Gaining Ratio = New Ratio – Old Ratio
*Difference between sacrificing Ratio and Gaining Ratio:
Basis Sacrificing Ratio Gaining Ratio
1) Meaning: The ratio in which the old partners The ratio in which the remaining
surrender a part of their share in partner’s acquire the outgoing
favour of a new partner. partners share.
2)When calculated Calculated at the time of the Calculated at the time of the
admission of a new partner. retirement or death of a partner.
3)Formula for calculation Sacrificing Ratio=Old Ratio-New Gaining Ratio=New Ratio-Old
Ratio Ratio
4) Purpose New partners share of goodwill is Goodwill paid to retiring partner is
divided between the old partners paid by the remaining partners in
in sacrificing ratio. their gaining ratio.
*Accounting Treatment of Goodwill:
1) Remaining partner’s capital A/c Dr. (In gaining ratio)
To Retiring/Deceased partner’s capital A/c ( with his share of goodwill)
2) When the goodwill A/c is already appearing in the books:
i) All partner’s capital A/c Dr.( in old ratio )
To Goodwill A/c (goodwill existing in the books)
ii) Remaining partner’s capital A/c Dr. (in the gaining ratio)
To Retiring/Deceased partner’s capital A/c
*Adjustment of Accumulated profits and reserves:
1) For distributing reserves and accumulated profits-
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Profit and loss A/c (cr.) Dr.
To All partners capital or current A/c (in old ratio)
2) For distributing accumulated losses:
All partner’s capital or current A/c Dr. (in old ratio)
To Profit and loss A/c
3) For distributing surplus of specific funds:
Workmen compensation fund A/c Dr.
Investment fluctuation fund A/c Dr.
To All partner’s capital or current A/c (in old ratio)
*Adjustment of joint life policy on retirement of a partner:
1) when premium paid has been considered as revenue expenditure:
- Joint life policy A/c Dr. (surrender value on the date of retirement)
To All partner’s capital A/c (in old ratio)
2) when remaining partners decide not to show Joint life policy in books:
Remaining partner’s capital A/c Dr. (in new profit sharing ratio)
To Joint life policy A/c
3) when premium paid has been considered as capital expenditure: No further
treatment required
if remaining partners decide not to show Joint life policy in books-
Remaining partner’s capital A/c (in new ratio)
To Joint life policy A/c
Payment to retiring partner
a) If the amount is paid in cash or by cheque to retiring partner:
Retiring partner’s capital A/c Dr.
To cash/Bank A/c (His share paid off)
b) If the amount is not paid in cash, the amount due to him will be transferred to his loan A/c:
Retiring partner’s capital A/c Dr.
To Retiring partner’s loan A/c
* Death of a partner :
On the death of a partner, the amount payable to him is to be paid to his legal representatives
following amounts will be his capital account:
1) The amount standing to the credit of his capital A/c.
2) His share of the increase in the value of goodwill of the firm.
3) Interest on capital, if provided in the partnership deed.
4) His share of profit on the revaluation of assets and liabilities.
5) His share of undistributed profits or reserves.
6) His share of life policy.
7) His share of profit upto the date of his death.
Ø Followingamounts will be debited to the account of the deceased partner for
ascertaining the amount due to his legal representatives:
1) Drawings.
2) Interest on drawings.
3) His share of loss on the revaluation of assets and liabilities.
4) His share of undistributed loss, such as debit balance of profit and loss A/c.
5) His share of the reduction in the value of goodwill.
*Calculation of profit : If the death of a partner occurs on any day during the year , the executors of
the deceased partner will also be entitled to the share of profits earned by the firm from the beginning of the year till
the date of his death.
Ø Two methods to ascertain profit:
A) On Time Basis: In this method , we have to take into consideration the profit of the last year and the time for
which he remained a partner during the current year.
