the firm. Show your working notes clearly.
Analytical table (Statement) showing the net amount which to be adjusted
Particulars A B C Firm

Dr Cr Dr Cr Dr Cr Dr Cr

Adjustment Entry
Date Particulars L.F. Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 112

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Question – 6
Raman. Manan and Naman were partners sharing profit in the ratio of
2: 1: 1. Raman withdrew ₹3,000 every month and Manan withdrew
₹ 4,000 every month. Interest on drawings @ 6% p.n. was charged
whereas the partnership deed was silent about interest on drawings.
Showing your working clearly, pass the necessary adjustment entry to
rectify the error.
Analytical table (Statement) showing the net amount which to be adjusted
Particulars R M N Firm

Dr Cr Dr Cr Dr Cr Dr Cr

Adjustment Entry
Date Particulars L.F. Dr. (₹) Cr. (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 113

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SCALE YOUR PREPAREDNESS

SELF PRACTICE TEST
Topic Accounting for Partnership
Day - 10
Time Allowed 2:00 HOURS (Morning Session)
Question – 1
The Balance Sheet of Ram and Shyam who were sharing profits in the
ratio of 3:1, on 31st March 2024 was as follows:
Liabilities Amt.(₹) Assets Amt.(₹)
Creditors 8,400 Cash at Bank 6,000
Employees' Provident Fund 3,600 Debtors 19,500
General Reserve 12,000 Less: P.F.D.D. 1,500 18,000
Capitals A/cs: Stock 9,000
Ram 18,000 Investments 15,000
Shyam 12,000 30,000 Goodwill 6,000

54,000 54,000
They decided to admit Mohan on April 1st 2024 for 1/5th share on the
following terms:
 Mohan shall bring ₹ 18,000 as his share of premium.
 That unaccounted accrued income of ₹ 300 be provided for.
 The market value of investments was ₹ 13,500.
 A debtor whose dues of ₹ 1,500 was written off as bad debts paid
₹ 1,200 in full settlement.
 Mohan to bring in capital to the extent of 1/5th of the total capital of
the new firm

Prepare Revaluation A/c, Partners' Capital A/cs and the Balance Sheet of
the new firm

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Question – 2
The Balance Sheet of A, B and C who were sharing profits in the ratio of
5:3:2, is given below as on 31st March, 2024.
Liabilities Amt (₹) Assets Amt (₹)
Sundry Creditors 1,24,000 Land 4,00,000
Reserve Fund 1,80,000 Building 3,81,000
Outstanding Expenses 16,000 Plant and Machinery 4,65,000
Capital A/cs: Furniture and Fittings 77,000
A 7,20,000 Stock 1,85,000
B 4,15,000 Sundry Debtors 1,80,000
C 3,45,000 14,80,000 Less: P.F.D.D. 9,000 1,71,000
Cash in hand 1,21,000

18,00,000 18,00,000

B retires on the above date and the following adjustments are agreed
upon his retirement.
 Stock was valued at ₹1,72,000
 Furniture and Fittings were valued at ₹ 78,000.
 An amount of ₹ 10,000 due from Mr. Deepak, a debtor, is to be
written off as no longer receivable. Provision for Bad Debts on
remaining debtors is to be maintained at the current rate.
 An old computer previously written off was sold for ₹ 1,500.
 Goodwill of the firm was valued at ₹ 2,00,000 but it was decided not
to show goodwill in the books of accounts.
 An adjustment is to be made in the capital accounts of the partners
to rectify a mistake committed in the past, in which A was credited
in excess by ₹ 3,000, while B and C were debited in excess of ₹ 2,000
and ₹ 1,000 respectively.
 B was paid ₹ 40,000 immediately on retirement and the balance
amount is to be settled in two equal annual instalments.
 A and C were to share future profits in the ratio of 3:2.
Prepare Revaluation Account, Capital Account and Balance Sheet of the
reconstituted firm.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 115

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 3
Ram, Mohan and Sohan were partners sharing profits and losses in the
ratio of 5:3:2. On 31st March, 2024, their Balance Sheet was:
Liabilities Amt. (₹) Assets Amt. (₹)
Creditors 30,000 Leasehold 1,25,000
Workmen Compensation Reserve 1,55,000 Patents 30,000
Capital A/cs: 3,50,000 Machinery 1,50,000
Ram 1,50,000 Stock 1,90,000
Mohan 1,25,000 Cash at Bank 40,000
Sohan 75,000
5,35,000 5,35,000
Sohan died on 1st August, 2024. It was agreed that:

 Goodwill of the firm is to be valued at ₹ 1,75,000.

 Machinery be valued at ₹ 1,40,000; Patents at ₹ 40,000; Leasehold at
₹ 1,50,000 on this date.
 For the purpose of calculating Sohan's share in the profits of 2024 –
25, the profits should be taken to have accrued on the same scale as
in 2023 – 24, which were ₹ 75,000.
 ₹ 51,000 to be paid to Sohan’s executors immediately

Prepare Revaluation Account, Sohan's Capital Account and Sohan’s

Executors’ A/c.
Question – 4
A, B and C were partners in a firm sharing profits in 3:2:1 ratio. The firm
closes its books on 31st March every year. B died on 12.06.2023. On B's
death, the goodwill of the firm was valued at ₹ 60,000. On B's death, his
share in the profits of the firm till the time of his death was to be
calculated on the basis of previous Years' profit which was ₹ 1,50,000.
Calculate B's share in the profit of the firm. Pass necessary Journal
entries for the treatment of goodwill and B's share of profit at the time of
his death.

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… Experience in Action

,
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Question – 5
A, B and C were partners sharing profit in the ratio of 3:1:1. Their
Balance Sheet as on 31st March, 2024, the date on which they dissolve
their firm, was as follows:
Liabilities Amt.(₹) Assets Amt.(₹)
Creditors 6,000 Sundry Assets 17,000

Loan 1,500 Stock 7,800

Capital A/cs: Debtors 24,200

A 27,500 Less: P.F.D.D. 1,200 23,000

B 10,000 Bills Receivable 1,000

C 7,000 44,500 Cash 3,200

52,000 52,000
It was agreed that:
 A to take over Bills Receivable at ₹ 800, debtors amounting to
₹ 20,000 at ₹ 17,200 and the creditors of ₹ 6,000 were to be paid by
him at this figure.
 B is to take over all stock for ₹ 7,000 and some sundry assets at
₹ 7,200 (being 10% less than the book value).

 C to take over remaining sundry assets at 90% of the book value and
assume the responsibility of discharge of loan together with accrued
interest of ₹ 300.
 The remaining debtors were sold to a debt collecting agency at 50%
of the book value.
 The expenses of realisation were ₹ 270.
Prepare Realisation A/c, Partners' Capital A/c and Cash A/c

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 117

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Question – 6
Parul, Payal and Priyanka are partners. They decided to dissolve the firm.
Pass the necessary Journal entries for the following after the various
assets (other than Cash and Bank) and outside liabilities have been
transferred to Realisation Account:
(i) There were total debtors of ₹ 76,000. A provision of Bad and
Doubtful Debts also stood in the books at ₹ 6,000. ₹ 12,000 debtors
proved bad and rest paid the amount due.
(ii) Parul agreed to pay off her husband's loan of ₹ 7,000 at a discount of
5%.
(iii) Total creditors of the firm were ₹ 40,000. Creditors worth ₹ 10,000
were given a piece of furniture costing ₹ 8,000 in full and final
settlement. Remaining creditors allowed a discount of 10%.
(iv) Payal had given a loan of ₹ 70,000 to the firm which was duly paid.
(v) A contingent liability (not provided for) of ₹ 4,000 was also
discharged.
(vi) The firm had a debit balance of ₹ 27,000 in the Profit and Loss
Account on the date of dissolution.

Question – 7
Sharma and Verma were partners in a firm sharing profits and losses in
the ratio of 3: 2. Their fixed capitals were ₹ 14,00,000 and ₹ 10,00,000
respectively. The partnership deed provided for the following:

(i) Interest on capital @ 10% per annum.

(ii) Interest on drawings @ 12% per annum.

During the year ended 31.03.2023, Sharma withdrew and Verma

withdrew ₹ 1,00,000. After preparing the accounts for the year ended
31.03.2023, it was realised that interest on capital was not allowed and
interest on drawings was not charged.

Showing your working notes clearly pass necessary journal entries in the
books of the firm to rectify the above error.
************************************************************************************************

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 118

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SCALE YOUR PREPAREDNESS

SELF ASSESSMENT TEST
Topic Accounting for Partnership
Day - 10
Time Allowed 2:00 HOURS (Evening Session)
Question – 1
A, B and C are partners sharing profits and the ratio of 2:3:5. On 31st
March 2023, their Balance Sheet was as follows.

Liabilities (₹) Assets (₹)

Creditors 1,92,000 Cash 54,000
Bills Payable 96,000 Stock 1,32,000
Capital A/cs: Debtors 1,98,000
A 1,08,000 Furniture 84,000
B 1,32,000 Investments 96,000
C 1,26,000 3,66,000 Machinery 1,02,000
P & L Account 72,000 Goodwill 60,000
7,26,000 7,26,000
They admit D into partnership on the following terms:

 D to bring ₹ 96,000 towards his capital for 1/6th share.

 Goodwill is to be valued at ₹ 72,000 and D brought his share of
goodwill in cash.
 Half of the goodwill was withdrawn.
 Bad debts was ₹ 6,000 and a provision for doubtful debts be created
at 5%.
 An unrecorded liability of ₹ 8,800 was paid by A.
 Appreciate investment by 15%
 Capital of the old partners to be adjusted by opening current
account on the basis of capital contributed by D.

