Professional Documents
Culture Documents
A Partner may leave the firm by taking retirement. Normally the retirement takes place by
consent of all the partners and / or by other mode of communication by the intended partner
to all other partners.
In case of retirement, for paying off the retiring partner(s) some adjustment are required to be
done in the books of accounts.
Following steps to be taken and books of accounts to be prepared to calculate the due of retir-
ing partner.
This is required for giving the share of net assets of the firm. Treatments are:
Profit or loss on revaluation to be transferred to all the partners in old Profit Sharing ratio.
If the remaining partners decide not to after the book value of assets or liabilities then the
profit or loss on revaluation as distributed earlier should be reversed through remaining
partner’s capital account in new profit sharing ratio. We shall to prepare memorandum re-
valuation account.
Any undistributed profit or loss including reserve is to be transferred in old profit sharing
ratio.
Journal entries:
At the time of retirement the retiring partner is also eligible for share of goodwill of the firm.
This can be made in the following ways:
a) Raising of goodwill : ( If goodwill is already existing in the Balance sheet the difference
shall raised)
Goodwill account Dr
( Value of goodwill – existing goodwill in the balance sheet)
To all partners capital account (Old P.S.R)
b) Goodwill raised and written off :
i) Raise goodwill as discussed above.
ii) Write off goodwill
iii) existing partners Capital A/c Dr.
iv) To Goodwill A/c
Settlement of Dues to the Retiring Partner :
The retiring partner becomes entitled to get back his dues from the firm which consists of the
following:
i) Balance of his capital and current account at the time of retirement.
ii) Share of goodwill, undistributed profit or loss, reserves and profit or loss on revaluation if
assets and liabilities.
iii) Salary, commission, interest on capital, if any and all other dues till the date of retirement.
iv) Any adjustment in drawings and interest thereon.
Payment of dues.
i) Payment at a time. Subject to availability of the fund, the payment may be made at a
time. Journal entry:
Retiring Partner’s Capital A/c Dr
To Bank A/c
ii) If part payment be made by giving assets:
Retiring Partner’s Capital A/c Dr
To Assets A/c
iii) If the dues are transferred to Loan account.
Retiring Partner’s Capital A/c Dr
To Retiring partners’ Loan A/c
Illustration :
The Balance Sheet of Baichung, Tausif and Vijayan who shared profits and losses in the ratio
3:3:2 respectively was as follows on 31st December, 2007 :
Baichung retired from the business on 1st January, 2008. Revaluation of assets were made as :
Machinery Rs. 34,000, Furniture Rs. 5,000, Stock Rs. 9,600, Debtors Rs. 4,000 and Goodwill Rs.
10,000.
Baichung was paid Rs. 4,225 immediately and the balance was transferred to a Loan Account
for payment in 4 equal half-yearly installments together with interest @ 6% p.a.
Show the necessary accounts, the Balance Sheet of the firm immediately after Baichung’s re-
tirement and his Loan Account till finally paid off.
63,075 63,075
27,365 27,365
30.6.09 To Bank A/c 6,890 1.1.09 By Balance b/d
[6500+390] 13,000
31.12.09 To Bank A/c 6,695 31.06.09 By Interest A/c
[6,500+195] [6% of 13,000 for 6
months] 390
31.12.09 By Interest A/c
[6% of 6,500 for 6
months] 195
13,585 13,585
Illustration 2 :
On 31st March, 2008 the Balance Sheet of M/s. Ram, Hari and Mohan sharing profits & losses
as 2:3:2, stood as follows :
Liabilities Rs. Assets Rs.
Capital Accounts : Land & Building 10,00,000
Ram 10,00,000 Machinery 17,00,000
Hari 15,00,000 Closing Stock 5,00,000
Mohan 10,00,000 35,00,000 Sundry Debtors 6,00,000
Sundry Creditors 5,00,000 Cash & Bank Balance 2,00,000
40,00,000 40,00,000
Prepare Revaluation Account, Capital Accounts of Partners, Cash Account and Balance Sheet
as on 1.4.2008 of M/s Ram & Mohan.
Solution :
Books of M/s Ram, Hari & Mohan
Revaluation Account
Dr. Cr.
Particulars Amt. Amt. Particulars Amt. Amt.
Rs. Rs. Rs. Rs.
To Machinery A/c 3,40,000 By Land & Buildings A/c 3,00,000
To Stock A/c 50,000 By Sundry Creditors 50,000
To Provision for 30,000 By Partners Capital A/cs :
Bad Debts Ram [2/7] 20,000
Hari [3/7] 30,000
Mohan [2/7] 20,000 70,000
4,20,000 4,20,000
Date Particulars Ram Hari Mohan Date Particulars Ram Hari Mohan
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.
