BC 311AA-E

B.Com
SECOND YEAR SEMESTER-III

ADVANCED ACCOUNTING

“ We may forgo material benefits of civilisation,

but we cannot forgo right and opportunity to reap the
benefits of the highest education to the fullest extent.”

Dr.B.R.Ambedkar

Dr. B.R. AMBEDKAR OPEN UNIVERSITY

HYDERABAD
2018
 COURSE TEAM

Course Development Team Course Development Team

( Original ) (CBCS)
Editor Editor
Prof. V.Viswanadham Prof. Prashanta Athma

Associate Editors Associate Editor & Course Coordinator

Prof.V.Nagaraja Naidu Dr.D. Rabindranath Solomon
Sri P.Krishna Rao
Sri G.Malla Reddy

Writers Writers (Units)

Prof. D.Obul Reddy Dr.A.Venkat Reddy - Block –I
Sri P.Diwakar Rao Dr.Sandhya-Block-II
Sri V.B.Sastry Dr.P.Ravinder-Block-III
Sri R.P.Trivedi Dr.K.Srinivas – Block-IV
Sri C.Mallikarjun Rao Dr. Srilatha Reddy- Block-V
Sri C. Pandu
Sri G.Malla Reddy
Sri C.V.A.S.Suryanarayana
Sri M.Satyanarayana

Cover Design
G.V.Swamy

Dr.B.R.Ambedkar Open University, Hyderabad

First Published Edition: 2018

All rights reserved. No part of this book may be reproduced in any form without the permission
in writing from the University.

The text forms part of Dr.B.R.Ambedkar Open University Programme.

Further information on Dr.B.R.Ambedkar Open University courses may be obtained from the
Director (Academic), Dr.B.R.Ambedkar Open University, Road No.46, Prof.G.Ram Reddy
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Printed on behalf of Dr.B.R.Ambedkar Open University, Hyderabad by the Registrar
 PREFACE
This course deals with the topics in ‘Advanced Accounting’ included
in the syllabus for the Second Year ( Third Semester) of B.Com programme
offered by Dr.B.R.Ambedkar Open University. These topics generally cover
the core area of the subject to be studied in the Second year of the three year
degree programme in commerce (B.Com). The Syllabus, for the sake of
convenience is divided into Blocks and each of which comprises certain
number of Units. Each block generally covers a specific area of the subject.
The units are prepared by specialists in accordance with the format so
designed as to enable the learner to study and comprehend them without
much difficulty. Each unit begins with aims and objectives followed by
contents and has at its end Model Examination Questions intended to test
the students’ comprehension of the subject matter. Technical terms with
which the students may not be familiar are given at the end of each unit
under the head “Glossary”.
The purpose of introducing this course to ensure that the student on
graduating from the University will have acquired adequate knowledge in
accounting matters of the business concerns.
This course consists of 5 blocks, which are divided into 13 units.
The first block deals with the accounts pertaining to Hire Purchase and
Instalment purchase. The second block and third blocks are devoted to
Partnership Accounts. The fourth block deals with Departmental Accounts
while Block five covers Branch Accounts.
The University hopes that this material will help the student to get
acquainted with the principal accounting aspects in Advanced Accounts,
which make for its distinctiveness and significance.
 CONTENTS
Pg.No

BLOCK I : HIRE - PURCHASE AND INSTALMENT

PURCHASE SYSTEMS :
Unit - 1 : Hire Purchase 3
Unit - 2 : Instalment Purchase System 59

BLOCK II : PARTNERSHIP ACCOUNTS-I:

Unit - 3 : Partnership Accounts – An Introduction 73
Unit - 4 : Final Accounts of the Partnership Firm 94

BLOCK III : PARTNERSHIP ACCOUNTS –II:

Unit - 5 : Admission of a Partner 119
Unit - 6 : Retirement or Death of a Partner 150
Unit - 7 : Dissolution of Firm 166
Unit - 8 : Insolvency of a Partner 178

BLOCK IV : DEPARTMENTAL ACCOUNTS :

Unit –9 : Departmental Accounts – I 197
Unit – 10 : Departmental Accounts –II 205

BLOCK - V : BRANCH ACCOUNTS :

Unit – 11 : Branch Accounts – An Introduction 221
Unit – 12 : Accounts of Dependent Branches (Cash and Credit Sales) 238
Unit – 13 : Accounts of Independent Branches 261
 SYLLABUS
BLOCK I :HIRE- PURCHASE AND INSTALMENT PURCHASE SYSTEMS :
Unit -1 : Hire Purchase : Introduction - Recording the Transactions in the Hire-Purchaser’s
Books - Different Methods of Recording the Transactions in the Books of Hire Purchaser -
Charging Depreciation in the books of Hire-Purchaser - Recording the Transactions in the
books of Hire-Vendor - Procedure for working out the problems when Cash Price is not given
- Procedure for working out the problems when Rate of Interest is not given - Default and
Repossession of Goods - Hire Purchase Trading Account.
Unit – 2 : Instalment Purchase System : Introduction - Distinction between Hire-Purchase
System and Instalment Purchase System - Accounting aspect of instalment Purchase
Transactions.

BLOCK II : PARTNERSHIP ACCOUNTS-I:

Unit – 3 Partnership Accounts – An Introduction – Introduction - Definition and Essential
Features - Partnership Deed -Rules Applicable in the Absence of Agreement - Partnership
and Co-ownership - Registration of Firms - Usual Adjustments in Partnerships Accounts -
Partner’s Capital Accounts - fluctuating Capital - Fixed Capital.
Unit –4 : Final Accounts of the Partnership Firm : Introduction - Final Accounts of the
Partnership firms - Illustrations on Final Accounts.

BLOCK III : PARTNERSHIP ACCOUNTS –II:

Unit – 5 : Admission of a Partner – Introduction - Revaluation of Assets and Liabilities -
Adjustment of Accumulated Profit and Losses - Adjustment of Goodwill of the Firm - Calculation
of New Profit-sharing ratio - Adjustment regarding Capitals - Guarantee of Assets and Liabilities
- Guarantee of Minimum Profit - Reservation of Profit to Old Partners - Admission of a Partner
during the Accounting year.
Unit – 6 : Retirement or Death of a Partner – Introduction - Revaluation of Assets and
Liabilities - Adjustment of Accumulated Profit and Losses - Adjustment of Goodwill - Calculation
of Gaining Ratio of remaining partners - Ascertaining the amount due to the Retiring/Deceased
Partner - Adjusting the Capitals of Continuing Partners - Mode of Payment to Retiring/Deceased
Partner.
Unit –7: Dissolution of Firm: Introduction - Modes of Dissolution - Settlement of Accounts
- Firm Debts Vs Private Debts - Accounting Procedure on Dissolution.
Unit - 8: Insolvency of a Partner - Introduction - Consequences of Insolvency - Loss
arising out of Insolvency - Decision in Garner Vs. Murray Case - Capital Ratio - Procedure
when some of the Partners are Insolvent - Procedure when all the Partners are Insolvent.
 BLOCK IV : DEPARTMENTAL ACCOUNTS :
Unit –9 : Departmental Accounts – I: Introduction - Meaning of Departmental Accounts -
Advantages of Departmental Accounts - Methods of Maintaining Departmental Accounts -
Allocation of Expenses - Inter-Departmental Transfers - at Cost and at Profit.
Unit – 10 : Departmental Accounts –II : Introduction – Illustrations.

BLOCK - V : BRANCH ACCOUNTS :

Unit – 11 : Branch Accounts – An Introduction: Introduction - Objects of Branch
Accounting - Classification of Branches - Dependent Branches - System of Accounting -
Accounting Treatment.
Unit – 12 : Accounts of Dependent Branches (Cash and Credit Sales) - Introduction
Adjustment Entries – Introduction -Accounts to be opened in the Books of Head Office -
Specimen Journal Entries. Accounts of Dependent Branches (Including Stock and Debtors
Systems).
Unit – 13 : Accounts of Independent Branches: Introduction - Meaning of Independent
Branch - Characteristics of the Accounting System - Incorporation of Branch Trail Balance in
Head Office Books - Detailed Incorporation Method- Abridged Incorporation Method.

*****
 BLOCK I
HIRE - PURCHASE AND INSTALMENT
PURCHASE SYSTEMS
Unit - 1 : Hire Purchase

Unit - 2 : Instalment Purchase System

2
UNIT-1 : HIRE-PURCHASE SYSTEM
CONTENTS
1.0 Aims and Objectives.
1.1 Introduction.
1.2 Definition and Meaning.
1.3 Important Terms.
1.4 Recording the Transactions in the Hire - Purchaser’s books.
1.5 Different methods of recording the transactions in the books of Hire Purchaser.
1.6 Charging depreciation in the books of Hire Purchaser.
1.7 Recording the Transactions in the books of Hire Vendor.
1.8 Procedure for working out the problems, when Cash Price is not given.
1.9. Procedure for working out the problems, when rate of interest is not given.
1.10 Default and Repossession of goods.
1.11 Hire purchase Trading account.
1.12 Summary
1.13 Check Your Progress; Model Answers
1.14 Model Examination Questions.
1.15 Glossary
1.16 Further Readings

1.0 AIMS AND OBJECTIVES

The aims of this unit are to discuss the term Hire Purchase, it’s definition and the terms
which we come across in Hire Purchase agreements and to explain you the recording of
transactions both in the books of Hire Purchaser and Hire Vendor following different methods
of accounting. Further, this unit makes you acquaint with the method of ascertaining the missing
items like Cash Price, rate of interest etc., and also method of recording of transactions relating
to default and repossession.
Having studied and worked through this unit, you should be able to :
* Define Hire Purchase system.
* Analyse the legal aspects of Hire Purchase system.
* Explain the important terms of Hire - Purchase system.
* Pass Journal entries in the books of Hire Puchaser and Hire Vendor
* Explain the method of depreciation.
* Find out the missing items to solve the problem
* Identify the accounting procedure to be followed in case of default and repossessions
of goods.

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1.1 INTRODUCTION
The Hire-Purchase System, as the very name indicates, is a combination of two modes of
possessing the goods by hiring them or by purchasing them (on cash or credit). A farmer may
hire a tractor or a contractor may hire a bulldozer because they are wanted for very limited
periods. When goods are wanted for permanent use, people usually buy them. But, where they
are of very high value in relation to the financial capacity and convenience of the buyer, it helps,
if he is allowed to spread the payment over a period of time. This is true in the case of an
ordinary person wanting to purchase a costly T.V. Set, as also, in the case of a manufacturer
who wants to install costly machinery in his factory. Such need is answered by the Hire-Purchase
System and the Instalment System. Under the Hire-Purchase system the seller and the buyer
enter into an agreement under which the buyer receives possession of goods immediately, but is
allowed to pay the price in instalments. The price so paid in instalments, called the Hire- purchase
price, is usually higher than the cash price i.e., the price paid when goods are bought for cash.
This is because the hire-purchase price includes interest for the period covering instalments.
Under the Instalment Purchase System also, the instalment price (similar to the hire- purchase
price) will be paid in a number of instalments as per the agreement. The main difference from the
hire purchase system is that the purchaser under the instalment system acquires the ownership of
the property purchased immediately on signing the contract and the vendor has no right to take
back the property. The Instalment Purchase System will be discussed in detail at an appropriate
place Now. we take up a detailed discussion on the Hire-Purchase System.

1.2 DEFINITION AND MEANING

According to the Hire-Purchase Act. 1972, it is “an agreement under which goods are let
on hire and under which the hirer has an option to purchase them in accordance with the terms
of the agreement and includes an agreement under which - (i) possession of goods is delivered
by the owner thereof to a person on condition that such person pays the agreed amount in
periodical instalments, (ii) the property or the ownership in the goods is to pass to such person
on the payment of the last of such instalments: and (iii) such person has a right to terminate the
agreement, at any time, before the property so passes.
The following points emerge from the definition :
a) Possession of goods is given at the time of agreement itself;
b) The ownership passes to the buyer only after payment of the last instalment and in
the case of any default in payment of instalments, the owner can reposses the
goods.
c) The hire purchaser may terminate the agreement, at any time, before he becomes
the owner i.e., before payment of the last instalment; and
d) The amount paid through instalment is treated as hire charges until the hire purchaser
exercises his option to purchase the goods by paying the last instalment.
The Act further specifies that the agreement must state the following:
(a) the hire-purchase price, (b) the cash price, (c) the date of commencement of the
agreement, (d) the number of instalments, with the amount of each instalment (e) other details
such as the dates, the manner in which the instalments are to be paid, the person to whom they
are payable, the place; and (f) the description of goods covered by the agreement.
From the foregoing discussion it must be clear that under the Hire-Purchase System, the
buyer receives possession of goods immediately on signing the agreement and pays the price in
instalments. The price payable under this system will be usually higher than the price payable

4
when it is a cash purchase. The excess amount agreed to be paid represents interest which is an
income to the hire-vendor and expense to the hire-purchaser. The hire-purchaser becomes the
owner only when be pays all the instalments including the last instalment. In case of default the
hire vendor may reclaim the goods and the amount so far paid by the hire purchaser will not
normally be refunded as it is treated as hire charges for the use of goods. The hire purchaser
has also the option to rescind the contract before the ownership in the goods passes to him
During the period the goods are in his possession, he cannot destroy, damage or sell them. The
hire purchase price paid in each instalment includes interest.

1.3 IMPORTANT TERMS

We will now deal with the important terms that we come across in the hire-purchase
transactions:
a) Hire-Purchase Price : The total amount payable by the hire-purchaser for the goods he
had taken under an agreement of hire-purchase.
b) Cash Price : Cash price represents the cash retail price, the hire-purchaser would have
paid had he purchased the goods for cash instead of on hire-purchase.
When interest charged by the Hire-Vendor is added to the cash price, the hire-purchase
price is obtained. In other words hire purchase price is equal to cash price plus interest
c) Hire-Purchaser : The person who agrees to buy the goods under an agreement of hire-
purchase.
d) Hire-Vendor : The person who agrees to sell the goods under a hire-purchase agree-
ment.
e) Cash Down Payment or Down Payment: This is the initial amount payable in cash by
the hire purchaser on signing the contracts, according to the terms of the agreement.
f) Instalment : This is the periodic payment, the hire-purchaser is required to pay against
the hire-purchase price of goods taken, as per the terms of agreement, until the whole of
the price is paid off.
Thus the instalment paid from time to time includes part payment towards the cash price
(i.e principal amount) and the balance amount towards interest.
g) Net Cash Price : The cash price of the goods under the agreement less any initial
amount paid or cash down payment is known as net cash price.
h) Net Hire-Purchase Price : This is the hire-purchase price less delivery expenses,
registration fees, insurance and any other fees payable.

1.4 RECORDING THE TRANSACTIONS IN THE HIRE

PURCHASER’S BOOKS
Having understood the meaning and the terms, let us now proceed to learn how to record
the transactions in the books of hire-purchaser and hire-vendor. First, we shall discuss the
accounting entries in the books of the hire-purchaser and then the hire-vendor’s books.
While recording the entries in the books of hire-purchaser, the question arises whether
we should record the asset at its full cash price or only at the cash price actually paid for up-to-
date. Some accountants are of the opinion that since the hire-purchaser does not acquire ownership
in the goods until the last payment, he should record the asset value in his books only to the
extent of the amount paid so far towards its cash price. Some others hold the view that it is
wrong to record the asset at part-value as the hire-purchaser acquired it with the clear intention

5
of paying the full price, and therefore, full cash price must be recorded. The latter view appears
more logical because if strict legal view is to be taken in terms of ownership, recording the asset
at part-value, would equally be incorrect in as much as absolutely no owner- ship rights are
acquired under a hire-purchase agreement until the last instalment is paid. However, in practice,
the method followed depends on the choice of the trader. In addition to these two, a third
method, known as Interest Suspense Method is also followed by a few. Under this method, the
asset is debited with its full cash price, the total interest payable by the hire-purchaser (i.e. the
excess of hire-purchase price over its cash price), is debited to a specially opened Interest
Suspense Account. Thus there are three methods of recording the transactions in the hire-
purchaser’s books.

1.5 DIFFERENT METHODS OF RECORDING THE TRANSACTIONS IN

THE BOOKS OF HIRE PURCHASER
1) The asset account is debited with the cash price included in each instalment when-
ever it falls due. The amount paid on taking delivery of the asset, known as down payment will
be fully debited to the asset account as cash price. This method is called ‘Asset Accrual
Method’
2) The asset account, under Full Cash Price Method, is debited with full cash price at
the time of purchase.
3) The third method is known as Interest Suspense Method where total interest payable
is debited to Interest Suspense Account in addition to debiting the asset with full cash price at
the time of the contract.
Before we proceed to learn the journal entries to be written in the books of hire-pur-
chaser. under each method, certain important points which are common to all the methods need
to be further emphasised.
They are
a) The Asset Account (Truck A/c., Machinery A/c. etc.) should, under no circumstances,
be debited with anything more than the cash price, whether it is debited with the whole of its
cash price at one time or with part-value each time when an instalment falls due depending upon
the method followed.
b) The excess amount paid by the hire-purchaser over and above the cash price is towards
interest for the facility of instalments and, therefore, this excess amount should be debited to
interest account. The hire-purchase price minus the cash price is equal to the total interest
amount. Interest account is closed by transferring it to Profit and Loss Account every year.
c) After the initial cash down payment the trader pays the balance of the hire purchase
price in a specified number of instalments over a period of time. Thus in each instalment there
are two components - 1) payment for the asset (principal or cash price), and (2) the interest
payment for the period. The calculation of interest is an important aspect in the hire- purchase
problems and you are expected to pay particular attention.
d) Interest is always calculated on the amount still due by the hire-purchaser, for the
asset. When an instalment falls due, the entire amount of instalment should not be treated as a
payment for the asset. Interest calculated for the period should be debited to interest account
and only the remaining amount is to be treated as payment for the asset. Let us now take up the
entries to be written in the books of the hire-purchaser, under each method with the help of an
example.

6
Illustration - 1
Srikant Trader purchased a Mini-Truck on hire-purchase from Vishnu Vani & Co. on 1st
April 2015 The terms are as follows :
Cash Price ... Rs. 25,826
Cash down payment ... Rs. 4,000
Instalment ... 3 instalments of Rs. 8,000/- each at the end of every
year for three years.
Rate of interest ... 5 per cent per annum.
Write journal entries in the books of Srikant Traders.
Solution
Before attempting the entries, it is advisable to prepare a table showing the interest
and principal amounts separately for each instalment. This will facilitate calculation of interest
and splitting of the instalments. Accordingly, the following table is prepared:
Analytical Table
Cash Price Rs. 25,826
H P. Price... Rs. 28,000
Date Down Payment or Principal / or Interest Cash Price Still due
instalment Cash Price @5% at the end of each
paid instalment
1 2 3 4 5
1-4-15 Rs. 4,000 Rs. 4,000 - Rs. 21,826 (25,826-4,000)
31-3-16 I Rs. 8,000 Rs. 6,909 Rs. 1,091 Rs. 14,917(21,826-6,909)
31-3-17 II Rs. 8,000 Rs. 7,254 Rs. 746 Rs. 7,663 Rs 14,917-7,254)
31-3-18 III Rs.8,000 Rs. 7,663 Rs. 337 --- (7,663-7,663)

Total Rs. 28,000 = Rs. 25,826 + Rs. 2,174

Interest at the rate provided should be calculated on the amount due for the cash price.
For the first year (2016) the amount due is Rs. 21,826 i.e. cash price Rs. 25,826 - 4,000.
5
amount paid as down payment on 1-4-2015 Thus 21,826 x = Rs. 1,091 (Approx.)
100

Therefore, the instalment amount of Rs. 8,000 paid includes Rs. 1091 for interest and the
balance (Rs. 8,000-1091) Rs 6,909 towards cash price of the asset.
* The interest component in the last instalment is the balancing figure i.e., it must be
ascertained by deducting the interest debited so far from the total interest. Thus
Total Interest = H.P.P. - C .P.
= Rs. 28,000 - Rs. 25,826
= Rs. 2,174
Therefore. Rs. 2,174 - Rs. 1,837 (Rs.1,091 - Rs.746) = Rs.337
** Sometimes, the hire-purchase price may not be specifically given in the problem, it is
equal to the total amount paid i.e.. Down Payment + Instalments.

7
 In the Book of Srikant Traders
First Method : Asset Accrual Method : The asset is debited only with the cash price
in each instalment whenever the instalment is due.
Journal
2015 Rs. Rs.
Apr. 1 Mini Truck A/c Dr. 4,000
To Vishnu Vani & Co. A/c. 4,000
(Being Down Payment due)
Vishnu Vani & Co. A/c Dr. 4,000
To Bank A/c. 4,000
(Being amount paid as down Payment)
2016
Mar.31 Mini Truck A/c. Dr. 6,909
Interest A/c Dr. 1,091
To Vishnu & Co. A/c 8,000
(Being amount due for the I instalment)
Vishnu Vani & Co. A/c Dr. 8,000
To Bank A/c. 8,000
(Being I instalment paid)
2017
Mar. 31 Mini Truck A/c. Dr. 7,254
Interest A/c. Dr. 746
To Vishnu Vani & Co. A/c 8,000
(Being II instalment due)
Vishnu Vani & Co. A/c. Dr. 8000
To Bank A/c. 8,000
(Being II instalment paid)
2018
Mar. 31 Mini Truck A/c. Dr. 7,663
Interest A/c. Dr. 337
To Vishnu Vani & Co. A/c. 8,000
(Being III instalment due)
Vishnu Vani & Co. A/c. Dr. 8,000
To Bank A/c. 8,000
(Being III Instalment paid)

Note : The student is advised to prepare ledger accounts on his own.

Second Method : Full Cash Price Method : Where the asset is debited with the full cashprice
at the time of signing the contract i.e., at the beginning itself.

8
 Journal
2015 Rs Rs.
Apr. 1 Mini Truck A/c Dr. 25,826
To Vishnu Vani & Co. A/c. 25,826
(Being the mini truck purchased on hire-purchase)
Vishnu Vani & Co. A/c Dr. 4,000
To Bank A/c. 4,000
(Being amount paid as down Payment)
2016
Mar. 31 Interest A/c Dr. 1,091
To Vishnu Vani & Co. A/c 1,091
(Being interest due @5% per annum)
Vishnu Vani & Co. A/c Dr. 8,000
To Bank A/c. 8,000
(Being I instalment paid)
2017
Mar. 31 Interest A/c Dr. 746
To Vishnu Vani & Co. 746
(Being interest due @ 5% for the year)
Vishnu Vani & Co. A/c Dr. 8,000
To Bank A/c. 8,000
(Being 11 instalment paid) Dr.
2018
Mar. 31 Interest A/c Dr. 337
To Vishnu Vani & Co. A/c. 337
(Being interest due for the year)
Vishnu Vani & Co. A/c. Dr 8,000
To Bank A/c.
(Being III & final instalment paid) 8,000
Note : It will be observed that before each instalment falls due interest for the year is credited
to the Hire-Vendor A/c. As the asset account is debited and the hire vendor’s A/c. credited
with the full value of the cash price in the beginning (1.4.2015) therc is no need to debit
and credit these accounts once again whenever an instalment is due.
LEDGER ACCOUNTS
 Dr. Vishnu Vani & Co. A/c. Cr.
2015 Rs. 2015 Rs.
Apr. 1 To Bank A/c. 4,000 Apr. 1 By Mini Truck A/c. 25,826
20l6 2016
Mar. 31 To Bank A/c 8,000 Mar.31 By Interest A/c. 1,091
“ To Balance c/d. 14,917 “
26,917 26,917

9
2017 2016
Mar. 31 To Bank A/c. 8,000 Apr.1 By Balance b/d. 14,917
To Balance c/d 7,663 2017
Mar. 31 Interest A/c. 746
15,663 15,663
2018 2017
Mar.31 To Bank A/c. 8,000 Apr.1 By Balance b/d. 7,663
2018 By Interest A/c. 337
8,000 Mar. 31 8,000

Mini Truck A/c

Dr Cr.
2015 Rs. Rs.
Apr.1 To Vishnu Vani Co. 25,826

Note : The hire purchaser will depreciate the Asset according to the method that he follows
annually.
Third Method (Interest Suspense Method) : Where the full cash price of the Asset as also the
total amount of interest payable are credited to the hire-vendor’s account in the beginning.
Journal
2015
Apr. 1 Mini Truck A/c. Dr 25,826
Interest suspense A/c. Dr 2,174
To Vishnu Vani & Co. A/c. 28,000
(Being mini tmck purchased on hire
purchase and the total interest payable)
Vishnu Vani & Co. A/c. Dr. 4,000
To Bank A/c 4,000
(Being amount paid as down Payment)
2016
Mar.31 Interest A/c. Dr. 1,091
To Interest Suspense A/c. 1,091
(Being interest of the year @5%)
Vishnu Vani & Co. A/c. Dr. 8,000
To Bank A/c. 8,000
(Being I Instalment paid)
2017
Mar. 31 Interest A/c Dr. 746
To Interest suspense A/c. 7,46
(Being interest for the year) -

10
 Vishnu Vani & Co. A/c. Dr. 8,000
To Bank A/c. 8000
(Being II Instalment paid)
2018
Mar. 31 Interest A/c. Dr. 337
To Interest suspense A/c. 337
(Being interest for the year)
Vishnu Vani & Co. A/c. Dr. 8,000
To Bank A/c. 8,000
(Being III & Final instalment paid)
Explanatory Note : As the asset is debited with the full cash price in the beginning, no further
debits will be necessary at the time of instalments. Similarly, the hire vendor’s a/c. is credited
with full amount of cash price as also the total interest payable for all the years in the beginning.
As such, no credit to his account is necessary at the time of instalments. His account will be
debited whenever any amount is paid.
When the instalment falls due, the interest calculated for each period (year) is trans-
ferred from Interest Suspense A/c. to Interest A/c. so that each year’s expense towards inter-
est is charged for the same period. After the entire interest is paid, the Interest Suspense A/
c.will be automatically closed. The Hire Vendor’s A/c. will also stand closed when the entire
hire-purchase price (cash price + interest) is paid to him.
These points may be better appreciated with the help of ledger accounts given below
IMPORTANT LEDGER ACCOUNTS
Dr. Mini Truck A/c Cr
2015 Rs Rs.
Apr. 1 To Vishnu Vani & Co.a/c 25,826

Vishnu & Co. A/c.

Dr. Cr.
2015 Rs. 2015 Rs.
Apr. 1 To Bank A/c. 4,000 Apr. 1 By Mini Truck A/c. 25,826
2016
Mar. 31 To Bank A/c. 8,000 “ By Interest
Suspense A/c 2,174
To Balance c/d 16,000
28,000 28,000
2017 2016
Mar. 31 To Bank A/c. 8,000 Apr. 1 By Balance b/d. 16,000
To Balance c/d 8,000
16,000 16,000
2018 2017
Mar. 31 To Bank A/c. 8,000 Apr.1 By Balance b/d. 8,000
8,000 8,000

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 Dr. Interest Suspense A/c. Cr
2015 RS. 2016 RS.
Apr. 1 To Vishnu Vani 2,174 Mar.1 By Interest A/c. 1,091
& Co. A/c By Balance c/d. 1,083
2,174 2,174
2016 2017
Apr.1 To Balance b/d. 1,083 Mar.31 By Interest A/c. 746
By Balance c/d. 337
1,083 1,083
2017 2018
Apr. 1 To Balance b/d 337 Mar.31 By Interest A/c. 337
337 337
Note
Interest Suspense A/c. (Balance) will appear tas an asset in the Balance Sheet, year after
year. This amount represents the interest that is not yet due i.e. interest of the future years.
Balance Sheet on 31 March 2016
Liabilities Rs. Assets Rs.
Hire Vendor 16,000 Interest Suspense A/c. 1083
Balance Sheet on 31st March 2017
Liabilities Rs. Assets Rs.
Hire Vendor 8,000 Interest Suspense A/c. 337

At the end of 31st March 20l8 there is no balance left in the Interest Suspense A/c.
Therefore, Interest Suspense A/c. will not appear in the balance sheet of 31 st March 2018
Similar is the case with Hire Vendor’s A/c.
Similarly, the amount due to the hire-vendor at the end of each accounting year will
appear as a liability as this amount represents the balance amount still payable.
In the above illustration, observe how Interest Suspense A/c. and Hire Vendor’s A/c.
appear in the balance sheet :
Which method to follow ?
The student may follow any of the three methods mentioned above unless the problem
suggests a particular method. For instance, the examination problem requires preparation of
interest suspense a/c., then, necessarily, the student will have to adopt the third method.

CHECK YOUR PROGRESS - 1

(a) What are the methods of recording transactions in the books of Hire-purchaser?
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12
(b) What is the journal entry for recording the purchase of asset by Hire-purchaser under
full cash price method?
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1.6 CHARGING DEPRECIATION IN THE BOOKS OF HIRE-

PURCHASER
While recording the hire-purchase transactions in the books of the hire-purchaser, an-
other aspect to be considered is depreciation of the asset. As the student must be well aware,
the business man usually provides for depreciation on all the fixed assets employed bv him in his
business. The property or the asset is charged with depreciation every year, whatever may be
the mode or manner of purchasing the asset-whether it is purchased for cash or on credit or on
hire purchase basis. Depreciation, it may be recalled, is the reduction in the value of an asset
due to wear and tear usage, lapse of time and obsolescence. Even though the asset does not
become the property of the purchaser until the last instalment is paid off under the hire-purchase
system, the purchaser makes use of the whole of the property from the time he takes possession.
Therefore, depreciation must be charged on full cash price of the rate provided. This is irrespective
of the fact whether the asset is recorded in the books of account of the hire- purchaser at full
cash price or not.
There are a number of methods of charging depreciation. For problems on hire-pur-
chase usually only two methods are followed viz., (1) Straight Line or Fixed Instalment Method,
and (2) Diminishing Balance or Reducing Instalment Method.
1. Straight Line Method : In this method, a fixed percentage of the original cost of the
asset is charged as depreciation every year. Thus, every year the value of the particular
asset gets reduced by a fixed amount At the end of the estimated life of the asset, its book
value finally gets reduced to nil or its scrap value, if any.
For instance, the original cost of a machine is Rs. 24,000 and its estimated life is 10 years.
At the end of 10 years, it is expected to fetch Rs. 4,000 when sold as scrap. It can be
seen that Rs. 20,000 (24,000 - 4,000) is expended over a period of 10 years i.e., 2000 for
each year. Thus, the amount of depreciation per annum is Rs. 2,000 or 10 per cent.
24,000 4,000
Under the straight line method. Rs. 2,000 is charged every year as
10
depreciation.
2. Diminishing Balance Method : This method is also known as Written Down Value
(WDV) Method. Unlike the first method, here the depreciation is charged at a certain
percentage every year, not on the original cost of the asset, but on its balance book value
i.e. value of the asset after depreciation is deducted. It needs hardly be emphasised that
the book value of the asset gets reduced progressively year after year as each year’s
depreciation is deducted from the asset value. While under the straight line method, the
same amount of depreciation is charged every year, the amount of depreciation under the
Diminishing Balance Method progressively decreases from year to year. The amount
charged as depreciation will become less and, less for each successive year. This is so
because the depreciation is calculated on the depreciated value of the asset, under the
Diminishing Balance Method.
13
 Whatever be the method, the same journal entries are passed to record depreciation and
transfer it to Profit and Loss Account at the end of every accounting period.
a) For charging Depreciation :
Depreciation A/c. Dr.
To Asset A/c. (Name of the asset)
b) For transfer to P & L A/c. :
Profit and Loss A/c. Dr
To Depreciation
The following instruction will further enable the student to appreciate the difference
in the calculations of depreciation under the two different methods, discussed above.
Illustration - 2
On 1st April 2015 the Reliable Transport Company signed an agreement for the pur-
chase of a mini-bus from Progressive Motor Ltd. under hire-purchase system. Rs. 25,000
was paid immediately as down-payment. The balance was to be paid in three equal
instalments of Rs. 20.000/- each on 31st March every year for three years. The cash
price of the Mini bus is Rs. 76,000/-. Interest was charged at 9 percent per annum by the
hire-vendors. The Reliable Motor Company charges depreciation @15 percent per annum
on Written Down Value.
Journalise these transactions, in the books of purchasing company assuming that the
asset is not recorded at full cash price but on accrual basis. Write up important ledger
accounts and show how the relevant items appear in the balance sheets of the three
years.
Solution
Analytical Table
Cash price 76,000
H P. Price 85,000
(25,000+20,000+20,000+20,000)
Date Down Payment or Principal Interest Cash Price still
instalment or cash price @9% due after this
paid Instalment
1 2 3 4 5
l-4-2015 Rs. 25,000 Rs. 25,000 - Rs. 51,000 (76,000-25,000)
31-3-2016 I Rs. 20,000 Rs. 15,410 Rs. 4,590 Rs. 35,590 (51,000-15,410)
31-3-2017 II Rs. 20,000 Rs. 16,797 Rs. 3,203 Rs. 18,793 (35,590-16,797)
31-3-2018 III Rs. 20,000 Rs. 18,793 Rs. 1,207 Nil (18,793-18,793)
Total Rs. 85,000 = Rs. 76,000 + Rs. 9,000
* Interest for the last year must be adjusted. Instalment amount minus cash price due at the
end of the previous year (20,000 - 18,793)

14
 In the Books of Reliable Transport Co.
Journal
2015 Rs. Rs.
Apr. 1 Mini Bus A/c. Dr. 25,000
To Progressive Motors 25,000
(Being Down Payment due on mini bus
Hire-purchased)
Progressive Motors Ltd. A/c. Dr. 25,000
To Bank A/c. 25,000
(Being amount paid as down payment)
2016
Mar. 31 Mini Bus A/c. Dr. 15,410
Interest A/c 4,590
To Progressive Motors Ltd., A/c 20,000
(Being Instalment due)
“ Progressive Motors Ltd. Dr. 20,000
To Bank A/c. 20,000
(Being I Instalment duly paid)
“ Depreciation A/c. Dr. 11,400
To Mini Bus A/c 11,400
(Being Depreciation at 15% i.e.,
15
76,000 x 100
)

“ Profit and Loss A/c. Dr. 15,990

To Depreciation A/c 11,400
To Interest A/c 4,590
(Being depreciation & interest transferred)
Note : Interest and Depreciation being expenses will be transferred to Profit and Loss A/c every
year.
20l17
Mar. 31 Mini Bus A/c. Dr. 16,797
Interest A/c , Dr. 3,203
To Progressive Motors Ltd. A/c. 20,000
(Being II Instalment due)
Progressive Motors Ltd. Dr. 20,000
To Bank A/c 20,000
(Being II Instalment duly paid)
Depreciation A/c. Dr. 9,690
To Mini Bus A/c. 9,690
(Being Depreciation at 15% i.e

15
 15
76,000-11,400 = 64,600 x 100 )

Profit and Loss A/c. Dr. 12,893

To Depreciation A/c. 9,690
To Interest A/c. 3,203
(Being depreciation & interest transferred)
2018
Mar.31 Mini Bus A/c. Dr. 18,793
Interest A/c. Dr. 1,207
To Progressive Motors Ltd. 20,000
(Being III Instalment due)
Progressive Motors Ltd. Dr. 20,000
To Bank A/c. 20,000
(Being final Instalment Paid)
Depreciation A/c. Dr. 8,237
To Mini Bus A/c. 8,237
(Being Depreciation @ 15%
64,600-9,690 = 54,910 x 15 /100
Profit and Loss A/c. Dr. 9,444
To Depreciation A/c. 8,237
To Interest A/c. 1,207
(Being depreciation & interest transferred)
IMPORTANT LEDGER ACCOUNTS
Mini Bus A/c.
Dr. Cr.
2015 Rs. 2016 Rs.
Apr 1 To Progressive Mar. 31 By Depreciation 11,400
Motors Ltd. A/c. 25,000 By Balance c/d. 29,010
To Mini Bus A/c 15,410
40,410 40,410
2016 2017
Apr.1 To Balance b/d 29,010 Mar.31 By Depreciation 9,690
2017
Mar 31 To Progressive By Balance c/d 36,117
Motors Ltd A/c 16,797 .
45,807 45,807
2017 2018
Apr. 1 To Balance b/d 36,117 Mar.31 By Depreciation 8,237
2018

16
Mar.31 To Progressive
Motors Ltd A/c 18,793 By Balance c/d. 45,673
54,910 54,910
Dr. Progressive Motors Ltd. A/c. Cr.
2015 2015
Apr.1 To Bank A/c.. 25,000 Apr.1 By Mini Bus A/c. 25,000
2016 2016
Mar.31 To Bank A/c. 20,000 Mar.31 By Mini Bus A/c. 15,410
By Interest A/c. 4,590
45,000 45,000
2017 2018
Apr.1 To Bank A/c. 20,000 Mar. 31 By Mini Bus A/C. 16,797
By Interest 3,203
20,000 20,000
154
20l7 2017
Mar.31 To Bank A/c. 20,000 Mar. 31 By Mini Bus A/c. 18,793
By Interest A/c. 1,207
20,000 20,000
Note :The Hire-Vendor A/c. (Progressive Motors Ltd.) does not show any balance in any
year. This is so because full cash price of the asset is not credited to Hire-Vendors under this
method.
The account does not figure in the balance sheet.

Balance Sheet on 31st March 2016

Liabilities Rs. Assets Rs.

Mini Bus 40,410
Less :
Depreciation 11,400 29,010

Balance Sheet on 31st March 2017

Liabilities Rs. Assets Rs.

Mini Bus 45,807
(29,010+16,797) -
Less :
Depreciation 9,690 36,117

17
 Balance Sheet on 31st March 2018
Liabilities Rs. Assets Rs.
Mini Bus 54,910
(36,117+18,793)
Less : Depreciation
8.,237 46,673
Illustration - 3
Srinivasa Colliery Co. purchased a wagon from Srikant Engineering Ltd. on hire pur-
chase basis. The agreement was signed on 1st April 2013 and the collery company paid Rs.
5.000 in cash on the same day. The remaining amount was paid in five annual instalments of Rs.
5,000. Rs. 7,000, Rs. 8,000, Rs. 10,000 and Rs. 9,000 respectively beginning from 31st March
2014. The cash price of the wagon was Rs. 34,000 the rate of interest being 10% p.a.
Srinivas Colliery Company depreciates the wagons @ 15% on Straight Line Method.They
record the value of the asset at full cash price on the date of purchase.
You are required to write the journal entries and prepare the ledger accounts in the books
of the hire purchasers.
Solution
Hire Purchase price = Rs. 44,000 (Rs. 5,000 + 5,000 + 7,000 + 8,000 + 10,000 + 9,000)
Cash price (given) = Rs. 34,000
Total interest charged by the Hire Vendors = Rs. 10,000
Analytical Table
Date Down Payment Principal Interest Cash Price still
or instalment Or cash price @ 10% due after this
paid instalment
Rs Rs Rs Rs.
1 2 3 4 5
1 -4-2013 5.000 5,000 - 29,000 (34,000-5,000)
31-3-2014 5,000 2,100 2,900 26,900 (29,000-2,100)
31-3-2015 II 7,000 4,310 2,690 22,590 (26,900-4,310)
31-3-2016 III 8,000 5,741 2,259 16,849 (22,590-5,741)
31-3-2-17 I 10,000 8,315 1,685 8,534 (16,849-8,315)
31-3-2018 V 9,000 8,534 466 —
Total Rs. 44,000 Rs. 34,000 + Rs.10,000
In the Books of Srinivasa Colliery Co.
Journal
2013
Apr. 1 Wagons A/c. Dr. 34,000
To Srikant Engg. Ltd. A/c. 34,000
(Being the cash price due’ on the wagon
hire-purchased)
Srikanth Engg. Ltd. A/c. Dr. 5,000

18
 To Cash A/c. 5,000
(Being Down Payment made)
2014
Mar. 31 Interest A/c. Dr. 2,900
To Srikanth Engg. Ltd. A/c. 2,900
(Being Interest due @ 10%)
“ Srikant Engg. Ltd. A/c. Dr. 5,000
To Bank A/c. 5,000
(Being I Instalment paid)
“ Depreciation A/c. Dr. 5,100
To Wagons A/c. 5,100
(Being depreciation @ 15%)
“ Profit & Loss A/c. Dr. 8,000
To Depreciation A/c. 5,100
To Interest A/c. 2,900
(Being Depreciation and Interest transferred)
2014
Mar.31 Interest A/c. Dr. 2,690
To Srikant Engg. Ltd. A/c. 2,690
(Being Interest due for the year)
“ Srikant Engg. Ltd. A/c. Dr. 7,000
To Bank A/c 7,000
(Being II Instalment paid)
“ Depreciation A/c. Dr 5,100
To Wagons A/c. 5,100
(Being depreciation @ 15%)
“ Profit & Loss A/c. Dr. 7,790
To Depreciation A/c.. 5,100
To Interest A/c. 2,690
(Being Depreciation and Interest transferred)
2016
Mar. 31 Interest A/c. Dr. 2,259
To Srikant Engg. Ltd. A/c. 2,259
(Being Interest due for the year)
“ Srikant Engg. Ltd. A/c. Dr. 8,000
To Bank A/c 8,000
(Being III Instalment paid)
Depreciation A/c. Dr. 5,100
To Wagons A/c. 5,100
19
 (Being depreciation % 15%)
Profit & loss A/c. Dr. 7,359
To Depreciation A/c. 5,100
To Interest A/c. 2,259
(Being Depreciation and Interest transferred)
2017
Mar. 31 Interest A/c. Dr. 1,685
To Srikant Engg. Ltd. A/c. 1,685
(Being Interest due for the year)
Srikant Engg. Ltd. A/c. Dr. 10,000
To Bank A/c 10,000
(Being IV Instalment paid)
Depreciation A/c. Dr. 5,100
To Wagons A/c. 5,100
(Being depreciation @ 15%)
Profit & Loss A/c. Dr. 6,785
To Depreciation A/c.. 1,685
To Interest A/c. 5,100
(Being Depreciation and Interest transferred)
2018
Mar. 31 Interest A/c. Dr 466
To Srikant Engg. Ltd. A/c. 466
(Being Interest due for the year)
Srikant Engg. Ltd. A/c. Dr. 9,000
To Bank A/c 9,000
(Being V & Final Instalment paid)
Depreciation A/c. Dr. 5,100
To Wagons A/c. 5,100
(Being depreciation @ 15%)

Profit & Loss A/c. Dr. 5,566

To Depreciation A/c. 5,100
To Interest A/c. 466
(Being Depreciation and Interest transferred)

Note : It is assumed that Srinivas Colliery Co. closes accounts on 31 st March every year

20
 Explanation : The instalment amounts may be uniform or different depending on the agreement.
Wagons A/c.
Dr. Cr.
2013 Rs. 2014 Rs.
Apr. 1 To Srikanth Mar. 31 By DepreciationA/c 5,100
Engg. Ltd.A/c 34,000 By Balance c/d 28,900
34,000 34,000
2014 2015
Apr. 1 To Balance b/d. 28,900 Mar.31 By DepreciationA/c 5,100
By Balance c/d. 23,800
28,900 28,900
20l5 2016
Apr. 1 To Balance b/d. 23,800 Mar.31 By Depreciation A/c. 5,100
By Balance c/d. 18,700
23,800 23,800
2016 2017
Apr. 1 To Balance b/d. 18,700 Mar.31 By Depreciation A/c. 5,100
By Balance c/d. 13,600
18,700 18,700

2017 2018
Apr. 1 To Balance b/d. 13,600 Mar.31 By Depreciation A/c. 5,100
By Balance c/d. 8,500
13,600 13,600

Srikant Engg. Ltd. A/c.

Dr Cr.
2013 Rs. 2013 Rs.
Apr. 1 To Cash A/c. 5,000 Apr.1 By Wagons A/c. 34,000
2014 2014
Mar. 31 To Bank A/c. 5,000 Mar. 31 By Interest A/c. 2,900
To Balance c/d. 26,900
36,900 36,900
2015 2014
Mar. 31 To Bank A/c. 7,000 Apr. 1 By Balance b/d. 26,900
“ To Balance c/d. 22,590 2015
Mar.31 By Interest A/c. 2,690
29,590 29,590

21
2016 2015
Mar. 31 To Bank A/c. 8,000 Apr. 1 Bv Balance b/d. 22,590
2016 2016
Mar. 31 To Balance c/d. 16,849 Mar. 31 By Interest A/c. 2,259
24, 849 24,849
2017 2016
Mar. 31 To Bank A/c. 10,000 Apr.1 By Balance b/d. 16,849
2017 2017
Mar. 31 To Balance c/d. 8,534 Ma.r. 31 By Interest A/c. 1,685
18,534 18,534
2018 2018
Mar. 31 To Bank A/c. 9,000 Apr. 1 By Balance b/d. 8,534
2018
Mar. 31 By Interest A/c. 466
9,000 9,000

Depreciation A/c.
Dr. Cr.
2014 Rs. 2014 Rs.
Mar.31 To Wagons A/c 5,100 Mar.31 By P&L A/c 5,100
2015 2015
Mar.31 To Wagons A/c 5,100 Mar.31 By P&L A/c 5,100
2016 2016
Mar.31 To Wagons A/c 5,100 Mar.31 By P&L A/c 5,100
2017 2017
Mar.31 To Wagons A/c 5,100 Mar.31 By P&L A/c 5,100
2018 2018
Mar.31 To Wagons A/c 5,100 Mar.31 By P&L A/c 5,100

Interest A/c.
Dr. Gr.
2014 Rs. 2014 Rs.
Mar. 31 To Srikant Mar. 31 By P & L A/c. 2,900
Engg. Ltd. A/c. 2,900 transferred
2015 2015
Mar. 31 To Srikant Mar. 31 By P & L A/c. 2,690
Engg, Ltd. A/c. 2,690 transferred

22
2016 2016
Mar. 31 To Srikant Mar. 31 By P & L A/c. 2,259
Engg. Ltd. A/c. 2,259 transferred
2017 2017
Mar. 31 To Srikant Mar. 31 By P & L Ac. 1,685
Engg. Ltd. A/c. 1,685 transferred
2018 2018
Mar. 31 To Srikant Mar. 31 By P & L Ac. 466
Engg. Ltd. A/c. 466 transferred

Profit and Loss A/c

for the year ending 31st March 2014
Dr Cr
Rs. Rs.
To Depreciation A/c. 5,100
To Interest A/c. 2,900

Profit and Loss A/c

for the year ending 31st March 2015
Dr Cr
Rs Rs.
To Depreciation A/c 5,100
To Interest A/c. 2,690

Profit and Loss A/c

for the year ending 31st March 2016
Dr Cr
Rs. Rs.
To Depreciation A/c 5,100
To Interest A/c. 2,259

Profit and Loss A/c

for the year ending 31st March 2017
Dr. Cr.
Rs Rs.
To Depreciation A/c. 5,100
To Interest A/c. 1,685

23
 Profit and Loss A/c
for the year ending 31st March 2018
Dr. Cr.
Rs Rs.
To Depreciation A/c. 5,100
To Interest A/c. 466

If the student is required to show how the items appear in the Balance Sheets of various years,
should be answered as follows:
(It is not asked in the present problem).
Balance Sheet as on 31st March 2014
Liabilities Rs Assets Rs.
Creditors for wagons
Srikant Engg Ltd. A c. 26,900 Wagons 34,000
Less : Depn. 5,100 28,900

Balance Sheet as on 31st March 2015

Liabilities Rs. Assets Rs.
Creditors for wagons 22,590 Wagons 28,900
Less : Depn. 5,100 23,800

Balance Sheet as on 31st March 2016

Liabilities Rs Assets Rs.
Creditors for wagons 16,849 Wagons 23,800
Less : Depn. 5,100 18,700

Balance Sheet as on 31st March 2017

Liabilities Rs. Assets Rs.
Creditors for wagons 8,534 Wagons 18,700
Less : Depn. 5,100 13,600

Balance Sheet as on 31st March 2018

Liabilities Rs. Assets Rs.
Creditors for wagons Nil Wagons 13,600
Less : Depn. 5,100 8,500

CHECK YOUR PROGRESS - 2

1. How do you differentiate Straight-line Method from Reducing Balance Method?
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24
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1.7 RECORDING THE TRANSACTIONS IN THE BOOKS OF

HIRE VENDOR
Having learnt the method of recording the hire-purchase transactions in the books of
hire-purchaser, we shall now proceed to learn how these transactions are recorded in the books
of the hire-vendor. The goods sold by him on hire-purchase are treated as sales in the books of
the hire-vendors. However, he may credit hire-purchase sales account instead of sales A/c. to
distinguish the hire-purchase sales from the ordinary sales. Cash price of the goods is credited
to the sales A/c. (or hire-purchase sales A/c.). Interest charged to the hire-purchaser, being
income to the hire-vendor, will be credited in his books to the interest A/c, and is transferred to
Profit and Loss A/c. (Cr.) later on.
There are two methods of recording the hire-purchase transactions in the books of the
hire-vendor. In the first method, interest due at the time of each instalment will be debited to the
hire-purchaser A/c. and credited to interest A/c. In the second method, the total interest payable
by the hire-purchaser (i.e., the difference between the hire-purchase Price and the cash price)
is credited to an account styled as Interest Suspense A/c. and the amount is debited along with
the cash price to the hire-purchaser A/c. At the time when instalment becomes due, interest
suspense A/c is debited and interest A/c. is credited. The difference between the two methods
is only with regard to recording of the interest. Let us observe the model entries under each
method (in the books of Hire-Vendor).
First Method :
(i) When goods are sold on hire-purchase :
Hire Purchaser A/c. Dr. (Total cash price)
To Hire-purchase Sales A/c.
(ii) For receiving cash as Down Payment:
Cash/Bank/A/c. Dr.
To Hire Purchaser’s A/c
(iii) For interest due on instalment at the end of the year :
Hire-Purchaser’s A/c. Dr.
To Interest A/c
(iv) For receipt of the instalment :
Cash/Bank A/c. Dr
To Hire-Purchaser’s A/c.
(v) For transfer of interest to P &L A/c. :
Interest A/c. Dr.
To Profit & Loss A/c
Note : While the first two entries arise only in the first year at the time of entering into the
contract of sale, entries (iii) (iv) and (v) will be repeated every year till the last instal-
ment is received.

25
Second Method :
(i) When goods are sold on hire-purchase :
Hire Purchaser A/c. Dr. (Total Hire-purchase price)*
To Hire-purchase Sales A/c. (Total cash price)
To Interest Suspense A/c. (Total interest or hire-purchase price-
cash price)
(ii) For receiving cash as Down Payment:
cash/Bank A/c. Dr.
To Hire Purchaser’s A/c
(iii) For interest due on instalment at the end of the year :
Interest Suspense A/c. Dr.
To Interest A/c

(iv) For receiving the instalment:

Cash/Bank A/c. Dr.
To Hire-Purchaser’s A/c.

(v) For transfer of interest to P & L A/c.

Interest A/c. Dr.
To Profit & Loss A/c

Note : Entries (iii), (iv) and (v) will be repeated every year until the last instalment is received..
The balance in the Interest Suspense A/c. will appear on the liability side of the balance
sheet representing the portion of interest, not yet due against the total interest debited to
hire purchaser’s A/c in the beginning. The balance in the hire-purchaser s A/c repre-
senting the cash price as well as interest receivable will appear as an asset.
Illustration - 4
A cement Co., Castle Cement Co. Ltd., purchased three trucks on 1-4-2015 from Globe
Vehicles Ltd., on hire-purchase basis. The terms are as follows:
1. Down Payment Rs. 2,00,000
2. Three Annual Instalments
Payable on 31st March 2016-2017, Rs. 2,00,000 each
3. Rate of interest charged 5 per cent per annum.
4. Cash price Rs. 7,45,000
Castle Co. Ltd. depreciates the trucks annually at 10% on diminishing balance.
Write journal entries in the books of both the parties. Prepare the Hire-Purchaser ‘s A/c
in the Vendor’s Ledger.

26
Solution
Analytical Table

Date Down Payment Principal Interest Cash Price still

or instalment amount @9% due after this
paid Instalment
Rs. Rs. Rs. Rs.
1 2 3 4 5
1-4-15 2,00,000 2,00,000 - 5,45000 (7,45,000-2,00,000)
31-3-16 2,00,000 1,72,750 27,250 3,72,250 (5,45,000-1,72,750)
31-3-17 2,00,000 1,81,387 18,613 1,90,863 (3,72,250-1,81,387)
31-3-18 2,00,000 1,90,863 9,137 Nil
Total 8,00,000 7,45,000 55,000

In the Books of Castle Cement Co. Ltd.

(Hire-purchaser’s)

Journal
2015
Apr.1 Trucks A/c. Dr. 2,00,000
To Global Vehicle Ltd. A/c. 2,00,000
(Being down payment due on trucks)

2015
Apr. 1 Globe Vehicles Ltd. A/c. Dr. 2,00,000
To Bank A/c. 2,00,000
(Being down payment paid)
2016
Mar. 31 Truck A/c. Dr. 1,72,750
Interest Dr. 27,250
To Globe Vehicles Ltd. A/c. 2,00,000
(Being 1st instalment due)

“ Globe Vehicles Ltd. A/c. Dr. 2,00,000

To Bank A/c. 2,00,000
(Being I instalment paid)

Depreciation A/c Dr. 74,500

To Trucks A/c 74,500
(Being depreciation @ 10%

27
“ Profit & Loss A/c. Dr. 1,01,750
To Depreciation A/c 74,500
To Interest A/c. 27,250
(Being Depreciation and Interest
transferred)
2017
Mar. 31 Truck A/c. Dr. 1,81,387
Interest Dr 18,613
To Globe Vehicles Ltd. A/c. 2,00,000
(Being II instalment due)

“ Globe Vehicles Ltd. A/c. Dr. 2,00,000

To Bank A/c. 2,00,000
(Being II instalment paid)

“ Depreciation A/c Dr. 67,050

To Trucks A/c 67,050
(Being depreciation @ 10%

“ Profit & Loss A/c. Dr. 85,663

To Depreciation A/c 67,050
To Interest A/c. 18,613
(Being Depreciation- and Interest
transferred)

2017
Mar. 31 Truck A/c. Dr. 1,90,863
Interest A/c. Dr. 9,137
To Globe Vehicles Ltd. A/c. 2,00,000
(Being III instalment due)
“ Globe Vehicles Ltd. A/c. Dr. 2,00,000
To Bank A/c. 2,00,000
(Being III instalment paid)
“ Depreciation A/c Dr. 60,345
To Trucks A/c 60,345
(Being depreciation @ 10%)
“ Profit & Loss A/c. Dr. 69,482
To Depreciation A/c 60,345
To Interest A/c. 9,137
(Being Depreciation and Interest
transferred)

28
 In the Books of Globe Vehicles Ltd.
(Hire-Vendors)
Journal
2015
Apr. 1 Castle Cement Co. Ltd. A/c. Dr. 7,45,000
To Sales A/c. 7,45,000
(Being sale of 3 trucks on hire-purchase)
“ Bank A/c. Dr. 2,00,000
To Castle Cement Co. Ltd. A/c. 2,00,000
(Being amount received as down payment)
2016
Mar. 31 Castle Cement Co. Ltd. A/c Dr. 27,250
To Interest A/c. 27,250
(Being interest receivable for the year)
“ Bank A/c. Dr. 2,00,000
To Castle Cement Co. Ltd. A/c. 2,00,000
(Being I instalment received)
“ Interest A/c. Dr. 27,250
To Profit and Loss A/c. 27,250
(Being interest transferred)
2017
Mar. 31 Castle Cement Co. Ltd. A/c Dr. 18,613
To Interest A/c. 18,613
(Being interest receivable for the year)
“ Bank A/c. Dr. 2,00,000
To Castle Co. Ltd. Cement A/c. 2,00,000
(Being II instalment received)
“ Interest A/c. Dr, 18,613
To Profit and Loss A/c. 18,613
(Being interest transferred)
2018
Mar.31 Castle Cement Co. Ltd. A/c Dr. 9,137
To Interest A/c. 9,137
(Being interest received for the year)
“ Bank A/c. Dr. 2,00,000
To Castle Cement Co. Ltd. A/c. 2,00,000
(Being final instalment received)

29
“ Interest A/c. Dr. 9,137
To Profit and Loss A/c. 9,137
(Being interest transferred)

Castle Cement Co. Ltd. A/c.

Dr. Cr.
2015 2015
Apr.1 To Sales A/c. 7,45,000 Apr.1 By Bank A/c. 2,00,000
2016 2016
Mar.31 To Interest A/c. 27,250 Mar.31 By Bank A/c. 2,00,000
By Balance c/d. 3,72,250
7,72,250 7,72,250
2016 2017
Apr.1 To Balance b/d. 3,72,250 Mar.31 By Bank A/c 2,00,000
To Interest A/c. 18,613 By Bank c/d. 1,90,863
3,90,863 3,90,863
2017 2018
Mar. 31 To Balance b/d. 1,90,863 Mar.31 By Bank A/c. 2,00,000
To Interest A/c. 9,137
2,00,000 2,00,000

Note :
1. Sales A/c. in the Vendor’s books will be transferred to trading A/c. along with other sales
at the end of the year.
Sales A/c. Dr.
To Trading A/c.
2 The question does not specify or indicate the method to be followed either in the ease of
hire-purchaser or the hire-vendor books. Here, the first method is followed in both the
cases.
Illustration - 5
On 1st April 2015 Gangadhar Manufacturing Company purchased a machine from Modem
Machineries Ltd. Rs. 20,000 was paid immediately and further three instalments of Rs. 25,000
each was paid by Gangadhar Manufacturing Co. on 31st March 2016, 2017 and 2018 respectively.
The rate of interest was 6% p.a. Cash price of the machine was Rs. 86,830.
Write up the journal of Gangadhar Manufacturing Co. assuming that it provides depre-
ciation 10% on Straight Line Method. ,
Also write the journal entries as they appear in the books of Modem Machineries Ltd.
and prepare the following ledger accounts : (i) Gangadhar Mfg. Co. A/c. (ii) Interest Suspense
A/c. (iii) Interest A/c. and (iv) Profit and Loss A/c. Show further how the relevant items appear
in the Balance Sheet.

30
Solution
As Interest Suspense A/c. is indicated in the problem both books will be prepared fol-
lowing the Interest Suspense Method,
Analytical Table
Date Down Payment Principal/ Interest Cash Price still
or instalment or cash price @6% due after this
paid instalment
Rs Rs Rs Rs.
1 2 3 4 5
l-4-2015 20,000 20,000 - 66,830(86,830-20,000)
31-3-2016 25,000 20,990 4,010 45,840(66,830-20,990) ,
31-3-2017 25,000 22,250 2,750 23,590 (45,840-22,250)
31-3-2018 25,000 23.590 1,410 (23,590-23,590)
Total 95,000 86,830 8,170

In the Books of Gangadhar Mfg. Co.

