Accounts 2

- · -CBSEXII
1.44 Double Entry Book Keeping

CALCULATION OF OPENING CAPITAL Solution: Interest on A's Capital:
Chapter 1 · Accounting for Partnership Firms-Fundamentals 1.45
f
Solution: A (~
Interest on '{ 6,00,000 for one year: '{ 6,00,Q0Q X 10/lQQ 60,000
Particulars 00,000
75,000
Interest on '{ 1,00,000 for 6 months: '{ 1,00,000 X 6/12 X 10/100 5,000
Capitals at the end
Add: Drawings during the year 7,500 (from 1st October, 2017 to 31st March, 2018)
Interest on Drawings 7, ,5
1,00,000
10,000 Interest on B's Capital:
Less: Capital Introduced during the year 15,000
Interest on Capital 1,00,000 1,15,000 1,00,000 2, 10,000 Intere on '{ 4,00,000 for one year: r 4,00,QQO X 10/lQO '{ 40,000
Share of Profit for the year 6,67,500 4.45,ooo
Capitals in the beginning ustration 29. Ramesh and Naresh are partners in a firm. Their capitals as on 1st April, 2017
be prepared to determine Opening Cap· ta] were'{ 2,50,000 and'{ 1,50,000 respectively. They share profits equally. On 1st July, 2017, they
Altematively, Capital Account of each partner may I
as follows: decided that their capitals should be'{ 2,00,000 each. The necessary adjustment in the capitals
Dr.
Particulars A(\)
PARTNERS' CAPITAL ACCOUNTS
I 8 It) Particulars A~) -

8 (fl
Cr were made by introducing or withdrawing capital. Interest on capital is allowed @ 8% p.a.
Compute interest on capital for both the partners for the year ended 31st March, 2018.
To Drawings Ne I 50,000 By Balance bid 6,67,500 4,45,00Q Solution: Calculation of interest on capital: () -
·,1.-1 u '"'· / 0-0-V ' .,
To Interest on Drawings Ne I 75,000
7,500 5,000 (Balancing Figure) (i) Interest on Ramesh's Capital: '5°""0 I ,:s-cst) 4 ~,:)lJdJ'~
To Balance dd (Given) 7,00,000 6,00,000 By Cash/Bank Ne " ' 1,00,000
(Add. Capital Introduced) From 1st April, 2017 to 30th June, 2017 = '{ 2,50,000 x 8/100 x 3/12 5,000
I By Interest on Capital Ne
I
I
II
By Profit and Loss Approp. Ne
(Share of Profit)
15,000
1,00,000
10,000
1,00,000
From 1st July, 2017 to 31st March, 2018 = '{ 2,00,000 x 8/100 x 9/12 12,000
17,000
_, I 7,82,soo I 6,55,000 7,82,500 6,55,000 (ii) Interest on Naresh's Capital:
.)Jifutration 27 (Calculation of Opening Capital). A and B are Partners in a business and their From 1st April, 2017 to 30th June, 2017 = '{ 1,50,000 x 8/100 x 3/12 3,000
capit~ls at t~e end of_ the_year were '{ 7,00,000 and '{ 6,00,000 respectively. Calculate their From 1st July, 2017 to 31st March, 2018,= '{ 2,00,000 x 8/100 x 9/12 12,000
operung capitals cons1denng the following information: 15,000
(a) Drawings of A and B for the year were '{ 75,000 and '{ 50,000 res ectivel .
(b) B introduced capital of '{ 1,00,000 during the year. P Y Illustration 30. From the following Balance Sheet of X and Y, calculate interest on capital
(c) Interest on capital credited to the Capital Accounts of A d B '3' @5% p.a. for the year ended 31st March, 2018: L
'{ 10,000 respectively. an were , 15,000 and :-1 ~ 0 0
BALANCE SHEET asat 31st March, 2018 ~ l-.c7\
(d) Interest on drawings debited to the Ca . I rl -
respectively. pita Accounts of A and B were'{ 7,500 and'{ 5,000 Liabilities t Assets t
/ \
(e) Share of loss debited to Capital A X's Capital A/c - 90,000 Sundry Assets 2,10,000
. ccounts was '{ 20,000 each Y's Capital Ne 80,000
S0 IU t! On- ·
Particulars
. CALCULATION OF OPENING CAPITAL Reserve
~ "-:-'Fi 40,000
2,10,000 2,10,000
Capitals at the end A(~ 8('{)
Add: Drawings during the year 7,00,000 During the year ended 31st March, 2018, X's drawings were f 10,000 and Y's drawings were
Interest on Drawings 6,00,000
75,000 '{ 30,000. Profit for the year ended 31st March, 2018 was f 60,000. The amount of Reserve, i.e.,
Share of Loss for the year 50,000
7,500 '{ 40,000 is transferred from Current Year's profit to strengthenllie financial position of the firm.