31.3 To Hari’s 1,62,000 -- 1,08,800 31.3 By Balance 10,00,000 15,00,000 10,00,000
Capital A/c b/d
To By Bank 1,00,000 1,50,000 1,00,000
Revaluation 20,000 30,000 20,000 A/c (Joint
A/c Life Policy
To Cash - 9,45,000 - as 2:3:2)
/Bank A/c By Ram’s
[50%] & Mohan’s - 2,70,000 -
To Loan - 9,45,000 - Capital
A/c (G/will
To Balance shared)
c/d (Note) 21,00,000 By
14,00,000 Cash/Bank 11,82,000 - 4,28,00
A/c (Bal.
figure)
Total Capital of the new firm = Total of the old firm (given)
= Rs. 35,00,00
Therefore Ram’s Capital = 3/5 x 35,00,000 = 21,00,000
Mohan’s Capital = 2/5 x 35,00,000 = 14,00,000
Cash/Bank
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
31.3.08 To Balance b/d 2,00,000 31.3.08 By Hari’s Capital A/c 9,45,000
To (Joint Life Policy A/c 3,50,000
To Ram’s Capital A/c 11,82,000 By Balance c/d 12,15,000
To Mohan Capital A/c 4,28,000
21,60,000
21,60,000
48,95,000 48,95,000
Working Notes :
1. Calculation of Gaining Ratio [New Ratio – Old Ratio]
Ram = 3/5 – 2/7 = 11/35; Mohan = 2/5 – 2/7 = 4/35 So, Gaining Ratio = 11:4
Illustration 3 :
A, B and C were in partnership sharing profits in the proportion of 5:4:3. The Balance Sheet of
the firm as on 31st March, 2008 was as under :
A had been suffering from ill-health and gave notice that he wished to retire. An agreement
was, therefore entered into as on 31st March, 2008, the terms of which were as follows:
(i) The Profit & Loss Account for the year ended 31st March, 1998, which showed a net profit
of Rs. 48,000 was to be reopened. B was to be credited with Rs. 4,000 as bonus, in consid-
eration of the extra work which had devolved upon him during the year. The profit
sharing ratio was to be revised as from 1st April, 2007 to 3:4:4.
(ii) Goodwill was to be valued at two years purchase of the average profits of the preceding
five years. The Fixtures were to be revalued by an independent valuer. A provision of 2%
was to be made for doubtful debts and the remaining assets were to be taken at their book
values.
(iii) The valuations arising out of the above agreement were Goodwill Rs. 56,800 and Fix
ture Rs. 10,980.
(iv) B and C agreed, as between themselves, to continue the business, sharing profits in the
ratio of 3:2 and decided to eliminate Goodwill from the Balance Sheet, to retain the Fix-
tures on the books at revised value, and to increase the provision for doubtful debts to 6%.
You are required to submit the Journal Entries necessary to give effect to the above arrange-
ment and to draw up the Capital Accounts of the partners after carrying out all adjustment
entries as stated above.
Solution
Books of the Firm A, B & C
Journal Entries
Date Particulars Amount Amount
Rs. Rs.
31.3.08 A’s Capital A/c [5/12 of Rs. 48,000] Dr. 20,000
B’s Capital A/c [4/12 of Rs. 48,000] Dr. 16,000
C’s Capital A/c [3/12 of Rs. 48,000] Dr. 12,000
To Profit & Loss Adjustment A/c 48,000
[Profits of Rs. 48,000 already shared by
A,B & C as 5:4:3 written back]
Profit & Loss Adjustment A/c Dr. 4,000
To B’s Capital A/c 4,000
[B Credited with bonus of Rs. 4,000
for his extra work]
Illustration 4 :
Sona, Mona and Dona were partners sharing profits in the proportions of ½, 1/3 and 1/6
respectively. Their Balance Sheet as on 31st March, 2008 was as under :
Pass the necessary Journal entries and prepare the Capital Accounts and the Balance Sheet
assuming that no alteration of book values of assets and liabilities is to be made.
Note
Solution :
Sona, Mona and Dona
Journal Entries
Dr. Cr.
Illustration 5 :
P, Q & R were equal partners. R retired on 31st March, 2008. The Balance Sheet of the firm as on
31st December, 2007 was as follows :
On 31.3.08 the following adjustments were considered : (a) Buildings were appreciated by Rs.
18,000; Book Debts were considered good; Investments were considered worth Rs. 4,700 and
Stock was valued at Rs. 9,400; (b) Goodwill was considered equivalent to the average annual
profits of the last three years; (c) R’s share of Profit up to the date of his retirement was calcu-
lated on the basis of the average annual profits of the preceding three years which were Rs.
8,000; Rs. 9,000 and Rs. 10,000.
Show the Journal Entries and prepare the Balance Sheet immediately after R’s retirement.
Working notes :
1. Valuation of Goodwill : Average Annual Profits = 8,000 + 9,000 + 10,000/3 = Rs. 9,000
This shall be shared amongst all the Partners’ in their old ratio.
2. R retired on 31st March, 2008, that is, after 3 months from the date of the last year ending.
Estimated Profits for 3 months = 3/12 of 9,000 = Rs. 2,250. The retiring partner should be
credited with 1/3rd of 2,250 = Rs. 750.
Either the continuing Partners’ Capital accounts should be debited in their Gaining Ratio
OR Profit and Loss Suspense Account may be debited.
3. Investment at cost was shown at Rs. 5,000. Now It is valued at Rs. 4,700. Loss on Revalu-
ation is Rs. 300. The fluctuation fund in excess of Rs. 300 (that is Rs. 1,200- Rs.
300= 900) should be transferred to Revaluation Account.
P and Q
Balance Sheet as on 31st March, 2008
Liabilities Amount Amount Assets Amount Amount
Rs. Rs. Rs. Rs.