Prepare Revaluation A/c and Partner’s Capital accounts

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 119

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Question – 2
Kabir, Kalim and Kapil were partners in a firm sharing profit & losses in
the ratio of 2:2:3. On 31st March 2023, their Balance Sheet was as
follows:

Liabilities Amount Assets Amount

Capital A/C s: Land and Building 5,00,000
Kabir - 6,25,000 Machinery 2,50,000
Kalim - 4,00,000 Furniture 3,50,000
Kapil - 5,25,000 15,50,000 Investments 1,00,000
Long - term Debts 2,00,000 Stock 2,00,000
Creditors 80,000 Debtors 20,000
Bank Overdraft 22,000 Bank 1,20,000
Employees Provident Fund 38,000 Deferred Advertisement Exp. 3,50,000
18,90,000 18,90,000
On 31st March 2023, Kalim retired from the firm and remaining partners
decided to carry on business. It was decided to revalue assets and
liabilities as under:

 Land and Building be appreciated by ₹ 2,40,000 and Machinery be

depreciated by10%.

50% of investments were taken by the retiring partner at book value.

 Provision for doubtful debts was to be made at 5% on debtors.

 Stock will be valued at market price which is ₹ 91,000.

 Goodwill of the firm be valued at ₹ 5,60,000. Kabir and Kapil decided

to share future profits and losses in the ratio of 2:3.

 The total capital of the new firm will be ₹ 32,00,000 which will be in
proportion of profit - sharing ratio of Kabir and Kapil.

 Gain on revaluation account amounted to ₹ 1,05,000.

Prepare Partner’s Capital accounts and Balance sheet of firm after Kalim’s
retirement

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 120

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Question – 3
Arti, Bharti and Suniti were partners sharing profits in the proportion of 3
: 2 : 1 and their Balance Sheet on March 31, 2023 stood as follows :
Liabilities Amount Assets Amount
Bills Payable 24,000 Cash in Hand 24,000
Creditors 28,000 Bank 27,400
Contingency Reserve 24,000 Debtors 24,000
Capitals : Bills Receivable 8,600
Arti 40,000 Stock 3,500
Bharti 25,000 Investment 26,500
Suniti 15,000 80,000 Buildings 42,000
1,56,000 1,56,000
Bharti died on June 12, 2023 and according to the deed of the said
partnership her executors are entitled to be paid as under:

 The capital to her credit at the time of her death and interest thereon
@ 10% per annum.

 Her proportionate share of reserves.

 Her share of profits for the intervening period will be based on the
sales during that period, which were calculated at ₹ 1,00,000. The
rate of profit during past three years had been 15 % on sales.

 Goodwill according to her share of profit to be calculated by taking

twice the amount of the average profit of the last three years less
20%. The profits of the previous years were:
31-3- 2021 – ₹ 8,200; 31- 3- 2022 – ₹ 9,000; 31- 3- 2023 – ₹ 9,800.

 The investments were sold at par and her executors were paid out.

Prepare Bharti’s Capital Account to be rendered to her executor.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 121

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Question – 4
Achal and Aanchal were partners in a firm sharing profits in the ratio of
3:5. On 31.3.2023 their Balance Sheet was as follows :

Liabilities ₹ Assets ₹
Capitals: Land and Building 4,00,000
Achal 3,00,000 Machinery 3,00,000
Aanchal 5,00,000 8,00,000 Debtors 2,22,000
Creditors 1,59,000 Cash at Bank 66,000
Employees Provident Fund 21,000 P&L Account 12,000
Workmen Compensation Fund 20,000
10,00,000 10,00,000
The firm was dissolved on 1.4.2023 and the assets and liabilities were
settled as follows:

 Land and Building realised ₹ 4,30,000 after charging brokerage ₹

20,000.

 Debtors realised ₹ 2,25,000 (with interest) and ₹ 1,000 were

recovered for bad debts written off in last year.

 There was an unrecorded investment which was taken over by a

creditor of ₹ 39,000 at an agreed value of ₹ 30,000 in full settlement.

 Aanchal took-over machinery at ₹ 2,80,000 for cash.

 Half of the remaining creditors were paid ₹ 4,000 less in full

settlement and the remaining creditors were paid full amount.

 Claim against workmen compensation fund determined at ₹ 15,000.

Prepare Realisation Account.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 122

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Question – 5
A, B and C were partners in a firm having capitals of ₹ 60,000; ₹ 60,000
and ₹ 80,000 respectively. Their Current Account balances were
A : ₹ 10,000; B : ₹ 5,000 and C : ₹ 2,000 (Dr.). According to the
partnership deed 10% of the profit is to be transferred to General Reserve
and the partners were entitled to interest on capital @ 5% p.a. C being the
working partner was also entitled to a salary of ₹ 12,000 p.a. The profits
were to be divided as follows :
(a) The first ₹ 20,000 in proportion to their capitals.
(b) Next ₹ 30,000 in the ratio of 5 : 3 : 2.
(c) Remaining profits to be shared equally.
The firm made a profit of ₹ 1,80,000 for the year ended 31st March, 2023
before charging any of the above items.
Prepare the Profit & Loss Appropriation Account and pass necessary
journal entry for apportionment of profit.

Question – 6
Mudit and Uday are partners in a firm sharing profits in the ratio 2:3.
Their capital accounts as on April 1, 2022 showed balances of ₹ 70,000
and ₹ 60,000 respectively. The drawings of Mudit and Uday during the
year 2022-23 were ₹ 16,000 and ₹ 12,000 respectively. Both the amounts
were withdrawn on 1st January 2023. It was subsequently found that the
following items had been omitted while preparing the final accounts for
the year ended 31st march 2023.
(a) Interest on capitals @ 6% p.a.;
(b) Interest on drawings @ 6% p.a.;
(c) Mudit was entitled to a commission of ₹ 4,000 for the whole year.
Showing your workings clearly pass a rectifying entry in the books of the
firm.
*********************************************************************************

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 123

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ACCOUNTANCY - XII
Day – 11
Question – 1
Under which main heads and sub-heads of Equity and Liabilities part of the Balance
Sheet as per Schedule III of a company are the following items shown:
(i) Debentures Redemption Reserve (ii) 12% Debentures
(iii) Calls-in-Advance (iv) Provision for Tax
(v) Trade Payables (vi) Tax Reserve
(vii) Interest on Calls-in-Advance (viii) Premium on Redemption of Debentures
(ix) Encashment of Employees Leave Payable on Retirement(x) Subsidy Reserve
(xi) Provision for Warranty Claims (xii) Excess application money due for refund
Solution:

S. No. Items Main Head Sub-Head

(i) Debentures Redemption Reserve

(ii) 12% Debentures

(iii) Calls-in-Advance

(iv) Provision for Tax

(v) Trade Payables

(vi) Tax Reserve

(vii) Interest on Calls-in-Advance

(viii) Premium on Redemption of

Debentures

(ix) Encashment of Employees Leave

Payable on Retirement

(x) Subsidy Reserve

(xi) Provision for Warranty Claims

(xii) Excess application money due

for refund

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 124

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Question – 2
Under which main heads and sub-heads of Equity and Liabilities part of the Balance
Sheet as per Schedule III of a company are the following items shown:
(i) Sundry Creditors (ii) Securities Premium Reserve
(iii) Advances received from Customers (iv) Capital Reserve
(v) Deferred Tax Liability (vi) Bills Payable
(vii) Forfeited Shares Account (viii) Unclaimed Dividend
(ix) Provision for Warranties (x) Mortgage Loan
(xi) Revaluation Reserve (xii) Commercial Paper
Solution:

S. No. Items Main Head Sub-Head

(i) Sundry Creditors

(ii) Securities Premium

Reserve

(iii) Advances received from

Customers

(iv) Capital Reserve

(v) Deferred Tax Liability

(vi) Bills Payable

(vii) Forfeited Shares Account

(viii) Unclaimed Dividend

(ix) Provision for Warranties

(x) Mortgage Loan

(xi) Revaluation Reserve

(xii) Commercial Paper

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 125

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Question – 3
Under which main heads and sub-heads of Assets part of the Balance Sheet as per
Schedule III of a company are the following items shown:
(i) Bank Balance (ii) Vehicles
(iii) Licenses and Franchise (iv) Accrued Income
(v) Stores and Spares (vi) Goodwill
(vii) Loose Tools (viii) Building
Solution:

S. No. Items Main Head Sub-Head

(i) Bank Balance

(ii) Vehicles

(iii) Licenses and Franchise

(iv) Accrued Income

(v) Stores and Spares

(vi) Mastheads and Publishing

Title

(vii) Loose Tools

Question – 4
Under which main heads and sub-heads of Assets part of the Balance Sheet as per
Schedule III of a company are the following items shown:
(i) Advance Income Tax (ii) Computer Software
(iii) Furniture and Fixture (iv) Investment in Debentures (Long-Term)
(v) Cash on Hand (vi) Plant and Equipment
Solution:

S. No. Items Main Head Sub-Head

(I) Advance Income Tax

(ii) Computer Software

(iii) Furniture and Fixture

(iv) Investment in Debentures

(v) Cash in Hand

(vi) Plant and Equipment

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 126

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Question – 5
Under what heads and sub-heads will the following items will appear in the Balance
Sheet of a company as per Schedule III, of the Companies Act, 2013:
(i) Public Deposit for 12 months; (ii) Mining Rights;
(iii) Interest accrued and due on debentures; (iv) Cheques and Drafts on hand;
(v) Investment in Property; (vi) Advance received from Customers;
(vii) Interest accrued but not due on Loans; (viii) Capital Reserve;
(ix) Calls-in-Advance; (x) Guarantees given by the Company;
(xi) Arrears of dividends on Cumulative Preference Shares.
Solution:

S. No. Item Main Head Sub-Head

(i) Public Deposits for 12 months

(ii) Mining Rights

(iii) Interest accrued and due on

Debentures

(iv) Cheques and Drafts on hand

(v) Investment in Property

(vi) Advance received from

Customers

(vii) Interest accrued but not due

on loans

(viii) Capital Reserve

(ix) Calls-in-Advance

(x) Guarantees given by the

Company

(xi) Arrears of dividends on

Cumulative Preference Shares

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 127

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Question – 6
Briefly explain any three limitations of Financial Statements Analysis.