5,000
Less: Capital Introduced during the ear 20,000 20,000
Interest on Capital Y ... 8,02,500
6,75,000 Soiiifion: ~Q~
Capitals in the beginning 15,000 lS,OOo 1,00,000 Calculation of Interest on X's Capital: f (J
1
~(•
1 1
J
1) () O f
~ 78 10,000 1,10,000 X's Capital as at 31st March, 2018 <... , ~ 90,000
7
, tration 28 (Calculation of Jnte 1
' ,soo 5 65 000 Add: Drawings made during the year l O O1 10,000
th capitals oH 6,00,000 and'{ 4 ;;s on Capital). A and B sta . , ,
to the firm as additional capital ~n lO~OOrespectively. During ;~ed business on 1st April, 2017
\ l o o oo 1,00,009 ,
h o u s e ~ •.,. , -_, __,; -··F0 ft s ctober, 2017 Th
X>-C IJ . . e year, A introduced'{ 1 00 000 Less: Profit added (~redited)~ 60,pQO 40,09~)] .P h l ~ ~ ( 10:000~
-·· r ~ 1 s. Interest
a cu ate interest payable to A and 8 fo
· ey Withdrew'{ 50
on capital is to be al]
' '
,000 per month for Capital as at 1st April, 2017 ""1' ~
., l'-" - - \ .,,(y\j;W\,W1 90,000
r the year ended 31 owed @ 10% per annum.
st Interest on capital@ 5% ~-~- = ? 0,000 x 5/100 = f 4,500. . ~ cG\Jvli._
~_ "'""'· 2018. ( ,_, (
,r 1.1..""\...;, _!.,
r I '
r,
\ .
(
r
K ping-C BSt: !\II r, n ~ Y lc.{Y .
""1
&
'
- Partne ll Firm s-'fu ndam enta ls
rship
I .'-ti
1.._.Y
1.46 Double Entry Book ee Ch pter 1 . Accou nting ,or
'· a ital:
Calwla tirn of Intcrd 011 y , C p t (b) When Capitals are Fluctuali'!.,g: · -
t March, 2018 so, 000 OPENING CAPITAL
Y's Capital as at 31 s - - - - - ~ - CALCULATION OF y
Add. OrJwings made ur

d ing the year
d (credite d ) [1 /2 ('{ 60,000 - f 40,00 0)]

...._Jo,ooo
1,10:000 -
particulars
X
t
10,00,0 00
-, .
~
12,50,000
~~
Less: Profit adde 5,00,000 1,25,000
Closing Capital
Capital as at 1st April, 20l?
5/ 100 = '{' 5,000 .
,oo,ooo Add: Withdrawal of Capital 2,50,00 9 1,25,000
'taJ /@ 5 01 pa = '{ 1 00,000 X ~ I 15,00 ,00- 0-
~ C I-"' ~ ' , C::::ora wing 0 --1:f<. 17,50,000
2,50,000 6,25,00 0
Notes:
l. Capital in the beginnin g is calculated by adding
drawin gs and deduc ting profit distrib uted. Less: Additional Capital Introdu ced !3,00,0 00 ~ 5,000
2. Profit during the year wast 60,000 out of which . .

f 40,000 is transf erred to Reserv e and .is shown 1. 3,00,00 0 I 2,00,0 00
Balance Sheet. Thus, in effect, only t 20,000 were distrib uted

.
wh ich have been deduc ted,
rs will share profit and los
n the
Less: ~ re of Pro fit~ 12,00,000 ! 6,75,0 00
- -
In the absence of any profit-sharing ratio being given, partne s equally. Opening Capital~ \ I
ustration 31 (Calrnlation of Interes t on Capital, Drawi

ngs Again st Profits nnd D
ratio of 3 . 2 On 3 1 t M archrawings Against
. , I
~ IN~T~ER'.:,'.E:,:'5'.T~
.~F
CALCULATI0;1N,'._'O ~A
.'._ O::_N:_:C I
_:,:P,:_IT:.:,A~L:_-:-: -_+ -
Y_ /_
- - ,:...
I ~'{
/_- T-
'- -
1
Capital). X and Y are partners sharinoo profits in the
.