Capital : Goodwill 9,000
P 34,400 Buildings 40,000
Q 24,400 58,800 Add: Appreciation 18,000 58,000
R’s Loan A/c 25,150 Investment at Cost 5,000
Investment Stock 9,400
Fluctuation Fund 300 Debtors 10,000
Trade Creditors 17,900 Cash at Bank 10,000
P & L Suspense A/c Dr. 750
1,02,150 1,02,150
Illustration 6 :
X, Y and Z were partners sharing profits & losses as 4:3:1. On 1.4.2007 their capitals were Rs.
15,000, Rs. 15,000 and Rs.10,000 respectively. The Partnership Deed contained :
1. Interest on Capital would be provided @ 10% p.a.
2. In case of retirement, the goodwill would be valued at 2 years purchase of the average
distributable profits of the preceeding 5 years.
3. The Profit of the retiring partner to the date of retirement would be estimated on the
basis of the average distributable profit of the last 3 years; and
4. The firm would effect a Joint Life Policy for Rs. 30,000 whose premium would be charged
as business expense.
X retired from the firm on 1.10.07. The surrender value of the policy as on that date was ascer-
tained as Rs. 8,000. Drawings of the partners upto that date were X Rs. 3,000; Y Rs. 2,000 and Z
Rs. 1,000. The annual net profits after charging interest on capital and joint life policy premia
were : 2002-03 – Rs. 8,000; 2003-04- Rs. 8,800; 2004-05-Rs. 7,200; 2005-06- Rs. 9,500; 2006-07-Rs.
10,000.
Rs.
Current Accounts :
M 12,000 Plant & Machinery 80,000
J 8,000 Less: Dep. 28,000 52,000
P 6,000 26,000 Premises (at cost) 75,000
Capital Accounts:
M 90,000
J 50,000
P 30,000 1,70,000
2,64,000 2,64,000
5. Rs. 5,000 due to creditors for expenses had been omitted from the books of accounts;
6. Provide Rs. 1,200 for professional charges in connection with the revaluation.
As per the deed of partnership, in the event of retirement of a partner, goodwill was to be
valued at an amount equal to one year’s purchase of the average profits of the preceeding 3
years on the date of retirement. Before determining the said average profits, a notional amount
of Rs. 80,000 should be charged for remuneration of partners. The necessary profits (before
charging such remuneration ) for the years ending on 31st December, 2006, 2007 and 2008 were
Rs. 1,44,000, Rs 1,68,000 and Rs. 1,88,200 (as per draft accounts) respectively.
It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2008
be recomputed after charging the loss on revaluation in respect of premises and stock, the
unprovided expenses (except professional expenses) and increasein the provision for doubtful
debts. The continuing partners decided to eliminate goodwill account from their books.
Prepare the Revaluation Account; Capital Accounts (merging current accounts therein); J’s
Account showing balance due to him, and Balance Sheet of M and P as at 1st January, 2009.
Solution :
M, J & P
Dr. Revaluation Account Cr.
Particulars Am ount Am ount Particulars Amt. Amt.
Rs. Rs. Rs. Rs.
To Prem ises A/s 10,000 By Machinery A/c 6,000
To Provision for Bad [58,000 – 52,000]
Debts A/c 1,200 By Capital A/cs :
To Creditors for (Loss on Revaluation )
Expenses A/c M [8/20]
5,000 6,160
To Stock A/c J [7/30]
4,000 5,390
To Outstanding P [5/20]
Professional 3,850 15,400
Charges A/s
1,200
21,400 21,400
Particulars M J P Particulars M J P
Rs. Rs. Rs. Rs. Rs. Rs.
To Revaluation 6,160 5,390 3,850 By Balance b/d 90,000 50,000 30,000
A/c 16,000 -- 12,000 By Current A/c 12,000 8,000 6,000
To J’s loan A/c 80,610 By M and P’s - 28,000 -
(Bal. Cap. A/c
Transferred) - 80,610 - [Note]
To Balance c/d 79,840 - 20,150
Working Notes :
Adjustment of Profit & Valuation of Goodwill
Rs. Rs.
Total Profits for the last 3 years [1,44,000 + 1,68,000 + 5,00,200
1,88,200]
Less : (1) Notional Remuneration for 3 years [80,000 x 3] 2,40,000
(2) Premises w/off 10,000
(3) Creditors for Expenses 5,000
(4) Provision on Debtors 1,200
(5) Stock written off 4,000 2,60,200
Solution :
Working Notes:
(3)
Partner Capital Accounts
Dr. Cr.
X Y Z Q X Y Z Q
By Balance
b/d 1,00,000 1,00,000 2,00,000 -
“ X’s Current
Transfer 1,70,000 - - -
To Cash
A/c Final
settlement 2,70,000 - - - “ Cash A/c
To Balance - 1,00,00 2,00,00 1,00,000 Capital
c/d introduced - - - 1,00,000
2,70,000 1,00,000 2,00,000 1,00,000 2,70,000 1,00,000 2,00,000 1,00,000
(4)
Partner Current Accounts
Dr. Cr.
X Y Z Q Z Y Z Q
To X’s Cap By Bal. b/d 50,000 75,000 25,000 -
A/c(Tran) 1,70,000 - - - “ Y’s Current
To X’s A/c 60,000 - - -
Current A/c - 60,000 60,000 - “ Z’s Current
A/c 60,000 - - -
Dr. Cr.
Rs. Rs.
