Partnership Account

INTRODUCTION TO PARTNERSHIP ACCOUNTS

 Business carried on by all or any one of them acting for all
 An agreement entered into by all persons concerned
 Existence of a business
 Unlimited liability of all partners
 An association of two or more persons
 Sharing of profits and losses of the business

DEFINITION OF PARTNERSHIP
As per Section 4 of the Partnership Act, 1932
Partnership is the relation between persons who have agreed to share the profit of a
business carried on by all or any of them acting for all.

ACCOUNTS OF PARTNERSHIP FIRM

 Trading and Profit and Loss Account and Balance Sheet
 Profit and Loss Appropriation Account
 Capital accounts of partners: fixed capital method or fluctuating capital method

FEATURES OF A PARTNERSHIP
 Existence of an agreement
The relation of partnership arises from contract between parties and not from
status as it happens in case of HUF (Hindu Undivided Family). A formal or
written agreement is not necessary to create a partnership.
 Business
A partnership can exist only for business. Section 2 (b) of Indian Partnership
Act, 1932 states that business includes every trade, occupation and profession.
 Sharing of profit
The persons concerned must agree to share the profits of the business. Section
4 of Indian Partnership Act, 1932 does not insist upon sharing of losses. Thus,
a provision for sharing of loss is not necessary.

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  Mutual agency
It means that the business is to be carried on by all or any of them acting for
all. Thus, if the person carrying on the business acts not only for himself but
for others also so that they stand in the positions of principals and agents, they
are partners.

NUMBER OF PARTNERS
Minimum Partners - Two
Maximum Partners - 50*
*As per Section 464 of the Companies Act, 2013, no association or partnership
consisting of more than 100 number of persons as may be prescribed shall be formed
for the purpose of carrying on any business. Rule 10 of Companies (incorporation)
Rules 2014 specifies the limit as 50. Thus, maximum number of members in a
partnership firm are 50.

LIMITED LIABILITY PARTNERSHIP

 The Limited Liability Partnership (LLP) is viewed as an alternative corporate
business proposal that provides the benefits of limited liability but allows its
members, the flexibility of organizing their internal structure as a partnership,
which is based on a mutually arrived agreement.
 The LLP will be a separate legal entity, liable to the full extent of its assets,
with the liability of the partners being limited to their agreed contribution in the
LLP which may be of tangible or intangible nature or both tangible and
intangible in nature.
 No partner would be liable on account of the independent or un-authorized
actions of other partners or their misconduct.
 The liabilities of the LLP and partners who are found to have acted with intent
to defraud Creditors or for any fraudulent purpose shall be unlimited for all or
any of the debts or other liabilities of the LLP.
 The main benefit in an LLP is that it is taxed as a partnership, but has the
benefits of being a corporate, or more significantly, a juristic entity with
limited liability.
 An LLP has the special characteristic of being a separate legal personality
distinct from its partners. The LLP is à body corporate in nature.

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  The Limited Liability Partnerships (LLPs) in India were introduced by Limited
Liability Partnership Act, 2008 which lay down the law for the formation and
regulation of Limited Liability Partnerships.

DEFINITION OF LLP
Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines
Limited liability partnership as a partnership formed and registered under this Act;
and limited liability partnership agreement means any written agreement between the
partners of the limited liability partnership or between the limited liability partnership
and its partners which determines the mutual rights and duties of the partners and
their rights and duties in relation to that limited liability partnership.

MINIMUM NUMBER OF PARTNERS IN CASE OF LLP

As per the LLP Act, any individual or body corporate may be a partner in a limited
liability partnership; provided that an individual shall not be capable of becoming a
partner of a limited liability partnership, if-
 he has been found to be of unsound mind by a Court of competent jurisdiction
and the finding is in force;
 he is an undischarged insolvent; or
 he has applied to be adjudicated as an insolvent and his application is pending.

Every limited liability partnership shall have at least two partners.

 If at any time the number of partners of a limited liability partnership is
reduced below two and the limited liability partnership carries on business for
more than six months while the number is so reduced, the person, who is the
only partner of the limited liability partnership during the time that it so carries
on business after those six months and has the knowledge of the fact that it is
carrying on business with him alone, shall be liable personally for the
obligations of the limited liability partnership incurred during that period.

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Distinction between an ordinary partnership firm and an LLP
Key Elements Partnerships LLPs
Applicable Law Indian Partnership ActThe Limited Liability
1932 Partnerships Act, 2008
Registration Optional Compulsory with ROC
Creation Created by an Agreement
Created by Law
Body Corporate No Yes
Separate Legal Entity No Yes
Perpetual Succession Partnerships do not have
It has perpetual succession
perpetual succession and individual partners may
come and go
Number of Partners Minimum 2 and Maximum Minimum 2 but no
50 maximum limit

Ownership of Assets Firm cannot own any The LLP as an independent

assets. The partners own entity can own assets
the assets of the firm

Liability of Partners Unlimited: /Partners are Limited to the extent of

Members severally and jointly liable their contribution towards
for actions of other partners LLP except in case of
and the firm and their intentional fraud or
liability extends to personal wrongful act of omission or
assets commission by a partner.

Principal Agent Partners are the agents of Partners are agents of the
Relationship the firm and of each other firm only and not of other
partners

MAIN CLAUSES REQUIRED IN A PARTNERSHIP DEED

 Name of the firm and the partners;
 Commencement and duration of business;
 Amount of capital to be contributed by each partner;
 Amount to be allowed to each partner as drawings and the timings of such
drawings;
 Rate of interest to be allowed to each partner on his capital and on his loan to
the firm, and to be charged on his drawings;

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  The ratio in which profits or losses are to be shared;
 Whether a partner will be allowed to draw any salary,
 Any variations in the mutual rights and duties of partners;
 Method of valuing goodwill on the occasions of changes in the constitution of
the firm;
 Procedure by which a partner may retire and the method of payment of his
dues;
 Basis of the determination of the executors of a deceased partner and the
method of payment;
 Treatment of losses arising out of the insolvency of a partner;
 Procedure to be allowed for settlement of disputes among partners;
 Preparation of accounts and their audit.

RULES IN THE ABSENCE OF PARTNERSHIP DEED

 No partner has the right to a salary
 No interest is to be allowed on capital
 No interest is to be charged on the drawings
 Interest at the rate of 6% p.a is to be allowed on a partner's loan to the firm
 Profits and losses are to be shared equally
Note: In the absence of an agreement, the interest and salary payable to a partner will
be paid only if there is profit.

POWERS OF PARTNERS
(a) Buying and selling of goods
(b) Receiving payments on behalf of the firm and giving valid receipt
(c) Drawing cheques and drawing, accepting and endorsing bills of exchange and
promissory notes in the name of the firm
(d) Borrowing money on behalf of the firm with or without pledging the
inventories-in-trade
(e) Engaging servants for the business of the firm
In certain cases an individual partner has no power to bind the firm. This is to say that
third parties cannot bind the firm unless all the partners have agreed. These cases are:
(a) Submitting a dispute relating to the firm arbitration
(b) Opening a bank account on behalf of the firm in the name of a partner
(c) Compromise or relinquishment of any claim at portion of claim by the firm

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 (d) Withdrawal of a suit or proceeding filed on behalf of the firm
(e) Admission of any liability in a suit or proceedings against the firm
(f) Acceptance of immovable property belonging to the firm
(g) Earning partnership on behalf of the firm
The rights, duties and power of partners can be changed by mutual consent.

ACCOUNTS
 Partnership Act doesn't specify any format for preparation of accounts of
Partnership Firm and thus accounts are prepared as per Basic rules of
Partnership accounts.
 There is not much difference between the accounts of a partnership firm and
that of sole proprietorship (provided there is no change in the firm itself).
 The only difference to be noted is that instead of one Capital Account there
will be as many Capital Accounts as there are partners.
 When a partner takes money out of the firms for his domestic purpose, either
his Capital Account can be debited or a separate account, named as Drawings
Account, can be opened in his name and the account may be debited.
 In a Trial Balance of a partnership firm, one may find Capital Accounts of
partners as well as Drawings Accounts
 Finally the Drawings Account of a partner may be transferred to his Capital
Account so that a net figure is available.
 Generally the Drawings Account or Current Account (as it is usually called)
remains separate.

PROFIT AND LOSS APPROPRIATION ACCOUNT

 During the course of business, a partnership firm will prepare Trading Account
and a Profit and Loss Account at the end of every year.
 The final accounts of a sole proprietorship concern will not differ from the
accounts of a partnership firm.
 The Profit and Loss Account will show the profit earned by the firm or loss
suffered by it.
 This profit or loss has to be transferred to the Capital Accounts of partners
according to the terms of the Partnership Deed or according to the provisions
of the Indian Partnership Act (if there is no Partnership Deed or if the Deed is
silent on a particular point).

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Two methods of accounting
 Fluctuating capital method
No current account is maintained. All such transactions and events are passed
through capital accounts Naturally, capital account balance of the partners
fluctuates every time. So, in fixed capital method, a fixed capital balance is
maintained over a period of time while in fluctuating capital method capital
account balances fluctuate all the time.
 Fixed capital method
Generally initial capital contributions by the partners are credited to partners'
capital accounts and all subsequent transactions and events are dealt with
through current accounts. Unless a decision is taken to change it, initial capital
account balance is not changed.

INTEREST ON CAPITAL
 The amount of interest is debited to interest on capital accounts and credited to
the capital accounts, if capitals are fluctuating and current accounts, if capitals
are fixed. Interest on capital account is then closed by transfer to profit and loss
appropriation account.
 Alternatively, credit the capital (or current) account of the partner concerned
and debit the profit and loss appropriation account.

FOR ALLOWING INTEREST ON CAPITAL

Profit and Loss Appropriation Account Dr.
To (Individual) Capital (or Current) Accounts of Partners
Net loss and Interest on Capital
Subject to contract between the partners, interest on capitals is to be provided out of
profits only. Thus in case of loss, no interest is provided. But in case of insufficient
profits (i.e. net profit less than the amount of interest on capital) the amount of profit
is distributed in the ratio of capital as partners get profit by way of interest on capital
only.

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INTEREST ON DRAWINGS
Calculation of Interest on Drawings =
Total Drawings x Interest Rate x Multiplication Factor

(a) Fixed Amount is drawn:

Time of Multiplication Time of drawing Multiplication
drawings factor factor
Beginning of 6.5/12 Beginning of 7.5/12
every months each quarter
Middle of every 6/12 Middle of each 6/12
month quarter
End of every 5.5/12 End of each 4.5/12
month quarter

Note: Where the date of drawings not given then interest on drawing is always
calculated for 6 months/multiplication factor will be 6/12.

(b) Different amount is withdrawn at various dates: Use Product Method

For charging interest on drawings
(individual) Capital (or Current) Account of Partners Dr.
To Profit/Loss Appropriation Account

GUARANTEE OF MINIMUM PROFIT

 Sometimes, one partner can enjoy the right to have minimum amount of profit
in a year as per the terms of the partnership agreement.
 In such case, allocation of profit is done in a normal way if the share of partner,
who has been guaranteed minimum profit, is more than the amount of
guaranteed profit.
 However, if share of the partner is less than the guaranteed amount, he takes
minimum profit and the excess of guaranteed share of profit over the actual
share is borne by the remaining partners as per the agreement.
 There are three possibilities as far as share of deficiency by other partners is
concerned. These are as follows:

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 o Excess is payable by one of the remaining partners.
o Excess is payable by at least two or all the partners in an agreed ratio.
o Excess is payable by remaining partners in their mutual profit sharing
ratio.
 If the question is silent about the nature of guarantee, the burden of guarantee
is borne by the remaining partners in their mutual profit sharing ratio.

CAPITAL RATIO
Partners may agree to share profits and losses in the capital ratio.
Capital ratio
 If capitals are fixed
o profits will be shared in the ratio of given capitals
 If capitals are fluctuating and partners introduce or withdraw capitals during
the year
o the capitals for the purpose of ratio would be determined with reference
to time on the basis of weighted average method

VALUATION OF GOODWILL
Goodwill is the value of reputation of a firm in respect of profits expected in future
over and above the normal rate of profits.
Necessity for valuation of goodwill
Necessity for valuation of goodwill
Change in profit Admission of Retirement or When business is
sharing ratio partner death of partner dissolved or sold*

*This situation is not covered at Foundation level.

Methods of valuation of goodwill

 Annuity basis
 Super profit basis
 Capitalization basis
 Average profit basis

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 a) Average profit basis
 Average Profit = Total profit/ Number of years
 Goodwill = Average Profit x No. of Years' purchased
 The profits taken into consideration are adjusted with abnormal losses,
abnormal gains, return on non- trade investments and errors.

b) Super profit basis

 Calculate Capital Employed
Assets xxx
Less: Liability xxx
Capital Employed xxx
 Find the normal Rate of Return (NRR)
 Find Normal Profit= Capital Employed x Normal rate of Return
 Find Average Actual Profit
 Find Super Profit = Average Actual Profit – Normal Profit
 Find Goodwill = Super Profit x Number of Years Purchased

c) Annuity basis
Goodwill = Super Profit x Annuity Number

d) Capitalization basis
Goodwill = Super Profit/Normal Rate of Return

ADMISSION OF A NEW PARTNER

New partners are admitted for the benefit of the partnership firm. New partner is
admitted either for increasing the partnership capital or for strengthening the
management of the firm.
 Revaluation Account or Profit and Loss Adjustment Account for revaluation of
assets and liabilities
 Adjustment of goodwill amongst the old partners in their sacrificing gaining
ratio
 Profit/loss on revaluation account is transfer to old partners in their old profit
sharing ratio

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  Reserve lying in the balance sheet transferred to the capital accounts of old
partners in their old profit sharing ratio

Revaluation Account or Profit and Loss Adjustment Account

 When a new partner is admitted into the partnership, assets are revalued and
liabilities are reassessed. A Revaluation Account (or Profit and Loss
Adjustment Account) is opened for the purpose.
 This account is debited with all reduction in the value of assets and increase in
liabilities and credited with increase in the value of assets and decrease in the
value of liabilities.
 The difference in two sides of the account will show profit or loss. This is
transferred to the Capital Accounts of old partners in the old profit sharing
ratio.