· ·
000 and "{ 12 50 000
s 2017
' . after - - - +'-,- -
- - - --:- -X -t
closing the books of account, their capita ls are '{ 10,00, 40,500
l of"{ 2 50 00·0 ,d y' .thresp ective ly. On Interest on Openin g Capital
1st May, 2016, X had introduced an additi onal capita , , an w1 drew '{}' 250 Interest on Opening Capital
72,000
fro hi ·1 I On 00 000 f hi • ' op (t 6,75,000 X 6/100)
m s capi a • 1st Octobe r, 2016 X w ithdre w'{ 5, d , rom s capita l and y introd uced (t 12,00,000 X 6/100)
Add: Interes t on Additional Capital
.
t 6,25,000 . After closing the accoun ts, it
been omitted. During the year ended 31::a ~: ~o~~;
t 2,50,000 and~ 1,25,000 Profits (before . t
. d
,
~ ~~a~Inte~e st o n Capital @ 6% p.a. has
, s r awmg s and Y's drawi ngs were
Add: Interest on Additional Capital
(t 2,50,000 X 6/ 100 X 11 /12)
13,750
85,750
(t 6,25,00 0 X 6/100 X 6/ 12) 1:::::
· meres t on C a pital) dur·mg th e year were '{ 5,00,000, 6,875
Calculate Interest on Capital if th . 15,000 Less: Interes t on Capital Withd rawn
Less: Interes t on Capital Withdrawn 6/ 100 X 11/ 12)
(a) fi: ed a~d (b)_~ n A g . (t 1,25,000 X
Solution~ (~ 5,00,000 X 6/ 100 X 6/12) 2,375
il
70,750
(a) When Capitals are Fixed)
- - - I r - CALCULATION OFOPENING CAPITAL

~ rs -
- -- -- -- Differ ence Betw een N et Profit and D ivisib
le Profi t
erre d to Profit and Loss
I
y and Loss Acco unt which is transf
X Net Profit m eans profit as per the Profit
Closing Cap1tal
Add: Withdrawal )f Cap11a1
- r t Appro priatio n Accou nt.
The net profit so transf erred is appro priate
d as is provid ed in the Partn ersh ip Deed.
-----
10,00,000 12,50,000 !t ..!!!1d Lo ss
l ess: Additiona l Capital I 5,00,000 1,25 000 Divisi ble Profit me<lll,s...iuoli L ai.ter_ _credi
t of tritfile.§.! OJ1 Draw ings Lil anvl t <:_~
Op,,ning Capital rrtroduc('(J towar ds salary to partn ers and intere st on
15,00,000 13,7,,000 App ropr iation Acco unt and a p p_r~priation
-
L/ --- -- - -
2,50,000
12.50,000
6,25,000
7,50,000
[ capi\ a l, etc .-
--
- --- --- --- --- - --- ---
<~
ng profi ts
- - - ; - - - _CALCUL Ano
Illu s trnt i o n 31 (Trn11 sf er of Profit to Ge11er
nl Reser ve). X a nd Y are partn ers shari
/ X ~
t ~
INTERES T ON
CAPITAL
___,_
, 2017 stood at
lntHeston o -
- _ -- a nd losse s in the ratio of L1. -Their Capit al Acco unts as a t 1st April
I
~ 12 50000 Pen:ngc apitat y -
5.%_p .a. The
, ' X6/1 00/ 75 OOo - I ? ers are allow ed interest on capit al @
Add: m:erest o A , Interest - - X- ~ 5,00,0 0Q; Y -'{ 4, 00,0 0Q. The partn
~ 2,-0,ooo
< Ca
nx dd1t,onat Pitat I{ on Openin C . -
ende d 31st M a r ch, 2018 amou nted to~
72,00 0 and
51100 x 111121 13,7so 7.So,ooo x61 g aprtal I 45,000 u rawin gs of the part ners d uring the year
Add· I 100) salar y
befor e allow ing inter est on capit al and
50,0 00 r esp e c tively . The profi t fo r the year
L . nterest on Add'
e.,. r.tHesr on Capita/ - 88,7so (? 6 25 000 itional Capital 18,750 _! t is to be set aside as
~ s,oo ooo Withdrawn 8 ,00, 000. 10% of the n e t profi
x 611oo x 611 2i 15,00o , , X6/12x 61100J to Y @ '{ 5 ,000 per mont h amou nted to'{
f
Less• - ____ _.
I . 1nteres1 on . Withdrawn G enern l Reser ve.
----
63,750
----= =-.:_- 73.7so ~ 1.2s ooo Capital 6,875 Acco unt for
X 11112 x 61100) Prepa re P r ofit and Loss Appr opria tio n
....:::....::.C ' Pass the Jo urnal entrie s for Appr opriation.