Firm’s Profit = Average Profit X Number of months
12
Share of deceased person in profit = Firms profit X Share of deceased person
B) On Turnover or sales Basis:
= Profit of pervious year/Sales of previous year X Sales of current year
* Individual life policy:
- Instead of taking only one joint life policy, the firm may take individual policies on the lives of partners.
Accounting Treatment:
(1) When surrender values are not appearing in the books,
· For amount received from the insurance company on maturity or death of a partner,
Insurance company A/c Dr.
To life policy A/c
Life policy A/c Dr.
To All partners’ capital A/c (in old ratio)
· For recording the deceased partners share in the surrender value of surviving partners policies,
Surviving partner’s capital A/c Dr.(in gaining ratio)
To Deceased partner’s capital A/c
(2) When surrender values are already appearing in the books,
· For amount received from the insurance company on maturity or death of a partner,
Insurance company A/c Dr.
To life policy A/c
Life policy A/c Dr.(amount received minus surrender value
Appearing in the balance sheet)
To All partners’ capital A/c (in old ratio)
> Entry for recording the surrender value of surviving partner’s policies will not be passed in
this case since they are already appearing in the balance sheet.
Dissolution of a Partnership firm
* Dissolution of a partnership means:-The act of ending of the old Partnership
agreement and a reconstruction of the firm due to admission, retirement and death of a partner. It may or may not
close the business.
* Dissolution of a Partnership ‘firm’ means:-The firm close its business then the assets of the
firm are sold and liabilities are paid off and remaining amount is distributed among the partners.
*Cases of Dissolution of Partnership: -
1. In case of change in profit-sharing ratio of the exiting partners.
2. In case of admission of a new partner.
3. In case of retirement of a partner.
4. In case of expulsion of a partner.
5. In case of death of a partner.
6. In case of insolvency of a partner.
7. In case of expiry of the period of partnership.
*Cases of Dissolution of Partnership firm:-
*Without the intervention of the court:
1. When all partners agree to dissolve the firm.[sec.40]
2. Compulsory Dissolution [sec.41]
· When all or one partner of the firm becomes insolvent.
· When business of the firm becomes unlawful.
3. On the happening of any incidents:[sec.42]
· Insolvency of a partner.
· Fulfilment of the object for which the firm was formed.
· Expiry of the period.
4. When any partner giving notice to other partners can dissolve the firm.[sec.43 ]
· By order of the court [sec.44]: cases in which the court may order the dissolution of the partnership firm.
1. A partner has become of unsound mind.
2. When a partner unable to perform his duties as a partner.
3. When a partner is guilty of misconduct.
4. When a partner wilfully, commits violation of law of partnership agreement.
5. When a partner has transferred the whole of his interest in the firm to a third party.
6. The firm cannot be carried on except at a loss.
7. The dissolution is just and equitable due to some other reasons.
*Difference between Dissolution of Partnership and Dissolution of firm:-
[Link] Dissolution of partnership Dissolution of firm
.
I. Change in the exiting agreement between the Dissolution of partnership between all the
partners. partners of the firm.
II. The firm continues its business. The firm dose not continue its business.
III. Books of accounts may not be closed. Books of accounts have to be closed.
IV. Dissolution of partnership does not mean the Dissolution of firm means the dissolution of
dissolution of firm. partnership also.
V. It is voluntary nature. It is voluntary and compulsory nature.
*Settlement of accounts on Dissolution:
Section 48,49and55 of the partnership act specify the mode of settlement of accounts on the dissolution of a
partnership firm. These are as follows:
1. The amount of loss including the deficiency of capital shall be paid out of profit, next out of capital.
2. Amount realised from the sale of the assets of the firm, shall be applied in the following manner:
· Outside debts of firm will be paid, first of all
· Out of the remaining amount, the loans advanced by partners will be paid off.
· Thereafter the balance of partners’ capital accounts will be returned.
· If some amount remains, it will be divided among the partners in their profit-sharing ratio.