8,50,000 8,50,000
Illustration 9 :
Khana and Lilavati started practicing as Chartered Accountants since 1965 sharing profits as
equal partners. They admitted Gargi in 1970 from which time they have all been equal part-
ners. The accounts were maintained on cash basis without regard to debtors and work-in-
progress. At the time of Gargi’s admission. She paid Khana and Lilabati privately in respect of
debtors and work-in-progress.
On 31st December, 2008 Khana and Lilavati retired from the partnership and Maitrayee, their
paid assistant, became an equal partner with Gargi. Upon the elevation of Maitrayee as part-
ner, Arundhati was engaged on a salary of Rs. 24,500 per annum to take over the place, so long
held by Maitrayee who was paid Rs. 15,000, Rs. 17,500 and Rs. 20,000 respectively as salary for
the last three financial years. It was agreed that Maitrayee would effectively replace Khana
and Lilavate. The Profits of the last three years as shown by partnership accounts were Rs.
85,000 Rs. 87,000 and Rs. 92,000 respectively. The fees received in each of the past three years
have been about Rs. 6,00,000 accruing evenly throughout the year.It is agreed that goodwill
based on one year’s purchase of the average of the past 3 years profits, as adjusted, should be
shown in the books in lieu of the present book value of Rs. 60,000. On 31st December, 2008, the
Capital Accounts of Khana, Lilavati and Gargi stood at Rs. 40,000 each without any adjustment
suggested above. Maitrayee was to pay adequate cash to make her capital equivalent to that of
Gargi and this amount was to be withdrawn equally by Khana and Lilavati, any balance due to
them should be transferred to their loan accounts.
As the financial adviser to the partnership you are requested to opine on inter-partner pay-
ments required regarding debtors and work-in-progress. You come to know that normally a
job takes 6 months from start to finish, at the end of which the client concerned is billed and
payment is received.
Show :
1. The Capital Accounts of Khana, Lilavati, Gargi and maitrayee showing the Goodwill ad-
justments; and
Solution :
Working Notes :
1. Adjustment for Goodwill
2006 2007 2008
Rs. Rs. Rs.
Annual Profits as per accounts 85,000 87,000 92,000
Add: Salary of Maitrayee 15,000 17,500 20,000
1,00,000 1,04,500 1,12,000
Less : Salary of Arundhati 24,500 24,500 24,500
75,500 80,000 87,500
Dr. Cr.
Particulars Khana Lilavati Gargi Mait- Particulars Khana Lilavati Gargi Mait-
Rs. Rs. Rs. yrayee Rs. Rs. Rs. Rs. yrayee
Rs. Rs.
By Balance b/d 40,000 40,000 40,000
To Cash A/c 23,500 23,500 - - By Goodwill 7,000 7,000 7,000 -
To Loan A/c 23,500 23,500 - - A/c
To Balance [21,000 as 1:1:1]
c/d - - 47,000 47,000 By Cash A/c - - - 47,000
Illustration 10 :
P, Q and R were partners sharing Profits & Losses as 2 : 3 : 5. P retired on 31.3.08 and X joined
as a new partner on the same date, the new profit sharing ratio between Q, R and X being 2: 3:1.
The Balance Sheet of P, Q & R on 31.3.2008 was as follows:
R 20,000 45,000
1,85,000 1,85,000
20,000 20,000
To Reversal of Items b/d By Reversal of Items b/d
Building 20,000 Machinery 3,000
Stock 5,000
Prov. for D/Debts 1,500
By P/Capital A/c
(Share of Rev. loss)
Q - 3,500
}
R - 5,250
X - 1,750 10,500
20,000 20,000
(4)
Q, R & X
Dr. Balance sheet as at 31.3.08 Cr.
Rs. Rs.
S/Creditors 50,000 Building 10,000
Loan for X 30,120 Machinery 30,000
Loan from P 26,100 Stock 20,000
Capitals
Q : 25,650 Debtors 30,000
R : 40,000
X : 13,130
} 78,780
Cash in hand
Cash at Bank
2,000
93,000
1,85,000 1,85,000
Shukla, Grewal, Jain and Narang were partners sharing profits and losses as 4:3:2:1. Their
Balance Sheet as on 31.03.08 was as follows:
On that date Grewal retired and the amount due to him was paid privately by the other part-
ners in their profit sharing ratio. Chakraborty was then admitted as a new partner. The latter
paid Rs. 5,000 as capital and Rs. 3,200 as his share of goodwill, his share being 1/5th of the
future profits. Shukla, Jain and Narang resolved to share the remaining profits as 3 : 3 :2. It was
also decided that the capitals of Shukla, Jain, Narang and Chakraborty should be made pro-
portionate to their new profit sharing ratio and for this they should bring in or withdraw cash,
as necessary.
1. The undistributed loss should be shared by Shukla, Grewal, Jain and Narang (the old
partners) in old ratio 4 : 3: 2 : 1.
2. Grewal retived and the amount due to him was paid privately by the other Partners,
Shukla, Jain, Narang in their profits haring ratio.
3.
Jain & Narang shall also pay to Shukla the only sacrificing partner, in their gaining ratio.