----- 56,875 the y e ar ended 31st M11rc h, 20 18, and Capit
al and Curre nt Acco unts of the pMtn ers.
r 1.48 Double Entry Book Keeping-CBSE XII Chapter 1 • Accounting for Partnership Firms-Fund
ament als 1.49
--rl
JOURNAL Cr
Solution: L.F. Dr. Cr. Dr. PARTNERS' CAPITAL ACCOUNTS
Particulars '{ t X y
Date Date Particulars X y Date Particulars
t' t'
t' t'
201 s -- ...Dr.
8,00,000
2018 201 7
March 31 Profit and Loss Ale 8,00,000 5,00,000 4,00,000
To Profit and Loss Appropriation Ale March 31 To Balance dd ,5,00,000 4,00,000 April 1 By Balance bid
/
(Being the net profit transferred to Profit and Loss
t)_ _ _ _ _ _ _ _ _ _ _ _ _ ---; Cr.
Appropriation Accoun-'-
45,000 Dr. PARTNERS' CURRENT ACCOUNTS .
... Dr. / X y
Interest on Capital Ale 25,ooo, Particulars X y Date Particulars
Date '{
To X's Current Ale t'
To Y'sCurrent Ale ~ 20,000 t' t'
(Being the interest on capital allowed @5%p.a.) 2018 2018
...Dr. 60,000 March31 By Interest on Capital Ne 25,000 20,000
Y'sSalary Ale March 31 To Drawings Ale 72,000 50,000
60,000
To Y'sCurrent Ale 60,000 March31 By Y'sSalary Ale ...
March 31 To Balance dd 3,83,500 2,14,500
(Being the salary allowed to Y@t' 5,000 per month) March31 By Profit and Loss
--- --- --- --< ...Dr. 1,05,000 Appropriation Ne (Profit) 4,30,500 1,84,500
Profit and Loss Appropriation Ale
To Interest on Capital Ale 45,000 4,55,500 2,64,500
4,55,500 2,64,500
To Y'sSalary Ale
(Being the interest on Capital and Partner's Salary transferred
Profit and Loss Approp riation Accoun t)
to
I 60,000
Working Nott: Profit to be distributed:

l) - t' 20,000
X's Drawings Ale ...Dr. 72,000
t' 8,00,000 (Profit)- 't' 80,000 (General Reserve) - 't'
60,000 (Y's Salary) - 't' 25,000 (Interest on X's Capita
Y's Drawings Ale ...Dr. 50,000
(Interest on Y's Capital)= 't' 6,15,000.
I fo Cash/Bank A/c 1,22,000
1
(Being the drawings made by the partners during the year)
X'sCurrent Ale
Y's Current Ale
I
...Dr.- i 72,000
,_,)1l ustra ~~r ans fer of Profit to General Reser
losse s in the ratio of 7 : 3. Their Capit al Acco
ve). X and Y are partne rs shari ng profi ts and
unts as at 1st April, 2017 stood at X-'t' 5,00,0
00;
...Dr. / The draw ings of the
50,000 st on capita l @ 5% p.a.
To X'sDrawings Ale Y -t' 4,00,000. The partn ers are allow ed intere
To Y's Drawings Ale
72,000
h, 2018 amou nted to'{ 72,000 and 't' 50,000 respe ctivel y.
50,000 partn ers during the year ended 31st Marc
(Being the amount of drawings transferred to their respective ~th
st on capita l and salar y to Y @'t' 5,000 per
( urrent Accounts)
I The profi t for the year before allow ing intere
amou nted to '{ 8,00,000. ~ % of the divisible
profiJjs to be set aside as Gene ral Rese ivef
Profit and Loss Appro ~A/~
... Dr. 7 6,95,000
of profit s, Partn ers' Capit al and Ctmem Acco
To X'sCurrent Ale m,ts.
To Y'sCurrent Ale
/ 4,30,500 Prepa re an accou nt show ing the alloca tion
b"'
To General Reserve Ale
(Being the profit distributed in the ratio of 7 ·. 3 after transfer
I /
1,84,500
80,000' Solut ion: PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ended 31st March, 2018
Cr.
oft' 80,000 to General Reserve) Dr.
•A f
mount transferred to General Re f Particu lars
serve: 10%of Net Profit - 1O'¾ ft' Particulars ,
L - o o 8,00,000 = t' 80,000. 8,00,000
Dr. PROFIT AND By Profit and Loss Ale
055 APPROPRIATION ACCOUNT fi h To Interest on Capital A/cs:
orr eyear ended 3Ist March, 2018 Cr. 25,000 (Net Profit)
Particulars X
t' 20,000 45,000
o Interest on Capital Ales· y
k's Current Ale ·
25,000
By Pro~ ,:;z- - -
Loss ,..._t_ _
8,00,000 To Y's Salary Ale (Y's Current Ale)
60,000
rs Current Ale (Net Profit) 69,500'
45,000 To General Reserve Ale
To rs Salary Mc (Y's Current Ale) 1 0,000
To General Reserve Ale 60,000 To Profit transferred to:
80,000 4,37,850
(1096 oft' 8,00,000) X'sCurrent Ale 6,25,500
1,87,650
To Profit transferred to· Y's Current Ale 8,00,000
Ks Current Ale (7/ 1OJ 8,00,000
rsCurrent Ale (311OJ 4,30,SOO
.M4 500 6 15 000 Divisible Profit
8,00,000 •Amount transferred to General Reserve = 10% of 20,000 - t' 60,000)
= 10% of 't' 6,95,000 (i.e., 't' 8,00,000 - 't' 25,000 - 't'
= 't' 69,500.