*Payment of firm debts and separate debts:
The amount realised from the sale of private property of partners will be used first to pay the private debts of the
partners and if there is any surplus available. it will be used in paying off the firms’ liabilities.
*Accounting procedure on Dissolution of firm:
The following accounts are opened in the order to close the books.
1. realisation account
2. partner’s loan account
3. partner’s capital account
4. cash or bank account
1 Realisation account: -This account is opened for disposing of all the assets of the firms and making
payment to all the creditors. It is nominal account.
· For closing assets accounts: -
Realisation a/c Dr.
To assets a/c (except cash and bank balance)
(Assets transferred to realisation a/c at book values)
· Fictitious assets are transferred to the partner’s capital accounts. Such as accumulated losses:
Partner’s capital a/c Dr.
To profit & loss a/c
To Deferred Revenue expenditure a/c
· If there exists a Provision against any assets. The assets should be transferred to Realisation account.
1. Realisation a/c Dr
To Debtors a/c
2. Provision for Doubtful Debts a/c Dr.
To Realisation a/c
Following entry is passed for the transfer of such provisions:
Provision for bad debts a/c Dr.
Provision for Depreciation a/c Dr.
Machinery Replacement Reserve a/c Dr.
Investment fluctuation fund a/c Dr.
Joint life policy reserve a/c Dr.
To Realisation a/c
For closing Liabilities account: -
Liabilities a/c Dr.
To Realisation a/c
Following points should be kept in mind :-
· Only those liabilities related to third parties are transferred to Realisation account
· Partner’s loan account is not transferred to realisation account.
· Entry for transfer of undistributed profits and reserves
· General reserve a/c Dr.
Reserve fund a/c Dr.
Contingency Reserve a/c Dr.
Profit & loss a/c Dr.
Workmen compensation reserve a/c Dr.
To Partner’s capital a/c
(undistributed profits transferred to capital a/cs)
Entries for realisation of assets:
· When assets are sold for cash
Cash / bank a/c Dr.
To Realisation a/c
· When assets is taken away by one of the partners:
Partner’s capital a/c Dr.
To realisation a/c
· No entry is passed for the transfer of assets to the creditor.
Entries of payment of Liabilities:
· When liabilities are paid in cash:
Realisation a/c Dr.
To cash / bank a/c
· When any partner agrees to take over some liabilities:
Realisation a/c Dr.
To partner’s capital a/c
For payment of realisation expenses:
· When expenses are paid in cash:
Realisation a/c Dr.
To cash / bank a/c
· When expenses of realisation are paid by a partner:
Realisation a/c Dr.
To partner’s capital a/c
For closing realisation account:
· When realisation account discloses profit:
Realisation a/c Dr.
To partner’s capital a/c
· When realisation account discloses loss:
Partner’s capital a/c Dr.
To realisation a/c
Format of Realisation account:
Particulars Amount Particular Amount
To All Assets [excluding cash / By All Liabilities [excluding credit
bank balance , fictitious assets, balance of profit and loss a/c
debit balance of P & L account, ,reserve, Partner ‘s capital /current
debit balance of Partner’s capital / accounts, Loan from Partners]
current account, Loan to partner]
By Provision on any assets
To Bank / Cash a/c
[Amount paid for discharging By bank / cash a/c
liability ] [Amount received on realisation of
assets]
To Bank / Cash a/c
[Amount paid for unrecorded By Partner’s capital a/c
liabilities] [Assets taken over by a partner ]
To Partner’s capital a/c By Partner’s capital a/c
[Liability taken over by a partner or [for transferring loss on realisation]
any expenses paid by him or
remuneration / commission
payable to him]
To Partner’s capital a/c
[for transferring profit on
realisation]
*Difference between Revalution account and Realisation Account:
[Link]. Revalution account Realisation account
1. It is prepared on the admission , retirement or it is prepared on the Dissolution of
death of a partner. partnership firm.