ACCOUNTING ENTRIES
1 Revaluation Account Dr.
To Assets Account with the reduction in the
value of the assets

(Individually which show a decrease)

To the Liabilities Accounts with the increase in the
liabilities.

(Individually which have to be Increased)

2 Assets Account (Individually) Dr. with the increase in the

value of the of assets

Liabilities Accounts Dr. with the reduction in the

amount liabilities

To Revaluation Account
3 Revaluation Account Dr. with the profit in the old
profit sharing ratio.

To Capital A/cs of the old partners

Or

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 Capital a/c of the old partners Dr. with the loss in old profit
sharing ratio.
To revaluation account

 Whenever a new partner is admitted, any reserve etc. lying in the Balance
Sheet
 should be transferred to the Capital Accounts of the old partners
 in the old profit sharing ratio.

GAINING PARTNERS
The partners whose profit shares have increased as a result of change are known as
gaining partners.
GAINING RATIO
 The ratio in which the partners
 have agreed to gain their shares
 in profit from
 the other partner or partners.
Gaining ratio= difference between new profit shares and old profit shares

HIDDEN GOODWILL
Particulars

When the value of the goodwill of the firm is not specifically given, xxx
the value of goodwill has to be inferred as follows:
Incoming partner's capital x Reciprocal of share of incoming partner xxx
Less: Total capital after taking into consideration the capital brought
in by incoming partner
Value of Goodwill xxx

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RETIREMENT OF A PARTNER
 Revaluation Account or Profit and Loss Adjustment Account for revaluation of
assets and liabilities
 Adjustment of goodwill amongst the remaining partners in their profit gaining
ratio
 Transfer of reserves goodwill, Transfer of profit/ loss on revaluation to retiring
partner
 Profit/loss on revaluation is transferred to old partners in their old profit
sharing ratio

REVALUATION OF ASSETS AND LIABILITIES ON

RETIREMENT OF PARTNER
 On retirement of a partner, it is required to revalue assets and liabilities.
 To arrive at profit or loss on revaluation of assets and liabilities, a Revaluation
Account or Profit and Loss Adjustment Account is opened.
 Profit or loss on revaluation, such profit or loss should be distributed amongst
the existing partners including the retiring partner at the existing profit sharing
ratio.
 Revaluation Account or Profit and Loss Adjustment Account is closed
automatically by transfer of profit or loss balance to the Partners' Capital
Accounts.
 If it is decided that revalued figures of assets and liabilities will not appear in
the balance sheet of the continuing partners, then a journal entry should be
passed with the amount payable or chargeable to the retiring partner which the
continuing partners will share at the ratio of gain.

RESERVES
 On the retirement of a partner any undistributed profit or reserve standing at
the Balance Sheet is to be credited to the Partners' Capital Accounts in the old
profit sharing ratio.
 Alternatively, only the retiring partner's share may be transferred to his Capital
Account if the others continue at the same profit sharing ratio.

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FINAL PAYMENT TO A RETIRING PARTNER
The following adjustments are necessary in the Capital A/c:
 Transfer of reserve
 Transfer of goodwill
 Transfer of profit/loss on revaluation
After adjustment of the above mentioned items, the Capital Account balance standing
to the credit of the retiring partner represents amount to be paid to him.

The continuing partners may discharge the whole claim at the time of retirement.
Then the journal entry will be
Retiring Partner's Capital A/c Dr.
To Bank A/c

Sometimes the retiring partner agrees to retain some portion of his claim in the
partnership as loan. The journal entry will be
Retiring partner's Capital A/c Dr.
To Retiring Partner's Loan A/c
To Bank A/c

As a rule, the payment is made according to terms of partnership agreement which

might provide one of the following alternatives:
(a) Repayment may be made in instalments over a period of time and the
interest is paid on outstanding balance which will be treated as a loan of
the outgoing partner.
(b) The amount due may be treated as a loan to the firm and in return the firm
will either pay interest at a fixed rate or share of the profit of the firm.
(c) An annuity may be paid to a retired partner for life or for an agreed
number of years for the life of some dependent.

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PAYING A PARTNER'S LOAN IN INSTALMENT
 Paying a partner's loan is only a matter of arranging finance.
 Sometimes it is stated that the loan is to be paid off in equal instalments and
that the balance is to carry interest.
 In such case, loan should be divided into equal parts.
 The interest for the period should be calculated and The payment should
consist of the instalment on account of the loan plus interest for the period.

DEATH OF A PARTNER
 When the partner dies the amount payable to him/her is paid to his/her legal
representatives.
 Right of outgoing partner in certain cases to share subsequent profits
 As per provisions of Section 37 of the Indian Partnership Act., Where any
member of a firm has died or otherwise ceased to be a partner, and the
surviving or continuing partners carry on the business of the firm with the
property of the firm without any final settlement of accounts as between them
and the outgoing partner or his estate, then, in the absence of a contract to the
contrary, the outgoing partner or his estate is entitled at the option of himself or
his representatives to such share of the profits made since he ceased to be a
partner as may be attributable to the use of his share of the property of the firm
or to interest at the rate of six per cent per annum on the amount of his share in
the property of the firm.
 Provided that whereby contract between the partners an option is given to
surviving or continuing partners to purchase the interest of a deceased or
outgoing partner, and that option is duly exercised, the estate of the deceased
partner, or the outgoing partner or his estate, as the case may be, is not entitled
to any further or other share of profits; but if any partner assuming to act in
exercise of the option does not in all material respects comply with the terms
thereof, he is liable to account under the foregoing provisions of this section.
This way, the outgoing partner has the option to receive, interest at the rate of
6% p.a. or the share of profit earned on the unsettled amounts for the period till
his dues are settled by the firm in the absence of any contract made to the
contrary.
 It may be noted that the outgoing partner is not bound to make election until
the share of the profit that would be payable to him has been ascertained.

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AMOUNT PAYABLE TO LEGAL REPRESENTATIVES OF DEAD
PARTNER
(a) The amount standing to the credit to the capital account of the deceased partner
(b) Interest on capital, if provided in the partnership deed upto the date of death
(c) Share of goodwill of the firm
(d) Share of undistributed profit or reserves
(e) Share of profit on the revaluation of assets and liabilities
(f) Share of profit upto the date of death
(g) Share of Joint Life Policy.

CALCULATION OF PROFIT UPTO THE DATE OF DEATH OF A

PARTNER
 Such Profit is calculated through P&L. Suspense account. After ascertaining
the amount due to the deceased partner, it should be credited to his Executor's
Account.
 If the death of a partner occurs during the year, the representatives of the
deceased partner are entitled to his/her share of profits* earned till the date of
his/her death.
*Such profit is ascertained by either of the following methods
 Time Basis
It is assumed that profit has been earned uniformly throughout the year
 Turnover or Sales Basis
We have to take into consideration the profit and the total sales of the last year.
Thereafter the profit up to the date of death is estimated on the basis of the sale
of the last year. Profit is assumed to be earned uniformly at the same rate.

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 Dissolution of Partnership Firms
First of all, it is required to comprehend the circumstances leading to the
dissolution of a partnership firm and accounting treatment necessary to close its
books of accounts. Also, the special adjustments relating to the insolvency of
partners and the settlement of the partnership's liabilities must be thoroughly
understood. Let us understand the difference between Dissolution of Partnership
and Dissolution of Partnership Firm.

Distinction between Dissolution of Partnership and Dissolution of

Partnership Firm
Dissolution of Partnership Dissolution of Partnership Firm

Dissolution of a partnership refers to Dissolution of the firm implies

the discontinuance of the relation that the entire firm ceases to exist,
between the partners of the firm. including the relation among all
the partners.

There can be change in profit sharing Dissolution of partnership firm

ratio or admission/ occurs. occurs
death/retirement of a partner.

In event of dissolution of the In event of the dissolution of the

partnership, the business continues as firm, the business ceases to end
usual, but the end. partnership is
reconstituted.

There is no intervention by the court. Court has the inherent power to

intervene. By its order, a firm can
be dissolved.

Economic relationships among partners Economic relationship among

may remain same or change. partners comes to an end.

Assets and liabilities are revalued. Assets are realized and liabilities
are paid off.

Revaluation account is prepared. Realization account is prepared.

Assets and liabilities are revalued after Assets and liabilities are settled on

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 winding up of the existing partnership. winding up of a firm.

Books of accounts are not closed. Books of accounts are closed.

Circumstances Leading to Dissolution of Partnership

A partnership dissolves or comes to an end on:

 The expiry of the term for which it was formed

 Completion of the venture for which it was entered into
 Death of a partner
 Insolvency of a partner

The partners or remaining partners (in case of death or insolvency of a partner)

may continue to do the business. In such a case there will be a new partnership,
but the firm will continue. When the business comes to an end then only it will
be said that the firm has been dissolved.

A firm stands dissolved in the following cases:

 The partners agree that the firm should be dissolved

 All partners except one become insolvent
 The business becomes illegal
 In case of partnership at will, a partner gives notice of dissolution
 The court orders dissolution

The court has the option to order dissolution of a firm if

 A partner has become of unsound mind;

 A partner suffers from permanent incapacity;
 A partner is guilty of misconduct of the business;
 A partner persistently disregards the partnership agreement;
 A partner transfers his interest or share to a third party:
 The business cannot be carried on except at a loss; and
 It appears to be just and equitable.

Consequences of Dissolution
 On the dissolution of a partnership, firstly, the assets of the firm, including
goodwill, are realized;

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  Then the amount realized, is applied first towards repayment of liabilities
to outsiders and loans taken from partners;
 Afterwards, the capital contributed by partners is repaid and, if there is still
a surplus, it is distributed among the partners in their profit-sharing ratio.

Conversely, after payment of liabilities of the firm and repayment of loans from
partners, if the assets of the firm leftover are insufficient to repay in full the
capital contributed by each partner, the deficiency is borne by the partners in their
profit-sharing ratio.

According to the provisions contained in the Partnership Act, upon dissolution of

the partnership, the mutual rights of the partners, unless otherwise agreed upon,
are settled in the following manner:

The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital have to be applied in the following manner and order:

 in paying the debts of the firm to third parties

 in paying to each partner ratably what is due to him from the firm in
respect of advances as distinguished capital from capital
 in paying to each partner what is due to him on account of capital
 the residue, if any, to be divided among the partners in the proportion in
which they are entitled to share profits

Losses including deficiencies of capital are paid, first out of profits, next out of
capital, and, lastly, if necessary, by the partners individually in the proportion in
which they are entitled to share profits.

Dissolution before the expiry of a fixed term

A partner who, on admission, pays a premium to the other partners with a
stipulation that the firm will not be dissolved before the expiry of a certain term,
will be entitled to a suitable refund of premium or of such part as may be
reasonable, if the firm is dissolved before the term has expired.

The amount to be repaid will be such as is reasonable having regard to the terms
upon which the admission was made and to the length of the period agreed upon
and that already expired. Any amount that becomes due will be borne by other
partners in their profit-sharing ratio.

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 No claim in this respect will arise if

 Firm is dissolved due to the death of a partner;

 Dissolution is mainly due to the partner's (claiming refund) own misconduct;
 Dissolution is in pursuance of an agreement containing no provision for the
return of the premium or any part of it.

Closing of Partnership Books on Dissolution

To close books of accounts of Partnership Firm, we need to transfer all the assets
and liabilities to Realization Account. Given below is the specimen of the
Realization Account.

Specimen of Realization Account

Particulars Rs. Particulars Rs.

To Sundry Assets (Excluding By Sundry Liabilities

Cash/Bank, Debit Balance of (Excluding Credit Balance
P&L A/c, Partners' Capital, and of P&L. A/c, Partners'
Loan A/c) Capital, and Loan A/c)

To Bank/Cash (expenses for By Provision on Assets

realization)

To Bank/Cash A/c (Amount By Bank/Cash A/c (Amount

paid for liabilities and realized from assets and
unrecorded liabilities) unrecorded assets)

To Partners' Capital A/c By Partners' Capital A/c

(Expenses or Liabilities paid by (Assets taken over by
partners) partners)

To Partners' Capital A/c (Profit By Partners' Capital A/c

on realization distributed among (Loss on realization
partners in profit sharing ratio) distributed among partners

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 in profit sharing ratio)

Points to Note

 If any of the assets are taken over by a partner at a value mutually agreed to by
the partners, debit the Partner's Capital Account and credit Realization Account
with the price of asset taken over.
 Pay off the liabilities (if not transferred to Realization A/c) crediting cash, and
debiting the liability accounts, the difference between the book figure and the
amount paid being transferred to the Realization Account.
 Liabilities to outsiders may also be transferred to the Realization Account. In
that case, the amount paid in respect of the liabilities in cash should be debited to
the Realization Account, Cash Account being credited. If liability is taken over by
a partner, Realization Account should be debited and the Partners' Capital A/cs
credited at the figure agreed upon.
 The balance of the Realization Account will represent either the profit or loss
on realization. Divide it between the partners in the proportion in which they
shared profits and losses. In the case of a loss, credit Realization Account and
debit various Partners' Capital Accounts; follow the opposite course in the case of
a profit.
 Pay off the partners' loans or advances which are separate from the capital (if
any) contributed by them, after setting off against them any debit balance in the
capital account of the concerned partner.
 The balance of the cash account at the end will be exactly equal to the balance
of capital account, provided they are in credit; credit cash, and debit the partners'
capital account with the amount payable to them to close their accounts.