Journal
2015
Apr.1 Machinery A/c. Dr. 86,830
Interest Suspense A/c Dr. 8,170
To Modern Machineries Ltd. A/c. 95,000
(Being the amount payable on machinery
including interest)
Modem Machineries Ltd. A/c. Dr. 20,000
To Bank A/c. 20,000
(Being amount paid as down payment)
2016
Mar31 Interest A/c. Dr. 4,010
To Interest Suspense A/c. 4,010
(Being interest for the year transferred from
Interest Suspense A/c.)
2016
Mar.31 Modem Machineries Ltd. A/c Dr. 25,000
To Bank A/c. 25,000
(Being I Instalment paid)
“ Depreciation A/c. Dr. 8,683

31
 To Machinery men A/c. 8,683
(Being Depreciation @ 10%)
Profit & Loss A/c Dr 12,693
To Depreciation A/c. 8,683
To Interest A/c. 4,010
(Being Depreciation and interest transferred)

2017
Mar. 31 Interest A/c. Dr 2,750
To Interest Suspense A/c. 2,750
(Being interest for the year transferred)
Modern Machineries Ltd. A/c. 25,000
To Bank A/c. 25,000
(Being II Instalment paid)
Depreciation A/c. Dr. 8,683
To Machinery A/c. 8,683
(Being Depreciation @ 10%)
Profit & Loss A/c Dr. 11,433
To Depreciation A/c. 8,683
To Interest A/c. 2,750
(Being Depreciation and interest transferred)

2018
Mar.31 Interest A/c Dr. 1,410
To Interest Suspense A/c. 1,410
(Being interest for the year transferred)
“ Modem Machineries Ltd. A/c. 25,000
To Bank A/c. 25.000
(Being III Instalment paid)
Depreciation A/c. Dr. 8,683
To Machinery A/c. 8,683
(Being Depreciation @ 10%)
Profit & Loss A/c Dr 10,093
To Depreciation A/c. 8,683
To Interest A/c. 1,410
(Being Depreciation and interest transferred)

32
 In the Books of Modern Machineries Ltd.
Journal
2015 Rs. Rs.
Apr.1 Gangadhar Mfg. Co. A/c. Dr. 95,000
To Sales A/c. 86,830
To Interest Suspense A/c. 8,170
(Being the amount receivable on machinery
sold on hire-purchase)
“ Bank A/c. Dr. 20,000
To Gangadhar Mfg. Co. Ltd. A/c 20,000
(Being down payment received)
2016
Mar. 31 Interest Suspense A/c. Dr. 4,010
To Interest A/c.
(Being interest for the year) 4,010
“ Bank A/c.. Dr, 25,000
To Gangadhar Mfg. Co. A/c. 25,000
(Being I Instalment received)
“ Interest A/c. Dr. 4,010
To Profit & Loss A/c 4,010
(Being interest transferred)
2017
Mar. 31 Interest Suspense A/c. Dr. 2,750
To Interest A/c. 2,750
(Being interest for the year)
“ Bank A/c. Dr. 25,000
To Gangadhar Mfg. Co. A/c. 25,000
(Being II Instalment received)
2018
Mar. 31 Interest A/c. Dr. 2,750
To Profit & Loss A/c 2,750
(Being interest transferred)
Interest Suspense A/c. Dr. 1,410
To Interest A/c. 1,410
(Being interest for the year)
Bank A/c. Dr. 25,000
To Gangadhar Mfg. Co. A/c. 25,000
(Being III & final Instalment received)

33
“ Interest A/c. Dr. 1,410
To Profit & Loss A/c 1,410
(Being interest transferred)
Ledger of Modern Machines LTD.

Dr Gangadhar Mfg.Co.a/c Cr.

2015 Rs. 2015 Rs.

Apr I To Sales 86,830 Apr. 1 By Bank A/c. 20,000
To Int. Sus. A/c. 8,170
2016
Mar. 31 By Bank A/c. 25,000
By Balance c/d 50,000
95,000 95,000
2016 2017
Mar 1 To Balance b/d. 50,000 Mar. 31 By Bank A/c. 25,000
By Balance c/d. 25,000
50,000 50,000
2017 2018
Mar.31 To Balance b/d. 25,000 Mar 31 By Bank A/c. 25,000
25,000 25,000
Interest suspense a/c
Dr Cr.
2016 Rs. 2015 Rs.
Mar.31 To Interest A/c 4,010 Apr.1 By Gangadhar Mfg.A/c 8,170
To Balace c/d 4,160
8,170 8,170
2017 2016
Mar.31 To Interest A/c 2,750 Apr.1 By Balance b/d. 4,160
To Balace c/d 1,410
4,160 4,160
2018 2017
Mar.31 To Interest A/c 1,410 Apr.1 By Balance b/d 1,410
1,410 1,410
Interest a/c
Dr Cr.
2016 Rs. 2016 Rs.
Mar. 31 To P & L A/c 4,010 Mar.31 By Int.Sus. A/c 4,010
31-3-17 To P & L A/c 2,750 31-3-17 By Int.Sus. A/c 2,750
31-3-18 To P & L A/c 1,410 31-3-18 By Int.Sus. A/c 1,410

34
 Profit & Loss A/c.
for the year ending 31-3-2016
Dr. Cr.
Rs. Rs.
By Interest A/c. 4,010

Profit & Loss A/c.

for the year ending 31 -3-2017
Dr. Cr.
Rs. Rs.
By Interest A/c. 2,750

Profit & Loss A/c.

for the year ending 31-3-2018
Dr. Cr.
Rs. Rs.
By Interest A/c. 1,410

Modern Machineries Limited

Balance Sheet as on 31st March, 2016
Dr. Cr.
Rs. Rs.
Interest- Suspense A/c 4,160 Gangadhar Mfg.Co. 50,000

Balance Sheet as on 31st March, 2017

Dr. Cr.
Rs. Rs.
Interest Suspense A/c 1,410 Gangadhar Mfg.Co. 25,000

Balance Sheet as on 31st March, 2018

Dr. Cr.
Rs. Rs.
Interest Suspense A/c Nil Gangadhar Mfg.Co. Nil

We have, so far, worked out problems where rate of interest, total cash price and
instalments are given. In problems on hire-purchase, some times, information on one of these
items is not given, we will have to calculate this missing information on the basis of informa-
tion provided in the problem.

35
1.8 PROCEDURE FOR WORKING OUT THE PROBLEMS
WHEN CASH PRICE IS NOT GIVEN
Illustration - 6
On 1st April 2014 Ronald Enterprises purchased a machinery from Wahab-Industries
Ltd. on hire-purchase and immediately paid Rs. 10,000. The balance was paid in four annual
instalments of Rs. 10,000 each 31st March every year. Interest was charged @ 10% on the
balance of cash price.
Ronald Enterprises depreciates Machinery @ 15% on reducing balance method.
Prepare Ledger Accounts in the books of both parties.
Explanation : Cash price is not given m the problem. Hence, this must be ascertained first.
Cash price can be ascertained from the procedure given below:
(a) Take up the last instalment first (4th year). The instalment amount is inclusive of the
interest. Therefore, find out the interest component by the following formula.

Rate (of interest)

Instalment Amount x ________________
100 + Rate

10
For ex. when instalment is Rs 10,000 and rate of interest is 10%, 10,000 x
100  10
(b) The same formula must be applied to find out the interest for the third year, then the
second year and finally, for the first year. This is known as “Work Back’ method.
(c) The cash price paid for the fourth year should be added to the amount of interest of the
third year before applying the formula to find out the interest component for the third
year. The reason is that at that time 3rd instalment is due, the cash price of the 4th
instalment is also due.
Similarly for the second year cash prices paid in third and fourth years should be included
and for the first year, cash prices of II, III and IV years be included.
Now, let us attempt the solutions of the problem, accordingly.
Solution
Table for ascertainment of Cash Price
Year Instalment Interest paid Cash price paid
Rs Rs

31-3-18
10
(4th year) 10,000 10,000  = 909 9,091 (10,000-909)
100  10

10
31-3-17 10,000 10,000 + 9,091 
100  10

10
= 19,091  = 1,736 8,264(10,000-1,736)
110

36
31-3-16 10,000 10,000+8264+9091

10
=27,355  = 2,487 7,513(10,000-2,487)
110

10
31-3-15 10,000 10,000+7,513+8,264+9,091 
110

10
= 34,868  =3,170 6,830(10,000-3,170)
110
1-4-14 10,000 Down Payment - 10,000
No Interest
Total 50,000 INT 8,302 C.P. 41,698

In the Books of Ronald Enterprises

(Hire Purchasers)
LEDGER ACCOUNTS
Machinery A/c.
Dr. Cr
2014 Rs. 2015 Rs.
Apr, 1 To Wahab Indts. A/c. Mar. 31 By Depreciation A/c. 6,255
Ltd. A/c 41,698 By Balance c/d. 35,443
41,698 41,698
2015 2016
Apr.1 To Balance b/d. 35,443 Mar. 31 By Depreciation A/c. 5,316
By Balance c/d. 30,127
35,443 35,443
2016 2017
Apr. 1 To Balance b/d 30,127 Mar. 31 By Depreciation A/c. 4,519
By Balance c/d. 25,608
30,127 30,127
2017 2018
To Balance b/d 25,608 Mar. 31 By Depreciation A/c. 3,841
By Balance c/d. 21,767
25,608 25,608

Wahab Industries Ltd. A/c

Dr. Cr
2014 Rs. 2014 Rs.
Apr.1 To Bank A/c. 10,000 Apr.1 By Machinery A/c 41,698

37
2015 2015
Mar.31 To Bank A/c. 10,000 Mar.31 By Interest A/c. 3,170
To Balance c/d 24,868
44,868 44,868
2016 2015
Mar. 31 To Bank A/c. 10,000 Apr. 1 By Balance b/d. 24,868
To Balance c/d. 17,355 2016
Mar. 31 By Interest A/c 2,487
27,355 27,355
2017 2016
Mar. 31 To Bank A/c. 10,000 Apr.1 By Balance b/d. 17,355
To Balance c/d. 9,091 2017
Mar.31 By Interest A/c. 1,736
19,091 19,091
2018 2017
Mar 31 To Bank A/c 10,000 Apr.1 By Balance b/d. 9,091
2018
Mar.31 By Interest A/c. 909
10.000 10,000
Interest A/c.
Dr Cr.
2015 Rs. 2015 Rs.
Mar.31 To Wahab Indts 3,170 Mar. 31 By P& L A/c, 3,170
2016 2016
Mar.31 To Wahab Indts 2,487 Mar. 31 By P& L A/c. 2,487
2017 2017
Mar. 31 To Wahab Indts 1,736 Mar. 31 By P& L A/c. 1,736
2018 2018
Mar. 31 To Wahab Indts 909 Mar. 31 By P& L A/c. 909

Depreciation A/c.
Dr. Cr.
2015 Rs. 2015 Rs.
Mar. 31 To Machinery A c 6,255 Mar. 31 By P& L A/c. 6,255
2016 2016
Mar. 31 To Machinery A c 5,316 Mar. 31 By P& L A/c. 5,316
2017 2017
Mar. 31 To Machinery A c 4,519 Mar. 31 By P& L A/c. 4,519

38
2018 2018
Mar. 31 To Machinery A c 3,841 Mar. 31 By P& L A/c. 3,841
Profit & Loss A/c.
for the year ending 31st March 2015
Dr. Cr.
Rs Rs
To Interest 3,710
To Depreciation 6,255

Profit & Loss A/c.

for the year ending 31st March 2016
Dr. Cr.
Rs. Rs.
To Interest 2,487
To Depreciation 5,316

Profit & Loss A/c.

for the year ending 31st March 2017
Dr. Cr.
Rs. Rs

To Interest 1,736
To Depreciation 4,519
Profit & Loss A/c.
for the year ending 31st March 20l8
Dr. Cr
Rs. Rs.
To Interest 909
To Depreciation 3,841

In the Books of Wahab Industries Ltd

(Hire Vendors)
Ledger Accounts
Ronald Enterprises A/c
Dr. Cr
2014 Rs. 2014 Rs.
Apr. 1To Sales A/c. 41,698 Apr. 1 By Bank A/c. 10,000
2015 2015
Mar. 31 To Interest A/c. 3,170 Mar. 31 By Bank A/c. 10,000

39
 By Balance c/d. 24,868
44,868 44,868
2015 2016
Apr 1 To Balance b/d. 24,868 Mar. 31 By Bank A/c 10,000
2016
Mar. 31 To Interest A/c. 2,487 “ By Balance c/d. 17,355
27,355 27,355

2016 2017
Apr. 1 To Balance b/d. 17,355 Mar. 31 By Bank A/c. 10,000
2017
Mar. 31 To Interest A/c. 1,736 By Balance c/d. 9,091
19,091 19,091
2017 2018
Apr.1 To Balance b/d. 9,091 Mar. 31 By Bank Ac. 10,000
2018
Mar.31 To Interest A/c. 909
10,000 10,000

Interest A/c.
Dr. Cr.
2015 Rs. 2015 Rs.
Mar.31 To P & L A/c. 3,170 Mar. 31 By Ronald
Enterprises A/c. 3,170
2016 2016
Mar. 31 To P & L A/c. 2,487 Mar. 31 By Ronald
Enterprises A/c. 2,487
2017 2017
Mar. 31 To P & L Ac. 1,736 Mar. 31 By Ronald
Enterprises A/c. 1,736
2018 2018
Mar.31 To P & L Ac. 909 Mar. 31 By Ronald
Enterprises Ac. 909

Profit & Loss A/c.

for the year ending 31st March 2015
Dr. Cr.
Rs. Rs.

By Interest Ac. 3,170

40
 Profit & Loss A/c.
for the year ending 31st March 2016
Rs. Rs.
By Interest Ac. 2,487

Profit & Loss A/c.

for the year ending 31st March 2017
Rs. Rs.
By Interest Ac. 1,736

Profit & Loss A/c.

for the year ending 31st March 2018
Rs. Rs.
By Interest Ac. 909

Notes
1 Calculations are made to the nearest rupee.
2. 31st March was assumed as the date of closing of accounts for both the parties.
3. Full cash price method in the case of hire-purchasers and the method without interest
suspense A/c. in the case of hire-vendor are follow ed since no specific method is mentioned
in the question.

1.9 PROCEDURE FOR WORKING OUT THE PROBLEMS

WHEN RATE OF INTEREST IS NOT GIVEN
When the cash price and instalments are given, interest for each year can be found out
even though the rate of interest is not given. The total interest can be obtained by deducting the
cash price from the hire-purchase price. The total interest should then be distributed in the ratio
of reverse serial order of the instalments. For example, if there are four instalments 1,2,3 and 4,
the total interest is distributed in the ratio of 4:3:2:1 respectively. In other words. the division is
made on the basis of the amount still due towards instalments at the beginning of each year. This
technique is followed when the instalment amounts payable are uniform.
Illustration - 7
Devaki General Stores Ltd. purchased a three-wheeler delivery van from Mini Motors
Ltd. on hire-purchase basis. On 1st April, 2014 the date of signing the agreement they paid
Rs. 8,600. The balance is paid @ Rs. 5,000 on 31st March every year for three years.
The cash price of the van is Rs. 20,000 and the hire-purchasers provide depreciation at a
uniform rate of 10% p.a., on the original cost.
Enter these transactions in the journals of both the parties assuming that they adjust
interest through interest suspense A/c. and that they close their books on 31st March every
year.
Solution
As the rate of interest is not given, first the total interest will have to be distributed
as follows :
41
 Rs.
Hire Purchase price (8,600 + 5,000 + 5,000 + 5,000) = 23,600
Cash price, as given = 20,000
Total interest 3,600
The number of instalments being three, the interest will be distributed in the ratio of 3:2:1.

3
I Year 3.600 x- = Rs. 1,800
6

2
II Year 3,600 x- = Rs. 1,200  
6

1
III Year 3,600 x = Rs. 600
6
Total = Rs. 3,600
Analytical Table
Date Down Payment cash Interest Cash Price still
or instalment price due after this
paid instalment
Rs Rs Rs Rs.
1 2 3 4 5
1-4-2015 8,600 8,600 - 11,400 (20,000-8,600)
31-3-16 5,000 3,200 1,800 8,200 (11,400-3,200)
31-3-17 5,000 3,800 1,200 4,400 (8,200-3,800)
31-3-18 5,000 4,400 600 -- (4,400-4,400)

In the Books of Devaki General Stores Ltd.

(Hire Purchasers)
Journal

2015 Rs Rs
Apr.1 Van A/c. Dr. 20,000
Interest suspense A/c. Dr. 3,600
To Mini Motors Ltd. A/c. 23,600
(Being hire-purchase of dely. van)
Mini Motors A/c. Dr. 8,600
To Bank A/c,
(Being down payment made) 8,600
2016
Mar. 31 Interest A/c. Dr. 1,800
To Interest Suspense A/c. 1,800
(Being interest for the year)

42
 Mini Motors Ltd. A/c. Dr 5,000
To Bank A/c. 5,000
(Being I Instalment paid)
Depreciation A/c. Dr 2,000
To Van A/c. 2,000
(Being Depreciation @ 10% p.a.)
Profit & Loss A/c. Dr. 3,800
To Interest A/c. 1,800
To Depreciation A/c. 2,000
(Being Depreciation and interest transferred)
2017
Mar.31 Interest A/c. Dr. 1,200
To Interest Suspense A/c. 1,200
(Being interest for the year)
Mini Motors Ltd. A/c. Dr. 5,000
To Bank A/c. 5,000
(Being II Instalment paid)
Depreciation A/c. Dr. 2,000
To Van A/c. 2,000
(Being Depreciation @ 10% p.a.)
Profit & Loss A/c. Dr. 3,200
To Interest A/c. 1,200
To Depreciation A/c. 2,000
(Being Depreciation and interest transferrer)
2018
Mar. 31 Interest A/c. Dr 600
To Interest Suspense A/c. 600
(Being interest for the year)
Mini Motors Ltd. A/c. Dr. 5,000
To Bank A/c. 5000
(Being III & Final Instalment paid)
Depreciation A/c. Dr. 2,000
To Van A/c 2,000
(Being Depreciation @ 10% p.a.)
Profit & Loss A/c. Dr. 2,600
To Interest A/c. 600
To Depreciation A/c. 2,000
(Being Depreciation and interest transferred)

43
 In the Books of Mini Motors Ltd.
(Hire Vendors)
Journal
2015 Rs. Rs.
Apr.1 Devaki General Stores Ltd. A/c. Dr. 23,600
To Sales A/c. 20,000
To Interest Suspense A/c. 3,600
(Being Sale of van on hire-purchase)
“ Bank A/c. Dr. 8,600
To Devaki General Stores Ltd. A/c 8,600
(Being down payment received)
2016
Mar.31 Interest Suspense A/c. Dr. 1,800
To Interest A/c 1,800
(Being interest for the year)
Bank A/c. Dr. 5,000
To Devaki General Stores Ltd. A/c. 5,000
(Being I Instalment received)
Interest A/c. Dr. 1,800
To profit & Loss A/c. 1,800
(Being interest transferred)
Interest Suspense A/c. Dr. 1,200
To Interest A/c 1,200
(Being interest for the year)
Bank A/c. Dr. 5,000
To Devaki General Stores Ltd. A/c. 5,000
(Being II Instalment received)
Interest A/c. Dr. 1,200
To profit & Loss A/c. 1,200
(Being interest transferred)
2018
Mar.31 Interest Suspense A/c. Dr. 600
To Interest A/c 600
(Being interest for the year)
Bank A/c. Dr. 5,000

44
 To Devaki General Stores Ltd. A/c. 5,000
(Being III Instalment received)
Interest A/c. Dr. 600
To profit & Loss A/c. 600
(Being interest transferred)

CHECK YOUR PROGRESS - 3

1. Explain the procedure to be followed where infonnation like cash price or rate of interest
is not given.
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1.10 DEFAULT AND REPOSSESSION OF GOODS

When the hire-purchasers commits default in the payment of instalments, the hire-vendor-
has a right to take back the goods, treating the payment made till date as hire charges. The loss
suffered by the hire-purchaser as a result of the repossession will have to be written off to profit
& Loss A/c. The vendor sells these goods usually after spending some amount towards repairs
and reconditioning. This may result in profit or loss which he transfers to his own profit and loss
account.
However, when the hire-purchaser has already paid substantial portion of the price for
the goods taken, the vendor may not take back the entire goods but only a part of the goods,
leaving the remaining with the hire-purchaser. For example, when the hire-purchaser buys 5
trucks and pays 6 out of the ten instalments, then only 2 trucks may be taken back by the hire-
vendor, on default.
The accounting to be followed in the event of default and re-possession will be different
for complete re-possession and partial re-possession.
I. When the Vendor takes complete re-possession of the goods
The procedure is as follows :
a) In the books of the purchaser
(i) Entries will be passed as usual upto the date of default including entries for depre-
ciation and interest, for the year in which he commits the default. Of course, the
entry for the payment of the instalment will not be made in respect of the instalment
defaulted.
(ii) The balance in the vendor’s a/c. will be transferred to the asset account by debiting
vendor’s a/c. and crediting the asset a/c.
(iii) The balance left in the asset account now represents loss and will be closed by
transfer to profit and loss a/c.
b) In the books of the Vendor
(i) Entries will be passed as usual upto the date of default including entry for interest
for the year for which the buyer failed to pay the instalment.

45
 (ii) The vendor closes the account of the hire-purchaser by crediting his account and
debiting a newly opened Repossessed Stock Account (or Returned Goods a/c.)
Repossessed Stock Account will be further debited with expenses incurred in repairing
etc., when these goods are sold, this account is credited (and the bank a/c. debited). Any
balance now remaining in this account will be transferred to profit and loss account.
Illustration - 8
Hyderabad Transport Ltd. purchased three mini trucks from Efficient Motors Ltd. on
hire-purchase basis. Each truck costs Rs. 40,000 - The other details are as follows :
Down payment .... Rs. 30,000 (for all trucks)
Instalments - three equal .... Rs. 30,000 each year together with
interest 5% p.a.
Depreciation written off by
Hyderabad Transport Ltd. ..... 20% on W.D.V. (written down value)
The buyers paid the instalment due, at the end of the first year but could not pay the
next.The hire vendor took re-possession of all the three trucks. He spent Rs. 5,350 on repairing
the trucks and sold them for Rs. 70,000.
Give the journal entries in the books of the buyers and important ledger accounts in the
books of both the parties.
Solution
Journal of Hyderabad Transport Ltd.
1 st year Rs. Rs.
begining Mini Trucks A/c. Dr. 1,20,000
To Efficient Motors 1,20,000
(Being cash price of 3 trucks purchased
on hire-purchase system)
“ Efficient Motors Ltd. A/c. Dr 30,000
To Bank A/c 30,000
( Being down payment made)
End of
1st Year Interest A/c. Dr. 4,500
To Efficient Motors 4,500
( Being interest due for the year
on Rs 90.000 @ 5%)
Efficient Motors Ltd A/c. Dr 34,500
To Bank A/c 34,500
(Being I Instalment paid)
(Rs 30,000 - Interest)
Depreciation A/c Dr. 24,000
To Mini Trucks A./c. 24,000
(Being depreciation a 20%)

46
 Profit & Loss A /c Dr. 28,500
To Interest A c. 4,500
To Depreciation Ac. 24,000
(Being Depreciation transferred)
End of
IInd year Interest A/c Dr. 3,000
To Efficient Motors Ltd. A/c. 3,000
(Bong interest due for the year on
Rs 60,000 25%)
Depreciation A /c Dr. 19,200
To Mini Trucks A/c 19,200
(Being deprecation for the year)
Efficient Motors Ltd. A/c. Dr. 63,000
To Mini Trucks A/c. 63,000
(Being the balance in Vendor’s A/c.
transferrred on default)
Profit & Loss A/c. Dr. 36,000
To Mini Trucks A/c. (Loss) 13,800
To Depreciation A/c. 19,200
To Interest A/c. 3,000
(Being loss on repossession, depreciation
& interest transferred)

* See Mini Truck ledger A/c.

Important Ledger Accounts
Mini Trucks A/c.
Dr. Cr
Rs. Rs.
1st 1st
Year To Efficient 1,20,000 Year By Depreciation A/c 24,000
Motors Ltd. A/c. By Balance c/d. 96,000
1,20,000 1,20,000
2 nd 2 nd
year To Balance b/d. 96,000 year By Depreciation A/c. 19,200
By Efficient Motors
transferred 63,000
By P & L A/c. (Loss) 13,800
96,000 96,000

47
 Efficient Motors Ltd. A/c.
Dr. Cr.
Rs. Rs.
1st 1st
Year To Bank A/c. 30,000 Year By Mini Truck A/c. 1,20,000
To Bank A/c. 34,500 By Interest A/c. 4,500
To Balance c/d. 60,000
1,24,500 1,24,500
2nd 2nd
Year To Mini Trucks Year By Balance b/d. 60,000
(A/c. transfer) 63,000 By Interest A/c. 3,000

63,000 63,000
Note
1. In this problem, the amount payable for the cash price is uniform (Rs. 30,000). Each
instalment comprises this thirty thousand plus interest for the year.
2. It is assumed that the buyers followed the full cash price method.
3. If, on the other hand asset is recorded at the part-cash-price no entry will be passed
for showing the amount due to vendors in the second year because of default.
Accounts Accrual Method
Under this method, as the student is aware, each year the Hire-Vendor’s A/c will not
show any balance. As such the question of transferring the balance of hire vendor’s a/c to asset
a/c does not arise. The asset a/c will appear under this method as follows :

Mini Trucks A/c.

Dr. Cr.
Rs. Rs.
I st I st
year To Efficient Year By Depreciation A/c. 24,000
Motors Ltd. A/c. 30,000 By Balance c/d 36,000
To Efficient
Motors Ltd. A/c. 30,000 .
60,000 60,000
2 nd 2 nd
Year To Balance b/d. 36,000 Year By Depreciation A/c. 19,200
By P&L A/c.(Loss)** 16,800
36,000 36,000

** This amount represents total loss which was split in the earlier working, as follows :
Loss Rs. 13,800 + Interest for 2nd year Rs. 3,000 = 16,800

48
 BOOKS OF EFFICIENT MOTORS LIMITED
IMPORTANT LEDGER ACCOUNTS
Hyderabad Transport Ltd.
Dr. Cr.
Rs. Rs.
1st 1st
Year To Sales A/c. 1,20,000 Year By Bank A/c. 30,000
To Interest A/c. 4,500 By Bank A/c. 34,500
By Balance c/d. 60,000
1,24,500 1,24,500
2nd 2nd
Year To balance b/d. 60,000 Year By Transfer to
To Interest 3,000 Repossessed
Stock A/c. 63,000
63,000 63,000

Repossessed Stock A/c.

Dr. Cr.
Rs. Rs.
To Hyd. Transport Ltd. 63,000 By Bank (sales) 70,000
To Cash A/c.
repairs etc. 5,350
To P & L A/c. (Profit) 1,650
70,000 70,000

II. When the Vendor takes re-possession of a part of the goods

As in the first case, entries will be passed up to the date of default, including the entries
for depreciation and interest in the books of the buyer and entry for interest in the vendor’s
books in the year of default.
However, in case of partial re-possession, neither the Vendor’s A/c. nor the buyers a/c.
will be closed in their respective books. This is because of the fact that the entire asset is not
taken back. At the close the asset A/c in the buyer’s books will have a balance equal to the
value of the (part) asset allowed to remain with the buyer. The value of the asset taken away by
the vendor is fixed as per mutual agreement and is debited to vendor’s account and credited to
the asset account. After adjusting these items, any difference between the debit and credit sides
of the asset a/c in the books of the buyer will be transferred to profit and loss a/c. The re-
possessed stock account in the vendor’s books will be dealt with, in the same manner as described
in the case of complete-repossession.
Illustration - 9
North India Transporters Ltd. purchased two trucks costing Rs. 80,000 each from
Southern India Motors Ltd. on hire purchase system, on 1st April 2015 On the same day an
amount of Rs. 20,000 per truck was paid. The balance was to be paid in three equal instalments
49
together with interest @ 10% on 31st March each year. The hire-purchasers could not pay the
final instalments.
After negotiations, the vendors took back one truck valuing it at 30% depreciation on the
diminishing value method and adjusting this value against amount due.
The repossessed truck was sold by vendors for Rs. 40,000 after spending Rs. 7,248 for
its repairs and overhauling.
Write up the ledger accounts in the books of both the parties assuming that the buyers
charge depreciation at 25% on the written down value.
Solution
Books of North India Transporters Ltd.
Truck A/c.
Dr Cr.
Rs. Rs.
2015 2016
Apr. 1 To S I. Motors 1,60,000 Mar. 31 By Depreciation(25%) 40,000
By Balance c/d. 1,20,000
1,60,000 1,60,000
2016 2017
Apr. 1 To Balance b/d. 1,20,000 Mar.31 By Depreciation 30,000
By Balance c/d. 90,000
1,20,000 1,20,000
2017 2018
Apr.1 To Balance b/d. 90,000 Mar. 31 By Depreciatio 22,500
By Vendors (1) 27,440
By P&L .A/c. (3) Loss 6,310
By Balance c/d. (2) 33,750
90,000 90,000

1) Value of one truck re-possessed at 30% Depreciation on W.D.V.

Rs.
I Year Cost of 1 truck 80,000
30
Less Depreciation 30% ( 80,000 x ) 24,000
100
56,000
30
II Year Less Depreciation 30%( 56,000 x ) 16,800
100
39,200
30
III Year Less Depreciation 30% ( 39,200 x ) 11,760
100
27,440
50
2) Value of one truck left with buyers :
1 Year Cost of 1 truck 80,000

25
Less Depreciation 25% (80,000 x ) 20,000
100
60,000

25
II Year Less Depreciation 25%( 60,000 x ) 15,000
100
45,000

25
III Year Less Depreciation 25% ( 45,000 x ) 11,250
100
33,750
Hence , Rs. 33,750 should be the closing balance of the asset a/c.
3. After adjusting the value of the truck taken over and the closing balance of Rs. 33.750,
the difference is transferred to Profit & Loss A/c. (Loss)
Southern India Motors Ltd. A/c.
Dr. Cr.
Rs. Rs.
2015 2015
Apr.1 To Bank A/c. 40,000 Apr. 1 By Truck A/c. 1,60,000
2016 2016
Mar.31 To Bank A/c. 52,000 Mar. 31 By Interest A/c. 12,000
To Balance c/d. 80,000
1,72,000 1,72,000
2017 2016
Mar. 31 To Bank A/c. 48,000 Apr. 1 By Balance b/d. 80,000
To Balance c/d. 40,000 2017
Mar. 31 By Interest A/c. 8,000
88,000 88,000
2018 2017
Mar. 31 To Truck A/c. 27.440 Apr.1 By Balance b/d. 40,000
(Repossessed) 2018
To Balance c/d. 16,560 Apr.1 By Interest A/c. 4,000
44,000 44,000
Dr. Interest A/c. Cr.
2016 Rs. 2016 Rs.
Mar.31 To S I. Motors Ltd. 12,000 Mar. 31 By P & L A/c. 12,000
2017 2017
Mar.31 To S I. Motors Ltd. 8,000 Mar. 31 By P & L A/c. 8,000

51
2018 2018
Mar. 31 To S.I. Motors Ltd. 4,000 Mar. 31 By P & L A/c. 4,000
P & L A/c.
Dr Cr.
Rs.
31-3-16 To Interest 12,000
To Depreciation 40,000
2002
31-3-17 To Interest
To Depreciation 8,000
30,000

31-3-18 To Interest 4,000

To Depreciation 22,500

Books of Southern India Motors Ltd.

Northern India Transporters Ltd. A/c.
Dr. Cr.
2015 Rs. 2015 Rs.
Apr. 1 To Sales A/c. 1,60,000 Apr. 1 By Bank A/c. 40,000
2016 2016
Mar. 31 To Interest A/c. 12,000 Mar. 31 By Bank A/c. 52,000
By Balance c/d. 80,000
1,72,000 1,72,000
2016 2017
Apr. 1 To Balance b/d. 80,000 Mar. 31 By Bank A/c. 48,000
2017
Mar. 31 To Interest A/c. 8,000 By Balance c/d. 40,000
88,000 88.000
2017 2018
Apr. 1 To Balance b/d. 40,000 Mar. 31 By Repossessed
2018 Stock A/c. 27,440
Mar. 31 To Interest A/c. 4,000 By Balance c/d 16,560
44.000 44,000

52
 Repossessed Stock A/c.
Dr. Cr.
2018 Rs. 2018 Rs.
Mar. 31 To Northern India Mar. 31 By Cash A/c. (Sale) 40,000
Transporters Ltd. 27,440
To Cash Account 7,248
To P & L A/c (Profit) 5,312
40,000 40,000
Note : The student may himself prepare the Interest A/c. and Profit & Loss A/c.

1.11 HIRE-PURCHASE TRADING ACCOUNT

When the goods, sold under the hire-purchase system, are of small value such as electric
fans, radios, cycles, etc., the vendor may find it very inconvenient to open a separate account
for each of the numerous customers. He maintains a separate subsidiary book for this purpose,
Details such as date of contract, customer, article cost and selling prices, down payment, number
instalments allowed, date of payment of each instalment, etc., will be entered in this book in
various columns. From these details, the following summarised information can be obtained:
a) Stock with the customers at the beginning and end of the year.
b) Instalments due and unpaid at the beginning and end (i.e.. debtors)
c) Cost price of the goods sold to customers during the year
d) Cash received from customers.
e) Any return of goods.
With the help of the above information, the trader will prepare a Hire-Purchase Trading
count to ascertain the net profit made on the hire-purchase sales. As the preparation of hire-
purchase trading account is considered as an advanced topic involving entries and calculations
a complex nature, it is excluded from the purview of the present discussion.

1.12 SUMMARY
When goods are sold on hire-purchase system, the cash price along with interest, which
together constitute the hire-purchase price, is paid in instalments.
In the books of the purchaser, one of the three methods may be followed in recording the
transactions;
a) The asset account is debited with cash price included in each instalment when the payment
falls due (Asset Accrual Method)
b) The asset is debited with full cash price on signing the contract.
c) In addition to debiting the asset with full cash price, total interest is debited to Interest
Suspense Account on signing the contract (Interest Suspense Method).
In the books of the vendor full cash price is credited to sales account. Interest is credited
and hire-purchaser account debited when each instalment falls due. When interest suspense
method is followed interest suspense account is debited. In the problems, if cash price is not
given, it has to be ascertained by ‘Back Work’ method. And where rate of interest is not given,
it has to be distributed in the ratio of the total instalment amount due at.the beginning of each, or,
in other words, in reverse serial order.
53
 While recording the hire-purchase transactions in the books of hire-purchaser, deprecia-
tion may be charged on ‘Straight Line Method’ or ‘Diminishing Balance Method’.’
In the case of default in the payment of instalments under hire-purchase system, goods
are repossessed either wholly or a part of them. Depending upon the valuation of goods repos-
sessed and remaining, the accounts must be adjusted. When the goods, sold under hire-purchase
system are of small value, the vendor maintains a separate subsidiary’ book to enter such
transactions. With the help of this information, he prepares an account known as ‘Hire Pur-
chase Trading Account”.

1.13 CHECK YOUR PROGRESS : MODEL ANSWERS

1. (a) There are three methods of recording the transactions in the books of Hire-pur-
chaser. They are : (a) Asset Accrual Method, (b) Full Cash Price Method and (c) Interest
Suspense Method.
(b) Asset A/c. Dr.
To Hire Vendor’s A/c.
2. In the case of straight-line method the amount of depreciation to be charged every’ year,
will be same over the life of the asset. Contrary’ to this, the amount of depreciation to be
charged decreases progressively from year to year, under Reducing Balance Method.
3. Where cash price is not given, it is ascertained by ‘Work Back Method’. When rate of
interest is not given, it is calculated in the following manner.
(i) Ascertain the total interest by deducting the cash price form the Hire-purchase
price.
ii) The amount thus ascertained in step (i) to be distributed in ratio of reverse serial
order of the instalments.

1.14 MODEL EXAMINATION QUESTIONS

1. Answer the following questions in about 30 lines each.
1. Give the model entries without figures in first year of the Hire-purchase agreement
in the books of Purchaser and Vendor.
2. Define a Hire-purchase contract and discuss its salient features.
3. What are the legal consequences of a buyer of goods under Hire-purchase system
committing default in the payment of instalment? What changes occur from the
accounting point of view?
II. Answer the following questions in about 15 lines each.
1. Define Hire purchase agreement. *
2. How do you distribute the total interest in the hire-purchase transactions where rate
of interest is not given?
3. Explain the procedure for ascertaining cash price when it is not given under, hire-
purchase.
4. Write short notes on the following .
a) Asset Accural Method.
b) Interest Suspense Account
5. Write short notes on the following :

54
 a) Re-possessed stock
b) Hire Purchase Trading Account.
III. Objective type Questions
(A) Multiple choice Questions.
1. Amount paid by the Hire purchaser towards interest in each instalment is treated by him as

a. Income b. Revenue expense c. Capital expenditure

d. Deferred Revenue Expenditure

2. Given cash price of Rs.9,000/- down payment of Rs.3,000/- and three instalments of Rs.3000/
- each, interest is distributed amongst instalments in the ratio of

a. 1:1:1 b. 1:2:3 c. 3:2:1 d. None

3. For each period interest is calculated on

a. Cash price remaining unpaid b. Hire purchase price remaining unpaid

c. Cash price minus instalments paid d. None.

4. Amount spent by the Hire Vendor on repairs of repossessed goods is

a. Debited to repairs account b. Debited to cash account

c. Credited to repossessed goods account d. Debited to repossessed goods account

5. Under Hire purchase system, Hire purchaser become the owner of goods / asset

a. On signing the contract b. After making down payment

c. After the payment of last instalment d. After the payment of first instalment

Ans: 1.b 2.c 3.a 4.d 5.c.

(B) Fill in the Blanks

1. Hire purchase act was enacted in the year _________________

2. Amount paid by the Hire purchaser at the time of signing the contract is called as ______

3. The total of all the instalments and down payment is called as ____________

4. ____________ is the person /party who purchases the goods/ assets under purchase
system

5. Excess of Hire purchase price over the cash price is ___________

Ans: 1. 1972 2. Down payment 3. Hire purchase price

4. Hire purchaser 5. Interest

55
(C) Match the following.

1. Hire purchase act… ( ) a. Asset side of Balance sheet.

(In Hire purchaser’s books)

2. Interest suspense account ( ) b. 1972

3. Hire purchaser’s account ( ) c. Liabilities side of Balance sheet

4. Hire purchase price-interest ( ) d. Debit Balance

5. Interest suspense account ( ) e. Cash price

(In Hire vendor’s books)

Ans: 1.b 2.a 3.d 4.e 5.c

Problems
1. On 1st April 2015, Mehta Mini Wool (P) Ltd. purchased a machine from Automatic
Machines Ltd. The same day a sum of Rs. 2,200 was paid as down payment? The
remaining was paid in three annual instalments of Rs- 2,200 each at the end of 31s
March 2016, 2017 and 2018. The cash price of the machine was Rs. 7,700. No depreciation
was provided by the newly incorporated purchasing company. The vendors charge interest
@ 10% p.a.
Journalise these transactions in the books of Mehra Wool (P) Ltd. and write up the
Vendor’s A/c.
(Interest 1 year Rs. 550; 2nd Year Rs. 385 and 3rd Year Rs. 165)
2. The X Transport Company purchased a Motor car from India Motors Ltd. on 1st April
paying Rs. 10,000 cash immediately and agreeing to pay further three instalments of Rs.
10,000 each on 31st March each year for 3 years. The cash price of the car was Rs .
37,251 and the motor company charges interest @ 5% p.a. The Transport Company
depreciates the car @ 20% on reducing balance system. Give the necessary journal
entries in the books of both the parties. (Interest Rs. 1,363; Rs. 931; Rs. 455)
3. The Hyderabad Industries Ltd. purchased on 1st April 2015 a lathe machine from HMT
Ltd. at a cost of Rs. 26,000 and paid Rs. 8.300 as down payment under hire-purchase
system. They further paid on 31st March 2016. 2017"and 2018 Rs. 8.000 each towards the
instalments. The machine was depreciated @ 10% p.a. on fixed instalment (Straight line)
System. Prepare the ledger accounts in the books of both the parties. (The total interest
Rs. 6,300 must be distributed in the ratio of 3:2:1 - Rs. 3,150; 2,100; 1,050).
4. Rao & Company purchased a 3500 CC Motor Cycle for their office use for Rs. 8.600 on
hire purchase system and immediately paid Rs. 1,600. Again Rs. 2,400, Rs. 4.400 and Rs.
1,600 were paid at the end of the 1st year, 2nd year and 3rd year respectively, which
sums are inclusive of interest @ 10% p.a. The asset was depreciated @ 20% p.a. on
written down value. The vendors were Exe Ltd. .
Journalise these transactions in the books of Rao & Co. and prepare Rao & Co’s A/ c.
and Interest Suspense A/c. in Vendor’s books assuming books are closed on 31st March
every year (Interest Rs. 700; 530; 170)
5. On l-4-2015 India Trucks Ltd. sold a truck on Hire Purchase basis to Kashmir Transport
Company who made an immediate payment of Rs. 45, 000. Identical sums were paid at
56
 the end of 31st March 2016 , 2017 and 2018. The vendors charge interest @ 10% p.a.
Kashmir Transport Co. provides depreciation @ 25% on written down value. Write up
the ledger accounts in the books of transport company including interest suspense a/c and
profit and loss a/c and also show how the relevant accounts appear in their Balance
Sheets. Make calculations to the nearest rupee.
Hint: First ascertain the cash price. Interest Rs. 11,191; Rs. 7,810 and Rs. 4,091 Cash
price Rs. 1,56,908).
6. A sold a machine to B on hire-purchase system on 1st. April 2015 The price of the
machine was Rs. 57,130 against which he paid Rs. 15,000 on l-4-2015. B was to pay
three more instalments of Rs. 20,000 each on 31st March every year for three years
beginning from 31st March 20l6 A, charges 20% interest per annum.
B paid the first instalment on 31st March 2017 but failed to pay the second and A seized
the machine. A spent Rs. 3,500 and sold it for 45,000.
Write Journal entries in the books of both the parties, assuming that B provides annual
depreciation @ 15% on written down value. Also show the repossessed stock A/c. in
the vendor’s books. (Loss to B Rs. 4,609; Profit to A Rs. 4,833)
7. On 1st April 2018 Exe Ltd. purchased 3 trucks from Wye Ltd. on hire-purchase basis.
The cash price of each truck was Rs. 1,20,000. Down payment was Rs. 60,000. Further
three instalments of Rs. 1,28,000 each at the end of 31st March each year were to be
paid. These include interest @ 13% p.a. Exe Ltd. charges depreciation @ 10% on straight
line method.
During 2017-18 Exe Ltd. was caught up in a very difficult financial position and could not
pay third instalment. Wye Ltd. took repossession of one truck adjusting its value against
the amount due. The truck was valued by Wye Ltd. on the basis of 13% depreciation
annually , on written down value basis. After spending Rs. 8,580 on repairs Wye Ltd sold
the truck for Rs. 98,000.
Prepare the Truck A/c. and Hire-vendor’s A/c. in the books of Exe Ltd. and the Hire
purcheser’s A/c. as also Repossessed stock A/c. in Wye’ books.
( Re - possessed value o f1 truck Rs. 79,020, closing balance of track a/c. Rs. 1,68,000
Loo to Exe Ltd Rs. 4,980, profit to Wye Ltd. on sale of repossessed stock Rs. 10,400)

1.16. GLOSSRY
Asset Accrual : Treating the asset as property by the buyer only
to the extent of cash price included in instalments
as they fall due.
Default : Failure on the part of the buyer to pay one or
more instalments. ‘
Re-possession : The seller taking back the goods on default under
hire-purchase system.
Interest Suspense : The total interest payable (H P. Price - Cash Price)
Hir - Purchase Tradding A/c. : An account prepared to find out the net profit on
hire-purchase or instalment-purchase sales by
vendor in the case of goods of small value.
Straight Line Method : A method of depreciation wherein the asset is
depreciated at a certain percentage on original
cost uniformly over the period of life of the asset.

57
Diminishing Balance Method : : A method of depreciation where every year, a
certain percentage of depreciation is written off
on the balance after previous’year’s depreciation.

1.16 FURTHER READINGS

1. Gupta. R. L : Advanced Accountancy,
Radhaswamy . M Sultan Chand & Sons, New Delhi.
2. Shukla M.C A: : Advanced Accounts
Grewal, T.S Sultan Giand & Sons, New Delhi.
3. Jam. S P & : Advanced Accountancy,
Narang. k L Kalyani Publishers. New Delhi.

58
UNIT - 2 : INSTALMENT PURCHASE SYSTEM
Contents
2.0 Aims and Objectives
2.1 Introduction
2.2 Distinction between the Hire-Purchase and Instalment Purchase Systems
2.3 Accounting aspect of the Instalment Purchase Transactions
2.4 Summary
2.5 Check Your Progress : Model Answers
2.6 Model Examination Questions
2.7 Glossary
2.8 Further Readings

2.0 AIMS AND OBJECTIVES

The aim of this unit is to learn the accounting entries to be passed in the books of Purchaser
and Instalment Vendor, under Instalment Purchase System.
After reading this unit, you should be able to:
• draw the distinction between Instalment -Purchase and Instalment Purchase Systems;
• pass journal entries in the books of Hire-Purchaser; and
• pass journal entries in the books of Instalment Vendor.

2.1 INTRODUCTION
In the last unit we have seen the recording of transactions in the books of Hire-Purchaser
and Hire-Vendor. The Instalment Purchase System is different in certain matters from Hire-
Purchase System, particularly in respect of legal aspects. We cannot follow all the three methods,
which we discussed under Hire-Purchase System, to record the transactions under Instalment
Purchase System. Let us understand how entries are passed both in the books of instalment
purchaser and instalment Vendor.

2.2 DISTINCTION BETWEEN THE HIRE - PURCHASE AND

INSTALMENT PURCHASE SYSTEMS
The Instalment Purchase System is similar to the Hire-Purchase System in many
respects. The legal position, however, is different. When goods are sold on Instalment
Purchase System, it is like a credit sale, with the price being payable in installments along
with interest.The following points of distinction between the two systems may be noted:
1. Contract: While the agreement under the hire-purchase system is for hiring the asset:
in the case of instalment system it is an agreement of sale.
2. Ownership: The ownership in the asset passes immediately on signing the agree-
ment under instalment system, whereas it passes only after the payment of last instalment in the
hire-purchase system. The vendor remains the owner till that date.
3. Default : Default in the payment of installments by the purchaser will entitle the
vendor to take back the asset under hire-purchase system. No such right exists in the instalment
system. He can only sue for the recovery of the amount due but cannot repossess the asset.
59
 4. Return of the goods : The hire-purchaser can terminate the contract and return the,
asset or goods to the vendor under hire-purchase system. This is not possible in instalment
purchase system
5. Dealing with the asset : The hire-purchaser cannot damage, destroy or dispose of
the goods. The instalment purchaser can deal with them in the manner, he chooses.

CHECK YOUR PROGRESS -1

1. In what respects the Hire-Purchase System is different from Instalment Purchase
System?
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2.3 ACCOUNTING ASPECT OF THE INSTALMENT PURCHASE

TRANSACTIONS
In so far as the recording of the transactions in the books of the Instalment purchaser
and the Instalment vendor is concerned it is the same as under the hire-purchase system learnt
earlier in Unit 1. The same entries recorded in the books of both the parties under hire-purchase
system will be followed here too.
However, the asset accural method cannot be followed here as the buyer acquires owner-
ship as soon as he enters into agreement. As the buyer becomes liable to pay for the cash price
of the asset as well as the interest as per the agreement the Interest Suspense Method is followed
in recording the transactions in the books of the purchaser as well as the vendor under the
Instalment Purchase System The other aspects such as the ascertainment of cash price or
distribution of interest when they are not given are common. The question of repossession of
stock does not arise in the instalment purchase system, as the vendor has no right to take back
the property even though the purchaser fails to pay the instalment. The other method, viz,
debiting interest and crediting vendors a/c, when an instalment falls due may also be adopted,
but this is seldom followed in solving problems on instalment purchase system.
Illustration - 1
On 1 st April 2015, X purchased a machine from Y Ltd. at a cost of Rs. 66,850 on instal-
ment system and paid Rs 15,000 Further, he paid Rs. 20,000 each on 31st March 2016,2017 and
2018 which includes interest @ 8% o p.a on the unpaid balance of the cash price. Machinery
was depreciated at 20% on reducing balance method by X.
Record the transactions in the books of X. Prepare ledger accounts in the books of Y
Ltd.

60
Solution
Analytical Table
Date Down Paymentor Principal Interest Cash Price Still due after
or instalment amount @ 8% this instalment
(Cash Price)
Rs. Rs. Rs. Rs.
1 2 3 4 5
1-4-2015 15,000 15,000 - 51,850 (66,850-15,000)
31-3-2016 20,000 15,852 4,148 35,998 (51,850-15,852)
31-3-2017 20,000 17,120 2,880 18,878 (35,998-17,120)
31-3-2018 20,000 18.878 1,122 Nil (18,878-18,878)
Total 75,000 66,850 8,150 —

Books of X Journal
2015 Rs. Rs.
Apr 1 Machinery A/c. Dr. 66,850
Interest Suspense A/c Dr. 8,150
To Y Ltd A/c. 75,000
(Being machinery purchased on instalment
basis)
Y Ltd A/c. Dr. 15,000
To Bank A/c. 15,000
(Being down payment made).

2016
Mar.31 Interest A/c. Dr. 4,148
To Interest Suspense A/c. 4,148
(Being interest due for the year transferred)

“ Y Ltd. A/c, Dr. 20,000

To Bank A/c. 20,000
(Being 1 instalment paid)
“ Depreciation A/c. Dr 13,370
To Machinery A/c. 13,370
(Being Depreciation for the year
66,850x20/100)
“ Profit and Loss A/c. Dr. 17,518
To Depreciation A/c. 13,370
To Interest A/c. 4,148
(Being depreciation and interest transferred)

61
2017
Mar. 31 Interest A/c. Dr. 2,880
To Interest Suspense A/c. 2,880
(Being interest due for the year transferred)
“ Y Ltd. A/c. Dr. 20,000
To Bank A/c 20,000
(Being II instalment paid)
“ Depreciation A/c. Dr. 10,696
To Machinery A/c, 10,696
(Being Depreciation for the year
53,480 x 20/100)
“ Profit and Loss A/c. Dr. 13,576
To Depreciation A/c. 10,696
To Interest A/c. 2,880
(Being depreciation and interest transferred)
2018
Mar. 31 Interest A/c. Dr. 1,122
To Interest Suspense A/c. 1,122
(Being interest due for the year transferred)
“ Y Ltd. A/c. Dr. 20,000
To Bank A/c. 20,000
(Being III instalment paid)
“ Depreciation A/c. Dr. 8,557
To Machinery A/c. 8,557
(Being Depreciation for the year
42,784x20/100)
“ Profit and Loss A/c. Dr 9,679
To Depreciation A/c. 8,557
To Interest A/c. 1,122
(Being depreciation and interest transferred)

Books of Y Ltd. Ledger Account X’s A/c

Dr. Cr.
2015 Rs. 2015 Rs.
Apr 1 To Sales a/c. 66,850 Apr.1 By Bank a/c 15,000
To Interest Suspense a/c 8,150 2016
Mar.31 By Bank a/c. 20,000
By Balance c/d. 40,000
75,000 75,000
62
2016 2016
Apr.1 To Balance b/d. 40,000 Mar.31 By Bank a/c. 20,000
By Balance c/d 20,000
40,000 40,000
2017 2017
Apr. 1 To Balance b/d. 20,000 Mar. 31 By Bank A/c. 20,000
20,000 20,000

Interest Suspense A/c.

Dr. Cr.
2016 Rs. 2015 Rs.
Mar. 31 To Interest A/c. 4,148 Apr. 1 By X A/c. 8,150
To Balance c/d. 4,002
8,150 8,150
2017 2017
Mar. 31 To Interest A/c. 2,880 Apr 1 By Balance b/d. 4,002
To Balance c/d. 1,122
4,002 4,002
Mar. 31 To, Interest A/c. 1,122 Mar.31 By Balance b/d. 1,122
1,122 1,122
Interest A/c.
Dr. Cr.
2016 Rs. 2016 Rs.
Mar. 31 To P & L A/c. 4,148 Mar. 31 By lnt. Sus. A/c. 4,148
2017 2017
Mar. 31 To P & L A/c. 2,880 Mar. 31 By lnt. Sus. A/c. 2,880
2018 2018
Mar. 31 To P & L A/c. 1,122 Mar. 31 By lnt. Sus. A/c. 1,122

Profit & Loss A/c.

for the year ending 31 st March 2016
Dr. Cr.
Rs. Rs.
By Interest A/c. 4,148
Profit & Loss A/c
for the year ending 3lst March 2017
Dr. Cr.
Rs. Rs.

By Interest A/c 2,880

63
 Profit & Loss A/c.
for the year ending 31st March 2018
Dr. Cr.
Rs. Rs.
By Interest A/c. 1,122
Ilustration - 2
Alfa Trading Co. Ltd. sold a machine to Kamalakar & Bros, on instalment purchase
system charging interest @ 10% p.a. on April 2015. The follow ing sums were paid on the dates
mentioned in full discharge of the obligation towards the cost as well as interest.
Rs.
l-4-2015 2,00,000
31-3-2016 1,21,000
31-3-2017 1,33,100
31-3-2018 1,46,410
Assuming that the buyers provide depreciation @ 20% p.a. on diminishing balance method
and that they close their books on 31st March every year, prepare Machinery A/c., Vendors A/
c. and Interest Suspense A/c. in their books.
Solution
Before attempting the ledger accounts, we have to ascertain the cash price it is not
given. The procedure to find out the cash price is already explained in detail earlier under the
hire-puchase system.
Date Instalment Interest Cash price
Rs. Rs. Rs.

10
31-3-2018 1,46,410  1,46,410 = 13,310 1,33,100
110
10
31-3-2017 1,33,100 
110 1,33,100+ 1,33,100 = 24,200 1,08,900

10
31-3-2016 1,21,000  1,21.000+ 1,08,900
110
+ 1,33,100 = 33,000 88,000
1-4-2015 2,00,000 Down Payment - Nil 2,00,000
Total 6,00,510 70,510 5,30,000

Ledger OF KAMALAKAR & BROTHERS

Machinery A/c.
Dr. Cr.
2015 Rs. 2016 Rs.
Apr. l To Alfa Trading Co. Ltd 5,30,000 Mar. 31 By Depreciation A/c. 1,06,000
By Balance c/d. 4,24,000
5,30,000 5,30,000

64
2016 2017
Apr. 1 To Balance b/d. 4,24,000 Mar. 31 By Depreciation A/c. 84,800
By Balance A/c 3,39,200
4,24,000 4,24,000
2017 2018
Apr.1 To Balance b/d. 3,39,200 Mar.31 By Depreciation A/c. 67,840
By Balance c/d 2,71,360
3,39,200 3,39,200

Alfa Trading Co. Ltd.

(Vendor) A/c.
Dr. Cr.
2015 Rs. 2015 Rs.
Apr 1 To Bank A/c. 2,00,000 Apr. 1 By Machinery A/c. 5,30,000
2016 2015
Mar.31 To Bank A/c. 1,21,000 Apr. 1 By Interest sus. A/c. 70,510
“ To Balance c/d. 2,79,510
6,00,510 6,00,510
2017 2016
Mar.31 To Bank A/c. 1,33,100 Apr. 1 By Balance b/d. 2,79,510
“ To Balance c/d. 1,46,410
2,79,510 2,79,510
2018 2017
Mar. 31 To Bank A/c. 1,46,410 Apr. 1 By Balance b/d. 1,46,410
1,46,410 1,46,410

Interest Suspense a/c.

Dr. Cr.
2015 Rs. 2016 Rs.
Apr.l To Alfa Trading Co. Ltd 70,510 Mar. 31 By Interest A/c. 33,000
“ By Balance c/d. 37,510
70,510 70,510
2016 2017
Apr. 1 To Balance b/d 37,510 Mar. 31 By Interest A/c. 24,200
By Balance c/d. 13,310
37,510 37,510
2017 2018
Apr. 1 To Balance b/d. 13,310 Mar. 31 By Interest A/c. 13,310
13,310 13,310

65
Illustration - 3
On 1st October 2014, X purchased a machine for his printing press from ABC Enter-
prises (P) Ltd. on instalment purchase system at a cash price of Rs. 46,580 of which he imme-
diately paid Rs. 7,580. The remaining is to be paid in six half-yearly instalments of Rs. 6,500
each plus interest @ 12% The instalments are to be paid on 30th September and 31 st March
every year. X who closes his books at the end of March, decided to depreciate the machinery
at 10% p.a. on straight line basis.
You are requested to writte up the Journal entries in the books ofX up to 31st March
2016.
Books of X
Journal
2014 Rs. Rs.
Oct 1 Machinery A/c. Dr. 46,580
Interest Suspense A/c. Dr 8.190
To ABC Enterprises (P) Ltd A/c. 54,770
(Being machinery purchased on instalment
basis)
ABC Enterprises (P) Ltd. A/c Dr. 7,580
To Bank A/c 7,580
(Being down payment made)
2015
Mar 31 Interest A/c. Dr. 2,340
To Interest Suspense A/c. 2,340
(Being interest for half year)
12 6
39,000 x 100  12

“ ABC Enterprises (P) Ltd. A/c. Dr. 8,840

To Bank A/c. 8,840
(Being I Instalment paid 6.500 + 2,340)
Depreciation A/c. Dr 2,329
To Machinery A/c. 2.329
(Being Depreciation from the date of
10 6
purchase: 46.580 x 100  12 )

“ Profit and Loss A/c. Dr. 4,669

To Interest A/c. 2,340
To Depreciation A/c. 2.329
(Being interest, depreciation transferred]
2015
Sep.30 Interest A/c. Dr. 1,950
To Interest Suspense A/c. 1.950

66
 (Being interest for half year)
12 6
32.500 x 100  12 )

ABC Enterprises (P) Ltd. A/c. Dr. 8,450

To Bank A/c. 8,450
(Being II Instalment paid 6,500 + 1,950)

2016
Mar. 31 Interest A/c. Dr. 1,560
To Interest Suspense A/c. 1,560
(Being interest for half year

12 6
26,000 x  )
100 12
ABC Enterprises (P) Ltd. A/c. Dr. 8,060
To Bank A/c.
(Being III Instalment paid 6,500 + 1,560) 8,060

Depreciation A/c. Dr. 4,658

To Machinery A/c, 4,658
(Being Depreciation for full year)
Profit and Loss A/c. Dr. 8,168
To Interest A/c. 3,510
To Depreciation A/c. 4,658
(Being depreciation & interest transferred at
the end of the year - interest 1,950 + 1,560)
Notes
1. Total interest debited to Interest Suspense A/c. Rs. 8,190 is arrived at, as follows:
12 6
31-3-2015 on Rs. 39,000 (46,580-7,580) (39,000 x  ) = 2,340
100 12
12 6
30-9-2015 on Rs, 32,500 (39,000-6,500)(32,500 x  ) = 1,950
100 12
12 6
31-3-2016 on Rs. 26,000 (32,500-6,500) (26,000x  ) = 1,560
100 12
12 6
30-9-2916 19,500(26,000-6,500) (19,500x  ) = 1,170
100 12
12 6
31-3-2017 13,000(19,500-6,500) (13,000x  ) = 780
100 12
12 6
30-9-2017 6,500(13,000-6,500) (6,500x  ) = 390
100 12
Total = 8,190
67
2. Each year, the instalment amount paid is Rs 6,500 plus interest for the period.
3. Entries for depreciation and the transfer of interest and depreciation to profit and loss will
be made only on the date on which the accounting year has ended. It is 31 st March here.
For the year ended 31-3-2015 depreciation is calculated for half-year, from the date of
purchase 1-10-14to 31-3-15
4. In problems involving half-yearly instalments when transfer to profit and loss a/c is made,
at the end of the accounting year, care must be taken to transfer interest paid m the
middle of the year as well as at the end, along with depreciation.

2.4 SUMMING UP
When goods are sold on Instalment Purchase System, the accounting procedure is the
same as that of Hire Purchase System, except that the method usually followed under instalment
system is “Interest Suspense Method”. Asset Accrual Method cannot be followed.