Jain’s share = 1/70 X 16,000 = 229
Narang’s = 4/70 X 16,000 = 914
Jain’s Capital A/c Dr. 229
Narang’s Capital A/c Dr. 914
Cash A/c Dr. 3,200
To Shukla’s Capital A/c 4,343
Journal Entries
5,000
5,000
2,590
1,260
3,850
3,850
2,410
1,440
26,200 26,200
C died on 31st March, 2008. His account is to be settled under the following terms :
Goodwill is to be calculated at the rate of 2 years purchase on the basis of the average of 5 years
profit or loss. Profit for January to March’ 08 is to be calculated proportionately on the average
profit of 3 years. The profits were : 2003 Rs. 3,000, 2004 Rs. 7,000, 2005 Rs. 10,000, 2006 Rs.
14,000, 2007 loss Rs. 12,000. During 2007 a Moped costing Rs. 4,000 was purchased and debited
to Travelling Expenses Account on which depreciation is to be calculated @ 25%/. Other val-
ues agreed on assets are : Stock Rs. 12,000, Building Rs, 35,000, Machinery Rs,. 25,000 and
Investments Rs. 8,000. Debtors are considered good.
Prepare new Balance Sheet of the firm, necessary Journal entries and Ledger Accounts of the
Partners.
Solution :
Working Notes :
Capital Accounts
Date Particulars A B C Date Particulars A B C
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.
31.3 To Goodwill 1.1. By Balance
A/c 1,000 2,000 2,000 31.3 b/d 10,000 20,000 20,000
To Goodwill
A/c 3,333 6,667 - “ Revaluation
To C’s A/c 2,600 5,200 5,200
Executors A/c 27,700 “ Sundry
(Balance Reserves A/c 2,000 4,000 4,000
transferred) “P&L
To Balance Suspense A/c -- -- 500
c/d 10,267 20,533 --
A and B
Balance Sheet as at 31.3.2008
Illustration 2 :
A and B entered into partnership on 1.1.2005 agreeing to share profits and losses as 2 : 1. On
that date they introduced capital : A Rs. 90,000 and B Rs. 30,000. They effected a policy of
Insurance for Rs. 30,000 of their joint lives. The net profits before charging interests on capitals
as at the beginning of each year at 6% per annum and on drawings averaged at 4% per annum
were as follows:
1. Adjustment of Profits
2. Adjustment of Capitals
3. Valuation of Goodwill
Total Profits after adjustments for Interest [Note 1]
Rs. Rs.
2005 28,200
2006 29,972
2007 29,356 87,528
Added Back : Insurance Premium for 3 years [3 x 3,000] 9,000
96,528
1,99,330 1,99,330
Illustration 3 :
Peter, Paul and Prince were partners sharing profit and losses in the ratio 2 : 1 : 1. It was
provided in the partnership deed that in the event of retirement/death of a partner he/his
legal representatives would be paid :
(ii) His share of Goodwill of the firm valued at two years purchase of normal average profits
(after charging interest on fixed capital) for the last three years to 31st December preceeding
the retirement or death.
(iii) His share of profits from the beginning of the accounting year to the date of retirement or
death, which shall be taken on proportionate basis of profits of the previous year as in-
creased by 25%.
(iv) Interest on Fixed Capital at 10% p.a. though payable to the partners, but not payable in
the year of death or retirement.
(v) All the assets are to be revalued on the date of retirement or death and the profit and loss
be debited/credited to the Capital Accounts in the profit sharing ratio.
Peter died on 30th September, 2008. The books of Account are closed on calendar year basis
from 1st January to 31st December.
The balance in the Fixed Capital Accounts as on 1st January, 2008 were Peter – Rs. 1,00,000; Paul
– Rs. 50,000 and Prince – Rs. 50,000. The balance in the Current Accounts as on 1st January, 2008
were Peter—Rs. 20,000; Paul – Rs 10,000 and Prince – Rs. 7,000, Drawings of Peter till 30th
September, 2008 were Rs. 10,000. The Profits of the firm before charging interest on capital for
the calendar years 2005, 2006 and 2007 were Rs. 1,00,000; Rs, 1,20,000 and Rs. 1,50,000 respec-
tively. The profits include the following abnormal items of credit :
Shashi died on 1.4.2008. His drawings in 2008 amounted to Rs. 3,000. His capital as per 31.12.2007
Rs. 80,000.
The profits for the years 2005, 2006 and 2007 after inclusion of the policy premium as business
expenses, amounted to Rs. 65,000; Rs. 64,000 and Rs. 69,000 respectively.
Draw up Sashi’s Account to show the amount due to him from the firm.
[Ans : Amount due to legal representatives of Sashi Rs. 1,99,367. Adjusted Average Annual
Profits Rs. 73,500. Value of Goodwill Rs. 1,47,000. Sashi’s share of Profit Rs. 5,500]
Problem 2
Firm ABC consisted 3 partners, A, B and C sharing profits and losses in the ration of 5 : 3 : 2
respectively. A died on February 20, 2008. Profit & Loss Account of the period up to the date of
death and Balance Sheet as on that date was as below :
Capital :
In addition to the assets shown above, the firm had three life policies in the name of each
partner, for insured value of Rs. 20,000 each, the premium of which were charged to Profit &
Loss Account.
According to the Partnership deed, on the death of a partner, the assets and liabilities are to be
valued independently by a valuer. The revalued figures were:
(1) Goodwill Rs. 21,000; Machinery Rs. 45,000; Debtors are subject to a provision for doubtful
debts at 10% and Furniture at Rs. 7,000.