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 Consequences of Insolvency of a Partner
If a partner goes insolvent, the following are the consequences:

 The partner adjudicated as insolvent ceases to be a partner on the date on

which the order of adjudication is made
 The firm is dissolved on the date of the order of adjudication unless there is a
contract to the contrary
 The estate of the insolvent partner is not liable for any act of the firm after the
date of the order of adjudication
 The firm cannot be held liable for any acts of the insolvent partner after the
date of the order of adjudication

Loss Arising from Insolvency of a Partner

When a partner is unable to pay his debt due to the firm, he is said to be insolvent
and the share of loss is to be borne by other solvent partners following the
decision in the English case of Garner vs. Murray.

According to this decision, solvent partners have to bear the loss due to
insolvency of a partner and have to categorically put that the normal loss on
realization of assets to be borne by all partners (including insolvent partner) in the
profit-sharing ratio but a loss due to insolvency of a partner has to be borne by the
solvent partners in the capital ratio.

The provisions of the Indian Partnership Act are not contrary to Garner vs.
Murray rule. However, if the partnership deed provides for a specific method to
be followed in case of insolvency of a partner, the provisions as per the deed
should be applied.

Determination of Capital Ratio on Insolvency

 The partners are free to have either fixed or fluctuating capitals in the firm.
 If some partner is having a debit balance in his Capital Account and is not
insolvent then he cannot be called upon to bear the loss on account of the
insolvency of other partner.
 If the partners are maintaining capitals at fixed amounts then all adjustments
regarding their share of profits, interest on capitals, drawings, interest on

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 drawings, salary, etc. are done through Current Accounts, which may have debit
or credit balances, and insolvency loss is distributed in the ratio of fixed capitals.
 If capitals are not fixed and all transactions relating to drawings, profits,
interest, etc., are passed through Capital Accounts then capital ratio will be
determined after adjusting all the reserves and accumulated profits to the date of
dissolution, all drawings to the date of dissolution, all interest on capitals and
drawings to the date of dissolution but before adjusting profit or loss on
Realization.

Insolvency of all Partners

 When the liabilities of the firm cannot be paid in full out of the firm's assets as
well as personal assets of the partners, then all the partners of the firm are said to
be insolvent. Under such circumstances, it is better not to transfer the amount of
creditors to Realization Account.
 The balance of the creditors' accounts is transferred to Deficiency Account.
Creditors may be paid the amount available including the amount contributed by
the partners.
 The unsatisfied portion of the creditor account is transferred to the Capital
Accounts of the partners in the profit-sharing ratio. Then Capital Accounts are
closed.

Piecemeal Payments
 Generally, the assets sold upon dissolution of partnership are realised only in
small instalments over a period of time.
 In such circumstances, the choice is either to distribute whatever is collected or
to wait till the whole amount is collected. Usually, the first course is adopted.
 In order to ensure that the distribution of cash among the partners is in
proportion to their interest in the partnership concern either of the two methods
described below may be followed for determining the order of payments.

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 Piecemeal distribution involves either of two methods
 Maximum Loss Method
 Highest Relative Capital Method

a) Maximum Loss Method

 Each installment realised is considered to be the final payment i.e., outstanding
assets and claims are considered worthless and partners' accounts are adjusted on
that basis each time when a distribution is made, following either Garner vs.
Murray Rule or the profit-sharing ratio.

b) Highest Relative Capital Method

 According to this method, the partner who has the higher relative capital, that
is, whose capital is greater in proportion to his profit- sharing ratio, is first paid
off.
 For determining the amount by which the capital of each partner is in excess of
his relative capital, partners' capitals are first divided by figures that are in
proportion to their profit-sharing ratio; the smallest quotient will indicate the
basic capital. Having ascertained the partner who has the smallest basic capital,
the amount of capital of other partners proportionate to the profit-sharing ratio of
the basic capital is calculated. These may be called as their hypothetical capitals*.

*The amount of hypothetical capital of each partner is then subtracted from the
amount of his actual capital; the resultant figure will be the amount of excess
capital held by him. By repeating the process once or twice, as may be necessary
between the partners having excess capital, the amount by which the capital of
each partner is in excess will be ascertained. The partner with the largest excess
capital will be paid off first, followed by payment to the other or others who rank
next to him until the capitals of partners are reduced to their profit-sharing ratio.

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 Limited Liability Partnerships
 The Limited Liability Partnerships (LLPs) in India were introduced by Limited
Liability Partnership Act, 2008 which lay down the law for the formation and
regulation of Limited Liability Partnerships.
 Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines
"limited liability partnership" means a partnership formed and registered under
this Act and "limited liability partnership agreement" means any written
agreement between the partners of the limited liability partnership or between the
limited liability partnership and its partners which determines the mutual rights
and duties of the partners and their rights and duties in relation to that limited
liability partnership.

Nature of Limited Liability Partnership

 A limited liability partnership is a body corporate formed and incorporated
under this Act and is a legal entity separate from that of its partners.
 A limited liability partnership should have perpetual succession.
 Any change in the partners of a limited liability partnership should not affect
the existence, rights or liabilities of the limited liability partnership.

Non-applicability of the Indian Partnership Act, 1932

 Provisions of the Indian Partnership Act, 1932 should not apply to a limited
liability partnership.

Distinction between an ordinary partnership firm and an LLP

Key Elements Partnership LLPs

Applicable Law Indian Partnership Act 1932 The Limited Liability

Partnerships Act, 2008

Registration Optional Compulsory with ROC

Creation Created by an Agreement Created by Law

Body No Yes
Corporate

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 Separate Legal No Yes
Entity

Perpetual Partnerships do not have It has perpetual

Succession perpetual succession succession individual
perpetual and partners
may come and go

Number of Minimum 2 and Maximum Minimum 2 but no

Partners 50 maximum limit

Ownership of Firm cannot own any assets. The LLP as an

Assets The partners own the assets independent entity can
of the firm own assets

Liability of Unlimited: Partners are Limited to the extent

Partners/ severally and jointly liable of their contribution
Members for actions of other partners towards LLP except in
and the firm and their case of intentional
liability extends to personal fraud or wrongful act
assets of omission or
commission by a
partner.

Principal Agent Partners are the agents of the Partners are agents of
Relationship firm and of each other the firm only and not
of other partners

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 Amalgamation, Conversion and Sale of Partnership Firms
Amalgamation of partnership firms includes

 Closing the old books of Amalgamating firms

 Opening the new books of Amalgamated firm

Amalgamation of Partnership Firms

When two or more partnership firms are amalgamated, the books of the old firm
are closed and books of the new firm are opened. The accounting procedures for
the same are:

a) Closing the books of old firm

 Each firm should prepare a Realisation or Revaluation Account relating to its
own assets and liabilities and transfer the balance to the partners' capital accounts
in the profit-sharing ratio. Entries for raising goodwill should be passed.
 Assets and liabilities not taken over by the new firm should be transferred to
the capital accounts of partners in the ratio of their capitals.
 The new firm should be debited with the difference between the value of assets
and liabilities taken over by it; the assets should be credited and liabilities
debited.
 Partners' capital accounts should be transferred to the new firm's account.

b) Opening the books of the new firm

 Debit assets taken out at the agreed values.
 Credit the liabilities taken over, and
 Credit individual partners' capital accounts with the closing balances in the
erstwhile firm.
 When one firm is merged with another existing firm, entries will be in the
pattern of winding up in the books of the firm which has ceased to exist. The
other firm will record the transaction as that of a business purchase.

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 Conversion of Partnership Firm into a Company on sale to a
Company
 At times partnerships also are reconstructed like joint-stock companies or are
sold to companies.
 Reconstruction usually entails preparation of Reconstruction Account for
determining the past losses which belong to old partners and writing them off to
the debit of their capital accounts. If a creditor agrees to join as a partner the
whole or only a part of the account standing to the credit of his loan account is
transferred to his capital account.
 When the partnership firm is converted into a company, then the financial
statements of the new company will be prepared according to Schedule III to the
Companies Act, 2013.

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 Amalgamation of companies
Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act 2013 or any other statute which may be applicable to companies
and includes merger.

Amalgamation refers to the process of merger of two or more companies into a

single entity or where one company takes over the other by outright purchase.

The accounting for amalgamation depends on whether amalgamation is in the

nature of merger or in the nature of purchase.

 the term amalgamation contemplates two kinds of activities:

 two or more companies join to form a new company or
 absorption and blending of one by the other.

The accounting for amalgamation depends on whether amalgamation is in the

nature of merger or in the nature of purchase.

Types of Amalgamation
 Amalgamation in the nature of merger
 Amalgamation in the nature of purchase

In amalgamation we have generally two companies called as

 Vendor or Transferor Company

 Vendee or Transferee Company

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 The concept given above can be understood from the following
table of differences-
Basis Amalgamation Absorption External
Reconstruction

Meaning Two or more In this case an In this case, a

companies are wound existing newly formed
up and a new company company takes company takes
is formed to take over over the over the business
their business. business of one of an existing
or more existing company.
companies

Number Only one resultant No new Only one resultant

of new company is formed. resultant company is
resultant Two companies are company is formed. Under this
companies wound up to form a formed case a newly
single resultant formed company
company. takes over the
business of an
existing company.

Objective Amalgamation is done Absorption is External

to cut competition & done to cut reconstruction is
reap the economies in competition & done to reorganize
large scale. reap the the financial
economies in structure of the
large scale. company

Purchase Consideration
AS 14 defines the term purchase consideration as the "aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets
by the transferee company to the shareholders of the transferor company".

In simple words, it is the price payable by the transferee company to the

transferor company for taking over the business of the transferor company.

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 It is important to note that the amount paid towards the equity shareholders and
preference shareholders is only considered as part of the purchase consideration
as per the definition under AS-14. Hence, it should be noted that purchase
consideration does not include the sum which the transferee company will
directly pay to the debenture-holders or creditors of the transferor company. If a
certain liability of the transferor company has not been taken over by the
transferee company it will be discharged by the transferor company.

The purchase consideration can be computed in the following methods.

 Lumpsum method
The transferee company agrees to pay a lumpsum/fixed amount to shareholders of
the transferor company.
 Net payment method
The transferee company makes individual payments to the equity shareholders
and preference shareholders either by way of cash, issue of shares and debentures.
 Net assets method
The purchase consideration is arrived based on the value of the assets less the
outside liabilities (excluding share capital and reserves) taken over by the
transferee company. As per AS 14, the value of the assets and liabilities shall be
at the value as agreed between the two parties. If there is no value agreed, then
assets and liabilities taken at the book value.
 Intrinsic value method
Under this method, the purchase consideration is calculated at the intrinsic value
of shares of the transferor or transferee company. The ratio of shares to be issued
is computed and multiplied with intrinsic value.

Any of the methods or a combination of the above methods can be used by the
companies to calculate the purchase consideration.

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 Methods of Accounting for Amalgamations
There are two main methods of accounting for amalgamation viz,

 Pooling of interest method

 Purchase method

The first method is used in case of amalgamation in the nature of merger where
the conditions as per AS-14, required are fulfilled and the second method is used
in case of amalgamation in the nature of purchase.

Amalgamation in the nature of merger is an amalgamation which satisfies all the

following conditions.

(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii)The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity shareholders
of the transferee company is discharged by the transferee company wholly by the
issue of equity shares in the transferee company, except that cash may be paid in
respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.

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 Amalgamation in the nature of purchase is an amalgamation which does not
satisfy any one or more of the conditions specified above.

Pooling of Interest Method

In case of pooling method- the amount to be adjusted against the reserves- can be
computed in the following 3 steps-

Step 1- Equity Share capital + Preference share capital issued+ any other
additional consideration in form of cash and other assets by the Transferee
Company.

Step II- Existing Equity share capital +Existing Preference share capital in the
books of Transferor Company.

Step III- Step 1-Step II- amount to be adjusted from the reserves of Transferee
Company.

Purchase Method
Assets and Liabilities

 Assets and liabilities of the transferor company should be incorporated at their

existing carrying amounts or the purchase consideration should be allocated to
individual identifiable assets and liabilities on the basis of their fair values at the
date of amalgamation.

In case of purchase method- the amount to be transferred to capital reserve or to

be recorded as Goodwill- can be computed as

Step I: Find out the Net assets amount using the following formula- Total assets
– Outside liabilities (Non-current liabilities + Current Liabilities)

Step II: Compute the purchase consideration using any of the methods as given
under Purchase consideration computation

Step III:

 If Step 1-Step II- Positive amount- then it is capital reserve- since the
assets received more than the amount paid as purchase consideration to
acquire them.
 If Step I-Step II- Negative amount- then it is to be recorded as Goodwill
(intangible asset) - since the amount paid for acquiring business is more

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 than the net assets, which is technically due to its goodwill.

Treatment of reserves under purchase method-

No reserves, other than statutory reserves, of the transferor company should be
incorporated in the financial statements of transferee-company.

The balance of Profit and Loss account, general reserves of the transferor
company are not recorded at all.