2.5 CHECK YOUR PROGRESS : MODEL ANSWERS

HIRE-PURCHASE INSTALMENT PURCHASE
i. Title in the goods transfers only after i. Title in the goods passess to the
the last instalment is paid. purchaser immediately after the
agreement.
ii. The instalment paid before the last ii. Each instalment is treated as
instalment would be treatedas hire payment towards principal and
charges. interest.
iii. The agreement can be cancelled any iii. Ther e is no such r ight to the
time before the last instalment being purchaser.
paid.
iv. The seller has the right to iv. The seller has no such right but he
repossessthe goods, in case the can file a suit for price of the goods
purchaser is in default of instalment and damages.

v. The Hire Purchaser cannot sell the v. The purchaser can sell the goods
goods, as he has no title. as he has title of the goods.

2.6 MODEL EXAMINATION QUESTIONS

I. Answer the following questions in about 30 lines each.
1. What do you understand by instalment purchase system? In what ways is it different
from the Hire-purchase system?
2. Explain the advantages of Hire-purchase or Instalment purchase agreements that may
accrue to the purchaser and vendor? How are these transactions different from credit
sales?
II. Answer the following questions in about 15 lines each.
1. Write short notes on the following:
a) Instalment purchase system.
b) Interest Suspense Method.

68
III. Objective type questions :
a) Multiple choice Questions .
1. Identify the correct statement.
a. Instalment vendor can reposses the goods. b. Instalment vendor can rescind the
contract . c. Instalment vendor can sue the purchaser for the amount due. d. All the
above.
2. Given cash price of 20,000, down payment of Rs 5000 and balance in three yearly
instalments of Rs. 5000 together with interest @ 10%. Instalment purchase price ?
a. Rs. 22,000 b. Rs .21,500 c. Rs. 23,000 d. None
3. Under the instalment purchase system, buyer becomes the owner.
a. on signing the contract. b. paying the first instalment c. on paying the last instalment.
d. on making the down payment.
4. Given the amount of last yearly instalment Rs 5500 and rate of interest is 10%, the
amount of interest included in instalment is .
a. Rs. 550 b. Rs. 500 c. Rs. 55 Rs. 5,000
5. When rate of interest is not given, total interest is distributed in various instalments.
a. Equally b. In the ratio of number of instalments c. In the ratio of amounts due at the
beginning of each instalment d. None
Ans : 1.c 2. a 3. a 4. b 5. c
b) Fill in the blanks .
1. One who purchases the goods/asset under Instalment purchase systems is _________
2. In the books of instalment verdor, interest suspense a/c shows __________ balance.
3. Instalment purchase shows the balance in interest suspense account, in the _________
side of his balance sheet .
4. For the instalment vendor interest included in the instalments is _________
5. In the sucessive instalments, the interest part goes on __________
Ans : 1. Instalment purchases 2. Credit 3. Asset 4. Income 5. Decreasing
c) Match the following :
1. Cash Price ( ) a. Can rescind the contract
2. Instalment purchase system ( ) b. Cannot reposses the goods.
3. Instalment Vendor ( ) c. Instalment purchase price - Interest
4. Hire purchase system ( ) d. Ownership transferred on signing the contact.
5. Hire purchaser ( ) e. Ownership transferred after the payment of last
instalment
Problems
1. Vasakha Vans Ltd. sold a mini delivery van to Raju & Sons on instalment purchase
system accepting an immediate payment of Rs. 10,000 against the cash price of Rs.
32,12 5.Raju & Sons further paid Rs. 10,000 each at the end of 1st Year, 2nd year and 3rd
year. Interest was charged at 16 2/3 per cent per annum.
Raju & Sons provide depreciation on the reducing balance method @ 20% p.a. Books are
closed on 31st March each year.
Prepare Vasakha Vans Ltd. interest suspense a/c for three years in the books of Raju &
69
 Sons. Also prepare Raju & Sons account and Interest Suspense A/c in the books of
Vendors. (Answer : Interest Rs. 3,703; 2,653; 1,429).
2. Velbeing Enterprises Ltd. purchased three scooters for official use from New Auto Prod-
uct Ltd. on instalment purchase system and make a cash down payment of Rs. 5,000.
The balance amount is to be paid in five installments of Rs. 5,000 each at the end of each
year for 5 years The cash price of the scooters is Rs. 23,000. Interest is chargeable @
12%p.a. Velbeing Enterprises Ltd. writeoff depreciation @10% on straight line method.
Journalise these transactions in the books of both the parties for the first two years. (Total
interest Rs. 7,000; 1st year Rs.Rs. 2,160; 2ndYearRs. 1,819; 3rd year Rs. 1,437; 4th year
Rs. 1.010).
3. Maruti Transports purchased a truck on instalment purchase system from Safe speeds
Ltd. on 1-4-2014. The cash price was Rs. 1,21,850 and down payment Rs. 21.850. The
balance was payable in 4 installments of Rs. 25,000 each plus an annual interest @ 12%
p a. at the end 31st March 2015,2016, 2017 and 2018 Maruti Transports provide depre-
ciation @ 20% on W.D.V.
Prepare ledger accounts.
(Answer : Instalments: I Rs. 37,000; II Rs. 34,000; III Rs. 31,000 and IV Rs. 28,000 Total
interest Rs. 30,000; H.P. Price Rs. 1,51,850).

2.7. GLOSSARY
Instalment puchse system : A system in which the buyer becomes the owner of the goods on
signing a contract agreeing to pay the price of goods along with interest in instalments.
Instalment buyer : one who buy goods or asset under instalment system .

2.8 FURTHER READINGS

1. Gupta, R.L. : Advanced Accountancy,
Sultan Chand & Sons, New Delhi.
2. Shukla, M.C. & : Advanced Accounts,
Grewal, T.S Sultan Chand & Sons, New Delhi.
3. Jain, S.P. & : Advanced Accountancy,
Narang. K.L. Kalyan Publishers, New Delhi.

70
 BLOCK II
PARTNERSHIP ACCOUNTS-I

Unit - 3 : Partnership Accounts – An Introduction

Unit - 4 : Final Accounts of the Partnership Firm

71
72
UNIT - 3 : PARTNERSHIPACCOUNTS – INTRODUCTION
AND METHODS OF MAINTAINING CAPITAL
ACCOUNTS

Contents
3.0 Aims and Objectives
3.1 Introduction
3.2 Definition and Essential Features
3.3 Partnership Deed
3.4. Rules Applicable in the Absence of Agreement
3.5 Partnership and Co-ownership
3.6 Registration of Firms
3.7 Usual Adjustments in Partnership Accounts
3.8 Method of Partners Capital Accounts
3.9 Method of Fluctuating Capital
3.10 Method of Fixed Capital
3.11 Summary
3.12 Check Your Progress: Model Answers
3.13 Model Examination Questions
3.14 Glossary
3.15 Further Readings

3.0 AIMS AND OBJECTIVES

Preparation of partnership accounts involves the observance of certain rules, legal pro-
visions and adjustments. This unit is designed to familiarise you with such rules, provisions and
to explain the methods of preparing capital accounts of partners.
After going through this unit, you should be able to:
• Define the term partnership;
• List out the features and characteristics of partnership;
• Explain the contents of partnership deed;
• Recognise the rules applicable in the absence of agreement among the partners;
• Distinguish between partnership and co-ownership;
• Prepare the capital accounts of partners under:
• Fixed Capital. Method; and
• Fluctuating Capital Method.

3.1 INTRODUCTION
It is the common experience of businessmen that the combination of more than one
person in business, brings out better and more efficient results. In addition, a person who has the
73
ability and experience but does not have the required money can join with person(s) who can
bring in the necessary money. Thus, when two or more persons combine their skills and property
in a venture and agree to share the results, it is referred to as Partnership. While in a sole
trading concern, one person is the owner in a partnership concern, two or more persons share
the ownership. The limitations of sole trader to a large extent, are overcome in a partnership
type of business.

3.2 DEFINITION AND ESSENTIAL FEATURES

Partnership in India is governed by the Indian Partnership Act, 1932. Section 4 of the Act
defines a partnership as ‘the relation between persons who have agreed to share the profits of
the business carried on by all or any of them acting for all’. Individually they are called ‘Partners’
and collectively it is called a ‘Firm’.
According to the above definition the following are the essential features of a partnership.
a. Number of Persons: In order to constitute a partnership firm there should be atleast
two persons. (The maximum number is twenty and if the business is that of banking it
must not exceed ten. If the number exceeds this limit the partnership becomes illegal
association).
b. Agreement: It is necessary that there should be an agreement between the partners.
c. Activity: The partners have to join to carry on some business.
d. Profits: They must agree to share the profits (or losses, as the case may be). It cannot
be called as partnership, if the profits are not shared.
e. Management: The firm can be managed by all the partners or any of them on behalf of
all.
The characteristics of partnership are as follows:
i. The law treats the partners and the firm as one. They are not legally separate. If a
partner dies, the firm gets dissolved. Each partner can enter into contracts on behalf
of the firm and each of them can be used for the debts of the firm.
ii. The liability of the partners is both joint and several and unlimited. If the firm’s assets
are not sufficient enough to pay of its debts, the remaining amount can be recovered
from any or all of the partners.
iii. No partner can retire from the firm without the consent of the remaining partners.

3.3 PARTNERSHIP DEED

A partnership is the outcome of an agreement between the partners. Such an agreement
may be made simply by word of mouth (oral); or implied by the conduct of the persons; or in
writing. Though verbal or implied agreement may be quite sufficient to evidence the existence,
it is always advisable to have a written agreement, so that, in case of any dispute, it may readily
be referred to.
The document which contains the terms and conditions of the agreement for the conduct
of the business is called ‘Partnership Deed’. The terms and conditions are inserted in the Deed
in the form of clauses. As the accounts of the partnership are to be prepared strictly in accordance
with the agreement, the usual accounting clauses which should find a place in the Deed are as
follows:
a. The capital of the firm and the proportion in which it is to be contributed by the
partners.

74
 b. The ratio of sharing profits and losses.
c. Whether the capital accounts are ‘Fixed’ or ‘Fluctuating’?
d. Whether interest is to be allowed on capital and charged on drawings and if so, at
what rate?
e. The amount of each partner can be allowed to draw, its anticipation at profits.
f. Amount of salaries, if any, payable to partners.
g. Preparation and authenticating the annual accounts.
h. The method of ascertaining the partner’s share in the event of death/retirement.
i. The method of ascertaining the value of goodwill of the firm.
j. Whether any interest is to be paid to the partner, if amount is advanced in addition to
capital; and if so, at what rate?
k. How the accounts are to be settled in case of insolvency of a partner?
l. Provision for arbitration clause in case of dispute between partners.
In addition to the above, the deed can contain provisions for smooth conduct of the business.
In most respects, the partners may make whatever arrangements they like for the conduct of
the business, and also in respect of the adjustment of their mutual rights and interests. However,
where there is no agreement, the whole of the Indian Partnership Act applies, but only certain
provisions thereof apply to a firm having an agreement.

3.4 RULES APPLICABLE IN THE ABSENCE OF

AGREEMENT
Where there is no specific agreement between the partners-written, verbal, express or
implied the relations of partners are determined by the following rules, as per the Partnership
Act:
i. Partners share profits/losses equally;
ii. Interest on capital is not allowed and similarly no interest is charged on drawings;
iii. Partners are not entitled for any salary or remunerations;
iv. Partners giving loans to the firm are entitled to interest 6 per cent per annum;
v. The partnership books are to be kept at the place of business and every partner will
have access besides the right to inspect and copy any of them.
Illustration – 1
Balram and Krishna commenced partnership business on 1st Jan, 2017. There is no
partnership agreement between them. Balram contributed Rs. 80,000 and Krishna Rs. 20,000
as capital. Balram also advanced the firm Rs. 40,000 on 1st July 2017. Balram was hospitalized
for 3 months and could not attend to the business during this period. For the year ended December
31, 2017 the firm’s profit amounted to Rs. 51,200. Balram claimed that the profit should be
distributed in proportion to the capital contributed; and he should be paid 12% interest on loan.
Krishna claimed that the profits should be distributed equally and he should be paid special
remuneration of Rs. 5,000 for looking after the business entirely, when Balram was hospitalized.
You are required to distribute the profits as per law, giving reasons to the claims of partners.
Solution
In the absence of any specific agreement between the partners, as per the Partnership
Act 1932:

75
 a. the profits are to be shared by Balram and Krishna equally;
b. Balram is entitled to 6% interest on the loan;
c. Krishna is not entitled for any remuneration:
The profits are distributed as follows:
Rs.
Profits as ascertained 51,200
Less: Interest on Balram’s loan of Rs. 40,000 at the rate of 6% for 6 months. 1,200
Net Profit 50,000
——-
Balram’s share 25,000
Krishna’s share 25,000

CHECK YOUR PROGRESS -1

What are the rules applicable in the absence of agreement among the partners?
………………………………………………………………………………………………………
………………………………………………………………………………………………………
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3.5 PARTNERSHIP AND CO-OWNERSHIP

It was stated earlier that in the case of a partnership firm, there will be two or more
owners. But partners are different from Co-owners as follows:
i. Partnership is necessary the result of an agreement while co-ownership may not. They
may be legal co-heirs.
ii. Partners share profits of a business. The co-owners share the income, if any, from the
asset owned.
iii. A co-owner can demand partition in the property but a partner cannot demand partition of
the firm’s property.
iv. A co-owner can transfer his interest in the property, without the consent of others but in
a partnership firm, partners cannot transfer their interests freely.
v. Each partner acts as agent of other partners but a co-owner does not.

3.6 REGISTRATION OF FIRMS

According to the Partnership Act, it is not compulsory for the partnership firms to get
registered, though the Act contains a provision for registration. But if the firm is not resisted:
a) The firm cannot file a suit against third parties, and
b) No partner can file a suit against the firm or other partners of the firm. Hence, it is
desirable to get the firm registered.

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3.7 USUAL ADJUSTMENTS IN PARTNERSHIP ACCOUNTS
Interest on Capital: As per the partnership act no interest is paid on capitals of partners.
But if the “Deed” provides for it, it is paid. If the partners sharing profits and losses equally
contribute different amounts of capital and no interest is paid on Capitals, the partner who
contribute more amount capital stands to lose and partner with lesser amount of capital stands
to gain. So, to maintain equity inter-se, the deed provides for the payment of interest on Capital
at some rate. Interest on capital in an expense to the firm.
Interest on Drawings: Drawings are the amount of cash and goods drawn by the
partners from the firm. As per the Act no interest is charged on drawings. But, if the deed
include a provision to charge the interest on drawings, it is charged. Partners may draw different
amounts from the firm. So, to maintain equity inter-se the deed provides for charging of interest
on drawings. Interest on Drawings in an income to the firm.
Remuneration to Partners: According to Section 12(b) of the Partnership Act every
partner is bound to attend diligently to his duties in the conduct of the business. As per Section
13(a), no partner is entitled to receive remuneration for taking part in the business. However, it
may become necessary to pay remuneration to those partners who devote their full attention to
the business, while others do not. Hence, if the partners agree mutually, some of them can be
paid salary.
In view of the above, the net profit, as may be arrived at, cannot straight away be
transferred to capital accounts of the partners. It requires further adjustment towards interest
on Capitals, Partners salaries and Interest on Drawings. Such an adjustment can be made in the
P&L Account itself. Alternatively, net profit in the P&L Account can be transferred to P & L
Appropriation Account, necessary adjustments can be made there at and then the profit divided
among the members. The following illustrations will explain the adjustments.
Illustration - 2
Kamal and Vimal entered into partnership on 1st January 2017 contributing Rs. 60,000
and Rs. 45,000 respectively. They agreed to share profits and losses in 3:2 ratio. Vimal is
entitled to a salary of Rs, 2,000 pm. Partners are entitled to interest on capital at 6% per annum.
During the year Kamal and Vimal withdraw Rs. 5,000 and Rs. 4,000 respectively and the
interest on the same amounted to Rs. 250 and Rs. 200 respectively. For the year 2017, the
profits before the above adjustments amounted to Rs. 13,000. Show the distribution of profits
among the partners.
Solution
Profit and Loss Appropriation Account
for the year ended 31st December, 2017
Dr. Cr.
Particulars Amount Amount Particulars Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
To Interest on capital: By P&L A/c. (N.P.) 13,000
Kamal 3,600
Vimal 2,700 By Interest on Drawings:
6,300
To Partners salaries:
Vimal 2,000 Kamal 250

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 Vimal 200
To Capital A/c:
Kamal N/P 3/5 3,090 450
Vimal N/P 2/5 2,060 5,150
13,450 13,450
llustration - 3
Raja, Rama and Ravi are in partnership and on 1-10-2016, their capital stood at Rs.
50,000, Rs. 40,000 and Rs. 45,000 respectively. Ravi and Raja are entitled to draw for the year
a salary of Rs. 5,000 and Rs. 4,500 respectively. All the, partners are entitled for interest on
Capital at 8% p.a. No interest is charged on drawings. Their drawings amounted to Rs. 4.000
each. Of the net profits Rs. 9,000 is shared by the partners in the ratio of 40:30:20 respectively
and the remaining net profits are shared equally.
For the year ended 30th Sept, 2017, the profits after charging interest on capital but
before debiting partner’s salaries amounted to Rs. 30,500. Show the distribution of net profits
among the partners.
Solution
Profit and Loss Appropriation Account for the year ended 30-9-2017
Dr Cr.
Particulars Amount Amount Particulars Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
To Partner’s Salaries: By Profit b/f 30,500
Raja (4,000+4,000) 5,000
Ravi 4,500 9,500
To Capital A/c (NP trd):
Raja (3,000+4,000) 8,000
Rama (4,000+4,000) 7,000
Ravi (2,000+4,000) 6,000 21,000
30,500 30,500
Amount of profits to be distributed equally, is arrived at as follows:
Rs. 21,000 – Rs. 9,000 = Rs. 12,000
Raja’s profit 40/90 x 9,000 = 4,000 + 1/3 of Rs. 12,000 = Rs. 4,000
Rama’s profit 30/90 x 9,000 = 3,000 + 1/3 of Rs. 12,000 = Rs. 4,000
Ravi’s profit 20/90 x 9,000 = 2,000 + 1/3 of Rs. 12,000 = Rs. 4,000

9,000 12,000
Interest on Drawings: The interest on drawings has to be charged according to the
time that elapses between the date of drawing and the end of the year. If the dates on which
amounts are drawn are not available, interest can be charged on the whole amount for half of
the accounting period (i.e., if the accounts are drawn up for a year, interest is charged for 6
months) on the assumption that the money was drawn evenly throughout the year.
Illustration – 4
Rakesh, a partner has drawn the following sums of money:

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 Rs.
th
28 Feb 20017 500
31st March 2017 400
30th June 2017 600
st
31 Oct 2017 800
Accounts are drawn up on 31st December every year. Interest on drawings is to be
charged at 6% p.a. Ascertain the interest.
Solution
On Rs. 500, interest is to be charged for 10 months i.e. 500 x (10/12) x (6/100) = 25
On Rs. 400, interest is to. be charged for 9 months i.e. 400 x (9/12) x (6/100) = 18
On Rs. 600, interest is to be charged for 6 months i.e. 600 x (6/12) x (6/100) = 18
On Rs. 800, interest is to be charged for 2 months i.e. 800 x (2/12) x (6/100) = 8
Total interest on Drawings = 69
Alternatively, it can also be calculated on product method as follows

Amount Months Product

Rs.
500 10 5,000
400 9 3,600
600 6 3,600
800 2 1,600
13,800

Interest on the Product of 13,800 for one month = 13,800 x (1/12) x (6/100)
= Rs. 69
It can also be calculated by finding out an average drawing date.
Calculation of interest on Drawings
1. Same amount drawn on first day of every month: if same amount is drawn on the
first day of every month, instead of calculating the interest on each amount from the date
of drawing, till the end of the year and adding all of them to get the total interest on
drawings, it is sufficient if the interest is calculated on the total drawings for 6 1/2 months
at the given rate. The above statement can be made more clear with the help at an
example.
Illustration - 5
Sachin a partner in a firm has drawn Rs. 600 p.m. on the first day of every month during
the year ended 31-12-2017. As per the deed interest is charged on drawing mg at 12%. Calculate
the interest on drawings.
Solution

on Rs. 600 drawn on 1-1-2017 interest for 12 months = = 72

on Rs. 600 drawn on 1-2-2017 interest for 11 months = = 66

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 on Rs. 600 drawn on 1-3-2017 interest for 10 months = = 60

on Rs. 600 drawn on 1-4-2017 interest for 9 months = = 54

on Rs. 600 drawn on 1-5-2017 interest for 8 months = = 48

on Rs. 600 drawn on 1-6-2017 interest for 7 months = = 42

on Rs. 600 drawn on 1-7-2017 interest for 6 months = = 36

on Rs. 600 drawn on 1-8-2017 interest for 5 months = = 30

on Rs. 600 drawn on 1-9-2017 interest for 4 months = = 24

on Rs. 600 drawn on 1-10-2017 interest for 3 months = = 18

on Rs. 600 drawn on 1-11-2017 interest for 2 months = = 12

on Rs. 600 drawn on 1-12-2017 interest for 1 months = = 6

Total Interest is = Rs. 468

Instead of doing a length exercise as above, if the interest at given rate is calculated as
the total drawings for 6 1/2 months, it is sufficient. In this method total interest is

= Rs. 468
2. Same amount drawn on the last day of every month: Interest is to be calculated on
the the total drawings for a period 5 ½ months at the given rate
3. Same amount drawn on the 15th of every month: Interest is to be calculated on the
total drawings for a period of 6 months at the given rate.

CHECK YOUR PROGRESS – 2

1. What is the logic behind the calculation of interest on capital and drawings?

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 Adjustments for the past: Sometimes the partners may be paid their salaries, interest
on capital etc. wrongly. Such errors may be discovered at a later date i.e. after the net profits
have been distributed. That requires rectification. It is necessary to find out what is the excess
amount credited or debited so that it can be adjusted now.
The following illustration makes the things clear:
Illustration – 6
The accounts of the partnership firm of Satyam, Shivam and Sundaram for the calendar
year 2016 and 2017 were already drawn up and closed. It is now discovered that there is no
provision for payment of interest on capital as per the partnership agreement, but as the partners
have been allowed interest on capital at 5% for 2016 and 2017 which amounted to as follows:

2016 2017
Rs. Rs.
Satyam 700 720
Shivam 400 420
Sundaram 220 220

The partners shared profits and losses in 2:2:1 ratio. Ascertain the amount to be adjusted
to rectify the error.
Solution
Statement showing the adjustment

Year Partner Interest Interest allow Adjustment Total

allowed amount, now required for the amount to be
distributed as year adjusted
profit
Rs. Rs. Rs. Rs.

2016 Satyam 700 528 -172

Shivam 400 528 +128
Sundaram 220 264 + 44
1,320 1,320
2017 Satyam 720 544
Shivam 420 544 -176 -348
Sundaram 220 272 +124 +252
1,360 1,360 +52 +96

3.8 METHODS OF PARTNERS’ CAPITAL ACCOUNTS

We all know that, in partnership, there will be more than two partners. These partners,
generally contribute capital and withdraw, now and then, amounts for their personal requirements
in anticipation of profits to be made in near future. The capitals of partners are subject to
adjustments, when there are items like profit or loss, interest on capital, interest on drawings
etc. Capital accounts are prepared separately for each partner. Let us learn, how the capital
accounts are to be prepared.
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 There are two methods of maintaining the Capital Accounts. They are: (1) Floating, or
Fluctuating Capital Method and (2) Fixed Capital Method.

3.9 FLOATING OR FLUCTUATING CAPITAL

Under this method a Capital Account is kept for each partner in which are recorded all
the transactions relating to the amount of capital contributed, interest on capital, drawings, interest
on drawings, salary of the partner and share of profit or loss; and the balance of which appears
in the Balance Sheet. Since all these entries are passed through Capital Account, the capital at
the end of the period will not be the same what it was at the beginning of the period. Thus, under
this method the capital will be fluctuating from one period to the other.

3.10 FIXED CAPITAL

Some firms, however, prefer to continue to show in the Capital Accounts, only the capital
amount contributed by the partner. In such a case, entries are passed in the Capital Account
only when capital is brought in or withdrawn. All other items like Drawings, Interest on drawings,
Interest on capital, Salary of the partner etc., are recorded in the Current Account or “Drawing
Account”. Balances of both Capital Account and Current Account are shown in the Balance
Sheet. Since the Capital Account shows a constant figure (unless additional capital is introduced
or existing capital is withdrawn), this method is known as Fixed Capital Method.
JOURNAL ENTRIES
The following are the journal entries passed under both the above methods for recording
various transactions:
Transaction Fluctuation capital method Fixed capital method
1. Capital
contributed:
a) In cash Bank A/c. Dr. Bank A/c. Dr.
To Partners’ Capital A/c To Partners’ Capital A/c
b) In kind Concerned property A/c. Dr. Concerned property A/c. Dr.
To Partner’s Capital A/c. To Partner’s Capital A/c.
2. Interest on Interest on Capital A/c Dr. Interest on Capital A/c Dr.
Capital:
To Partner’s Capital A/c To Partner’s Current A/c

3. Salary or Partner’s Salaries A/c Dr. Partner’s Salaries A/c Dr.

Commission Or Or
payable to
Partner Partner’s Commission A/c Dr. Partner’s Commission A/c Dr.
To Partner’s Capital A/c. To Partner’s Current A/c.
4. For Drawings
i) In cash Partner’s Drawings A/c. Dr. *Partner’s Drawings A/c Dr.
To Bank A/c. Or
Partner’s Current A/c. Dr.
To Bank A/c.
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 ii) In goods Partner’s Drawings A/c. Dr. *Partner’s Drawings A/c. Dr.
To Purchases A/c. Or
Partner’s Current A/c. Dr.
To Purchases A/c.
5. For interest Partner’s Capital A/c. Dr. Partner’s Capital A/c. Dr.
on Drawings To Interest on To Interest on
Drawings A/c. Dr. Drawings A/c. Dr.
6. For distributing P & L A/c. Dr. P & L A/c. Dr.
Profit Or Or
P & L Appro A/c. Dr. P & L Appro A/c. Dr.
To Partner’s Capital A/c. To Partner’s Current A/c.
7. For sharing Partner’s Capital A/c. Dr. Partner’s Current A/c. Dr.
the loss To P & L A/c. To P & L A/c.
Or Or.
P & L Appro A/c. P & L Appro A/c.
* Where Partner’s Drawing A/c is debited it later transferred to Partner’s Current Account.
Both the methods of maintaining the capital accounts are explained in the following
illustration:
Illustration - 7
Sham and Madhu entered into a partnership. On 1st Jan 2017 their capitals were Rs.
1,52,000 and Rs. 32,000 respectively. For the six months ended 30th June, 2017 they made a
profit of Rs. 42,800 before allowing 5% p.a. interest on capitals and Rs. 6,000 as salary to
Madhu. Sham drew Rs. 24,800 and Madhu Rs. 14,000 as Drawings.
The profits were shared by Sham and Madhu in 4:1 ratio. Prepare the Profit and loss
Appropriation Account and the accounts of the partners as on 30th June 2017 both under (a)
Fluctuating Capital Method and (b) Fixed Capital Method.
Solution
a) Fluctuating Capital Method
Profit & Loss Appropriation Account for
the half year ended 30th June 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Interest on Capital: By P & L A/c. (N.P. b/f) 42,800
Sham 3,800 4,600
Madhu 800
To Partner’s Salary: 6,000
Madhu
To Sham’s Capital A/c.
(4/5 N.P.) 25,760
Madhu’s Capital A/c.
(1/5 N.P.) 6,440 32,200
42,800 42,800
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 Sham’s Capital A/c
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 24,800 By Balance b/f 1,52,000
To Balance c/d. 1,56,760 By Interest on Capital 3,800
By P & L Appropriation
A/c (4/5 N.P.) 25,760
1,81,560 1,81,560
By Balance b/d 1,56,760
Madhu’s Capital A/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Drawings 14,000 By Balance b/f 32,000
To Balance c/d. 31,240 By Interest on Capital 800
By Partner’s Salary 6,000
By P & L Appropriation 6,440
A/c (1/5 N.P.)
45,240 45,420
By Balance b/d 31,240

b) Fixed Capital Method

Profit & Loss Appropriation Account for
the half year ended 30th June 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Interest on Capital: By P & L A/c. (N.P. b/f) 42,800
Sham 3,800
Madhu 800
4,600
To Partner’s Salary:
Madhu 6,000
Sham’s Capital A/c.
(4/5 N.P.) 25,760
Madhu’s Capital A/c.
(1/5 N.P.) 6,440 32,200
42,800 42,800

84
 Sham’s Capital A/c
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Balance c/d. 1,52,000 By Balance b/f 1,52,000
1,52,000 1,52,000
By Balance b/d. 1,52,000
Madhu’s Capital A/c
To Balance c/d. 32,000 By Balance b/f 32,000
32,000 32,000
By Balance b/d. 32,000
Sham’s Current A/c
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 24,800 By Interest on Capital 3,800
To Balance c/d. 4,760 By P & L Appropriation A/c
(4/5 N.P.) 25,760
29,560 29,560
By Balance b/d 4,760

Madhu’s Current A/c

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 14,000 By Interest on Capital 800
By Partner’s Salary A/c. 6,000
By P & L Appropriation 6,440
A/c (1/5 N.P.)
By Balance c/d 760
14,000 14,000
To Balance b/d 760

CHECK YOUR PROGRESS - 3

(a) Distinguish between Fluctuating Capital Method and Fixed Capital Method?
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(b) What is the journal entry under fixed capital method, when a partner draws cash from the
business?
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Illustration – 8
On 1st Jan 2017 Ajay and Bhaskar entered into partnership to share profits and losses in
the ratio of 3:2. They have contributed Rs. 50,000 and Rs. 40,000 respectively, towards the
capital of the firm. As per the partnership deed, interest is to be allowed on Capitals at 6% per
annum and 5% interest is to be charged on drawings. Ajay is entitled to a salary of Rs. 6,000
p.a. The partner’s drawings during 2017 were as follows:
Ajay Bhaskar
on March 31, 2017 Rs. 2,000 Rs. 1,200
on June 30, 20017 Rs. 3,000 Rs. 2,000
on Sept. 30, 2017 Rs. 2,000 Rs. 1,600
on Dec. 31, 2017 Rs. 2,400 Rs. 1,800

During the year 2017 the firm made a profit of Rs. 61,110/- before making the above
adjustments. Show the P & L Appropriation A/c. and partner’s accounts both under Fluctuating
Capital and Fixed Capital Methods. Show also how the relevant items appear in the Balance
Sheet as on 31st December, 2017.
Solution
Calculation of Interest on Drawings of Ajay
Date Amount Months to Product
Dec. 31-2017 (Amount X months)
(Rs.)
March 31, 2017 2,000 9 18,000
June 30, 2017 3,000 6 18,000
Sept. 30, 2017 2,000 3 6,000
Dec. 31, 2017 2,400 0 0
Total 42,000

Interest = = Rs. 175 /-

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 Calculation of Interest on Drawings of Bhaskar
Date Amount Months to Product
Dec. 31-2017 (Amount X months)
Rs.
March 31, 2017 1,200 9 10,800
June 30, 2017 2,000 6 12,000
Sept. 30, 2017 1,600 3 4,800
Dec. 31, 2017 1,800 0 0
Total 27,600
Interest = = Rs. 115 /-

a) Fluctuating Capital Method

Profit & Loss Appropriation Account for
the year ended 31st Dec. 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Interest on Capital: By P & L A/c. (N.P. b/f) 61,110
Ajay 3,000 By Interest on Drawings
Bhaskar 2,400 5,400 Ajay 175
To Partner’s Salary: Bhaskar 115
Ajay 6,000 290
Ajay’s Capital A/c.
(3/5 N.P.) 30,000
Bhaskar’s Capital A/c.
(2/5 N.P.) 20,000 50,000
61,400 61,400

Ajay’s Capital A/c

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 9,400 By Bank 50,000
To Interest on Drawings 175 By Partner’s Salary 6,000
To Balance c/d. 79,425 By Interest on Capital 3,000
To P & L Appropriation
A/c (3/5 N.P.) 30,000
89,000 89,000
By Balance b/d 79,425

87
 Bhaskar’s Capital A/c
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 6,600 By Bank 40,000
To Interest on Drawings 115 By Interest on Capital 2,400
To Balance c/d. 55,685 To P & L Appropriation 20,000
A/c (2/5 N.P.)
62,400 62,400
By Balance b/d 55,685

Balance Sheet as on December 31, 2017

Liabilities Amount Amount Amount Assets
Ajay’s Capital A/c:
Amount introduced 50,000
Add: Salary 6,000
Interest on Capital 3,000
3/5 N.P. 30,000
89,000
Less: Drawings 9,400
Interest on Drawings 175 9,575 79,425
Bhaskar’s Capital A/c:
Amount introduced 40,000
Add: Interest on Capital 2,400
2/5 Net Profit 20,000
62,400
Less: Drawings 6,600
Interest on Drawings 115 6,715 55,685

a) Fixed Capital Method

Profit & Loss Appropriation Account
For the year ended 31st December 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Interest on Capital: By P & L A/c. (N.P. b/f) 61,110
Ajay 3,000 By Interest on Drawings
Bhaskar 2,400 Ajay 175
To Partner’s Salary: Bhaskar 115 290

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 Ajay 5,400
To Partner’s Salary:
Ajay 6,000
Ajay’s Capital A/c.
(3/5 N.P.) 30,000
Bhaskar’s Capital A/c.
(2/5 N.P.) 20,000 50,000
61,400 61,400

Ajay’s Capital A/c

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
31-12-17 To Balance c/d. 50,000 1-1-17 By Bank 50,000
50,000 50,000
1-1-18 By Balance b/d. 50,000

Bhaskar’s Capital A/c

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
31-12-17 To Balance c/d. 40,000 1-1-17 By Bank 40,000
40,000 40,000
1-1-18 By Balance b/d 40,000

Ajay’s Current A/c

Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 9,400 By Partner’s Salary 6,000

To Interest on Drawings 175 By Interest on Capital 3,000

To Balance c/d. 29,425 By P & L Appropriation 30,000

A/c (3/5 N.P.)

39,000 39,000
By Balance b/d 29,425

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 Bhaskar’s Current A/c
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Drawings 6,600 By Interest on Capital 2,400
To Interest on Drawings 115 By P & L Appropriation 20,000
To Balance c/d. 15,685 A/c (3/5 N.P.)
22,400 22,400

By Balance b/d 15,685

Balance Sheet as on 31-12-2017

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capitals
Ajay 50,000
Bhaskar 40,000
90,000
Current Accounts
Ajay 29,425
Bhaskar 15,685
45,110

3.11 SUMMARY
When two or more persons combine their skill and property in a venture and agree to
share the results, it is referred to as partnership. Individually they are called ‘Partners’ and
collectively called a ‘Firm’. The agreement between the partners may be oral, implied or written.
It is always advisable to have a written agreement, known as ‘partnership Deed’, so that in case
of any dispute, it may readily be referred to. The accounts of the partnership are to be prepared
in accordance with the agreement.
Partnership in India is governed by partnership Act, 1932. Where there is no specific
agreement between the partners, the relations of partners are determined by the provisions of
the partnership Act. It is desirable to get the firm registered under the partnership Act.
There is no fundamental difference between the accounts of a Sole Trader and that of a
partnership. The transactions are recorded in the usual manner. However, it becomes necessary
to maintain personal accounts of the partners separately. Certain adjustments may also have to
be made in regard to interest on capital, interest on drawings, remuneration to partners, etc.
There are two methods of maintaining the capital accounts viz., Floating or Fluctuating
Capital Method and Fixed Capital Method. Under the floating capital method a Capital Account
is kept for each partner and the capital will be fluctuating from one period to the other. Under
the Fixed Capital Method Capital Account as well as Current Accounts of the partners are

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maintained. Capital Accounts show the amount of the capital contributed by the partners. Current
Accounts show other items like drawings, interest on capital, etc. The balances of both the
accounts are shown in the Balance Sheet.

3.12 CHECK YOUR PROGRESS: MODEL ANSWERS

1. i) All the partners should share profits and losses equally.
ii) Interest on capital is not allowed and in the same manner interest on drawings is not
charged.
i) No partners is entitled for salary or commission.
ii) Partners who advance loans to the firm are entitled to receive interest at 6°/a p.a.
iii) All the partners are entitled for examining the books of accounts and take a copy of
them.
2. Sometimes, partners may bring in unequal capitals but agree to share profits and losses
equally. In such a case, the partners who contribute more capital will gain nothing for the
excess capital contributed over and above their respective share. Therefore in order to
maintain equity among the partners, interest on capital is allowed.
Likewise, interest on drawings is charged so as to bring about an equity between the
partners drawing more amounts and the partners drawing less amounts.
3. a) Under fluctuating capital method, a capital account is kept for each partner and in that
all the transactions relating to the concerned partner are recorded Under fixed capital
method, there will be two accounts for each partner viz., capital account and current
account. The capital account contains only the entries relating to capital brought in and
capital withdrawn. All other items are entered in current account.
b) Concerned Partner’s Drawings account Dr
To Bank A/c.
Note: The total drawings account is transferred to current account subsequently. If there is
only one transaction of drawings, it can be straight away debited to current account.

3.13 MODEL EXAMINATION QUESTIONS

I. Answer the following questions in about 30 lines each.
1. What is Partnership? What are the usual adjustments in partnership accounts?
2. State the provisions of partnership Act to be followed when the partnership agreement is
silent.
3. Explain how the accounts are maintained under fixed capital and fluctuating capital method?
II. Answer the following questions in about 15 lines each.
1. What are the contents of Partnership deed?
2. Define partnership and explain its main features.
3. Distinguish between partnership and co-ownership.
III. Objective Type Questions
a) Multiple Choice Questions:
1. How many members are required to form a partnership business?
a) Minimum 3 members b) Minimum 2 members
c) Minimum 10 members d) Minimum 1 member
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2. In the absence of an agreement, profits are divided among the partners in the ratio of
a) Capital b) Equally c) Time devoted in the business d) None
3. In the absence of an agreement interest on partner’s loan is paid in the ratio of
a) 10% b) 5% c) 6% d) 6.5%
4. The Current account of a partner will always have
a) Credit balance b) Debit balance c) No balance d) Either debit balance or credit balance
5. How would be drawings account closed?
a) By transferring to debit side either Capital or current accounts
b) By transferring to credit side of Capital account
c) By transferring to credit side of current account
d) By transfering to Balance sheet
Answers:1. B 2. B 3. C 4. D 5. A
b) Fill in the blanks:
1. Partner’s current accounts are opened when capitals are ————————————
2. In the absence of agreement, partners are not entitled to receive ———————
3. Interest on Capital is calculated on the ————————————balance
4. ——————————————— contains the terms and conditions of partnership
agreed by all the partners.
5. In case of ————————————— capital method, the capital accounts of the
partners keep on changing every year.
Answers: 1. Fixed 2. Salary, Commission, Interest on capital 3. Opening
4. Partnership Deed 5. Fluctuating
c) Match the following:
1. Partnership Deed a) Current account
2. Fixed Capital Method b) for adjust of Interest on drawings and Capital
3. Goodwill c) AS-10
4. Profit and loss appropriation a/c d) 10
5. Banking kind of partnership e) contains terms and conditions
Answers: 1. E 2. a 3. c 4. b 5. d
Problems
1. On 31st December 2017, the capital accounts of Amal & Bimal stood at Rs. 80,000 and
Rs. 60,000 respectively, after necessary adjustments in respect of drawings and net profits
its for 2017. It was subsequently ascertained that interest on capitals and drawings at 5%
p.a. was not taken into account. During the year Amal withdrew Rs. 2,400 at the end of
each quarter and Bimal withdrew Rs. 3,600 at the end of each half year. Amal and Bimal
share profits in 3:2 ratio and the profits for 2017 as adjusted amounted to Rs. 40,000.
Show the adjustments required in the capital accounts.
(Answers Interest on capital - Amal: Rs. 3,280, Bimal: Rs. 2,560
Interest on drawings - Amal: Rs. 180. Bimal: Rs. 90
Balance in Capital A/c. - Amal: Rs. 79,758, Bimal: Rs. 60,242)

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2. Charan and Bharan were sharing profits in the ratio of 3:1 in their partnership business.
They were having an office manager. Mr. Karan, drawing a salary of Rs. 18.000 per
annum. With effect from 1st July 2016, they decide to, admit Mr. Karan into partnership
for a fifth share in the profits. Any excess of Karan’s share over and above his salary and
commission (at 5% net profits after charging such commission) which he used to get
previously is to be borne by Charan. For the year ended June 30, 2017 the profits of the
firm (before charging Karan’s salary and commission) amounted to Rs. 2,62,440. Show
the final distribution of profits.
(Answer: Charan: Rs. 1,51,752, Bharan: Rs. 58,200, Karan: Rs. 52,488)

3.14 GLOSSARY
Firm : Partnership Comprising of some Partners
Partner : A person sharing the profits and losses of the Partnership firm.
Partnership : Relation between persons who have agreed to share profits of
the business carried on by all or any of them acting for all.
Partnership Deed : Document containing the terms and conditions of the agreement
between partners to carry on the partnership business.
Fixed Capital : Balance in the capital account, which does not change unless
additional capital is introduced or existing capital is withdrawn.
Final Accounts : Trading, Profit & Loss, Profit & Loss Appropriation Accounts,
Balance Sheet of a business concern.
Floating Capital or
Fluctuating Capital : Balance in the capital account which fluctuates from one period
to another, because of posting of all transactions like Interest on
Capital, Drawings etc.

3.15 FURTHER READINGS

1. Gupta. R.L. &
Radhaswamy. M : Advanced Accountancy, Sultan Chand & Sons, New Delhi.
2. Shukla. M.C. &
Grewal, T.S : Advanced Accounts, Sultan Chand & Sons, New Delhi.
3. Jain, S.P. &
Narang. K.L : Advanced Accountancy, Kalyan Publishing House, New Delhi

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UNIT - 4 : FINAL ACCOUNTS OF THE PARTNERSHIP
FIRM

Contents
4.0 Aims and Objectives
4.1 Introduction
4.2 Final Accounts of the Partnership Firm
4.3 Illustrations on Final Accounts
4.4 Summary
4.5 Model Examination Questions
4.6 Further Readings

4.0 AIMS AND OBJECTIVES

The aim of this unit is to present the final accounts of partnership with various adjustments.
On completion of this unit, you should be able to:
- Identify the differences between the final accounts of sole trader and that of partnership;
and
- Prepare the final accounts of partnership firm.

4.1 INTRODUCTION
In earlier Unit, we have seen how capital accounts of partners are prepared. In this unit,
we shall learn the preparation of final accounts of partnership firm with comprehensive illustrations.
The final accounts of partnership firm include Trading and Profit and Loss Account, Profit and
Loss Appropriation Account and Balance Sheet. We shall see how these accounts are to be
prepared.

4.2 FINAL ACCOUNTS OF THE PARTNERSHIP FIRM

As already stated earlier, there is not much difference between the preparation of final
accounts of a Sole Trading Concern and the Partnership Firm. Since there will be more than
one owner in the firm, there will be as many capital accounts, drawing accounts, current accounts
as the number of partners maintained separately. At the end of the year the drawings are
adjusted to capital account of the partner under the fluctuating capital method and to the current
account of the partner under the fixed capital method.
Usually, the partnership deed may contain provisions for payment of salary, interest on
capital, commission, etc., to the partners. These are credited to Capital Account or Current
Account of the partner as the case may be, at the end of the year. In the same manner, interest
on drawings may have to be charged to partner. This is debited to Capital Account or Current
Account of the partner, at the end of the year.
The trading account and Profit and Loss Account of the firm are prepared on lines similar
to the sole trading concern. The Profit arrived at is transferred to Profit & Loss Appropriation
A/c, for taking into account the interest on capital, partners’ salaries. Interest on drawings, etc.,
and thereafter the net profit or net loss, distributed among the partners in the profit/loss sharing
ratio. The net profit is credited to Partner’s Capital Account (or Partner’s Current A/c, as the

94
case may be) and the net loss debited to Partner’s Capital Account (or Partner’s Current A/c as
the case may be). These adjustments are shown in the Balance Sheet, in the respective partner’
capital or current accounts. We have already seen these aspects in the previous unit.

We shall now see how these are drawn up under the Fluctuating Capital Method and
Fixed Capital Method.

Illustration – 1
Rahim agreed to take the Manager, Sayeed into the partnership on 1st January, 2017 on
the following conditions:
a) Rahim, as manager of business, is to be credited with 10% of the net profits after
charging interest on capital at (5% to both the partners).
b) Each partner draws Rs. 120 per week on account of anticipated profits.
c) Profits & Loss are to be shared by Rahim and Sayeed in 2:1 ratio
d) Excess of profits of Sayeed are to be credited to his Capital Account
On 31st December, 2017 the following balances appeared in the firm’s books:
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Rahim’s Capital 1,20,000 Sales Returns 1,070
Rahim’s Drawings 6,240 Sundry Creditors 85,440
Sayeed’s Drawings 6,240 Sundry Debtors 93,600
Manufacturing Charges 20,000 Cash at Bank 27,900
Trade Expenses 20,280 Carriage Outwards 2,090
Wages 40,060 Sales 3,16,040
Bad Debts 550 Purchases 1,86,030
Discount Received 420 Building 31,000
Plant & Machinery 31,050 Salaries 12,500
Stock 1-1-20017 26,200 Rent, Taxes and Insurance 3,900
Purchase Returns 2,810 Goodwill 10,000

You are required to prepare the Trading and Profit & Loss Account for the year ended
31-12-2017 and a Balance Sheet as on December, 31, 2017, after taking into consideration the
following:
a) Provide Rs. 570 for wages outstanding;
b) Provide 2.5% for doubtful debts;
c) Plant & Machinery is worth Rs. 29,000;
d) Unexpired Insurance amounted to Rs. 250;
e) Stock on hand at the end amounted to Rs. 49,120.

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Solution
Trading and Profit & Loss A/c for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening Stock 26,200 By Sales 3,16,040
To Purchases 1,86,030 Less: Returns 1,070 3,14,970
Less: Returns 2,810 1,83,220
By Closing Stock 49,120
To Wages 46,060
Add: Outstanding 570 46,630

To Manufacturing Expenses 20,000

To Gross Profit c/d 88,040
3,64,090 3,64,090

To Trade Expenses 20,280 By Gross Profit b/d 88,040

To Rent, Taxes &
Insurance 3,900 By Discount Received 420
Less: Prepaid 250 3,650
To Salaries 12,500
To Carriage Outwards 2,090
To Bad Debts 550
To Provision for doubtful debts 2,340
To Depreciation on P & M 2,050
To Net Profit 45,000
88,460 88,460

Profit & Loss Appropriation A/c for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Interest on Capital: 6,000 By P&L A/c (NP b/d) 45,000
Rahim
To Sayeed’s Commission 3,900
To Rahim’s Capitl A/c 23,400
2/3 of Net Profit
To Sayeed’s Capital 11,700
1/3 of Net Profit
45,000 45,000
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 Sayeed’s commission is calculated as follows:
Rs.
Net Profit as per P & L A/c 45,000
Less: Interest on Capital 6,000

Net Profit after charging interest on Capital 39,000

10% of Rs. 39,000 = Rs. 3,900

Balance Sheet as on December 31, 2017

Liabilities Amount Amount Assets Amount Amount

(Rs.) (Rs.) (Rs.) (Rs.)
Rahims Capital 1,20,000 Goodwill 10,000
Add: Interest 6,000 Building 31,000
2/3 NP 23,400 Plant & Machinery 31,050
1,49,400 Less: Depreciation 2,050 29,000
Less: Drawings 6,240 1,43,160
Sayeed’s Capital Stock 49,120
1/3 NP 11,700 Sundry Debtors 93,600
Add: Commission 3,900 Less: Prov for DD 2,340 91,260
15,600
Unexpired Insurance 250
Less: Drawings 6,240 9,360 Cash at Bank 27,900
Sundry Creditors 85,440
Outstanding Wages 570
2,38,530 2,38,530

Illustration - 2
The following balances were extracted from the books of Mohan & Co. as on 31st
December, 2017

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Suguna’s Capital 45,000 Sundry Debtors 15,000
Mohan’s Capital 35,000 Purchases 1,30,000
Suguna’s Current A/c 5,000 Carriage Outwards 2,800
Mohan’s Current A/c 5,000 Salesmen’s Commission 20,000
Furniture 8,000 Rent Received 8,000
Freehold Building 1,20,000 Sales 1,60,000
Bad Debts 800 Discount Allowed 1,000

97
 Creditors 10,000 Loan taken from Suguna
Cash in Hand 10,400 on 1-7-2017 40,000
Suguna’s Drawings 5,000 General Expenses 7,050
Mohan’s Drawings 4,000 Provision for Doubtful Debts 1,000
Bank Overdraft 15,050

Prepare the Final Accounts and the Balance Sheet after taking into consideration the following:
1. Mohan is entitled for a salary of Rs. 6,000 p.a.
2. Partner’s are entitled for interest on capital
Suguna Rs. 3,000; Mohan Rs. 2,400
3. Interest on Drawings is to be charged at 6% p.a.
4. Rent accrued due Rs. 1,000
5. Closing Stock Rs. 35,000
6. Depreciation is to be written off from furniture at 10%
7. Provision is to be made for Doubtful Debts at 3% on Debtors
Solution
Trading and Profit & Loss Account for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Purchases 1,30,000 By Sales 1,60,000
To Gross Profit c/d 65,000 By Closing Stock 35,000
1,95,000 1,95,000
To General expenses 7,050 By Gross Profit b/d 65,000
To Salesman’s Commission 20,000 By Rent Received 8,000
To Discount Allowed 1,000 Add: Accrued Due 1,000 9,000
To Carriage Outwards 2,800
To Bad Debts 800
Add: Prov. For DD 450
1,250
Less:Existing Prov. for DD1,000 250
To Depreciation for Furniture @
of 10% on Rs. 8,000 800
To Interest on Loan (@ of 6%
on 40,000 half year) 1,200
To Net Profit c/d 40,900
74,000 74,000

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 Profit and Loss Appropriation Account for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Partner’s Salary By Net Profit b/d 40,900
Mohan 6,000 By Interest on Drawings:
To Interest on Capital Suguna 150
Suguna 3,000 Mohan 120 270
Mohan 2,400 5,400
To Suguna’s Current A/c
½ NP 14,885
To Mohan’s Current A/c
½ NP 14,885 29,770
41,170 41,170

Balance Sheet as on December 31, 2017

Liabilities Amount Amount Assets Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Suguna’s Capital 45,000 Freehold Building 1,20,000
Mohan’s Capital 35,000 80,000 Furniture 8,000
Less: Depreciation @ 10% 800 7,200
Suguna’s Current A/c:
Balance on 1.1.2017 5,000 Stock on hand 35,000
Add: Interest on Capital 3,000 Sundry Debtors 15,000 14,550
½ NP 14,885 Less: Prov for DD 450
22,885
Less: Drawings 5,000 Rent accrued due 1,000
Interest on Drawings 150 5,150 Cash in hand 10,400
Mohan Current A/c 17,735
Balance on 1-1-2017 5,000
Add: Salary 6,000
Interest on Capital 2,400
½ NP 14,885
28,885
Less: Drawings 4,000
Interest on
Drawings 120 4,120 24,165
Suguna’s Loan 40,000
Add: Interest Accrued 1,200 41,200
Bank Overdraft 15,050
Sundry Creditors 10,000
1,88,150 1,88,150

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4.3 ILLUSTRATIONS ON FINAL ACCOUNTS
So far, we have seen how final accounts of the Partnership firm are prepared both under
Fixed Capital Method and Fluctuating Capital Method. The following illustrations will provide
further guidance in attending to various adjustments.
Illustration – 3
Ramesh and Suresh are in partnership as architects sharing profits and losses equally.
The partnership deed provides:
a. That interest at 5% p.a. is to be allowed on capital and current balances at the
commencement of the year.
b. Capitals to remain fixed.
c. Ramesh and Suresh are entitled to a salary of Rs. 1,000 and 1,200 respectively p.a.
The following balances were extracted from the books of the firm as on 30th Sept. 2017

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Capitals: (1.10.20017): Office Furniture 21,000
Ramesh 31,000 Drawing Equipment 8,600
Suresh 27,000 Motor Cars 23,000
Current A/c (1.10.2017): National Savings Certificates 4,000
Ramesh 1,200 Sundry Debtors 21,400
Suresh 1,800 Sundry Creditors 3,250
Drawings: Loan from Andhra Bank 10,000
Ramesh 21,150 Printing & Stationery 1,540
Suresh 17,100 Salaries 82,400
Motor Car expenses 2,130 Rent & Rates 6,120
Interest on Loan 300 Insurance 630
Prov. For Depreciation: Postage & Telephones 1,980
Office Furniture 4,500 Bank Charges 3,360
Motor cars 4,600 Interest on NSCs 330
Drawing Equipment 2,650 Professional fees received 1,42,130
Cash in hand 150
Cash at Bank 13,600

Prepare the Profit and Loss Account for the year ended 30th Sept 2017 and Balance
Sheet as on that date after taking into account the following:
1. The Bank Loan is at 6%
2. Suresh paid Rs. 310 to one of the firm’s creditors, which has not been recorded in the
books at all
3. Rs. 190 paid towards the insurance premium on the personal policy of Ramesh is
included in the Insurance amount.
4. Uncompleted work was valued at Rs. 8,200 as on 30.9.20017

100
 5. Stock of Stationery at 30th Sept. 2017 is Rs. 250
6. Rent and Electricity charges unpaid are Rs. 300 and Rs. 230 respectively
7. Rates and Insurance unexpired are Rs. 420 and Rs. 190 respectively
8. For the current year depreciation is as follows:
Drawing equipment Rs. 1,290; Motor Cars Rs. 4,600; Office Furniture Rs. 2,100
Solution
Trading and Profit & Loss Account for the year ended September 31, 2017
Dr. Cr.
Particulars Amount Amount Particulars Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
To Salaries 82,400 By Professional Fees 1,42,130
To Printing & Stationery 1,540 Received 8,200
Less: Stock at end 250 1,290 By Work in Progress 330
By Interest on NSCs
To Rent and Rates 6,120
Add: Rent O/s 300
6,420
Less: Rates Unexpired 420
6,000
To Insurance 630
Less: Personal Premium 190
440
Less: Unexpired 190 250

To Electricity Charges 230

To Postage & Telephone 1,980
To Bank Charges 3,360
To Motor Care Expenses 2,130
To Interest on Bank Loan
Add: O/s 300
300 600
To Depreciation:
Drawing Equipment 1,290 7,990
Motor Cars 4,600
Other Furniture 2,100
To Net Profit c/d 44,430
1,50,660 1,50,660

101
 Profit and Loss Appropriation Account for the year ended 30th September, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Partner’s Salary: By P & L (NP b/f) 44,430
Ramesh 1,000
Suresh 1,200 2,200
To Interest on Capital & Current
A/cs:
Ramesh 1,620
Suresh 1,440 3,050
To Ramesh’s Current A/c
½ NP 19,090
To Suresh’s Current A/c
1.2 NP 19,090 39,180
44,430 44,430

Balance Sheet as on September 30, 2017

Particulars Amount Amount Particulars Amount Amount

(Rs.) (Rs.) (Rs.) (Rs.)
Capital: Office Furniture 21,000
Ramesh 31,000 Less: Prov for Dep.
Suresh 27,000 58,000 1.10.2016 4,500
Current Year
Current A/c: Dep. 2,100 6,600 14,400
Ramesh Op. Bal 1,200
Add: Salary 1,000
Int. on Capital and Drawing Equipment 8,600
Current A/c 1,610 Less: Prov for Dep.
Net Profit ½ 19,090 1.10.2016 2,650
Current Year
22,900 Dep. 1,290 3,940 4,660
Less: Drawings 21,150
Insurance 190 21,340 1,560 Motor Cars 23,000
Less: Prov for Dep.
1.10.2016 4,600
Current A/c: Current Year
Suresh Op Balance 1,800 Depreciation 4,600 9,200 12,800

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 Add: Salary 1,200
Interest on Capital and 1,440
current A/c NSC 4,000
Net Profit ½ 19,090 Sundry Debtors 21,400
Paid to creditors 310 Work in Progress 8,200
Stock of Stationery 250
23,840 Unexpired Insurance 190
Unexpires Rates 420
Less: Drawings 17,100 6,740 Cash at Bank 13,600
Cash in India 150

Loan from Andhra Bank 10,000

Interest due 300 10,300

Sundry Creditors 3,250

Less: Paid by Partner 310 2,940
Outstanding Expenses:
Rent 300
Electricity Charges 230
530
80070 80,070

Illustration – 4
Vishnu, who was carrying on business as a Sole Trader, took his Office Manager, Madhav
on 1.7.2016 as his partner on the following terms:
a. Vishnu and Madhav were to draw Rs. 750 and Rs. 500 p.m. on which no interest is to
be charged
b. Interest at 6% was to be allowed on capitals
c. Madhav was to be paid a salary of Rs. 250 p.m.
d. Profits were to be shared by Vishnu and Madhav in 3:1 ratio
e. Out of Madhav’s share of profits, Rs. 5,000 (or so much available) shall be transferred
to his capital a/c, till his capital is equal to half of that of Vishnu.
On 30th June, 2017, the following balances were extracted from the books of the firm:

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Capital: Madhav Salary 3,000
Vishnu 85,000 Stock on 30th June 2017 39,240
Madhav (cash brought) on Bad Debts 3,810
1.7.2016 5,000 Provision for Bad Debts 2,500

103
Drawings: Office Salaries 14,890
Vishnu 9,000 Office Expenses 2,630
Madhav 3,000 Travelling Expenses 19,730
Goodwill 40,000 Rent & Insurance 2,760
Plant & Machinery 38,000 Discount Received 230
Overdraft at SBI 2,460 Office Furniture 2,000
Sundry Debtors 87,320 Sundry Creditors 66,340
Carriage on Sales 15,420 Gross Profit 1,19,270

Prepare the final accounts of the firm, after taking into account the following:
a. Plant and Machinery and Office Furniture are to be depreciated at 10% and 5%
respectively
b. Provision for Bad Debts should be maintained at Rs. 4,500
c. Travelling Expenses bill of Rs. 1,960 is pending to be paid
Solution
Profit and Loss Account for the year ended June 30, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Office Salaries 14,890 By Gross Profit b/d 1,19,270
To Office Expenses 2,630 By Discount Received 230
To Travelling Expenses 19,730
Add: Outstanding 1,960
-------- 21,690
To Rent & Insurance 2,760
To Depreciation on:
P & M at the @ 10% 3,800
Office Furniture @ 5% 100 3,900
--------
To Carriage on Sales 15,420
To Prov. For B.D
Required 4,500
Bad Debts 3,810
---------
8,310
Less: Prov. for B.D
Opening 2,500 5,810
---------
To Net Profit c/d 52,400
1,19,500 1,19,500

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 Profit and Loss Appropriation Account for the year ended June 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Partner’s Salary: By Net Profit b/d 52,400
Madhav 3,000
To Interest on Capital:
Vishnu 5,100
Madhav 300 5,400
---------
To Vishnu Current A/c 33,000
To Madhav Current A/c 6,000
To Madhav Capital A/c 5,000 44,000
--------- 52,400 52,400

Balance Sheet as on June 30, 2017

Liabilities Amount Amount Assets Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Capital: Goodwill 40,000
Vishnu 85,000 Plant & Machinery 38,000
Madhav 5,000 Less: Dep 3,800 34,200
Trnsferred from
current year profit 5,000 10,000 95,000 Office Furniture 2,000
------ Less: Dep 100 1,900

Current Accounts: Stock 39,240

Vishnu Sundry Debtors 87,320
Interest on Capital 5,100 Less: PDD 4,500 82,820
¾ Net Profit 33,000
38,100
Less: Drawings 9,000 29,100
Madhav Interest on
Capital 300
Net Profit Transferred 6,000
6,300
Less: Drawings 3,000 3,300
Creditors 66,340
Overdraft at SBI 2,460
O/s Travelling Expenses 1,960
1,98,160 1,98,160
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Illustration – 5

Arun & Pavan who were carrying on business, decided to admit their Sales Manager,
Kiran, into business with effect from 1st January, 2017 and share profits and losses in the ratio
of 3:2:1. It was also decided that Kiran should transfer half of his profits every year to his
Capital Account, till it amounts to Rs. 30,000. The following trial balance was extracted from
the books of the firm on 31st Dec 2017.