W
Fundamentals 1.51
Chapter 1 · Accounting for Partnership Firms-
1.50 Double Entry Book Keeping-CBSE XII
Cr. PllQffi-AN0t oss-APPR0PRIATt0N-ACCOUNT
PARTNERS' CAPITAL ACCOUNTS Dr. fi rt eyearendedJlstMarch,2012 Cr.
Dr. X y
y Date I
Particulars Particulars ,
Date Paniculars X t I t f Particulars
{ {
2017 - C =
-.:~
To Prime Minister's ReliefFu 8d
ToNational Blind Reliefl'arnn"cr-~ -+- ~
'fo • Nett"rofln ransferretl to:
1,00,000
1 50,000
By Profit and Loss Ale
(Trading Profit)
10,00,000
2018
March 31 To Balance dd
5,00,000 4,00,000 __ __ Balance__
By __
April 1 . .---00
~
bid __.;GQ0,0 4,00,000
Ram's Capital Ale 2 83 333
Mohan's Capital Ale 2'83' 333 /
Cr. Rakhi's Capita l Ale 2;83:334 1 8,50,000
PARTNERS' CURRENT ACCOUNTS
Dr. 10,00,000
Paniculars X Y 10,00,000
y Date
Date Paniculars { {
{
1st April, 2017, Precious, Noble and Perfect enter ed into partn ershi p with
Illus tratio n 35. On
2018
March 31 To Drawings Ne
March 31 To Balance dd
72,000
3,90,850
50,000
2, 17,650
I
2018
March 31
March 31
a, rm,re><oo C.pital~
By Y's Salary Ne /
2s,,oo /
...
,o,roo
60,000
capit als off 60,000, f 50,000 and t 30,000 respe
Perfe ~t advan ced t 10:000 as ~oan to the partn
conta ined the follow ing clauses:
D
1 1
ctively.
ership on 1st Octob er, 2017. The Partnership
~ \'." '-->
...i:..-
Deed
March 31 By Profit and Loss I

(i) Inter est on capit al @6% p.a.
, ,=;::
Appropriation Ne (Profit) / 4,37,850 / 1,87,650 g
{4,00 0 at the end of each quarter commencin
4,62,850 / 2,67,650 (ii) Interest on draw ings @6% p.a. Each drew
4,62,850 2,67,65 0 from 30th June, 2017.
.
a salary of { 200 and { 300 per month respectively
(iii) Working partn ers Precious and Noble to get
Approprintio11 Acco1111t). Ram and Moha n are 6% p.a. •
}firu :eation 34 (Value Based a11d Profit a11d Loss (iv) Inter est on loan was given to Perfect @ --.;.,. ~ '
to
partn er witho ut capita l for I/3rd share in
the . mont h for use of his build ing by the firm. It is paid
partners in a firm. They admitted Rakhi as a (v) Nobl e 1s to get rent of {2,000 per
new
having good m anage ment quali ties. The / him by chequ e at the end of every mont h.
profi t of the firm. She is blind by birth but
ratio of 4 : 2 : I up to ~ 70,000 and above
partnership agreement provides for the follow
ing: ) }if Profi ts and losses are to be share d in the
Minis ter 's Relief Fund . \~ 70,000 equa lly.' )j(
•1i''(i) 10% of the trading profi t will be donated to Prime Net profit of the firm for the year ended 31st March
, 2018 (before the above adjustments) was~ 1,35,C
XXJ.
Relief Fund . unt and Capital Acco unts of Partn ers assum
ing
,. (iU 5% of the trading profit will be .dona ted to the National Blind Prep are Profi t and Loss Appropriation Acco
15% on Maximum Retail Price to the peop
le &_ c!f3J t-i
(iii) Pr~ducts will be sold at a discount of capit als to be~
living below poverty line. PROFIT AND LOSS APPROPRIATION ACCOUNT Cr.