1. Though, normally, in an amalgamation in the nature of purchase, the identity of

reserves is not preserved, an exception is made only in respect of statutory
reserves and such reserves shall retain their identity in the financial statements of
the transferee company in the same form in which they appeared in the financial
statements of the transferor company, till the time their identity is required to be
maintained to comply with the relevant statute.
2. "Amalgamation Adjustment Reserve' is debited to bring in the statutory
reserves of the transferor company. This is represented as deduction from the
reserves of the transferee company after amalgamation.
3. This exception is made only in those amalgamations where the requirements of
the relevant statute for recording the statutory reserves in the books of the
transferee company are complied with. Statutory reserves of the transferor
company should be incorporated in the balance sheet of transferee company by
way of the following journal entry.
Amalgamation Adjustment Reserve A/c Dr.
To Statutory Reserves
4. Once after the time period to show such statutory reserves is over, both the
reserves and the aforesaid account are reversed. Amalgamation Adjustment
Reserve' has to be shown as a separate line item - which implies, that this debit
"cannot be set off against statutory reserve taken over" and therefore, the
presentation will be as follows

Reserves
Description Amount (Current Amount (Previous
year) Year)

Statutory Reserve (taken

over from transferor

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 company)

General Reserve

Retained Earnings

Amalgamation Adjustment
Reserve (negative balance)

Journal Entries to close the books of Vendor Company

 In case of amalgamation under any of the above methods, there shall be an
accounting treatment both in the books of vendor (transferor) and vendee
(transferee) companies.
 Since the books of the vendor will be closed upon amalgamation- the assets
and the liabilities at the book values are transferred to a separate account called as
the "Realization account.
 The purchase consideration receivable is credited to the Realization account.
On the receipt of the purchase consideration, it is debited to equity shareholders
and preference shareholders' account. The balance of realization account (either
profit/loss) is transferred to the equity shareholders' account.

Those assets and liabilities which are not taken over by vendee company but
settled by the vendor company are shown in the books of the vendor only.

1. Open Realization Account and transfer all assets at book value.

Exception: If cash is not taken over by the purchasing company, it should not be
transferred.

Note: Profit and Loss Account (Dr.) and expenses not written off are not assets
and should not be transferred to the Realization Account.

2. Transfer to the Realization Account the liabilities which the purchasing

company is to take over.

 In case of the provisions, the portion which represents liability expected to

arise in future should be so transferred and the portion which is not
required should be treated as profit.
 For liabilities not taken over by the purchasing company, the profit or loss

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 on discharge of such liabilities shall be transferred to Realization Account

3. Debit purchasing company and credit Realization Account with the purchase
consideration.

4. On receipt of the purchase consideration debit what is received (cash,

debentures, shares etc.) and credit the purchasing company.

5. Expenses of Liquidation.

Expenses of liquidation have to be dealt with according to the circumstances

of each case.

 If vendor company has to bear and pay

o Realization Account should be debited and Cash Account credited.
 If the expenses are to be borne by the purchasing company, the question may
be dealt within one of the two ways mentioned as
o It may be ignored in the books of the vendor company: No Entry
o If the expenses are to be paid first by the vendor company and
afterwards reimbursed by the purchasing company, the following two entries will
be passed:
 Debit Purchasing company and credit Cash Account when expenses
are paid by the vendor company; and
 Debit Cash Account and credit purchasing company (on the expenses
being reimbursed).

6. Liabilities not assumed by the purchasing company, have to be paid off. On

payment, debit the liability concerned and credit cash. Any difference between
the amount actually paid and the book figure must be transferred to the
Realization Account.

7. Credit the preference shareholders with the amount payable to them, debiting
Preference Share Capital with the amount shown in the books, transferring the
difference between the two, if any, to the Realization Account.

 In the absence of any indication to the contrary, preference shareholders will be

entitled only to the capital contributed by them. But if funds available after
paying off creditors are not sufficient to satisfy the claim of preference
shareholders fully, they will have to suffer a loss to the extent of the deficit.

8. Pay off preference shareholders by debiting them and crediting whatever is

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 given to them.

9. Transfer equity share capital and account representing profit or loss (including
the balance in Realization Account) to Equity Shareholders Account. This will
determine the amount receivable by the equity shareholders.

10. On satisfaction of the claims of the equity shareholders, debit their account
and credit whatever is given to them.

Entries in the books of Purchasing Company

In the books of the purchasing/ vendee/ transferee company, the assets and
liabilities which are taken overs are recorded at the agreed values and where there
is no agreed value then at the book values.

1. Debit Business Purchase Account and Credit Liquidator of the vendor

company with the account of the purchase consideration.

2.

(i) Debit assets acquired (except goodwill) at the value placed on them by the
purchasing company:
(ii) Credit liabilities taken over at agreed values and credit Business Purchase
Account with the amount of purchase consideration; and

If the credit as per (ii) above exceed debits as per (i) above, the difference should
be debited to Goodwill Account, in the reverse case, the difference should be
credited to Capital Reserve.

3. On the payment to the vendor company the balance at its credit, the entry to be
made for payment of cash and issue of shares in satisfaction of purchase
consideration.

4. If the purchasing company is required to pay the expenses of liquidation of the

vendor company, the amount should be debited to the Goodwill or Capital
Reserve Account, as the case may be.

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 Typical adjustments which shall be noted while working out the
problems-
Inter Company-owing
 If the purchasing company owe an amount to the vendor company or vice
versa, the amount will be included in the book debts of one company and trade
payables of the other. This should be adjusted by the entry:
Trade payables Dr.
To Trade receivables
 The entry should be made after the usual acquisition entries have been passed.
At the time of preparing the Realization Account and passing the business
purchase entries, no attention need be paid to the fact that the two companies
involved owed money mutually.

Adjustment of the value of stock

Inter-company owing arise usually from purchase and sale of goods; it is likely,
therefore, that at the time. of the sale of business, the debtor company also has
goods in stock which it purchased from the creditor company the cost of the
debtor company will include the profit made by the creditor company. After the
takeover of the business it is essential that such a profit is eliminated. The entry
for this will be made by the purchasing company. If it is the vendor company
which has such goods in stock, at the time of passing the acquisition entries, the
value of the stock should be reduced to its cost to the company which is acquiring
the business; automatically goodwill or capital reserve, as the case may be, will
be adjusted. But if the original sale was made by the vendor company and the
stock is with the company acquiring the business, the latter company will have to
debit Goodwill (or Capital Reserve) and credit stock with the amount of the profit
included in the stock.

Inter-company Loans
 Where there is any loan taken by the transferor company from the transferee
company then the amount of the loan shall be taken over by the transferee
company and adjustment entry to be passed as follows-
Loan (liability of Transferor co) A/c Dr XXX
To Loans and advances (assets) XXX

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 INTERNAL RECONSTRUCTION
Meaning of Reconstruction
Reconstruction is a process by which affairs of a company are reorganized by
revaluation of assets, reassessment of liabilities and by writing off the losses
already suffered, by reducing the paid-up value of shares and/or varying the
rights attached to different classes of shares.

The object of reconstruction is usually to reorganize capital or to compound

with creditors so that company can be bailed out from present situation
without winding up the existing company.

Types of Reconstruction
 Internal Reconstruction
 External reconstruction

Difference Between Internal and External Reconstruction

Basis Internal Reconstruction External Reconstruction

Liquidation The existing company is not The existing company is

and liquidated rather the capital liquidated to form a new
formation and debt structure is changed. company in which the
of new existing shareholders become
company shareholders of new
company as well.

Reduction There is certain reduction of There is no reduction of

of capital capital and sometimes the capital. In fact, there may be
and outside liabilities like addition of fresh share capital
varying debenture holders may have of the company. The
rights to reduce their claim in this shareholders need not vary
scheme. their rights in company

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 Methods of Internal Reconstruction
For property deploying the process of internal reconstruction, following methods
are generally employed or used simultaneously:

 Alteration of Share Capital

o Sub-division and Consolidation of Shares
o Conversion of share into stock or vice-versa
 Variation of Shareholders' rights
 Reduction of Share Capital
 Compromise/ Arrangement
 Surrender of Shares

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 Liquidation of Companies
LIQUIDATION - INTRODUCTION
A company being a creation of law cannot die a natural death. A company, when
found necessary, can be liquidated.

Liquidation is the legal procedure by which the company comes to an end.

DEFINITION OF WINDING UP
Winding Up Includes

 Winding up under the Companies Act, 2013

 Liquidation under Insolvency and Bankruptcy Code

WINDING UP BY TRIBUNAL
Circumstances in which company may be wound up by Tribunal

(a) The company has resolved that the company be wound up by the Tribunal.
The company is required to pass special resolution.
(b) The company has acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with foreign States, public
order, decency or morality.
(c) The Registrar or any other person authorised by the Central Government by
notification under this Act can make an application to Tribunal. The Tribunal is
of the opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or the
persons concerned in the formation have been guilty of fraud.
(d) The company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding 5 consecutive financial
years.
(e) The Tribunal is of the opinion that it is just and equitable that the company
should be wound up.

PETITION FOR WINDING UP

Petition for Winding Up to Tribunal can be made by

 The Company

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  Any Contributory or Contributories
 The Registrar
 Any person authorized by Central Government in that behalf
 In case affairs of the company have been conducted in a fraudulent manner, by
the Central Government or a State Government

Petition by Contributory
A Contributory can present petition if

 Shares in respect of which he is a contributory were either originally allotted to

him or have been held by him for at least 6 months during the 18 months
immediately before the commencement of the winding up and registered in his
name or have transferred to him through the death of a former holder.

Contributory can file petition ignoring these points

 He may be the holder of fully paid-up shares.

 The company may have no assets at all.
 The company may have no surplus assets left for distribution among the
shareholders after the satisfaction of its liabilities.

Petition by Registrar
 The Registrar should be entitled to present a petition for winding up under
section 271, except on the grounds specified in the section.
 The Registrar should obtain the previous sanction of the Central Government
to the presentation for a petition.
 The Central Government should not accord its sanction unless the company has
been given a reasonable opportunity of making representations.

Petition by Company
A petition presented by the company for winding up before the Tribunal should
be admitted

 If accompanied by a statement of affairs in such form and

 in such manner as may be prescribed.

A copy of the petition should also be filed with the Registrar.

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 The Registrar should, without prejudice to any other provisions,

 submit his views to the Tribunal

 within 60 days
 of receipt of such petition.

STATEMENT OF AFFAIRS
The broad lines on which the Statement of Affairs is prepared are the following-

(1) Include assets on which there is no fixed charge at the value they are expected
to realise include calls in arrear but not uncalled capital.
(2) Include assets on which there is a fixed charge. The amount expected to be
realised would be compared with the amount due to the creditor concerned. A
deficit (the amount owed to the creditor exceeding the amount realisable from the
asset) is to be added to unsecured creditors.
(3) The total of assets in point (1) and any surplus from assets mentioned in point
(2) is available for all the creditors (except secured creditors already covered by
specifically mortgaged assets).
(4) From the total assets available, the following should be deducted one by one:
 Preferential creditors,
 Debentures having a floating charge, and
 Unsecured creditors.
If a minus balance emerges, there would be deficiency as regards creditors,
otherwise there would be a surplus.
(5) The amount of total paid-up capital (giving details of each class of shares)
should be added and the figure emerging will be deficiency (or surplus) as
regards members.

Statement of affairs should accompany eight lists:

 List A - Full particulars of every description of property not specifically
pledged and included in any other list are to be set forth in this list.
 List B - Assets specifically pledged and creditors fully or partly secured.
 List C - Preferential creditors for rates, taxes, salaries, wages and otherwise.
 List D - List of debenture holders secured by a floating charge.
 List E - Unsecured creditors.
 List F - List of preference shareholders.

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  List G - List of equity shareholders.
 List H - Deficiency or Surplus account.

DEFICIENCY ACCOUNT
The official liquidator will specify a date for period (minimum three years)
beginning with the date on which information is supplied for preparation of an
account to explain the deficiency or surplus. On that date, either assets would
exceed capital plus liabilities, that is, there would be a reserve or there would be a
deficit or debit balance in the Profit and Loss Account.

Deficiency account is divided into two parts:

 First part starts with the deficit (on the given date) and contains every item that
increases deficiency (or reduces surplus such as losses, dividends etc.).
 Second part starts with the surplus on the given date and includes all profits.

If the total of the first part exceeds that of the second, there would be a deficiency
to the extent of the difference, and if the total of the second part exceeds that of
the first, there would be a surplus.

OVERRIDING PREFERENTIAL PAYMENTS

In the winding up of a company, the following debts should be paid in
priority to all other debts:

a. workmen's dues; and

b. where a secured creditor has realised a secured asset, so much of the debts due
to such secured creditor as could not be realised by him or the amount of the
workmen's portion in his security (if payable under the law), whichever is less,
pari-passu with the workmen's dues.

Explanation: For the purposes of this section:

(A) Workmen, in relation to a company, means the employees of the company,

being workmen within the meaning of Section 2 (s) of the Industrial Disputes
Act, 1947;
(B) Workmen dues, in relation to a company, means the aggregate of the

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 following sums due from the company to its workmen, namely:
(C) Workmen portion, in relation to the security of any secured creditor of a
company, means the amount which bears to the value of the security the same
proportion as the amount of the workmen's dues bears to the aggregate of the
amount of workmen's dues and the amount of the debts due to the secured
creditors.

Workmen Dues
 All wages or salary including wages payable
o Wages payable time or piece work
o Salary earned wholly or in part by way of commission
 All accrued holiday remuneration becoming payable to any workman
 Unless the company is being wound up voluntarily merely for the purposes of
reconstruction or amalgamation with another company or unless the company
has, at the commencement of the winding up, under such a contract with insurers
as is mentioned in the Workmen's Compensation Act, 1923, rights capable of
being transferred to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of the
death or disablement of any workman of the company;
 All sums due to any workman from provident fund, pension fund. gratuity fund
or any other fund maintained by the company.

The following payment should be made in priority to secured

creditors:
 All wages or salary including wages payable
 all accrued holiday remuneration becoming payable to any workman
 If the above payments are payable for a period of 2 years preceding the
winding up order then the same shall be paid in priority to all other debts
(including debts due to secured creditors), within a period of 30 days of sale of
assets and shall be subject to such charge over the security of secured creditors.

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 PREFERENTIAL CREDITORS
In a winding up preferential creditors should be paid in priority to all other debts
subject to the provisions of section 326 of the Companies Act.