Question – 7
Briefly explain any three objectives of Financial Statements Analysis.

Question – 8
Distinguish between Horizontal Analysis and Vertical Analysis.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 128

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ACCOUNTANCY - XII
Day – 12
Question – 1
From the following Balance Sheets of Universe Ltd. as at 31st March 2024 and 2023,
prepare a Comparative Balance Sheet.
UNIVERSE LTD.
Balance Sheets as at 31st March 2024 and 2023

Particulars Note No. 31.03.2024 31.03.2023

(₹) (₹)

I. EQUITY AND LIABILITIES

1. Shareholders' Funds

(a) Share Capital 20,00,000 15,00,000

(b) Reserves and Surplus 3,00,000 4,00,000

2. Non-Current Liabilities

Long-term Borrowings 9,00,000 6,00,000

3. Current – Liabilities

Trade Payables 3,00,000 2,00,000

Total 35,00,000 27,00,000

II. ASSETS

1. Non-Current Assets

Fixed Assets 20,00,000 15,00,000

(i) Tangible Assets 9,00,000 6,00,000

(ii) Intangible Assets

2. Current Assets 3,00,000 4,00,000

(a) Inventories

(b) Cash and Cash equivalents 3,00,000 2,00,000

Total 35,00,000 27,00,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 129

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COMPARATIVE BALANCE SHEET OF UNIVERSE LTD.

as at 31st March 2023 and 2024
Particulars Note 2022-23 2023-24 Absolute Change Percentage Change
No. (₹) (Increase/Decrease) (Increase/Decrease)
(₹)
(₹) %

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 130

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Question – 2
From the following Statement of Profit and Loss of Suntrack Ltd. for the years ended
31st March, 2024 and 2023, prepare comparative Statement of Profit and Loss.

Particulars Note No. 2023-24 (₹) 2022-23 (₹)

Revenue from Operations 20,00,000 12,00,000

Other Income 12,00,000 9,00,000

Expenses 13,00,000 10,00,000

Solution:
COMPARATIVE STATEMENT OF PROFIT AND LOSS
for the years ended 31st March, 2023 and 2024

Particulars Note 31st March, 31st March, Absolute Change Percentage

(₹) 2024 (₹) (Increase/ Change (Increase
No. 2023 Decrease) (₹) /Decrease) %

A B (C = B-A) D=C/A × 100

Question – 3
From the following 'Statement of Profit and Loss' for the years ended 31st March, 2024
and 2023, prepare a 'Comparative Statement of Profit and Loss' of Good Services Ltd.

Revenue from Operations 20,00,000 15,00,000

Other Income 10,00,000 4,00,000

Expenses 21,00,000 15,00,000

Rate of Income tax was 50%.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 131

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Solution:
GOOD SERVICES LTD.
COMPARATIVE STATEMENT OF PROFIT AND LOSS
for the years ended 31st March, 2023 and 2024

Particulars Note 31st March, 31st March, Absolute Change Percentage

No. 2022-23 2023-24 (Increase/ Change (Increase
(₹) (₹) Decrease) (₹) /Decrease) %
A B (C = B-A) D=C/A × 100

Question – 4
From the following information of Jupiter Ltd. for the years ended 31st March, 2024
and 2023, prepare a Common Size Statement of Profit and Loss and comment upon
the changes.

Particulars Note No. 31st March, 2024 (₹) 31st March, 2023 (₹)

Revenue from Operations 20,00,000 16,00,000

Employees Benefit Expenses 10,00,000 8,00,000

Other Expenses 1,00,000 2,00,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 132

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Jupiter Ltd.
COMMON-SIZE STATEMENT OF PROFIT AND LOSS
for the years ended 31st March, 2023 and 2024

Particulars Note Absolute Absolute Percentage of Revenue

No, Amount Amount from Operations

31 3 23 (₹) 31.3.24 (₹) 31.3.23(%) 31.3.24(%)

Question – 5
From the following information of Pluto Ltd. for the year ended 31st March 2024,
prepare a Common Size Statement of Profit and loss.

Particulars Note No. 31st March, 2024 (₹)

Revenue from Operations 30,00,000

Employees Benefit Expenses 15,00,000

Other Expenses 3,00,000

COMMON-SIZE STATEMENT OF PROFIT AND LOSS

for the years ended 31st March, 2024

Particulars Note No, Absolute Amount Percentage of Revenue

from Operations

31.3.24 (₹) 31.3.24(%)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 133

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Question – 6
From the following Balance Sheet of H.P. Ltd. as at 31st March, 2024, prepare
Comparative Balance Sheet:
Particulars Note No. 31/03/2024 (₹) 31/03/2023 (₹)
1. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital:
(i) Equity Share Capital 12,50,000 5,00,000
(ii) Preference Share Capital 2,50,000 2,50,000
(b) Reserves and Surplus 3,00,000 4,50,000
2. Non-Current Liabilities
Long-term Borrowings: 12% Debentures 9,50,000 5,50,000
Loan from Directors 2,50,000 2,00,000
3. Current Liabilities
(a) Short-term Borrowings 3,50,000 1,75,000
(b) Trade Payables 2,00,000 1,00,000
(c) Short-term Provisions 50,000 25,000
Total 36,00,000 22,50,000

II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment 22,50,000 15,00,000
(Fixed Assets)—Tangible
2. Current Assets
(a) Inventories 4,50,000 2,50,000
(b) Trade Receivables 8,00,000 4,50,000
(c) Cash and Cash Equivalents 1,00,000 50,000
Total 36,00,000 22,50,000

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COMMON-SIZE BALANCE SHEET OF H.P. LTD..

as at 31st March 2023 and 2024
Particulars Note 2022-23 2023-24 2022-23 (%) 2023-24 (%)
No. (₹) (₹)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 135

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ACCOUNTANCY - XII
Day – 13
Meaning of Liquidity Ratios:
The term 'liquidity' means the ability of the firm to pay its short-term obligations as
and when these become due for payment. Liquidity ratios are the ratios which are
calculated to assess the company's ability to repay its short term liabilities. Liquidity
ratios are also known as short-term solvency ratios. Types of liquidity ratios are: (i)
Current Ratio; (ii) Quick Ratio.
Purpose/Objective: The main purpose of calculating liquidity ratios is to assess the
company's ability to repay its short-term liabilities. These ratios are used to assess the
short-term solvency of the concern.
Current Ratio
Current Ratio Current Ratio refers to the relationship of current assets to current
liabilities. This ratio is also known as working capital ratio.
Formula:
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬
Current Ratio =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Current Assets Current Liabilities

Meaning: Current assets are the assets Meaning: Current liabilities are the
that are either in the form of cash or cash liabilities that are either due for settlement
equivalents or are expected to be realised within 12 months or are expected to be
within 12 months or within company's settled within company's normal operating
normal operating cycle. cycle.

Calculation: Current assets are calculated Calculation: Current liabilities are

by adding the following items: calculated by adding the following items:
(a) Current Investments (a) Short-term Borrowings (Bank overdraft,
(b) Inventories of raw materials / work-in- cash credit etc.)
progress / finished goods / stock-in-trade (b) Trade Payables (Sundry creditors and
(c) Trade Receivables (Sundry Debtors bills payable)
Less: Provision for doubtful debts & Bills (c) Other Current Liabilities (Current
Receivables) maturities of long-term debts, outstanding
(d) Cash and Cash Equivalents (Cash in expenses, income received in advance,
hand, cash at bank, cheques/drafts on unclaimed dividend etc.)
hand etc.) (d) Short-term Provisions (Proposed
dividend, provision for taxation etc.)
(e) Short-term Loans and Advances
(f) Other Current Assets like prepaid
expenses, accrued income, advance tax
etc. (Exclude fictitious assets such as
underwriting commission, Discount on
issue of shares/ debentures, shares issue
expenses etc.)

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Liquid Ratio
Liquid Ratio refers to the relationship between liquid assets and current liabilities.
This ratio is also known as Quick Ratio or Acid Test Ratio.
Formula:
𝐋𝐢𝐪𝐮𝐢𝐝 𝐀𝐬𝐬𝐞𝐭𝐬
Liquid Ratio =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Liquid Assets = Current Assets - Inventories - Other Current Assets (like prepaid
expenses, advance tax etc.) Significance: This ratio helps the enterprise to assess its
short-term financial position in a better way. A liquid ratio of 1 : 1 is generally
considered to be acceptable. Higher the liquid ratio better it is as it signifies higher
liquidity.

Meaning of Solvency Ratios: The term 'solvency' refers to the financial ability of the
enterprise to meet its long-term obligations. The ratios used to assess the firm's ability
to meet its long term obligations are called 'solvency ratios'. Some of the important
solvency ratios are: (i) Debt to equity ratio; (ii) Debt to capital employed ratio; (iii) Total
assets to debt ratio; (iv) Proprietary ratio and (v) Interest coverage ratio.
Objectives of Calculating Solvency Ratios:-
(i) To measure the long-term financial position of the business.
(ii) To assess the firm's ability to repay its long-term liabilities on maturity.
(iii) To look at the relationship between external funds and internal funds.