Solu tion: for theyear ended 31st March, 2018
Dr. --, -- -- - - - - - - - - - - ,--:; --
(iv) l affected areas of the coun try. - --- --- --- -.- --- -,-
New retail shops will be opene d in the Naxa { '{ Particulars
'{
Pa rt icuIars
(v) the girls belon ging to Sch d I d C 1,10,700
New jobs of sales persons will be reserved for e ue astes To Interest on Capital A/cs:
By Profit and Loss Ale (Net Profit)
and Sched uled Tribes. 3,600 ({ 1,35,000 - ~ 24,000 being rent -
Precious
3,000 ~ 300 being Interest on Loan)
. . Noble
h 2012 8,400 By Interest on Drawings Ncs (Note):
Trading profit of the firm for the year ended 31st Marc
. ' wast 10,00 ,000, id entify any four Perfect 1,800
360
R khi Precious
values considered by Ram Moh an an d a while prepa · p To Partner's Salaries Ale: .- '1 360
' nng new artners hip Deed and also 2,400 Noble 1,080
p repar e 'Profit and Loss Appropr·a t· A Precious Perfect '2, y .: :_ J '°'ll..J
/ _ 360
i ion ccoun t' of Ram ' Moh an an d Ra klii for the year ende d 3,600 6,000
31st March, 2012.
Noble
~ '1 b crO
To Share of Balanca-1'1efit liailSl@lf~ to O
Wel/1 i 2013 C)
.
Solut io1 : Follow ing y a1ues are consid ered by Ram M0 h . . Current A/cs: l / 0 ·1 °
' an and Rakhi wh ile prepa ring n ew First U0,000: 40,000
Partn ershi p Deed : Precious (4/7) 20,000
Noble (2/7) 10,000
• Sensi tivity towa rds differently ablnd
~ peop1e. Per f e c t ~ (,l / 7 )-
Next '(27,380 (i. - l O,OOO): 9,127
• Resp onsib ility towar ds nation.
Preclou 9,127
d . . 9,126 t --
• Provi ding entre prene urial opport·unities a n ciea ti ng empl oyme nt. Noble (1/3) 1, 11,780
m naxal affected mw1s. Perfect (1 /3) [ 1,11,7~
• Provi ding employment oppo rtun·ti ·ies for the upliftm .
ent of girls belon ging to Sche duled
Cas tes and Sched uled Tribes.
;p
- Chapt er 1 · Accou nting for Partn ership Firms
-Fun dame ntals 1.53
1.52 Doubl e Entry Book Keeping -CBSE XII Cr.

Acco unt givin g effec t to the abov e
omis sions woul d
Corre ct Profi t and Loss Appr opria tion
PARTNERS' CAPITAL ACCOUNTS Precious Noble Perfect
have been as follo ws:
Dr. Particulars f f f
Precious Noble j Perfect PROFIT AND LOSS APPROPRIATION ACCOUNT Cr
Particulars '{ '{
'{
60,000 ) J0,00 0 30,000 forthe year ended 3 I st March 2018
To Balanced d
--<
60,000 _so,ooo J 30,000 By Bank Ne i =
Cr.
Or
particulars f Particulars l_'_
PARTNERS' CURRENT ACCOUNTS 1 3,00,00 0
By Profit and Loss A/c-N et Profit
Dr. / Precious I Noble Perfect To Interes t on Capita
l A/cs:
By Interes t on Drawings A/cs:
Precious Noble Perfect Particulars f f A 12,000
1,200
Particulars f 9,600 A
'{ '{ 8 900 2,100
'{ 10,500 32, 100 8
16,000 16,000 16,000 By Interest on Capital Ne

3,600
2,400
3,000
3,600
1,800
T0
C
Profit transfe rred to: -
To DrawingsNc 360 360 By Partner's Salaries Ale 29,127 19,126 A's Capital A/c 90,000
360 49,127
To Interest on Drawings Ale By P & LApp. Ne (Profit) B~ta f:°Af c 90,000
(Note) 4,566 90,000 2,70,000
Cs C<!gita)-ALL
To Balance dd 38,767 19,367
35,727 20,926
55,127 I 35,727 20,926 ---
I
3,02,1 00
3,02, 100
55,127
' -
rved:
propr iation Acco unt, follo wing is obse
Notes: be charg ed on the From the corr ect Profi t and Lo ss A p
ofeach quarter during the year, intere st will Ale
1. If the fixed amoun t is withdrawn at the end
gs to be chang ed from each partne r will be: A's Capit al Ale I B's Capi tal A l e C's Capit al
whole amount for 4½ month s. Thus, interes t on drawin - -- - - - ---' ---- f 9,600 '{ 10,50 0
~ 12,00 0
x x l / l 2 x 6/100 = f 360. Cred ited S h ort for Inte rest on Capi tals
~I.. Total Drawings x Rate of Interest x 4½ = '{ 16,000 912 (f' 900)
12 (~ 1,200)
"'' 100 D e bited S h ~ r Inter est o n Draw ings
e to Noble are charge s agains t profit. (f' 10,000)
2. Interest on Loan from Perfect and rent payabl (~ 10,00 0) (~ 10,00 0)
- ---•
/
Cred it ed Exce ss as Share of Profi t
(~ 32, 100 (Inte rest on Capit al) - '{ 2,100 I
___,_/_
( Intere st on Draw ings )_ E_qua lly ]_ _ _
({ 1,300) ~ 500
finan cial I f' 800
a partn ership fi rm, i.e., prepa ring the N e t Effec t
Somet imes after closin g the accou nts of rs are foun d . For S h ort Cred ited E xcess Cred ited Shor t Cred ited
the accou nts of the earli er yea
s tatement_s, some errors or omiss ions in r or lowe r rate
mitte d, allow ed or charg ed at highe
ex~p le, mtere ston capita l or drawi ngs is o Thes e error ; d a s follow s rectif ying th e abov e error
s:
partn ers in a wron g r atio and so o n. A s ingle adju s tmen t entry can be passe
pr~fits ~r l~sses are d1s'.n buted amon g the Cr.