 Government Taxes
 Expenses of Investigation
 Salary and Wages
 PF, Pension Fund and Gratuity Fund
 Holiday Remuneration
 Compensation in respect of death or disablement
 Contribution under ESI Act

a) Government Taxes:
All revenues, taxes, cess and rates due from the company to the Central
Government or a State Government or to a local authority at the relevant date,
and having become due and payable within the 12 months immediately before
that date.

b) Salary and Wages:

All wages or salary including wages payable for time or piece work and salary
earned wholly or in part by way of commission of any employee in respect of
services rendered to the company and due for a period not exceeding four months
within the 12 months immediately before the relevant date, subject to the
condition that the amount payable under this clause to any workman should not
exceed such amount as may be notified.

c) Holiday Remuneration:
All accrued holiday remuneration becoming payable to any employee, or in the
case of his death, to any other person claiming under him, on the termination of
his employment before, or by the winding up order, or, as the case may be, the
dissolution of the company.

d) Contribution under ESI Act:

Unless the company is being wound up voluntarily merely for the purposes of
reconstruction or amalgamation with another company, all amount due in respect
of contributions payable during the period of twelve months immediately before
the relevant date by the company as the employer of persons under the

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 Employees' State Insurance Act, 1948 or any other law for the time being in
force.

e) Compensation in respect of death or disablement:

 Unless the company has, at the commencement of winding up, under such
a contract with any insurer as is mentioned in the Workmen's
Compensation Act, 1923, rights capable of being transferred to and vested
in the workmen, all amount due in respect of any compensation or liability
for compensation under the said Act in respect of the death or disablement
of any employee of the company:
 Where any compensation under the said Act is a weekly payment, the
amount payable under this clause should be taken to be the amount of the
lump sum for which such weekly payment could, if redeemable, be
redeemed, if the employer has made an application under that Act.

f) PF, Pension Fund or Gratuity Fund:

All sums due to any employee from the provident fund, the pension fund, the
gratuity fund or any other fund for the welfare of the employees, maintained by
the company.

g) Expenses of Investigation:
The expenses of investigation held in pursuance of sections 213 and 216 of the
Companies Act as far as they are payable by the company.

Explanations: For the purposes of this section:

Accrued Holiday Remuneration includes,

In relation to any person. all sums which, by virtue either of his contract of
employment or of any enactment including any order made or direction and given
thereunder, are payable on account of the remuneration which would, in the
ordinary course, have become payable to him in respect of a period of holiday,
had his employment with the company continued until he became entitled to be
allowed the holiday;

Employee

 Does not include a workman;

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 Relevant Date means

 In the case of a company being wound up by the Tribunal, the date of

appointment or first appointment of a provisional liquidator, or if no such
appointment was made, the date of the winding up order, unless, in either case,
the company had commenced to be wound up voluntarily before that date under
the Insolvency and Bankruptcy Code, 2016.

Effect of Floating Charge

Where a company is being wound up, a floating charge on the undertaking or

property of the company created within the 12 months immediately preceding the
commencement of the winding up, should be invalid unless it is proved that the
company immediately after the creation of the charge was solvent except for the
amount of any cash paid to the company at the time of and in consideration for or
subsequent to the creation of the charge together with interest on that amount at
the rate of 5 per cent per annum or such other rate as may be notified by the
Central Government in this behalf.

B LIST CONTRIBUTORIES
Shareholders who had transferred Partly Paid Shares (otherwise than by operation
of law or by death) within one year, prior to the date of winding up may be called
upon to pay an amount to pay off such creditors as existed on the date of transfer
of shares. These Transferors are called as B List Contributories.

Liability:

Their liability is restricted to the amount not called up when the shares were
transferred. They cannot be called upon to pay more than the entire face value of
the share.

Conditions:

Liability of B List Contributories will crystallise only

(a) when the existing assets available with the liquidator are not sufficient to
cover the liabilities;
(b) when the existing shareholders fail to pay the amount due on the shares to the
Liquidator.

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 LIQUIDATOR'S FINAL STATEMENT OF ACCOUNT
The statement showing receipts and payments of cash prepared in case of

 voluntary winding up
o Liquidator's Statement of Account"
 compulsory winding up
o "Official Liquidator's Final Account”

While Preparing the Statement of Account, the following points should be

noted:

1) Assets are included in the prescribed order of liquidity.

2) In case of assets specifically charged in favour of creditors, only the surplus
from it, if any, is recognised as "Surplus from Securities"
3) Net result of trading entered on the receipts side, profits being added and losses
being deducted.
4) Payments made to redeem securities and cost of execution, i.e. cost of
collecting debts, are deducted from the total receipts.
5) Payments are made as shown in the following order:
(a) Legal Charges;
(b) Liquidator's Remuneration;
(c) Liquidation Expenses;
(d) Debenture holders (including interest up to the date of winding up if the
company is insolvent and to the date of payment if it is solvent);
(e) Creditors;
(i) Preferential (in actual practice, preferential creditors are paid
before debenture holders having a floating charge).
(ii) Unsecured creditors, shareholders for dividends declared but not
yet paid;
(f) Preference shareholders; and
(g) Equity shareholders.
6) Arrears of dividends on cumulative preference shares should be paid up to the
date of winding up.
7) In case of partly paid shares, it should be seen whether any amount is to be
called up on such shares.
Firstly, the equity shareholders should be called up to pay the necessary amount

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 (not exceeding the amount of uncalled capital) if creditors' claims of preference
shareholders cannot be satisfied with the amount. Preference shareholders would
be called upon to contribute (not exceeding the amount as yet uncalled on the
shares) for paying off creditors.
8) The loss suffered by each class of shareholders, i.e. the amount that cannot be
repaid, should be proportionate to the nominal value of the share.

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 Hire Purchase and Instalment sale transactions
Sales under Hire Purchase and Instalment Payment System

Sales

On full
payment (in On Instalment
Cash or Credit)

oTransfer of
Ownership at the oHire Purchase oInstalment
time of sale

Agreement of Agreement of
Hiring Sale

Ownership transfer on
Ownership transfer on
payment of last
payment of first Instalment
Instalment

Parties Parties

Hire Purchaser Hire Vendor Buyer Seller

Important Terms Used in Hire Purchase Arrangements and

Instalment Payment System
 Hire Vendor
Person who delivers the goods along with its possession to the hire purchaser
under a hire purchase agreement.
 Hire Purchaser
Person who obtains the goods and rights to use the same from hire vendor under a
hire purchase agreement.
 Cash Price
Amount to be paid by the buyer on outright purchase in cash.
 Down Payment
Initial payment made to the hire vendor by the hire purchaser at the time of
entering into a hire purchase agreement.
 Hire Purchase Instalment

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 Amount which the hire purchaser has to pay after a regular interval upto certain
period as per the agreement to obtain the ownership of the asset purchased (on
payment of the last Instalment). It comprises of principal amount and the interest
on the unpaid amount.
 Hire purchase price
Total sum payable by the hire purchaser to obtain the ownership of the asset
purchased under hire purchase agreement. It comprises of cash price and interest
on outstanding balances.
 Repossession
If the hire purchaser fails to pay any of the instalments, the hire vendor takes the
asset back in its actual form. This act of recovery of possession of the asset is
termed as repossession.

Ascertainment of Cash Price

Calculation of cash price and Interest

 Without using annuity table (Interest included in each instalment is calculated

from an appropriate formula)
 With the help of annuity table (Cash price = Down payment + Present value of
instalments)

Accounting for Hire Purchase Transactions

Books of Hire Purchaser

Methods

1) Cash Price Method

 Full cash price of asset is debited to Asset Account and credited to Hire
Vendor Account
2) Interest Suspense Method
 At the time of transfer of possession of asset, total interest unaccrued is
transferred to interest suspense account.
 At later years, as and when. interest becomes due, interest account is
debited and interest suspense account is credited.

Journal Entries

Cash Price Method

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 At the time of entering into the agreement

Asset Account Dr. [Full cash price]

To Hire Vendor Account

When down payment is made

Hire Vendor Account Dr. [Down payment]

To Cash/Bank Account

When an instalment becomes due

Interest Account Dr. [Interest on outstanding balance]

To Hire Vendor Account

When an instalment is paid

Hire Vendor Account Dr. [Amount of instalment]

To Bank Account

When depreciation is charged on the asset

Depreciation Account Dr. [Calculated on cash price]

To Asset Account

For closing interest and depreciation account

Profit and Loss Account Dr.

To Interest Account

To Depreciation Account

Interest suspense method

When the asset is acquired on hire purchase

Asset Account Dr. [Full cash price]

To Hire Vendor Account

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 For total interest payment

H.P. Interest Suspense Account Dr. [Total interest]

To Hire Vendor Account

When down payment is made

Hire Vendor Account Dr.

To Bank Account

For Interest of the relevant period

Interest Account Dr. [Interest of the relevant period]

To H.P. Interest Suspense Account

When an instalment is paid

Hire Vendor Account Dr.

To Bank Account

When depreciation is charged on the asset

Depreciation Account Dr. [Calculated on cash price]

To Asset Account

For closing interest and depreciation account

Profit and Loss Account Dr.

To Interest Account

To Depreciation Account

Books of Hire Vendor

Methods

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 1) Sales Method
 Hire purchase sale is treated as a credit sale, subject to payment in
instalments
2) Interest Suspense Method
 Hire purchaser is debited with full cash price and total interest included in
the selling price.

Journal Entries

Sales Method

When Goods are sold and delivered

Hire Purchaser Account Dr.[Full cash price]

To H.P. Sales Account

When the down payment is received

Bank Account Dr.

To Hire Purchaser Account

When an instalment becomes due

Hire Purchaser Account Dr.

To Interest Account

When the amount of instalment is received

Bank Account Dr.

To Hire Purchaser Account

For closing interest Account

Interest Account Dr.

To Profit and Loss Account

For closing Hire Purchase Sales Account

H.P. Sales Account Dr.

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 To Trading Account

Interest Suspense Method

When Goods are sold and delivered

Hire Purchaser Account Dr. [Full cash price + total interest]

To H.P. Sales Account [Full cash price]

To Interest Suspense Account [Total Interest]

When down payment/instalment is received

Bank Account Dr.

To Hire Purchaser Account

For interest of the relevant accounting period

Interest Suspense Account Dr.

To Interest Account

For closing interest Account

Interest Account Dr.

To Profit and Loss Account

For closing Hire Purchase Sales Account

H.P. Sales Account Dr.

To Trading Account

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 Repossession

Repossession

Books of Hire Books of Hire

Purchaser vendor

oHire Vendor A/c oGoods Repossessed A/c Dr.

Dr. To Asset A/c To Hire Purchaser

oVendor may incur

Complete Partial further expenses and sell
at profit or loss

Hire vendor repossesses part of

Hire vendor repossesses all
the goods & Balance of goods
the goods
remains with the purchaser.

Loss on surrender If the

For remaining
repossessed value is < book
portion of asset
value

oApplication of
oAsset in books af
usual rate of
W.D.V
depreciation

Accounting Treatment of Sales Under Instalment Payment System

Books of buyer

Asset A/c Dr. Full cash price

Interest Suspense A/c Dr. Full Instalment price less cash price

To Vendor Full Instalment price

Books of Seller

Purchaser Dr. Full Instalment price

To Sales A/c cash price

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 To Interest Suspense A/c Full Instalment price less cash price

Differences Between Sales Under Hire Purchase And Instalment

System
Basis of Hire Purchase Instalment System
Distinction

Governing It is governed by Hire It is governed by the Sale

Act Purchase Act, 1972. of Goods Act, 1930.

Nature of It is an agreement of hiring. It is an agreement of sale.

Contract

Passing of The title to goods passes on The title to goods passes

Title last payment. immediately as in the case
(ownership) of usual sales.

Right to The hirer may return goods Unless seller defaults,

Return goods without further payment goods are not returnable.
except for accrued
instalments.

Seller's right The seller may take The seller can sue for price
to repossess possession of the goods if if the buyer is in default.
hirer is in default. He cannot take possession
of the goods.

Right of Hirer cannot hire out, sell, The buyer may dispose of
Disposal pledge or assign entitling the goods and give good
transferee to retain title to the purchaser.
possession as against the hire
vendor.

Responsibility The hirer is not responsible The buyer is responsible

for Risk of for risk of loss of goods if he for risk of loss of goods
Loss. has taken reasonable because ownership has
precaution because the

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 ownership has not yet transferred.
transferred.

Name of The parties involved are The parties involved are

Parties called Hirer and Hire vendor. called buyer and seller.
involved

Component Component other than Cash Component other than

other than Price included in instalment Cash Price included in
cash price. is called Hire charges. Instalment is called
Interest.

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 Branch Accounts

Accounting for Branches (including Foreign Branches)

A branch can be described as any establishment carrying on either the same or
substantially the same activity as that carried on by head office of the company. It
must also be noted that the concept of a branch means existence of a head office; for
there can be no branch without a head office - the principal place of business. Branch
offices are of a great utility in the sense that they allow business to expand closer to
the clients and hence they facilitate face to face interaction with customers. Branch
accounting provides better accountability and control since profitability and
efficiency can be closely tracked for each location.
For finding out the trading results of branch, it is assumed that the branch is an entity
separate from the head office.
On this basis, a Branch Account is stated in the head office books to which the price
of goods or services provided or expenses paid out are debited and correspondingly,
the value of benefits and cash received from the branch are credited.
Distinction Between Branch Accounts and Departmental Accounts
Basis of Branch Accounts Departmental
Accounts
distinction
1. Maintenance Branch accounts may be Departmental accounts
of accounts maintained either at branch or are maintained at one
at head office. place only.
2. Apportionment As expenses in respect of Common expenses
of common each branch can be identified,
are distributed among
expenses so the apportionment problem
the departments
never arises.
concerned on some
equitable basis
considered suitable in
the case.