Debt to Equity Ratio

Debt to equity ratio is the ratio which establishes the relationship between long term
debts and shareholder's funds. This ratio is calculated as follows:
Formula:
𝐃𝐞𝐛𝐭
Debt to Equity Ratio =
𝐄𝐪𝐮𝐢𝐭𝐲
How to calculate debt and equity?
Debt: Debt means long-term (non-current) liabilities towards the outsiders. It is
calculated as follows:
Debt = Long-term Borrowings (Debentures, long-term loans from banks and financial
institutions, public deposits etc.) + Other Long-term Liabilities + Long-term Provisions
Equity: Equity means shareholder's funds. It is calculated as follows:
Equity = Equity Share Capital + Preference Share Capital + Reserves and Surplus or
Equity = Non-Current Assets + Working Capital - Non-Current Liabilities

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Debt to Capital Employed Ratio

Debt to capital employed ratio is the ratio which measures the relationship between
long term debts and the capital employed.
Formula:
𝐋𝐨𝐧𝐠−𝐭𝐞𝐫𝐦 𝐃𝐞𝐛𝐭
Debt to Capital Employed Ratio =
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝
Capital Employed = Long-term Debt + Shareholders' Funds or
= Total Assets - Current Liabilities
Total Assets to Debt Ratio
Total assets to debt ratio is the ratio which measures the relationship between total
assets and long term debts.
Formula:
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
Total Assets to Debt Ratio =
𝐃𝐞𝐛𝐭
Total Assets = Non-Current Assets + Current Assets
Debt: Debt means long-term (non-current) liabilities towards the outsiders. It is
calculated as follows:
Debt = Long-term Borrowings (Debentures, long-term loans from banks and financial
institutions, public deposits etc.) + Other Long-term Liabilities + Long-term Provisions
Proprietary Ratio
Proprietary ratio is the ratio which establishes the relationship between proprietor's
funds and total assets of the firm.
Formula:
𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬’ 𝐅𝐮𝐧𝐝𝐬
Proprietary Ratio =
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
Components: There are two components of this ratio - (i) Proprietors' funds and (ii)
Total assets. These are calculated as under:
Proprietors' Funds = Equity Share Capital + Preference Share Capital + Reserves and Surplus
or
Non-Current Assets + Working Capital - Non-Current Liabilities
Total Assets = Non-Current Assets + Current Assets

Interest Coverage Ratio

Interest coverage ratio is the ratio which establishes the relationship between
'Net profit before interest and tax' and 'Interest on long-term borrowings'. It shows how
many times interest charges are covered by net profit before interest and tax.
Formula:
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐁𝐞𝐟𝐨𝐫𝐞 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐚𝐧𝐝 𝐓𝐚𝐱
Interest Coverage Ratio =
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐨𝐧 𝐋𝐨𝐧𝐠 𝐓𝐞𝐫𝐦 𝐁𝐨𝐫𝐫𝐨𝐰𝐢𝐧𝐠𝐬

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Meaning of Activity Ratios: The performance of a company is judged on the basis of

activities performed or turnover achieved by it. The ratios, which are calculated to
measure the efficiency of an organisation in terms of its activities or turnover, are
called 'activity ratios' or 'turnover ratios'. These ratios show how effectively the firm is
using its resources to generate sales, Some of the important activity ratios are:
(i) Inventory Turnover Ratio; (ii) Trade Receivables Turnover Ratio; (iii) Trade Payables
Turnover Ratio; (iv) Fixed Assets Turnover Ratio; (v) Net Assets Turnover Ratio; and (vi)
Working Capital Turnover Ratio. Higher the activity or turnover ratios the better it is.

Inventory Turnover Ratio:

Inventory turnover ratio (or Stock turnover ratio) is the ratio which shows the
relationship between cost of revenue from operations and average inventory. This ratio
indicates the number of times the inventory of a firm is converted into sales during the
year.
Formula:
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Inventory Turnover Ratio =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲
Cost of Revenue from Operations = Cost of Materials Consumed + Purchases of Stock-
in-Trade + Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-
Trade + Direct Expenses
Or
Cost of Revenue from Operations = Opening Inventory + Net Purchases + Direct
Expenses - Closing Inventory
Or
Cost of Revenue from Operations = Net Revenue from Operations - Gross Profit
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲
Average Inventory =
𝟐
Trade Receivables Turnover Ratio:
Trade receivables turnover ratio is the ratio which establishes the relationship
between net credit revenue from operations (i.e. net credit sales) and average trade
receivables.
Formula:
𝐍𝐞𝐭 𝐂𝐫𝐞𝐝𝐢𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Trade Receivables Turnover Ratio = = ...times
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐓𝐫𝐚𝐝𝐞 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞𝐬
Net Credit Revenue from Operations = Net Revenue from Operations - Cash Revenue
from Operations
Trade Receivables = Debtors + Bills Receivables
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐓𝐫𝐚𝐝𝐞 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞𝐬 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐓𝐫𝐚𝐝𝐞 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞𝐬
Average Trade Receivables =
𝟐
𝟑𝟔𝟓 𝐨𝐫 𝟏𝟐
Average Collection Period = = ... days/months
𝐓𝐫𝐚𝐝𝐞 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨

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Trade Payables Turnover Ratio

Trade Payables Turnover Ratio is the ratio which establishes the relationship between
net credit purchases and average trade payables. This ratio is also known as
'Creditors Turnover Ratio'.
Formula:
𝐍𝐞𝐭 𝐂𝐫𝐞𝐝𝐢𝐭 𝐏𝐮𝐫𝐜𝐡𝐚𝐬𝐞𝐬
Trade Payables Turnover Ratio = = ... times
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐓𝐫𝐚𝐝𝐞 𝐏𝐚𝐲𝐚𝐛𝐥𝐞𝐬
Trade Payables = Creditors + Bills Payables
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐓𝐫𝐚𝐝𝐞 𝐏𝐚𝐲𝐚𝐛𝐥𝐞𝐬 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐓𝐫𝐚𝐝𝐞 𝐏𝐚𝐲𝐚𝐛𝐥𝐞𝐬
Average Trade Payables =
𝟐
𝟑𝟔𝟓 𝐨𝐫 𝟏𝟐
Average Payment Period = = ... days/months
𝐓𝐫𝐚𝐝𝐞 𝐏𝐚𝐲𝐚𝐛𝐥𝐞𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨

Net Assets Turnover Ratio.

Net assets turnover ratio reflects the relationship between revenue from operations
and net assets. Net assets turnover ratio is also known as capital employed turnover
ratio.
Formula:
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Net Assets Turnover Ratio = = ... times
𝐍𝐞𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 (𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝)

Fixed Assets Turnover Ratio

Fixed assets turnover ratio reflects the relationship between revenue from operations
and net fixed assets.
Formula:
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Fixed Assets Turnover Ratio = = ... times
𝐍𝐞𝐭 𝐅𝐢𝐱𝐞𝐝 𝐀𝐬𝐬𝐞𝐭𝐬

Working Capital Turnover Ratio

Working Capital Turnover Ratio is the ratio which reflects the relationship between
revenue from operations and working capital.
Formula:
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Working Capital Turnover Ratio = = ... times
𝐖𝐨𝐫𝐤𝐢𝐧𝐠 𝐂𝐚𝐩𝐢𝐭𝐚𝐥
Working Capital = Current Assets - Current Liabilities

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Meaning of Profitability Ratios Profitability ratios are those ratios which measure
the profit earning capacity of the firm. Examples of profitability ratios are: (i) Gross
Profit Ratio; (ii) Net Profit Ratio; (iii) Operating Profit Ratio etc.
Gross Profit Ratio
Gross Profit Ratio: Gross Profit ratio is the ratio which measures the relationship
between gross profit and net revenue from operations (i.e. net sales). This ratio is
usually expressed in terms of percentage.
Formula:
𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭
Gross Profit Ratio = × 100
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Gross Profit = Net Revenue from Operations - Cost of Revenue from Operations

Net Revenue from Operations (Net Sales) = Gross Revenue from Operations (Gross
Sales) - Sales Returns

Net Profit Ratio.

Net Profit Ratio is the ratio which measures the relationship between net profit and
net revenue from operations (net sales). This ratio is usually expressed in terms of
percentage.
Formula:
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
Net Profit Ratio = × 100
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬

Operating Ratio
Operating Ratio is the ratio which measures the relationship between operating cost
and net revenue from operations (net sales). This ratio is usually expressed in terms of
percentage.
Formula:
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐂𝐨𝐬𝐭
Operating Ratio = × 100
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬
Operating Cost = Cost of Revenue from Operations (Cost of Goods Sold) + Operating
Expenses Note: Operating expenses = Office and administration expenses + Selling
and distribution expenses.

Net Revenue from Operations = Revenue from Operations - Sales Returns

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Operating Profit Ratio

Operating Profit Ratio is the ratio which measures the relationship between operating
profit and net revenue from operations (net sales). This ratio is usually expressed in
terms of percentage.
Formula:
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭
Operating Profit Ratio = × 100
𝐍𝐞𝐭 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧𝐬

Operating Profit = Net Profit + Non-operating Expenses - Non-operating Incomes Or

Net Revenue from Operations - Operating Cost Or

Gross Profit - Operating Expenses

Net Revenue from Operations = Revenue from Operations - Sales Returns

Return on Investment Ratio

Return on Investment (or Return on Capital Employed) Ratio is the ratio which
measures the relationship between net profit (before interest, tax and dividend) and
capital employed. This ratio is usually expressed in terms of percentage.
Formula:

𝐏𝐫𝐨𝐟𝐢𝐭 𝐛𝐞𝐟𝐨𝐫𝐞 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭,𝐓𝐚𝐱 𝐚𝐧𝐝 𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝

Return on Investment (ROI) = × 100
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝
Capital Employed can be computed by any of the following methods:
Method I (Liabilities Approach):
Capital Employed = Shareholders' funds + Non-current liabilities - Non-trade
investments

OR

= Equity share capital + Preference share capital + Reserves and surplus + Long-term
borrowings + Longterm provisions - Non-trade Investments

Method 2 (Assets Approach):

Capital Employed = Non-Current Assets (excluding non-trade investments & fictitious

assets) + Working Capital (i.e. Current Assets - Current Liabilities)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 142

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question – 1
Calculate trade receivables turnover ratio from the following information
Cost of revenue from operations ₹ 4,50,000, Gross profit on sales 20%, Cash sales
25% of net credit sales, Opening trade receivables ₹ 60,000, Closing trade receivables
₹ 90,000.