Particulars Amount Amount

(Rs.) (Rs.)

Debtors and Creditors 1,76,800 84,280

Cash on debts 4,940

Cash on hand 1,100

Purchases and Sales 7,41,300 9,11,000

Stock at beginning 1,25,000

Provision for Doubtful Debts 6,500

Rent and Taxes 8,700

Salaries and Wages 36,000

Arun’s Capital 1,20,000

Pavan’s Capital 60,000

Arun’s Current Account 12,000

Pavan’s Current Account 2,180

Indin Overseas Bank Overdraft 11,440

Advertising 10,340

Motor vehicles 36,000

Furniture 16,000

Trade Expenses 12,860

Arun’s Drawings in 2017 18,000

Pavan’s Drawings in 2017 12,000

Kiran’s Drawings in 2017 4,000

12,05,220 12,05,220

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Prepare the Final Accounts of the firm taking into account the following:
a. Stock at end amounted to Rs. 1,15,340
b. Provision for doubtful debts should be at 5% on debtors
c. Rs. 3,000 of the advertising is to be carried forward
d. Furniture and Motor vehicles are to be depreciated at 10% and 20% respectively
e. Partners are entitled to Interest on Capital at 9%
Solution
Trading and Profit and Loss A/c for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening Stock 1,25,000 By Sales 9,11,000
To Purchases 7,41,300 By Closing Stock 1,15,340
To Gross Profit c/d 1,60,040 10,26,340
10,26,340
To Salaries & Wages 36,000 By Gross Profit b/d 1,60,040
To Rent & Taxes 8,700
To Trade Expenses 12,860
To Advertising 10,340
Less: c/f 3,000 7,340

To Provision for BD required

@ of 5% on1,76,800 8,840
Add: Bad Debts 4,940

13,780
Less: Existing Provision
For BD 6,500 7,280
To Deprecition:
On Furniture 1,600
On Motor Vehicle 7,200 8,800

To Net Profit c/d 79,060

1,60,040 1,60,040

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 Profit and Loss Appropriation A/c for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Interest on Capital: By Net Profit b/d 79,060
Arun 10,800
Pavan 5,400 16,200
To Arun’s Current A/c (3/6) 31,430
To Pavan’s Current A/c(2/6) 20,953
To Kiran’s Current A/c (1/12) 5,238
To Kiran’s Capital A/c (1/2) 5,239
62,860
79.060 79,060

Balance Sheet as on 31st December, 2017

Liabilities Amount Amount Assets Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Capital Accounts:
Arun 1,20,000 Motor Vehicles 36,000
Pavan 60,000 Less: Dep. 7,200 28,800
Kiran 5,329 1,85,239
Furniture 16,000
Current Accounts: Less: Dep. 1,600 14,400
Arun Ope. Balance 12,000
Add: NP 31,430 Stock 1,15,340
Int. on Capital 10,800 Sundry Debtors 1,76,800
54,230 Less: Prov. for BD 8,840 1,67,960
Less: Drawings 18,000 36,230

Pavan: NP Advertising Prepaid 3,000

Int. on Capital 20,953 Cash in Hand 1,100
5,400
26,353
Less: Drawings12,000
Ope. Balance 2,180
14,180 12,173

Kiran: NP 5,238
Less: Drawings 4,000 1,238
Creditors 84,280
IOB Overdraft 11,440

3,30,600 3,30,600

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Illustration – 6
Two brothers Rama and Krishna are carrying on partnership business in the name of
Ramakrishna Traders, sharing Profits & Losses in 3:2 ratio. The following balances were
extracted from their books as on December, 31 2017:
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Bills Payable 6,000 Buildings 43,800
Creditors 10,000 Motor Vehicles 12,000
Provisions for Doubtful Debts 2,000 Patents 6,000
Sales 1,20,000 Plant & Machinery 44,000
Purchase Returns 4,000 Drawings:
Discount Received 800 Rama 10,000
Interest Received 400 Krishna 6,000
Loan from Rama at 5% 8,000 Interest Paid 600
Rama’s Capital 48,000 Discount Allowed 184
Krishna’s Capital 40,800 Rent, Rates, Insurance 1,900
Trade Expenses 2,000 Royalties paid 800
Salaries & Wages 12,000 General Expenses 2,400
Sales Returns 8,000 Purchases 50,000
Sundry Debtors 12,000 Opening Stock 20,000
Bills Receivable 4,600 Bad Debts 600
Cash at Bank 3,116

Prepare Trading, Profit and Loss Account and Balance Sheet taking into consideration
the following additional information:
a. Expenses Outstanding: Salaries Rs. 1,600; Rent Rs.200; Interest to Rama on Loan Rs.200
(to be credited to his Capital Account)
b. Expenses prepaid: Rates Rs. 100
c. Interest to be received Rs. 200
d. Provision for Doubtful Debts is to be raised to Rs. 2,400. One of the debtors for Rs.
1,600 has become insolvent and only Rs. 800 have been received
e. Provide for Discount on Debtors & Creditors at 2%
f. Closing Stock Rs. 36,000
g. Depreciate Plant and Machinery 5%, Motor Vehicles 10%; Patents 15% and Building
2.5%

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Solution
Trading and Profit & Loss Account for the year ended December 31, 2017
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening Stock 20,000 By Sales 1,20,000
To Purchases 50,000 Less: Returns 8,000 1,12,000
Less: Returns 4,000 46,000 ----------
-------- By Closing Stock 36,000
To Trading Expenses 2,000
To Royalties Paid 800
To G/P c/d 79,200
1,48,000 1,48,000

To Salaries & Wages 12,000 By G.P b/d 79,200

Add: O/s 1,600 13,600 By Discount Received 800
--------- By Int. received 400
To General Expenses 2,400 Add. To be recd. 200 600
To Rent, Rates, Insurance 1,900
Add: Rent O/s 200
--------- By Prov. for discount on Crs. @
2,100 2% on 10,000 200
Less: Rates prepaid 100 2,000
----------
To Interest paid 600
To Interest on loan (Rama) 200
To Bad Debts 600
Add: New BD 800
Prov. for DD reqd. 2,400
----------
3,800
Less: Existing prov. 2,000 1,800
-----------
To Discount allowed 184
To Prov. for Dis. On Drs 176
(2% on (12,000-800-2400=8800)
To Depreciation:
On P & M @ 5% 2,200
On Motor Vehicle @ 10%1,200
On Patents @ 15% 900
On Buildings @ 2.5%1.095 5,395
---------
To Net Profit:
Rama (3/5) 32,667
Krishna (2.5) 21,778 54,445
---------
80,800 80,800

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 Balance Sheet as on December 31, 2017
Liabilities Amount Amount Assets Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Capital: Buildings 43,800
Rama: Ope. Balance 48,000 Less: Dep. 1,095 42,705
Add: NP 3/5 32,667
Interest on Loan 200 Patents 6,000
80,876 Less: Dep. 900 5,100
Less: Drawings 10,000 70,867
Plant & Machinery 44,000
Less: Dep. 2,200 41,800
Krishna: Ope. Balance 40,800
Add: 2/5 NP 21,778 Motor Vehicles 12,000
62,578 Less: Dep. 1,200
Less: Drawings 6,000 10,800
56,578 Closing Stock 36,000

Loan from Rama @ 5% 8,000 Sundry Debtors 12,000

Less: Further BD 800
Creditors 10,000 11,200
Less: Prov. for Discount 200 Less: Prov. for DD 2,400
9,800 8,800
Bills Payable 6,000 Less: Prov. for Dis. on
Expenses o/s Drs. 176 8,624
Salaries 1,600
Rent 200 1,800 Bills Receivable 4,600
Interest to be received 200
Prepaid rates 100
Cash at Bank 3,116

1,53,045 1,53,045

4.4 SUMMARY
There is not much difference between the preparation of final accounts of Sole Trading
Concern and that of a partnership firm. The profit arrived at in the Profit & Loss Account is
transferred to Profit and Loss Appropriation Account for taking into account the interest on
capital, partners’ salaries, interest on drawings, etc., and thereafter the net profit or loss will be
distributed among the partners in their profit/ loss sharing ratio. These adjustments are also
shown in the Balance Sheet in the respective partner’s capital or current accounts.

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4.5 MODEL EXAMINATION QUESTIONS
Multiple Choice Questions:

1. Investment in partnership is made by introducing:

(a) Cash (b) Non – cash assets

(c) Cash or non – cash assets (d) None of these

2. Drawings of the partners are:

(a) Debited to profit & loss A/c (b) Credited to profit &loss A/c

(c) Credited to capital A/c (d) Debited to capital A/c

3. A partners has to pay interest on drawings what is the entry in the personal A/c of the
partner?

(a) Credit partners capital A/c (b) Credit partners current A/c

(c) Credit the partners current A/c (d) Debit partners current A/c

4. For Interest on capital

(a) Debited to profit & loss A/c

(b) Credit to profit & loss A/c

(c) Debit to profit & loss Appropriation A/c and credited to partners capital A/c.

(d) Only credited to partners capital A/c.

5. In the absence of an agreement, Interest on loan advanced by the partner to the firm is
allowed at the rate of:

(a) 6% (b) 5% (c) 12% (d) 9%

Answers: 1. C 2. D 3. D 4. C 5. A

Fill in the blanks:

1. When drawings are made at the end of every month of certain amount, then interest will
be calculated on total drawings for———————————

2. The main intention of preparing a profit and loss appropriation account is to show ———
——————— among the partners.

3. When Current account shows a debit balance, it appears on the —————————

—— side of the balance sheet.

4. When Salary paid to the partner, it is to be recorded in the —————————side of

Profit and loss appropriation account and —————————side of the Partners
Capital A/c

5. Accounting Standard——— refers of Goodwill in a partnership firm.

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Answers: 1. 5 1/2 months2. the distribution of profits 3. Assets 4. Debit and Credit 5. 10

Problems
1. Rani and Radha are partners sharing profits and losses in 3:1 ratio. As per the terms of
their agreement, Rani can draw Rs. 750 p.m, and Radha can draw Rs. 7,200 p.a. on
which no interest is to be charged. Both are entitled to interest on capitals at 6% p.m.
Radha is entitled to a salary of Rs. 3,000 p.a.
On 31st December, 2017 their ledger disclosed following:

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Purchases 2,10,000 Sales 3,29,270
Stock on 31.12.2017 39,240 Office salaries 14,890
Rent, Rates 22,490 Office expenses 2,630
Discount(credit) 230 Bank O.D 2,460
Carriage on sales 15,420 Debtors 87,320
Provision for bad debts 2,500 Creditors 66,340
Bad debts 3,810 Furniture 2,000
Plant and Machinery 38,000 Radha’s salary 3,000
Goodwill 40,000 Radha’s drawings 3,000
Radha’s capital 10,000 Rani’s drawings 9,000
Rani’s capital 80,000

Prepare the final accounts of the firm (taking into consideration the following) under
Fixed Capital Method:
a) An amount of Rs. 5,000 (or so much as is available) out of Radha’s share of profits, has
to be transferred to her capital account, till her capital account is equal to 1/4th of Rani’s
capital.
b) Plant & Machinery and Furniture are to be depreciated at 10% and 5% respectively.
c) Raise the Provision for Doubtful Account to Rs. 4,500.
d) Rent outstanding Rs. 1,960.
(Answer : Net Profit : Rani – 33,000, Radha Rs. 11,000.
Balance Sheet total : Rs. 1,98,160).
2. Aruna, Bimala, Karuna and Dharani were in partnership sharing profits and losses in
the ratio 4:3:2:1. All are entitled to 5% interest on capital. The following balances were
extracted from their books as on 30th September, 2017.

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Purchases 55,400 Sales 96,870
Wages 8,000 Office overheads 9,440
Machinery 12,000 Depreciation on

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Sundry debtors 7,600 machinery 1.10.2016 4,000
Sundry creditors 5,520 Provision for bad debts 280
Cash 12,150 Aruna’s capital 12,000
Aruna’s drawings 8,000 Bimala’s capital 6,400
Bimala’s drawings 5,000 Karuna’s capital 4,800
Karuna’s drawings 400 Dharani’s capital 3,600
Dharani’s drawings 480 Stock 1.10.2016 15,000

Stock on 30th September, 2017 amounted to Rs. 13,820. Office overheads accrued
amounted to Rs. 240. Machinery is to be depreciated by Rs. 1,600. Provision for doubtful
debts is to be raised to Rs. 1,000. Goods costing Rs. 800 were sold on sale or return basis
at Rs. 1200. The purchasers still had time to decide as on 30th September, 2017.
Prepare the Trading, P & L Account and Balance Sheet.
(Answer : Gross Profit Rs. 31,890, N.P. Rs. 18,550 B.S. Total : 38,570).
3) Sridhar and Kiran are partners sharing profits and losses, in the proportions of three-
fifths and two -fifths respectively. The under-mentioned balances were extracted from
their books on 31st December, 2017.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Sridhar’s Capital Account 65,000 Postage and telegrams 500
Sridhar’s drawings 4,000 Advertising 9,000
Kiran’s Capital Account 40,000 Stocks on 31st Dec, 2017 12,500
Kiran’s drawings 3,000 Cash in hand 16,000
Goodwill 40,000 Telephone charges 500
Sundry creditors 14,500 Salaries 12,250
Bills payable 8,900 Printing and Stationery 740
Office furniture 5,000 Commission paid 5,000
Sundry debtors 40,500 Travelling expenses 2,000
Rent 3,750 Motor vans 20,860
Gross profit 57,200 Plant and Machinery 10,000

Please take into account the following adjustments:

a) Write off Rs. 250 from office furniture, 10% on plant and machinery, 20% on Motor
Vans.
b) Create a Reserve of 5% on sundry debtors for bad debts.
c) Write off one fifth of the advertising expenses.
d) Partners are entitled to interest on capital at 5% p.a.
e) Kiran is entitled to salary at Rs. 1.800 p.a.
You are required to prepare Trading and Profit and Loss Account for the year ending 31st

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 December, 2017 and a Balance Sheet as on that date.
(Ans. Net Profit Rs. 16,163; Balance Sheet Total Rs. 1,44,613)
4) A and B are partners sharing in the ratio of 5: 3. From the following Trial Balance as
on 31.12.2017 prepare the final accounts.

Particulars Dr. Cr.

Amount Amount
(Rs.) (Rs.)
Cash at Bank 13,999 -
B/R and B/P 5,000 8,000
Debtors and Creditors 8,000 10,000
A’s capital a/c - 70,000
B’s capital a/c - 50,000
A’s current a/c - 20,000
B’s current a/c - 10,000
Drawings A 8,600 -
Drawings B 5,400 -
Stock (1-1-2017) 7,000 -
Purchases and Sales 1,15,000 1,90,000
Returns 2,000 3,000
Carriage 1,000 -
Bank loan - 29,700
Land and other assets 1,95,000
Rent and Rates 4,001 -
Investments @ 6%
(Purchased on 1-4-2017) 10,000 -
Interest on Investment 300

Furniture 6,000 -
Interest on Bank Loans 800
-
Expenses of Office 6,700 -
Wages 3,000 -
Bad Debts Reserve - 500

3,91,500 3,91,500

Additional Information:
1) Closing Stock was Rs. 10,000.
2) Depreciate furniture by 10%, depreciation in case of Land and other assets amounted
to Rs. 14,300

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3) Provide interest at 5% p.a. on Partners’ Capitals.
4) Calculate interest on drawings at 6% for 6 months to A and 3 months to B.
5) On the last day of the year goods worth Rs. 400 were taken away by B for personal
use.
6) Maintain Reserve for Bad and Doubtful Debts at 5% on Sundry Debtors. Bad Debts
written off during the year amounted to Rs. 300 and was included in the expenses of
office account.
7) Prepaid Expenses of Office amounted to Rs. 300.
(Ans: Gross Profit Rs. 75,400; Net Profit transferred to Capital accounts Rs. 44188;
Balance Sheet Total Rs. 2,33,149).

4.6 FURTHER READINGS

1. Gupta, R.L. &
Radhaswamy, M. - Advanced Accountacy, Sultan Chand & Sons, New
Delhi.
2. Shukla, M.C. &
Grewal, T.S. - Advanced Accounts, S. Chand & Co. Ltd., New Delhi.
3. Jain, S.P. & Narang K.L - Advanced Accountancy, Kalyani Publish ers, New Delhi.

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 BLOCK III

PARTNERSHIP ACCOUNTS-II

Unit - 5 : Admission of a Partner

Unit - 6 : Retirement or Death of a Partner
Unit - 7: Dissolution of Firm
Unit - 8: Insolvency of a Partner

117
118
UNIT-5 : ADMISSION OF A PARTNER
Contents
5.0 Aims and Objectives
5.1 Introduction
5.2 Revaluation of Assets and Liabilities
5.3 Adjustment of Accumulated Profit and Losses
5.4 Adjustment of Goodwill of the Firm
5.5 Calculation of New Profit-sharing ratio
5.6 Adjustment regarding Capitals
5.7 Guarantee of Assets and Liabilities
5.8 Guarantee of Minimum Profit
5.9 Reservation of Profit to Old Partners
5.10 Admission of a Partner during the Accounting year
5.11 Summary
5.12 Check Your Progress – Model Answers
5.13 Model Examination Questions
5.14 Glossary
5.15 Further Readings

5.0 AIMS AND OBJECTIVES

The objective of this unit is to explain the adjustment of assets, liabilities, accumulated
profits and goodwill of the firm when a new partner is admitted into partnership. It also explains
the adjustments to be made in the capital and profits of the firm on the admission of a partner.
After completing this unit, you should be able to:
* explain the accounting treatment involved in the adjustment of assets and liabilities;
* distribute the accumulated profits and losses to the existing partners;
* ascertain the value of goodwill and explain its accounting treatment;
* calculate new profit sharing ratio and sacrificing ratio;
* adjust the capitals of the partners on some basis;
* work out the problems relating to the adjustment of assets and liabilities and guarantee
of minimum profit to the incoming partner; and
* describe the accounting treatment when a part of the profit is reserved for the old
partners.

5.1 INTRODUCTION
A Sole Trader or an already existing partnership concern may decide to take a new
partner (or more partners) into the business, to meet the need of additional capital, special skills
or influence. Such a new partner gets entitled to a share in the future profits of the firm.
(whether, he brings in capital or not). Hence the following adjustments may need to be made.

119
 Prior to admission of new partner
1. Accumulated Profit/Reserves or losses are to be distributed among old partners:
Any amount of accumulated profit, reserves or losses are distributed among old
partners.
2. Book value of the Assets and Liabilities need to be adjusted according to present
value: Since new partner gets right on existing assets and liabilities they need to be
adjusted as per agreed present value and profit or loss on such revaluation belongs to
old partners.
3. Goodwill of the firm has to be adjusted: Goodwill of the firm till such admission,
belongs to old partners. Accordingly required adjustments need to be made in Goodwill.
On admission of new partner
4.Contribution of Capital / Goodwill by the new partner to be recorded:
New partner may contribute capital or goodwill, such contribution made by the new
incoming partner is to be recorded as Capital or Goodwill or both accordingly.
After admission of new partner
5. New profit sharing ration of the partners need to be arrived at:
Since new partner has entered, the sharing ratio among all partners need to be calculated
afresh.
6. Capitals of the partners may need to be adjusted as per agreement:
After the entry of new partner, all partners together may decide for adjustment of
capitals. It may happen that, the capital of the old partners may have to be adjusted on
the basis of the capital brought in by the new partner.
7. Adjustment of the values of Assets and Liabilities: After entry of new partner,
all the partners together may resolve to adjust the value of assets and liabilities including
goodwill. In such case they are to be adjusted accordingly and then the firm continues
its existence.
Often, the incoming partner may be given assurance regarding the value of assets
and liabilities and also for a fixed amount of profit. Likewise, the old partners may be
reserved a portion of the profit at the time of adjustments which are effected on the
basis of partnership deed.
Let us now learn the theoretical and practical aspects at the time of admission of a
new partner.

5.2 REVALUATION OF ASSETS AND LIABILITIES:

A going concern generally shows its assets and liabilities at their ongoing values but not at
realizable values. Fluctuations in the Fixed Assets are not taken into account in the case of a
going concern. When a new partner is admitted, he gets a right in the properties as well. Hence
in order to be fair to the existing partners and as well as the incoming partner, all the assets and
liabilities are scrutinized and revalued. It is possible that the provisions made for depreciation,
doubtful debts etc., are inadequate. It may also happen that the realizable value of assets is
more than their book value. Similarly, the liabilities also may be subject to increase or decrease.
Net loss or gain on such revaluation should be of existing partners only but not to new incoming
partner. Hence, suitable adjustments may be necessary to the capital accounts of the existing
partners.
Adjustment in the book values of assets & liabilities is made by opening a Revaluation
Account (or Profit & Loss Adjustment Account) which will be debited with losses and credited

120
with profits, consequent upon revaluation. The balance in the Revaluation Account represents
net loss or net gain, which will be transferred to the existing owners ( in their old profit sharing
ratio), and the Revaluation Account is closed. The following journal entries are passed.
(a) For increasing the value of the assets: Concerned Asset A/c Dr
To Revaluation A/c
(b) For decreasing the value of the assets: Revaluation A/cDr
To Concerned Asset A/c
(c) For increasing the value of the liabilities: Revaluation A/c Dr
To Concerned liability A/c
(d) For decreasing the value of the liabilities: Concerned Liability A/c Dr
To Revaluation A/c
(e) For transfer of credit balance (profit) in the revaluation account:
Revaluation A/c Dr
To Existing partners capital A/cs
(f) For transfer of debit balance (loss) in the revaluation account:
Existing partners capital A/cs Dr
To Revaluation A/c
The assets and liabilities will now appear at their revised figures.
* It may be noted here that if the Revaluation A/c is not opened, the loss or gain from
each asset / liability account is to be transferred to capital account(s). This will be
a tedious process and the net loss or gain on account of revaluation of various
assets and liabilities cannot be known. This is avoided by opening Revaluation
Account to which loss/gain from each Asset/Liability account is transferred, and
finally, the net loss/gain transferred to capital account(s). Thus, if there are only
one or two items to be adjusted, the loss / gain can be directly transferred to capital
account(s).
The process of revaluation accounting is explained in the following illustration:
Illustration-1
Victor and Samuel are partners and their balance sheet stood as below on March 31,
2012 on which date they desired to admit Luther.

Liabilities Amount Assets Amount

Rs. Rs.
Victor’s capital 32,000 Buildings 36,000
Samuel’s capital 16,000 Machinery 6,000
Sundry Creditors 1,500 Stock 4,000
Sundry Debtors 3,000
Cash 500
49,500 49,500

They share profits and losses in proportion to their capital. Prior to admitting Luther, they
desire that (a)Provision for doubtful debts to be created to the extent of 10% of debtors;
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 (b)Stock and buildings be depreciated by 15%;(c)value of machinery be stepped up by
20%; and (d)Provision for liability on bills discounted Rs.300.
Give journal entries and show the revised balance sheet as it appears before Luther is
admitted. Show also Revaluation a/c.
JOURNAL
1. Revaluation a/c Dr 6,600
To Provision for doubtful debts a/c 300
To Provision for liability on bills
Discounted a/c 300
To Stock a/c 600
To Buildings a/c 5,400
(Being the entry for loss on revaluation of assets
and liabilities)
2. Machinery a/c Dr 1,200
To Revaluation a/c 1,200
(Being the entry for raising the value of
Machinery on revaluation)
3. Victor’s capital a/c Dr 3,600
Samuel capital a/c Dr 1,800
To Revaluation a/c
(Being the entry for transferring the net loss 5,400
on revaluation)

Dr Revaluation Account Cr
Rs. Rs.
To Provision for doubtful debts a/c 300 By Machinery a/c 1,200
To Provision for liability on
bills discounted a/c 300 By Victor’s capital a/c 3,600
To Stock a/c 600 By Samuel’s capital a/c 1,800 5,400
To Buildings a/c 5,400
--------- ---------
6,600 6,600

Revised Balance Sheet of the firm as on 31st March, 2012

Liabilities Rs. Assets Rs.
Victor’s capital 28,400 Buildings (36,000-5,400) 30,600
Samuel’s capital 14,200 Machinery (6,000+1,200) 7,200
Sundry creditors 1,500 Stock (4,000-600) 3,400
Provision for liability Sundry debtors 3,000 2,700

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 on bills discounted 300 Prov.for RBDD 300
Cash 400
44,400 44,400

Memorandum Revaluation Account

Sometimes, the partners including the new partner may resolve to keep the assets and
liabilities, at their pre-revaluation figures. In such cases, the Revaluation Account is called
Memorandum Revaluation Account and this is divided into two sections. In the first section, the
entries for loss/gain in the assets/liabilities are posted, (vide journal entries (a),(b),(c) and (d)
given under Adjustment of Assets & Liabilities). However, while posting the journal entries, the
asset/liabilities accounts are not given the posting. It is only the ‘Memorandum Revaluation
Account’ that is posted. In other words, only one effect of the transaction is posted. Then, the
net gain/loss (vide journal entry (e) or (f) referred above) is posted to existing partners’ (prior to
admission of new partner) capital accounts and as well as Memorandum Revaluation Account.
At this state, the Memorandum Revaluation Account gets closed. After the admission of the
new partner, the journal entries (a),(b),(c) and (d) are reversed and posted (again, only) to
Memorandum Revaluation Account (and not to the concerned asset/liability accounts). The
part where this is done is known as second section. The difference in the Memorandum
Revaluation Account is now transferred to all the partners’ capital accounts (including new
partner) in their profit sharing ration from the Memorandum Revaluation Account. This entry is
posted both to capital accounts and Memorandum Revaluation Account.
(i) When there is profit on revaluation:
Memorandum Revaluation a/c Dr
To Old partners’ capital a/c
(ii) After the admission of new partner:
Individual Partners’ capital a/cs Dr (including new partner)
To Memorandum Revaluation a/c
The method is explained in the following Memorandum Revaluation Account.
Illustration – 2
Assuming that the three partners in Illustration – I; share profits and losses in 2:1:1 ratio,
the Memorandum Revaluation Account when prepared, appears as follows.
Dr Memorandum Revaluation Account Cr
Rs. Rs.
To Provision for doubtful debts a/c 300 By Increase in Machinery a/c 1,200
To Provision for liability on 300 By Victor’s capital a/c 3,600
bills discounted a/c 600 By Samuel’s capital a/c 1,800 5,400
To Stock a/c 5,400
To Buildings a/c 6,600 6,600
To Decrease in Machinery 1,200 By Provision for doubtful debts a/c 300
To Victor’s capital a/c 2,700 By Provision for liability on

123
To Samuel’s capital a/c 1,350 bills discounted a/c 300
To Luther’s capital a/c 1,350 By Stock a/c 600
By Buildings a/c 5,400
6,600 6,600

5.3. ADJUSTMENT OF ACCUMULATED PROFIT AND LOSSES

It is necessary, before a new partner is admitted into the business, to distribute all
accumulated profits (and also losses) of the concern to the existing partners in the old profit
sharing ratio. This is so because, it is these partners who have earned the profits (or have
incurred the losses) and hence those profits belong to them only. After the admission of the new
partner, he also gets a share in the profits. Therefore, the following entries are passed for the
accumulated profits / losses, before the new partner is admitted.
a. For accumulated profits:
General Reserve a/c Dr
P&L A/c (for credit balance) Dr
To Existing partners’ capital account
(Being the entry for transferring the accumulated profits)
b. For accumulated losses:
Existing partners’ capital account Dr
To Profit & Loss a/c (for debit balance)
(Being the entry for transferring the accumulated losses)
Illustration – 3
A partnership firm consists of A and B as partners, who had the following Balance sheet.
Liabilities Rs. Assets Rs.
General Reserve 20,000 Buildings 60,000
Profit & Loss A/c 14,000 Machinery 20,000
A’s capital 40,000 Stock 10,000
B’s capital 40,000 Sundry debtors 25,000
Sundry creditors 6,000 Cash 5,000
1,20,000 1,20,000
They agreed to admit C into partnership. Incorporate the changes required and show the
Balance Sheet after revision and before C is admitted.

JOURNAL
1. General Reserve a/c Dr 20,000
To A’s capital a/c 10,000
To B’s capital a/c 10,000
(Being the general reserve transferred to
partners capital accounts)

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2. Profit & Loss a/c Dr 14,000
To A’s capital a/c 7,000
To B’s capital a/c 7,000
(Being the accumulated profit transferred to
partners capital accounts)

Revised Balance Sheet of A and B

Liabilities Rs. Assets Rs.
A’s capital 57,000 Buildings 60,000
(40,000+10,000+7,000) Machinery 20,000
B’s capital 57,000 Stock 10,000
(40,000+10,000+7,000) Sundry debtors 25,000
Sundry creditors 6,000 Cash 5,000
1,20,000 1,20,000

CHECK YOUR PROGRESS- I

Padyami and Vidiya are in partnership, sharing profit and losses in 3:2 ratio. The balance
sheet of the firm as on 31st March, 2016 was as follows:
Liabilities Rs. Assets Rs.
Sundry Creditors 10,000 Bank 5,000
Bills Payable 4,000 Sundry debtors 8,000
General Reserve 6,000 Stock 6,000
Bills Receivable 2,000
Padyami’s capital 12,000 Machinery 8,000
Vidiya’s capital 8,000 20,000 Land and Buildings 11,000
40,000 40,000
On 1-4-2016 Thadiya is admitted into partnership for 1/5 th share, for which she has to
bring in Rs.5,000 towards capital. The assets and liabilities of the firm are revalued on his
admission as follows:
i) Machinery is to be reduced by 5%
ii) Land and Buildings are to be appreciated by Rs.4,000
iii) Provide Rs.500 towards band and doubtful debts.
Write journal entries for the above and prepare Revaluation Account and Balance Sheet
of the firm after admission.
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(Answer: Revaluation gain- Rs.3,100; Balance Sheet Total-Rs.48,100)

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5.4 ADJUSTMENT OF GOODWILL OF THE FIRM
The businessmen make efforts to establish good reputation for their business and bring it
to a stage of profit-making. They must have faced several risks. When a new person is admitted
into the business, he also gets entitled to share the profits which are due to the efforts put in by
the previous partners. Hence, the previous partners should be rewarded, suitably, by the new
partner, as they surrender, a part of their future profit rights in the business, in favour of the new
comer. Hence it is necessary to value the goodwill of the business concern. The following
factors usually influence the value of the goodwill.
a) Location of the business
b) Nature of the business / product / service
c) Efficiency of the Management
d) Competition
e) Capital required
f) Tenure of the business
g) Technical know – how required
h) Customer satisfaction
Goodwill is an intangible asset. In the case of a partnership firm, goodwill may have to be
valued:
a) When the new partner is admitted;
b) When the existing partners change their profit ratio;
c) When one of the existing partners retires or dies;
d) When the business is sold;
e) When the business is amalgamated with another one; and
f) When the partners decide to close down the business.
Methods of Valuation
Goodwill is valued generally by
(a) Average profits method;
(b) Super profits method; and
(c) Capitalisation method.
However, before a particular method is selected, it is necessary to refer to the Partnership
Deed of the firm.
(a) Average Profits Method: In this case it is valued as a few years purchase of average
past profits of some years. For example, if it is given as Three years purchase of four
years average profits, we have to calculate first, the average of the preceding four years
profits and then multiply the resultant figure with three. This is explained below:
Illustration – 4
A firm values its goodwill on the basis of 4 years purchase of average profits of previous
3 years. Previous three years profits were Rs.9,000; Rs.12,000; and Rs.15,000; What is the
goodwill of the firm ?
Solution:
Total profits of previous three years = 9,000+12,000+15,000=36,000

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 Average of previous 3 years profits = 36,000/3 = Rs.12,000.
4 years purchase of average profits = 12000x4 = Rs.48,000.
Hence, Goodwill of the firm is Rs.48,000.
b) Super Profits Methods: Goodwill is also termed as the capacity to earn super profits.
Expected future profits of the business, over and above normal profits are known as
“Super profits. Goodwill can be valued on the basis of super profits of the business. There
are two ways of doing the same.
i) In this goodwill can be taken as equal to some 3 or 4 or 5 times of the super profits.
For example, if the capital of the business is Rs.1,00,0000 and the normal return were
to be 10% then the normal profits should be Rs.10,000. Suppose, the profits of the firm
are Rs.18,000 then Rs.8,000 (i.e.18000-10000) are the super profits. If the goodwill is
to be taken as 3 years purchase of super profits, it will be 3x8,000=Rs.24,000.
ii) In this case, the capital value of an annuity equal to super profits, for a given number
of years and at given rate of interest is found out. This capital value is treated as the
Goodwill of the business.
c) Capitalisation Method: When a business is established, one expects some normal return,
on the capital. Under this method the value of the business is estimated on the basis of the
expected return and the average profits. The formula for this is:
Profit / Normal Return x 100
From the value of the business thus arrived at, the net assets are deducted and the
resultant figure is treated as the Goodwill. For example, for a business the normal return
on capital is 10% per annum and the average profits are Rs.17,500. The value of the
business = 17,500/10 x 100=Rs.1,75,000. If the net assets are Rs.1,25,000, then the goodwill
is Rs.1,75,000-Rs.1,25,000=Rs.50,000.
In addition to the above three methods, goodwill can also be calculated on the basis of the
share of the incoming partner. Suppose, the incoming partner, for a 1/4th share in profits,
brings in Rs.5,000 as his share of goodwill. Then, the firm’s full value of the goodwill can
be taken as 4x5,000=Rs.20,000.
Treatment of Goodwill
We have seen that the new partner, when he joins the firm, gets the benefit of super profit
earning capacity of the firm. Therefore, he has to compensate the existing partners, but for
whose efforts, the firm would not have reached that stage. Thus when a new person joins, he
has to compensate, separately, towards goodwill of the firm, in addition to bringing in money, if
any towards the capital of the firm. There are different ways of treating the goodwill. They are:
i) PremiumMethod.
ii) Revaluation Method.
iii) Memorandum Revaluation Method.
i) Premium Method
This method is followed when the incoming partner brings in cash towards his share of
goodwill of the firm. This, in turn, can take the following forms:
1. The Premium is paid privately: In this case the new partner pays his share of goodwill
amount to the existing partners privately. Nothing is recorded in the books of the firm.
This method is not desirable. No entry is passed in the firm’s books, as the matter is
treated as outside the business.
2. Amount of premium is retained in business: In this case, the new partner brings the
cash towards goodwill, into the business, it is credited to the existing partners’ capital
127
 accounts and retained in the business. Existing partners’ capital accounts have to be
credited in proportion to the profit sacrificed by them in favour of the incoming partner.
For this purpose, sacrificing ratio is to be ascertained.
Sacrificing ratio: Suppose, X & Y are partners in a firm sharing profits and losses
in 3:2 ratio i.e.3/5 and 2/5 respectively. Now, they decided to admit Z and that the
new profit sharing ratio shall be 2:2:1 i,e,2/5:2/5:1/5.
It is seen from the above that Y continues to share 2/5 profits. It is X who has
sacrificed his 1/5 share (out of 3/5th) towards Z. Hence, sacrificing ration of X &
Y is 1:0. Therefore, entire goodwill that may be brought in by Z, shall go to X only.
The following journal entries are required:
a) When cash is brought in towards goodwill: Bank A/c Dr
To Goodwill A/c
(Being the amount brought in by the new partner towards Goodwill)
b) For giving the goodwill to existing partners: Goodwill A/c Dr
To Existing partners’ capital A/cs (in sacrificing ratio)
(Being the entry for transferring the goodwill to existing partners)
3. Amount of premium is withdrawn by previous partners: In this case, the amount of
premium brought in by the new partner is withdrawn by the previous partners. Hence,
one more journal entry is required for withdrawing the amount in addition to (a) and
(b) above. It is:
c) When the goodwill amount is withdrawn by the previous partners, after it is credited:
Existing partners’ capital A/cs Dr
To Bank A/c
(Being the entry for recording the withdrawal of goodwill amount)
Illustration – 5
Ramesh and Satish are partners in a partnership firm sharing Profts & Losses in 6:4 ratio.
They decided to admit Prakash for 1/5 th share in the business. The new profit sharing ratio
shall be 5:3:2 between Ramesh, Satish and Prakash. Prakash brings in Rs.5,000 as his share of
goodwill, which is later withdrawn. Pass journal entries.
JOURNAL
Rs. Rs.
a) Bank a/c Dr 5,000
To Goodwill a/c 5,000
(Being the entry for the cash brought in by
Prakash towards Goodwill)
b) Goodwill a/c Dr 5,000
To Ramesh capital a/c 2,500
To Satish capital a/c 2,500
(Being goodwill amount credited to Ramesh and
Satish as per their sacrificed ratio)
c) Ramesh capital a/c Dr 2,500
Satish capital a/c Dr 2,500

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 To Bank a/c 5,000
(Being the goodwill amount withdrawn by
previous partners)
Note:Sacrificing ratio is calculated as follows:
Previous partners PreviousShare PresentShare Sacrificed
Ramesh 6 / 10 5 / 10 1 / 10
Satish 4 / 10 3 / 10 1 / 10
Since the sacrifice is equal, goodwill is equally credited.
ii) Revaluation Method
This method is followed when the new partner does not bring in cash towards goodwill.
Goodwill account is then raised to its full value, before the new partner is admitted, in the
books of the firm. It is possible sometimes, the goodwill account may exist in the books
and its amount may be less than the full value or more than the full value. Hence, the
following steps are followed:
Steps
1. Ascertain the full value of the goodwill
2. Find out the difference between the full value of the goodwill and the amount appearing
in the books already (if there is no such account in the books, it can be taken as Zero).
3. Pass the journal entry for the difference so that the goodwill account now appears in
the books at its full value.
The following are the journal entries required under this method:
a) Where there is n goodwill account in the books now or where the full value of the
goodwill is more than the existing goodwill amount:

Goodwill a/cDr ( for the difference as per step 2 above)

To Previous partners’ capital A/cs (in their old profit sharing ratio)
(Being the entry for raising the Goodwill account)

b) Where the existing goodwill amount is more than the full value of the goodwill:
Previous partners’ capital A/cs Dr (in their old profit sharing ratio)
To Goodwill A/c (for the difference as per step 2 above)
(Being the entry for bringing down the goodwill to its full value)
—————————————————————————————————
This is explained in the following illustration:
Illustration - 6
Amal, Bimal and Kamal share profits and losses in 3:2:1 ratio. They admit Suman into
partnership giving him ¼ share in future profits. The goodwill of the firm is valued by agreement
as Rs.30,000, though it is now appearing in the books at Rs.12,000. The new partner is unable to
bring in cash for his share of goodwill and it is agreed that the goodwill account be raised as may
be necessary. Pass journal entries.
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Solution:
JOURNAL
Rs. Rs.
Goodwill Account Dr 18,000
To Amal capital A/c 9,000
To Bimal Capital A/c 6,000
To Kamal capital A/c 3,000
(Being the entry for raising the goodwill
account to its full value)

iii) Memorandum Revaluation Method:

Sometimes, when cash is not brought in by the new partner towards goodwill, the goodwill
account is raised (as under Revaluation Method) and then later written off by debiting all
the partners’ capital account (including that of the new partner) in their new profit sharing
ratio and crediting the goodwill account. The net effect of this is, the new partner’s
capital account stands debited to the extent of his share in the goodwill, and previous
partners’ capital accounts stand credited in the sacrificing ratio. Thus, instead of first
raising the goodwill account to its full value and later writing off the same, adjustments in
the capital accounts can be made straight away. The point is explained in the following
illustration:
Illustration – 7
Ajay and Bijay are partners in a firm sharing profits in the ratio of 4:1. They decided to
admit Chatterjee for a 1/6th share. Chatterjee is not in a position to bring cash towards goodwill.
It is agreed that the firm’s goodwill is Rs.36,000 and is decided not to raise any goodwill account
in the books. Pass necessary journal entry to adjust their rights.
Solution Calculation of net effect:
Ajay Bijay Chatterjee
Debit Credit Debit Credit Debit Credit
a) When goodwill is raised 28,800 7,200
b) When goodwill is written off 24,000 6,000 6,000
c) Net effect (a-b) 4,800 1,200 6,000

Journal Entry
Chatterjee’s Capital A/c Dr 6,000
To Ajay’s Capital A/c 4,800
To Bijay’s Capital A/c 1,200
(Being the entry for giving the net effect of
raising and then writing off the goodwill)

New partner unable to bring in cash, his full share of goodwill: It may, happen that
goodwill account may appear in the books of the firm at some value but not at its full
value. The new partner may be willing to bring in some cash towards goodwill but not to

130
 the extent of his full share. In such cases the following procedure can be adopted.
Step:1 The existing goodwill amount should be raised in the books to its full value by
debiting the Goodwill account with the difference amount and crediting the existing partners’
capital account in their old profit sharing ratio.
Step:2 Then the Goodwill account is written off, by debiting all the partner’s capital accounts
(including that of new partner) in their new profit sharing ratio and crediting the Goodwill
Account.
Step:3 Cash brought in by the new partner, towards goodwill, is debited to Bank account
and credited to his capital account.

5.5 CALCULATION OF NEW PROFIT SHARING RATIO

Whenever there is a change in the constitution of the partnership firm, it may be necessary
to recalculate the profit sharing ratio. For example, a new partner may be admitted or one of the
partners may retire or die. In such cases new profit sharing ratio has to be calculated. In the
following few lines, the method of calculation of new profit sharing ratio when a new person is
admitted into the partnership, is explained.
a) Old Profit sharing and New partner’s share are given: In such cases it is presumed
that, the profits left, after giving the new partner his share, are shared by previous partners
in their old profit sharing ratio: For example, M,N are sharing profits in 3:1 ratio. They
agree to admit P for 1/3 share in future profits. In that case the new profit sharing ratio
will be:
From the total profit P will get 1/3 share
Profits left = 1 - 1/3 = 2/3
These 2/3 profits left are now to be shared by M & N in their old profit sharing ratio.
Thus M will get: 2/3 x ¾ = 6/12
N will get: 2/3 x ¼ = 2/12
Thus M:N:P = 6/12 , 2/12, 1/3 = 6/12 : 2/12 : 4/12 = 6:2:4 = 3:1:2.
b) New Partner acquires the share from existing partners in a particular proportion:
Sometimes new partner may acquire his share of profit in future profits of the firm, from
the existing partners in a particular proportion. For example: A and B are sharing profits
in 3:2 ratio. They decided to admit C into partnership for a 1/6th share, which he acquires
1/8 from A and 1/24 from B. The ratio is calculated as follows:
C acquires 1/6th share of profit by taking 1/8 from A 1/24 from B
A’s remaining share = 3/5 – 1/8 = 24 - 5/40 = 19/40
B’s remaining share = 2/5 – 1/24 = 48 - 5/120 = 43/120
Thus A:B:C=19/40 : 43/120 : 20/120 = 57/120:43/120:20/120
= 57:43:20

CHECK YOUR PROGRESS-2

(a) What is sacrificing ratio ?
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(b) A and B are sharing in the ratio of 2:1. C is given 1/4th share. What is new ratio ?
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(c) X and Y are partners sharing in the ratio of 3:2. Z is admitted and the new ratio of X,Y,Z
is agreed to be 5:3:2. Calculate sacrifice ratio of X and Y.
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(d) Goodwill of a firm in which Good and Better are there is valued as Rs.12,000 which is not
shown in books of account. They admit Best in to the firm who does not bring any
goodwill. Show how can Good and Better be benefited on entry of new partner.
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5.6 ADJUSTMENT REGARDING CAPITALS

When a new partner is admitted into the firm, the partners may agree to adjust their
capital accounts in proportion to the new profit sharing ratio. This can be done in two ways:
a) Adjusting the capital accounts of the old partners on the basis of the capital of the
new partners.
b) Calculating the capital of the partners on the basis of the capital of the new firm and
accordingly, adjusting the old partners’ capitals and asking the new partner to bring in
the necessary amount as capital.
a) Adjusting the capital accounts on the basis of the new partner’s capital: On the
basis of the profit ratio and capital brought in by the new partner, the amount of capital to
be maintained by each old partner (depending upon the new profit sharing ratio) is
calculated. This amount is compared with balance in the capital account (after making
the necessary adjustments regarding goodwill, accumulated profits / losses and revaluing
assets / liabilities ). If the balance in the capital account is less:
i) the old partner brings in the necessary amount; or
ii) the old partner’s current account id debited and capital account credited
If the balance in the capital account is more:
iii) the old partner withdraws the excess amount; or
iv) the old partner’s capital account is debited and current account credited.
b) Calculating the capital of the partners on the basis of the total capital of the firm:
When the total capital of the newly constituted firm is given, each partner’s capital is
calculated on the basis of the total capital and the respective share of each partner ( in the
new profit sharing ratio). The new partner is asked to bring in his share of capital and old
partners’ capit accounts are adjusted depending upon the balances whether excess or

132
 less as explained against points (i) to (iv) under (a).
C) Determining the new partner’s capital if it is not given: Sometime the new firm’s
total capital may not be given and the student may be required to calculate the amount
which the new partner may have to bring in as capital. In such a case, the old partners’
total capital (after making adjustments regarding goodwill accumulated profits/losses
revaluation) and the proportion of their total profit in the newly constituted firm are
ascertained.
For example, the new partner’s share of profit in the new firm is 1/6th. It means that the
total proportion of the old partners’ is 5/6th (which should be shared in the previous profit
sharing ratio). Let us assume that the total capital of all the old partners (after making
adjustments) is Rs.50,000. The 5/6th share of the capital is Rs.50,000 for 1/6th share the
new partner has to bring in:
1/6x50,000x6/5=Rs.10,000
The old partners’ capital, if required can also be calculated and excess or deficit balance
can be adjusted as explained earlier.
This is made clear through the following Illustrations.
Illustration – 8
Bhima and Krishna are partners in a firm sharing profits and losses in the ratio of 4:3.
Their capitals are Rs.60,000 and Rs.50,000 respectively. They decide to admit Balaram
with Rs.16,000 as capital by giving him a 1/8th share in future profits. They also decide to
adjust their capital according to the new profit sharing ratio by bringing in additional
amount or withdrawing addition amount. Make the necessary adjustments in the capital
accounts:
Solution
Calculation of new profit sharing ratio:
Balaram gets 1/8th share in the new firm.
Remaining shares are 1-New partner’s share.
Hence Remaining shares for Bhima and Krishna are 1-1/8=7/8 .
New share = Remaining shares x old ratio, since their old ratio is 4/7 and 3/7
Bhima’s new share = 7/8 x 4/7 = 4/8 and Krishna’s new share = 7/8 x 3/7 = 3/8
Therefore finally the new ratio of Bhima, Krishna and Balaram will be 4/8, 3/8, 1/8=4:3:1.
Calculation of the capital to be maintained:
Since Balaram brings Rs.16,000 for his share 1/8
Krishna has to keep 16,000x1/8x4/8 = Rs.64,000 and
Bhima has to keep 16,000x1/8x3/8=Rs.48,000.
Hence, Bhima has to bring in Rs.4,000 in addition to present Rs.60,000 to make it Rs.64,000
and
Krishna can withdraw Rs.2,000 from his present capital Rs.50,000 keeping as Rs.48,000.
JOURNAL
Bank a/c Dr 4,000
To Bhima’s capital a/c 4,000
(Being the additional amount brought
in by Bhima as per the agreement)
133
 Krishna’s capital a/c Dr 2,000
To Bank a/c 2,000
(Being the excess amount of capital
withdrawn by Krishna as per agreement)

Illustration – 9
Akbar and Pasha were carrying on a partnership business. On the 31st of March, 2016
their capitals stood at Rs.40,000 and Rs.34,500 respectively. On that date they decided to admit
Basheer for a 1/5th share in future profits. Basheer was to bring in capital in proportion to the
new profit sharing ratio. The old partners’ capital accounts also are to be adjusted to the new
profit sharing ratio. For this purpose they bring in the additional capital required. Pass necessary
journal entries on the admission of the new partner and adjustment of old partners’ capital
account.
Solution
Calculation of the new profit sharing ratio:
Basheer gets 1/5 share, hence
remaining share is 1 - 1/5 = 4/5 which is shared equally by Akbar and Pasha.
Thus new ratio of Akbar = 4 /5 x 1/ 2 =4 /10,
Pasha = 4 /5 x 1 / 2 = 4 / 10 and
Basheer’s share is = 1/5 = 2/10. Therefore, the new ratio is 4:4:2 or 2:2:1.
Calculation of capital:
For 2/5 + 2/5 = 4/5 share Akbar and Pasha have kept………Rs.74,500 (40,000+34,500)
which gives the entire capital of the firm as 74,500 x 5/4 = Rs.93,125.
Accordingly Akbar’s capital should be 93,125 x 4/10=Rs.37,250.
Pasha’s capital should also be Rs.37,250 and
Basheer’s capital should be 93,125 x 2 / 10 = Rs.18,625.
Thus
Akbar has to withdraw Rs. 2,750 (40,000-37,250),
Pasha has to contribute Rs.2,750 and
Basheer has to contribute Rs.18,625.

JOURNAL

Bank a/c Dr 21,375

To Pasha’s capital a/c
To Basheer capital 18,625
(Being the additional amount brought
in by Pasha as per the agreement)

134
 Akbar’s capital a/c Dr 2,750
To Bank a/c 2,750
(Being the excess amountof capital
withdrawn by Akbar as per agreement)

5.7 GUARANTEE OF ASSETS AND LIABILITIES

As we have seen earlier, the assets and liabilities are usually revalued before the new
partner is admitted into the firm. However, the new partner may, sometime, ask the old partners
to guarantee the values of assets and liabilities shown in the Balance Sheet (prepared just
before admission). If this guarantee is given by the old partner (s), the loss that may be arise
later, if any, has to be borne by the old partner(s) as per their old profit sharing ratio. It is
sometimes possible that the provision made for doubtful debts may not be sufficient to meet the
bad debts, the latter exceeding the former. The excess loss in such a case is to be borne by the
old partners.
The adjustment required to be made is explained through the following illustration:
Illustration – 10
Raghav and Bhairav were sharing profits and losses in the ratio of 3:2. They decided to
admit Madhav for a 1/4th share in future profits and the latter was to bring in Rs.10,000 as his
capital. The old partners guaranteed the assets and liabilities shown in the Balance Sheet. It
was later noticed that the actual bad debts exceed the provision made by Rs.500 and the
outstanding expenses of Rs.500 were not taken into account in the final accounts prior to his
admission.
Pass the necessary journal entries.
JOURNAL
Bank a/c Dr 10,000
To Madhav’s capital a/c 10,000
(Being the capital brought in by Madhav)
Raghav’s capital a/c Dr 600
Bhairav’s capital a/c Dr 400
To Provision for doubtful debts a/c 500
To Outstanding expenses a/c 500
(Being the entry for short provision for
doubtful debts and bringing into a/c
outstanding expenses)

5.8. GUARNATEE OF MINIMUM PROFIT

Sometimes a share in the partnership is offered to an employee of the firm. In that case
the new partner may request the old partners to guarantee a minimum amount of remuneration
which he was getting, as profit after admission. This guarantee can be given by all the existing
partners or some of them.
As long as the share of profit of the new partner is more than the guaranteed profit (the
135
remuneration which he was getting), the profit of the period is distributed in the new profit
sharing ratio.
If the share of profit is less than the guaranteed profit, the new partner is credited with
the guaranteed profit and the short-fall (i.e. guaranteed profit – his share of profit as per profit
sharing ratio) is debited to the other partner(s) in their profit sharing ratio. Alternatiely, if all the
other partners have given the guarantee, the new partner is given the guaranteed profit out of
the profits of the firm and the remaining profits are shared by the remaining partner.
The adjustments are explained in the following illustration:
Illustration – 11
Rakesh and Satish who were in partnership sharing profits and losses in 3:2 ratio, decided
to admit into the partnership Mukesh theoffice manager who was getting Rs.6,000 per annum
as salary and 5% of the net profits (before charging such commission) as commission. Mukesh
is entitled to 1/6th share in future profits. The old partners guaranteed Mukesh the amount which
he was getting by way of salary and commission as his share of profits. Short fall, if any, is to be
met by the old partners in their profit sharing ratio.
For the following 12 months’ period the profits of the firm (without charging Mukesh’s
salary and commission) amounted to Rs.42,000. Explain how the profits are distributed.
Solution:
(i) Amount that Mukesh would have got, had he continued as Manager: Rs.7,800
Salary Rs.6,000
Add: Commission @ 5% on 36,000 (i.e.42,000-6,000) Rs.1,800
(ii) Amount that Mukesh gets as partner if not guaranteed any minimum: Rs.7,000
(iii) Short fall to be borne by Rakesh and Satish due to minimum guarantee Rs. 800
Share of Rakesh: Rs.800x3/5=Rs.480 and Share of Satish: Rs.800x2/5=320.
Actual profit if distributed straight away,
Share of Rakesh=42,000x3/6=21,000
Share of Satish =42,000x2/6= 14,000
Share of Mukesh=42,000x1/6=7,000
Due to minimum guarantee to Mukesh
Share of Rakesh (21,000-480)= Rs.20,520
Share of Satish (14,000-320)= Rs.13,680
Share of Mukesh (as above)= Rs. 7,800
This can be accounted for as shown:
Dr Profit & Loss Appropriation Account Cr
Rs. Rs.
To Mukesh capital a/c 7,800 By Net Profit 42,000
To Rakesh capital a/c 20,520
To Satish capital a/c 13,680
--------
42,000 42,000

136
Alternatively:
Dr Profit & Loss Appropriation Account Cr
Rs. Rs.
To Mukesh capital a/c 7,800 By Net Profit 42,000
To Rakesh capital a/c 21,000 By Rakesh capital a/c 480
To Satish capital a/c 14,000 By Satish capital a/c 320
42,800 42,800

5.9 RESERVATION OF PROFIT TO OLD PARTNERS

Sometimes just before the new partner was admitted into the firm, the old partners might
have obtained a big order which was almost executed. The old partners might wish that the
profit on such order be distributed among them. The new partner might agree to such a request.
In such a case out of the profits of the following period first the profit expected on such pending
order would be distributed among the previous partners in their old profit sharing ratio and the
remaining profits would then be shared by all the partners in their new profit sharing ratio.
This is explained in the following illustration:
Illustration – 12
Harsha and Varsha are partners in a firm. They admitted Karsha into the firm for 1/3
share of future profits. The old partners got a profitable contract which was almost completed
and the new partner agreed to the old partners’ taking an estimated profit of Rs.5,000 from the
following period’s profits. For the following period, the P&LA/c disclosed a profit of Rs.23,000.
Give journal entries for distribution of profit and show the P&L Appropriation A/c.
Solution:
Out of profit Rs.5,000 is
to be distributed to Harsha and Varsha equally i.e, Rs.2,500 each
Balance of Rs.18,000 (23,000-5,000) is
to be distributed to Harsha, Varsha and Karsha equally i.e, each Rs.6,000.
JOURNAL
Rs. Rs.
P&L Appropriation a/c Dr 5,000
To Harsha’s capital a/c 2,500
To Varsha’s capital a/c 2,500
(Being the profit of contract of previous year
distributed to old partners as agreed)
Rs. Rs.
P&L Appropriation a/c Dr 18,000
To Harsha’s capital a/c 6,000
To Varsha’s capital a/c 6,000
To Karsha’s capital a/c 6,000
(Being the remaining profit distributed to all
partners equally)

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Dr Profit & Loss Appropriation Account Cr
Rs. Rs.
To Harsha’s capital a/c 2,500 By Net Profit 23,000
To Varsha’s capital a/c 2,500
To Harsha’s capital a/c 6,000
To Varsha’s capital a/c 6,000
To Karsha’s capital a/c 6,000
23,000 23,000

CHECK YOUR PROGRESS – 3

Anand and Mukesh are in the partnership sharing profits and losses equally. They admitted
Mukund giving him 1/5th share in future profits after guaranteeing an amount of Rs.10,000 of
profits every year to the old partners. The profit for the year 2012 amounted to Rs.40,000. Pass
journal entries showing the distribution of profit.
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5.10 ADMISSION OF A PARTNER DURING THE ACCOUNTING

YEAR
Normally, new partners are admitted into the firm at the beginning of the accounting year
so that there is no dispute with regard to profits earned from the commencement of the
accounting year to the date of admission. This simplifies the distribution of profits earned from
the date of admission to the end of the accounting period. However, it is not necessary that one
should be admitted at the beginning of the accounting period only.
Sometimes, a partner can be admitted during the course of the accounting year. But the
profit and loss account cannot be prepared up to that date, as it would involve stock taking
among other things. Hence, the profit and loss account is prepared at the end of the accounting
period only. However, it is the old partners who are entitled to the profits earned up to the date
of admission of the new partner, while all the partners are entitled to the profits earned after the
admission of the new partner. Hence, it is necessary to estimate the profits for the pre-admission
period and post-admission period. The profits of the entire accounting period are apportioned
between the pre-admission period and post-admission period on the basis or sales of time (days
or months) during those two periods.
It is explained in the following illustration.
Illustration - 13
Akhil and Nikhil are partners sharing profits and losses in the ratio of 2:1. They prepare
their annual accounts at the end of each calendar year. On 1-8-2012 they decided to admit Sunil
for 1/4th share in future profits. Distribute the profits among the partners for the year ending on
March, 31, 2013, which amounted to Rs.48,000.
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Solution:
The profits for the year are Rs.48,000 of which
upto admission for 4 months = 4/12x48,000 = Rs.16,000
after admission for 8 months = 8/12x48,000 = Rs.32,000

Period Ratio Akhil Nikhil Sunil Total

Rs. Rs. Rs. Rs. Rs.
Pre-admission 2:1 10,667 5,333 - 16,000
Post-admission 2:1:1 16,000 8,000 8,000 32,000
Total Profit: 26,667 13,333 8,000 48,000

The following are some comprehensive illustration involving admission of a partner among
other transactions.
Illustration – 14
Sudhaker and Karunakar are in partnership sharing profits and losses in the ratio of 3:2.
Their Balance Sheet is as follows:
Balance Sheet as on 31st March, 2015
Liabilities Rs. Assets Rs.
Creditors 4,000 Bank 6,500
Sudhakar ‘s capital 20,000 Debtors 10,000
Karunakar’s capital 10,000 Prov.For BDDebts 4,000 6,000
Stock 15,000
Plant & Machinery 6,500
34,000 34,000
st
On the 1 April, 2015 they decided to admit Palekar into partnership and given him ½
share in future profits. Palekar was to bring into the business a building worth Rs.10,000 as
goodwill of the firm and sufficient capital to give him a half share in the total capital of the firm.
It was further agreed to reduce the provision for bad debts to Rs.1,000. The stock is to be taken
at Rs.20,000. The Plant is to be reduced to Rs.5,000. Give journal entries for these and prepare
the Balance Sheet of the newly constituted firm.
Solution:
JOURNAL
Rs Rs.
P&L Adjustment a/c Dr 1, 500
To Plant & Machinery a/c 1,500
(Being the entry for reducing the value of
Plant And Machinery)
Provision for Bad debts a/c Dr 3,000
Stock a/c Dr 5,000
To P&L Adjustment a/c 8,000
(Being entry for gain on revaluation)
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 P&L Adjustment a/c Dr 6,500
To Sudhaker’s capital a/c 3,900
To Karunaker’s capital a/c 2,600
(Being the distribution of net
gain on revaluation)
Buildings a/c Dr 10,000
To Goodwill a/c 10,000
(Being the entry for bringing
building towardsGoodwill)
Goodwill a/c Dr 10,000
To Sudhakar’s capital a/c 6,000
To Karunakar’s capital a/c 4,000
(Being the entry for distributing goodwill
among Old partners in sacrificing ratio)
Bank a/c Dr 46,500
To Palekar’s capital a/c 46,500
(Being the amount brought in by the new partner)

Profit and Loss Adjustment Account

Dr Cr
Rs. Rs.
To Plant & Machinery a/c 1,500 By Provision for bad debts a/c 3,000
To Sudhakar’s capital a/c 3,900
To Karunakar’s capital a/c 2,600 6,500 By Stock a/c 5,000
8,000 8,000
Capital to be brought in by the new partner Palekar is calculated as shown:
Combined capital of Sudhakar & Karunakar together(20,000+10,000) Rs.30,000
+Profit on revaluation Rs.6,500
+Goodwill Rs.10,000
Total amount of capital of Sudhakar & Karunakar for their ½ share is equal to Rs.46,500
Since Palekar is being given ½ share, capital to be contributed by him is also Rs.46,500
Bank Account
Dr Cr
Rs. Rs.
To Balance b/d 6,500
To Palekar’s capital a/c 46,500 By Balance c/d 53,000
53,000 53,000
To Balance b/d 53,000

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 Balance Sheet as on 1st April, 2015
Liabilities Rs. Assets Rs.
Buildings 10,000
Sudhakar ‘s capital 29,900 Plant & Machinery 5,000
Karunakar’s capital 16,600 Stock 20,000
Palekar’s capital 46,500 Debtors 10,000
Creditors 4,000 Prov. For BDDebts 1,000 9,000
Bank balance 53,000
97,000 97,000

Illustration – 15
Anand and Bhargav are partners sharing profits & losses in 2:1 ratio. Their Balance
Sheet was as follows on 31-03-2014.
Balance Sheet as on 31st March, 2014
Liabilities Rs. Assets Rs.
Anand ‘s capital 1,50,000 Plant & Machinery 40,000
Bhargav’s capital 1,00,000 Stock 2,20,000
Creditors 20,000 Debtors 1,50,000
Bank Overdraft 1,50,000 Cash 10,000
4,20,000 4,20,000
st
On April 1 , 2014 they decided to admit Chaturvedi into partnership and give him ¼ th
share in the future profits. The new partner had to bring in Rs.30,000 for his share of goodwill
and Rs.1,00,000 towards capital. It was agreed that the Plant & Machinery was to be reduced
by Rs.4,000 and stock to be raised to Rs.2,49,400. Provision was to be made for doubtful debts
Rs.5,000. It was also agreed that capitals should also be in proportion to that of Chaturvedi
either by bringing in additional cash or withdrawing.
Give the necessary journal entries, capital accounts and the Balance Sheet of the newly
constituted firm.
JOURNAL
Rs. Rs.