On 1.1.07. S was admitted as a new partner with 1/5th share of profits. S paid Rs. 30,000 for
capital and Rs. 20,000 as his share of goodwill (which was retained in the business).
On 30.6.08 X died. The joint policy realized Rs. 50,000. The share of the deceased partner in the
goodwill was determined at Rs. 36,000.
The Profit for the period ending on 30.6.08 was estimated at Rs. 45,000. The surviving partners
carried on the business, profit sharing remaining unchanged between them. Net Profit be-
tween 1.7.08 and 31.12.08 amounted to Rs. 33,000.
Drawings of the Partners were :
X (Rs.) Y (Rs.) Z (Rs.) S (Rs.)
Up to 30.6.08 13,000 10,000 4,000 7,500
Between 1.7.08 and 31.12.08 — 8,000 5,000 5,000
A sum of Rs. 50,000 was advanced by Y to pay off the dues of the deceased. partner on 1.12.08.
Show the Partner’s Capital Accounts and the draft Balance Sheet as on 31.12.08 assuming that
on that date creditors were Rs. 1,17,000 and Property and Assets were Rs. 2,37,000 respectively.
[Loan : X’s Loan paid off on 31.12.08 Rs. 1,76,387; Balance of Capitals of Y,Z & S on 31.12.08 Y
– Rs. 70,812; Z – Rs. 16,977; S – Rs. 19,954; B/S Total on 31.12.08 Rs. 2,74,113]
[Hints: X died on 30.6.08 but final settlement of accounts could not be made on that date.
Under section 37 of the Indian Partnership Act, his executors are entitled to a share of profit
even after his death or to an interest @6% p.a. on the unsettled share of the deceased partner in
the property of the firm.]
Problem 4.
Basu, Chatterjee and Saxena were in partnership sharing profits as 3/6, 2/6 and 1/6 respec-
tively. There was no provision in the agreement for interest on capital / drawings. Basu Died
on 31st December, 2006 and on that date the partner balances were as follows:
By Virtue of the Partnership agreement the sum due to Basu’s estate was required to be paid
within a period of 3 years, and minimum instalments of Rs. 20,000 were to be paid, the first
such instalment falling due immediately after death and the subsequent instalments at half
yearly intervals thereafter. Interest @ 5% per annum was to be credited half yearly.
In ascertaining his share, goodwill (not recorded in the books) was to be valued at Rs. 60,000
and the assets, including the Joint endowment Assurance Policy mentioned below, were val-
ued at Rs. 36,000 in excess of the book values.
No goodwill account was raised and no alteration was made to the book values of the assets.
The Joint Assurance Policy shown in the books at Rs. 20,000 matured on 1.1.2007 realising Rs.
26,000. Payments of Rs. 20,000 each were made to Basu’s estate on 1st January, 2007, 30th June,
2007 and 31st December, 2007. Chatterjee and Saxena contined trading on the same terms as
previously existing and the net profits for the year to 31st December, 2007 (before charging the
interest due to Basu’s Estate) amounted to Rs. 32,000. During the period the Partner’s Draw-
ings were : Chatterjee Rs. 15,000 and Saxena Rs. 8,000.
On 1.1.1995 the partnership was dissolved, an offer to purchase the business as a going con-
cern for Rs. 1,40,000 being accepted on that day. A cheque for that sum was received on 15.3.2008.
The balance due to Basu’s Estate, including interest, was paid on 30th June, 2008 and that day
Chatterjee and Saxena received the sums due to them.
You are to prepare the Partner’s Capital and Current Accounts between 1.1.08 and 30.6.08.
Also show the account of the Executors of Basu.
Whenever a reconstitution takes place within a Partnership in the form of admission, retire-
ment or death of a Partner, the existing partnership is dissolved. The Partnership firm, may
however, continue, if the remaining partners desire so.
But if the partnership firm is discontinued for any reason, that is called Dissolution of the firm.
Dissolution of Firm – when does it take place [in accordance with the Indian Partnership Act of
1932]
1. By Mutual consent of all the partners or in accordance with a contract made by them
[Section 40]
2. By Notice – given in writing, by any partner to all other partners if the Partnership is at
will [Section 43].
3. On the happening of any one of the following events : [Section 42] : (i) expiry of the term,
where the Partnership was constituted for a fixed term; (ii) completion of the adventure
for which the firm was constituted; (iii) Death of a partner, (iv) Adjudication of a Partner
as insolvent.
(i) Where all the partners or all but one are adjudged insolvent.
(ii) If any event occurs making it unlawful for the business of the firm to be carried
on.
5. Dissolution by Court: According to Section 44 of the Indian Partnership Act the court, at
the suit of a partner, may dissolve a firm on any one of the grounds namely –
(vi) If the court considers that the business cannot be carried on except at loss ;
(vii) On any other ground on which the court considers the dissolution as just and equi-
table.