Question – 2
From the details given below, calculate Inventory Turnover Ratio and Operating Ratio:
Opening Inventory ₹ 28,000 Carriage Inwards ₹ 4,000
Closing Inventory ₹ 22,000 Employees' Benefit Expenses ₹ 4,000
Purchases ₹ 40,000 Depreciation ₹ 2,000
Revenue from Operations ₹ 80,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 143

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Question – 3
Calculate ‘Return on Investment’ and ‘Debt to Equity Ratio’ from the undermentioned
information:
Net Profit after Interest and Tax ₹ 12,00,000
10% Debentures ₹ 20,00,000
Tax Rate 40%
Capital Employed ₹ 1,60,00,000

Question – 4
Bright International Limited has Current Liabilities of ₹ 90,000. After purchasing
stock-in-trade of ₹10,000 on credit, its current ratio become 2:1. Determine the size of
current assets and working capital after and before the acquisition of inventories.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 144

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Question – 5
Calculate value of opening stock and closing stock from the following information
Sales ₹ 5,00,000, Gross profit is 20% of net sales. Return inward is ₹ 20,000. Return
outward is ₹ 50,000. Purchase ₹ 2,50,000 and Opening Stock is 2 times of the closing
stock.

Question – 6
From the following information, Compute Debt Equity Ratio and Current ratio.
Long-term Borrowings ₹ 3,00,000
Current Liabilities ₹ 50,000
Inventory ₹ 6,000
Prepaid Expenses ₹ 4,000
Non-current Assets ₹ 3,60,000
Current Assets ₹ 90,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 145

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Question – 7
From the following information calculate the Working Capital Turnover Ratio and
Fixed Assets Turnover
Ratio.
Cost of Revenue from Operations ₹ 5,00,000
Gross Profit Ratio 20%
Fixed Assets ₹ 5,00,000
Capital Employed ₹ 7,50,000

Question – 8
From the following information, calculate Current Ratio and Quick Ratio.
Inventory Turnover Ratio- 8 times; Cost of Revenue from Operation- ₹ 20,00,000; Gross Profit. –
20% on Revenue from Operation; Capital Employed ₹ 10,00,000;Working Capital Turnover Ratio-
12.5 times; Total Assets- ₹ 15,00,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 146

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Question – 9
Debt to Capital Employed Ratio of a company is 0.4: 1. State giving reasons, which of
the following will improve, reduce or not change the ratio?
i. Sale of Machinery at a loss of₹ 50,000.
ii. Purchase of Stock-in-Trade on credit of two months for ₹ 80,000.
iii. Conversion of Debentures into Equity Shares of ₹ 5,00,000.
iv. Purchase of Fixed Assets for ₹ 4,00,000 on a long-term deferred payment basis.

Question – 10
Current Ratio of GTS Food Private Limited is 3:1. State giving reasons, which of the
following would improve, reduce or not change the ratio?
i. Issue of bonus shares out of profits;
ii. Redemption of Preference Shares out of proceeds from fresh issue of shares of
equal amount;
iii. Revenue from Operations, i.e., Sale of goods for ₹ 80,000 on credit of 1 month.
(Cost of goods ₹ 60,000).

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 147

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Question – 11
The current ratio of a company is 2: 1. State giving reasons which of the following
would improve, reduce or not change the ratio:
i. Repayment of trade payables.
ii. Sale of Motor vehicles at a loss of 20%.
iii. Sale of goods at a profit of 10%.
iv. Purchase of Machinery for ₹ 10,000 on credit of 2 months.

Question – 12
From the information given below, calculate Trade Receivables Turnover Ratio:
Credit Revenue from Operations, i.e., Credit Sales ₹ 8,00,000; Opening Trade
Receivables ₹ 1,20,000; and Closing Trade Receivables ₹ 2,00,000.
State, giving reason, which of the following would increase, decrease or not change
Trade Receivables Turnover Ratio:
i. Collection from Trade Receivables ₹ 40,000.
ii. Credit Revenue from Operations, i.e., Credit Sales ₹ 80,000.
iii. Sales Return ₹ 20,000.
iv. Credit Purchase ₹ 1,60,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 148

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Question – 13
Calculate Inventory Turnover Ratio from the following information:
Opening Inventory ₹ 58,000; Revenue from Operations ₹ 6,40,000; and Closing
Inventory ₹ 62,000 and Gross Profit Ratio 25%.
State, giving reason, which of the following transactions would (i) increase, (ii)
decrease, (iii) neither increase nor decrease the Inventory Turnover Ratio:
i. Sale of goods for ₹ 40,000 (Cost ₹ 32,000).
ii. Increase in the value of Closing Inventory by ₹ 40,000.
iii. Goods purchased for ₹ 80,000.
iv. Purchases Return ₹ 20,000.
v. Goods costing ₹ 10,000 withdrawn for personal use.
vi. Goods costing ₹ 20,000 distributed as free samples.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 149

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Question – 14
Debt to Capital Employed Ratio of a company is 0.4: 1. State giving reasons, which of
the following will improve, reduce or not change the ratio₹
i. Sale of Machinery at a loss of₹ 50,000.
ii. Purchase of Stock-in-Trade on credit of two months for ₹ 80,000.
iii. Conversion of Debentures into Equity Shares of ₹ 5,00,000.
iv. Purchase of Fixed Assets for ₹ 4,00,000 on a long-term deferred payment basis.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 150

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Question – 15
Assuming that the Debt-to-Equity Ratio is 2 :1, state, giving reasons, which of the
following transactions would (i) Increase; (ii) Decrease; (iii) Not alter Debt to Equity
Ratio:
Issue of new shares for cash.
Conversion of debentures into equity shares.
Sale of a fixed asset at profit.
Purchase of a fixed asset on long-term deferred payment basis.
Payment to creditors.

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ACCOUNTANCY - XII
Day – 14
CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)
Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items —
Adjustments for non-cash and non-operating items:
Add: Items to be added:
- Depreciation on Tangible Fixed Assets —
- Preliminary Expenses written off —
- Discount on issue of Share and Debentures written off —
- Goodwill, Patents and Trademarks Amortised —
- Interest on Long-term Borrowings —
- Increase in Provision for Doubtful Debts —
- Loss on Sale of Fixed Assets — —
Less: Items to be subtracted:
- Interest Income (—)
- Dividend Income (—)
- Rental Income (—)
- Profit on sale of Fixed Assets (—) (—)
Operating Profit before Working Capital Changes —
Add: Working Capital Changes to be added:
Decrease in Current Assets (Value of individual assets) —
Increase in Current Liabilities (Value of Individual Liabilities) — —
Less: Working Capital Changes to be subtracted:
Increase in current Assets (Value of individual assets) (—)
Decrease in Current Liabilities (Value of Individual Liabilities) (—) (—)
Cash Generated from Operations before Tax —
Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2) (—)
Cash from (or used in) Operating Activities before extra- —
ordinary items
Add: Extra ordinary inflows —
Less: Extra ordinary outflows (—)
Net Cash from (or used in) Operating Activities —

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Working Note
1. Calculation of Net Profit before Tax and Extraordinary Item.
Particulars Amount

Net Profit / Surplus of the current year (after appropriations)CY-PY —

Add: Transfer to Reserves —
(all transfers to reserves from balances of the statement of Profit & Loss)
Add: Proposed dividend for previous year —
Add: Interim dividend paid during the year —
Add: Provisions for tax made during the current year (note no. 2) —
Less: Refund of tax during the current year —
Net Profit before Tax —
Add: Extraordinary Losses —
Less : Extraordinary Income (—)
Net Profit before Tax and Extraordinary Item. —

2. Provision for Taxation Account

Particulars Particulars
To Bank A/c -- By Balance b/d --
(Tax Paid) (Opening Balance)
To Balance c/d -- By Statement of Profit and Loss --
(Closing Balance) (Provision made)
-- --

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 153

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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EXAMPLE
From the following Summarised Balance Sheets of a company, calculate cash flow
from operating activities.
Particulars Note No. 31.3.2024 (₹) 31.3.2023(₹)
I. Equity and Liabilities
1. Shareholders' Funds
(a) Share Capital 1,00,000 1,00,000
(b) Reserves and Surplus 1 60,000 30,000
2. Non – Current Liabilities
Long – term Borrowings 2 80,000 60,000
3. Current Liabilities
Trade Payables 45,000 60,000
Other Current Liabilities 45,000 40,000
Total 3,30,000 2,90,000
II. ASSETS
1. Non – Current Assets
(a) Fixed Assets
Tangible (Machinery) 1,90,000 1,50,000
(b) Non – Current Investments 30,000 40,000
2. Current Assets
(a) Inventories 55,000 40,000
(b) Trade Receivables 45,000 40,000
(c) Cash and Cash Equivalents 10,000 20,000
Total 3,30,000 2,90,000
Notes to Accounts:
Particulars 31.3.2024 31.3.2023
(₹) (₹)
1. Reserves and Surplus
Surplus i.e. Balance in Statement of Profit and Loss 60,000 30,000
2. Long – term Borrowings
6% Debentures 80,000 60,000
Additional Information:
(i) A piece of machinery costing ₹ 5,000, on which depreciation of ₹ 2,000 had been
charged was sold for ₹ 1,000. Depreciation charged during the year was ₹ 17,000.
(ii) New Debentures have been issued on 1st August, 2023.
(iii) Interim Dividend paid ₹ 10,000.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 154

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)

Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items (note No. 1) 40,000
Adjustments for non-cash and non-operating items:
Add: Items to be added:
- Depreciation on Tangible Fixed Assets 17,000
- Interest on Long-term Borrowings 4,400
6 4 6 8
(60,000 x x12 ) + (80,000 x x12 )
100 100

- Loss on Sale of Fixed Assets (5,000 – 2,000) – 1,000 2,000 23,400

Less: Items to be subtracted:
Operating Profit before Working Capital Changes 63,400
Add: Working Capital Changes to be added:
Increase in Other Current Liabilities 5,000 5,000
Less: Working Capital Changes to be subtracted:
Increase in Trade Receivables (5,000)
Increase in Inventories (15,000)
Decrease in Trade Payables (15,000) (35,000)
Cash Generated from Operations before Tax 33,400
Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2) (—)
Net Cash from (or used in) Operating Activities 33,400

Working Note
1. Calculation of Net Profit before Tax and Extraordinary Item.
Particulars Amount