P & l Adjustment a/c Dr 9,000

To Plant & Machinery a/c 4,000
To Provision for doubtful debts a/c 5,000
(Being the entry for reduction of assets on revalutation)
Stock a/c Dr 29,400
To P&L Adjustment a/c 29,400
(Being the entry for raising the value of stock)
P&L Adjustment a/c Dr 20,400
To Anand’s capital a/c 13,600
To Bhargav’s capital a/c 6,800
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 (Being the entry for distribution of profit on revaluation)
Bank a/c Dr 30,000
To Goodwill a/c 30,000
(Being the entry for cash brought in by the newPartner
towards goodwill)
Goodwill a/c Dr 30,000
To Anand’s capital a/c 20,000
To Bhargav’s capital a/c 10,000
(Being the entry for distribution of goodwill)
Bank a/c Dr 1,00,000
To Chaturvedi capital a/c 1,00,000
(Being the cash brought in by the new partner)
Bank a/c Dr 16,400
To Anand’s capital a/c 16,400
(Being the cash brought in by Anand to fill short of capital)
Bhargav’s capital a/c Dr 16,800
To Bank a/c 16,800
(Being the excess capital withdrawn by Bhargava)

Dr Anand’s capital Account Cr

Rs. Rs.
To Balance c/d 2,00,000 By Balance b/f 1,50,000
By P & L Adjustment a/c 13,600
By Goodwill a/c 20,000
By Bank a/c 16,400
2,00,000 2,00,000
By Balance b/d 2,00,000

Dr Bhargav’s capital Account Cr

Rs. Rs.
By Balance b/d 1,00,000
To Bank a/c 16,800 By P & L Adjustment a/c 6,800
By Goodwill a/c 10,000
To Balance c/d 1,00,000
1,16,800 1,16,800
By Balance b/d 1,00,000

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 Dr Chaturvedi’s capital Account Cr
Rs. Rs.
By Bank a/c 1,00,000

To Balance c/d 1,00,000

1,00,000 1,00,000
By Balance b/d 1,00,000

Balance Sheet as on 1st April, 2014

Liabilities Rs. Assets Rs.
Anand ‘s capital 2,00,000 Plant & Machinery 36,000
Bhargav’s capital 1,00,000 Stock 2,49,400
Chaturvedi’s capital 1,00,000 Debtors (1,50,000-5,000) 1,45,000
Creditors 20,000 Cash 10,000
Bank Overdraft 20,400
4,40,400 4,40,400
Working note:
New Ratio of Anand:Bhargav:Chaturvedi=2:1:1
Since
Chaturvedi contributes Rs.1,00,000 of 1/4th share, similarly
Anand has to keep Rs.2,00,000 for 2/4sth share and
Bhargav has to keep Rs.1,00,000 for his 1/4th share.

5.11 SUMMARY
When a new partner is admitted into partnership is admitted into partnership,, he is entitled
to a share in the future profits of the firm. Hence, certain adjustments may have to be made in
regard to assets and liabilities, undistributed profits/losses and goodwill. Goodwill is generally
valued by Average Profits Method, Super Profits Method and Capitalization Method.
When a new partner joins partnership, generally, he may have to contribute capital and
also compensate the old partners by way of goodwill. Goodwill is treated in the books in
different ways. Whenever there is a change in the partnership deed, there is a need to calculate
the new profit sharing ratio.
The old partners, on admission of a new partner, sometimes, adjust their capital accounts
in proportion to their new profit sharing ratio. Sometimes, the partner may be guaranteed a
minimum amount of profit by one or more old partners. Often, a new partner may be admitted
during the accounting year. In such a case, profit for the pre-admission and post-admission are
calculated separately. The pre-admission profit is distributed among the old partners and the
profit for the period of post-admission is distributed among all the partners in the new profit
sharing ratio.

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5.12 CHECK YOUR PROGRESS – MODEL ANSWERS
CHECK YOUR PROGRESS- I

1. ------------------------------------------------------------------------------------------------------
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JOURNAL
Rs. Rs.

General Reserve Dr 6,000

To Padyami’s capital a/c 3,600

To Vidiya’s capital a/c 2,400

(Being general reserve transferred to old partners)

cAPITAL a/C

Revaluation a/c Dr 900

To Machinery a/c 400

To Prov. For bad & doubtful debts a/c 500

(Being reduction in the value of assets on revaluation)

Land and Buildings a/c Dr 4,000

To Revaluation a/c 4,000

(Being the value of asset increased on revaluation)

Revaluation a/c Dr 3,100

To Padyami’s capital a/c 1,860

To Vidiya’s capital a/c 1,240

(Being gain on revaluation distributed

to old partners capital a/c)

Bank a/c Dr 5,000

To Thadiya’s capital a/c 5,000

(Being new partner introduced capital)

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 Revaluation Account
Dr Cr
To Machinery a/c 400 By Land & Building a/c 4,000
To Prov. For bad and doubtful debts a/c 500
To Padyami’s capital a/c 1,860
To Vidiya’s capital a/c 1,240
4,000 4,000

Balance Sheet of the firm after admission of Thadiya

Liabilities Rs. Assets Rs.

Sundry Creditors 10,000 Bank (5,000+5,000) 10,000
Bills Payable 4,000 Sundry debtors (8,000-500) 7,500
Padyami’s capital 17,460 Stock 6,000
(12,000+3,600+1,860) Bills Receivable 2,000
Vidiya’s capital 11,640 Machinery (8,000-400) 7,600
(8,000+2,400+1,240) Land & Buildings 15,000
Thadiya’s capital 5,000 (11,000+4,000)
48,100 48,100
2.
(a) When a new partner is admitted into partnership, the existing partners forego their share
to the extent of share given to such new partner. The share foregone by existing partner
is called sacrificed share. Such sacrifice may be made by one/few/all existing partners.
The proportion in which the existing partners forego for the sake of new partner is called
sacrificing ratio.
(b) Share given to C is 1/4, hence left for A and B = 1 – ¼ =3/4.
A’s new share = 3/4 x 2/3 = 2/4 and B’s new share = 3/4 x 1/3 = 1/4.
Hence new ratio of A,B,C = 2:1:1.
(c) Sacrificed share=Old share-New share
Sacrifice by X = 3/5 – 5/10 = 6/10 – 5/10 = 1/10, similarly
Sacrifice by Y = 2/5 – 3/10 = 4/10 – 3/10 = 1/10.
Therefore sacrifice ratio of X and Y = 1:1 i.e; EQUAL
(d) Good and Better be benefited by creation of goodwill in the old firm and writing off of
Goodwill in the new firm. Hence,
On creation:
Rs. Rs.
Goodwill a/c Dr 12,000
To Good’s capital a/c 6,000
To Better’s capital a/c 6,000
(Being goodwill created crediting the old partners)
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 On writing off:
Good’s capital a/c Dr 4,000
Better’s capital a/c Dr 4,000
Best’s capital a/c Dr 4,000
To Goodwill a/c 12,000
(Being goodwill written off among all the partners)
*Good and Better are benefited of Rs.2,000 each through above entries.
3. Distribution of Profit:
Profit Anand Mukesh Mukund Total
First 10,000 (only to old partners equally) 5,000 5,000 - 10,000
Balance Rs.30,000 (to all in 2:2:1 ratio) 12,000 12,000 6,000 30,000
Total : 17,000 17,000 6,000 40,000

Journal entry:
Profit & Loss Appropriation a/c Dr 40,000
To Anand’s capital a/c 17,000
To Mukesh’s capital a/c 17,000
To Mukund’s capital a/c 6,000
(Being profit distributed as per agreement of the partners)

5.13 MODEL EXAMINATION QUESTIONS

I. Short Answer Questions:
1. What is Revaluation Account ? Explain.
2. List out the methods of valuation of Goodwill.
3.What is sacrificing ratio ? Explain with an example.
4. Anita, Binata, Mamata were sharing profits in the ratio of 4:3:2. They decided to admit
Sarita into partnership for 1/3 share in future profits. Calculate the new profit sharing
ratio and the ratio; in which the old partners have sacrificed.
(New ratio-8:6:4:9; sacrificing ratio-4:3:2).
5. Vani and Rani wer ein partnership sharing profits in 4:3 ratio. They admitted Subhashini
into the firm by offering her 3/7th share in future profits (which she takes 2/7th from Vani
and 1/7th from Rani). Ascertain the new profit sharing ratio and the sacrificing ratio.
(Answer: New ratio-2:2:3; Sacrificing ratio – 2:1).
II. Long Answer Questions:
1. Describe the various accounting aspects to be considered on admission of a partner.
2. Explain the various methods of treatment of goodwill on admission of a partner.
3. Ashwani and Bharani were in partnership sharing profits and losses 3/5 and 2/5
respectively. Their capital balances were Rs.1,00,000 and Rs.75,0000 respectively. They
agreed to admit Kartik into partnership for a one third share in future profits. Kartik
brought in Rs.1,00,000. As he is unable to bring in anything towards Goodwill, it is agree

146
 to raise the Goodwill account in the books which was values at Rs.75,000. Give journal
entries, capital account of the partners. Calculate the ratio in-which they have to share
future profits.
(Answer: Capitals : Aswani Rs.1,45,000; Bharani: Rs.1,05,000; Kartik Rs.1,00,000:
Ratio-6:4:5).
4. Radha and Ramani are partners in a firm. Their Balance Sheet was as under
on 31st March, 2012.
Liabilities Rs. Assets Rs.
Radha’s capital 30,000 Cash at Bank 10,000
Ramani’s capital 20,000 Sundry debtors 32,000
Reserve Fund 8,000 Stock 25,000
Creditors 35,000 Furniture 11,000
Expenses payable 5,000 Machinery and Plant 20,000
98,000 98,000
They decided to admit Rajani into partnership with the following adjustments:
a) Provision for doubtful debts has to be created at Rs.6,000
b) Investments not appearing in the books amounted to Rs.8,000
c) Furniture is to be depreciated to Rs.8,000
d) Rajani has to bring in Rs.20,000 towards capital and Rs.20,000 towards goodwill
(which is to be withdrawn by old partners).
Give journal entries, necessary ledger accounts and balance sheet after admission.
(Answer: Loss Rs.1,000; Balance Sheet total Rs.1,17,000; Radha’s capital-Rs.33,500;
Ramani capital – Rs.23,500).
5. Atmaram and Rajaram are partners sharing profits and losses in 3:2 ratio. They decided
to admit Dharaniram who has to bring in Rs.80,000 towards capital and Rs.20,000 towards
goodwill. Their new profit sharing ratio shall be 2:2:1. Their balance sheet before admission
was as under:
Liabilities Rs. Assets Rs.
Atmaram’s capital 80,000 Goodwill 25,000
Rajarami’s capital 80,000 Plant & Machinery 1,55,000
General Reserve 40,000 Debtors 20,000
Sundry Creditors 20,000 Cash at Bank 20,000
2,20,000 2,20,000
They decided that Goodwill account should appear in the books at Rs.60,000.
Give journal entries and necessary ledger accounts and prepare the Balance Sheet after
admission Dharaniram.
(Answer: Balance Sheet Total Rs.3,55,000; Capital- Atmaram:Rs.1,33,000;
Rajaram:Rs.,=1,10,000; Dharaniram;Rs.92,000;)
6. Amar and Akbar were in partnership sharing profits in 2:1 ratio. They decided to admit
Anthony on 1st April, 2012 for 1/4th share in future profits. Anthony was to bring Rs.1,00,000
towards capital and Rs.60,000 towards goodwill. Their balance sheet stood as under on
31st March, 2012.
147
 Liabilities Rs. Assets Rs.
Capital: Amar 1,25,000 Cash 10,000
Akbar 75,000 Stock 1,00,000
Creditors 80,000 Debtors 64,000
Bills Payable 20,000 Machinery 50,000
Furniture 76,000
3,00,000 3,00,000
The following adjustments were agreed on admission:
a) Stock , Machinery and Furniture are to be taken at Rs.1,10,000, Rs.40,000 and Rs.70,000
respectively.
b) Provision for doubtful debts to be created at Rs.3,000.
Give necessary journal entries and show ledger and Balance Sheet after admission.
(Answer: Loss Rs.9,000; Balance Sheet total Rs.4,51,000; )
III. Objective Type Questions
(a) Multiple Choice Questions
1. A new partner is admitted in to partnership for ( )
(a) more capital (b) special skills
(c) more influence (d) any or all the above
2. On admission of a partner General Reserve is transferred to ( )
(a)new partner (b)all partners (c) old partners (d) outgoing partner
3. Account prepared to know the result of changes in values of assets / liabilities ( )
(a) Revaluationa/c (b) Reconstruction a/c
(c) Deficiencya/c (d) Reorganisation a/c
4. Creation of goodwill and writing off of goodwill on admission is done to
(a) benefit to the incoming partner (b) benefit to the outgoing partner
(c)benefit to all the partners (d) benefit to the old partners
5. When a new partner is admitted into partnership, share of old partners( )
(a) increases (b) decrease (c) Remain same
(Answers: 1.d 2.c 3.a 4.d 5.b)
(b) Fill in the Blanks
1. ________________ is the reward paid by new partner to old partners for sacrifice of
their future profits.
2. Accumulated loss in the firm is distributed to___________________partners on admission
of a new partner.
3. Account prepared to find the result of changes in values of assets and liabilities is known
as_________________________________.
4. Profits above the normal rate of return in the market are
called_ass____________________.
5. A firm in which A and B are sharing at 3:4 admit C for one fourth share, both equally
sacrificing for him. New ratio of A,B,C shall be_______________. .
(Answers: 1.Goodwill 2. Existing partners 3. Revaluation A/c 4.Super profits 5. 9:12:7)
148
 (c) Match the following
1. Increased value of building ( ) a. Goodwill
2. Sacrificing ratio ( ) b. Benefits the old partners
3. Creation and writing off of goodwill ( ) c. Shar e foregone by old partners
4. Admission of a new partner ( ) d. Revaluation a/c
5. Value of anticipated excess earnings ( ) e. Gives right in future profits
( Answers: 1.d 2.c 3.b 4.e 5.a )

5.14 GLOSSARY
Accumulated Profit / Loss:Profit / losse not distributed, but allowed to accumulate.
Adjustment of Assets and Liabilities: Adjusting the balances of assets and liabilities
to their true values.
Goodwill: Present values of anticipated excess earnings (or)extra saleable value attached
to prosperous business, beyond the intrinsic value of Net Assets.
Gaining Ratio: Difference between new and old share.
New Partner: Person to be admitted to the existing partnership.
Old Partners: The existing partners in the firm before a new partner is admitted.
Revaluation Account: An account prepared to show the increase and decrease in the
value of assets and liabilities on the admission of a new partner.
Sacrificing Ratio: Ratio in which the old partners sacrifice their share. Difference between
the old and new share.

5.15 FURTHER READINGS

1. Gupta.R.L. & Radhaswamy.M : Advanced Accountancy, Sultan Chand & Sons, New
Delhi.
2. Jain.S.P. & Narang. K.L : Advanced Accountancy, Kalyani publishers, New Delhi.
3. Maheshwari.S.N. : Advanced Accountancy, Vikas Publishing House, New Delhi.

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UNIT - 6 : RETIREMENT OR DEATH OF A PARTNER
Contents
6.0 Aims and Objectives
6.1 Introduction
6.2 Revaluation of Assets and Liabilities
6.3 Adjustment of Accumulated Profit and Losses
6.4 Adjustment of Goodwill of the Firm
6.5 Calculation of Gaining Ratio of remaining partners
6.6 Ascertaining the amount due to the Retiring/Deceased Partner
6.7 Adjusting the Capitals of Continuing Partners
6.8 Mode of Payment to Retiring/Deceased Partner
6.9 Summary
6.10 Check Your Progress – Model Answers
6.11 Model Examination Questions
6.12 Glossary
6.13 Further Readings

6.0 AIMS AND OBJECTIVES

The aims of this unit is to acquaint you with the accounting process involved at the time
of retirement or death of a partner.
After studying of this unit, you should be able to:
* adjust the assets and liabilities as per the agreement of partnership;
* calculate the gaining ratio of partners remaining after the retirement/death of a partner.
* find out the amount due to retiring/deceased partner; and
* adjust the capitals of continuing partners.

6.1 INTRODUCTION
Sometimes, the partner of the firm may decide to retire for personal or business reasons.
According to the Partnership Act, a partner can retire as per the following three methods:
a) One can retire from the firm if all the other partners agree to the same.
b) If there is an express agreement among the partners, the partner can retire accordingly.
c) If the partnership is at will, one can retire from the firm by giving a notice of his desire
to retire from the firm.
When retirement of a partner is at his free will, a partner’s exit may become inevitable
when he dies while in partnership.
In both the above cases i.e., when a partner retires or dies, it is necessary to find out
what is the amount due to the retiring / deceased partner and how it is to be paid out. We have
seen that certain adjustments, are necessary before a new partner is admitted. Similarly,
adjustment in regard to accumulated profits, goodwill, assets and liabilities may be necessary to
ascertain the amount due to retiring/deceased partner. We shall now see what adjustments are
required.
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6.2 REVALUATION OF ASSETS & LIABILITIES
The assets and liabilities are revalued either in the case of death or retirement, as is done
in the case of admission of a partner. However, the net loss or gain on account of revaluation is
distributed to all the partners including the retiring / deceased partner.

6.3 ACCUMULATED PROFITS AND LOSSES

The undistributed profits and losses belong to all the partners of the firm including the
retiring / deceased partner. Hence, to ascertain the amount due to them, it is necessary to
distribute such accumulated profits/losses to all the partners. The procedure to be followed is
similar to that of admission of a partner. However when the remaining partners decide to continue
the business without any change in the profit sharing ratio between them the accumulated
profits/losses can be distributed only to the retiring/deceased partner, instead of all the partners.

6.4 ADJUSTMENT OF GOODWILL

Goodwill is valued in a similar manner as explained already i.e. average profits method,
super profits method and capitalization method.
The retiring/deceased partner is also entitled to share in the goodwill of the firm. It is to be
credited to him as follows:
a) When there is no goodwill account in the books and it is to be raised to its full value the
following journal entry is passed:
Goodwill A/c Dr (for its full value)
To All the Partners Capital A/cs (in their profit sharing ratio)
b) When there is goodwill account already in the books, but it is less than the full value:
When the goodwill account in the books is appearing at an amount less than its full
value, the difference is ascertained and the entry at (a) above is passed for such
difference of amount.
c) When there is goodwill account already in the books and its value is more than the full
value:
In such cases, the difference is ascertained and the following entry is passed for the
difference of amount.
All the Partners’ Capital Accounts Dr (in their profit ratio)
To Goodwill A/c (for difference amount)
d) When the goodwill account is to be raised and then written off:
In the circumstances (a), (b) & (c) explained above, goodwill account is brought to its
full value. However, the continuing partners may decide to write off the account and
not to show in the Balance Sheet. The following additional entry is necessary to write
off the account:
Continuing Partners’ Capital Accounts Dr (in their revised ratio)
To Goodwill
e) When the goodwill account is raised only to the share of retiring/deceased partner:
Sometimes goodwill account may be raised only to the extent of the share of the
retiring/deceased partner instead of its full value. The following entry is necessary:
Goodwill A/c Dr (to the extent of retiring/deceased partner’s share)
151
 To the Retiring/Deceased Partner’s Capital A/c
Later if it is decided to write off the goodwill account the following journal entry is
necessary:
Continuing Partners’ capital A/cs Dr (in gaining ratio)
To Goodwill A/c
f) When the retiring/deceased partner’s share of goodwill is adjusted directly in the
capital accounts, without raising and closing Goodwill Account.
Continuing Capital A/cs Dr (in the gaining ratio)
To Retiring/Deceased Partner’s Capital A/c (to the extent of his share of Goodwill)

6.5 CALCULATION OF GAINING RATIO OF THE

REMAINING PARTNERS
Usually, when a partner dies/retires from the firm, the other partners continue to stay in
the business and share the profits and losses in the ratio ;in between them. In other words, they
gain (the retiring/deceased partner’s share of prift/loss) in their previous ratio. However, sometime
the new ratio of the continuing partners may be given. In such cases it is necessary to calculate
the gain by deducting the new proportion from the previous proportion. This gaining ratio is
necessary as the compensation to the retiring/deceased partner is to be paid by the continuing
partners in the gaining ratio. This is the reverse of the sacrificing ratio we have learnt in the
case of Admission of a partner.

6.6 ASCERTAINING THE AMOUNT DUE TO THE RETIRING /

DECEASED PARTNER
The total amount payable to the retiring/deceased partner comprises the following:
i) Capital account balance
ii) Interest on capital and salary, if any, up to the date of retirement / death.
iii) Share of accumulated profits/losses.
iv) Share of profit/loss on revaluation.
v) Share of goodwill.
vi) Share of profit/loss for the current period, from the date of last preparation of final
accounts to the date of retirement/death.
This can be ascertained proportionately on the basis of previous year profits. However, it
is necessary to refer to the agreement, before selecting a particular basis.
From the aggregate of the above amount, the withdrawals made by the partner, the
interest, if any, due on the same should be deducted. The resulting figure is the amount
due to the retiring/deceased partner.

CHECK YOUR PROGRESS-I

(a) What is gaining ratio ?
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(b) How do you ascertain the amount due to Retiring / Deceased partner ?
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6.7 ADJUSTING THE CAPITALS OF THE CONTINUING

PARTNERS
Sometimes, the continuing partners may decide to adjust their capital amount balances to
their new profit sharing ratio. The total capital of all the partners is taken as the firm’s capital
and the amount each individual partner is required to maintain is ascertained on the basis of the
new profit sharing ratio. If the amount so arrived at is less than the existing balance, the difference
amount is refunded to him or credited to his current account. If the amount so arrived at is more
than the existing balance the partner would be asked to bring the difference amount or his
capital account is credited by debiting his current account.

6.8 MODE OF PAYMENT TO RETIRING / DECEASED

PARTNER
The amount due to the retiring partner or deceased partner is paid out in the following
ways:
a) Lump sum Payment: The entire amount due, is paid to the retiring partner or the
executors of the deceased partner in lump sum. The required funds can be borrowed
from Bank or can be found from a joint life policy (in the case of death of one of the
partners). However, it is difficult to pay heavy amount suddenly. Hence, this method is
not usually adopted.
b) Installment Method: The entire amount due is transferred to his Loan Account
(Executors of Deceased Partner’s Loan account – in the case of deceased partner)
and the amount is paid out together with agreed interest in certain fixed installments.
Before selecting a particular method, it is necessary to refer the Partnership Agreement,
whether there is any provision in this regard.
The following illustration will make the above adjustment clear.
Illustration – 1
Ajit, Biswas and Chatterjee are partners in a firm sharing profits and losses equally. On
st
31 March, 2012 their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 16,800 Cash at Bank 3,000
General Reserve 1,200 Sundry debtors 12,900
Ajit’s capital 30,000 Less:Pro.for DD 900 12,000

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 Biswas’s capital 20,000 Stock 10,000
Chatterjee’s capital 20,000 Investment (Cost) 5,000
Property 20,000
Goodwill 38,000
88,000 88,000
On April, 1st of 2012 Chatterjee was allowed to retire. As per the Partnership Agreement
(i)Goodwill is to be valued as two years purchase of average profits of last 3 years and (ii)profit
till the date of retirement of partner has to be calculated on the basis of average profits of
previous three years.
It was agree to by the partners that property is to be taken at Rs.32,000. Investments at
Rs.4,700 and there is need for provision of Rs.900 more for doubtful debts.
Profits for preceding three years were Rs.10,000; Rs.10,500; and Rs.9,500.
Pass journal entries and show the retiring partner’s account and the Balance Sheet after retirement
of Chatterjee.
Solution:
Computation of Goodwill:
Sum of last 3 years profits=Rs.10,000+10,500+9,500=30,000
Average profit=30,000/3=10,000
Goodwill=10,000x2=Rs.20,000.
JOURNAL
Rs. Rs.
General Reserve Dr 1,200
To Ajit’s capital a/c 400
To Biswas’s capital a/c 400
To Chatterjee’s capital a/c 400
(Being general reserve transferred to capital accounts)
Ajit’s capital a/c Dr 6000
Biswas’s capital a/c Dr 6000
Chatterjee’s capital a/c Dr 6000
To Goodwill a/c 18,000
(Being reduction in the value of Goodwill)
*Alternatively this can be done through Revaluation a/c
Property a/c Dr 12,000
To Revaluation a/c 12,000
(Being the value of property increased on revaluation)
Revaluation a/c Dr 1,200
To Investment a/c 300
To Prov. For DD a/c 900
(Being the value of assets reduced)

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 Revaluation a/c Dr 10,800
To Ajit’s capital a/c 3,600
To Biswas’s capital a/c 3,600
To Chatterjee’s capital a/c 3,600
(Being loss on revaluation transferred to partners)
Chatterjee’s capital a/c Dr 18,000
To Chatterjee’s loan a/c 18,000
(Being the amount due to outgoing partner)

Chatterjee’s Capital Account

Dr Cr
To Goodwill a/c 6,000 By Balance b/d 20,000
To Chatterjee’s loan a/c 18,000 By General reserve a/c 400
By Revaluation a/c 3,600
24,000 24,000

Balance Sheet of the firm after retiring of Chatterjee

Liabilities Rs. Assets Rs.

Sundry Creditors 16,800 Cash at Bank 3,000
Chatterjee’s loan a/c 18,000 Sundry debtors 12,900
Less:Pro.for DD 1,800 11,100
Ajit’s capital Stock 10,000
(30,000+400-6,000+3,600) 28,000 Investment (5,000-300) 4,700
Biswas’s capital Property (20,000+12,000) 32,000
(20,000+400-6,000+3,600) 18,000 Goodwill (38,000-18,000) 20,000
80,800 80,800

Illustration – 2
P,Q and R were in partnership sharing profits and losses equally. On 1-4-2013 ‘P’ retired
when the firm’s Balance Sheet was as under:
Liabilities Rs. Assets Rs.
Capital Accounts: Land & Buildings 8,400
P 16,000 Plant & Machinery 13,960
Q 13,600 Debtors 17,830
R 15,600 Investments 16,000
Reserve Fund 12,000 Cash 14,860
Creditors 13,850
71,050 71,050
The partners agreed to revalue the assets on P’s retirement as follows:
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 Land & Buildings Rs.11,600;Plant & Machinery Rs.13,000; Investments Rs.16,900;
Besides, goodwill was valued at Rs,19,200. P’s amount was settled by giving investments values
at Rs.16,800 and the remaining in cash. For this Q brought in Rs.8,000 as additional capital. It
was decided to adjust the Goodwill directly in the capital accounts.
Prepare Revaluation a/c, Partners’ capital accounts and the revised balance sheet assuming
that Goodwill Account is not raised in the books.
Solution:
Dr Revaluation a/c Cr

Rs. Rs.
To Plant & Machinery 960 By Land & Buildings 3,200
To Profit on Revaluation: By Investments 800
P Rs.1,047
Q Rs.1,047
R Rs,1,046 3,140
4,100 4,100

Computation of Goodwill:
Value of firm’s Goodwill=Rs.19,200
Shares of P Q R
On creation (to PQR equally) 6,400 6,400 6,400
On writing off (to QR equally) 9,600 9,600
Net effect 6,400 Cr 3,200 Dr 3,200 Dr

Dr Partners’ Capital Accounts Cr

P Q R P Q R
To P’s capital - 3,200 3,200 By Balance b/d 16,000 13,600 15,600
To Investments 16,800 - - By Revaluation a/c 1,047 1,047 1,046
To Bank 10,647 - - By Q’s capital a/c 3,200 -- --
To Balance c/d - 23,456 17,456 By R’s capital a/c 3,200 -- --
By Reserve Fund a/c 4,000 4,000 4,000
By Bank -- 8,000 --
27,447 26,656 20,656 27,447 26,656 20,656

Dr Cash a/c Cr

Rs. Rs.
To Balance b/d 14,860 By P’s capital a/c 10,647
To Q’s capital a/c 8,000 By Balance c/d 12,213
22,860 22,860

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 Balance Sheet of Q and R (after retirement of P)
Liabilities Rs. Assets Rs.

Capital Accounts: Land & Buildings 11,600

Q 23,456 Plant & Machinery 13,128

R 17,456 Debtors 17,830

Creditors 13,850 Cash 12,204

54,762 54,762

Illustration – 3

Laxman, Omkar and Nandu are in partnership sharing profits and losses in 2:2:1 ratio.
They are entitled to interest on capitals at 5% p.a. and salary of Rs.600, Rs.500 and Rs.400 p.m
respectively. Their balance sheet on 31st March, 2012 was as follows:

Liabilities Rs. Assets Rs.

Capital Accounts: Sundry assets 80,000

Laxman 50,000 Sundry Debtors 50,000

Omkar 67,000 Cash at Bank 30,000

Nandu 33,000

Creditors 10,000

1,60,000 1,60,000

Laxman died on 30th Sep, 2012. According to partnership deed the deceased partner is
entitled to share of profit up to the date of death on the basis of average profits of preceding
three years and share of goodwill on the basis of one year’s purchase of average profits of
preceding three years in addition to capital account, interest on capital at 5% and salary.

Profits for preceding years were: Rs.60,000, Rs.50,000 and Rs.40,000.

The other partners decided to continue the business and pay off the executor of Laxman
by raising bank loan of Rs.75,000.

Give journal entries, Laxamn’s capital account and Balance Sheet of continuing partners.

Working notes:

Goodwill:

Sum of preceding 3 years profits=60,000+50,000+40,000=1,50,000

Average profit=1,50,000/3=50,000Share of deceased Laxman=50,000x2/5= Rs.20,000

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Profit for six months (in current year i.e.1.4.12 to 30.9.12)
Average profit =Rs.50,000 hence for 6 months it is 50,000x6/12=25,000
Share of deceased Laxman=Rs.25,000x2/5=Rs.10,000
JOURNAL
Profit & Loss a/c ………………………Dr 10,000
Interest on capital a/c Dr 1,250
Partners’ salaries a/c Dr 3,600
To Laxman’s capital a/c 14,850
(Being share in profit, int.on capital and salary of
deceased Partner credited to his capital account)
Goodwill a/c Dr 20,000
To Laxman’s capital a/c 20,000
(Being goodwill raised to the extent of share of the
deceased partner)
*Goodwill is created only to the extent of deceased
partner’s share, alternatively full also can be created.
Laxman’s capital a/c Dr 74,850
To Laxman’s Executor’s a/c 74,850
(Being the amount owe to deceased Laxman
transferred to his executors account)
Bank a/c Dr 75,000
To Bank loan a/c 75,000
(Being loan borrowed to pay the executors)
Laxman’s Executor’s a/c Dr 74,850
To Bank a/c 74,850
(Being amount paid to the executor of
deceased Laxman)

Dr Laxman’s Capital a/c Cr

Rs. Rs.
By Balance b/d 50,000
By Profit & Loss a/c 10,000
By Interest on capital a/c 1,250
To Laxman’s executor’s a/c 84,850 (on 50000@5% for 6 months)
By Salary a/c 3,600
(6 months @ Rs.600 p.m.)
By Goodwill a/c 20,000
84,850 84,850

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Dr Laxman’s Executor’s a/c Cr
Rs. Rs.
To Bank a/c 84,850 By Laxman’s capital a/c 84,850

84,850 84,850

Balance Sheet of Omkar & Naidu firm

Liabilities Rs. Assets Rs.

Capital Accounts: Sundry assets 80,000
Omkar 67,000 Goodwill 20,000
Nandu 33,000 Sundry Debtors 50,000
Bank loan 75,000 Cash at Bank: 20,150
Creditors 10,000 Opening balance 30,000
+bank loan 75,000
1,05,000
-paid to executor 84,850
Advances: (deceased Laxman) 14,850
Profit 10,000
Int.on cap. 1,250
Salary 3,600
1,85,000 1,85,000
Illustration – 4
Basu, Sen and Gupta are partners sharing profits and losses equally. On 31st March, 2015
Basu retires from the firm, on which date their balance sheet stood as under:

Liabilities Rs. Assets Rs.

Basu’s capital 20,000 Property 40,000
Sen’s capital 20,000 Sundry debtors 20,000
Gupta’s capital 20,000 Bills Receivable 10,000
Reserve 15,000 Cash at Bank 5,000
75,000 75,000

Goodwill of the firm is valued at Rs.15,000. Sen and Gupta decided to continue the business.
It was agreed to between the continuing partners and Basu that the amount due to Basu should
be paid in three equal yearly installments with interest @5% p.a. on the balances. Show the
amount payable to Basu and prepare Basu’s loan account till fully repaid.
Amount payable to Basu:
Balance in capital a/c Rs.20,000
+Share in Reserve (15,000/3) Rs.5,000
+Share in Goodwill (15,000/3) Rs.5,000
Total : Rs.30,000

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Dr Basu’s Loan a/c Cr
Rs. Rs.
31-03-16 To Bank a/c 11,500 01-04-15 By Basu’s capital a/c 30,000
31-03-16 To Balance c/d 20,000 31-03-16 By interest a/c 1,500
31,500 31,500
31-03-17 To Bank a/c 11,000 01-04-16 By Balance b/d 20,000
31-03-17 To Balance c/d 10,000 31-03-17 By interest a/c 1,000
21,000 21,000
31-03-18 To Bank a/c 10,500 01-04-17 By Balance b/d 10,000
31-03-18 By interest a/c 500
10,500 10,500
Illustration – 5
Chand, Balu and Suraj are in partnership sharing profits and losses in 4:3:2 ratio. Their
balance sheet on 31st March, 2012 was as under.
Liabilities Rs. Assets Rs.
Creditors 40,000 Cash in hand 20,000
Mortgage loan 50,000 Cash at Bank 10,000
Chand’s capital 2,00,000 Sundry debtors 1,30,000
Balu’s Capital 1,50,000 Stock 1,80,000
Suraj’s capital 1,00,000 Plant & Machinery 2,00,000
5,40,000 5,40,000

Chand decided to retire from the firm 30th June, 2012. As per the partnership agreement
when a partner retires, he is entitled to goodwill calculated at two years purchase of average
profits of previous five years and profit up to the date of retirement on the basis of previous
year’s profits. Profits for the previous year amounted to Rs.1,44,000. Profits for the previous
five years amounted to Rs.4,50,000.
Show Chand’s capital account and the balance sheet of continuing partners, assuming
that the continuing partners decided to write off the Goodwill account.
Working notes:
Goodwill:
Profit for five years Rs.4,50,000;
Average per year=4,50,000/5=Rs.90,000;
Two years purchase=90,000x2=1,80,000;
Share of Chand=1,80,000x4/9=Rs.80,000.
Profit for 3 months:
Previous year’s profit Rs.1,44,000;
Profit for 3 months=1,44,000x3/12=36,000;
Share of Chand=36,000x4/9=Rs.16,000;

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Dr Chand’s Capital a/c Cr
Rs. Rs.
By Balance b/d 2,00,000
By Profit & Loss a/c 16,000
By Goodwill a/c 80,000
To Chand’s Loan a/c 2,96,000
2,96,000 2,96,000

Balance Sheet of Balu & Suraj firm

Liabilities Rs. Assets Rs.
Creditors 40,000 Cash on hand 20,000
Mortgage loan 50,000 Cash at bank 10,000
Chand’s loan 2,96,000 Sundry debtors 1,30,000
Balu’s Capital: Stock 1,80,000
Opening balance Rs.1,50,000 Plant & Machinery 2,00,000
-write of Goodwill Profit & Loss a/c 16,000
(80000x3/5) 48,000 1,02,000
Suraj’s Capital:
Opening balance Rs.1,00,000
-write of Goodwill
(80000x2/5) 32,000 68,000
5,56,000 5,56,000

CHECK YOUR PROGRESS-II

(a) What is the journal entry to be passed for transferring the amount due to retiring
partner ?
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(b) What is the journal entry to be passed for transferring the amount due to deceased
partner ?
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6.9 SUMMARY
When a partner retires or dies, adjustments (as are made on admission of a partner)in
regard to accumulated profits, goodwill, assets and liabilities and profit up to the date of retirement/
death, may be required to be made to ascertain the amount due to retiring or deceased partner.
He is paid out the amount in lump sum or the amount is transferred to a Loan Account and paid
out together with agree interest in certain installments.

6.10 CHECK YOUR PROGRESS: MODEL ANSWERS

I.(a) Proportion of increase in the share of remaining partners in a firm due to retirement/death
of a partner.
Ex:If ratio of A:B:C was 4:3:3; after C it is 5:5;A’s gain=5/10 -4/10=1,
similarly B’s gain=5/10-3/10=2.
Therefore Gaining ratio of A and B is 1:2.
1. (b) The total amount payable to the retiring/deceased partner comprises the following:
i) Capital account balance
ii) Interest on capital and salary, if any, up to the date of retirement / death.
iii) Share of accumulated profits/losses.
iv) Share of profit/loss on revaluation.
v) Share of goodwill.
vi) Share of profit/loss for the current period, from the date of last preparation of final
accounts to the date of retirement/death.
This can be ascertained proportionately on the basis of previous year profits. However, it
is necessary to refer to the agreement, before selecting a particular basis.
From the aggregate of the above amount, the withdrawals made by the partner, the
interest, if any, due on the same should be deducted. The resulting figure is the amount due to
the retiring/deceased partner.
II (a) Retiring partner’s capital a/c Dr
To Retiring partner’s loan a/c
(Being the amount due to the retiring partner transferred to his loan account)
(b) (a) Deceased partner’s capital a/c Dr
To Retiring partner’s executor’s a/c
(Being the amount due to the retiring partner transferred to his loan account)

6.11 MODEL EXAMINATION QUESTIONS

I. Short Answer Questions:
1. Give a list of items payable to a retiring partner.
2. How the profit for partial year during which the deceased partner was alive, calculated ?
3. Explain what is gaining ratio.
II. Long Answer Questions:
1. Explain the accounting procedure to be followed on retirement / death of a partner.

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2. The balance sheet of Akash, Dinesh, Mody sharing profits and losses in 4:3:2 ratio was as
under as on 31st March, 2012.
Liabilities Rs. Assets Rs.
Sundry creditors 8,280 Cash 6,600
Capitals: Debtors 5,880
Akash 24,000 Stock 9,600
Dinesh 18,000 Machinery 10,200
Mody 12,000 Building 30,000
62,280 62,280

Dinesh desired to retire from the firm and the partners agreed to the following:
a) Building to be taken at Rs.33,000
b) A debtors account for Rs.210 is not included in the above
c) Stock to be raised by Rs.1,920
d) Dinesh’s share of goodwill is agreed to be Rs.10,000 and raised in books.
e) Akash and Mody continue the business sharing in 2:1 ratio
f) Amount payable to Dinesh is shown as his loan
Prepare Revaluation a/c, Partners’ capital a/cs and Balance sheet of Akash and Mody.
(Answers: Profit-Rs. 5,130; Dinesh’s loan-Rs.29,710; Balance Sheet total-Rs.77,410)
3. Ajay,Bindu and Kamal were in partnership sharing profits and losses as 3:2:1 respectively.
Their balance sheet was as under on 31st March, 2012.
Liabilities Rs. Assets Rs.
Sundry creditors 20,000 Goodwill 1,00,000
Bills payable 10,000 Fixed Assets 1,00,000
Capitals: Current Assets 1,30,000
Ajay 1,40,000
Bindu 1,00,000
Kamal 60,000
3,30,000 3,30,000
Kamal agreed to retire and accepted for Rs.1,00,000 as lump sum for his share and the
amount payable to him is contributed by Ajay and Bindu as per their profit sharing ratio.
Resolved to donot change book value of Goodwill.
Write journal entries and prepare balance sheet of Ajay and Bindu.
(Answers: Goodwill to Kamal Rs.40,000;Ajay’s capital Rs.1,76,000 and Bindu’s
capital Rs.1,24,000; Balance Sheet Total-Rs.3,30,000).
4. A,B and C were partners sharing profits and losses in 3:2:1 ratio. B dies on 31st August,
2012.As per the partnership deed the executors of the deceased partner are entitled to:
i) Capital balance on the date of death Rs.6,000;
ii) Interest on capital from 31st March, 2012 to date of death @ 6% p.a;
iii) Share in profit up to the date of death assuming the profit in the same proportion as of last
year which was Rs.24,000 during last year
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 iv) Goodwill is Rs.30,000 of the entire firm;
The amount payable to the executor’s of B is to be paid in three yearly equal installments
without any interest. Show the computation of amount payable to executors and show the
executor’s loan account till the end.
(Answers: Amount payable Rs. 19,484; Each installment Rs.6,495).
III OBJECTIVE TYPE QUESTIONS
A. Multiple Choice Questions
1. Increase in the share of continuing partners on death/retirement of a partner
a. Sacrifice ratio b.Ganing ratio c.Foregone ratio d.None of the above
2. On death of a partner, goodwill is payable to
a. executors of deceased partner b.remaining partners
c.all partners d.executor
3. A firm consists of A,B,C who share equally. If C retires, ratio of A and B shall be
a.2:3 b.3:2 c.1:2 d.1:1
4. Need for estimation of profit for part of the current year generally arises on
a.admission b.retirement c.death d.every event
5. In the event of retirement of a partner, goodwill is payable
a.by retiring partner to remaining partner
b.by remaining partners to retiring partner
c.by firm to all partners
d.by all partners to firm.
(Answers: 1-b 2-a 3-d 4-c 5-b)
B. Fill in the Blanks
1. An asset revalued as of higher value, such excess is debited to_______________a/c.
2. An asset revalued as of lower value, such short is debited to__________________a/c.
3. Reduction in the value of a liability is credited to_________________________a/c.
4. Amount due to a retiring partner is transferred to______________________ a/c.
5. On death of a partner, _____________ a/c is credited with the amount due to him.
(1.Asset 2.Revaluation3.Revaluation 4.retiring partner’s loan5.executor’s loan)
C. Match the following

1. Gaining ratio ( ) a.on retirement of a partner

2. Executor’s account ( ) b. on retirement or death of a partner

3. Partner’s loan account ( ) c. credited to all partners

4. Profit for part of the year ( ) d. on death of a partner

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 5. Firm’s Goodwill creation ( ) e. on the basis of average profits

(1-b 2-d 3-a 4-e 5-c)

6.12 GLOSSARY
Retiring Partner: The partner who decides to retire from the business.

Deceased Partner:The partner in the firm who died.

6.13 FURTHER READINGS

1. Gupta.R.L. & Radhaswamy.M : Advanced Accountancy, Sultan Chand & Sons, New
Delhi.

2. Jain.S.P. & Narang. K.L : Advanced Accountancy, Kalyani publishers, New Delhi.

3. Maheshwari.S.N.: Advanced Accountancy, Vikas Publishing House, New Delhi.

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UNIT-7 : DISSOLUTION OF FIRM
Contents
7.0 Aims and Objectives
7.1 Introduction
7.2 Modes of Dissolution
7.3 Settlement of Accounts
7.4 Firm Debts Vs Private Debts
7.5 Accounting Procedure on Dissolution
7.6 Summary
7.7 Check Your Progress – Model Answers
7.8 Model Examination Questions
7.9 Glossary
7.10 Further Readings

7.0 AIMS AND OBJECTIVES

The aim of this unit is to explain you the circumstances in which the firm gets closed and
the accounting procedure to be followed.
After going through this unit, you should be able to:
*explain the various ways in which the firm can be closed.
*explain how firm debts and private debts are settled on dissolution. And
*work out the problems on dissolution.

7.1 INTRODUCTION
We have seen in the previous Unit how accounts are settled when a partner decides to
retire from the firm or dies. In such cases it was taken that the remaining partners decided to
carry on the business. In other words the firm’s existence continued. But where the remaining
partners decide not to continue the business, the firm’s existence comes to an end, and a different
accounting treatment is required to close the firm’s books. Such a closure is known as
DISSOLUTION of the firm.

7.2 MODES OF DISSOLUTION

Section 39 to 55 of the Partnership Act, 1932 contains the provisions of dissolution of the
partnership firm. According to the Act, a firm may get dissolved in any one of the following
ways:
a) Dissolution by agreement (Section-40): A partnership comes into existence by way
of an agreement between two or more persons. Similarly, it comes to an end when all the
partners agree that it should be closed.
b) Compulsory dissolution (Section-41): When all the partners become insolvent, the
firm gets dissolved. The firm also gets dissolved when all but one become insolvent, as
only one person cannot carry on the business (this is known as sole trader form of business).
Sometimes, the business carried on by a firm, may be decided illegal and hence the firm
may have to compulsorily get dissolved.

166
c) On the happening of a certain event (Section-42): The firm may also get dissolved in
the following cases, unless there is an agreement to the contrary:
i) after the expiry of the duration of the firm, if any:
ii) after the completion of the venture for which the firm was specifically formed:
iii) on the death of one of the partners:
d) By serving a notice (Section-43): In the case of a partnership at will, the firm gets
dissolved when a partner serves notice on the other partners of his intention to dissolve
the firm.
e) By order of the court (Section-44): The court on an application may order dissolution
of the firm in the following circumstances:
i) When one of the partners has become of unsound mind;
ii) When a partner has become incapable of performing his duties as a partner;
iii) When a partner is found to be guilty of misconduct which affects the business of the
firm;
iv) When a partners willfully and persistently commits breach of agreement (between the
partners) in the conduct of business;
v) When a partner has transferred his interest in the firm;
vi) When the business cannot be carried on except at loss;
vii) When the court is satisfied on the basis of the grounds which make it just and equitable
to dissolve the firm.
Sometimes the partners may resolve to convert the firm into a company or sell to a joint
stock company. In such cases also the firm would get dissolved.

7.3 SETTLEMENT OF ACCOUNTS

Where there is no specific agreement between the partners as to how the accounts on
dissolution are to be settled, the provisions of 48 to 50 which are as follows shall have to be
followed:
Losses:Losses including deficiencies of capital shall be paid first out of profits, next out of
capital and finally, if necessary, by the partners contributing in the ratio in which they
share profits and losses.
Assets: The assets of the firm including any sums contributed by the partners to make up
deficiencies of capital shall be applied in the following manner and order:
i) paying the debts of the firm to a third party
ii) paying each partner proportionately the amount due to him from the firm towards
advances other than capital.
iii) paying each partner proportionately the amount due to him from the firm towards
capital.
iv) dividing the remaining amount among the partners in their profit sharing ratio.

7.4 FIRM’S DEBTS Vs PRIVATE DEBTS

When the firm is dissolved there may be firm’s debts as well as individual partner’s debts
(in their individual capacities).When both the debts exist, the debts should be settled in the
following manner:

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a) Firm’s debts should be paid first out of the properties of the firm and the remaining
amount should be distributed among the partners in the manner explained under the Para,
‘ Settlement of Accounts’.
b) Private debts of the partners should be paid first out of the private estates of the partners.
If any surplus is left in private estate, after paying the debts the amount will be utilized in
paying off firm’s liabilities (when the amount realized on the properties of the firm is not
sufficient ).

7.5 ACCOUNTING PROCEDURE ON DISSOLUTION

When a firm is dissolved all its accounts should get closed on the date of dissolution there
will be certain assets and liabilities. The assets have to be disposed off and the liabilities paid
out. The following accounts are usually opened:
Realisation Account: When individual assets are disposed off and liabilities paid out some
balances (representing loss or profit) may be left in such individual accounts. Unless all
these are added, the net loss or net gain on account of depreciation (which has to be
transferred to partners) cannot be known hence all assets and outside liabilities are
transferred to an account known as realization account, the proceeds of the assets are
credited to it and the liabilities are paid from that account. The account, ultimately, reveals
the loss or gain on account of dissolution.
Capital Accounts: After paying the outside liabilities and partners’ advances, if any, partners
are to be paid. Sometimes the partners may have to bring in some amount . Hence to
know their position, the capital accounts of all the partners opened.
Bank Account: Since cash is to be received and paid this account is not, normally transferred
to realization account. All entries of receipts and payments of money are recorded in this
account.
The following are the entries that are usually passed on dissolution of the firm.
1. For transferring the asset account (except cash) to Realisation A/c:
Realisation A/c Dr
To Assets accounts (individually) at book values
2. For transferring the outside liabilities and provisions against assets to Realisation a/c:
Liabilitiesa/c (individually) Dr
Provision or Fund A/c Dr (at book values)
To Realisation A/c
3. The capital accounts, Partners’ loan A/c and bank A/c (if both cash and bank are given
cash is closed by transfer to bank and only the bank account shall be operated till the end)
are opened at this stage. (They already exist in the books but in the examination such
accounts are opened with balances as on the date of dissolution).
*In the era of digitalization, cash account shall be avoided.
4. For transferring accumulated profits:
Reserve a/c Dr
P&L a/c (credit balance) Dr
To Partners’ capital a/cs (in their profit sharing ratio
5. For transferring the accumulated losses:
Partners’ capital accounts Dr (in their profit sharing ratio)

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 To P& L a/c (for debit balance)
6. When cash is realized on assets:
Bank a/c(for actual amount realized)
To Realisation a/c
7. When the assets are taken over by partners:
Partners’ capital a/cs Dr (at the values agreed upon)
To Realisation a/c
8. When outside liabilities are paid off:
Realisation a/c Dr (for actual amount paid)
To Bank a/c
9. When liabilities are taken over by partners:
Realisation a/c Dr (for agreed amount)
To Partners’ capital a/cs
10. When some expenses are incurred by the firm for dissolution:
Realisation a/c Dr
To Bank a/c
11. When dissolution expenses are met by the partners:
Realisation a/c Dr
To Bank a/c
12. The Realisation account may now show some balances representing loss or gain on
dissolution. This is transferred to partners’ capital accounts in their profit sharing ratio.
Where there is gain (i.e.credit side is more):
Realisation a/c Dr
To Partners’ capital a/cs
Where there is loss (i.e. debit side is more):
Partners’ capital a/cs Dr
To Realisation a/c
13. For paying partners’ advances:
Partners’ Loan a/c Dr
To Bank a/c
*The above entries are given assuming that the capital accounts are maintained
under Fluctuating capital method. If Fixed Capital Method is followed, all entries
made hither to (to the Partners’ capital accounts) are made to partners’ current
accounts instead of capital accounts. Finally the balances in current accounts are
transferred to respective capital accounts where only capital accounts remain.
14. At this state, only the partners are to be paid. Sometimes a partner’s capital account may
show debit balance, representing the amount due from him to the firm. Such partners
bring in the necessary amount and the remaining partners (whose accounts show credit
balance) are paid the amount due to them.
a. Entry for receipt of cash when a partner’s capital a/c shows debit balance:
Bank a/c Dr
To Respective Partner’s capital a/c
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 b. Entry for payment of cash when a partner’s capital a/c shows credit balance:
Respective Partner’s capital a/c Dr
To Bank a/c
At this stage all accounts would get closed.
Sometimes it may be given in the problem that some amount is realized on an asset. For
example Goodwill, though does not appear in the balance sheet just before dissolution.
Similarly it may also be given that some amount is paid towards a liability, though such an
item does not appear in the balance sheet ( before the dissolution). In such cases we can
assume that such assets and liabilities did exist in the balance sheet (before dissolution) at zero
values and got transferred to realization account. The accounting treatment suggested above
will therefore hold good and no further adjustment is required.
No specific treatment is required for goodwill as is done in the case of admission,
retirement or death of a partner. It is treated just like any other asset and transferred to realization
account (if it exists) along with other assets.
The procedure is explained in the following illustrations:
Illustration-I
Sham and Sunder are in partnership sharing profits and losses in 3:2 ratio. The following
was their balance sheet as on 31st March, 2012.

Liabilities Rs. Assets Rs.

Sundry Creditors 10,560 Cash at Bank 7,260
Bank Overdraft 30,000 Investments 41,600
Sundry debtors 39,200
Sham’s capital 1,20,000 Stock 17,500
Sunder’s capital 40,000 Furniture 5,000
Building 90,000
2,00,560 2,00,560

They decided to dissolve the partnership on the above date. The assets except cash and
investments are sold for Rs.1,38,000. The investments, were taken over by Sunder at Rs.44,000
who agreed to discharge the Bank overdraft. The expenses of dissolution amounted to Rs.2,200.
The creditors were paid Rs.10,060 in full settlement.
Gove journal entries and Ledger accounts relating to the dissolution.
Solution:
JOURNAL
Rs. Rs.
Realisation a/c Dr 1,93,300
To Investments a/c 41,600
To Sundry debtors a/c 39,200
To Stock a/c 17,500
To Furniture a/c 5,000
To Building a/c 90,000
(Being assets transferred to Realisation a/c)
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Creditors a/c Dr 10,560
Bank overdraft a/c Dr 30,000
To Realisation a/c 40,560
(Being liabilities transferred to Realisation a/c)
Bank a/c Dr 1,38,000
To Realisation a/c 1,38,000
(Being assets sold except investments)
Sunder’s capital a/c Dr 44,000
To Realisation a/c 44,000
(Being investments taken by Sunder)
Realisation a/c Dr 10,060
To Bank a/c 10,060
(Being creditors paid in full settlement)
Realisation a/c Dr 30,000
To Sunder Capital a/c 30,000
(Being the bank overdraft discharged by Sunder)
Realisation a/c Dr 2,200
To Bank a/c 2,200
(Being expenses on realization)
Sham’s capital a/c Dr 7,800
Sunder’s capital a/c Dr 5,200
To Realisation a/c 13,000
(Being loss on realization transferred to partners)
Sham’s capital a/c Dr 1,12,200
Sunder’s capital a/c Dr 20,800
To Bank a/c 1,33,000
(Being the balances of partners paid off)

LEDGER
Realisation Account
Dr Cr
Rs. Rs.
To Investments a/c 41,600 By Creditors a/c 10,560
To Sundry debtors a/c 39,200 By Bank overdraft a/c 30,000
To Stock a/c 17,500 By Bank a/c 1,38,000
To Furniture a/c 5,000 By Sunder’s capital a/c 44,000
To Building a/c 90,000 By Sham’s capital a/c 7,800
To Bank a/c 10,060 By Sunder’s capital a/c 5,200
To Sunder capital a/c 30,000
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 To Bank a/c 2,200
2,35,560 2,35,560

Dr Partners’ Capital Accounts Cr

Sham Sunder Sham Sunder
To Realisation a/c -- 44,000 By Balance b/d 1,20,000 40,000
To Realisation a/c 7,800 5,200 By Revaluation a/c — 30,000
To Bank a/c 1,12,200 20,800
1,20,000 70,000 1,20,000 70,000

Bank Account
Dr Cr
Rs. Rs.
To Balance b/d 7,260 By Realisation a/c 10,060
To Realisation a/c 1,38,000 By Realisation a/c 2,200
By Sham’s capital a/c 1,12,200
By Sunder’s capital a/c 20,800
1,45,260 1,45,260

CHECK YOUR PROGRESS-I

(a) Why is Realisation Account prepared ?
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(b) When cash realized on assets is transferred to Realisation A/c; what is the entry?
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(c) What is entry when liabilities are taken over by a partner ?
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Illustration -2
The following is the Balance Sheet of Arjun and Bhim as on 31st March, 2013 on which
date they decided to dissolve the firm.

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 Balance sheet
Liabilities Rs. Assets Rs.
Sundry Creditors 60,000 Cash at Bank 7,000
Bills payable 16,000 Investments 20,000
Mrs. Arjun’s loan 10,000 Sundry debtors 40,000
Mrs.Bhim’s loan 20,000 Stock 10,000
Reserve fund 20,000 Furniture 20,000
Arjun’s capital 30,000 Building 50,000
Bhim’s capital 10,000 Goodwill 10,000
Profit & Loss A/c 9,000
1,66,000 1,66,000
All assets except Bank balance were sold outside which realized Rs.1,60,000. Creditors
accepted Rs.50,000 in full settlement whereas bills and other liabilities were paid in full. All the
accounts were settled.
Show the Realisation account b.Partners’ capital accounts and c.Bank account.
Solution:
LEDGER
Realisation Account
Dr Cr
Rs. Rs.
To Investments 20,000 By Sundry Creditors 60,000
To Sundry debtors 40,000 By Bills payable 16,000
To Stock 10,000 By Mrs. Arjun’s loan 10,000
To Furniture 20,000 By Mrs.Bhim’s loan 20,000
To Building 50,000 By Bank (sale of assets) 1,60,000
To Goodwill 10,000
To Bank : 96,000
Creditors Rs.50,000
Bills payable 16,000
Mrs.Arju loan 10,000
Mrs.Bhim loan 20,000
To Arjun’s capital a/c 10,000
To Bhim’s capital a/c 10,000 20,000
2,66,000 2,66,000

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Dr Partners’ Capital Accounts Cr

Arjun Bhim Arjun Bhim

To P&L a/c 4,500 4,500 By Balance b/d 30,000 10,000
To Bank a/c 45,500 25,500 By Reserve fund a/c 10,000 10,000
By Revaluation a/c 10,000 10,000
50,000 30,000 50,000 30,000

Bank Account
Dr Cr
To Balance b/d 7,000 By Realisation a/c 96,000
To Realisation a/c 1,60,000 By Arjun’s capital a/c 45,500
By Bhim’s capital a/c 25,500
1,67,000 1,67,000

7.6 SUMMARY
In the case of retirement / death of a partner the remaning partners, usually continue the
business. But where the remaining partners decide not to continue, the firm has to be dissolved.
The firm may also get dissolved due to different reasons.
The partners accounts have to be settled on dissolution as per the terms of their agreement,
but where there is no specific agreement, provisions of Section:48 to 50 of the Partnership Act
have to be followed.
On the dissolution of the firm , the assets have to be disposed off and the liabilities are
paid out. On completion all the accounts get closed.
Sometimes on dissolution the capital accounts of the some o f the partners may show a
debit balance. Such partners are required to bring in necessary cash, so that other partners
accounts can be settled.