According to Section 48 of the Indian Partnership Act the following rules should be observed
for settlement of Accounts after dissolution, subject to agreement by partners :
(a) Regarding Losses : “Losses, including deficiencies of capital, shall be paid first out of
profits, next out of capital, and lastly if necessary, by the partners individually in the
proportions in which they are entitled to share profits”. [Section 48(1)]
(b) Regarding Assets : “The assets of the firm, including any sums contributed by the part-
ners to make up deficiencies of capital, shall be applied in the following manner and
order:
(ii) In paying each partner rateably what is due to him from the firm for advances as
distinguished from capital ;
(iii) In paying to each partner rateably what is due to him as capital; and
(iv) The residue, if any, shall be divided among the partners in the proportions in which
they are entitled to share profits.” [Section 48(2)]
The two separate aspects of Dissolution for which accounting entries have to be made are:
[A] Realization of Assets and Payment of liabilities and [B] Settlement of the dues of the Part-
ners,
(ii) Trausfer all assets (except cash, bank & fictitious assets) and liabilities at book values to
Realisation Account.
4. Closing the External External Liabilities A/c .. Dr. (a) Alternatively – this entry may
liabilities (such as creditors, outstanding be passed (combining 4,5 & 6)
expenses, Bank Loan etc.)
To Realization A/c. Liability A/c ……. Dr.
(book value) To Bank A/c (actual amt.
5. External liabilities Realization A/c. …………. Dr. paid) OR,
paid off To Cash/Bank A/c (actual To Partners Cap.
amt. paid) A/c (agreed value)
6. External liabilities Realization A/c……….. Dr. To Realization A/c
taken over by any To Partner’s (Discount, if any received on
partner Cap. A/c (agreed payment/discharge)
value)
(b) Where assets and liabilities are
taken over by another business on
7. Unrecorded asset Cash / Bank A/c Dr. making some lump sum payment,
sold or taken over by Partners Capital A/c Dr. separate entries for realization of
any partner To Realisation A/c assets and / payment of liabilities
need not be made.
To Realization A/c.
(Loss shared in Profit Sharing
Ratio)
Illustration 1 :
X, Y and Z sharing profits & Losses in the ratio of 2 : 2: 1 agreed upon dissolution of their
partnership on 31st December, 2007 on which date their Balance Sheet was as under :
Investments were taken over by X at Rs. 6,000, creditors of Rs. 10,000 were taken over by Y who
has agreed to settle account with them at Rs. 9,900. Remaining creditors were paid Rs. 7,500.
Joint Life Policy was surrendered and Fixed Assets realized Rs. 70,000, Stock and Debtors real-
ized Rs. 7,000 and Rs. 9,000 respectively. One customer, whose account was written off as bad,
now paid Rs. 800 which is not included in Rs. 9,000 mentioned above. There was an unre-
corded asset estimated at Rs. 3,000, half of which as handed over to an unrecorded liability of
Rs. 5,000 in settlement of claim of Rs 2,500 and the remaining half was sold in the market which
realized Rs. 1,300.
Y took over the responsibility of completing the dissolution and he is granted a salary of Rs.
400 per month. Actual expenses amounted to Rs. 1,100. Dissolution was completed and final
payments were made on 30th April, 2008.
You are required to prepare the Realization Account, Capital Account and Bank Account.
1,38,100 1,38,100
Date X Y Z Date X Y Z
Particulars Rs. Particulars
2008 Rs. Rs. 2008 Rs. Rs. Rs.
NOTE :
1. Unrecorded Asset and unrecorded liability were not recorded. Any part of such asset
utilized to discharge any part of such liability and discount received there on have been
ignored.
But unrecorded asset realized (debts previously written off now recovered) has been re-
corded. Similarly unrecorded asset sold has been recorded.
2. Y took over creditors of Rs. 10,000. This has been recorded. How he settles such liability is
his personal matter. The discount on payment does not benefit the firm.
Garner Vs.Murray Rule : (The third partner who became insolvent was Mr. Wilkins)
The deficiency of the insolvent partner shall be taken over by the solvent partners. The follow-
ing steps are taken:
(a) The loss on realisation shall be shared between all the partners (including the insolvent
partner) in their profit-sharing ratio.
(b) The solvent partners shall bring in cash equal to the amount of loss suffered by them.
Cash A/c Dr.
To Solvent Partners Capital A/cs
(c) The deficiency of the insolvent partner shall be taken over by the solvent partners in their
capital contribution ratio ( fixed or fluctuating capitals)
Solvent Partners Capital A/cs Dr.
To Insolvent Partner’s Capital A/c
Indian Partnership Act,1932
As per the Indian Partrnership Act,1932, the deficiency of the insolvent partrner is shared as
follows:
(a) The loss on realisation shall be shared between all the partners (including the insolvent
partner) in their profit-sharing ratio.
(b) The deficiency of the insolvent partner shall be taken over by the solvent partners in their
capital contribution ratio ( fixed or fluctuating capitals)
Solvent Partners Capital A/cs Dr.
To Insolvent Partner’s Capital A/c
Note: As per Indian Partnership Act, the solvent partners shall not bring in cash, their share
of loss on realisation.
Ilustration: Balance Sheet as at 31.10.08
Capitals
A 25,000 Cash 15,000
B 15,000 C’s Capital 10,000
Realisation A/c(Dr.) 15,000
40,000 40,000
Particulars A B C Particulars A B C
If all the partners are insolvent, the external liabilities shall have to take the share of defi-
ciency of the insolvent partners, i.e. the firm.
(b) Partners Capital A/cs- the total deficiency of the insolvent partners shall have to be
transferred to Deficiency A/c.