Surplus of the current year (after appropriations) (60,000 – 30,000) 30,000

Add: Interim dividend paid during the year 10,000
Net Profit before Tax and Extraordinary Item. 40,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 155

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

CASH FLOWS FROM INVESTING ACTIVITIES

Cash Flow from Investing Activities ₹

- Proceeds from Sale of Tangible Fixed Assets -

- Proceeds from Sale of Intangible Fixed Assets -
- Proceeds from Sale of Non-Current Investments -
- Interest Received -
- Dividend Received -
- Rent Received -
- Purchase of Tangible Fixed Assets (-)
- Purchase of Intangible Fixed Assets like goodwill (-)
- Purchase of Non-Current Investments (-)
Net Cash Generated from / used in Investing Activities ----

EXAMPLE
The following balances appeared in the books of Bharat Ltd:
31.3.2024 31.3.2023
₹ ₹
Plant (at cost) 9,70,000 7,50,000
Accumulated Depreciation on Plant 2,40,000 1,80,000
Land & Building (at present / book value ) 4,80,000 4,00,000
10% Investments 3,00,000 2,50,000
Goodwill 75,000 1,00,000
Patents 1,25,000 1,00,000
Additional Information:
 During the year 2023-24, Plant costing ₹ 1,45,000; Accumulated Depreciation
thereon ₹ 70,000, was sold for ₹ 35,000.
 Investment costing ₹ 25,000 sold at a profit of 20%.
 Patents amortised during the year ₹25,000.
 Building purchased for ₹ 2,00,000.
 Building sold at a loss of 20,000.
 Depreciation to be charged on opening balance of building @ 10%
You are required to:
Calculate Net Cash from investing activities

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 156

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Plant A/c (at cost)

To Balance B/d 7,50,000 By Accumulated Dep. A/c 70,000

To Bank (Purchases)/ BF 3,65,000 (Acc. Dep. on Disposal Assets )
By Bank (Sale Price) 35,000
By Statement of P&L (Loss) 40,000
By Balance C/D 9,70,000
11,15,000 11,15,000
Accumulated Depreciation on Plant A/c

To Plant A/c 70,000 By Balance B/D 1,80,000

(Acc. Dep. on Disposal Assets ) By Depreciation 1,30,000
To Balance C/D 2,40,000 (Charged during the year)
3,10,000 3,10,000
Building A/c (at book value)

To Balance B/d 4,00,000 By Bank (Sale Price) 60,000

To Bank (Purchases) 2,00,000 By Depreciation (Charged) 40,000
By Statement of P&L (Loss) 20,000
By Balance C/D 4,80,000
6,00,000 6,00,000
10% Investments A/c

To Balance B/d 2,50,000 By Bank (Sale Price) 30,000

To Statement of P&L (profit) 5,000 By Statement of P&L (Loss) --
To Bank (Purchases) 75,000 By Balance C/D 3,00,000
3,30,000 3,30,000
Patents A/c (at book value)

To Balance B/d 1,00,000 By Amortisation (Charged) 25,000

To Bank (Purchases) 50,000 By Balance C/D 1,25,000
1,50,000 1,50,000

CASH FLOWS FROM INVESTING ACTIVITIES

Cash Flow from Investing Activities ₹
- Proceeds from Sale of Tangible Fixed Assets- Plant 35,000
- Proceeds from Sale of Tangible Fixed Assets- Building 60,000
- Proceeds from Sale of Non-Current Investments 30,000
- Interest on Investment – (2,50,000 x 10%) 25,000
- Purchase of Tangible Fixed Assets – Plant (3,65,000)
- Purchase of Tangible Fixed Assets – Building (2,00,000)
- Purchase of Intangible Fixed Assets – Patents (50,000)
- Purchase of Non-Current Investments (75,000)
Net Cash used in Investing Activities (5,40,000)

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 157

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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CASH FLOWS FROM FINANCING ACTIVITIES

Cash Flow from Financing Activities ₹
- Proceeds from issue of Shares -
- Proceeds from issue of Debentures -
- Proceeds from Other Long-term Borrowings -
- Proceeds from Short-term Borrowings- Bank Loan, Bank Overdraft -
- Final Dividend Paid (-)
- Interim Dividend Paid (-)
- Interest on Long-term borrowings paid (-)
- Repayment of Loan (-)
- Redemption of Debentures (-)
- Redemption of Preference Shares (-)
- Buyback of Equity Shares (-)
Net Cash generated from / used in Financing Activities -----

EXAMPLE
The following balances appeared in the books of India Ltd:
31.3.2024 31.3.2023
₹ ₹
Equity Share Capital 8,00,000 4,00,000
12% Preference Share Capital 4,00,000 5,00,000
15% Debentures 5,00,000 3,00,000
10% Bank Loan 2,00,000 2,00,000
Short-term Borrowings – Bank O.D. 50,000 20,000
Public Deposits 50,000 1,00,000
Securities Premium Reserve 30,000 20,000
Additional Information:
 Equity shares issued on 31st March 2024 at 10% Premium.
 Preference shares were redeemed on 1st April, 2023 at 10% premium.
 Debentures issued on 1st October, 2023 at 10% Discount.
 Equity dividend paid @ 10%.

You are required to:

Calculate Net Cash from financing activities

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 158

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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CASH FLOWS FROM FINANCING ACTIVITIES

Cash Flow from Financing Activities ₹
- Proceeds from issue of Equity Shares (4,00,000 + 40,000) 4,40,000
- Proceeds from issue of Debentures (2,00,000 – 20,000) 3,80,000
- Proceeds from Short-term Borrowings- Bank Overdraft 30,000
- Final Dividend Paid on Equity Shares (4,00,000 x 10% ) (40,000)
- Final Dividend Paid on Preference Shares (4,00,000 x 12% ) (48,000)
- Interest on Debentures paid (3,00,000 x 15% x 6/12 ) + (5,00,000 x 15% x 6/12) (60,000)
- Interest on Bank Loan paid ( 2,00,000 x 10%) (20,000)
- Repayment of Public Deposits (50,000)
- Redemption of Preference Shares (1,00,000 + 10,000) (1,10,000)
Net Cash generated from Financing Activities 5,22,000

Question – 1
Jaya an alumni of Apex School initiated her startup Super Moon Private Limited in
2024. The net profit after tax of Super Moon Private Limited for the year ended 31st
March, 2024 was ₹ 3,40,000. Following is the extract of Balance Sheet of Super Moon
Private Limited as at 31st March, 2024

Particulars 31 March 2024 (₹) 31 March 2023 (₹)

Inventories 69,000 72,000
Trade Receivables 94,000 61,000
Prepaid Expenses 14,000 3,000
Trade payables 82,000 78,000
Provision for Tax 13,000 19,000
Depreciation charged on plant and machinery ₹ 49,000, insurance claim received
₹ 20,000 and gain on sale of investments of ₹ 8,000 appeared in the statement of profit
and loss for the year ended 31st March, 2020.
You are required to
(i) Calculate net profit before tax and extraordinary items.
(ii) Calculate operating profit before working capital changes.
(iii) Calculate cash flow from operating activities.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 159

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)

Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items (note No. 1)
Adjustments for non-cash and non-operating items:
Add: Items to be added:

Less: Items to be subtracted:

Operating Profit before Working Capital Changes

Add: Working Capital Changes to be added:

Less: Working Capital Changes to be subtracted:

Cash Generated from Operations before Tax

Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2)
Net Cash from (or used in) Operating Activities
Calculation of Net Profit before Tax and Extraordinary Item.
Particulars Amount

Net Profit / Surplus of the current year (after appropriations)CY-PY

Add:
Add:
Add:
Add:
Net Profit before Tax
Add: Extraordinary Losses
Less : Extraordinary Income
Net Profit before Tax and Extraordinary Item. —

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 160

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 2
Following information is related to Vishwas Ltd.:
STATEMENT OF PROFIT & LOSS for the year ended 31st March, 2023
Particulars Note No. ₹
I. Revenue from Operations (Net Sales) 30,00,000
II. Other Income 1 45,000
III. Total Revenue (I + II) 30,45,000
IV. Expenses:
(a) Purchases of Stock-in-Trade 23,03,000
(b) Change in Inventories of Stock-in-Trade 2 (16,000)
(c) Depreciation and Amortisation Expenses 1,85,000
(d) Other Expenses 3 3,29,000
Total Expenses 28,01,000
V. Profit before Tax (III - IV) 2,44,000
VI. Less: Provision for Tax 64,000
VII. Profit after Tax (V-VI) 1,80,000

Notes to Accounts
Particulars ₹
1. Other Income
(a) Dividend Received 5,000
(b) Gain (Profit) on Sale of Plant 40,000
45,000
2. Change in Inventories of Stock-in-Trade
Opening Inventories 2,84,000
Less: Closing Inventories 3,00,000
(16,000)
3. Other Expenses
(a) Office Expenses 58,000
(b) Selling Expenses 2,35,000
(c) Loss on Sale of Assets 36,000
3,29,000
Other Information: 31st March, 2023 (₹) 31st March, 2022 (₹)
Trade Payables 2,78,000 2,50,000
Trade Receivables 4,52,000 4,15,000
Office Expenses Outstanding … 5,000
Selling Expenses Outstanding 25,000 22,000
Calculate Cash Flow from Operating Activities.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 161

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)

Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items (note No. 1)
Adjustments for non-cash and non-operating items:
Add: Items to be added:

Less: Items to be subtracted:

Operating Profit before Working Capital Changes

Add: Working Capital Changes to be added:

Less: Working Capital Changes to be subtracted:

Cash Generated from Operations before Tax

Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2)
Net Cash from (or used in) Operating Activities
Calculation of Net Profit before Tax and Extraordinary Item.
Particulars Amount

Net Profit / Surplus of the current year (after appropriations)CY-PY

Add:
Add:
Add:
Add:
Net Profit before Tax
Add: Extraordinary Losses
Less : Extraordinary Income
Net Profit before Tax and Extraordinary Item. —

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 162

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 3
Jalco Ltd. provided the following information, calculate Net Cash Flow from Financing
Activities:

Particulars 31st March, 2023 (₹) 31st March, 2022 (₹)

Equity Share Capital 13,50,000 10,00,000

12% Debentures 2,00,000 1,00,000
Additional Information:
1. Interest paid on debentures ₹ 19,000.
2. Dividend paid in the year ₹ 50,000.
3. During the year, Jalco Ltd. issued bonus shares in the ratio of 5:1 by capitalising
reserve.