:~~:t;::!::~~f L.F. Dr.
1 5
!~altri ~~cou nts of the affec ted partn ers
by Date Particulars r r
; :ss:~ :; : a:;~ s=~e !:;,
(A) When an Adjus tment Entry (Sing

is passe d for th
adjust ment entry
Let us under stand it w ·th
le Ad'us tmen t E
t J
.
ntry) IS passe d: In thi s case, a singl e
e ne amou nt of all the pas t a djustm ents.
2018
March 31 B's Capital Ale
To A's Capital A/c
...Dr. T 1,300
800
500
an examp le. Follow ing is th p f
e ro it a nd Loss Appr opria tion Acco unt To Cs Capital Ne
. I
rs:
of a firm in which A, Band Care equal partne (Being the interest on capital not allowed and Interes
t on
PROFIT AND LOSS APPROPRIATION ACCOUNT drawin gs not charge d, now adjusted)
Dr. for deter minin g
for the year ended 3 I st March, lO I B follow ing the below speci fied proce dure
. ulars Cr. Alter nativ ely, a table can b e prepa red by y :
and passi ng the adjus tmen t entr
Particulars the net effec t of the past adjus tmen ts
To Profit transferred to: for each partn er
table w ith one colum n for parti cular s, one
A's Capital Ale 1,00,000 By Profit and Loss A/c-N et Profit 3,00,00 0 S tep I : Prepa re an analy tical and the firm are divid ed
ns for the partn ers
B's Capital Ale 1,00,000 separ ate ly a nd o ne for the firm. The colum s:
utlay of the Analy tical Table is as follow
C's Capital Ale
~ 00 3,00,000 into two parts -deb it and credi t. An o
C irm (Profit and Loss
/3,0Moo Particulars
A 8
j ustme nt Accou nt)
- - 3,00,00 0
After prep aring th e f inanc1.al s ta teme . Dr. (\) Cr. ('{)
it w as detec ted tha t in Dr. ('{) Cr.('{) Dr.('{) Cr.('{)
allow ed to A - f 12, 000, B -'{ 9 nts, Dr.('{) Cr.('{)
l was not
- t 10,500 and also int;; :::t o n capita
dra w ings of A and B a moun ting,1:0~ ~~OC was not charg ed on
' I
and f 900 resp ectiv e y. Interest on Capital 0
Interest on Drawings
1.5 4 Double Entry Book Keeping-CBSE
XII . t
. ·tted . Plac e mte res due to ind ' 'd . Chapter 1 · Accounting for Partnershi
Step 2: C alcu late inte rest on cap!·t a l earl ier onu 1v1 Ual Jllustra hon 37. A and.,.B-a re p p Firms-Fundamentals 1.55
d tota l inte rest so omi·tte d m · th d
wing was the sLl.
artn . .