2. To record necessary adjustments in the value It is prepared to find out profit or loss on the
of assets and liabilities . sale of assets and repayment of liabilities.
3. The firm continues to function though with a The firm comes to an end after preparation
changed relationship among the partners. of this account.
4. Difference between the book value and The realised value of assets and the actual
revised values of assets and liabilities is payment of liabilities is recorded in this
recorded is this account. account.
5. It is prepared many times during the life time It is prepared only once during the life time of
of a firm. a firm.
*Partner’s Loan account: Partners loan will be paid off after the outside liabilities are paid in full.
Partner’s loan a/c Dr.
To cash / bank
*Partner’s capital account: After the transfer of profit or loss on realisation , undistributed profits
, reserve etc. to the capital account of partner’s the balance of capital accounts are closed.
· When a partner is required to clear off his Debit balance: -
Cash / bank a/c Dr.
To Partner’s capitals a/c
· When a partner is paid the credit balance of his account:-
Partner’s capital a/c Dr.
To cash / bank a/c
*Cash or bank account: Opening balance of cash and bank account and all the receipts are entered
on the debit side of this account and all the payments are entered on the credit side of this account. Total of the
both side must be equal.
*Treatment of Goodwill:
· If goodwill already appearing in the balance sheet .
Realisation a/c Dr.
To Goodwill a/c
· If goodwill is not appearing in balance sheet, the above mentioned entry will not be passed .
· When some amount is realised for goodwill
Cash / Bank a/c Dr.
To Realisation a/c
If goodwill is taken over by any of the partners.
Partner’s capital a/c Dr.
To Realisation a/c
Financial Statements of not- for - profit
Organisations.
* Meaning of not - for - profit Organisations: -
These Organisations which are formed not to
earn profits but to render services to its members and to the public, called
not - for- profit organisation.
Examples: - Clubs, hospitals, school etc.
* Characteristics of not - for- profit organisations:
(i) Service motive: - The main aim of these organisation is to
provide service to a specific group either free of cost or at nominal rates and
not to earn profit.
(ii) Form: - These organisations are set up as charitable trusts or
societies and subscribers to these organisations are called members.
(iii) Source of income: - The major sources of their incomes usually
are: (a) Subscription (b) Donations (c) Grant - in - aid (d) Income from
investments etc.
(iv) Managed by elected members: - All members electe some able
members to manage & to control to these organisations.
(v) Financial statements: -
(a) Receipt & Payments A/C
(b) Income & expenditure A/C
(c) Balance sheet
(vi) Legal requirements: - To maintain proper accounts to meet
legal requirement & control utilisation of funds.
(vii) Surplus not distributed among its members. It is added to capital
fund.
Parts of organisation
Profit - earning organisation Not - for- profit organisation
*Difference between not- for - profit organisation and profit - earning
organisation: -
Basis Not -for- profit Profit -
organisation earning
organisation
(i) Purpose: -To provide -To earn more
services. profit.
(ii) Capital A/c V/s -They maintain
Capital fund -They maintain capital A/c
capital fund
(iii) Financial -Trading A/c
Statement (A/cs) -Receipts and -profit and loss
payments A/c A/c
-Income & -Balance
expenditure A/c Sheet.
(iv) Surplus V/s Profit -Balance Sheet.
-Net result -Net result
(v) Distribution of shown by not shown by profit
surplus/profit for profit organisation is
organisation is either net profit
either surplus or or net loss.
deficit
- Profit and loss
- Surplus or is distributed
deficit is not among its
distributed members or
among its owner of
members. It is business.
adjusted in
capital fund.
* Financial Statements of Not – for- profit Organisations: -
(1.) Receipts and Payments A/c:-
Receipts and Payments A/c is nothing more than a
summary of the cash book.
1. It is prepared at the end of the year from cash book.
2. It is real A/c in nature
3. It starts with the opening balance of cash in hand and at bank.
4. Closing balance of this A/c shows closing balance of cash in hand & at
bank.