CASH FLOWS FROM FINANCING ACTIVITIES

Cash Flow from Financing Activities ₹

Net Cash generated from Financing Activities

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 163

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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Question – 4
From the following information of Jaipur Products Private Limited, prepare Cash Flow
Statement.

Balance Sheet of Jaipur Products Private Limited as at 31.03.2022

Particulars Note 31 March 31 March
No. 2022 (₹) 2021 (₹)
I. Equity And Liabilities
1. Shareholder’s Funds:
(a) Share Capital 3,20,000 2,40,000
(b) Reserves and Surplus 1 1,36,000 1,24,000
2. Non-Current Liabilities
Long Term Borrowing – 12% Debentures 2,00,000 1,20,000
3. Current Liabilities
(a) Trade Payables 88,000 68,000
(b) Other Current Liabilities
(c) Short-Term Provisions (Provisions for Tax) 12,000 8,000
Total 7,56,000 5,60,000
II. Assets
1. Non-Current Assets:
(a) Property, Plant & Equipments & Intangible
Assets:
(i) Property, Plant & Equipment – Machines 3,36,000 2,64,000
(ii) Intangible Assets – Goodwill 56,000 80,000
(b) Long-Term Investments – 10% Govt. Bonds 64,000 24,000
2. Current Assets
(a) Inventories 40,000 32,000
(b) Trade Receivables 1,56,000 64,000
(c) Cash & Cash Equivalents 1,04,000 96,000
Total 7,65,000 5,60,000
Notes to Accounts:

Particulars 31 March 2022 31 March 2021

(₹) (₹)
1. Reserves and Surplus
Reserves 80,000 72,000
Balance in Statement of Profit and Loss 56,000 52,000
1,36,000 1,24,000
Additional Information:
 Investment costing ₹ 24,000 were sold for ₹ 16,000.
 Depreciation on Machinery ₹ 48,000.
 Tax paid ₹ 4,800.
 Debentures were issued and investments were purchased and sold on March 31st 2022.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 164

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)

Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items
Adjustments for non-cash and non-operating items:
Add: Items to be added:

Less: Items to be subtracted:

Operating Profit before Working Capital Changes

Add: Working Capital Changes to be added:

Less: Working Capital Changes to be subtracted:

Cash Generated from Operations before Tax

Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2)
Net Cash from (or used in) Operating Activities
Cash Flow from Investing Activities ₹

Cash Flow from Financing Activities

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 165

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Working Note:

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 166

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question – 5
From the following information of Bikanerwala Sweets, prepare a Cash Flow
Statement:

Balance Sheet as at 31.03.2022

Particulars Note 31 March 31 March

No. 2022 (₹) 2021 (₹)
I. Equity and Liabilities
1. Shareholder’s Funds:
(a) Share Capital 1 1,35,000 1,30,000
(b) Reserves and Surplus 2 22,000 4,000
2. Non-Current Liabilities (10% Debentures) 25,000 21,000
3. Current Liabilities (Trade Payables) 12,500 8,500
Total 1,94,500 1,63,500
II. Assets
1. Non-Current Assets:
Property, Plant & Equipments and Intangible
Assets:
Property, Plant & Equipment: Tangible Fixed 41,000 32,000
Assets (Net)
Intangible Assets (Goodwill) 8,000 10,500
Non-Current Investments 68,000 63,000
2. Current Assets:
Current Investments 49,000 50,000
Cash & Cash Equivalents 4,000 2,000
Other Current Assets 24,500 6,000
Total 1,94,500 1,63,500
Notes to Accounts:

Particulars 31 March, 2022 31 March, 2021

(₹) (₹)
1. Share Capital
Equity Shares of ₹ 10 each 1,35,000 1,30,000
2. Reserves and Surplus
General Reserve 11,000 10,000
Surplus i.e. Balance in Statement of Profit 11,000 (6,000)
and Loss
22,000 4,000
Additional Information:
(i) A machine costing ₹ 3,000 (Depreciation provided thereon ₹ 400) was sold for ₹
2,800. Depreciation charged, during the year was ₹ 4,400.
(ii) Debentures were issued on 1st April, 2021.
(iii) Interim dividend of ₹ 30,000 has been paid during the year.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 167

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
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CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)

Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items
Adjustments for non-cash and non-operating items:
Add: Items to be added:

Less: Items to be subtracted:

Operating Profit before Working Capital Changes

Add: Working Capital Changes to be added:

Less: Working Capital Changes to be subtracted:

Cash Generated from Operations before Tax

Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2)
Net Cash from (or used in) Operating Activities
Cash Flow from Investing Activities ₹

Cash Flow from Financing Activities

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 168

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Working Note:

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 169

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Question - 6
Read the following hypothetical text and answer the given questions on the basis of
the same:
Atal Financed Company started to provide finance training in online and offline mode
in 2019. The main objective was to improve financial literacy in India. It has acquired
funding through equity and borrowing from banks.
Balance sheets for year ending 31st March 2021 and 2022 are as follows:
Particulars Note 31 March 31 March
No 2021 (₹) 2022 (₹)
I. Equity and Liabilities
1. Shareholder’s Funds:
(a) Share Capital 2,00,000 2,50,000
(b) Reserves and Surplus 1 50,000 70,000
2. Non-Current Liabilities
Long-Term Borrowings 2 1,00,000 80,000
3. Current Liabilities
(a) Trade Payables 3 60,000 1,60,000
(b) Other Current Liabilities 4 25,000 20,000
Total 4,35,000 5,80,000
II. Assets
1. Non-Current Assets
(a) Property, Plant & Equipment & Intangible Assets
(i) Property, Plant & Equipment: Tangible Assets 5 1,50,000 2,00,000
(ii) Intangible Assets 6 10,000 2,000
(b) Long-Term Loans & Advances 1,00,000 1,30,000
2. Current Assets:
(a) Inventories 70,000 90,000
(b) Trade Receivables 40,000 60,000
(c) Cash and Cash Equivalents 65,000 98,000
Total 4,35,000 5,80,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 170

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Notes to Accounts:

Particulars 31st March 2021 31st March 2020

(₹) (₹)
1. Reserve and Surplus
General Reserve 50,000 70,000
2. Long-Term Borrowings:
12% Debentures 1,00,000 80,000
3. Trade Payables
Creditors 40,000 60,000
Bills Payables 20,000 1,00,000
60,000 1,60,000
4. Other Current Liabilities
Outstanding Expenses 25,000 20,000
5. Property, Plant and Equipment’s
Machinery 2,00,000 2,60,000
Less: Provision for Depreciation (50,000) (60,000)
1,50,000 1,00,000
6. Intangible Fixed Assets
Goodwill 10,000 2,000
Additional Information:
(a) During the year a piece of machinery with a book value of ₹ 30,000; provision
for depreciation on it ₹ 10,000 was sold at a loss of 50% on book value.
(b) Debentures were redeemed on 31st March 2022.

You are required to calculate

(i) Operating profit before working capital changes
(ii) Cash flow from operating activities
(iii) Cash flow from investing activities
(iv) Cash flow from financing activities
(v) Closing cash and cash equivalents

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 171

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

CASH FLOWS FROM OPERATING ACTIVITIES (Indirect Method)

Particulars Amount
A. Cash Flow from Operating Activities
Net Profit before Tax & Extra Ordinary Items
Adjustments for non-cash and non-operating items:
Add: Items to be added:

Less: Items to be subtracted:

Operating Profit before Working Capital Changes

Add: Working Capital Changes to be added:

Less: Working Capital Changes to be subtracted:

Cash Generated from Operations before Tax

Less: Income Tax Paid (Net to Tax Refund)/ (note no. 2)
Net Cash from (or used in) Operating Activities
Cash Flow from Investing Activities ₹

Cash Flow from Financing Activities

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 172

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
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Working Note:

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 173

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

SCALE YOUR PREPAREDNESS

SELF PRACTICE TEST
Topic Analysis of Financial Statement

Day - 15
Time Allowed 1:30 HOURS (MORRNING SESSION)
Question – 1
Classify the following items under major heads and sub-heads (if any) in
the Balance Sheet of a company as per Schedule III, Part I of the
Companies Act, 2013:
(a) Computer Software
(b) Work-in-Progress
(c) Calls in Advance
Question – 2
Classify the following items under major heads and sub-heads (if any) in
the Balance Sheet of a company as per Schedule III, Part I of the
Companies Act, 2013:
i. Patents
ii. Capital work-in-progress
iii. Unpaid dividend
Question – 3
These ratios are calculated to determine the ability of the business to
service its debt in the long run. Identify and state the significance of three
such ratios.
Question – 4
Lala Ltd. and Bala Ltd. use different accounting policies for inventory
valuation. These variations leave a big question mark on the cross-
sectional analysis and comparison of these two firms was not possible.
Identify the limitation of Ratio Analysis highlighted in the above situation.
Also explain any two other limitations of Ratio Analysis apart from the
identified above.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 174

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 5
From the following information, calculate the value of opening and closing
inventory:
Inventory Turnover Ratio-4 times
Gross Profit 20% on Revenue from operations
Revenue from operations = 10,00,000
Opening inventory is 25% of the inventory at the end.

Question – 6
Debt-Equity Ratio of Z Ltd. is 2: 1. State with reason whether the
following transactions will improve, decline or will not change the debt-
equity ratio:
(i) Conversion of ₹ 3,00,000, 9% debentures into equity shares.
(ii) Cash received from debtors₹ 1,00,000.
(iII) Redemption of ₹ 10,00,000, 11% debentures.
(iv) Purchase of goods on credit ₹ 4,00,000.