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3. Reconciliation Reconciliation of head office Such problem never
and branch accounts is arises.
necessary in case of Branches
maintaining independent
accounting records at the end
of the accounting year.
4. Conversion of At the time of finalisation of Such problem never
foreign accounts, conversion of arises.
currency figures of foreign branch is
figures necessary.

Classification of Branches
From the accounting point of view, branches may be classified as follows:

Classification of Branches

Inland Branches Foreign Branches

Dependent Branches for

Independent Branches which
which whole accounting
maintain independent accounting
records are kept at Head
records
Office

Dependent Branches
When the business policies and the administration of a branch are wholly controlled
by the head office and its accounts also are maintained by it, the branch is described
as Dependent branch.
Branch accounts, in such a case, are maintained at the head office out of reports and
returns received from the branch

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 Some of the significant types of branches that are operated
in this manner are described below:

A branch set up merely for A branch established at a

booking orders that are commercial center for the sale A branch for the retail sale of
executed by the head office. of goods supplied by the head goods, supplied by the head
Such a branch only transmits office, and under its direction office.
orders to the head office. all collections are made by the
H.O.

Accounting in the case of first two types is simple. Only a record of expenses
incurred at the branch has to be maintained.
But however, a retail branch is essentially a sale agency that principally sells goods
supplied by the head office for cash and, if so authorised, also on credit to approved
customers.
Generally, cash collected is deposited into a local bank to the credit of the head office
and the head office issues cheques or transfers funds thereon for meeting the
expenses of the branch.
In addition, the Branch Manager is provided with a ‘float’ for petty expenses which
is replenished from time to time on an imprest basis.
If, however, the branch also sells certain lines of goods, directly purchased by it, the
branch retains a part of the sale proceeds to pay for the goods so purchased.
Methods of Charging Goods to Branches

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 Goods may be invoiced to branches

In case of retail
At cost At selling price branches, at wholesale
price

Where the goods

would be sold at a Suitable for dealers in In this way, greater control can be
fixed price by the tea, petrol, ghee, etc. exercised over the working of a branch in
branch. as much as that the branch balance in the
head office books would always be
composed of the value of unsold stock at
the branch and remittances or goods in
transit.

Accounting for Dependent Branches

Dependent branch does not maintain a complete record of its transactions. The Head
office may maintain accounts of dependent branches by any of the following
methods:

Methods of maintaining accounts of

Dependent Branches

Goods invoiced at Goods invoiced at

cost or selling price wholesale price

Trading and profit

Stock and Debtors and loss account Whole sale branch
Debtors Method
Method method (Final method
Accounts method)

When goods are invoiced at cost

(i) Debtor method
 It is suitable for small sized branches.
 Separate branch account is maintained for each branch to compute profit or
loss made by each branch.
If the branch is allowed to make small purchases of goods locally as well as to incur
expenses out of its cash receipts, it will be necessary for the branch to supply to the

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head office a copy of the Cash Account, showing details of cash collections and
disbursements.
To illustrate the various entries which are made in the Branch Account, the proforma
of a Branch Account is shown below:
Proforma Branch Account
To Balance b/d By Bank A/c (Cash remitted) By
Return to H.O.
Cash
By Balance c/d
Stock
Cash
Debtors
Stock
Petty Cash
Debtors
Fixed Assets
Petty Cash
Prepaid Expenses
Fixed Assets
To Goods sent to Branch
Prepaid Expenses
To Bank A/c
By Profit and Loss A/c—Loss
Salaries
(if debit side is larger)
Rent
Sundry Expenses
To Profit & Loss A/c—Profit
(if credit side is larger)

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 Note

The accuracy of the trading results as

disclosed by the Branch Account, so
Having credited the Branch Account by the maintained, if considered necessary, can be
actual cash received from debtors, it would be proved by preparing a Memorandum Branch
incorrect to debit the Branch Account, in Trading and Profit & Loss Account, in the
respect of discount or allowances to debtors. usual way, from the balances of various items
of income and expenses contained in the
Branch Account.

(ii) Stock and Debtors method:

The accounts of the branch are maintained under this method
• to exercise a more detailed control over the working of a branch.
Accounts maintained by the Head Office:
Account Purpose
1. Branch Stock Account Ascertainment of shortage or surplus
(or Branch Trading
Account)
2. Branch Debtors Account Ascertainment of closing balance of debtors
3. Branch Expenses Ascertainment of total expenses incurred
Account
4. Goods sent to Branch Ascertainment of cost of goods sent to branch
Account
5. Branch Cash / Bank Know about cash flow at branch (eg: where
Account branch is allowed to incur expenses locally)
6. Branch Fixed Asset Control over branch Fixed Assets
Account
7. Branch Profit and Loss Calculation of net profit or loss
Account

The manner in which entries are recorded in the above method is shown below:

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Transaction Account debited Account credited
Cost of goods sent to the Branch Stock A/c Goods sent to Branch
Branch A/c
Remittances for expenses Branch Cash A/c Cash A/c
Any asset (e.g. furniture) Branch Asset Asset A/c
provided by H.O. (Furniture) A/c
Cost of goods returned by Goods sent to Branch Stock A/c
the branch Branch A/c
Cash Sales at the Branch Branch Cash A/c Branch Stock A/c
Credit Sales at the Branch Branch Debtors Branch Stock A/c
A/c
Return of goods by Branch Stock A/c Branch Debtors A/c
debtors to the Branch
Cash paid by debtors Branch Cash A/c Branch Debtors A/c
Discount & allowance to Branch Expenses Branch Debtors A/c
debtors, bad debts A/c
Remittances to H.O. Cash A/c Branch Cash A/c
Branch Expenses directly Branch Expenses Cash A/c
paid by H.O. A/c
Expenses met by Branch Branch Expenses Branch Cash A/c
A/c

Closing Stock: Credit the Branch Stock Account with the value of closing stock at
cost. It will be carried down as opening balance (debit) for the next accounting
period. The Balance of the Branch Stock Account, (after adjustment therein the value
of closing stock), if in credit, will represent the gross profit on sales and vice versa.
Other Steps
Balance of Branch Stock Account will be transferred to the Branch Profit and Loss
Account.
Balance of Branch Expenses Account will be transferred to the debit of Branch Profit
& Loss Account.

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The balance in the Branch P&L A/c will be transferred to the (H.O.) Profit & Loss
Account.
The credit balance in the Goods sent to Branch Account is afterwards transferred to
the Head Office Purchase Account or Trading Account (in case of manufacturing
concerns), it being the value of goods transferred to the Branch.
(iii) Trading and Profit and Loss Account (Final Accounts Method)

Trading and Profit and It is merely a

Loss accounts are The main advantage memorandum account
prepared and therefore,

considering each It also gives complete the entries made do

It is easy to prepare information of all
branch as a separate not have double entry
and understand. transactions which are
entity. effect.
ignored in the other
methods.

When goods are invoiced at selling price

Whenever, goods sent to branch are invoiced at selling price:
(a) It would be obvious that, if Branch Account is debited with the sales price of
goods and subsequent to the debit being raised there is a change in the sale
price, the amount of debit either has to be increased or reduced on a
consideration of the quantity of unsold stock that was there at the branch at the
time the change took place. Such an adjustment will be necessary as often as
the change in sale price occurs.
(b) Moreover, the amount of anticipatory or unrealised profit, included in the
value of unsold stock with the branch at the close of the year will have to be
eliminated before the accounts of the branch are incorporated with that of the
head office. This will be done by creating a reserve.
(c) It may also be necessary to adjust the value of closing stock on account of the
physical losses of stock due to either pilferage or wastages which may have
occurred during the year. This adjustment is made by debiting the cost of such
goods to Goods Lost Account and the amount of loading (included in the lost
goods), to the Branch Adjustment Account.

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The three different methods that are usually adopted for maintaining accounts on this
basis are described below:
(i) Debtor method

Under this method, the principal accounts

that will be maintained are:

The Goods Sent to Branch The Stock Reserve

The Branch Account;
Account; and Account.

Entries in these accounts will be made in the following manner:

Transaction Account debited Account credited
(a) Goods sent to Branch at Branch A/c Goods Sent to Branch
selling price A/c
(b) ‘Loading being the Goods Sent to Branch A/c
difference between selling Branch A/c
price and cost of goods
(c) Returns to H.O. at selling Goods Sent to Branch A/c
price Branch A/c
(d) ‘Loading’ in respect of Branch A/c Goods Sent to Branch
goods returned to H.O. A/c
(e) ‘Loading’ included in the Stock Reserve A/c Branch A/c
opening stock to reduce it
(f) Closing stock at selling Branch Stock A/c Branch A/c
price
(g) ‘Loading’ included in Branch A/c Stock Reserve A/c
closing stock to reduce it
to cost

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Hence, the Branch Account will not correctly show the trading profit of the Branch
unless these amounts are adjusted to cost. Such an adjustment is affected by making
contra entries in ‘Goods Sent to Branch A/c’ and ‘Stock Reserve Account’.
In respect of closing stock at branch for the purpose of disclosure in the Balance
Sheet, the credit balance in the ‘Stock Reserve Account’ at the end of the year will be
deducted from the value of the closing stock, so as to reduce it to its cost; it will be
carried forward as a separate balance to the following year, for being transferred to
the credit of the Branch Account
(ii) Stock and Debtors Method
One additional account i.e. ‘Branch Adjustment account’ is also prepared in addition
to all the accounts which are maintained under stock and debtors method on cost
basis.
Journal Entries
Transaction Account debited Account credited
(a) Sale price of the Branch Stock A/c (at (i) Goods sent to Branch A/c
goods sent from selling price) at cost.
H.O. to the
(ii) Branch Adjustment A/c
Branch
(with the loading i.e.,
difference between the
selling price and cost price).
(b) Return of goods (i) Goods sent to Branch Stock A/c
by the Branch to Branch A/c (with the
H.O. cost of goods
returned).
(ii) Branch
Adjustment A/c (with
the loading)
(c) Cash sales at the Branch Cash/Bank Branch Stock A/c
Branch A/c
(d) Credit Sales at the Branch Debtors A/c Branch Stock A/c
Branch

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(e) Goods returned to Branch Stock A/c Branch Debtors A/c
Branch by
(at selling price)
customers
(f) Goods lost in (i) Goods Lost in Branch Stock A/c
transit or stolen Transit A/c or
Goods Stolen A/c
(with cost of the
goods)
(ii)Branch
Adjustment A/c
(with the loading)

Closing Stock
• The balance in the Branch Stock Account at the close of the year normally
should be equal to the unsold stock at the Branch valued at sale price.
• But quite often the value of stock actually held at the branch is either more or
less than the balance of the Branch Stock Account
• In that event balance in the Branch Stock Account is increased or reduced by
debit or credit to Goods Lost Account (at cost price of goods) and Branch
Adjustment Account (with the loading).
• The Stock Account at selling price, thus reveals loss of stock (or surplus) and
serves as a check on the branch in this respect.
The discrepancy in the amount of balance in the Branch Stock Account and the value
of stock actually in hand, valued at sale price, may be the result of one or more of the
under-mentioned factors:
• An error in applying the percentage of loading.
• Goods having been sold either below or above the established selling price.
• A Commission to adjust returns or allowances.
• Physical loss of stock due to natural causes or pilferage.
• Errors in Stocktaking
Rebates and allowances
• Rebates and allowances allowed to customers debited to P&L A/c & credited
to debtors A/c.
• In the Goods Sent to Branch Account, the cost of the goods sent out to a
branch for sale is credited by debiting Branch Stock Account

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 • Conversely, the cost of goods returned by the branch is debited to this account.
As such the balance in the account at the end of the year will be the cost of
goods sent to the branch; therefore, it will be transferred either to the Trading
Account or to Purchases Account of the head office.
• The amount of profit anticipated on sale of goods sent to the branch is credited
to the Branch Adjustment Account and conversely, the amount of profit not
realised in respect of goods returned by the branch to head office or that in
respect to stock remaining unsold with the branch at the close of the year is
debited to Branch Adjustment Account.
• The balance in this account, at the end of year thus will consist of the amount
of Gross Profit earned on sale by the branch.
• On that account, it will be transferred to the Branch Profit and Loss Account.
Elimination of unrealised profit in the closing stock
• The balance in the Branch Stock account would be at the sale price; therefore,
it would be necessary to eliminate the element of profit included in such
closing stock.
• This is done by creating a reserve against unrealised profit, by debiting the
Branch Adjustment Account and crediting Stock Reserve Account with an
amount equal to the difference in the cost and selling price of unsold stock.
• Sometimes instead of opening a separate account in respect of the reserve, the
amount of the difference is credited to Branch Stock Account. In that case, the
credited balance of such a reserve is also carried forward separately, along
with the debit balance in the Branch Stock Account; the difference between the
two would be the value of stock at cost. In either case, the credit balance will
be deducted out of the value of closing stock for the purpose of disclosure in
the balance sheet, so that the stock is shown at cost.
An Alternative method of elimination of unrealised profit in closing stock
• Where the gross profit of each branch is not required to be ascertained
separately, although the selling price is uniform, the amount of goods sent to
the branch is recorded only in two accounts namely - Branch Stock Account
and Goods Sent to Branch A/c.
• In this method, at the end of the year the Branch Stock Account is closed by
transfer of the balance representing the value of closing stock, at sale price, to
the Goods Sent to Branch Account.
• This has the effect of altogether eliminating from the books the value of stock
at the branch. The balance of Goods sent to Branch Account is afterwards
transferred to the Trading Account representing the net sale price of goods sold
at the branch. In that case, the value of closing stock at the branch at cost will

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 be subsequently introduced in the Trading Account together with that of
closing stock at the head office.
(iii) Trading and Profit and Loss Account (Final Accounts) Method:
• All items of memorandum Branch Trading and Profit and Loss Account are to
be converted into cost price if the goods are invoiced to branch at selling price.
• Other points will remain same as already discussed under this method when
goods are invoiced at cost.
Goods invoiced at wholesale price to retail branches
• Under this method, the Head Office (particularly, the manufacturing concern)
supplies goods to its retail branches at wholesale price which is cost plus
wholesale profit.
• Profit of branch = Sale proceeds at shop - wholesale price of the goods sold.
• For this purpose, it is assumed that Manufacturer would always be able to sell
the goods on wholesale terms thereby Manufacturer profit = Wholesale price -
Cost.
• Many concems, therefore, invoice goods to such shops at wholesale price and
determine profit or loss on sale of goods on this basis.