5. Non cash items are not recorded in this A/c
6. No adjustments are made in it.
* Limitations of receipts and payments A/c
1. It does not show the income and expenditure of the current year.
2. It is not prepared on accrual basis.
3. It does not tell us the surplus or deficit.
4. Balance sheet cannot be prepared on basis of it.
* Difference between receipts and payments A/c & cash book: -
Basis Receipts & payments Cash book
A/c
[Link]: - -Based on cash book -based on cash
receipts & cash
[Link] of -At the end of payments.
preparation: accounting year -Prepared on daily
- basis.
-Not- for- profit
3. Nature of Organisation.
institution:- -For both Not - profit
-Receipts and - Organisation &
4. Sides: - payments sides. Profit seeking entity.
-It does not have L.F. -Debit & credit sides.
[Link] column.
Folio -It has L.F. column.
* Format of receipts and payments A/c
Receipts & payments A/c
For the year ending......
Receipts Amount Payments Amount
To balance b/d xxxxx By salaries & xxxx
To Subscriptions xxxx wages xxx
To donation xxxx By rent xxxxx
received xxxx By furniture
To entrance fee xxxx purchase xxxxx
To sales of old By balance c/d
furniture (any other Cash in hand-
assets) xxxx
xxxxxx Cash at bank- xxxxxx
xxxxx
2. Income and expenditure A/c: -
It is summary of income and expenditure
of the current year.
. It is similar to the P & L A/c of a profit seeking entity.
. It is nominal A/c in nature.
. (a) Expenditures are recorded at the debit side
(b) Incomes are recorded at the credit side
4. It records only revenue nature items.
5. Incomes and expenditures are shown on accrual basis.
6. Closing balance is surplus or deficit.
7. Balance sheet can be prepared on the basis of this A/c.
. It records Incomes & expenditures of the current year only.
Format of income and expenditure A/c.
Income and expenditure A/c
for the year ending......
Expenditure Amount Income Amount
To rent xxx
To salaries By subscriptions
Less :- O/s salary Less: -O/s subscription
(beginning) (beginning)
Add: O/s salary Add: - O/s subscription (end.) xxxx
(end.) xxxx Add: - unearned subscription xxxx
Add.: Prepaid (beginning) xxxx
Salary (beginning) Less: - unearned subscription xxxx
xxxx (end.)
Less: - Prepaid xxx xxxx
salary(end.) By donations
xxxx By interest
To sundry By entrance fees
expenses xxxxx By deficit (if any) xxxxx
To depreciation
To surplus
* Difference between Income & expenditure A/c and profit & loss A/c:
Basis Income & expenditure Profit and Loss A/c
A/c
Object: -
To find surplus or - To find net profit or net loss.
deficit.
Basis of
-Prepared on the basis of trial
Preparation -Prepared on the basis balance.
of
Institutions: -
Receipts & payments -Prepared by trading institutions.
A/c
Opening
Items: - -prepared by It starts with gross profit or gross
non – trading Loss.
institutions
It does not have any
Opening item.
* Difference between Receipts & payments A/c and
Income & expenditure A/c
Basis Receipts & Payments A/c Income & expenditure A/c
Form
-summary of cash book. -summary of profit & loss A/c
Nature of -Real A/c -Nominal A/c
a/c
Sides:
-Receipts & payments -Income & expenditure sides.
Sides.
Balances: -
-Start with opening balance -It doesn’t start with opening
and balance of cash and closing
Revenue & ends with closing balance of balance of cash.
capital cash & bank -It records revenue nature
items:- -It records both items. items.
Amount: -
-Records only cash basis -Records accrual basis
transactions. transactions
3. Balance
Sheet:-
A balance sheet is to be prepared even by non-profit-
Organisations to show the financial position on the last date of the
accounting [Link] contains only capital items. Such as:-Assets, liabilities,
and capital fund.