Deficiency A/c Dr
To Partners Capital A/cs
(c) The total of the deficiency shall be shared between/amongst the external liabilities in the
ratio of their amount outstanding as on the date of dissolution:
All the partners were declared insolvent. Profit sharing ratio :5:3:2. Assets realized Rs.60,000.
Prepare necessary ledger accounts to close the books of the firm.
Solution:
Dr Realisation Account Cr
Particulars P Q R Particulars P Q R
By Balance b/d 5,000 3,000 2,000
To Realization A/c 20,000 12,000 8,000 By Deficiency A/c 15,000 9,000 6,000
20,000 12,000 8,000 20,000 12,000 8,000
Dr Deficiency Account Cr
To Partners Capital A/cs:
P 15,000 By Bank Loan A/c 18,000
Q 9,000 By Creditors 12,000
R 6,000
30,000 30,000
EXERCISE
They decided to dissolve the partnership and the following arrangements were agreed upon:
1. Fixed Assets included :
(i) Motor Car Rs. 5,500 taken over by Birdy at an agreed value of Rs. 9,000 after necessary
repairing cost amounting to Rs. 2,000 to be borne by the firm.
(ii) Land and Building Rs. 50,000 subject to Mortgage loan taken over by Antony at an
agreed value of Rs. 60,000 subject to Mortgage loan to be taken over at Rs. 40,000.
2. Other Assets excluding Cash and Creditors are taken over by Eureka Ltd. in consider-
ation of issue of 5,000 equity shares of Rs. 10 each fully paid. These shares are taken over
at a total agreed value of Rs. 48,000 equally Antony and Birdy.
3. A Creditor for Rs. 2,500 not provided in the books had to be paid.
Prepare the Realization Account, Partners Capital Accounts and Cash Account assuming
that the final settlement was made by partners bringing in necessary amounts.
[Ans : Profit on Realization : Rs. 12,500; Shared as Antony Rs. 5,000; Birdy Rs. 5,000 and
Costello Rs. 2,500 Final Settlement Cash paid to Antony Rs. 3,400, Brought by Birdy Rs.
600 and Costello Rs. 2,300]
2,13,000 2,13,000
Between 31.12.07 and 31.3.08 goods to the value of Rs. 30,000 were purchased and sales amounted
to Rs. 45,000. In addition to payment to trade creditors, payments made were for salaries and
wages Rs. 12,000 and office expenses Rs. 6,000. Drawing of each partner were Rs. 800 p.m. On
31.3.08 debtors, creditors and stock were Rs. 60,000, Rs. 70,000 and Rs. 45,000 respectively.
In dissolution proceedings the partners agreed to transfer the entire business (with all assets
and liabilities including partner’s loan) as a going concern to D for a consideration of Rs. 90,000,
costs of dissolution amounted to Rs. 2,800 which were paid by X.
Show the necessary entires for the dissolution of the fir and also the Capital Accounts of the
partners assuming that all of them are solvent.
{Ans : Trading Loss for 3 months Rs. 13,550; Loss on Realization Rs. 34,950; Final payment to X
Rs. 59,100 and Y Rs. 37,333; Z brings in Rs. 6,833}
Problem 3 :The following was the Balance Sheet of A, B and C who were in partnership
sharing profits & losses as 3 : 2 : 1.
Liabilities Rs. Assets Rs.
Capital Accounts: Cash 500
A 15,000 Machinery 10,000
B 10,000 25,000 Debtors 16,000
Reserve 6,000 Less : Prov. 1,000 15,000
A’s Loan 5,000 Stock 12,000
Creditors 10,000 C’s Capital (Dr.) 8,500
46,000 46,000
The firm was dissolved. Assets other than Cash realized Rs. 26,000. Expenses of winding up
were Rs. 1,000. C was insolvent but Rs. 2,000 was realized from his estate. Show the necessary
ledger accounts to close the books of the firm (Apply Garner Vs. Murray principle).
[Ans : Realization loss Rs. 12,000; Capital deficiency of C Rs. 7,500 to be shared by A and B in
the ratio of 3 : 2. Final payments to A Rs. 13,500 and to B Rs. 9,000 ]
Problem 4
A, B, C and D were in partnership. Their position on 30.6.2008 was as follows. They shared
profits and losses in the ration of 4 : 3 : 2 : 1.
Liabilities Rs. Assets Rs.
X, Y and Z are partners in a firm dealing in fancy goods, and sharing profits and losses as 2 : 2
: 1. They decided to dissolve the firm and to appoint Y to realize the assets and distribute the
proceeds. Y is to receive 5% of the amounts coming to X and Z as his remuneration and to bear
all expenses of realization.
The proceeds of realization were : (i) Debtors Rs. 3,462; Stock 1,444; Goodwill Rs. 50 and other
assets Rs. 909. (ii) Creditors omitted from the balance Sheet Rs. 100 had to be paid. (iii) The
expenses of realization amounted to Rs. 100.
Z informs that he has only Rs. 100 and the other partners agree that if as a result of realization,
Z is still indebted to more than this amount, they accept it in full settlement. Prepare the Disso-
lution Accounts.
[Ans : (i) Loss on Realization : X 793, Y 793 and Z 396; Y’s Remuneration Rs. 147; Cash paid to
X and Y Rs. 2,940 and Rs. 2,154 respectively, Z’s deficiency Rs. 653 shared by X and Y as 4 : 3]