Branch Stock Account or the

Trading Account

It is debited with It is credited by

The value of Price of goods sent Closing stock of

Sales effected at the
opening stock at the during the year at goods valued at
shop; and
Branch; and wholesale price. wholesale price.

The value of goods lost due to accident, theft etc., also is credited to the Branch
Stock Account or Trading Account calculated at the wholesale price. At this stage,
the Branch Stock or Trading Account will reveal the amount of gross profit (or loss).
It is transferred to the Branch Profit and Loss Account. On further being debited with
the expenses incurred at the shop and the wholesale price of goods lost, the Branch
Profit and Loss Account will disclose the net profit (or loss) at the shop.
The value of goods lost due to accident, theft etc., also is credited to the Branch
Stock Account or Trading Account calculated at the wholesale price. At this stage,
the Branch Stock or Trading Account will reveal the amount of gross profit (or loss).
It is transferred to the Branch Profit and Loss Account. On further being debited with

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the expenses incurred at the shop and the wholesale price of goods lost, the Branch
Profit and Loss Account will disclose the net profit (or loss) at the shop.

Accounting for Independent Branches

Salient features of accounting system of an Independent Branch are as follows
• Branch maintains its entire books of account under double entry system.
• Branch opens in its books a Head Office account to record all transactions that take
place between Head Office and branch. The Head Office maintains a Branch account
to record these transactions.
• Branch prepares its Trial Balance, Trading and profit and loss Account at the end of
the accounting period and sends copies of these statements to Head Office for
incorporation.
• After receiving the final statements from branch, Head Office reconciles between
the two – Branch account in Head Office books and Head Office account in Branch
books.
• Head office passes necessary journal entries to incorporate branch trial balance in
its books.
The Head Office Account in branch books and Branch Account in head office
books is maintained respectively.
(i) Dispatch of goods to Branch A/c Dr. Goods received from Dr.
branch by H.O. H.O. A/c To Head
To Good sent to
Office A/c
Branch A/c
(ii) When goods are Goods sent to Dr. Head Office A/c Dr.
returned by the Branch A/c To
To Goods received
Branch to H.O. Branch A/c
from H.O. A/c
(iii) Branch Expenses are No Entry Expenses A/c Dr.
paid by the Branch
To Bank or Cash A/c
(iv) Branch Expenses paid Branch A/c Dr. Expenses A/c Dr.
by H.O.
To Bank or Cash To Head Office A/c
A/c

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(v) Outside purchases No Entry Purchases A/c Dr.
made by the Branch
To Bank (or) Creditors
A/c
(vi) Sales effected by the No Entry Cash or Debtors A/c Dr.
Branch To Sales
(vii) Collection from Cash or Bank A/c Dr. Head office A/c Dr.
Debtors of the Branch To Branch A/c
To Sundry Debtors A/c
recd. by H.O.
(viii) Payment by H.O. for Branch A/c To Dr. Purchases (or) Sundry Dr.
purchase made by Bank A/c Creditors A/c To Head
Branch Office
(ix) Purchase of Asset by No Entry Sundry Assets Dr.
Branch
To Bank (or) Liability
(x) Asset purchased by Branch Asset A/c Dr. Head office Dr.
the Branch but Asset To Branch A/c
To Bank (or) Liability
A/c retained at H.O.
books
(xi) Depreciation on (x) Branch A/c Dr. Depreciation A/c To Dr.
above Head Office A/c
To Branch Asset
A/c
(xii) Remittance of funds Branch A/c To Dr. Bank A/c Dr.
by H.O. to Branch Bank A/c
To Head Office A/c
(xiii) Remittance of funds Reverse entry of Reverse entry of (xii)
by Branch to H.O. (xii) above i.e. above
(xiv) Transfer of goods (Recipient) Dr. Supplying Branch
from one Branch to Branch A/c
H.O. A/c
another branch
To (Supplying)
To Goods sent to H.O.
Branch A/c
A/c Dr.
Recipient Branch Dr.

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 Goods Received from
H.O. A/c To Head
Office A/c

The final result of these adjustments will be that so far as the Head Office is
concerned, the branch will be looked upon either as a debtor or creditor, as a debtor if
the amount of its assets is in excess of its liabilities and as a creditor if the position is
reverse.
A debit balance in the Branch Account should always be equal to the net assets at the
branch.
Adjustment and Reconciliation of Branch and Head Office Accounts
If the branch and the head office accounts, converse of each other, do not tally, these
must be reconciled before the preparation of the final accounts of the concern as a
whole.
Reasons for Disagreement
Following are the possible reasons for the disagreement between Branch A/c in Head
office books and Head office A/c in Branch books on the closing date
• Goods dispatched by the Head office not received by the branch. These goods
may be in transit or loss in transit.
• Goods returned by the branch to Head Office not received by the H.O. Again,
these goods may be in transit or lost in transit.
• Amount remitted by Head office to branch or vice versa remaining in transit on
the closing date.
• Receipt of income or payment or expenses relating to the Branch transacted
directly by the head office or vice versa, hence not recorded at the respective
ends wherein they are normally to be recorded.
Important Points to be noted:
(i) The balance of Head Office A/c in Branch books and Branch A/c in Head
Office books have tallied.
(ii) Adjustment are made only at the point:
• Where the recording has been omitted, and
• Other than the point where action has already been effected.

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Other points
Inter-Branch Transactions
• Inter-branch transactions (i.e. transaction between two branches) are usually
adjusted as if they were entered into only with the head office. It is a very convenient
method of treating such transaction especially where the number of branches are
large.
Fixed Assets
• Often the accounts of fixed assets of a branch are kept in the head office books; in
such a case, at the end of the year, the amount of depreciation on the assets is debited
to the branch concerned by recording the following entry by head office:
• Branch Account Dr.
To Branch Asset Account
The branch will pass the following entry:
• Depreciation Account Dr.
To Head Office Account
Head office Expenses charged to Branch
• Usually the head office devotes considerable time in attending the affairs of the
branch; on that account, it may decide to raise a charge against the branch in respect
of the cost of such time. In such a case the amount is debited to the branch (being
receivable from branch) and is credited to appropriate expense head such as Salaries
Accounts, General Charges Account, Entertainment Account, etc. (i.e. reducing the
expense in head office books). The branch credits the H.O. Account and debits
Expenses Account.
Incorporation of Branch Balance in Head Office Books
The method that will be adopted for incorporating the trading result of the branch
with that of the head office would depend on whether it is desirable to prepare
(a) Standalone P&L & Balance Sheet for each Branch, or
(b) Consolidated statement of Branch & H.O.
Method I: Separate P&L & Balance Sheet for each Branch
Amount of P&L is shown by Branch and is transferred to H.O. in Branch books &
converse entry is passed in H.O. Books as:

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The Branch Balance Sheet would show the amount advanced by H.O. to it as
'Capital'.
In H.O. Books, such amount would be shown as "Advance to Branch"
Method II: Prepare a consolidated Profit & Loss Account and Balance Sheet
Individual balances of all the revenue accounts would be separately transferred to the
H.O. by debit or credit in the branch books and the converse entries would be passed
in the H.O. books.
Amount of net profit or loss of the branch having been transferred since it would be
composed of the balances that have been transferred.
In case it is also desired that consolidated balance sheet of the branch and the head
office should be prepared, it will also be necessary to transfer the balance of assets
and liabilities of the branch to the head office.
The adjusting entries that would be passed in this respect in the books of branch are
shown below: (a) Head Office Account Dr.
To Asset (Individual) Account
(b) (Individual) Liability Account Dr.
To Head Office Account
Converse entries are passed in the head office books
It is obvious that after aforementioned entries have been passed, the Branch Account
in the head Office books and Head Office Account in the branch books will be closed
and it will be necessary to restart them at the beginning of the next year.
• In consequence, at the beginning of the following year, the under-mentioned entry
is recorded by the branch:
Asset Account (In Detail) Dr.
To Liability Accounts (In Detail)
To H.O. Account (The difference between assets and liabilities)
Incomplete Information In Branch Books
If it is desired that profitability of the branch should be kept secret from the branch
staff, the head office would hold back some key information from the branch, e.g.,
amount of opening stock, cost of goods sent to the branch, etc. The head office, in
such a case would maintain a record of goods sent to the branch by passing the entry:

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Goods Supplied to the Branch Account Dr.
To Purchases Account
The value of the closing stock will also be adjusted only in head office books.
In such a case, for closing its books at the end of the year, the branch will simply
transfer various revenue accounts to the head office without drawing up a Trading
and Profit & Loss Account.
On that basis, supplemented by the record of transactions maintained at the head
office, it will be possible to construct the Trading and Profit & Loss Account of the
branch.
FOREIGN BRANCHES
Foreign branches generally maintain independent and complete record of business
transacted by them in currency of the country in which they operate.
Thus, problems of incorporating balances of foreign branches relate mainly to
translation of foreign currency into Indian rupees.
This is because exchange rate of Indian rupee is not stable in relation to foreign
currencies due to international demand and supply effects on various currencies.
The accounting principles which apply to inland branches also apply to a foreign
branch after converting the trial balance of the foreign branch in the Indian currency.
ACCOUNTING FOR FOREIGN BRANCHES
For the purpose of accounting, AS 11 (revised 2003) classifies the
foreign branches may be classified into two types:
• Integral Foreign Operation;
• Non-Integral Foreign Operation.
Two types of foreign branches
Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the
reporting enterprise. The business of IFO is carried on as if it were an extension of
the reporting enterprise's operations. For example, sale of goods imported from the
reporting enterprise and remittance of proceeds to the reporting enterprise.
Non-Integral Foreign Operation (NFO)

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It is a foreign operation that is not an Integral Foreign Operation. The business of a
NFO is carried on in a substantially independent way by accumulating cash and other
monetary items, incurring expenses, generating income and arranging borrowing in
its local currency. An NFO may also enter into transactions in foreign currencies,
including transactions in the reporting currency. An example of NFO may be
production in a foreign currency out of the resources available in such country
independent of the reporting enterprise.
The following are the indicators of Non- Integral Foreign Operation
 Control by reporting enterprises - While the reporting enterprise may control
the foreign operation, the activities of foreign operation are carried
independently without much dependence on reporting enterprise.
 Transactions with the reporting enterprises are not a high proportion of the
foreign operation's activities.
 Activities of foreign operation are mainly financed by its operations or from
local borrowings. In other words, it raises finance independently and is in no
way dependent on reporting enterprises.
 Foreign operation sales are mainly in currencies other than reporting currency.
 Day-to-day cash flow of the reporting enterprises is independent of the foreign
enterprises cash flows
 There is an active sales market for the foreign operation product.
These are only indicators and not decisive/conclusive factors to classify the foreign
operations as non-integral, much will depend on factual information, situations of the
particular case and, therefore, judgment is necessary to determine the appropriate
classification.
TECHNIQUES FOR FOREIGN CURRENCY TRANSLATION
Items Integral Foreign Non-Integral Foreign
Operations Operations
Monetary Items Closing rate Closing rate
(Cash, Bank
Balance, Debtor,
Creditor, Loans,
Bills receivable,
Bills Payable)

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 Non-Monetary Rate on date of Closing rate
Items (Fixed purchase
Assets)
Inventory Generally, closing rate Closing rate
(but if rate on the date
of purchase of
inventory is available,
then that rate)
Profit and Loss Average rate (but if Average rate (but if rate on the
items (revenue rate on the date of date of transaction is available,
items) transaction is then that rate)
available, then that
rate)
Exchange Charge to P&L Accumulated in Foreign
Difference account. Currency Translation reserve.

CHANGE IN CLASSIFICATION

When there is a change in classification, accounting treatment is as under-

Integral to Non-Integral Non-Integral to Integral

(i) Translation procedure (i) Translation procedure as applicable to
applicable to non-integral integral should be applied from the date
shall be followed from the of change.
date of change.
(ii) Translated amount of nonmonetary items
(ii) Exchange difference arising at the date of change is treated as
on the translation of historical cost.
nonmonetary assets at the
(iii) Exchange difference lying in foreign
date of re-classification is
currency translation reserve is not to be
accumulated in foreign
recognised as income or expense till the
currency translation reserve.
disposal of the operation even if the
foreign operation becomes integral.

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 ROYALTY
Royalty mean the sum payable by one person to another person for using right i.e.
it is the periodic payment to the owner of some form of privilege or monopoly for
being allowed to use such right or privilege.

DEFINITION OF ROYALTY
‘‘Royalty refers to the amount paid by one person to another for granting the
some special rights by the former to the latter”.

DIFFERENCE BETWEEN ROYALTY AND RENT

1. Use- Consideration received from using some tangible assets like building,
factory etc. is known as rent. While consideration which is received from using
both tangible and intangible assets like patent, copyright etc. is known as royalty.
2. Basis of payment- Payment of rent is based on period like yearly, half-yearly,
monthly, weekly etc. while payment of royalty is based upon the limit of using it
like per item, per ton production or sale basis.