Assets: -
Fixed assets appearing in the previous year’s balance sheet should be
adjusted for assets purchased, sold and depreciation during the year.
Prepaid expenses, accrued incomes and investments should be shown on
the assets side.
The closing balance of the cash & bank as shown by the receipts and
payments A/c should be shown on the assets side.
Liabilities: -
(1) If any new loan has been raised, it will be shown on the liabilities side.
(2) If there is a special receipt like donation for building, it will be shown on the
liabilities side.
(3) Outstanding expenses and the incomes received for next year will be
shown on the liabilities side.
(4) Overdraft balance of bank will be shown on the liabilities side.
Capital fund: - Any excess of assets over liabilities in case of non -
profit seeking organisation is called capital fund.
-It will be also shown at the liabilities side of balance sheet.
Some Important items relating to Non - profit - seeking Organisations.
1. Capital receipts: These are not received at regular intervals or non-
recurring in nature.
E.g. (i) Life membership fees
(ii) Endowment fund receipts
ii) Legacies.
v) Donation for specific purpose.
v) All reserves.
2. Revenue receipts: - Remaining items appearing on the debit side of
receipts & payments A/c are treated as revenue receipts
such as: - Subscription, rent received, interest received,
Entrance fees etc.
3. Subscription: - the members have to pay a fixed amount at regular
interval to remain a part of association.
- Most of all it is revenue in nature.
But if it is capitalized then: Non – Recurring income.
- Received for certain specific purpose.
E.g. - Subscription for building fund.
- Subscription for tournament fund.
4. Donation: - It is amount received from an individual, firms &
institutions as gift.
nation: -It received for certain specific purpose is capital receipts.
- Shown at liabilities side of the balance sheet.
onation: -
ral donation of big amount: -
- Non – recurring nature.
- shown at the liabilities side of the balance sheet.
(b) General donation of small amount: -
- Recurring in nature.
- Revenue receipts
- shown in income and expenditure A/c, income side
5. Grant It received from central, state or local government for
routine expenses of these institutions is revenue receipts and treated as
income.
6. Legacy: - It is the amount received from individuals as per will.
-It is a receipt of non - recurring nature.
7. Endowment fund: - It is a fund arising from a bequest or gift, the income
of which is devoted for a specific purpose.
-It is a capital receipts.
8. Entrance fees: - Entrance fees is received from every member once
forever or every year. In absence of instructions, it is treated as revenue
receipts.
Calculation of the cost of consumable goods:
Particulars Rs.
1. Payment made for consumable goods .
Add: Opening stock
Less: Closing stock
Add: Creditors at the end
Less: Creditors in the beginning.
* Difference between fund based accounting and non -fund based
accounting
Basis Fund based Non -fund based
accounting accounting
Use of funds: -fund are used for -Fund can be used for
specific any
purposes except for profit earning purpose
Base: general
fund -Accrual basis
Accountabilit
y -Cash basis -It is towards all
- Accountability is stakeholders.
Financial towards
Statements law, regulations,
legislature, -Trading, P & L A/c and
Parliament, contributors. Balance sheet.
Usual
earning Receipts & payment A/c, -Net profit or Net loss.
Income & expenditure
A/c
And balance sheet.
-Surplus or deficit
Income & expenditure A/c
For the year ending
Expenditure Amoun Income Amount
t
To expenses By income
Add:-o/s Add:-accrued Or
expenses(end) O/s income (end.)
Less:-O/s expenses Less:- accrued Or
(beginning) O/s income
Less:- prepaid (beginning)
Expenses(end) Less:- Unearned
Add:- :- prepaid Income(end)
Expenses(beginning) Add:-Unearned
Income
(beginning)
Balance sheet
Liabilities Amount Assets Amount
O/s expenses - Accrued -
(end) - income(end) -
Unearned Prepaid expenses
income (end)
(end)