7.7 CHECK YOUR PROGRESS – MODEL ANSWERS

(a) Realisation account is prepared to sell all assets, settle all liabilities and find the net
loss or gain on such disposal of assets and liabilities.
(b) Bank a/c Dr
To Realisation a/c
(c) Respective partner’s capital a/c Dr
To Realisation a/c

7.8 MODEL EXAMINATION QUESTIONS

I. Short Answer Questions:
1. List out the circumstances in which dissolution of a firm takes place.
2. Write the order of priority in which the liabilities are to be paid on dissolution.

174
3. What is Realisation account ?
II. Long Answer Questions:
1. Explain the journal entries with respect to realization account on dissolution of firm.
2. The balance sheet of Krishna and Balaram stood as under as on 31st March, 2014 on
which date they decided to dissolve the firm.
Liabilities Rs. Assets Rs.
Sundry creditors 26,000 Cash at Bank 7,000
Krishna’s loan 10,000 Debtors 24,800
Reserve 12,000 Stock 35,600
Krishna’s capital 30,000 Machinery 45,000
Balaram’s capital 40,000 Furniture 5,600
1,18,000 1,18,000
The assets other than cash realiz ed Rs.99,200. Creditors allowed a discount of Rs.448.
Realisation expenses amounted to Rs.1,088.
Give necessary journal entries and ledger accounts for dissolution.
(Answers: Loss on Realisation -Rs.12,440; Paid to Krishna-Rs.29,780; Paid to Balaram-
Rs.39,780)
3. D,S and K were partners sharing profits and losses in 3:2:1 ratio. They decided to dissolve
the firm on 31st March, 2014 on which they had the following balance sheet:
Liabilities Rs. Assets Rs.
Sundry creditors 28,000 Good will ` 12,000
Capitals: Sundry debtors 57,200
D 68,000 Investments 25,200
S 80,000 Machinery 30,000
K 38,400 Motor van 26,000
Stock 49,200
Cash 14,800

2,14,400 2,14,400
D took the investments at Rs.22,000 and Motor Van at Rs.28,000. S took over other
assets and lliabilities at book values except Machinery at Rs.32,8000 and Stock at Rs.50,000.
Show ledger accounts assuming all payments were made.
(Answers: Profit on Realisation Rs.2,400; S brings Rs.43,200; D is paid Rs.19,200
and K is paid Rs.38,800).
4. The balance sheet of Kranthi, Shanti and Kiran who were sharing in the rati of 5:3:2 stood
as follow on 31st March, 2015.
Liabilities Rs. Assets Rs.
Sundry creditors 30,000 Cash at Bank 6,000
Bills payable 7,000 Debtors 19,000
Loan from Mrs.Kranthi 30,000 Stock 30,000

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General Reserve 15,000 Investments 10,000
Capital: Furniture 2,000
Kranthi 30,000 Machinery 35,000
Shanthi 25,000 Building 50,000
Kiran 15,000
1,52,000 1,52,000
On the above date they dissolved the firm and the assets realized as under:
Stock and Investments realized 10% less than their book values. Debtors realized Rs.17,500.
Machinery sold for Rs.30,000. Kranthi took over Building at Rs.85,000. Furniture was
taken over by Shanthi for Rs.1,200. Creditors were paid at a discount of 5%. Kiran has
agreed to pay the Bills Payable. Realisation expenses amounted to Rs.1,000. Show the
necessary Ledger accounts.
(Answers: Realisation Profit-Rs.24,200; Brought by Kranthi Rs.35,400; Paid to Shanthi
Rs.35,560; Paid to Kiran Rs.29,840)
III OBJECTIVE TYPE QUESTIONS
A.Multiple Choice Questions
1. Account prepared specifically on dissolution of firm
a.P& L adjustment a/c b.Revaluation a/c c.Realisation a/c d.All the above
2. On dissolution of firm amount of loan borrowed from a partner is repaid
a.before making payment to outside creditors b.after clearing debts to Government
c.along with capitals of the partners d.after clearing all outside liabilities
3. Expenses incurred on dissolution of firm are known as
a.prelimanary expenses b.liquidation expenses
c. realisation expenses d. other expenses
4. All assets are transferred to Realisation account at their
a. original value b. market value c. sale price d. book value
5. Amount realized on sale of assets is credited to
a.Asset account b.Partners’ account c.Bank accountd.Realisation account
6. Dissolution is said to complete when
a.All the accounts in the books get closed b. All assets are sold
c. All liabilities are repaid d. All the above take place.
(Answers: 1-c 2-d 3-c
4-d 5-d 6-a
B. Fill in the Blanks
1. An asset is ____________________ to Realisation a/c at its book value.
2. A liability is credited to Realisation a/c at its ______________________value.
3. Amount realized on sale of asset is credited to _____________________________a/c.
4. Amount paid for repayment of liability is _____________to Realisation a/c.
5. On dissolution of firm , ___________________ get closed in the books of accounts.
(Answers:1.Credited 2.Book value 3.Realisation 4.debited 5.All accounts)

176
C. Match the following
1. Dissolution of firm ( ) a. Debit balance in capital a/c
2. Amount due from partner ( ) b. paid before return of capital
3. Partner’s loan amount ( ) c. debited to partners capital a/cs
4. Profit on realization ( ) d. Realisation account
5. Loss on realization ( ) e. Credited to partners capital a/cs.
( Answers: 1-d 2-a 3- b 4-e 5-c)

7.9. GLOSSARY
Dissolution of firm : Closure of the firm by sale of assets and settlement of liabilities and
capitals of the partners.
Realisation account:Account prepared for the purpose of finding the net gain or loss on
settlement of all assets and liabilities.
Realisation expenses:Expenses incurred for dissolution of the firm.

7.10 FURTHER READINGS

1.Gupta.R.L. & Radhaswamy.M : Advanced Accountancy, Sultan Chand & Sons, New
Delhi.
2.Jain.S.P. & Narang. K.L : Advanced Accountancy, Kalyani publishers, New Delhi.
3.Maheshwari.S.N. : Advanced Accountancy, Vikas Publishing House, New
Delhi.

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UNIT-8 : INSOLVENCY OF A PARTNER
Contents
8.0 Aims and Objectives
8.1 Introduction
8.2 Consequences of Insolvency
8.3 Loss Arising out of Insolvency
8.4 Decision in Garner Vs Murray Case Firm Debts Vs Private Debts
8.5 Capital Ratio
8.6 Procedure when some of the Partners are Insolvent
8.7 Procedure when all the Partners are Insolvent
8.8 Summary
8.9 Check Your Progress – Model Answers
8.10 Model Examination Questions
8.11 Glossary
8.12 Further Readings

8.0 AIMS AND OBJECTIVES

When a partner or some of the partners of partnership become insolvent, there is a need
to write the same in the books of accounts of the firm. In this unit, an attempt is made to explain
you the accounting procedure when a partner becomes insolvent.
On completion of this unit, you should be able to:
*explain the consequences of insolvency of a partner;
*distribute the loss arising out of the insolvency of a partner among the solvent partners;
and
*calculate the capital ratio of solvent partners as per the decision given in Garner vs
Murray case.

8.1 INTRODUCTION
We have seen in the previous unit how the partners’ capital accounts are settled when
the firm is dissolved. The procedure indicated suits where the firm is solvent and its partners are
also solvent. Sometime, some of the partners’ capital accounts may show debit balance. If they
are solvent they would bring in necessary cash and hence there will be no difficulty in settling
the accounts of other partner(s).
Suppose , the account of a partner shows debit balance and being insolvent, he is not in a
position to pay the amount due to the firm. Such an amount becomes loss to the firm.
So far we have come across trading losses and loss on dissolution, which are shared by
all the partners in their profit sharing ratio. Now the question that arises is, how the loss on
account of insolvency of a partner is to be shared by other solvent partners. We shall deal with
the same in the following paras.

8.2 CONSEQUENCES OF INSOLVENCY

When a partner is adjudicated by the court as insolvent, he ceases to be partner of the
178
 firm from the date on which the order of adjudication is made. The partnership firm also
gets dissolved on the date of order of adjudication, unless there is some provision in the
Partnership agreement to the contrary. From the date onwards, the estate of the insolvent
partner is not liable for the acts of the firm. Similarly the firm also cannot be held liable for
the acts of the insolvent partner from the date of the order of adjudication.

8.3 LOSS ARISING OUT OF INSOLVENCY

The debit balance of the insolvent partner’s capital account, to the extent not paid to
the firm, is known as loss arising out of insolvency. Such loss is to be orne by the other
solvent partners in accordance with the decision in GARNER Vs MURRAY case, which is
as follows:

8.4 DECISION IN GARNERS Vs. MURRAY CASE

The question as to how the loss on account of insolvency of a partner was to be
shared by other solvent partners arose in a leading case Garner Vs.Murray. The learned
Judge held that there should be a distinction between ordinary loss arising out of the
realisation of assets and the abnormal loss arising on account of capital deficiency of an
insolvent partner. He ruled that in the absence of an agreement between the partners to
the contrary, the deficiency on insolvent Partner’s capital account should be borne by
other who are solvent in proportion to their capitals which stood before the dissolution of
the firm.
So far, there has been no court decision in India questioning this ruling. However,
according to Section 48 of the Partnership Act, the assets of the firm, including any sums
contributed by the partners to make up losses or deficiencies of capital must be applied
(after paying creditors and partners’ loans) in paying each partner what is rateably due
to him on capital. This is similar to the ruling in Garner Vs Murray according to which the
solvent partners had to contribute to the losses on realisation in cash and share the
deficiency in the capital account of the insolvent partner according to their capital ratio.
Hence, this rule is applicable in India also.

8.5 CAPITAL RATIO

As per Garner Vs Murray ruling the loss on insolvent partner’s capital account is to be
borne by other solvent partners in their capital ratio, before dissolution. Hence, it is necessary
to calculate the capital ratio.
We have seen earlier that partners can maintain their capital accounts either under Fixed
Capital Method or Fluctuating Capital Method.
Capital Ratio under Fixed Capital Method: Under this method, since all adjustments towards
trading profits/losses, drawings, interest on drawings, interest on capital, salary. Etc., are
made in the current account, the balance in the Capital Account represents the capital
before the dissolution. Hence the loss on insolvent partner’s capital account (after
transferring his current a/c balance to the capital a/c), is distributed in the ratio of the
balances in Capital accounts of other solvent partners.
Capital Ratio under Fluctuating Capital Method: Under this method all adjustments
towards profits, drawings, etc., are made in the capital accounts only. Hence, to know the
capital on the date of dissolution, all undistributed profts/losses, interest on capital, drawings,
interest on drawings, etc., (upto the date of dissolution), but not loss on realisation, are posted to
the capital accounts including that of the insolvent partner, and the capital balance thus arrived

179
at should be the basis of the ratio according to which the loss on insolvent partner’s capital
account is to be borne.
The loss or profit on realisation is not taken into consideration for arriving at the
capital, as according to the rule, the capital before dissolution only is to be taken into account.
As per the ruling in Garner Vs Murray case, solvent partners have to bring in cash to
the extent of loss on realisation. This is intended to bring the capital accounts of the solvent
partners to the level they stood before the dissolution. In practice, though cash is not
brought in by the solvent partners, notional entries are passed as ;if they have brought in
cash. Therefore, all postings to the solvent partners’ capital accounts from the Realisation
Account, are reversed either by debiting or crediting the Cash Acount, balances of the
solvent partner’s capital accounts struck and resultant figures are taken as the basis for the
ratio.

CHECK YOUR PROGRESS-I

How do the solvent partners share the loss arising due to insolvency of a partner?
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8.6 PROCEDURE WHEN SOME OF THE PARTNERS ARE

INSOLVENT
The adjustments required when some of the partners are adjudicated insolvent are explained
in the following two illustrations, both when fixed capital method and fluctuating capital
method are in operation:
Illustration-1 (under fixed capitals system)
Ramkumr, Gururaj, Shashikanth are partners sharing profits and losses in the ratio of
2:2:1. Their balance sheet as on 31st March, 2012 stood as follows, on which date they
decided to dissolve the firm.
Balance sheet
Liabilities Rs. Assets Rs.
Sundry Creditors 10,000 Cash at Bank 7,000
Bank Overdraft 30,000 Investments 41,000
Capital Accounts: Sundry debtors 39,000
Ramkumar 1,20,000 Stock 87,000
Gururaj 40,000 Furniture 5,000
Shashikanth 10,000 Building 96,000
Current Accounts:
Ramkumar 30,000
Gururaj 30,000
Shashikanth 5,000
2,75,000 2,75,000
All the assets realized Rs.1,85,000. Liabilities were repaid in full. Shashikanth could not contribute
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 the deficit in his account as he became insolvent. Prepare ledger accounts for closure of
the firm.
Solution:
LEDGER
Dr Realisation Account Cr
Rs. Rs.

To Cash at Bank a/c 7,000 By Creditors a/c 10,000

To Investments a/c 41,000 By Bank overdraft a/c 30,000

To Sundry debtors a/c 39,000

To Stock a/c 87,000 By Bank a/c 1,85,000
To Furniture a/c 5,000 (sale of assets)
To Building a/c 96,000
By Rajkumar’s current a/c 36,000
To Bank a/c 40,000 By Gururaj’s current a/c 36,000
(Repaid liabilities) By Shashikanth’s current a/c 18,000
(loss on realization)
3,15,000 3,15,000
Dr Shashikanth’s Current Account Cr
Rs. Rs.
To Realisation a/c 18,000 By Balance b/d 5,000
(share in loss on realization) By Shashikanth’s capital a/c 13,000

18,000 18,000

Dr Shashikanth’s Capital Account Cr

Rs. Rs.
To Shashikanth’s current a/c 13,000 By Balance b/d 10,000
(deficit being tr. to solvent By Ramkumar’s capital a/c 2,250
partners) By Gururaj’s capital a/c 750
13,000 13,000

Working notes:

Deficit in Shashikanth’s account: Rs.3,000

Ratio of Fixed capitals of Ramkumar & Gurraj=Rs.1,20,000:Rs.40,000 i.e; 3:1
Hence
Ramkumar has to bear Rs.3,000x3/4= Rs.2,250 and
Gururaj has to bear Rs.3,000x1/4= Rs.750;

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Dr Other Partners’ Current Accounts Cr
Ramkumar Gururaj Ramkumar Gururaj
To Realisation a/c 36,000 36,000 By Balance b/d 30,000 30,000
To Capital a/c 30,000 30,000 By Bank a/c 36,000 36,000
66,000 66,000 66,000 66,000
Dr Other Partners’ Capital Accounts Cr
Ramkumar Gururaj Ramkumar Gururaj
To Shashikanth’s capital a/c 2,250 750 By Balance b/d 1,20,000 40,000
(deficit of insolvent partner) By Current a/c 30,000 30,000
To Bank a/c 1,47,750 69,250
1,50,000 70,000 1,50,000 70,000

Dr Bank Account Cr
Rs. Rs.
To Balance b/d 7,000 By Realisation 7,000
To Realisation a/c 1,85,000 By Realisation a/c 40,000
To Ramkumar’s current a/c 36,000 By Ramkumar’s capital a/c 1,47,750
To Gururaj’s current a/c 36,000 By Gururaj’s capital a/c 69,250
2,64,000 2,64,000

Illustration-2
Anil, Bose and Chetan are partners in a firm sharing profits and losses equally. On 31st March,
2014 their Balance Sheet was as follows:
Balance Sheet

Liabilities Rs. Assets Rs.

Sundry Creditors 16,000 Cash at Bank 3,000
General Reserve 12,000 Sundry debtors 12,000
Stock 20,000
Anil’s capital 50,000 Investment 25,000
Bose’s capital 30,000 Free holdProperty 20,000
Chetan’s capital 10,000 Goodwill 38,000
1,18,000 1,18,000
They resolved to dissolve the firm and sold all the assets for Rs.73,000. Repaid the
liabilities. Chetan could not contribute the deficit in his account.
Show ledger accounts of the firm for the above.

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Solution:
Dr Realisation A ccount Cr
Rs. Rs.
To Cash at Bank 3,000 By Creditors a\c 16,000
To Sundry debtors 12,000 By Bank a\c 73,000

To Stock 20,000 (sale on assets)

To Investment 25,000

To Property 20,000 By Anil’s capital 15,000

To Goodwill 38,000 By Bose’s capital 15,000

To Bank a/c 16,000 By Chetan’s capital 15,000
(repayment to creditors) (loss on realisation)
1,34,000 1,34,000

Dr Chetan’s Capital Account Cr

Rs. Rs.
To Realisation a/c 15,000 By Balance b/d 10,000
(share in realization loss) By General Reserve a/c 4,000
By Anil’s capital 614
By Bose’s capital 386
(deficit born by solvent partners
15,000 15,000

Working notes:
Deficit in Chetan’s account: Rs.1,000 Ratio
of Fluctuating capital of Anil and Bose: (without the influence of realization loss)
Anil’s Capital + General Reserve =50,000+4,000=Rs.54,000
Bose’s Capital + General Reserve=30,000+4,000=Rs.34,000
Hence Anil’s share=1,000x54/88=Rs.614 and Bose’s share=1,000x34/88=Rs.386.
Dr Other Partners’ Current Accounts Cr
Anil Bose Anil Bose
To Realisation a/c 15,000 15,000 By Balance b/d 50,000 30,000
To Chetan’s Capital a/c 614 386 By General Reserve a/c 4,000 4,000
To Bank a/c 53,386 33,614 By Bank a\c 15,000 15,000
(contribution of
realization loss)
69,000 49,000 69,000 49,000
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Dr Bank Account Cr
Rs. Rs.
To Balance b/d 3,000
To Realisation a/c 73,000 By Realisation a/c 16,000
By Realisation a/c 3,000
To Anil’s capital a/c 15,000 By Anil’s capital a/c 53,386

To Bose’s capital a/c 15,000 By Bose capital a\c 33,614

1,03,000 1,03,000
*Solvent partners contributed their share of realization loss in cash as per Garner Vs Murray.

Illustration -3
S,K and P were partners in a firm sharing 3:2:1and possess the following Balance Sheet as on
31st March, 2015
Liabilities Rs. Assets Rs.
Building 20,000
S ‘s capital 30,000 Plant & Machinery 35,000
K’s capital 40,000 Stock 20,000
General Reserve 3,000 Debtors 22,000
Creditors 33,000 Bank dalance 3,000
P’s capital 6,000
1,06,000 1,06,000
The partners resolved to dissolve the firm and disposed off all assets except bank balance
for a lump sum of Rs.80,000. P who was not sound financially could contribute only
Rs.3,000 towards deficit in his account and was declared insolvent.
Write journal entries and prepare the required ledger accounts on dissolution.
Solution:
JOURNAL
Rs. Rs.
Realisation a/c Dr 97,000
To Buildings a/c 20,000
To Plant & Machinery 35,000
To Stock 20,000
To Debtors 22,000
(Being assets transferred to Realisation a/c)
Creditors a/c Dr 33,000
To Realisation a/c 33,000
(Being creditors transferred to Realisation a/c)

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 To Bank a/c Dr 79,000
To Realisation a/c 79,000
(Being assets sold )
Realisation a/c Dr 33,000
ToBank 33,000
(Being creditors paid in full )
S’s capital a/c Dr 9,000
K’s capital a/c Dr 6,000
P’s capital a/c Dr 3,000
To Realisation a/c 18,000
(Being loss on realization transferred to partners)
General Reserve a/c Dr 3,000
To S’s capital a/c 1,500
To K’s capital a/c 1,000
To P’s capital a/c 500
(Being reserve transferred to capital accounts)
Bank a/c Dr
To P’s capital a/c 3,000
(Being the contribution P could make) 3,000
Bank a/c Dr 15,000
To S’s capital a/c 9,000

To K’s capital a/c 6,000

(Being loss contributed by solvent partners)
S’s capital a/c Dr
K’s capital a/c Dr 2,390
To P’s capital a/c 3,110
(Deficiency of insolvent partners shared by solvent partners 5,500
in their capitals ratio)
S’s capital a/c Dr 29,110
K’s capital a/c Dr 37,890
To Bank a/c 67,000
(Being the balances of solvent partners repaid)
Working notes:
Deficiency in P’s account:
Debit balance Rs.6,000 -
Realisation loss Rs.3,000 -
Share in reserve Rs.500 +
&contribution Rs.3,000 +
Net deficit Rs. 5,500.

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Ratio of capitals of solvent partners: S K
Opening balances 30,000 40,000
+share in reserve 1,500 1,000
Ratio= 31,500 : 41,000 (irrespective of realization loss)
Hence S’s share=5500x315/725 i.e.;Rs.2,390
K’s share=5,500x410/725 i.e.;Rs.3,110.
LEDGER

Dr Realisation Account Cr
Rs. Rs.
To Building a\c 20,000 By Creditors a/c 33,000
To Plant Machinery 35,000 By Bank a\c 79,000
To Stock 20,000 (sale of assets)
To Debtors 22,000
By S’s capital a\c 9,000
To Bank a/c 33,000 By K’s capital a/c 6,000
(Repaid liabilities) By P’s capital a/c 3,000
(loss on realisation)
1,30,000 1,30,000

Dr P’s Capital Account Cr

Rs Rs
To Balance b/d 6,000 By General Reserve a/c 500

To Realisation a/c 3,000 By Bank a/c 3,000

By S’s capital a/c 2,390
By P’s capital a/c 3,110

9,000 9,000
Dr Other Partners’ Capital Accounts Cr
S K S K
To Realisation a/c 9,000 6,000 To Balance b/d 30,000 40,000

To K’s capital a/c 2,390 3,110 By General reserve a/c 1,500 1,000

To Bank a/c 29,110 37,890 By Bank a/c 9,000 6,000

40,500 47,000 40,500 47,000

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Dr Bank Account Cr
Rs. Rs.
To Balance b/d 3,000 By Realisation a/c 33,000
To Realisation a/c 79,000 By S’s capital a/c 29,110
To S’s capital a/c 9,000 By K’s capital a/c 37,890
To K’s capital a/c 6,000
To P’s capital a/c 3,000
1,00,000 1,00,000

8.7 PROCEDURE WHEN ALL THE PARTNERS ARE INSOLVENT

When the firm’s liabilities cannot be paid in full by disposing off the firm’s assets and the
partners are not in a position to bring the amount due from them, all the partners are said to be
insolvent. In such circumstances, the creditors of the firm will not be paid in full but only partly.
They have to be paid whatever cash is available in the firm (after meeting dissolution expenses)
together with cash brought in if any, by the partners. Since they are not paid in full the following
procedure can be followed instead of the procedure followed above (when only some of the
partners are insolvent).
The creditors are not transferred to Realisation account. They are paid to the extent cash
is available (including cash contributed if any, by the insolvent partners), by opening a separate
account. The unsatisfied (unpaid) portion of creditors account is transferred to an account
called Deficiency Account. The capital account balances of the partners are also transferred to
this Deficiency Account. The Deficiency Account will then automatically get closed and thus
all accounts get closed.
This is explained in the following illustrations.
Illustration -3
Madhu , Suman and Rao are partners in a firm sharing profits and losses equally. Their
Balance Sheet on 31st Dec.2018 was as follows :
Liabilities Rs. Assets Rs.
Sundry Creditors 1,80,000 Fixed Assets 1,65,000
Madhu’s capital 66,000 Profit & Loss 36,000
Rao’s capital 30,000 Suman’s capital a/c 75,000
2,76,000 2,76,000
All the three partners have become insolvent. The private estates of Madhu and Suman were
not sufficient enough pay to off the private liabilities. There was a surplus of Rs. 6,000 from
Rao’s estate, after paying off the private liabilities. The fixed assets of the firm realised
Rs.1,20,000, while the realisation expenses amounted to Rs. 3,000.
The firm is dissolved. Give journal entries and ledger accounts.
Solution JOURNAL

2018 Rs Rs
Dec.31 Realisation Dr. 1,65,000
To Fixed Assets a/c 1,65,000

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 (For transfer of fixed assets)
2) Bank A/c, Dr. 1,20,000
To Realisation a/c 1,20,000
(For cash realised on assets)
3) Realisation a/c Dr. 3,000
To Bank A/c. 3,000
(For paying the expenses)
4) Madhu’s capital a/c. Dr. 16,000
Suman’s capital a/c. Dr. 16,000
Rao’ capital a/c. Dr. 16,000
To Realisation a/c. 48,000
(For transferring loss on realisation)
5) Madhu’s capital a/c. Dr. 12,000
Suman’s capital a/c. Dr. 12,000
Rao’ capital a/c. Dr. 12,000
To Profit & Loss a/c 36,000
(Being debit balance on P& L a/c. transferred).
6) Bank a/c. Dr. 6,000
To Rao’s capital a/c 6,000
(Being the surplus received from Rao’s
private estate)
7) Sundry Creditors a/c. Dr. 1,23,000
To Bank a/c 1,23,000
(Being cash available paid)
8) Madhu’s capital a/c Dr. 38,000
Rao’s capital a/c. Dr. 8,000
To Deficiency a/c. Dr. 46,000
(Balances transferred to Deficiency amount).
9). Sundry Creditors a/c. Dr. 57,000
To Deficiency a/c. 57,000
(Being the balances transferred to
deficiency a/c.
10) Deficiency a/c. Dr. 1,03,000
To Suman’s capital a/c. 1,03,000
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 (Balances on his capital a/c. transferred
to deficiency a/c.
LEDGER
Dr. Realisation A/c. Cr.
Rs. Rs.
To fixed assets a/c 1,65,000 By Bank a/c. (sale if assets) 1,20,000
To Bank a/c (exp) 3,000 By Madhu’s capital a/c.(1/3 loss) 16,000
By Suman’s capital a/c.(1/3 loss) 16,000
By Rao’s capital a/c. 16,000
1,68,000 1,68,000
Dr. Bank Account Cr.
Rs. Rs.
To Realisation a/c. By Realisation a/c. (exp.) 3,000
(sale of assets) 1,20,000 By Sundry Creditors a/c. 1,23,000
To Rao’s Capital a/c. 6,000
1,26,000 1,26,000
Dr. Sundry Creditors A/c. Cr.
Rs. Rs.
To Bank a/c. 1,23,000 By Bank balance b/f 1,80,000
To Deficiency a/c. 57,000
1,80,000 1,80,000
Dr. Madhu’s Capital A/c. Cr.
Rs. Rs.
ToRealisation a/c. (loss) 16,000 By balance b/f 66,000
To P &L a/c. 12,000
To Deficiency a/c. 38,000
66,000 66,000
Dr. Suman’s Capital Cr.
Rs. Rs.

To Balance b/f 75,000 By Deficiency a/c. 1,03,000

To Realisation a/c. (Loss) 16,000
To Profit & Loss a/c. 12,000
1,03,000 1,03,000

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 Dr. Rao’s Capital Dr.
Rs. Rs.
To Realisation a/c. (Loss) 16,000 By balance b/f 30,000
To P&L a/c. 12,000 By Bank a/c. 6,000
To Deficiency a/c. 8,000
36,000 36,000
Dr. Deficiency A/c. Dr.
Rs. Rs.
To Suman’s capital a/c. 1,03,000 By Sundry creditors a/c 57,000
By Madhu’s capital 38,000
By Rao’s capital a/c 8,000
1,03,000 1,03,000
Dr. Head Office Account Cr.
2017 Rs. 2018 Rs.

2017 Rs. 2017 Rs.

Mar.31 To Balance b/fd 64,160 Mar. 31 By Balance b/fd 56,040
,, By cash in transit account 2,000
,, By Head office expenses a/c. 600
By Depreciation a/c 500
By Profit & Loss a/c. 5,020
64,160 64,160
8.8 SUMMARY
When a partner’s capital account shows debit balance and if he is not in a position to pay
that amount to the firm, being insolvent, such an amount becomes loss (to the firm).
Loss arising from capital deficiency of an insolvent partner is different from other trading
losses and loss on dissolution. As per the decision in Garner vs Murray case, where the partnership
agreement is not contrary, the deficiency on insolvent partner’s capital account should be borne
by the other solvent partners’ in proportion to their capitals which stood before dissolution of the
firm.
Under Fixed Capital Method, the balance in the capital accounts of the partners, represents
the capitals before dissolution. Under Fluctuating Capital Method, undistributed profts/losses,
interest on capital, drawings, interest on drawings (upto the date of dissolution), but not loss on
realisation are posted, to the capital accounts. The capital balances thus arrived at should be the
basis of the ratio of capitals before dissolution
Sometimes, all the partners may be insolvent and firm’s assets may not be sufficient to
pay off its liabilities. The creditors will be paid only partly to the extent cash is available.

8.9 CHECK YOUR PROGRESS – MODEL ANSWERS

1. The loss arising on account of insolvency of a partner is distributed depending on the
method of maintaining the capita accounts of partners.
a)When the capitals are fixed, the solvent partners share the loss in their fixed capital ratio.

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 b)When the capitals are fluctuating the loss is distributed in the ratio of capital balances
standing in the accounts of solvent partners, after transferring accumulated profits / losses,
if any, but before adjusting the profit or loss on realization.

8.10 MODEL EXAMINATIONS QUESTIONS

I. Short Answer Questions:
1.When is a partners treated as insolvent ?
2.What difficulty arises when a partner becomes insolvent ?
3.What is Garner Vs Murray case ?
4.What is meant by insolvency of a firm ?
II.Long Answer Questions:
1.Explain the method of dealing with deficiency in the insolvent partner’s capital account.
2.Narrate the judgement of Garner Vs Murray with a suitable example.
3.Naveen, Nischal and Nirmal were partners sharing profits and losses in 3:2:1 ratio. On 31st
March, 2015 their Balance Sheet was as follows:
Liabilities Rs. Assets Rs.
Sundry creditors 3,500 Stock 4,750
Naveen’s loan 600 Cash at Bank 950
Reserve 1,200 Furniture 500
P&L a/c 600 Machinery 2,100

Naveen’s capital 2,000 Nirmal’s Capital 600

Drawings ;
Nischal’s capital 1,500 Naveen 400
Nischal’s 100
9,400 9,400
They decided to dissolve the firm. Stock and furniture realized Rs.4,650. Naveen took
over the machinery at Rs.1,800. There was another liability, on a bill discounted for Rs.60.
Expenses of dissolution amounted to Rs.60. Nirmal became insolvent and Rs.190 could be
recovered from his estate.
Give necessary journal entries and ledger accounts for dissolution.
(Answers: Loss on Realisation -Rs.1,020; Nirmal’s deficiency Rs.280)
4. Pavan, Poor and Raju were partners. Their balance sheet was as under as on 31st March,
2015.
Liabilities Rs. Assets Rs.
Capital Accounts:
Pavan 5,000 Building 2,000
Raju 3,000 Furniture 1,000
Current Accounts: Stock & Debtors 10,620
Pavan 200 Cash 500
Raju 100 Current Account

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Sundry creditors 6,000 Poor 980
Loan on mortgage of buildings 800
15,100 15,100
They share profits and losses in 6:3:5ratio. They decided to close down the firm. Buildings,
Furniture and Stock & Debtors realized Rs.1,200; Rs.400; and Rs.7,000 respectively. Expenses
amounted to Rs.400. Creditors were paid Rs.4,5000 in full satisfaction. Poor has become insolvent
and a final dividend of fifty paisa in a rupee was paid from his estate.
Give the necessary ledger accounts to record the dissolution.
(Answers: Loss on Realisation Rs.3,920; Paid to Pavan Rs.4,631; Paid to Raju Rs.2,759).
III OBJECTIVE TYPE QUESTIONS
A.Multiple Choice Questions
1. A partner is insolvent, when
a.his capital account shows debit balance
b.he has no capital in the firm
c.he has credit balance in account but cannot contribute fully
d.he incurred loss to his share
2. On insolvency of a partner
a.other partners have no concern
b.other partners bear such deficit
c.creditors forego their balances
d.firm does not hold responsibility
3. A solvent partner is one
a.who does not owe any amount to firm
b.who has debit balance in his capital account
c.who incurred heavy loss
d.who has credit balance in his capital account
4. Garner Vs Murray insists that
a.realisation loss shall not affect the capital ratio of solvent partners
b.realisation loss shall be contributed by solvent partners
c.realisation loss should not occur
d.insolvent partner shall be exempted from realization loss
5. Deficiency in the account of insolvent partner
a.is borne by creditors of the firm
b.is borne by ancestors of such partner
c.is borne by other solvent partners
d.is not borne by anyone.
(Answers: 1-c 2-b 3-a 4-a 5-c)
B. Fill in the Blanks
1. An insolvent partner’s capital account shows __________________balance.

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2. A partner whose capital account is not showing deficit is called ______________partner.
3. Realisation loss shall not affect _______________of the solvent partners.
4. Garner Vs Murray’s judgement is concerned with distribution of
__________________among solvent partners.
5. Creditors of the firm forego their amount only on insolvency of ____________________.
(Answers:1.Debit2.Solvent 3.Capital ratio 4.insolvent’s deficit 5.all the partners )
C. Match the following
1. Insolvency of firm ( ) a. does not owe any amount to firm
2.Garner Vs Murray ( ) b. all partners becoming insolvent
3.Solvent partner ( ) c. does not influence deficit bearing ratio
4.Creditors forego ( ) d. Contribution of realisation loss
5.Fixed capitals method ( ) e. on insolvency of firm
( Answers: 1-b 2-d 3-a 4-e 5-c)

8.11. GLOSSARY
Insolvent Firm : A firm which is not able to pay its liabilities and declared as insolvent.
Insolvent partner: A partner who is not able to pay his liabilities and declared as insolvent.
Solvent partner: Partner who is in a position to pay off his liabilities.

8.12 FURTHER READINGS

1.Gupta.R.L. & Radhaswamy.M : Advanced Accountancy, Sultan Chand & Sons, New Delhi.
2.Jain.S.P. & Narang. K.L : Advanced Accountancy, Kalyani publishers, New Delhi.
3.Maheshwari.S.N. : Advanced Accountancy, Vikas Publishing House, New Delhi. *

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 BLOCK IV
DEPARTMENTAL ACCOUNTS

Unit –9 : Departmental Accounts – I

Unit – 10 : Departmental Accounts –II

196
UNIT-9 : DEPARTMENTAL ACCOUNTS -1
Contents
9.0 Aims and Objectives
9.1 Introduction
9.2 Meaning of Departmental Accounts
9.3 Advantages of Departmental Accounts
9.4 Methods of maintaining Departmental Accounts
9.5 Allocation of Expenses
9.6 Allocation of Incomes
9.9 Inter-departmental Transfers – at Cost and at Profit
9.7 Inter Department Transfer
9.8. Inter Department Transfer Price
9.11 Check your progress: model answers
9.9 Inter-departmental Transfers – at Cost and at Profit
9.10 Summary
9.11 Check your progress: model answers
9.12 Model examination questions
9.13 Glossary
9.11 Further Readings

9.0 AIMS AND OBJECTIVES

Following are the main objectives of the departmental accounting:
 To know the financial position of each and every department separately, it is helpful to
make a comparison.
 Calculate commission of the managers department wise.
 Evaluate performance, planning, and control
This unit aims at discussing the meaning definition of departmental accounts and the methods of
maintaining such accounts.
 At the end of this unit, you should be able to
 Explain the meaning of departmental accounts
 List out the advantages of maintaining departmental accounts
 Identify the bases for the allocation of common expenses among various departments,
and
 Identify how transfer of goods takes place among various departments

9.1 INTRODUCTION
Departmental stores have many types of stores under a single roof, for example one
departmental store may have a cosmetic store, shoe store, stationery store, readymade
departmental store, grocery stores, medicines, and many more.
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 It is essential to know the profit and loss account of each departmental store at the end of
the accounting year. However, it can be done by maintaining the department wise Trading &
Profit and Loss account.
9.2 MEANING OF DEPARTMENTAL ACCOUNTS
A businessman deals with different types of goods and services. If the business is carried
on a small scale, he may sell the goods or provide the services in one shop itself. But if the
business is carried on a relatively bigger scale, he may divide his business into some broad
divisions known as department. Each department may deal in certain class of goods and services.
For example, one department may deal in cloth, another in medicines and another may be
dealing in shoes, etc. All the departments will be generally under one roof. Each department is
separately managed by the departmental manager. Activities of all departments are coordinated
and controlled by a General Manager.The General Manager lays down the general policy and
guidelines for the conduct of the departments. The departmental managers may carry on their
activities in the best interest of the departments, subject to the guidelines given by the general
manager. These types of departmental organizations are quite common in case of big retail stores.
When a business is split up in a number of departments , the accounts have to be kept in
such a manner as to throw light not only on the trading result of the business as a whole , but
also on the trading result of each department individually. Accounts maintained to serve this
purpose are known as departmental accounts. Departmental trading and profit and loss account
are prepared on columnar basis which will reveal the profit of each department separately and
also the combined results.

9.3 ADVANTAGES OF DEPARTMENTAL ACCOUNTS

Following are the advantages of departmental accounting:
1. It is helpful in evaluating the result of each department.
2. It helps to know the profitability of each department.
3. Investors and outsiders may know the detailed information.
4. It is helpful in making comparison of each expense (same department) of the different
accounting years and different expenses (other departments) of the same accounting
year.
5. It helps the management in formulating proper policies relating to expansion of business.
Some departments may be earning profits, while others may be incurring losses . Necessary
investigation may be conducted to know why some departments are running in loss ,
causes of inefficiency may be known ,and if possible corrective steps may be taken to put
them on proper lines . If it is not possible to reduce losses , overall profits can be increased
by closing down such departments . The departments showing profits may be given
more attention, and if possible, expanded to maximize profits. New profitable lines, which
can be added successfully along with the existing ones, can be thought of.
6. Departmental accounts can be used for rewarding departmental staff showing good results.
This will create a healthy spirit of competition among the departments to maintain efficiency
and each department will try to maximize its profits.

9.4 METHODS OF MAINTAINING DEPARTMENTAL

ACCOUNTS
There are two methods of keeping departmental accounts:
 Separate Set of Books for each department
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  Accounting in Columnar Books form
Separate Set of Books for each Department
Under this method of accounting, each department is treated as a separate unit and
separate set of books are maintained for each unit. Financial results of each unit are combined
at the end of accounting year to know the overall result of the store.
Due to high cost, this method of accounting is followed only by very big business houses
or where to do so is compulsory as per the law. Insurance business is one of the best examples,
where to follow this system is compulsory.
Accounting in Columnar Books Form
Small trading unit generally uses this system of accounting, where accounts of all
departments are maintained together by central accounts department in the columnar books
form. Under this method, sale, purchase, stock, expenses, etc. are maintained in a columnar
form.
It is necessary that to prepare a departmental Trading and Profit and Loss Account,
preparation of subsidiary books of accounts having different columns for the different department
is required. Purchase Book, Purchase Return Book, Sale Book, Sales return books etc. are the
examples of the subsidiary books. For example, purchase book will be ruled as follows:
Pro-forma Departmental Purchases Book

Date Particulars Inward L.F Total Dept – A Dept -B Dept-C

Invoice
No. Rs Rs Rs Rs

Pro-forma Departmental Purchases Book

Date Particulars Outward L.F Total Dept – A Dept-B Dept-C

Invoice
No. Rs Rs Rs Rs

A Trading account in columnar form is prepared to know the department wise gross
profit of the concern.
Function wise classification may also be done in a business unit like Production department,
Finance department, Purchase department, Sale department, etc.

9.5 ALLOCATION OF EXPENSES

Departmental trading account in columnar form can be easily prepared as information
regarding purchases, sales, opening and closing stocks and direct expenses can be easily
ascertained when the accounts are maintained in columnar form . Difficulty arises only in case
of indirect expenses which have to be distributed or allocated to different departments on an

199
equitable or reasonable basis. If that is not done properly, departmental results may be misleading
the following guidelines may be followed in allocation of expenses.
Expenses incurred specially for a particular department should be charged directly to that
department. For example, salary paid to the employees working in a department should be
charged to that department.
* Amount spent on lighting may be conveniently allocated according to meter reading, if
separate meters for each department are kept. They can also apportion on the basis of number
of points in each department. If the above information is not available, allocation may be made
on the basis of floor area occupied by each department.
Expenses having a bearing on sales, etc., should be apportioned on the basis of turnover
of each department. There appears to be some disagreement among accountants regarding the
turnover. Some accountants feel that turnover should include transfers to other departments,
while others feel that inter-departmental transfers should be ignored for this purpose. It is
better to give an explanatory note regarding which method is followed.
Carriage freight inward account expenses may be divided according to purchase of each
department.
Depreciation may be divided according to the value of assets employed in each department.
Repairs and renewal charges of the assets may be divided according to the value of the
assets used by each department.
Managerial salary should be divided according to the time spent by the manager in each
department.
Building repair, rents & taxes, building insurance expenses related to the building should
be divided according to the floor space occupied by each department.
Selling and distribution expenses should be divided according to the sales of each
department, such as freight outward, travelling expenses of sales personals, salary and commission
paid to salesmen, after sales services expenses, discount and bad debts, etc.
Insurance of plant & machinery allocated in each department is the basis of the value of
the asset.
Employee/worker insurance charges of a group insurance should be divided according to
the direct wage expenses of each department.
Power & fuel will be allocated according to the working hours and power of the machine
(i.e. Hours worked x Horse power).
Income tax should be charged to the various departments on the basis of net profit (before
tax) of each department.
There are certain expenses which cannot be allocated to various departments, in an
equitable or reasonable manner such as debenture interest, Director’s fees, Auditor’s fees,
General Manager’s Salary, office expenses, etc,. No useful purpose will be served by arbitrary
allocation. Profits earned by all departments may be brought down in one account, termed as
general profit and loss account and expenses which cannot be allocated reasonably to various
departments should be debited to that account. Similarly, non-departmental incomes or profits
such as interest on investments, profits on sale of assets, transfer fee may be credited to that
account and net profit or loss for the business as a whole is ascertained.

CHECK YOUR PROGRESS-1

What are the basis for allocation of the following expenses;
a) Rent, rates, taxes and repair to building.
200
 b) Selling expenses, Advertisement, discount allowed.
c) Canteen expenses, Medical expenses and Welfare expenses.
d) Discount received, carriage inwards.
e) Interest on Capital, interest on drawings.
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9.6 ALLOCATION OF INCOME

The procedure for allocating some of the common items of income may be outlined as
under:
Discount received and reserve for discount on creditors are related to credit purchases,
these income items are allocated on the basis of net credit purchases.
Commission earned/received on sales should be allocated on the basis of net sales.
Dividends received, transfers fees and the like are not allocated to departments but are
credited directly to the general profit and loss account.

9.7 INTER-DEPARTMENT TRANSFER

An inter-department analysis sheet is prepared at a regular interval such as weekly or
monthly basis to record all the inter-departmental transfers of goods and services. It is necessary,
as each department is working as a separate profit center. Transfer prices of such transactions
can be cost base, market price, or dual basis.
Following Journal entry will be passed at the end of that period (weekly or monthly)
Journal Entry

Receiving Department A/c Dr

To Supplying Department A/c

9.8 INTER-DEPARTMENT TRANSFER PRICE

There are three types of transfer prices
Cost based transfer price: Where the transfer price is based on standard, actual, or
total cost, or marginal cost is called cost based transfer price.
Market based transfer price: Where the goods are transferred at selling price from
one department to another is known as market based price. Therefore, unrealized profit on the
goods sold is debited from the selling department in the form of a stock reserve for both the
opening and the closing stock.
Dual pricing system: Under this system, the goods are transferred on the selling price
by the transferor department and booked at the cost price by the transferee department.

201
 9.9 INTER - DEPARTMENTAL TRANSFERS - AT COST
AND AT PROFET
Gencrally transfer of goods and services may take place from one department to another
department. Whi!e preparing the departmental trading and profit and loss account, the department
receiving the goods or services should be debited and the department providing such goods or
services should be credited with the value of goods or services supplied.
Transfer of goods and services from one department to another is usually at cost. However,
if such transfer is at a profit, the profit or loss of each department should be ascertained on the
basis of transfer price itself. If the goods supplied by one department to another at profit are
completely sold out by the transferee department, there is no unrealised profit because goods
purchased are sold to third party and the profit charged by the transferor department is realised.
However, if a part of the goods transferred by one department to other at profit remains unsold
then there is ‘unrealised profit’ from the business connern point of view. In this case, the
closing stock of the transferee department includes the profit charged by the selling department
which is not realised as it is not yet sold to third party. In such a case, a reserve is created to the
extent of loading or profit included in the closing stock by passing the following journal entry.
General Profit and Loss Account Dr
To Stock Reserve Account
(Being the profit charged by the transferor dept,
included in the closing stock of the transferee
department adjusted).
In case, the opening stock of the transferee department includes profit charged by the
transferor department, then stock reserve would have been created in the last year. This has to
be transferred to general profit and loss account in the current year by means of the following
entry.
Stock Reserve account Dr
To General Profit and Loss Account
(Being the adjustment of profit charged by the
transferor department included in the opening stock
of the transferree department).
Alternative, a single journal entry may be passed for the unrealised profit on the basis of
the difference between unrealised profit in the opening and the closing stock.

CHECK YOUR PROGRESS - 2

What is the adjustment entry to be passed when a part of the goods transferred from one
department to another department remained unsold at the end of the year?
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9.10 SUMMING UP
A business may be divided into a number of divisions known as ‘Departments’. Accounts
202
maintained in such a manner which will disclose not only the profits made by the business as a
whole, but also the trading results of each department separately are known as ‘Departmental
Accounts’.
A departmental trading and profit and loss account in columns form is prepared showing
the expenses incurred and income earned and net profit or loss made by each department
separately.
Expenses may be direct or indirect. Direct expenses are those expenses which are
specifically incurred for a particular department and hence allocated or charged to the con-
cerned department. Indirect expenses are those expenses which are incurred for the benefit of
all the departments and cannot be allocated precisely. Such expenses have to be apportioned or
charged to the various departments on an equiatable or reasonable manner. For example,
expenses connected with building may be allocated on the basis of the area occupied by each
department. Similarly, expenses having a bearing on sales can be allocated in the ratio of turnover.
Expenses which cannot be apportioned on an equitable basis will be charged to General Profit
& Loss Account.
Goods may be transferred or services may be rendered by one department to another. It
may be recorded at cost or at profit. Depatments receiving goods or services should be debited
and the department providing such goods or services should be credited. If the goods sold by
one department to another at profit and a part of such goods remain unsold with the transferee
department, then a reserve has to be created for unrealised profit included in stock.

9.11 CHECK YOUR PROGRESS : MODEL ANSWERS

1. (a) On the basis of floor area occupied.
(b) On the basis of turnover
(c) On the basis of number of employees
(d) On the basis of purchases in case of discount received and carriage inwords
and turnover in case of carriage outwards.
(e) There is no basis for the aiiocation of these excuses and as such they have to
be charged to General Prof t and Loss Account.
2. General Profit and Loss Account Dr.
To Stock Reserve A/c.

9. 12 MODEL EXAMINATION QUESTIONS

1. Answer the following questions in about 30 lines each.
I What do you mean by Departmental Accounts? Point out their Advantages.
2. Explain clearly the basis of allocation of expenses among the various departments.
II. Answer the following questions in about 15 lines each.
1. What is the accounting treatment of intcr-departmental transfers at (a) cost price
(b) profit.
2. How are the following items apportioned between different departments : (a) Rent : (b)
Advertising, (c) Discount received.
3. Write short notes on:
(a) Departmental Trading A/c.
203
 (b) Direct & Indirect Expenses.
4. What is the basis of apportionment of the following items:
(a) Depreciation, b) Lighting, and c) Income Tax.
5. How do you treat the following items in Departmental acounts?
a) Interest on investments: b) Interest on bank loan: c) Audit fee: and d) General
Manager s salary.

9.13 GLOSSARY
Departmental Accounts : The accounts prepared in columnar form to show the
trading results of each department individually and the
net result of the business as a whole are called
departmentral accounts.
Direct Expenses : The expenses which can be allocated to different
departments precisely are called direct expenses.
Indirect Expenses : The expenses which are incurred for the common
benefit of the business and cannot be conveniently
allocated to a particular department are called indirect
expenses.
Inter - departmental transfers : The goods transferred from one Department to another
department are known as Inter-d e p a r t m e n t a l
transfers.
Stock Reserve : When goods are transferred from one department to
other at profit, the closing stock of transferee may
include unrealised profit. Reserve created to provide
for such unrealised profit is called ‘Stock Reserve’.

9.14 FURTHER READINGS

1. Gupta. R L &
Radhaswamy. M : Advanced Accountancy,
Sultan Chand & Sons, New Delhi.
2. Shukla. M.C & : Advanced Accounts, S Chand &
Grewal. T.S Co. Ltd. New Delhi.
3. Jain. S.P. &Nargang. K.L : Advanced AccontancyKalvani Publishers,
New Delhi.

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UNIT - 10 : DEPARTMENTAL ACCOUNTS - II
Contents
10.0 Aims and Objectives
10.1 Introduction
10.2 Illustrations
10.3 Summing Up
10.4 Check Your Progress : Model Answers
10.5 Model Examination Questions
10.6 Further Readings

10.0 AIMS AND OBJECTIVES

The unit provides a practical perspective of the departmental accounts.
Having studied this unit, you should be able to:
* Prepare departmental Trading and Profit and Loss Account: and
* Prepare departmental General Profit and Loss Account and Balance Sheet.

10.1 INTRODUCTION
In unit 9 we have discussed the complete theoretical framework of departmental accounts.
In this unit, we will learn the actual preparation of departmental accounts with appropriate
illustrations.
The expenses that can be identified with departments on some basis are allocated and
others are debited to General Profit and Loss Account. Let us get into details.

10.2 ILLUSTRATIONS
Illustration-1
A firm has two departments. A and B. From the following particulars prepare Departmental
Trading and Profit and Loss Account and General Profit and Loss Account for the year ended
3 1st March. 2017.
Stock on 1-4-2016 : Rs
‘A’Department 25,000
‘B’ Department 30,000
Purchases:
‘A’ Department 1,00,000
‘B’ Department 1,50,000
Sales :
A Department 2,00,000
B Department 3,00,000
Carriage inwards 2,500
Salaries 20,000
Rent and Rates 9,000
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 Advertising 8,000
Insurance 2,000
General Expenses 6,000
Discount Allowed 4,000
Carriage outwards 5,000
Discount recieved 1,250
Audit fees 600
Interest on loan taken 7,000
Interest on Investments 800
The following further information is provided:
(i) Stock on 31 st March, 2017
‘A’ Department Rs. 10,000
‘B’ Department Rs. 20.000
(ii) Goods were transferred from Department A to Department B at cost Rs. 6.000.
(iii)Salaries and general expenses are to be allocated equally between the two departments.
(iv)Area occupied by the two departments is in the ratio of 1: 2
(v) Insurance premium is for a comprehensive policy, allocation being inconvienient.
Solution
Departmental Trading and Profit and Loss Account
Dr For the year ended 31st March, 2017. Cr.
Dept.A Dept.B Total Dept.A Dept.B Total
To opening Stock 25,000 30,000 55,000 By Sales 2,00,000 3,00,000 5,00,000
To Purchases 1,00,000 1,50,000 2,50,000 By Goods Supplied
To Goods Rccicvcd to B Department 6.000 — 6,000
from A Department — 6.000 6.000 By Closing Stock 10.000 20.000 30.000
To Carriage inwards 1,000 1,500 2,500
To Gross Profit cd 90,000 1,32,500 2,22,500
2,16,000 3,20,000 5,36,000 2,16,000 3,20,000 5,36,000
To Salaries 10,000 10,000 20,000 By Gross Protit b/d 90,000 1,32,500 2,22,500
To Kent and Rates 3,000 6,000 9,000 By Discount received 500 750 1,250
To Advertising 3,200 4,800 8,000
To General expenses 3,000 3,000 6,000
To Discountallowed 1,600 2,400 4,000
To Carriage outwards
To Net Profit (trans 2,000 3,000 5,000
ferred to general
profit and loss
account) 67,700 1.04,050 1,71,750
90,500 1,33,250 2,23,750 90,500 1,33,250 2,23,750

206
Solution
General Profit and Loss Account
Dr for the year ended 31st March 2017 Cr.
Rs. Rs
To insurance 2,000 By Net Profit (Transferred
To Audit fees 600 from Departmental
To Interest on loan 7,000 Profit and Loss Account) 1,71,750
To Net Profit (Transferred
to Capital Account) 1,62,950 By Interest on Investments 800
1,72,550 1,72,550

Explanatory Notes
i. Carriage inwards and discount received have been allocated in the ratio of purchases.
ii. Carriage outwards, advertising and discount allowed have been allocated in the ratio of
sales,
iii Rent and Rates are allocated in the ratio of area occupied.
iv. It is stated in the problem that insurance premium is for comprehensive policy and allocation
between the departments is inconvenient, hence it is charged to general profit and loss
account. Audit fees and interest on loan taken cannot be reasonably allocated between
the departments, hence charged to general profit and loss account.
v. Interest on investments is non-departmental income, hence credited to general profit and
loss account.
Illustration - 2
From the undermentioned information and instructions, prepare departmental trading
and profit and loss account m columnar form of the three departments.
Dept. A Dept. B Dept. C
Rs Rs Rs
Stock. 1 st April 2017 40,000 30,000 90,000
Stock. 31st March 2018 45,000 40,200 82,400
Purchases 2,05,300 2.40,600 3,40.600
Returns outwards 2,100 3,200 3,300
Sales 3,08,600 4,03,400 5,09,800
Return inwards 8,600 3,400 9,800
Carriage inwards 3,400 3,800 4,300
Wages 14,000 13,000 16,000

Goods were transferred from one department to another at cost price as follows:
1 From Department A to Department B Rs. 8.000 and to Department C Rs. 5,000
2 From Department B to Department A Rs. 3.000 and to Department C Rs. 4,000
3 From Department C to Department A Rs. 3.000 and to Department B Rs. 2,000

207
 Allocate equally printing and stationery Rs. 2,100 general charges Rs. 1,000
insurance Rs. 600 postage Rs. 300: and depreciation Rs. 3,000.
Apportion the following further expenditure as you think best :
Establishment Rs 10,.000 Bad debts Rs. 2,400, advertising Rs. 6,000 and income tax Rs.
67,000, rent and rates Rs 6,000 is to be split up in proportion to space occupied i.e.,
Department A-3. Department B-2, Department C-3, and other - 2.
Solution
Departmental Trading and Profit & Loss Account
Dr for the year ending 31st March, 2018 Cr
Dept. A’ Dept. B* Dept.’C’ Total Dept. ‘A’ Dept. B’ Dept. C’ Total
Rs. Rs. Rs. Rs. Rs. Rs Rs Rs.
To Opening Stock 40,000 30,000 90,000 1,60.000 By Sales (less
To Purchase (less returns) 3,00,000 4,00,000 5,00,000 12,00,000
returns) 2,03,200 2,37,400 3,37,300 7,77,900 By Goods supplied
To Goods Received to other
trout other departments 13,000 7,000 5,000 25,000
departments 6,000 10,000 9,000 25,000
To Carriage By Closing stock 45,000 40,200 82,400 1,67,600
in\s aids 3,400 3,800 4,300 11,500
To Wages 14,000 13,000 16,000 43,000
To Gross profit c/ 91,400 1,53,000 1,30,800 3,75,200
5,87,400 4.47,200 5,87,400 13,92,600 3,58,000 4,47,200 5,87,400 13,92,600
To Establishment 4,500 6,000 7,500 18,000 By OrossProfit b/d 91,400 1,53,000 1,30,800 3,75,200
To [hinting and
Stationery 700 700 700 2,100
To Genera! Charges 600 600 600 1,800
To insurance 200 200 200 600
To Postage 100 100 100 300
To Rent and Rate; 2,200 1,600 2,200 6,000
To Bad debts 600 800 1,000 2,400
To Advertising 1,500 2,000 2,500 6,000
To Depreciation 1,000 1,000 1,000 3,000
To Net Profit
(before tax) 80,000 1,40,000 1,15,000 3,35,000
91,400 1,53,000 1,30,800 3,75,200 91,400 1,53,000 1,30,800 3,75,200
To Income Tax 16,000 28,000 23,000 67,000 By Net Profit
To Net Profit 64,000 1,12,000 92,000 2,68,000 (helore tax) 80,000 1,40,000 1,15,000 3,35,000

80,000 1,40,000 1,15,000 3,35,000 80,000 1,40,000 1,15,000 3,35,000

Working Notes
Goods received and transferred to departments have been ascertained as follows :
Department-A Rs
Goods transferred to other departments
From Department B 3,000
From Department C 2,000
6,000

208
Goods transferred to other departments
To Department .B 8,000
To Department C 5,000
13,000
Department - B
Goods received from other departments
From Department A 8,000
From Department C 2,000
10,000
Goods transferred to other departments
To Department A 3,000
To Department C 4,000
7,000
Department - C
Goods received from other departments
From Department A 5,000
From Department B 4,000
9,000
Goods received from other departments
From Department A 3,000
From Department B 2,000
5,000
(2) Establishment, Bad Bebts and Advertising have been divided in the Ratio of net sales i.e.,
3:4:5
(3) Rent and Rates have been divided in the ratio of space occupied. Rent and Rates of other
space have been divided equally.
(4) Income tax has been divided in the ratio of Net Profit before tax.
Illustration-3
From the following trial balance, prepare departmental trading and profit and loss account,
general profit and loss account for the year ended 3 1st March, 2018 and Batance Sheet as on
that date.
Debit balances Rs. Credit balances Rs.
Opening Stock: Capital 50,000
Dept. A 30,000 Sundry Creditors 33,500
Dept. B 20,000 Loan from Bank 10,000
Carriage Inwards: Sales.
Dept. A 2,000 Dept. A 1,50,000
Dept. B 4,000 Dept. B 3,00,000
Purchases: Interest on Investments 500
Dept. A 1,00,000
209
 Dept B 2,00,000
Salaries:
Dept. A 15,000
Dept. B 12,000
General Salaries 4,000
Advertising 2,000
Rent, Rates and Taxes 3,000
Carriage outwards 9,000
Furniture & Fittings 6,000 -
Plant and Machinery 1,00.000
Sundry Debtors 19,000
Drawings 5,000
Investments 10,000
Cash at Bank 2,000
Interest on Bank Loan 1,000
5,44,000 5,44,000
The following information is also provided:
i) Closing stock - Dept. A Rs. 25,000: Dept. B Rs 40,000.
ii) Area occupied by two departments in the ratio of 1 : 2
iii) General salaries are to be divided in the ratio of 5 : 3
iv) Interest outstanding on Bank Loan Rs. 200.
v) Depreciate Plant and Machinery and Furniture at 10%. Depreciation of Plant
and Machinery should be in the ration of 3 : 1 and of furniture in the
ratio of space occupied.
Departmental Trading and Profit and Loss Account
Dr for the year ended 31 st March, 2018 Cr.
Dept.A Dept.B Total Dept.A Dept.B Total
To Opening Stock 30,000 20,000 50,000 By Sales 1,50,000 3,00,000 4,50,000
To Purchases 1,00,000 2,00,000 3,00,000 By Closing Stock 25,000 40,000 65,000
To Carriage towards 2,000 4,000 6,000
To Gross Protit c/d. 43,000 1,16,000 1,59,000
1,75,000 3,40,000 5,15,000 1,75,000 3,40,000 5,15,000
To Salaries 15,000 12,000 27,000 By Gross Prolit b’d 43,000 1,16,000 1,59,000
To Genera) Sataries 2,500 1,500 4,000
To Rent and Rates 1,000 2,000 3,000
To Advertising 667 1,333 2,000
To Carriage outwards 3,000 6,000 9,000
To Depreciation:
Furniture & Fittings 200 400 600
Plant & Machinery 7,500 2,500 10,000
To Net Profit (transferrec

210
to general profit
and loss account) 13.133 90.267 1.03.400
43,000 1,16,000 1,59.000 43.000 1.16.000 1.59.000

General Profit and Loss Account

Rs. Rs.
To Interest on Loan 1,000 By Net prolit b/d
Add. outstanding 200 1,200 (from departmental protit
and loss account) 1,03,400
By Interest on Investments 500
To Net Prolit (transferred
to Capital account) 1,02,700
1,03,900 1,03,900

Balance Sheet
as at 31st March, 2018.
Liabilities Rs Assets Rs.
Capital Plant & Machinery 1,00,000
Opening Balancc 50,000 Less: Depn. at 10% 10,000 90,000
Add Net Profit 1,02,700
1,52,700 Furniture and Fittings 6,000
Less: Drawings 5,000
Loan from Bank 1,47,700 Less: Depn. at 10% 600 5,400
Add: outstanding 10,000
interest 200 Investments 10,000
Ctosing Stock 65,000
10,200 Sundry Debtors 19,000
Sundry Creditors 33,500 Cash at Bank 2,000
1,91, 400 1,91,400

Illustration-4
Messrs. A, B and C carried on business as cloth merchants at Hyderabad. The
partners A, B and C were incharge of the Departments, I II and III respectively. The partners
are entitied to remuneration equal to 50% of profits (before charging their remuneration) of the
respective departments of which they arc incharge and the balance of profits are to be divided
among them in the ratio of 1: 2 : 2 respectively . On the basis of the following information
prepare Departmcnta) trading and. profit and loss account and General Profit and Loss account
of the business.
Opening Stock: Rs. Sates: Rs.
Department -I 10,000 Department - I 1,00,000

211
Department -II 20,000 Department - II 1,50,000
Department - III 30,000 Department -III 2,00,000
Purchases: Closing Stock:
Department - I 60,000 Department - I 15,000
Department - II 70,000 Department - II 12,000
Department - III 90,000 Department - III 10,000
Sataries 10,000 Advertising 9,000
Rent 6,000 Discount Allowed 1,800
Discount Received 1,000 Sundry Expenses 3,600
Depreciation 6,000
Goods having a transfer price of Rs. 2,400 and Rs.6,000 were transferred from
DepartmentI and II respectively to department III. The inter-departmental transfers are made
at 12% of the cost.
The opening stock of department does not include any goods transferred from other
departments, but closing stock includes Rs. 2.400 valued at their inter-departmental transfer
price.
The various items are to be apportioned amongst the three departments in the following
proportion.
Dept. I Dept. II Dept. III
Salaries 2 1 2
Rent 3 2 1
Depreciation 1 1 1
Discount received 2 2 1

All other expenses on the basis of sales (exctuding inter-department transfers) of each
department.
Sotution
Departmentat Trading and Profit & Loss Account
Dept. 1 Dept. II Dept.III Total Dept. I Dept.II Dept.III Total
Rs. Rs. Rs. Rs Rs. Rs. Rs. Rs.
To Opening Stock 10,000 20,000 30,000 60,000 By Sales 1,00,000 1,50,000 2,00,000 4,50,000
To Purchases 60,000 70,000 90,000 2,20,000
To Goods received
from other By Goods transferred
departments — — 8,400 8,400 to dept. HI 2,400 6,000 - 8,400
To Gross profit 47,400 78,000 81,600 2,07,000 By Closing Stock 15,000 12,000 10,000 37.000
1,17,400 1,68,000 2,10,000 4,95,400 1,17,400 1,68,000 2,10.000 4.95.400
To Salaries 4,000 2,000 4,000 10,000 By Gross Profit b/d 47,400 78,000 81,600 2,07,000
To Rent 3,000 2,000 1,000 6,000
To Depreciation 2,000 2,000 2,000 6,000 By Discount Received. 400 400 200 1.000
To Advertising 2,000 3,000 4,000 9,000
To Discount 400 600 800 1,800

212
To Sundry Expenses 800 1,200 1,600 3,600
To Net profit (trans-
terred to General
protit and
liss acount) 35.600 67,600 68,400 1,71,600
47,800 78,400 8 1,800 2,08,000 47,800 78,400 81,800 2,08,000

General Profit and Loss Account

Dr for the year ended Cr
Rs Rs
To Stock Reserve 400 By Net Profit

 20 
100  2400  (Transferred from

Departmental Profit
Loss A/c) 1,71,600
To Remuneration to partners
(being 50% of profit of the
department of which they
arc inchargc)
A 17,800
B 33,800
C 34,200
85,800
To Net profit transferred
to capita) Accounts:
A-1/3 17,080
B-2/5 34,160
C- 3/5 34,160
85,400
1,71,600 1,71,600

CHECK YOUR PROGRESS -1

A firm has three departments viz. A.B. and C and it wanted to prepare Departmental
Trading Profit and Loss Account for the year ending 31st March. 2018. The normal rate of
Gross Profit is 30%, 25% respectively for departments A.B and C on sales.
Indirect Expenses are charged on the basis of Sales.
The following are the figures relating to the period ending with 31st March, 2018.
Stock 1-4-2017 10,000 15,000 20,000
Purchases 25,000 30,000 40,000

213
Sales 40,000 50,000 60,000
Direct Expenses 7,000 8,000 10,000
The total indirect expenses are Rs.15,000.
Prepare the Departmental Trading, Profit & Loss A/c.
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10. 3 SUMMING UP
In this unit illustrations are given on the preparation of Departmental Trading. Profit and
Loss Account, General Profit and Loss Account and Balance Sheet.