KINDS OF ROYALTY
 Mining royalty
 Bricks making royalties
 Royalties in connection with ail-wells
 Patent royalty
 Copy right royalty
 Royalties in connection with machine, secret instruments and technical
knowledge etc.

TERMS IN RESPECT OF ROYALTY

1. Landlord or lessor- This person is owner of the property and gives his
property to other for use and has the right in return to receive a royalty.
2. Lessee- This person takes a property from other land has a right to use it
and in return, he has to pay royalty to the owner of the property.
3. Minimum rent- Payment of amount of royalty is decided on the basis of
production or on sale of such property. As production or sale fluctuate,
owner of property calculate the minimum rent at the beginning of the year
which has to paid to him in any condition i.e. if there is reduction in
production or sale even the owner will receive a minimum rent. When
royalty is equal to or more than minimum then payment should be made of
royalty only, not of minimum rent.

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 4. Short working- The excess of minimum rent over royalty is called short-
working .i.e. short working= Minimum rent-Royalty.
5. Recouping or writing off short-working- When actual royalty is lower
than minimum rent, then it give rise to recouping or writing off short-
working. For compensating the loss arising from short working lessee can
make the contract with landlord, according to which he will be allowed to
recoup or recover the short working., from the future surplus (i.e. excess of
actual royalty over minimum rent subject to certain conditions. It may be
recouped without any time limit or within prescribed time limits.

CALCULATION OR ANALYSIS TABLE

1 2 3 4 5 6 7 8 9
y Output Actual Minimu Short Sur Re La Payment
ea or sale Royalt m Rent Workin plu co pse (3+5-7)
rs y g s up

ACCOUNTING FOR ROYALTY

Journal Entries
In the books of Lessee In the books of lessor
(1) For royalty and short working (1) For royalty and short working
Royalty (Payable) A/c Dr. Lessee A/c Dr.
Short working (Recoupable)A/c Dr. To Royalty (Receivable) A/c
To Lessor To Short working (Allowable)
[Being amount payable] [Being amount receivable]
(2) For short working recouped (2) For short working recouped
Lessor Dr. Short working Dr.
To short working A/c To Lessee
[Being short working recouped] [Being short working allowed to
recouped]
(3) For Payment (3) For Payment
Lessor Dr. Bank A/c Dr.
To Bank A/c To Lessee
[Being payment made] [Being payment received]
(4) For transfer of royalty (4) For transfer of royalty
Manufacturing A/c P&L A/c Dr. Royalty A/c Dr.
To Royalty A/c To P&L A/c
[Being transfer of Royalty] [Being transfer of Royalty]

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(5) For recoupable short working (5) For recoupable short working
P&L A/c Dr, Short working A/c Dr.
To Short working A/c To P&L A/c
[Being recoupable S.W.] [Being recoupable S.W.]

SUB-LEASE
If the lessee again leases out to other person some part of assets taken by him on
lease, it is called ‘sub- lease’. The other person is called sub-lease. Suppose A has
given 500 acres of land to B on lease and B has given 100 acres of land (out of
500 acres) to C on lease, then A is called main lessor, B is called main lessee as
well as sub-lessor and C is called sub-lessee. There will be two separate
agreements, the first one is between A and B and second one is between B and C.
A will receive the royalty on the total production of A and B, while B will receive
the royalty on the production by Conly. Two analysis Table will be prepared
accordingly.

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 INSOLVENCY ACCOUNT
MEANING OF INSOLVENCY
Any person, who fulfils the following two conditions, is called insolvent:
 His liabilities should be more than his assets; and
 He must be adjudged insolvent by a competent Court.

In India insolvency is governed by two acts, viz,

 The Presidency Towns Insolvency Act, 1909, which applies to the
persons residing in the Presidency towns of Mumbai, Kolkata, Chennai.
Delhi.
 The Provincial Insolvency Act, 1920, which applies to the persons
residing in the rest of India.
The insolvency proceeding will be conducted by the official assignee in
presidency towns and by the official receiver in other places.

INSOLVENCY PROCEDURE
1. Petition for adjudication as insolvent may be presented either by the debtor or
by the creditor in a Court having jurisdiction under this Act.
(a) A creditor shall be entitled to present an insolvency petition against a
debtor if the debts owing by the debtors to the creditors, amounts to five
hundred rupees, the debt is a liquidated sum payable either immediately or
at some certain future time; and the act of insolvency has occurred within
three months before presentation of petition.
(b) A debtor shall be entitled to present an insolvency petition if he is unable
to pay his debts, and :
(i) his debts amount to five hundred rupees;
(ii) he is under arrest to imprisonment in execution of the decree of any
Court for the payment of money, or
(iii) an order of attachment is subsisting against his property.
2. When an insolvency petition has been accepted, the court shall make an order
fixing a date for hearing the petition .
3. It may appoint an interim receiver of the property of the debtor and may direct
him to take immediate possession thereof.
4. If the Court is satisfied that the petition the reasonable, it shall make an order of
adjudication and shall specify in such order the period within which the debtor shall
apply for his discharge.

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 5. Effect of an Order of Adjudication (i) on making the order of adjudication, the
whole of the property of the insolvent shall become divisible among the creditors,
(ii) the insolvent shall aid to the utmost of his power in the realization of his
property and the distribution of his proceeds among his creditors.

Difference between both Acts

Basis of difference Presidency Towns Provisional Insolvency Act
Insolvency Act 1909 1920
1. Government dues All Govt. dues are Here also all Govt. dues are
considered preferential. treated as preferential.
2. Legal liability The compensation Here also these are
payable under payments preferential.
Factories Act, Workmen
Compensation Act etc.
are preferential
3. Salary due to The maximum amount The figure is Rs. 20 per
clerks during the last per head is Rs.300 head.
four months
4. Wages due The maximum amount The figure is Rs. 20 per
to per head is Rs.100 head
workers during the
last four months
5. Rent One month’s rent is Rent is treated
preferential unsecured.

Rate if final dividend

Net amount realizable from assets – Liquidation expenses
Rate of dividend =
𝐴𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑜 𝑢𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

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 STATEMENT OF AFFAIRS
Gross Liabilities (as Expected Assets (as stated Estimated to
Liabilities stated and to Rank and estimated Produce
estimated by the by the Debtor)
Debtor)
Rs. Rs. Rs.
Unsecured Property as per
Creditors as per list E viz: a. Cash
list A at Bankers
Fully Secured b. Cash in hand
Creditors as per c. Cash deposited
list B
with
Estimated value of
Solicit or for cost
Securities
of
…………………..
Petition
surplus
d. Stock-in-Trade
Less: Amount
e. Machinery
thereof carried to
f. Trade Fixture
list C………….
Balance thereof to Fittings, Utensils,
contra etc.
Partly Secured g. Furniture
Creditors as per h. Life
list C Ins.Policies
Less: Estimated i. Other Property
value of Book debts as
Securities per list F viz:
Preferential Good
Creditors as per Doubtful
list D Bad
(Creditors for Bills of exchange
Rates, Taxes, or other similar
Salaries and Wages, Securities as per
etc. , List G
payable, in full as Surplus from
per list D) Deducted Securities in the
as per contra hands of creditors
fully Secured
(per contra)
Deduct:
Creditors for

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 Preferential,
Rates, Taxes,
Salaries and
Wages, etc.
(per contra)
Deficiency as
per List H
Rs.
Rs

SPECIMEN OF DEFICIENCY ACCOUNT

Excess of assets over liabilities Rs. Excess of liabilities over Rs.
or capital interest on Capital assets or
Trading Profits losses from business
Profit on speculation Drawings
Liabilities waived off Bad Debts Other Losses:
Loan from wife Stock
Profit on realization Furniture
Deficiency as per statement of Buildings
affairs Plant & Machinery, etc.
Bills discounted &
dishonoured
Trade Expenses
Speculation Losses, etc.
Rs.
Rs.

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

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Difference between Profit and Loss Account and Deficiency Account
Basis of Profit and Loss Account Deficiency Account
difference
Date of This is often prepared at the It is prepared only once in
Preparation end of financial year. life of the business and that
too, only if .
Period Of It is prepared in all the year insolvency occurs
Preparation during which business is
carried on
Capital Capital is recorded in it. Capital is recorded in it.
Difference Excess of debit over credit Excess of the amount of right
of this account is a loss and side over the amount to left
excess of credit over debit side is called deficiency.
of this account is profit.
Sides Expenses and losses and Its left hand side is for gains
right hand side for gain and and right hand side is for
income losses.

Difference between Balance Sheet and Statement of Affairs

Basis of Balance Sheet Statement of Affairs

difference
Date of It is often prepared at the It is prepared at the time of
Preparation end of the year. insolvency.
Use of lists Lists are not used for Lists are used for assets and
writing of assets and liabilities.
liabilities
Records of All real and fictitious assets Only real assets are recorded
Assets are recorded in it. in it.
Value of Fixed assets are shown after Fixed assets are shown at
assets deduction of depreciation. realizable value.
Assets lodged Assets as a security are The assets lodged as security
as security shown in the assets side. are not shown in the assets
side but shown in the liability
side along with the
concerning loan.

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Record of Columns of gross liabilities These columns are made in
Liabilities and expected to rank are not it.
made in it.
Total Total of liabilities is equal Total liabilities are more than
to total of assets. total of assets and this excess
is called deficiency.
Number It is prepared for all the year It is prepared only once i.e. at
during which business is the time of insolvency
carried on.
Object It is prepared for knowing It is prepared to shoe the
the financial position of the inability of the debtor to pay
concern. this debts.
For whom It is prepared for the sake of It is prepared for the
prepared proprietor and others. satisfaction of the Court.
Deficiency Deficiency Account is not Deficiency Account is
A/c prepared along with it. prepared along with it.
Act In case of Sole Trader and It is prepared under the
Firm, there is no act for its Presidency Towns insolvency
preparation but in the case Act or Provincial Insolvency
of Companies it is prepared Act.
according to the Companies
Act.
Preferential Preferential Creditors are Preferential Creditors
creditor not deducted in the assets deducted in the assets side.
side.
Capital Capital is shown in the Capital is not shown in the
liabilities side. liabilities side.

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 Insurance claim for loss of stock and loss of profit
Significance of Insurance Policy
Loss of stock + Loss of profit = Insurance claims

Insurance claims

 Contract of indemnity
 Loss due to fire, flood, theft, earthquake etc.

Meaning of Fire

fire

Fire not occasioned or Explosion not occasioned or

Lightning
happening through happening through

oSpontaneous fomentation or
oBoilers used for
heating or any process
domestic purposes only
involving application of heat

oAny other
oEarthquake, riot, civil
boilers on the
commotion, war, etc.
premises

In a building, not being any gas works or

gas for domestic purposes or used for
lighting or heating

Claim For Loss Of Stock

Amount of claim in case goods are fully insured

 Total Loss
 Partial Loss
 Actual loss

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 Amount of claim in case of Under insurance

Amount of claim in
case of Under
insurance

Total Loss Partial Loss

oRestricted to the oWithout Average oWith Average

policy amount clause Clause

Actual loss Or Sum Loss of stock x sum

insured whichever is insured / Insurable
lower amount (Total cost)

Important Points
 Stock records are maintained
Value of the stock as at the date of the fire can be easily arrived.
 Stock records are not available or are destroyed by fire
Trading Account is prepared. After allowing for the usual gross profit, closing
stock ascertained as balancing item.
 Books of account are destroyed
Trading Account preparation is difficult. Information is obtained from the
customers and suppliers to ascertain the amount of sales and purchases.
 Insurance company makes payment
Damaged stocks are subrogated to the insurance company. Subrogation is the
right of an insurer to legally pursue a third party that caused an insurance loss
to the insured.
 Salvaged stock is made saleable after it is reconditioned
Cost of such stock credited to the Trading Account and debited to a salvaged
stock account. The expenses on reconditioning debited and sales credited to
this account, final balance being transferred to the P & L A/c

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 Loss of Stock
Particulars Amount

Value of stock on the date of fire

Less:- Value of Salvaged stock

Amount of loss of stock

Particulars Amount

Value of salvaged stock

Add: Expenses on re-conditioning

Less: Sales

Profit/(loss)

Claim for Loss of Profit

Loss of Profit
(consequential loss)
Policy

oAny increased cost

oLoss of net profit
of working

Business is
e.g., Renting of
interrupted due to
temporary premises
damage of premises

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 Insurance for Loss of Profit limited to loss of gross profit due to
(i) Reduction in turnover, and
(ii) Increase in the cost of working

Important Terms
Claim for Loss of The Loss of Profit Policy normally covers the
profit following items:

(1) Loss of net profit

(2) Any increased cost of working

Gross Profit Net profit +Insured Standing charges

OR

Insured Standing charges - [Net Trading Loss

(If any) X Insured Standing charges/ All
standing charges of business]

Net Profit The net trading profit (exclusive of all capital

receipts and accretion and all outlay properly
chargeable to capital) resulting from the
business of the Insured at the premises after
due provision has been made for all standing
and other charges including depreciation.

Insured standing Interest on Debentures, Mortgage Loans and

charges Bank Overdrafts, Rent, Rates and Taxes (other
than taxes which form part of net profit)
Salaries of Permanent Staff and Wages to
Skilled Employees, Boarding and Lodging of
resident Directors and/or Manager, Directors'
Fees, Unspecified Standing Charges.

Rate of gross Profit The rate of Gross Profit earned on turnover

during the financial year immediately before
the date of damage.

Annual turnover The turnover during the twelve months

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(adjusted) immediately before the damage.

Standard Turnover The turnover during that period (in the twelve
months immediately before the date of
damage) which corresponds with the
Indemnity Period.

Indemnity Period The period beginning with the occurrence of

the damage and ending not later than twelve
months.

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