Question – 7
The Current Ratio of Zenith Ltd. is 2 1. State giving reasons, which of the
following transactions will improve, reduce or not change the current
ratio:
(i) Payment to creditors ₹ 20,000
(ii) Purchased goods on credit ₹ 80,000
(iii) Cash received from debtors ₹ 15,000
(iv) Issue of equity shares ₹ 5,00,000

Question – 8
These ratios are calculated for measuring the efficiency of operations of
business based on effective utilisation of resources."
(a) Identify the types of ratios being discussed above.
Explain any two ratios of the types of ratios identified in (a) above.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 175

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 9
(a) From the following Statement of Profit and Loss of Sun Ltd., for the
years ended 31st March, 2023 and 2024, prepare a Common Size
Statement:

Particulars Note 2023-24 2022-23

No.

₹ ₹

Revenue from operations 30,00,000 20,00,000

Expenses 12,00,000 10,00,000

Other incomes 3,60,000 4,00,000

Income Tax 50% 40%

(b) Following is the Statement of Profit & Loss of X L Limited for the year
ended March 31, 2024:
STATEMENT OF PROFIT & LOSS far the year ended March 31, 2024

Particulars Notes to 2022-23 2023-24

Accounts Amount (₹) Amount (₹)

Revenue from Operations 50,00,000 80,00,000

Expenses :
(a) Employee Benefit Expenses :
10% of Revenue from Operations

(b) Other Expenses 10,00,000 12,00,000

Tax Rate 40%

Prepare Comparative Statement of Profit & Loss of X L Limited.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 176

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 10
From the following particulars from Rajeshwar Ltd., calculate :
(i) Cash Flows front Operating Activities, and (ii) Cash Flows from
Financing Activities.

31.3.2023 31.3.2024

₹ ₹

Equity Share Capital 6,00,000 10,00,000

18% Preference Share Capital 4,00,000 3,00,000

Securities Premium Reserve 1,00,000 2,60,000

14% Debentures 2,00,000 2,50,000

Discount on Debentures 5,000 6,000

Underwriting commission on issue of shares — 20,000

Bank Overdraft 1,00,000 1,50,000

Interest on Bank Overdraft 15,000 20,000

Profit & Loss Balance 3,50,000 5,00,000

Additional Information :

1. Preference shares were redeemed on 31st March, 2024 at a premium of

5%. Such premium has been provided out of profit.

2. New shares and debentures were issued on March 31, 2024.

3. Dividend on preference shares was paid.

4. Proposed Dividend on Equity Share Capital was: for 31st March 2024
@ 20%for 31st March 2023 @ 15%.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 177

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

SCALE YOUR PREPAREDNESS

SELF ASSESSMENT TEST
Topic Analysis of Financial Statement

Day - 15
Time Allowed 1:30 HOURS (EVENING SESSION)
Question – 1
Classify the following items under Major heads and Sub-head (if any) in
the Balance Sheet of a Company as per schedule III of the Companies Act
2013.
i. Current maturities of long term debts.
ii. Furniture and Fixtures
iii. Provision for Warranties
iv. Income received in advance
v. Capital Advances
vi. Advances recoverable in cash within the operation cycle

Question – 2
"It is a technique which involves regrouping of data by application of
arithmetical relationships." Identify the technique highlighted in the above
statement and state its any two objectives.

Question – 3
Debt to Capital Employed ratio is 0.3:1. State whether the following
transactions, will improve, decline or will have no change on the Debt to
Capital Employed Ratio. Also give reasons for the same.
(i) Sale of Equipments costing ₹ 10,00,000 for ₹ 9,00,000.
(ii) Purchased Goods on Credit for ₹ 1,00,000 for a credit of 15 months,
assuming operating cycle is of 18 months.
(iii) Conversion of Debentures into Equity Shares of ₹ 2,00,000

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 178

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 4
Determine Return on Investment and Net Assets Turnover ratio from the
following information:-
Profits after Tax were ₹ 6,00,000; Tax rate was 40%; 15% Debentures were
of ₹ 20,00,000; 10% Bank Loan was ₹ 20,00,000; 12% Preference Share
Capital ₹ 30,00,000, Equity Share Capital ₹ 40,00,000; Reserves and
Surplus were ₹ 10,00,000; Sales ₹ 3,75,00,000 and Sales Return
₹ 15,00,000.

Question – 5
These ratios are calculated to determine the ability of the business to
service its debt in the long run. Identify and state the significance of three
such ratios.
Question – 6
(a) From the following information, calculate Operating Ratio:

Revenue from Operations : 10,00,000

Cost of Revenue from Operations: 4,00,000
Selling expenses: 80,000
Administrative expenses: 1,20,000

(b)From the following details, calculate Interest Coverage Ratio:

Net Profit before Tax: ₹ 2,00,000

10% Long term debt: ₹ 5,00,000
Tax rate 40%

Question – 7
The Current Ratio of a company is 2: 1. State giving reasons which of the
following transactions would improve, reduce or not change the ratio:
(a) Purchase of goods for cash ₹ 60,000
(b) Purchase of fixed assets for cash ₹ 2,00,000
(c) Sale of goods costing ₹ 20,000 for ₹ 23,000 on credit
(d) Issue of shares ₹ 10,00,000
PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 179
SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 8
From the following balance sheet of Pratap Foods Limited as at 31st
March, 2024 and additional information, calculate the debtors' turnover
ratio and debt collection period.
Balance Sheet
as at 31st March, 2024
Particulars 31st March
2024 (₹)
I. Equity and Liabilities
1. Shareholder’s Funds
(i) Share Capital 5,00,000
(ii) Reserves and Surplus 2,00,000
2. Non-Current Liabilities
(i) Long-Term Borrowing 2,00,000
(ii) Deferred Tax Liabilities (Net) 50,000
3. Current Liabilities
(i) Trade Payables 2,00,000
(ii) Short-Term Provisions 10,000
Total 11,60,000
II. Assets
1. Non-Current Assets:
Fixed Assets (Tangible Assets) 7,00,000
2. Current Assets
(i) Trade Receivables 3,50,000
(ii) Inventories 1,10,000
Total 11,60,000
Additional Information:
(i) Credit sales of ₹ 15,00,000 and cash sales of ₹ 2,50,000.
(ii) Trade receivables in the beginning of the year were ₹ 4,50,000.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 180

SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 9
(a) From the following information, prepare a Common Size Balance Sheet
and comment upon the changes:

Particulars 31.3.2023 31.3.2024

₹ ₹
Share Capital 6,60,000 7,20,000

Reserves and Surplus 7,92,000 17,28,000

Non-Current Liabilities 6,65,000 4,00,000

Trade Payables 9,90,000 16,52,000

Short term Provision 1,93,000 3,00,000

Fixed Assets 10,00,000 20,00,000

Inventories 8,20,000 12,60,000

Trade Receivables 14,15,000 14,00,000

Cash and Cash Equivalents 65,000 1,40,000

(b) Following is the statement of Profit and Loss of Sun India Ltd. for the
year ended 31st March, 2024:

Particulars Note 31-3-2024 31-3-2023

No. (₹) (₹)

Revenue from Operations 25,00,000 20,00,000

Other Incomes 1,00,000 5,00,000

Employee benefits expenses 60% of Total 50% of Total

Revenue Revenue

Other Expenses 10% of Employee 20% of employee

benefits expenses benefits expenses

Tax Rate 50% 40%

You are required to prepare a Comparative Statement of Profit and Loss of

Sun India Ltd. from the given statement of Profit and Loss.
PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 181
SCH. NO. 78, VIJAY NAGAR, INDORE VARMECHA CLASSES
… Experience in Action
88393 89003, 89898 32300 Email- [email protected]

Question – 10
From the following Balance Sheet of Dhanuka Industries Limited as at 31.03.2022
and 31.03.2021, prepare a Cash Flow Statement.
Particulars Note 31 March 31 March
No. 2022 (₹) 2021 (₹)
I. Equity and Liabilities
1. Shareholder’s Funds:
(a) Share Capital 6,50,000 5,00,000
(b) Reserves and Surplus 1 1,70,000 80,000
2. Non-Current Liabilities
(a) Long-Term Borrowings 2 4,50,000 3,00,000
3. Current Liabilities
(a) Trade Payables 1,00,000 1,20,000
(b) Short-Term Provisions 3 2,20,000 1,80,000
Total 15,90,000 11,80,000
II. Assets
1. Non-Current Assets
Property, Plant & Equipment and Intangible
Assets 5,45,000 3,75,000
(i) Property, Plant & Equipment’s Tangible 2,20,000 1,80,000
Assets 5,00,000 4,00,000
(ii) Intangible Assets Patents
2. Non-Current Investments 30,000 60,000
3. Current Assets: 60,000 40,000
(a) Current Investments 65,000 25,000
(b) Trade Receivables 1,70,000 1,00,000
(c) Inventories
(d) Cash & Cash Equivalents
Total 15,90,000 11,80,000
Note to Accounts:

Particulars 31st March, 2022 31st March, 2021

(₹) (₹)
1. Reserves and Surplus
Surplus to Statement of Profit and Loss 1,70,000 80,000
1,70,000 80,000
2. Long-Term Borrowings
6% Debentures 4,50,000 3,00,000
4,50,000 3,00,000
3. Short-Term Borrowings
Provision for Tax 2,20,000 1,80,000
2,20,000 1,80,000
Additional Information:
(a) During the year, equipment costing ₹ 5,00,000 was purchased. Loss on sale of
equipment amounted to ₹ 60,000. Depreciation charged on them was ₹ 90,000.
(b) Patents purchased during the year for ₹ 90,000.
(c) Proposed Dividend as on 31st March 2021 and 2022 amounted to ₹ 26,000 and
₹ 30,000 respectively.

PRADEEP VARMECHA / ACCOUNTANCY/ 9425104917 Page 182