10.4 CHECK YOUR PROGRESS : MODEL ANSWERS

Departmental Trading and Profit & Loss Account
for the year ended 31-3-2018
Dept. A’ Dept. B* Dept.’C’ Total Dept. ‘A’ Dept. B’ Dept. C’ Total

Rs. Rs. Rs. Rs. Rs. Rs Rs Rs.

To Stock 1 0,00 0 1 5,00 0 2 0,00 0 4 5,00 0 By sales 4 0,00 0 5 0,00 0 6 0,00 0 1,50,000
To Purchases 2 5,00 0 3 0,00 0 4 0,00 0 9 5,00 0 By Closing Stock 14,000 1 5,50 0 2 2,00 0 5 1,50 0
To Direct (Bal. fig.)
Epenses 7,000 8,000 1 0,00 0 2 5,00 0
To G.P. c.d. 1 2,00 0 1 2,50 0 1 2,00 0 3 6,50 0
5 4,00 0 6 5,50 0 8 2,00 0 2,01,5 00 5 4,00 0 6 5,50 0 8 2,00 0 2,01,5 00
To Indirect
Expenses 4,000 5,000 6,000 1 5,00 0 ByG.P b/d. 1 2,00 0 1 2,30 0 1 2.00 0 3 6,50 0
To Net Profit 8,000 7,500 6,000 2 1,50 0
1 2,00 0 1 2,50 0 1 2,00 0 3 6,50 0 1 2,00 0 1 2,50 0 1 2,00 0 3 6,50 0

10. 5 MODEL EXAMINATION QUESTIONS

Problems
1. On the basis of the following information ascertain the value of goods received by
and supplied to each department. Goods were transferred from:
Department X to Department Y Rs. 379: to Department Z Rs. 6,543.
Department Y to Department X Rs. 7,654: to Department Z Rs. 2,345.
Department Z to Department X Rs 4,567; to Department Y Rs. 5,678
2. How do you apportion the following among Departments A. B and C.
Rs. Rs
Rent and Rates 4,800 Discount Received 500
Discount Allowed 800: Advertising 1,200

214
Lighting 140: Bad debts 900
Following further information is furnished
Dept. A Dept B Dept C
Sales 50,000 30,000 20,000
Purchases 30,000 13,000 5,000
No. of light points 4 2 1
Area occupied by each Department 5 3 2
Other space 2
3. Goods having a transfer price of Rs. 40.000 were transferred from department X to
Department Y ‘ The inter-dcpartmenta! transfers are made at 12.5% of cost. The opening
stock of department X does not include any goods transferred from other departments
but closing stock includes Rs. 5,000 valued at the inter-departmental price. How do you
treat this in the books of business?
4. From the following Trial Balance and adjoined information, prepare departmental Trading
and, Profit and Loss Account for the year ended 31st March, 2018 and Balance Sheet as on that
date.
Trial Balance as on 31st March 2018
Debit Credit
Stock on 1-4-2017 Rs. Rs.
Department A 30,000
Department B 25,000
Purchases :
Department A 70,000
Department B: 40,000
Wages
Department A 18,000
Department B 12,000
Sales:
Department A 1,50,000
Department B 1,00,000
Capital 50,000
Carriage inwards:
Department A 1,000
Department B 2,000
Salaries 20,000
Travelling expenses 2,000
Rent and Taxes 8,000
Insurance 2,400
Advertisement 6,000
General Expenses 600
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Cash at Bank 5,000
Bills receivable 4,000
Bills payable 8,000
Sundry Creditors 30,000
General Reserve 20,000
Plant and Machinery 50,000
Furniture and Fittings 10,000
Sundry Debtors 20,300
Buddings 30,000
Printmg and Stationery 500
Discount Allowed 1,200
3,58,000 3,58,000
Additional information:
(a) Stock on 31st March 2018 Department A Rs. 15.000: Department B Rs. 10.000.
(b)Wages outstanding: Department A Rs. 800 : Department B Rs.500.
(c) Salaries outstanding Rs.3,000
(d) Taxes prepaid Rs.500
(e) Write off bad debts Rs. 300 and make a provision for doubtful debts at 5% on sundry
debtors.
(f) Depreciate Plant and Machinery at 10% and Building at 5%.
All unallocated expenses are to be apportioned on the basis of turnover.
(Ans:
Dept. A Dept B
Rs Rs.
Gross Profit 45.200 30,500
Net Profit 14,600 10,100
Balance sheet total Rs 1,37,000)
5. From the following trial balance prepare departmental Trading and. Profit and loos Account
for the Year ended 31st Match. 2018 and Balance Sheet as at that date:
Trial Balance
Debit Credit
Rs Rs
Stock on 1-4-2017
Department A 35,000
Department B 30,000
Purchases :
Department A 80,000
Department B 60,000

216
Sales:
Department A 1,30,000
Department B 90,000
Wages:
Department A 15,000
Department B 6,000
Rent, taxes, and insurance 12,000
Sundry expenses 3,000
Salaries 6,000
Lighting 2,100
Discount allowed 1,100
Discount received 280
Avertising 4,000
Carriage inwards 1,800
Furniture 8,000
Plant and Machinery 50,000
Sundry Debtors 8,000
Sundry Creditors 20,720
Capital 1,00,000
Drawings 5,400
Cash in Hand 1,600
Cash at Bank 12,000
3,41,000 3,41,000
The following information is also provided :
(a) Transfer of goods from Dept. A to Dept. B at cost Rs. 800.
(b) The items Rent, taxes and insurance, sundry expenses, lighting, salaries and carriage inwards
to be apportioned 2/3 to Department A and 1/3 to Department B
(c) Advertinng to be apportioned equally-
(d) Discount allowed and received are apportioned on the basis of departmental sales and
purchases (excludingtransfers) respectively.
(e) Depreciation at 10% per annum on Furniture and Fittings, on Plant and Machinery. This
is to be charged 3/4 to Department A and 1/4 to Department B.
(f) Stock as on 31-3-2018
Department A Rs. 20,000; Department B Rs. 15,000.
Dept. A Dept B
Rs Rs.
Gross Profit 19,600 7,600
Net Loss 2,640 3,880
Balance sheet total Rs. 1,08,800)

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6.From the information given below, prepare departmental Trading and, profit and loss account
and ascertain the true profit tor the year ended 31st, March 2018.
Dept. A Dept B
Rs Rs
Stock on 1st April 2017 50,000 10,000
Purchases from outside 2.50,000 40,000
Wages 15.000 10,000
Goods received from Dept. A — 50,000
Stock on 31 st March 2018 60,000 20.000
Sales to outsiders 3,60,000 80,000
Goods supplied to Dept. B 50,000 —
The entire closing stock of Dept. B represents - Goods from Department A which transfers
them at 25% above cost. Administrative expenses amount to Rs. 10,000 which are to be allocated
between departments A and B in the ratio of 3:2 respectively.
(Ans: Dept. A - Gross Profit Rs. 1,55,000
Net Profit Rs. 1,49,000
Dept. B Gross Loss Rs 10.000
Net Loss Rs. 14,000
Net profit of the business Rs. 1,31,000
Stock reserve Rs. 4,000)
10.6 FURTHER READINGS
1 Gupta. RL &Radhaswaniy. MAdvanced Accountancy,Sultan Chand & Sons, New Delhi.
2. Shukla. M.C&G renal. T.SAdvanced Accountancy,S. Chand & Co. Ltd. New Delhi.
3. Jain. S.P &Narang. K.LAdvanced Accountancy, %Kalyani Publishers, New Delhi

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 BLOCK V
BRANCH ACCOUNTS

Unit – 11 : Branch Accounts – An Introduction

Unit – 12 : Accounts of Dependent Branches (Cash and Credit Sales)

Unit – 13 : Accounts of Independent Branches

219
220
UNIT -11 : BRANCH ACCOUNTS AN INTRODUCTION
Contents
11.0 Aims and Objectives
11.1 Introduction
11.2 Objects of Branch Accounting
11.3 Classification of Branches
11.4 Dependent Branches
11.5 System of Accounting
11.6 Accounting Treatment
11.7 Summary
11.8 Check Your Progress : Model Answers
11.9 Model Examination Questions
11.10 Glossary
11.11 Further Readings

11.0 AIMS AND OBJECTIVES

The aim of this unit is to acquaint you with the objectives of branch accounting, classification
of branches and the system of accounts to be followed by the branches.
On completion of this unit, you should be able to :
* explain the objectives of branch accounting;
* describe the classification of branches; and
* pass journal entries and prepare Branch Account.

11.1 INTRODUCTION
In order to have wider market for their products. Business houses may split their business
into several divisions. In case the various divisions are located in different parts of the same city
or in different towns, they are known as branches. It is necessary to know the profit or loss of
each branch so that the efficiency of the branch can be known and necessary steps can be
taken to remedy the state of affairs in case any branch is not giving desired results. Therefore,
it is necessary to maintain the accounts in such a manner that the profit or loss made at each
branch is easily known.

11.2 OBJECTIVES OF BRANCH ACCOUNTING

The main objective of maintaining branch accounts is dependent on the nature of business
and the type and needs of particular branch. However, the following can be said as the objectives
of keeping the branch accounts :
(i) To ascertain the profit or loss of each branch separately.
(ii) To evaluate the performance of each branch and to plan for expansion of the
business.
(iii) To know the cash and goods requirements of different branches from time to time.
(iv) To make concrete suggestions for improvement of the working of the branches.

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11.3 CLASSIFICATION OF BRANCHES
The branches may be broadly classified into different types, from the accounting point of
view.
They are :
(i) Branches which do not keep full system of accounting;
(ii) Branches which keep full system of accounting;
The branches are also classified as (i) Dependent branches and (ii) Independent branches,
from the point of view of recording transactions in the books of account. Sometimes they are
classified as Home branches and Foreign branches However, we will be discussing about the
Home branches only as Foreign branches are out of the scope of the syllabus prescribed. The
Home branches may either keep full set of books when they are known as Independent branches
or may not keep full set of books when they may be called dependent branches. One point is to
be noted carefully i.e., all the branches, whether they are dependent or independent, will have to
organize and work according to the instructions and directions issued by the parent organisation
i.e . Head office, therefore, the classification of branches into dependent or independent branches
is only from the point of view of recording of transactions in the books of accounts.

11. 4 DEPENDENT BRANCHES

These dependent branches may be further divided into following three types :
(I) Branches which receive goods from Head office and sell only for cash,
(II) Branches which receive goods from Head office and sell both for cash as well as credit
(III) Branches similar to the above but the goods are supplied by the Head office at setting
price i.e., at a higher price than the cost price or invoice price.
The salient features of these branches may be stated as follows.
(i) These branches are required to sell only those goods which are supplied by the Head
office and they are not generally allowed to make outside purchases in the open market.
(ii) Goods are supplied by Head office to the branches either at cost price or at Invoice price
which is higher than the cost price.
(iii) All expenses of the branch like salaries, rent etc., are directly paid by the Head office
through cheques.
(iv) Petty expenses of the branch are usually paid by the branch. The branch manager is
provided with the petty cash from Head office and it is usually maintained on imprest
system.
(v) The branch is usually expected to sell the goods for cash only but sometimes it may be
authorised to sell on credit basis also.
(vi) All cash received by the branch on account of cash sales or from its debtors is daily
remitted to Head office. The Head office account is usually opened in a local bank where
all cash collections are daily deposited by the branch.
(vii) These branches only keep some memorandum books such as stock register but do not
maintain complete set of books as mentioned earlier. The branch maintains a Debtors
Ledger, when it is authorised to sell goods on credit, in order to find out the amount due
for Debtors. The stock register is kept to provide information relating to the movement of
goods and balance of stock on hand.
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11.5 SYSTEM OF ACCOUNTING
As these branches do not keep complete set of books, the Head office maintains the
accouts relating to the branches. The system of accounting to be adopted at Head office depends
on the size of the branch and the degree of control to be exercised by the Head office. The
Head office may keep branch accounts by any one of the following methods:
Debtors System
This system is followed in case of branches which are small in size. Under the system,
the Head office opens a separate account for each branch to record al) the transactions relating
to the branches. The branch account opened in the Head offie books under the system is in the
nature of a nominal account and it is this account winch uitimately reveals profit or loss at the
branch. The system of finding out profit by preparing one account for one branch is known as
Debtors System.
Final account System
Under the system, head office opens a branch trading and profit and ioss account to find
out of profit or ioss at the branch. The Head office may aiso maintain a branch account, which
is in the nature of personal account as different from branch account opened under Debtors
system which is in the nature of a nominal account.
Stock and Debtors System
Under this system the Head office maintains a number of accounts for keeping a record
of branch transactions in place of one branch account such as branch stock account, branch
debtors account, branch assets account, branch expenses account and branch adjustment account
to find out profit or loss at the branch.

CHECK YOUR PROGRESS -1

(i) What are the various objectives of Branch Accounting?
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(ii) What are the various types of Branch Accounting.
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11.6 ACCOUNTING TREATMENT

The Accounting treatment under the different systems is given below :
Debtors System
The Head office opens a separate account for each branch called “... Branch account”
to find out profit or loss at the Branch. This account is in the nature of a nominal account. It is
debited with whatever the branch has at the beginning of the accounting year i.e., the opening

223
stock, debtors, petty cash etc., any other assets. It is also debited with whatever has been sent
by the Head Office, to the branch during the year i.e., cash sent for meetihg expenses on for
purchases made locally. It is credited with whatever the Head office receives and cash sales,
cash collected from the debtors, goods returned by the branch etc. It is also credited with
whatever the branch has at the end of the accounting year i .e. the closing stock, debtors, pletty
cash and any other asset etc.
The accounting entries in the books of Head Office for different branch transactions are
as follows:
(i) For goods supplied by the Head office to the branch
Branch Account Dr. with the value of goods
To Goods sent to branch account sent to branch

(ii) For goods returned by the branch to the Head Office

Goods sent to branch account Dr. with the value of goods
To branch account returned by branch
(iv) For expenses at the branch met by Head office
Branch account Dr with the amount of
To Bank account branch cheque of draft sent to
the branch
(v) For remittances received from the branch
Bank account Dr. with the amount of
To branch account cheque of draff recei-
ved from the branch
(vi) For dosing branches of assets at the branch
Branch assets account Dr. with the closing value
To branch account of assets suh as stock,
debtors petty cash
etc., after depreciation
in case of fixed assets.
(vii) For liabilities at the branch at the end of the accounting year.
Branch account
To branch liabilities account Dr with the closing balan-
ce of any liabilities
(invidually) such as
outstanding expenses
etc.
(a) For transferring assets at begninning of the year
Branch account Dr with the value of each asset
To Branch assets account

224
(b) For transferring liabilities at begninning of the year
Branch liabilities accouunt Dr. with the value of each liability
To Branch account
At this stage, the branch account, when balanced w ill reveal profit or loss at the branch. If the
credit side is more it is profit and if the debit side is more it is loss.
(viii) For transferring profit or loss at the branch
(a) For profit
Branch account Dr.
To General profit and loss account
(b) For loss
General profit and loss account Dr.
To Branch account
(ix) For transfer of balance in goods sent to branch account
Goods sent to branch account Dr. with the balance in goods
To purchases / trading account sent to Branch Account at
the end of accounting year
Note : The balance in goods sent ot branch account is transferred to purchases account in case
of trading concerns, and trading account in case of manufacturing concerns.
The branch account prepared in the Head office books will appear as under:
Dr Branch Account Cr.
Rs. Rs.
To Balance b/fd (opening By Balance b/fd(opening liabilities
balance of asset) if any such as outstanding
Stock xxx expenses) xxx
Debtors xxx By Bank account:
Petty cash xxx Cash sales xxx
Furniture xxx Cash received from
Prepaid Insurance etc. xxx debtor xxx xxx
To goods sent to branch account xxx
By goods sent to branch
To Bank account (expenses account (goods returned by
paid by the Head office) branch)
To Balance C/d (closing liabilities,
if any, suah as outstanding
expenses) xxx xxx
To General profit and loss By Balance C/d (closing balance
account (profit) xxx of assets)
Stock xxx
Debtors xxx
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 Petty cash xxx
Furniture (written down value) xxx
Prepaid insurance etc. xxx
By General profit and loss
account (loss) xxx
xxx xxx

Important points to be noted:

The following important points should be rememebred while recording transactions in
the branch account:
(1) Credit sales, bad debts etc
The Head Ofice need not make any entry in the branch account m respect of credit sales
made at the branch, return of goods by the branch debtors to the branch, discount allowed by
the branch to its debtors, bad debts written off by branch, shortage or surplus of stock at the
branch. However, these may have to be taken into account for ascertaning closing balance of
debtors at the branch
(2) Depreciation of Fixed assets
Depreciation on branch fixed assets is not shown in the branch account. However the
branch account is debited with the value of fixed assets at the beginning of the accouting year
and credited w ith the value of fixed assets at the end of the accounting year. Thus the differenc
between the two values, i .e.. depreciation, is charged automatically. For example if a branch is
having furniture worth Rs. 1.000 at the beginning of the accounting year and it is decided to
charge depreciation at 10% p.a., the branch account is debited with Rs. 1,000 at the beginning
of the accounting year and credited with Rs. 900 at the end of the accounting year. Thus
1000  10
depreciation of Rs. 100 is automatically changed to the branch.
100
(3) Petty expenses
Petty expenses incurred by the branch out of its petty cash is not shown in the branch
account But the brannch account is debited with the opening balance of petty cash at the
branch and the amount sent by the Head office to the branch for petty expenses. The branch
account, at the end of the accounting year, is credited with the closing balance of petty cash at
the branch, thus the petty explenses incurred by the branch are automatically charged to the
branch account
It is clear from the following example:
Petty cash balance at the branch at the beginning of the accounting year Rs.50
Petty cash sent by Head office to the branch during the accounting year Rs. 100
Petty expenses incurred by the branch during the accounting year 125
Then the branch account will be debited with Rs. 150 (opening balance Rs. 50+ and cash
sent by Head office Rs. 100) and it w ill be credited with Rs. 25 being the petty cash balance a
end of the accounting year (Rs. 150-125). Thus, the branch account is charged with Rs. 125
being petty expenses during the year.
(4) Purchase of fixed assets by the branch
The branch may purhease its fixed assets. If the assets arc purchased for cash, the
remittance of cash to the Head office is reduced to that extent and if they arc purchased on
226
credit at amount is outstanding till the end of the accounting year, liability is created by debiting
the branch account. However, the assets so purchased are credited to branch account at the
end of the year.
(5) Sale of fixed asset by the branch
The branch may also sell its fixed asset. Any amount realised on sale is remmitted to
Head office. In case, it is sold on credit, the amount due is shown as debtors at the end of the
accounting year. The asset is shown in the branch account, at the end of the accounting year, at
its reduced value which is arrived at as follows:
Opening balance of the asset + purchase of fixed asset - sale of the fixed asset. No
separate entry is made for profit or loss on sale of fixed asset, since it is automatically taken
care of when both opening and closing balances - and the amount realised on sale are recorded
in the branch account.
(6) Amount received from insurance Company
In case insurance company admits claim and pays any amount in respect of stock or a
property damaged at the branch, the amount so received by the branch will be remitted to Head
office and the remittances from the branch to Head office will increase. In case the claim
admitted by Insurance Company is outstanding till the end of the accounting year, the amount of
claim w ill be shown as an asset at the branch by crediting the branch account.
Thus, it is important to note that under this sytem of preparing the branch account, items
like credit sates, bad debts, discounts allowed to customers,depreciation on fixed assets, loss or
gain on sale of fixed asset do not figure in branch account at all. The profit or loss is ascertained
by a comparisonof the branch assets and liabilities at the beginning and end of the accounting
year and having regard to remittances, goods sent to the branch and remittances received from
the branch (where the branch setts goods only for cash).

CHECK YOUR PROGRESS - 2

1. What is the accouunting treatment with regard to purchases and sale of fixed assets by
the branch under debtors system’?
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2. How do y ou treat amount received from insurance company when the stock or any
other property damaged at the branch?
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Illustration -1
The Andhra Textiles Ltd., opened a branch at Hyderabad on 1st April 2016 from the
following particutars, prepare all the accounts for 2016-17 and branch account for 2017-18 in
the books of Head office. Also give journal entries for 2017-18.

227
 2016-17 2017-18
Rs. Rs.
Goods sent to Hyderabad branch 90,000 1,70,000
Cash sent to branch for:
Rent 12,000 12,000
Salaries 9,600 13,600
Other expenses 4,000 6,000
Cash received from the branch 1,40,000 2,20,000
Stock on 31 st March 14,000 52,000
Petty cash in hand on 31st March 240 520

Sotution
In the books of Head office
Dr. Hyderabad Branch Account Cr.
Rs. Rs.
2016 2016
April 01 To goods sent to April 1 By bank account 1,40,000
to branch account 90,000 to
2017 2017
Mar. 31 To Sank account Mar.31 By balncc c/d
“ Rent 12,000 Branc stock 14,000
Salaries 9,600 Branch petty
Other cash 240
expenses 4,000 14,240
25, 600
“ To General profit
and loss account 38,640
154,240 1,54,240

Dr. Goods sent to Branch Account Cr.

Rs. Rs.
2017 2016
Mar.31 To Trading accoutnt 90,000 Apr.01
to By Hyderabad
2017 branch account 90,000
Mar. 31

228
 Branch Stock Account
Dr. Cr.
2017 Rs. 2017 Rs.
Mar 31 To Hyderabad branch 14,000 Mar.31 By Balance c\d 14,000
account

2017
Apr. 01 To Balance b\d 14,000

Dr. Branch Petty Cash Account Cr.

2017 Rs. 2017 Rs.

Mar 31 To Hyderabad branch 240 Mar.31 By Balance c\d 240
account
2017
Apr. 01 To Balance b\d 240

Journal Entries for 2017-18

Date Particulars L.F. Dr. Cr.
Rs. Rs.
2017
Apr. 01 Hyderabad branch account Dr 14,240
To Branch stock account 14,000
To Branch petty cash account 240
(Being the opening balances of
stock and petty cash at the branch)
2017 Hyderabad branch account Dr. 1,70,000
Apr 1 To goods sent to branch account 1,70,000
2018 (Being the value of goods sent to
Mar 31 branch during the year)
Hyderabad branch account Dr 31,600
,, To Bank account 31,600
,, (Being the cash sent to branch:
Rent Rs. 12,000: salaries Rs. 13,600
and for other expenses Rs. 6,000) Dr.
,, Bank account Dr 2,20,000
To Hyderabad branch account 2,20,000
,, (Being the remittances received
from the branch)

229
,, Branch stock account Dr 52,000
Branch petty cash account Dr 520
,, To Hyderabad branch account 52,520
(Being the closing balances of stock Dr
and petty cash at the branch)
,, Hyderabad branch account Dr 56,680
,, To General profit and loss account 56,680
(Being the profit at the branch
transferred to general profit and loss a/c.)
Goods sent to Branch a/c. Dr 1,70,000
,, To Trading account 1,70,000
(Being goods sent to branch
,, tansferred to trading a/c.)

Hyderabad Branch Account

Dr. Cr.
2017 Rs. 2017 Rs.
Apr.01 To Balance b\f Apr. 01 By Bank account 2,20,000
Br. Stock 14,000 to
Br. Petty cash 240 2018
2017 To Goods sent to Mar.31 By Balance c\d
Apr. 01 branch account 1,70,000 Br stock 52,000
to To Bank account Br. Petty cash 520
2018 Rent 12,000
Mar.31 Salaries 13,600
Other
expenses 6,000
31,600
2018
Mar. 31 To General profit
and loss account
(profit) 56,680
2,72,520 2,72,520

Illustration - 2
(Where the branch sells goods (or cash as well as on credit)
From the following particulars relating to Tirupathi Br. for the year ending 31st March,2018)
prepare branch account in the Head office books : Rs
Stock at the branch on 1-4-2017 15,000
Debtors at the branch on 1-4-2017 32,000
Petty cash at the branch on 1-4-2017 400
Goods sent to branch during the year 2017-2018 2,50,000
Remittances from branch during 2017-2018

230
 For cash sales 63,000
Received from debtors 2,12,000 2,75,000
Credit sales during the year 2017-2018 2,25,000

Cheques sent to branch during 2017-2018

For rent and taxes 1,600
For salaries 9,000
For petty cash 1,000 11,600
Discount allowed to customers 200
Goods returned by customers 400
Goods returned by branch 2,000
Stock at tiic branch on 3 1-3-2018 23,000
Petty cash at the branch on 3 l-3-2018 200
Solution
Books of Head Office
Tirupathi Branch A/c
Dr. Cr.
2017 Rs. 2017 Rs.
Apr. 01 To Balance b/fd Apr. 01 By bank account
Br. Stock 15,000 to Cash
Br. Debtors 32,000 2018
Br. petty Mar. 31 Sales 63,000
cash 400 Cash recd 2,12000
debtors 2, 75,000
2017
Apr. 01 To Goods sent to ” By Goods sent to
to branch a/c 2,50,000 branch a/c”
2018 (returns) 2,000
Mar. 31 To Bank account ” By Balance c/d
Rent & taxes 1,600 Br. Stock 23,000
Salaries 9,000 Br. Debtors 44,400
Petty cash 1,000 Br. Petty 200
11,600
2018
Mar. 31 To general profit
and loss accounts 35,600
3,44,600 3,44,600
Note : As the closing balance of debtors is not given in the question it is to be ascertained by
preparing memorandum branch debtors account.

231
 Dr. Memorandum Branch Debtors Account Cr.
2017 Rs. 2017 Rs.
Apr. 01 To Balance b/fd 32,000 Apr. 01 By Cash 2,12,000
2017 to
Apr. 01 To Sales (Credit) 2,25,000 2018 By Discounts
to Mar.31 allowed 200
2018 ,, By returns Inwards 400
Mar.31 2018
Mar. 31 By Balance c/d (bal. fig) 44,400
2,57,000 2,57,000

Illustration - 3
Thyfollolling particulars relate to Vijayawada Branch Account for the year ended 31
March. 2018 prepare branch account in the books of Head Office.
Rs.
Stock at branch on 1-4-2017 20,000
Branch debtors on 1-4-2017 8,000
Branch debtors on 31-3-2018 9,800
Petty cash at branch on 1-4-2017 1,000
Furniture at branch on l-4-2017 4,000
Prepaid fire insurance on 1 -4-2017 300
Salaries outstanding at branch on 1-4-2017 200
Goods sent to branch during year 2017-18 1,60,000
Cash sales during the year 2017-18 1,80,000
Credit sales during the year 2017-18 80,000
Cash received from debtors 70,000
Discount allowed to debtors 200
Cash sent to branch for expenses :
Rent 4,000
Salaries 4,800
Petty cash 2,000
Insurance upto June 30, 2018 1,200
12,000
Goods returned by the branch 2,000
Goods returned by the dEtars de 4,000
Stock at branch in March. 31,2018 10,000
Petty expenses paid by the branch 1,700
Depreciation on furniture at 10% p.a. Goods costing Rs 2,400 were destroyed on account of
tire and a sum of Rs. 2,000 was received from the Insurance Company.

232
Solution
Dr. Vijayawada Branch Account Cr.

2017 Rs. 2017 Rs.

Apr. 01 To Balance b/fd: Apr. 01 By balance b/fd:
Branch stock 20,000 Salaries
Branch debtors 8.000 outstanding 200
Brach Petty cash 1,000 2017
Branch furniture 4,000 Apr.1 By Bank account:
to cash sales 1,80,000
2018 cash
Prepaid received
Insurance 300 Mar. 31 from
debtors 70,000
2017
Apr.01 To Goods sent to Cash paid
to branch a/c. 1,60,000 by debtors
2018 to Head
Mar. 31 To Bank account: Office 4,000
Rent 4.000 Cash received
Salaries 4,800 from
Petty Inc Co 2,000
cash 2,000 2,56,000
Insurance 1200 “ By Goods sent to
12,000 to branch a/c
(goods returned
by branch) 2,000
2018 To General profit 2018
Mar. 31 and loss a/c Mar. 31 By baiance b/d:
(profit) 77,900 Branch stock 10,000
Branch debtors 9,800
Branch petty
cash 1,300
Branch furniture 3.600
Prepaid
Insurance 300
2,83,200 2,83,200

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Working notes
(i) Calculation of petty cash balance at the end :
Rs.
Petty cash balance at the beginning 1,000
Petty cash sent by Head Office 2,000
Total petty cash with the branch 3,000
Less : Petty expenses paid by the branch 1,700
Petty cash balance at the end 1,300
ii) Calculation of closing value of furniture :
Value of furniture at the beginning 4,000
Less Depreciation at 10 % p.a 400
Closing value of furniture 3600
iii) Prepre Branch debtors account and find out cash directly remitted to Head Office
By Branch debtors t.e. Rs. 4,000.

11.7 SUMMARY
A business house may split its business into several divisions and locate them in different
places which are known as branches. The objects of branch accounting are to ascertain the
profit or loss of each and to take suitable measure for improving the performance of the branches.
The banches are broadly classified into (i) Branches which don’t keep full system of accounting
often called Dependent branches and, (ii) Branches which keep full system of accounting known
as Independent branches.
The features of dependent branches are that they are required to sell only those goods
which are supplied by Head office, all the expenses of the branch are paid by the Head Office
and all the cash collected by the branch is remitted to Head Office. The Head office maintains
the accounts relating to the branch following either Debtors system or Final Accounts system
or Stock and Debtors system.
Under Debtors system, the Head office opens a separate account for each branch to find
out profit or loss at the branch. This account is debited with opening balance of stock, debtors,
cash etc., and whatever has been sent by the Head office. It is credited with whatever the
branch has sent to Head Office and the closing balances of stock, debtors etc. The account is
balanced at the end of the year and profit or loss is ascertained. If the credits exceed debits it is
profit and if the debits exceed credits it is loss which is transferred to General Profit and Loss
Account.

11.8 CHECK YOUR PROGRESS : MODEL ANSWERS

1 (i) The following arc the objectives of branch accounting :
(a) to find out the profit or loss of each and even branch separately.
(b) to evaluate the performance of each branch,
(c) to ascertain the requirements of each branch in respect of cash and goods, and
(d) to know the financial position of each branch as at a particular date.
(ii) Branches can be broadly classified into two categories for the purpose of recording
transactions in the books of account.

234
 - Branches which do not keep full system of accounting.
- Branches which keep full system of accounting.
The other classificiation is that.
- Dependent branches, and
Independent branches
Again the independent branches can also be divided into
- Home branches, and
- Foreign branches.
2. (i) If the assets are purchased for cash by the branch, the remittance of cash to the Head
office is reduced to the extent and if they are purchased on credit and the amount is
outstanding till the end of the accounting year, liability is created by debiting the branch
account, if any branch sells any fixed asset for cash the amount realised on sale is
remitted to Head Office. In case, it is sold on credit, the amount due is shown as
debtors and the asset is shown in the branch account at the end of accounting year
(ii) In case the stock or property is insured, if the insurance company admits claim and
pays any amount in respect of the asset damaged at the branch, the amount so received
by the branch will be remitted to Head office, in case the claim admitted by insurance
company is outstanding till the end of accounting year, the amount of claim will be
shown as an asset at the branch by crediting the branch account.

11.9 MODEL EXAMINATION QUESTIONS

I. Answer the following questions in about 30 lines each.
1. Give a brief explanation of the accounting treatment under debtors system.
II. Answer the following questions in about 15 lines each.
1. What arc branch accounts?
2. How do you classify the branches?
3. What are the objectives of Branch accounting
4 What is stock and debtors system ?
5. What are the features of dependent branches ?
Problems
1. A manufacturing company of Hyderabad opens branch at Madras in 2001. From the
following particuiars relating to the year 2017 -18 Prepare Madras branch account and
other nccessary accounts in the books of Head Office.
Rs.
Stock 1st April 2017 30,000
Goods sent to Madras branch 3,40,000
Rent 30,000
Salaries 48,000
Other expenses 20,000
98,000
Cash received from the branch 6,00,000
Stock at 31st March 2018 48,000
235
 Petty cash in hand on 31st March 2018 3,000
(Ans. Profit-Rs. 1,83,000)
2. From the following particulars relating to Hyderabad Branch for the year ending 31st
March 2018 prepare Hyderabad Branch account in the Head Office books :
Rs.
stock at branch on 1-4-2017 89,000
Branch debtors on 1-4-2017 47,000
Petty cash at branch on 1-4-2017 200
Goods sent to branch during the year 2,84,000
Cash sales during the year 1,58,000
Credit sales during the year 4,04,000
Goods returned by branch 8,000
Cash received from debtors 3,79,000
Cash sent to branch for expenses 90,000
Stock at branch on 31-3-2018 54,000
Branch debtors on 31-3-2018 72,000
Petty cash at branch on 31-3-2018 300
(Ans : Profit - Rs. 1,61,100
3. From the following details relating to Bombay Branch, prepare Branch Account to ascertain
profit in the books of Head Office
Rs.
Stock an 1st April.2017 20,000
Stock on 31 st March 2018 16,000
Debtors on 31st March.2018 20,000
Goods sent to branch during 2017-2018 70,000
Goods returned by branch 8,000
Goods returned by customers to branch 1,500
Cash sales 43,000
Credit sales 60,000
Cash remitted by Branch to Head Office 1,13,000
Allowances to customers 400
Bad debts 700
Expenses paid by Head Office:
Salaries and Wages 28,000
Rent from 1st April 2017, 30 April 2018 13,000
Insurance upto 30 June 2018 18,000

59,000

(Ans : Loss Rs. 19,100 Opening balane of debtors Rs. 32,600)

236
11.10 GLOSSARY
Branch : Division of a business located at a different place.
Debtors System : System to find out profit by preparing one account
for one branch.
Depedent Branch : Branch whch do not keep futi sy stem of account-
ing.
Final Account System : System to ascertain proht by preparing ttna) ac-
counts of the branch.
11.11 FURTHER READINGS
1. Gupta R. Land : Advanced Accountancy, Sultan Chand & Sons
Radhaswamy, M. New Delhi.
2. Jain, S.P. and Narang,K.L. : Advanced Accountancy, Kalyani Publishers,new
Delhi
3. Maheswari. S.N. : Advanced Accoutancy, Vikas Publising House,New
Delhi.

237
 UNIT - 12 : ACCOUNTS OF DEPENDENT BRANCHES
(CASH AND CREDIT SALES)
Contents
12.0 Aims and Objectives
12.1 Introduction
:
12.2 Adjustment Entries
12.3 Accounts to be opened in the books of Head office.
12.4 Specimen Journal Entries
12.5 Summary
12.6 Check your progress Model Answers
12.7 Model Examination Questions
12.8 Glossary
12.9 Further Readings

12.0 AIMS AND OBJECTIVES

This unit is designed to explain you the accounting treatment when goods are sent to the
branch at a higher price than the cost price or invoice price.
On completion of this unit, you should be able to :
* give adjustment entries relating to loading on the invoice price; and
* Prepare Branch Account when the goods are sent at a higher price than the cost price.
* Explain the different accounts that are opened in the Head office books
* Pass Journal ecntries to the transactions of branch under stock & debetor system.

12.1 INTRODUCTION
The Head office while sending goods to the branch may mark them at a higher price than
the cost price by adding certain percentage of profit, which price is generally termed as invoice
price or selling price. When such a practice is followed the branch generally is required to sell
the goods at such invoice price only. The following may be said as the objectives in sending the
goods at such a price.
(i) Not to disclose the cost price of the goods and actual profits made by the branch to
the people who manage the branch,
(ii) To have an effective control on the stock of goods at the branch and also to know
from time to time the position of stock at branch.
The branch account maintained by Head office will be on the lines as already explained
earlier, but the entries relating to goods sent to branch, goods returned by branch to head office,
opening and closing stocks at the branch will be made at that higher price. In order to find out
the true profit or loss at the branch, certain adjustment entries, in addition to the usual Entries
relating to loading (the difference between invoice price and cost price) in the invoice price will
have to be made at the end of the accounting period, in the books of head office.

238
12.2 ADJUSTMENT ENTRIES
The follow ing are the adjustment entries :
(i) For adjustment of loading in the invoice price of the goods sent to branch less goods
returned by the branch to the Head Office :
Goods sent to branch account Dr. (with the excess of invoice
To Branch account price and tiie price of goods sent to
branch less returned to head office)
(ii) For adjustment of loading in the invoice price of closing stock of goods at the branch :
Branch account Dr. (with the excess of invoice
T o Stock reserve account price over the cost price
of closing stock of goods at the branch).
(iii) To adjust the loading in (he invoice price of the opening stock,, the following adjustment
entry is required :
Stock reserve account Dr. (with the excess o^invoice price
To Branch account over the cost price t)f opening stock of
goods at the branch).
For ascertaining the excess price (loading) the follow ing procedure may be adopted: For
e.g., the goods are invoiced to the branch at cost plus 20%. if the cost price is Rs. 100. loading
is Rs. 20 and therefore the invoice price is Rs. 120. The ratio of loading to invoice price is 20/
120 or 1/6 th. The adjustment for the excess price will be made on the basis of l/6th of the
invoice price. When the goods are invoiced at cost plus 25%. the loading in the invoice price will
be 1/5th. Similarly when the goods are invoiced at cost plus 10%: the loading will be 1/11th.
If the invoice price is given as to yield a certain percentage or profit on sale, the loading
in the invoice price is to be calculated as follows : For c.g.. the goods are invoiced at 20% on
profit on sale, if the sale price is Rs. 100. it will give a profit of Rs. 20 and this is the loading in
the invoice price. The ratio of loading to invoice price is 20/100 or l/5th. When the goods are
invoiced at a profit of 25% on sale, the loading m the invoice price is 1/4 th.

CHECK YOUR PROGRESS -1

(a) What are the objectives in sending the goods to the branch at a higher price than the cost
price ?
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Illustration -I
Mahcsh & Co., has a branch at Bangalore. Goods are invoiced to the branch at cost plus
25%. The branch is required to deposit cash every day in the Head office account in the bank.
All expenses arc paid by cheque by the Head office except petty cash expenses w hich
arc paid by the branch manager. From the following particulars relating to 2017-2018 prepare
branch account in the Head office books :
Rs.
Stock on 1st April. 2017 5,000
Stock on 31 st March 2018 6,000
Sundry debtors on 1st April 2017 2,800
Sundry debtors on 31 st March 2018 3,600
239
 Cash remitted to Head Office 30,000
Furniture purchased by the branch 2.400
Goods invoiced from Head office 36.400
Expenses paid by the Head office 3,280
Cash sales during the year 21,600
Credit sales during the year 14,000
Petty expenses paid by the branch 240
Solution
In the Books of Head Office Bangalore Branch Account
2017 Rs. 2017 Rs.
Apr.01 To Balance b/fd Apr. 01 By bank account 30,000
Branch Stock 5,000 2018 (remittances)
Branch debtors 2,800 Mar. 31
2017 2018
Apr.01 To Goods sent to Mar 31 By Goods sent to branch
to branch account 36,400 (loading in the invoice
2018 price) 7,280
Mar.31 To Bank expenses 3,280
2018
Mar. 31 To Stock reserve 1,200 ,, By Stock reserve (opening) 1,000
(closing)
,, To General profit & 3,760 Branch Stock 6,000
loss a/c (profit) Branch debtors 3,600
Branch cash 2,160
Branch furniture 2,400
52,400 52,400
Working Notes
In this problem, cash received from debtors and cash balance at the end is not given.
Therefore, these are to be ascertained by preparing Memorandum Branch debtors account and
branch cash account.
(i) For calculation of cash received from debtors
Dr Memorandum Branch Debtors Account Cr
2017 Rs. 2017 Rs.
Apr. 01 To Balance b/fd 2,800 Apr. 01 By Cash 13,200
2017 to (bal.fig)
Apr. 01 To Sale (Cr) 14,000 2018
to Mar.31
2018 ,,
Mar.31 2018
Mar. 31 By Balance c/d 3,600
16,800 16,800

240
Dr Branch Cash Account Cr
2017 Rs. 2017 Rs.
Apr. 01 To Sale (cash) 21,600 Apr. 01 By Remittance 30,000
to to to Head office 2,400
Apr. 01 To Debtors 13,200 2018 By furniture
to Mar.31
2018 2018
Mar.31 Mar. 31 By Petty express 240
By Balance c/d 2,160
(bal. fig)
34,800 34,800

Illustration - 2
Mayur Scales Ltd., has a branch at Warangal Goods are invoiced to the branch at 20%
profit on sale. Branch has been instructed to send all cash daily to the Head office. All expenses
are paid by the Head Office except petty expenses which are met by the Branch Manager,
Prepare branch account in the books of Head Office from the particulars given below :
Rs
Stock on 1st April 2017 (invoice price) 30,000
Stock on 31 st March 2018(invoice price) 28,000
Sundry debtors on 1st April,2017 18,000
Cash in hand on 1 st April.2017 800
Office furniture on 1st April 2017 2,400
Goods invoiced from Head office(invoice price) 1,60,000
Goods returned to Head office 2,000
Goods received from debtors 960
Cash received from debtors 60,000
Cash sales 1,00,000
Credit saics 60,000
Discount allowed to debtors 60
Expenses paid by the Head Office
Rent 2,400
Salaries 4,800
Stationery and printing 600
Petty expenses paid by the branch manger 600
Depreciation is to be provided on office furniture at 10% p.a. 560

241
Solution . In the books of Mayur Sales Ltd.,
Dr. Warangal Branch Account Cr
2017 Rs. 2017 Rs.
Apr.01 To Opening Balances : Apr.01 By Goods sent to
Stock 30,000 to branch a/c. 2,000
Debtors 18,000 2018 (returns)
Cash 800 Mar.31 By Bank:
Office funature 2,400 Cash sales 1,00,000

2017 To goods sent to By Cash received from

Apr.01 Branch a/c 1,60,000 Debtors 60,000
to To bank (expenses) : 2018 By goods sent to
Mar.31 Rent 2,400 Mar.31 branch a/c. (loading) 31,600
Salaries 4,800 By stock reserve 6,000
Stationery & (Opening)
printing 600 7,800
2018 “ By closing balances:
Mar.31 To Stock reserve (closing 5,600 Stock 28,000
“ To General profit and “ Debtors 16,980
loss a/c (profit) 22,380 Cash
(800-560) 240
Office furniture
(2,400 - 240) 2,160
2,46,980 2,46,980

Working Notes
1) At the closing balance of debtors is not given, it is to be ascertained by preparing memo-
randum branch debtors account.
Dr Memorandum Branch Debtors Account Cr.
2017 Rs. 2017 Rs.
Apr. 01 To Balance b/fd 18,000 Apr. 01 By Cash received 60,000
to To Sale (Cr) 60,000 to By Discount allowed 60
2018 2018
Mar. 31 Mar.31 By Return 960
2018
Mar. 31 By Balance c/d 16,980
(balancing.fig)
78,000 78,000

242
(2) Cash balance at the end of year is ascertained as follows :
Rs
Cash balance at the beginning of the year , 800
Less : Petty expenses paid by branch manager 560
240
(3) Balance of furniture at the end of the year is ascertained as follows:
Office furniture at the beginning of the year 2,400
Less: Depreciation at 10% p. a. 240
Balance at the end of the year 2,160
(4) Loading in the invoice value of goods sent to branch is ascertained after deducting
returns to the Head Office i.e., 1,60,000 - 2,000 - 1,58,000 x 1/5 = Rs. 31.600
Loading in the invoice value of opening stock 30,000 x 1/5 = Rs 6.000
Loading in the invoice value of closing stock 28,000 x 1/5 - Rs. 5,600
As the goods are invoiced to the branch at 20% profit on sale, the loading in the invoice
price is 1/5 th.
Final Account System
Under this system, the profit or loss of a dependent branch is ascertained by preparing
branch trading and profit and loss account but not by preparing branch account as was the case
This account is prepared at cost of goods sent to branch account but not in the invoice price.
The Head office may also maintain a branch account under this system and the account
to be maintained will be in the nature of personal account as different from the branch maintained
under debtors system which is the nature of nominal account. The branch account maintained
this system usually shows debit balance representing the net assets at the branch i.e.. Assets -
Liabilities at the branch at the specified date.
Illustration - 3
A Hyderabad Company has a branch at Bombay to which goods are charged at cost plus
25% The Bombay branch keeps its own sales ledger and remits all cash received to the Head
office everyday . All expenses are paid from Head office. The transactions of the branch for
the year 2017-18 were as follows :
Rs Rs
Opening balances : Cheques sent to branch for :
Stock (invoice price) 20,000
Debtors 400 Rent 1,200
Petty cash 200 Wages 400
Cash sales 5,400 Salaries 1,800
Goods sent to branch 42,000 Closing balances:
Collections from debtors 40,000 Stock (invoice price) 25,000
Goods returned to H O. 500 Debtors 4,000
Bad debts 500 Petty cash 50
Allowance to customers 400
Returns from customers 900

243
 Prepare Branch trading and profit and loss account and branch account for the year
ending 31st March 2018
Solution
Books of Head Office
Bombay Branch Trading and Profit and Loss Account
Dr for the year ending 31st March, 2018 Cr
Rs. Rs.
To Opening stock By Sales :
(20.000-4.000) 16.000 Cash 5,400
To Goods sent to branch Credit 45,400
less returns Less: Returns 900 44,500
(42,000-500) 41,500 49,900
Less : loading 8,300
33,200 By Closing stock
To Gross profit C/d 20,700 (25,000-5.000) 20,000
69,900 69,900
To Salaries 1,800 By Gross profit b/d - 20,700
To Wages 400
To Rent 1,200
To Bad debts 500
To Allowance to customers 400
To Pettv expenses
(200-50) 150
To Net profit (transferred
to general profit and loss a/c.) 16,250
20,700 20,700

Dr Bombay Branch Account (Personal Account) Cr

2017 Rs 2017 Rs.
Apl.01 To Opening balances Apr. 01 By Goods sent to
to to branch (Returns)
Stock 16,000 2018 (500-100) 400
Debtors 400 March By Bank
Petty Cash 200 ““ (remittances) 45,400
2017 To goods sent to By Balance c/d 24,050
Apl 01 to branch
2018 (42.000-8,400) 33,600 Stock 20,000
Mar.31 Debtors 4000
“ To Bank (expenses) 3,400 Petty Cash 50

244
2018
Mar.31 To General profit
and Loss A/c 16.250
69,850 69,850

Note
(1) The balance shown by branch account Rs. 24,050 is equa! to net asset at the branch i.e.,
branch stock at cost price (25,000-5,000) Rs. 20.000+Debtors Rs.4,000 Petty cash Rs.
50.
(2) Credit sates at the branch can be ascertained by preparing Memorandum Branch debtors
account.
Dr Memorandum Branch Debtors Account Cr
2017 Rs 2017 Rs.
Apl.01 To Balances b/fd 400 Apr.01to By cash 40,000
2018 2018
Apl 01 To Sales (Cr.) Mar.31 By Bad debts 500
(bal.fig) 45,400 By Allowances to
customers 400
By Returns from
customers 900
2018 By Balance c/d 4,000
Mar.31
45,800 45,800

Under debtors system discussed m eartier units, the Head office opens in its books only
branch account for ascertaining profit or loss at the branch. There is another method known as
stock and debtors system to find out the profit or loss at the branch, under which different
accounts are opened in the Head office books. This method is used where the branch manager
is required to sell the goods only at the selling price fixed by the Head office.

12.3 ACCOUNTS TO BE OPENED IN THE BOOKS OF

HEAD OFFICE
The various accounts opened under this system and brief description of these accounts is given
below :
(i) Branch stock account: This account is like goods account and helps the Head office to
have an effective control over the stock at the branch. This account reveals the shortage
or surplus of stock at branch and it is always prepared at invoice price.
(ii) Branch debtors account : This account is maintained to keep a record of all transac-
tions relating to branch debtors and to ascertain the balance of debtors at the end of the
accounting year.
(iii) Branch cash account : This account is maintained to record all cash transactions of the
branch. It will be particularly helpful in those cases where the branch is not required to

245
 send immediately all collections of cash but to remit money at regular intervals. This
account helps the Head office to have a control over branch cash.
(iv) Branch Expense Account : This account is prepared to know the total of all expenses
incurred at the branch, it is debited with depreciation on fixed assets, bad debts, discounts
to debtors, salaries, rent etc. The account is finally transferred to branch adjust-ment
account and closed.
(v) Branch Fixed Assets Account : A separate account for each of the fixed assets at the
branch is opened and all transactions relating to that particular asset are recorded therein.
(vi) Goods sent to branch account : This account is prepared to ascertain the net value of
goods sent to branch. The adjustment relating to loading in the value of goods sent to
branch is also made in this account and the balance (net) is transferred to either trading
account or purchases account.
(vii) Branch Adjustment Account: This account is just like trading and profit and loss account.
All loadings in the goods sent to the branch, opening and closing stocks at the branch and
shortage and surplus of stock etc., are recorded in this account and gross profit is
ascertained. The gross profit or gross loss (if any) is carried down to the second part of
the account and branch expenses and all other expenses and gains are recorded in this
account. The balance of this account is either net profit or net loss and is transferred to
general profit and loss account The second part of this account is also known as branch
profit and loss account when it is separately prepared.

12.4 SPECIMEN JOURNAL ENTRIES

Specimen journal entries under this system are given below :
(1) For goods sent td branch:
Branch Stock account Dr. (With the invoice value of
To Goods sent to branch account goods sent to branch)
(2) For goods returned by branch:
Goods sent to branch a/c Dr. (With the invoice value of
To branch stock account goods returned by branch)
(3) For sales made by branch :
(a) For cash sales remitted to Head office.
Cash Account Dr.
To branch stock account
(b) For credit sales :
Branch debtors account Dr.
To branch stock account.
(4) For goods returned by branch debtors to the branch (at invoice price)
Branch stock account Dr
To Branch debtors account
(5) For goods returned by branch debtors directly to the Head office (at invoice price)
Goods sent to branch account Dr.
To branch debtors account

246
(6) For cash received from debtors :
Cash account Dr
To branch debtors account
(7) For bad debts, discounts allowed, allowances given etc
Branch expenses account Dr
To branch debtors account
(8) For expense at the branch paid in cash :
Branch expenses account Dr
To cash account
(9) For abnormal loss, wastage or shortage of stock
Branch adjustment account Dr (loading)
Branch (P& L) a/c. Dr. (cost)
To branch stock account
Note
(i) For surplus of stock at branch, a reverse entry is passed. .
(ii) Any amount received from the Insurance company for abnormal loss of stock
(wheninsured) will be debited to cash account and credited to branch adjustment account.
(10) For transferring and closing branch expenses account:
Branch adjustment account Dr
To branch expenses account
(11) For adjustment of loading m opening stock :
Stock reserv e account Dr
To branch adjustment account
(12) For adjustment of loading in closing stock :
Branch adjustment account Dr
To stock reserve account
(13) For adjustment of loading in the invoice value of goods sent to branch (net):
Goods sent to branch account Dr.
To Branch adjustment account
(14) For transfer of Net Profit to general profit and loss account:
Branch adjustment account Dr.
To general profit and loss account
Note : If there is loss at the branch, the entry is reversed.
(15) For dosing the goods sent to branch account:
Goods sent to branch account Dr.
To Trading /purchases account
Illustration - 1
Ajay Sales Ltd . has a branch at Hyderabad. Goods are invoiced to the branch at cost
ptus 25%. Branch remits ah cash received to Head office and ah expenses are met by the Head

247
office. From the fohowing particutars. give journal entries and prepare necessary accounts in
the books of head office under stock and debtor s system to show the profit or loss earned by
the branches for the year ended 3 ist March.2018
Rs. Rs.
Stock on 1 st April (2017)(Invoicc price) 10,000
Debtors on st April 1 2017 8,000
Goods invoiced to the branch 60,000
Sales at Branch :
Cash sales 26,000
Credit sales 35,000
Cash collected from debtors 32,000
Goods returned by branch to Head office 1,500
Goods returned by debtors to branch 1,000
Surplus in stock 1,500
Discount allowed to debtors 200
Branch expenses paid by Head office
Rent 3,000
Salaries 2,400
Other expenses 1,200
6.600
Solution
Books of Ajay Sales Ltd., (H.O)
Journal
Date particulars LF Dr Cr.
Rs Rs
2017
Apr.01 Branch stock account Dr 60,000
to To goods sent to branch account 60,000
2018 (Being goods sent to branchat invoice price)
Mar 31 Cash account Dr 26,000
To Branch stock account 26,000
,, (Being cash sales at Branch)
Branch debtors accounts Dr. 35,000
To Branch stock account 35,000
(Being credit sales at the branch)
“ Cash account Dr 32,000
To Branch debtors account 32,000
(Being cash collected from branch debtors)
“ Goods sent to branch account Dr 1,500

248
 To Branch stock account 1,500
(Being goods returned by branchat invoice price)
“ Branch stock account Dr 1,000
To Branch debtors account 1,000
(Being goods returned by branch debtorsto branch)
Branch stock, account Dr. 1,500
To branch adjustment account 1,500
(Bemg surplus in branch stock)
“ Branch expenses account Dr 200
To Branch debtors account 200
(Being discounts allowed to branch debtors)
“ Branch expenses account Dr 6,600
To Cash account 6,600
(Being branch expenses, Rent Rs. 3,000,
salaries Rs. 2,400 and other expensesRs. 1.200 paid)
2018
March Stock reserve account Dr. 2,000
31. To branch adjustment account 2,000
(Being the toading m the invoice value
of opening stock at branch)
“ Goods sent to branch account Dr 11,700
To branch adjustment account 11,700
(Being the loading in the invoice value of net
amount of goods sent to branch i .c, goods
sent minus returns to Head office)
“ Branch adjustment account Dr 2,000
To stock reserve account 2,000
(Being the loading in the invoice value of
closing stock at the branch)
“ Branch adjustment account Dr 6,800
To branch expenses account 6,800
(Being the balance in branch expenses account
transferred to branch adjustment account)
Goods sent to branch account Dr 46,800
To Trading account 46,800
(Being goods sent to branch (net)
transferred to trading account)
“ Branch adjustment account Dr. 6,400
To genera! profit and loss a/c 6.400
249
 (Being the net profit of the branch transferred
to general profit and loss account)
LEDGER
Dr. Branch Stock Account Cr.

2017 Rs. 2017 Rs.

Apr. 01 To Balance b/fd 10,000 Apr. 01 By Cash account 26,000
2017 2018 (cash sales)
Apr.1 To Goods sent to Mar. 31
to barncch account 60,000 By Branch debtors
2018 a/c. (credit sales) 35,000
Mar.31 To Branch debtors By Goods sent to
2018 account (returns) 1,000 2018 branch a/c 1,500
Mar.31 To Branch adjustment Mar.31 By Balance c/d 10,000
account (surplus) 1,500
72,500 72,500
2018
Apr.01 To Balance b/d 10,000

Dr. Goods sent to Branch Account Cr.

2017 Rs. 2017 Rs.

Apr.01 To Branch stock Apr.01 By Branch stock 60,000
to account (returns) 1,500 to account
2018 2018
Mar.31 To Branch adjustment
account loading 11,700
2018
Mar.31 To Trading account 46,800
60,000 60,000

Dr. Branch Debtors Account Cr.

2017 Rs. 2017 Rs.
Apr. 01 To Balance b/fd 8,000 Apr. 01 By Cash account 32,000
2017 2018
Apr.01 To Branch stock 35,000 Mar. 31 By Branch stock
to account (credit ,, account (returns) 1,000
2018 sales ,, By Branch expenses
account (diccounts)
2018 allowed 200
Mar.31 By Balance c/d 9,800
43,000 43,000

250
Dr. Branch Expenses Account Cr.
2017 Rs. 2018 Rs.
Apr.01 To Branch debtors account Mar.31 By Branch adjustment
to (discounts allowed) 200 account 6,800
2018
Mar.31 To Cash account 6,600
(expenses)
6,800 6,800
Dr. Branch Adjustment Account Cr.

2018 Rs. 2018 Rs

Mar.31 To Stock reserve account Mar.31 By Branch stock account
(loading in closing (loading in surplus) 300
stock 2,000 ,, By Stock reserve
2018 ,, account (loading in
Mar.31 To Gross profit c/d 12,000 opening stock) 2,000
By Goods sent to branch a/c
. (loading in goods sent to
branch, net i.e.58,000x1/5 11,700
14,000 14,000
2018 2018
Mar.31 To Branch expenses 6,800 Mar.31 By Gross ptofit b/d 12,000
,, To Net profit transferred By Branch stock 1,200
To general profit & (Surplus at cost)
loss a/c 6,400
13,200 13,200

Dr. Stock Reserve Account Cr.

2017 Rs. 2018 Rs.
Mar.31 To Branch adjustment Mar.31 By Balance b/d 2,000
account 2,000
2018 2018
Mar.31 To Balance c/d 2,000 Mar.31 By Branch adjustment 2,000
account (loading in
closing stock

2018
Apr.01 By Balance b/d 2,000

Note : Surplus is divided into two parts. The loading in the surpius is credited to the first part of
the branch adjustment account and the actual cost of it is credited to second part.

CHECK YOUR PROGRESS -1

(a) What are the various accounts to be prepared in the books of Head office under stock

251
 and debtors system?
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(b) Draw the distinction between stock and Debtors system and Debtors system.
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Illustration - 2
Jain Brothers have a branch at Nizamabad Ah purchases are made by the Head office
and goods sent to the branch are invoiced at selling price which is 20% above cost. All sales by
the branch are on credit terms. Branch expenses are paid by Head office and all cash received
by the branch is remitted to Head office. The balances relating to branch in the Head office
books on 1st April 2017 and the transactions for the year ended 31 st March,2018 were given
below.
Branch stock account (invoice price) 1-4-2017 7,200
Branch debtors 1-4-2017 5,150
Transactions during the year 31st March,2018
Goods sent to branch (invoice price) 64,920
Return from branch (invoice price) 1,284
Cash received from debtors 62,000
Discounts allowed to debtors 1,150
Branch expenses paid by Head office 6,000
Branch stock account (invoice price) 31-3-18 9,636
Branch debtors 31-3-18 2,000
Ascertain the profit or loss at the branch by stock and debtors system by preparing the neces-
sary accounts in the Head office ledger :
Solution
LEDGER
Books of Jain Brothers (H.O)
Dr. Branch Stock Account Cr.
2017 Rs. 2017 Rs.
Apr. 01 To balance b/d 7,200 Apr. 1 to By Goods sent to
2017 2018 Br.a/c (returns) 1,284
Apr.01 Mar.31 By Br. debtors (credit 60,000
to To goods sent to 64,920 2018 By Br. adjustment a/c
2018 Branch a/c (shortage bal. flg) 1,200
Mar.31 ,, By balance c/d 9,636
72,120 72,120

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Dr. Goods sent to Branch Account Cr.
2017 Rs. 2017 Rs.
Apr.01 To Branch stock Apr.01 Br. Branch stock a/c 64,920
to account (returns) 1,284 to
2018 To Branch adjustment 2018
Mar.31 a/c 10,606 Mar.31
2018
Mar.31 To Purchase a/c 53,030
64,920 64,920

Dr. Branch Debtors Account Cr.

2017 Rs. 2017 Rs.
Apr.01 To Balance b/fd 5,150 Apr.01 By Cash account 62,000
Apr.01 To Branch stock to By Branch expenss
to account (credit sales) 2018 accounts (discounts) 1,150
2018 (bal. fig) 60,000 Mar.31
Mar.31 2018
Mar.31 By Balance c/d 2,000
65,150 65,150
Dr. Branch Expenses Account Cr.
2017 Rs. 2018 Rs.
Apr.01 To Branch debtors Mar By Branch adjustment
to accounts (discounts account 7,150
2018 allowed 1,150
Mar.31 To cash account 6,000
expenses
7,150 7,150

Dr. Stock Reserve Account Cr.

2018 Rs. 2017 Rs.
Mar.31 To Branch adjustment Apr.01 By Balance b/d 1,200
account 1,200
2018 2018
Mar.31 To Balance c/d 1,606 Mar.31 By Branch adjustment
account (loading in
closing stock 1,606
2,806 2,806
2018
Apr.01 By Balance b/d 1,606
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Dr. Branch Adjustment Account Cr.
2018 Rs. 2018 Rs.
Mar.31 To Stock reserve Mar.31 By stock reserve
account loading in account (loading in
closing stock 1,606 opening stock) 1,200
,, To Branch stock ,, By goods sent to
account (loading branch (loading in net
in shortage 200 goods sent to branch 10,606
To Gross profit c/d 10,000
11,806 11,806
2018 2018
Mar.31 To Branch stock 1,000 Mar.31 By gross profit b/d 10,000
account
(cost of shortage)
,, To branch expenses
account 7,150
To net profit transferred
to general profit &
loss account 1,850
10,000 10,000
Notes
(i) Credit sates made by branch arc ascertained by preparing branch debtors account.
(ii) The difference in branch stock account after recording stock is taken as shortage.
(iii) Shortage is dividend into two parts. The loading in the shortage is debited to the first part
of the branch adjustment account and the actual cost of shortage is debited to the second
part of branch adjustment account. This procedure is to be followed for ascertaining the
gross profit and net profit of the branch.
Illustration - 3
M/s Satinath Bros, have a retail branch at Kurnool. Goods are sent by the head office to
the branch market at selling price which is cost plus 25%. All the expenses of the branch arc
paid by the head office. All cash collected by the branch is deposited to the credit of head office.
From the following particulars of the branch prepare branch stock account, branch debtors
account, branch expenses account and branch adjustment account in the books of Head office:
Rs.
Debtors on 1 -4-2017 6,000
Debtors on 31-3-2018 7,000
Inventory with the branch at invoice price
on 1-4-2017 8,000
on31-3-2018 8,500
Cash sales during the year 30,000
Total amount deposited in the Head office account during
the year 63,500
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 Return of goods to Head office at invoice price 2,500
Salaries paid 3,000
Rent paid 2,000
Discount allowed to customers 1,000
Bad debts written off 500
Spoilage 1,000
Solution
In the books of Sannath Brothers (H.O)
LEDGER
Dr. Branch Stock Account Cr.
2017 Rs. 2017 Rs.
Apr.01 To balance b/d 8,000 Apr.01 By cash sales 30,000
2017 To goods sent to 2018
Apr.01 branch account 70,000 mar.31 By branch debtors
to (balancing fig) account
2018 (credit sales) 36,000
Mar.31 ,, By goods sent to
branch a/c 2,500
(returns to Head Office)
2018
Mar.31 By Branch adjustment
acciunt (spoilage) 1,000
,, By balance c/d 8,500
78,000 78,000

Dr. Branch Debtors Account Cr.

2017 Rs. 2017 Rs.

Apr.01 To balance b/fd 6,000 Apr.01 By cash received 33,500
to from debtors
2017 2018
Apr.01 To branch stock account 36,000 Mar.31 By Branch expenses 1,000
to (credit sales) (discount)
2018 (balancing fig) By Branch expenses
Mar.31 accounts 500
(bad debts)
Mar 31 By balance c/d 7,000
42,000 42,000

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Dr. Branch ExpensesAccount Cr.
2018 Rs. 2018 Rs.
Apr.01 To cash account Mar.31 By branch adjustment
to account 6,500
2018
Mar.31 Salaries 3,000
Rent 2,000 5,000
,, To branch debtors
account 1,000
(discount)
,, To branch debtors
account
(bad debts) 500
6,500 6,500

Dr. Branch Adjustment Cr.

2018 Rs. 2018 Rs.
Mar.31 To branch stock Mar.31 By Stock reserve account
(loading in spoilage) 200 (loading in opening stock) 1,600
Mar.31 To Stock reserve account By goods sent to branch
(loading in closing stock) 1,700 account loading 13,500
Mar.31 To Gross profit c/d 13,200
15,100 15,100
2018 2018
Mar.31 To Branch stock 800 Mar.31 By gross profit b/d 13,200
(cosy of spoilage)
Mar.31 To branch expenses 6,500
(transfer)
To net profit transferred
to Gen. profit
& Loss Account 5,900
13,200 13,200

Notes
(i) Goods sent to branch is ascertained by balancing stock account.
(ii) Cash received from debtors is ascertained as follows :
Amount received from debtors = total amount deposited in Head office account - Cash
sales.
= 63,500-30,000 = Rs. 33,500
256
12.5 SUMMARY
Sometimes the Head Office white sending the goods to the branch may mark them at a
higher price than the cost price, by adding certain percentage of profit. To find the true profit or
loss at the branch, adjustment entries retating to loading in the invoice price witt have to be
made.
Under final account system, the profit or loss of the dependent branch is ascertained by
preparing branch trading and profit and loss account but not by preparing branch account. The
trading and profit and loss account is prepared at cost of the goods sent to the branch but not the
invoice price The Head Office may also maintain branch account, which will be in the nature of
personal account sharing usually debit balance representing net assets at the branch.
Under the stock and debtors system, different accounts are opened in Head office books,
instead of oniy Branch account under Debtors System, to ascertain profit or loss at the branch.
This method is used where the branch manager is required to sell the goods only at the selling
price fixed by the Head office. The various accounts opened under the system are (a) Branch
Stock Account (b) Branch Debtors Account (c) Branch Cash Account (d) Branch Expenses
Account (e) Branch Fixed assets account (f) Goods sent to branch Account (g) Branch Adjust-
ment Account The Branch Adjustment account is usually divided into two parts, the first part
revealing gross profit or gross loss and the second showing net profit or net loss.

12.6 CHECK YOUR PROGRESS : MODEL ANSWERS

1 (a) The various accounts to be opened under stock and Debtors system are :
(i) Branch Stock Account (ii) Branch Debtors Account (iii) Branch Cash Account
(iv) Branch Expense Account (v) Branch Fixed Assets Account (vi) Goods sent to
Branch Account and (vii) Branch Adjustment Account.
(b) In the case of stock and debtors system various accounts are opened in the books of
Head Office as against a single Branch Account under Debtors system

12.6 MODEL EXAMINATION QUESTIONS

1. Answer the following questions in about 30 lines each
1. What are the objectives of sending goods to the branch at a higher price? Give the
adjustment entries relating to loading in the invoice price?
2. How do you prepare a Memorandum Branch Debtors Account Show its specimen.
II. Answer the following questions in about 15 lines each
1. What are the sailent features of dependent branches ?
2. Discuss briefly about the final accounting system ?
Problems
1. From the following infor mation- prepare Branch Account in the books of Head office
for the year ending 31st March, 2018. All expenses of the branch arc paid by Head
office. Goods are invoices by Head Office at 20% above cost.
Rs.
Stock on 1st April (2007) (lnvoicc price) 30,000
Stock on 31st March. (2018) (Invoice price) 45,000
Debtors on 1st April 2017 20,000

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 Debtors on 31 st March 2018 30,000
Petty cash on 1st Aprl 2017 50
Petty cash on 31st March.2018 25
Goods invoiced to Branch 1,50,000
Cash sales 75,000
Cash collected from debtors 80,000
Rent 1,500
Salaries 3,000
Goods returned to Head office 3,000
Sale of Gunny bags 100
Also ascertain credit sales made by branch.
(Ans. Profit Rs. 50,575 Credit sales Rs. 90,000)
2. A Private Limited company invoice goods to Branch at cost plus 25% thereon. Both cash
and credit sales are effected by the branch. Expenses are paid direct from the head
office. All cash received by the branch is remitted to Head office. The following are the
transactions for the year ended 31st March 2018
Rs.
Goods received from Head Office at invoice price 80,000
Returns to Head office at invoice price 1,600
Stock on 1 st April 2017 at invoice price 16,000
Credit sales during the year 60,000
Cash sales during the year 37,400
Debtors as at 1st April.2017 10,400
Cash received on ledger accounts 57,000
Discount allowed to customers 600
Bad debts written off 1,000
Returns from customers at selling price 1,400
Rent, rates etc.. 120
Sundry expenses 600
Salaries & Wages 2,400
Stock on 31st March 2018 at invoice price 12,000
Prepare Branch Account and Branch Trading and Profit and Loss Accbunt of Head
office.
(Ans. Profit Rs. 23.360/-)
II. Answers the following questions in about 15 lines each.
1. Explain the Branch Adjustment Account.
Problems
1. Hargopal of Hyderabad opened a branch at Madras. Goods are invoiced from Head
office at cost pius 33 1/3%. Branch is allowed to make sales at invoice price only . Ex-
penses of the branch are paid by the head office. Calculate (i) Gross profit and (ii) Net

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 Profit made by the branch by “Stock and Debtors” System. Transactions during the year
were as under.
Rs.
Stock on 1 st April 2017 invoice price 4,000
44,000
Goods invoiced by the Head office
25,000
Cash sales
18,000
Credit sales
400
Returns by branch debtors
1,000
Goods returned by branch to Head office
3,500
Stock on 31 st MarchT2018 at invoice Price
Branch expenses 2,865
(Ans. Net Profit Rs. 7,110/-)
2. A Limited company at Madras has a branch at Hyderabad. AM purchases are made by
Head Office and goods sent to branch arc invoiced at selling price which is 20% above
cost. Branch sells goods on credit. Branch expenses are paid by Head office and all cash
received by the branch is remitted to Head office. All branch transactions are did in Head
office books.
Following information is given to you.
Branch stock at invoice price on 1st Aprl 2016 7,400
Branch debtors on 1st April 2016 5,150
Transactions during the year 2016-17 were :
Goods sent to branch at invoice price 64,920
Returns to Head office from branch at invoice price 1,284
Branch saies 67,560
Returns from customers of branch 708
Cash received from Brandi debtors 65,696
Discount allowed to Branch debtors 2,830
Branch expenses paid 8,054
Branch stock at invoice price on 31st March2017 3,924
Expenses outstanding on31st March2017 100
Your are required to show branch stock account. Goods sent to Branch Account, Branch debt-
ors account branch expenses account and Branch adjustment m the books of Head Office for
the year 2016-17)
(Ans. Net Loss Rs. 59/-)

12.8 GLOSSARY
Dependent Branch : Branch which does not keep full system of -
accounting.
Loading : The excess of invoice price over cost price

259
Stock and Debtors : System where different accounts are maintained
to record the branch transactions and also to
ascertain profit of the branch.

12.9 RECOMMENDED BOOKS

1. Gupta, R.L & Radhaswamy, M. : Advanced Accountancy, Sultan Chand &
Sons.New Delhi. ,
2. Shukla, M.C & Grewal, T.S. : Advanced Accounts, S. Chand & Co Ltd ,New
Delhi.
3. Jain. S.P. & Narang. : K.LAdvanced Accountancy, Kalyani
Publishers,New Delhi.

260
UNIT-13 : ACCOUNTS OF INDEPENDENT BRANCHES
Contents
13.0 Aims and Objective
13.1 Introduction
13.2 Meaning of Independent Branch
13.3 Characteristics of the Accounting System
13.4 Incorporation of Branch Trial Balance in Head Office Books
13 .4.1 Detailed Incorporation Method
13.4.2 Abridged Incorporation Method
13.5 Summary
13.6 Check Your Progress : Model Answers
13.7 Model Examination Questions
13.8 Glossory
13.9 Further Readings

13.0 AIMS AND OBJECTIVES

The aim of this unit is to discuss the system of accounting to be followed by the Independent
Branches.
On completion of this unit, you should be able to :
* explain about the Independent Branch;
* recognize the system of accounting to be followed by the independent b ranch ;and
* incorporate the branch Trial Balance in Head office books.

13.1 INTRODUCTION
In unit 12 we have dealt w ith how Head office opens various accounts in its books to
ascertain the profit or loss at the branch. This is all about dependent branches. In-this unit, we
concen trate on accounting aspects of independent branches. Generally speaking, big branches
prepare accounts of their own independently. At the end of the accounting year, the branch
prepares trial balance and it is sent to the Head office. The Head office incorporates accounts
of all branches in its books and prepares a General Profit and Loss Account together with
Balance Sheet. Let us discuss these accounting aspects in detail.

13.2 MEANING OF INDEPENDENT BRANCH

Independent branch means a branch which maintains its own set of books. This branch,
besides getting goods from the head office, also engages itself in manufacturing activity and
even supply goods to head office. The branch meets its own expenses and all cash received is
deposited in its own account. The branch may remit money from time to time to head office.
This branch operates as an independent unit for all practical purposes subject to the supervision
and control of the head office

13.3 CHARACTERISTICS OF THE ACCOUNTING SYSTEM

The following are characteristics of the accounting system of an independent branch:
261
1. Such a branch keeps a complete set of its books of accounts. It may purchase goods
from outside suppliers and may even supply goods to Head office and other branches. It
maintains a separate bank account. Cash may be remitted to Head office from time to
time as per their instructions.
2. The branch prepares its own trial balance and final accounts at the end of the year,
thecopies of which are sent to Head office. The Head office incorporates the branch trial
balance in its books.
3. The branch maintains Head office account in its books and this is in the nature of personal
account. All instructions relating to Head office are recorded in this account. This account
is debited with cash remitted to Head office, goods supplied to head office etc., andit is
credited with cash received from head office, goods received from head office etc..
The Head office also maintains a branch account in its books and it is debited and cred-
ited with the transactions with the branch. Entries are similar to those which are ex-
piained in the previous units. The branch account in the head office books is also in the
nature of personal account. The branch account maintained in the Head office books
normally shows debit balance and Head office account maintained in branch books
showscredit balance. This represents the investments made by the Head office at the
branch.Therefore, the trial balance prepared by the branch at the end of the year does
not contain capital account, instead it will contain Head office account.Profit or loss
disclosed by branch accounts is transferred to Head office account. The Head office
account is credited with the profit and debited with the loss.
4. When the Head office is having several branches, it maintain a separate account for
eachbranch. Sometimes transactions may take place in between the branches. The
branches,often do not maintain the accounts of other branches in their books but any
transactionswhich are taking place with other branches will be recorded as if they are
taking placewith the head office. This w ill reduce a lot of clerical work at the branch
level.
5. The Head office, on receipt of trial balance and final accounts from the branch, recon-
ciles the balance as revealed by Head office account in the books of branch with the
branch account in the books of Head office. Necessary adjustment entries for reconciliation
of differences are passed. Then the branch trial balance is taken up and the variousbalances
are incorporated in Head office books for which the incorporation entries arepassed.
SPECIAL POINTS TO BE NOTED
1. Branch fixed assets : Usually, the accounts relating to fixed assets used by the branch are
Kept in the Head office books even though they are paid for by the branch when the
fixed asset is purchased, the following entries are passed in the books of Head office and
branch.
1)
Books of Head Office Books of Branch
Fixed asset is purchased Head office a/c Dr.
and payment Branch asset a/c Dr. To Bank a/c
is made by branch To branch a/c
2) Fixed asset is pur- Branch asset A/c Dr. -No entry
chased and payment To Bank A/c
made by H O.
2. Depreciation of Fixed Assets : When the accounts of fixed assets used by the branch
are kept in Head office books, it is necessary to record the depreciation on such assets in
262
 the books of both Head office and branch. The entries are :
Books of Head office : Books of branch
Branch a/c Dr. Depreciation A/c Dr.
To Branch Fixed asset A/c To Head office A/c.

Note : As the branch uses asset. Note : As the branch used the
the branch account is asset, depreciation is recorded in
debited the books of the branch.
The effect of the two entries will be to debit the branch profit and ioss account and credit
branch fixed asset account maintained in the head office books.
3. Head office expenses : The Head office does some service to the branch for which the
head office usually charge the branch at the end of the year with a reasonable amount.
As a matter of fact, a part of the time of Head office staff may be taken up in doing the
work of the branch. The adjustment entries passed in the books of Head office and
branch are :
Books of Head office :
Branch A/c Dr.
To Profit and Loss A/c

Note : Instead of crediting the

profit and loss a/c the
salaries a/c can be credited
but the ultimate effect will
be same in both cases.
The net of the above two entries will be to charge the branch profit and loss account and
to reduce the expenses of the Head office to the extent of work done by Head office in
relation to the branch.
4. Reconciliation of transit items : The Head office (in branch books) and the branch account
(in head office books) must show the same balance, i.e., the head office account showing
credit balance and branch account showing debit balance. But, often there may be a
difference in the balance shown by these accounts when they are compared on a particular
date. The reasons for such difference may be :
(i) Cash in transit : The branch may have sent cash to Head office before the close of the
accounting year which may not have been received by the Head office by the end of the
accounting year. Suppose branch sends cash on 29th March when the accounts are
closed on 31st March. The branch will immediately debit Head office account and credit
cash. But if the Head office has received the remittance on 4th April, following, then only
the Head office will debit cash and credit branch. The Head office will not give credit to
the branch on 31st March. Therefore, the two balances i.e, the balance of branch ac-
count and the balance of Head office account on 31st March, w ill differ. In order to
reconcile these balances, an adjustment entry will have to be passed in the branch books.
The entry is:
Cash in transit A/c Dr.

263
 To Head office Account
Note : Cash in transit will be shown as an asset in the balance sheet.
Instead of the above, the Head office may also pass the adjustment entry relating to cash
in transit in its books
The entry will be
Cash in transit A/c Dr.
To Branch Account
But the above entries cannot be passed in both the books. Normally the entry is passed in
the books of the branch which has sent cash.
(ii) Goods in Transit : The two balances may also differ because of goods in transit. Sup-
pose the head office has sent goods to the branch on 27th March, but these goods are
received by the branch on 3rd April following, Head office, while sending the goods, must
have debited the branch on 27th March, but the branch will not credit the Head office
account as on 31st March as the goods are not yet received but in transit. To reconcile
the balance the head office will pass the following adjusting entry:
Goods in transit A/c Dr.
To Branch Account
Note : Goods in transit will be shown as an asset in the balance sheet.
Ascertainment of cash in transit and goods in transit. The difference between the two
current accounts i.e. Head office account in branch books and branch account in Head
office books, may be either because of cash in transit or goods in transit or both. How to
ascertain these differences The following example will make it clear; The extracts of trial
balance of both Head office and branch are given below :
Trial Balance
Head office Branch
Particulars Dr. Cr. Dr. Cr
Rs Rs Rs Rs
Current Account 25,000 - - 20,000
Goods from Head office to branch . - 33,000 30.000 -

The current accounts disclose a difference of Rs. 5,000/- between the two balances. Out
of this differences of Rs. 5,000, Rs. 3,000/- is on account of goods in transit as disclosed
by the trial balance. The balance (Rs. 5,000-Rs. 3,000) Rs. 2,000, therefore, be taken as
cash in transit.
5. Inter branch transactions : When the head office is having many branches, and if any
transactions take place between the branches themselves, it will facilitate matters, if
each branch considers the transactions w ith other branches as if they are with Head
office. For example, a Hyderabad Head office is having branches at Waranga! and
Karimnagar and Warangai branch sends goods of the value of Rs. 5,000/- to Karimnagar
branch under instructions from Head office. The entries to be passed in the books will be:
In Warangal branch books :
Head Office Account Dr. 5,000
To Goods Supplied to Branch Account 5,000

264
 in Karimnagar branch books :
Goods received from Head office Account Dr. 5,000
To Head Office Account
In Hyderabad Head office books : 5,000
Karinmagar branch account Dr. 5,000
To Warangal Branch Account 5,000

CHECK YOUR PROGRESS - 1

(a) What do you mean by cash - in - transit?
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(b) What do you mean by goods -in-transit?
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(c) What do you mean by Inter branch transactions ? Which account is debited and which
account is credited in the books of H O?
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13.4 INCORPORATION OF BRANCH TRIAL BALANCE IN

HEAD OFFICE BOOKS
Since the Head office has to prepare a consolidated balance sheet, if not a consolidated
profit and loss account, for presentation to its shareholders and outsiders, the head office is
required to incorporate the branch trial balance in its books. The process by which consolidated
balance sheet of the whole business is prepared is known as incorporation of branch trial balance.
This can be done by any of the two methods: (i) Detailed incorporation method, and (ii) Abridged
incorporation method.
DETAILED INCORPORATION METHOD
Under this method, all items relating to trading and profit and loss account are incorporated
in the Head office books besides incorporation of branch assets and liabilities The trading and
profit and loss account is prepared in the usual way in the books of Head office. The entries are
as follows :
(i) For incorporating items which are shown on the debit side of the trading account
265
 Branch trading account Dr. With the total items debited to trading
To Branch a/c. account such as opening stock, purchases.
wages etc.
(ii) For incorporating items shown on the credit side of the Trading account:
Branch account Dr. With the total of items credited to
To Branch trading account trading account such as opening
stock,sates, closing stock

(iii) For transferring the gross profit to Branch profit and loss account:
Branch trading accounting Dr With the gross profit revealed by
trading account
To Branch P & L a/c
Note : In case of gross loss the above entry is reversed.
(iv) For incorporating the items shown on the debit side of the profit and loss account.
Branch Profit and loss account Dr. With the total of items debited to profit
To Branch a/c and loss account such as salaries, rent,
commission, discount, depreciation etc
(v) For incorporating the items shown on credit side of profit and loss account:
Branch account Dr. With the total items credit to profit
To Branch profit and loss account and loss account such as Interest received,
discount received etc.
(vi) For transferring the net profit revealed by profit and loss account:
Branch profit and loss account Dr. With the net profit revealed by profit and
To General profit and loss account loss a/c.
Note : In case of net loss, the above entry is reversed.
The above six entries will enable the preparation of consolidated Branch Trading and profit and
loss account. At this stage, if the branch account is balanced, it will show a balance equal to net
assets at the branch i e, the total assets minus liabilities If it is felt necessary to close the branch
books completely and to record the branch assets and liabilities for the purpose of preparing a
consolidated balance sheet, the following two entries should be passed.
(vii) For incorporating Branch assets :
Branch Assets account Dr. With the value of every asset after adjustment,
To Branch a/c. if any, such as branch stock, branch debtors,
branch cash etc.,
(viii) For incorporating Branch liabilities : With tire value of each liability after
Branch account Dr. adjustment,if any, such as branch creditors,
To Branch liabilities branchexpenses outstanding etc .

As a result of the above entries, the branch account in the head office books will be completely
closed. At the beginning of next year, the various assets and liabilities will be transferred back
to the branch account by passing reverse entries of the above VII and VIII entries.

266
13.4.2 ABRIDGED INCORPORATION METHOD
Under this method, the branch trading and protit and loss account is prepared by the
Head office as a memorandum account and the net profit or net toss of the branch is ascertained.
The entries arc passed only for incorporation of branch. Net profit or Net loss (no entries are
passed to prepare the full trading or profit and toss account) and the branch assets and liabilities.
Thus instead of first six entries passed under detailed incorporation method, onty the following
entry is passed and the entry Nos. VII and VIII are passed for incorporating branch assets and
liabilities.
For incorporating Branch Net profit:
Branch account Dr.
To General Profit and Loss Account
For incorporating Branch Net loss, the above entry is reversed.
Entries in the Bonks of the Branch
The branch books have also to be closed at the end of the accounting period The entries
may be passed according any one of the methods discussed above.
1 Detailed Incorporation : Under this method, each item of trading and profit and loss
accounts will be transferred to Head office account besides the items of assets and
liabilities. The entries are as foltows:
(1) For transfer of items appearing on the debit side of trading and profit and loss account.
Head office account Dr.
To Opening stock
To Purchases
To Goods Received from Head Office.
To Wages
To Rent
To General Expenses etc.
(ii) For transfer of items appearing on the credit of trading and profit and toss account :
Sales account Dr.
Closing Stock account Dr.
Interest Received account Dr.
Discount Received account Dr.
To Head Office account
(iii) For transfer of Branch assets:
Head Office account Dr.
To various assets (invidualty)
(iv) For transfer of Branch Liabilities :
Various Liabilities (individually) a/c Dr
To Head Office account
As a result of these entries. Head office account m the branch books wii! be completely
closed.
2. Abridged Incorporation under this method, the branch trading and profit and loss account
is prepared and the net profit/net loss revealed by it only will be transferred to Head
267
 Office Account. The entry is :
In case of Net profit :
Profit and Loss Account Dr.
To Head Office Account
In case of net loss, the above entry is reversed.
The entries for transferring the branch assets and liabilities wall be same as explained
under detailed incorporation method.
illustration -1
Pass necessary adjusting entries in the books of Hyderabad Head office for the following
transaction; assuming books arc closed on 31st March, every year March 2018
(i) Goods supplied to Vijayawada Branch on 28th March 2018 worth Rs 10.000 were
received by the branch on 4th Aprl 2018
(ii) Cash remitted by Waltatr Branch to the Head office on 29th March 2018 amounting
to Rs. 6,000 was received by the Head office on 3rd Apnil 2018
(iii)Goods were supplied by Vijayawada Branch to Waltair Branch under instructions
from Head office amounting to Rs. 4,000.
(iv)Depreciation at 10% on Vijayawada Branch Furniture worth Rs. 5.000 is to be provided.
The Branch furniture account is maintained in Head office books
(v) General administrative expenses of Rs. 3,000 atready incurred by Head office are to
be allocated equally to the two branches.
(vi) Waltair branch paid Rs. 4,000 for a machine purchased by the Head office for its use
Solution
Books of Hyderabad Head office
Journal
Date Particulars L.F. Dr Cr.
Rs. Rs.
2018
Mar.31 Goods in transit account Dr 10,000
To Vijayawada Branch account 10,000
(Being goods sent to Vijayawada
Branch but not received by branch)
Cash in transit account Dr 6,000
To Waltair branch account 6,000
(Being cash sent by Waltair branch
but not received till date)
Waltair branch account Dr. 4,000
To Vijayawada Branch account 4,000
(Being goods supplied by Vijayawada
Vijayawada branch account Dr 500
To branch furniture account 500
(Being depreciation on branch furniture)
268
 Vijayawada branch account Dr. 1,500
Waitair branch account Dr. 1,500
To General expenses account 3,000
(Being general expenses incurred ahocated
to branches
Machinery account Dr. 4,000
To Wattair branch account 4,000
(Being the amount paid by Wattair
branch for the machine purchased
Ilustration - 2
The Madras Branch of Universal Traders, closed its books 31st March2018 when the
following trial batance was extracted from its books:
Dr Cr
Rs Rs.
Sundry debtors 48, 000
Sundry creditors 34,400
Cash in hand 7,600
Furniture & Fixtures 25,000
Stock at 1st April 2017 9,000
Goods from Head office 1,36,000
Purchases 2,65,800 4,50,000
Sates
Wages and Sataries 22,000
Trade expenses 21,000 50,000
Head office account 5,34,400 5,34,400
The closing stock on 3 lmarch.(2018) was Rs. 10,400.Close the branch books. Prepare
trading and profit and loss account and batance sheet in the branch books and incorporate
branch figures in the Head office books by giving journal entries.
Solution
Books of Madras Branch
Trading and Profit and loss account
Dr for thr year ended 31st March 2018 Cr

To Opening stock 9,000 By Sales 4,50,000

To Goods from Head Office 1,36,000 By closing stock 10,400
To Purchases 2,65,800
To Goods profit & loss 49,000
4,60,400 4,60,400
To wages and salaries 22,000 By Gross profit 49,600
To Trade expenses 21,000
To Net profit transferred
To Head Office account 6,600
49,600 49,600
269
 Balance sheet as at March 2018
Liabilities Rs. Assets Rs.

Sundry creditors 34,400 Cash in hand 7,600

Head office account 56,600 Sy. Debtors 48,000
Closing Stock 10,400
Furniture & Fixtures 25,000
91,000 91,000

Head Office Account

2018 Rs. 2018 Rs.
Mar 31 To Balance c/d 56,000 Mar. 31 By Balance b/fd 50,000
By Profit &
Loss Account
(Net profit) 6,600
56,000 56,000
2018
Apr.01 By Balance 56,600

Solution
Books of Head office
Journal
Date Particulars L F. Dr Cr
Rs. Rs.
Mar.31 Head office account Dr. 4,53,800
To opening stock 9,000
To goods from Head office 1,36,000
To purchases 2,65,000
To wages and safaries 22,000
To trade expenses 21, 000
(Being the debit bafances or revenue items
transferred to Head office account)
Sale account Dr. 4,50,000
Closing stock account Dr. 10,400
To Head office account 4,60,400
(Being credit bafances of revenue items
transferred to Head account)
Head office account Dr 91,000
To Cash in hand 7,600
To Stock 10,400
To Sundry debtors 48,000
To furniture & fixtures 25,000
(Being the assets transferred to
Head office account)
Sundry creditors account Dr 34,400
To Head office account 34,400
(Being creditors transferred to
Head office account)

270
 Books Universal Traders (Head office)
Journal
Date Particulars L F. Dr Cr
Rs. Rs.
2018
Mar.31 Madras branch trading account Dr 4,32,800
To Madras branch account 4,32,800
(Being the incorporation of opening stock,
goods from Head office and purchases)
Madras branch account Dr. 4,60,000
To Madras branch trading account 4,60,000
(Being the incorporation of branch safes
and closing stock)
Madras Branch Trading account Dr. 27,600
To Madras Branch profit and loss a/c 27,600
(Being the gross profit transferred to profit
and loss a/c)
Madras Branch Profit & Loss a/c Dr. 21,000
To Madras Branch account 21,000
(Being the incorporation of
ages or salariesand trade expenses)
Madras Branch prof t and Loss a/c Dr. 6,600
To Genera! profit and Loss account’ 6,600
(Being the net profit of the branch transferred
to general proft and loss account)
Madras Branch cash in hand Dr. 7,600
Madras Branch sundry debtors a/c. Dr. 43,000
Madras Branch closing stock a/c Dr. 10,400
Madras Branch furniture and futures a/c Dr. 25,000
To Madras Branch account 91,000
(Being the incorporation of branch assets)
Madras Branch account Dr. 34,400
To Madras Branch sundry creditors a/c 34,400
(Being the incorporation of branch creditors)

Illustration - 3
The Head of fice of a business and its branch keep their own books and each prepares its
ownprofit and loss acccount. The following balances are appearing in the two sets of
books as on31st March.2018 after ascertaining of profits and after making ah adjustments
except these referred to below

271
 Head Office Branch
Particulars Dr. Dr. Dr Cr
Rs. Rs. Rs. Rs.
Capital 2,00,000
Fixed assets 72,000 - 32,000 -
Stock 68,400 - 21,480 -
Debtors and Creditors 15,640 7,920 9,680 3,840
Cash 21,480 - 2,840 -
Profit and Loss 29,320 0 6,120
Branch Office Account 59,720 - - -
Head Office Account 56,040
2,37,240 2,37,240 66,000 66,000

Set out the balance sheet of the business as on 31 st March2018 and journal entries necessary
(in both sets of books) to record the adjustments dealing with the following .
(a) On 31 st March, the branch had sent a cheque for 2,000 to the head office, not received
by them not credited to the branch till next month.
(b) Goods vaiucd at Rs.880 had been forwarded by the Head office of the branch and invoiced
on 30th March, but were not received by the branch nor deait with in their books till next
month.
(c) Stock stolen in transit from the head office to the branch and charged to the branch by
tire head office but not credited to the head office, in the branch books as the branch
manager declined to admit any liability Rs. 4,800 not covered by insurance). Soo
(d) it was agreed that the branch should be charged w ith Rs. 600 for administrative services,
rendered by the head office during the year.
(e) Depreciation of branch assets, of which accounts are maintained by the head office, not
provided for Rs. 500.
(f) The baiance of profit shown by the branch is to be transferred to the head office,..
Solution
Books of Head office
Journal
Date Particulars L F. Dr Cr
Rs. Rs.
2018.
Mar.31 Goods in Transit account Dr. 880
To Branch account 880
(Being goods invoiced on 30th December,
but not received by the branch)
Profit and ioss account Dr. 800
To Branch account 800
(Being stock stolen in transit not covered
by insurance)
Branch account Dr. 600
To Profit and ioss account 600

272
 (Being the administrative services rendered
to branch)
Branch account Dr. 500
To Branch fixed assets a/c 500
(Being the depreciation on branch assets,
the accounts of which are maintained in Head
office books)
Branch account Dr. 5,020
To Genera! profit and ioss a/c 5,020
(Being branch profit transferred to general
profit arid toss account

Dr. Profit and Loss Account Cr.

2018 Rs. 2018 Rs.
Mar.31 To Branch account Mar.31 By By Branch b/fd 29,320
(stock stolen in transit) 800 By Branch Account 600
Mar.31 To Balance c/d 29,120
29,920 29,920
2018
Apr.01 By Balance b/d 29,120

Dr. Branch Account Cr.

2018 Rs. 2018 Rs.
Mar.31 To Balance b/fd 59,720 Mar.31 By Goods in transit 880
“ To Profit and loss account 600 “ By Profit & Loss a/c 800
“ To Branch fixed assets 500 “ By Balance c/d. 64,160
“ To General profit &
loss account 5,020
65, 840 65,840
2018
Apr,01 To Banlance b/d : 64, 160

Books of Branch
Journal
Date Particulars L.F. Dr. Cr.
Rs. Rs.
2018
Mar.31 Cash in transit account Dr. 2,000
To Head Office Account 2,000

273
 (Being cheque sent but not received
by Head office)
,, Head office expense account Dr. 600
To Head Office Account 600
(Being the administrative services
charged by Head office
,, Description account Dr. 500
To Head Office Account 500
(Being the depreciation on assets the accounts
of which are maintained in Head Office books)
,, Profit and Loss account Dr. 5,020
To Head Office Account 5,020
(Being the transfer of profit to Head office account)

Dr. Profit and Loss account Cr.

2018 Rs. 2018 Rs.
Mar.31 To Head office expenses Mar.31 By balance c/d 6,120
account 600
,, To Deprreciation a/c 500
,, To Head office a/c 5,020
6,120 6,120

Dr. Head Office Account Cr.

2018 Rs. 2018 Rs.
Mar.31 To Banlance b/d : 64, 160 Mar.31 By Balance b/fd 56,040
“ By cash in transit acc. 2,000
“ By Head office a/c 600
By depreciation a/c 500
By profit and loss a/c 5,020
64,160 64,160
2018
Apr.1 By balance b/d 64,160

Balance Sheet as at 31 st March 2018

Liabilities Rs. Assets Rs.
Creditors : Cash
Head office 7,920 Head office 21,840
Branch 3,840 Branch 2,840
11,760 In transit 2,000 26,320

274
Profit and Loss account
Debtors :
Head office 29,120 Head office 15,640
Branch 5,020 Branch 9,680
34,140 25,320
Capital 2,00,000 Stock
Head office 68,400
Branch 21,480
In transit 880
99,760
Fixed assets :
. Head office 72,000

Less : Depreciate 500

Add : 71500
Branch 32,000
1,03,500
2,45,900 2,45,900

Notes
(i) The student is advised to check whether the balance as shown by the Head office account
in branch books and the branch account in Head office books reconcile or not. In this
question there is a difference of Rs. 3,680 and the difference is on account of (i) cash in
transit (ii) goods in transit and (iii) stock stolen in transit. The adjustment entries are
passed for these differences.
(ii) The net profit of Head office and branch is ascertained by preparing profit and loss
account in both the books.
(iii) In the consolidated balance sheet of the Head office and the branch the balance in branch
account in the books of Head office and the balance in Head office account in the books
of branch will not appear as they are contra to each other.
(iv) Balance in branch account in Head office books i.e., Rs. 64.160 represents net assets at
the branch i.e.. fixed assets Rs. 32,000+stock Rs. 21.480 + Debtors Rs. 9,680+ cash Rs.
2.840 + Cash in transit Rs. 2,000 = 68,000-crcditors Rs. 3.840 - Rs. 64,160.

CHECK YOUR PROGRESS -2

What is the difference between detailed incorporation and abridged incorporation ?
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275
13.5 SUMMARY
Independent branch is one which maintains its own set of books. The branch meets its
own expenses and all cash received is deposited in its own account. It gets goods from Head
Office and also purchases goods from outside suppliers. Sometimes the branch may engage
itself in manufacturing activity and even supply goods to Head office and other branches. The
Branch prepares its own Trial Balance and final accounts at the end of the year. The Head
office incorporates the Branch Trial Balances in its books by passing incorporation entries.

13.6 CHECK YOUR PROGRESS : MODEL ANSWERS

1. (a) Cash -in-transit implies cash remitted by the branch but not received by the Head
office within the accounting year or before the closing date of accounting year.
(b) When goods invoiced to the branch by the Head office, the same might not have been
received by the branch within the accounting year. Such goods are known as goods-in-
transit
(c) Those transactions which took places among the branches are called inter branch
transactions. The branch which received the goods is debited and the branch which
sends the goods is credited, in the books of H.O.
2. In the case of detailed incorporation method, all items of Trading and Profit and Loss
Account are incorporated in H.O. books together with branch assets and liabilities. On
the otherhand. under abridged incorporahon method, the H.O prepares a memorandum
account, instead of Trading and Profit and Loss Account to find out the profit. Further
entries arc aiso passed for the incorporation of branch assets and liabilities in the books
of H.O.

13.7 MODEL EXAMINATION QUESTIONS

Answers the following questions in about 30 !ines each.
1. Explain the accounting procedure of an independent branch
2. What is meant by reconciliation of transit items? Explain w ith examples.
3. Give the entries for incorporation of trial balance in Head office books.
II. Answers the following questions in about 15 lines each.
1. What are the methods of incorporation?
2. What are the inter-branch transactions?
Multiple choice Questions
1. Under Stock and Debtor’s system , the goods are sent to branch at ------------------
a) Cost Price b) Fair price c) Revaluation Price d) Invoice Price.
2. _______________ does not appear in Branch account prepared under Debotr’s System
a) Cash Sales b) Credit Salesc) Goods sent to Branch d) Expenses paid by Head office
3. ______________ Branches are required to sell only those goods sent by Head office.
a) Independent b) Home C) Dependent d) Foreign

4. Shortage or surplus of goods is ascertained by preparing_____________ account

276
 a) Branch debtors b) Branch Stock C) Goods debtorsd) Branch adjustment
5. Loading of goods sent on invoice price is called as ______________
a) Expenses b) adjustment C) Stock Reserve D) Bad Debts
Answers : 1 (a) 2. (b) 3. (c) 4.(b) 5. (c)
Fill in the Blanks :
1. Branch account maintained by Head Office under Debtor’s System is in the nature of -
----------------------account (Nominal)
2. ---------------------- Branches do not keep full set of Books. (Dependent)
3. In case of Dependant branches all the expenses of branch are paid by ---------------
(Head Office)
4. Branch account maintained under final accounts system is in the nature of --------------
account (Personal
5. The objective of Branch accounting is to ascertain --------------- of each branch. (Profit/
Loss)
Problems
The Kurnool branch closed its books on 31st March.2018 which the following trial bal-
ance was prepared :
Dr. Cr
Rs. Rs.
Sundry debtors 12,000
Sundry Creditors 8,600
Cash in hand 1900
Furniture & Fixtures 6,250
Stock at 1st April, 2017 2,250
Goods from Head office 34,000
Purchases 66,450
Sales 1,12,500
Salaries & Wages 5,500
Trade expenses 5,250
Head Office account 12,500

1,33,600 1,33,600
The closing stock on 31st March 2018 was Rs. 2,600. Close the branch books by
preparing trading and profit and loss account and balance sheet. Incorporate Branch trial balance
in Head office books by giving journal entries.
(Ans. Gross Profit Rs. 12,400;
Net Profit Rs. 1,650;
Balance Sheet Rs. 22,750)
A Limited Company with its Head office at Hy derabad has branch office at
Karimnagar. which obtains supplies partly from Head office at cost and partly from outside

277
supplies. The branch keeps a separate set of books. On 31st March.2018 the following trial bal-
ance were extracted:
Head office Branch Office
Dr Dr Dr Cr
Rs. Rs. Rs Rs
Share capital - 60,000
- -
Fixed Assets 32,000 - 16,000 -
P & L Account on 1st April 2017 - 8,000 - -
Opening stock 28,000 - 3,800 -
Debtors and Creditors 34,000 20.000 3,000 4,100
Cash 6,000 - 2.000 -
Purchases and sales 2,40,000 2,80,000 13,500 45,000
Sundry expenses 30.000 - 4,500 -
Goods from Head office - 24.000 23,000
Current accounts 22,000 - - 16,700

3,92,000 3,92,000 65,800 65,800

Fixed assets are to be depreciated at 10%. Stock on 31st March, (2018) Head office Rs
20,000 and Branch Rs. 4.200. ‘
Prepare the company’s profit and loss account for the year ended 31st March 2018 and
its Balance Sheet as on that date.)
(Ans. Gross profit- Head Office Rs. 56,000: Branch Rs. 8,900:
Net Profit - Head Office Rs. 22,800: Branch Rs. 2,800.
Balance Sheet total Rs. 1,17,700)
3. Giye the necessary adjusting entries in the books of Head Office for the following trans
actions.
(i) Goods supplied to Warangal branch on 28th March:2017 Amounting to Rs. 5, received by
the branch on 3rd April 2018.
(ii) Cash remitted by Vijayawada branch to Head office on 29th March 2017 amounting to
Rs. 4.000 was received by the Head office on 2nd April 2018.
(iii) Goods were supplied by the warangai branch to Vijayawada branch under instructions
from Head office amounting to Rs. 2,000.
(iv) Depreciation at 10% on Warangai branch furniture worth Rs. 10,000 is to be provided
The furniture account is maintained in Head office books.
(v) Administrative expenses or Rs. 4,000 already paid by Head office are to be allocated to
both the branches equally.
Note : The Head office and the branches close their books on 31st March every year.

278
13.8 GLOSSARY
Cash in Transit Cash sent by\ the Branch/Head Office not received by the other
at the close of the year.
Goods-in-Transit Goods sent by the Head office to Branch but not received by
the branch as at the close of the year
Incorporation of Branch The process by which consolidated balance
Trial Balance sheet of whole business is Prepared.
independent Branch Branch w hich keeps full system of accounting.

Final Accounts Method It is the method for finding the profits my preparying Branch
final Accounts

13.9 FURTHER READINGS

1. Gupta. R L & Radhaswamy. M. Advanced Accountancy, Sultan Chand &
Sons.New Delhi
2. Sliukla. M .C & Grew a!. T.S. Advanced Accountancy, Sultan Chand &
Sons.New Delhi
3. Jain. S.P & Narang. K.L. Advanced Accountancy, Kalyani
Publishers.New Delhi..

279
 DR.B.R.AMBEDKAR OPEN UNIVERSITY
FACULTY OF COMMERCE
B.COM. SECOND YEAR - SEMESTER-III
EXAMINATION MODEL QUESTION PAPER
ADVANCED ACCOUNTING
Total Time: 3 Hours Max. Marks 100
Min. Marks 40
SECTION – A
Short Answer Questions
(Marks: 5 X 4 = 20)

Note: Answer any FIVE of the following questions in 10 lines each.

Each question carries FOUR marks
1. Define a Hire-purchase contract and discuss its salient features
2. How do you distribute the total interest in the hire-purchase transactions where rate of
interest is not given?
3. What are the contents of Partnership deed?
4. Charan and Bharan were sharing profits in the ratio of 3:1 in their partnership business.
They were having an office manager. Mr. Karan, drawing a salary of Rs. 18,000 per
annum. With effect from 1st July 2016, they decide to admit Mr. Karan into partnership
for a fifth share in the profits. Any excess of Karan’s share over and above his salary
and commission (at 5% net profits after charging such commission) which he used to get
previously is to be borne by Charan. For the year ended June 30, 2017 the profits of the
firm (before charging Karan’s salary and commission) amounted to Rs. 2,62,440. Show
the final distribution of profits.
5. What is Revaluation Account ?
6. Explain the accounting procedure to be followed on retirement / death of a partner
7. Narrate the judgment of Garner Vs Murray with a suitable example.
8. What is the accounting treatment of intcr-departmental transfers at (a) cost price (b)
profit ?
9. On the basis of the following information ascertain the value of goods received by and
supplied to each department. Goods were transferred from:
Department X to Department Y Rs. 379: to Department Z Rs/ 6,543.
Department Y to Department X Rs. 7,654: to Department Z Rs2, 345.
Department Z to Department X Rs. 4,567: to Department Y Rs5, 678.
10. What are the objectives of Branch accounting
SECTION – B
Long Answer Questions
(Marks: 5 X 12 = 60)
Note: i) Answer All the questions in 30 lines each.
ii) Each question carries TWELVE marks.
11. a) Give the model entries without figures in first year of the Hire-purchase agreement in
the books of Purchaser and Vendor.
OR
(b) What are the legal consequences of a buyer of goods under Hire-purchase system
280
 committing default in the payment of installment? What changes occur from the accounting
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Purchases 2,10,000 Sales 3,29,270
Stock on 31.12.2017 39,240 Office salaries 14,890
Rent, Rates 22,490 Office expenses 2,630
Discount(credit) 230 Bank O.D 2,460
Carriage on sales 15,420 Debtors 87,320
Provision for bad debts 2,500 Creditors 66,340
Bad debts 3,810 Furniture 2,000
Plant and Machinery 38,000 Radha’s salary 3,000
Goodwill 40,000 Radha’s drawings 3,000
Radha’s capital 10,000 Rani’s drawings 9,000
Rani’s capital 80,000
Prepare the final accounts of the firm (taking into consideration the following) under
Fixed Capital Method:
a) An amount of Rs. 5,000 (or so much as is available) out of Radha’s share of profits, has
to be transferred to her capital account, till her capital account is equal to 1/4th of Rani’s
capital.
b) Plant & Machinery and Furniture are to be depreciated at 10% and 5% respectively.

c) Raise the Provision for Doubtful Account to Rs. 4,500.

d) Rent outstanding Rs. 1,960.

12. a) Explain how the accounts are maintained under fixed capital and fluctuating capital
method?
OR
b) Rani and Radha are partners sharing profits and losses in 3:1 ratio. As per the deed no
interest is to be charged. Both are entitled to interest on capitals at 6% p.m. Radha is
entitled to a salary of Rs. 3,000 p.a.
On 31st December, 2017 their ledger disclosed following:
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Purchases 2,10,000 Sales 3,29,270
Stock on 31.12.2017 39,240 Office salaries 14,890
Rent, Rates 22,490 Office expenses 2,630
Discount(credit) 230 Bank O.D 2,460
Carriage on sales 15,420 Debtors 87,320
Provision for bad debts 2,500 Creditors 66,340
Bad debts 3,810 Furniture 2,000
Plant and Machinery 38,000 Radha’s salary 3,000
Goodwill 40,000 Radha’s drawings 3,000
Radha’s capital 10,000 Rani’s drawings 9,000
Rani’s capital 80,000
281
 Prepare the final accounts of the firm (taking into consideration the following)
under Fixed Capital Method:
a) An amount of Rs. 5,000 (or so much as is available) out of Radha’s share of
profits, has to be transferred to her capital account, till her capital account is
equal to 1/4th of Rani’s capital.
b) Plant & Machinery and Furniture are to be depreciated at 10% and 5%
respectively.
c) Raise the Provision for Doubtful Account to Rs. 4,500.
d) Rent outstanding Rs. 1,960.
13. (a) Atmaram and Rajaram are partners sharing profits and losses in 3:2 ratio. They decided
to admit Dharaniram who has to bring in Rs.80,000 towards capital and Rs.20,000 towards
goodwill. Their new profit sharing ratio shall be 2:2:1. Their balance sheet before admission
was as under:

Liabilities Rs. Assets Rs.

Atmaram’s capital 80,000 Goodwill 25,000
Rajarami’s capital 80,000 Plant & Machinery 1,55,000
General Reserve 40,000 Debtors 20,000
Sundry Creditors 20,000 Cash at Bank 20,000
2,20,000 2,20,000

They decided that Goodwill account should appear in the books at Rs.60,000.
Give journal entries and necessary ledger accounts and prepare the Balance Sheet after
admission of Dharaniram
OR
b) Naveen, Nischal and Nirmal were partners sharing profits and losses in 3:2:1 ratio. On
31stMarch, 2016 their Balance Sheet was as follows:
Liabilities Rs. Assets Rs.
Sundry creditors 3,500 Stock 4,750
Naveen’s loan 600 Cash at Bank 950
Reserve 1,200 Furniture 500
P&L a/c 600 Machinery 2,100
Naveen’s capital 1,600 Nirmal’s Capital 600
Nischal’s capital 1,400
8,900 8,900
They decided to dissolve the firm. Stock and furniture realized Rs.4,650. Naveen took
over the machinery at Rs.1,800. There was another liability, on a bill discounted for Rs.60.
Expenses of dissolution amounted to Rs.60. Nirmal became insolvent and Rs.190 could
be recovered from his estate.
Give necessary journal entries and ledger accounts for dissolutiona)
14. (a) Explain clearly the basis of allocation of expenses among the various departments
OR
(b) Goods having a transfer price of Rs. 40,000 were transferred from department X to
Department Y. The inter-departmental transfers are made at 125% of cost. The opening
stock of department X does not include any goods transferred from other departments

282
 but closing stock includes Rs. 5,000 valued at the inter-departmental price. How do you
treat this in the books of business?
15. (a) From the following particulars relating to Hyderabad Branch for the year ending 31st
March 2018 prepare Hyderabad Branch account in the Head Office books :
Rs.
stock at branch on 1-4-2017 89,000
Branch debtors on 1-4-1017 47,000
Petty cash at branch on 1-4-2017 200
Goods sent to branch during the year 2,84,000
Cash sales during the year 1,58,000
Credit sales during the year 4,04,000
Goods returned by branch 8,000
Cash received from debtors 3,79,000
Cash sent to branch for expenses 90,000
Stock at branch on 31-3-2018 54,000
Branch debtors on 31-3-2018 72,000
Petty cash at branch on 31-3-2018 300
OR
b) From the following information prepare Branch Account m the books of Head office for
the year ending 31st March,2018. All expenses of the branch arc paid by Head office.
Goods are invoices by Head Office at 20% above cost.
Rs.
Stock on 1st April(2007)(invoice price) 30,000
Stock on 31st March.(2018)(Invoice price) 45,000
Debtors on 1st April 2017 20,000
Debtors on 31 st March 2018 30,000
Petty cash on 1st Aprl 2017 50
Petty cash on 31st March.2018 25
Goods invoiced to Branch 1,50,000
Cash sales 75,000
Cash collected from debtors 80,000
Rent 1,500
Salaries 3,000
Goods returned to Head office 3,000
Sale of Gunny bags 100
Also ascertain credit sales made by branch.
SECTION - C
Objective Type Questions
(20 X 1 = 20)
Note: i) Answer all the following questions.
ii) Each question carries 1 (ONE) mark.
A. Multiple Choice Questions
i) Under Hire purchase system, Hire purchaser become the owner of goods / asset( )
(a)On signing the contract (b) After making down payment
(c) After paying the last installment (d) After paying first installment.
283
ii) Amount paid by the Hire purchaser towards interest is treated by him as ( )
(a)Income (b) Revenue expense
(c) Capital expenditure (d) Deferred revenue expenditure
iii) On admission of a partner General Reserve is transferred to
(a)new partner (b) all partners ( )
(c) old partners (d) outgoing partner
iv) Creation of goodwill/ writing off goodwill on admission is for ( )
(a)Benefit of new partner (b) Benefit of outgoing partner
(c) Benefit all partners (d) Benefit old partners
v) Ratio to calculate share of remaining partners on death of partner ( )
(a)Sacrifice ration (b) gaining ratio
(c) foregone ratio (d) None of the above
vi) On death of a partner goodwill is payable to ( )
(a)executors of deceased partner (b) remaining partners
(c) All partners (d) None of the above
vii) Under stock and debtors system, goods are sent to branch at
(a)Cost price (b) Revalued price ( )
(c) Fair price (d) Invoice price
viii) A Branch that is required to sell only goods sent by the Head office ( )
(a)Independent branch (b) Home Branch
(c) Foreign branch (d) Dependent branch
ix) Loading of the goods sent on invoice price is an ( )
(a) Expense (b) Adjustment
(c) Stock reserve (d) Bad debt
x) Does not appear in the branch account prepared under debtors system ( )
(a)Cash sales (b) credit sales
(c) Goods sent to branch (d) Expenses paid by head office
B. Fill in the Blanks
i) Hire purchase Act was enacted in the year .........................................
ii) The total of all installments and down payment is called ..........................
iii) Account prepared to find the result of changes in values of assets and liabilities is known
as_________________________________.
iv) A firm in which A and B are sharing at 3:4 admit C for one fourth share, both equally
sacrificing for him, new ratio of ABC shall be_______________.
v) Branches which do not keep a complete set of books————————

C. Match the following

i) All partners Insolvent ( ) (a) Apportionment of Expenses
ii) Goodwill ( ) (b) Independent branches
iii) Executors Account ( ) (c) Extra profits
iv) Dependent Branches ( ) (d) Dissolution of firm
v) Departmental Accounts ( ) (e) On Death of a partner

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