•
Part ners in thei r resp ectiv e ere dit colu mns an e ebit 11 Sh ers m ~
for the firm ). Fo O firm shar ing prof its and lo~ es in the
ance eet o ratio of 3 : 2.
co lum n of the firm (as 1•t is · n expe nse
a Liabilities
m:u.,as at 31s t M_gw ,,.20 lS~ ;)
""
. . d to be con side red . Place
. inte rest due , Assets
Step 3: Calc ulat e inte rest on
draw ings
earl ier om1tte ~~~ ~ ~
. deb it colu mns and total mte . Sd A
·
from indi vidu al part ners in thei r resp ectiv e rest so A un ry ssets - - - - - - - -8-0-,00-0
( ' t •s an inco me for the
fi 60,00'o
rm)
omi tted in the cred it co Iumn f the
° firm
for an othe r expe nse or inco me
as I i
. d
. B
::ro-:afo'
Step 4: Rep eat the proc ess offil tte . 80,000
y . d for the firm . This will disc lose 80,000
Step 5: Find out bala nce of the net prof it Pro fit~ 30,0 00 for the year end
colu mns des1 gne ed 31st Mar ch, 2018 was divi ded
or n et loss . allo win g inte rest ~ betw een the part ners with out
itals @12% p.a. and sala ry to A@
S tep 6: Divi de prof it or loss (as • fi h · A with drew ~ 10,0 00 anct B ~ ·20,0 t 1,00 0 per mon th. Dur ing the year ,
per Step 5 above) amo ng the part ners in thei r pro t-s ann g ratio . 00. -
S tep i: Find the bala nce of each Pass nece ssar y adju stme nt Jour
p artn er sepa rateIY· In ca se one part ner has d ebit bala nce nal entr y and show your wor king
clearly. (De/Iii 2011 , Modified!
the othe r part ner mus t hav e ered . b 1 , Sol utio n:
1t a ance of the sam e amo unt. JOURNAL
Step 8: Pass Adj ustm ent Jo urna
l entr y with the amo unt dete rmi
ned as per step 7 .
Date I
Particulars
L.F. Dr.(f)
Note: If adju stme nts are to be Cr.~)
mad e ce than one year, then ascertain the cons d 2018
t en pass the required Journal e!lli} oli ated ·pos itior r-an a March 31 8 's Capital Ne
', _~ ~ To A's Capital A/c ...Dr. 5,280
Illu stra tion 36. p and Q wer e 1 (Being the interest on capitals and salary to 5,280
p artners in a firm shar ' ing prof Anot charged,
wer e ~ 1,00 ,000 and ~ 50,0 00
Cap ital at the rate of 10% per ann
resp ectively. The Part ners hip
um. For the year end ed 31st Mar
its equ aJlT
Dee d
Y· heir
prov ided
' f
for
d cap ita
ixe
Inte rest
· 1s
on
now adjusted) (WN)
Working Notes:
I
wer e distr ibut ed with out prov ch, 2016, the prof its of the firm
1. Calc ulati on of Opening Capi tal:
idin g Inte rest on C apital.
Pass nece ssar y adju stm ent entr
y to rect ify the erro r.
(Delhi 2017)
Particulars A(~ B rn
Sol u tion : Closing Capital 60,000 20,000
ADJUSTMENT ENTRY Less: Profit already credited (3 : 2) 1800 0 12 000
Date Particulars 42,000 8,000
--,- L.F. Add: Drawings already debited 10,000 20,000
Dr. ro cr.ro
Q's Current Ne Capital in the beginning 52,000 28,000
To P's Current Ne ...Dr. 2,500 -
I (Being the adjustment of omission of Interest on Capit 2,500 2. TABLE SHOWING ADJUSTMENT TO BE MAD
E
al)
Wor king Notes: Particulars A's Capi~ta~l ~N~c-. \-~ a~·s~C~a~p!!'ita;I~A/7c_,f
,
Dr. (~) , Cr.('{) -n." "mT ~:"m 1
Dr.('{) Cr.('{)
1. Calc ulati on of Inter est on Capi
tal: 6,240 3,360
Interest on Capital
p = '{ 1,00, 000 X 10/1 00 ='{ 10,00 0; Q = '{ 50,0 00 X 10/1 Salary to A 12,000
00 = '{ 5,00 0. 21,600
Tota l Inter est an Cap ital= '{ 10,00 Loss to be Debited (3 : 2) 12,960 8,640
0 + '{ 5,00 0 = '{ 15,000.
The abov e inter est on capital 12,960 18,240 _!!.
B,e64~0~ 1L-~3,,::.36
::::0~ 1---=2:.:.
1,=600 -'--~
has not been credited to the partn 1,600
Curr ent Accounts resulting in a loss ers. It is to be cred ited to the Part 5,280 (Cr.) 5,280 (Dr.) Nil
of'{ 15,00 0 to the firm, which is to be ners ' Net Balance (Effect)
profit-sharing ratio, i.e., equally. debi ted to the part ners in their . . t t on Capital and Interest on
· d ·11iout Prov1d111
Illu st ratio n 38 (Profits Appart1on g for 1n eres
2. Stat eme nt Show ing the Adju stme
e w, . a finn shar ing prof its in the ratio o f 3 2
Drawings). Man nu and Shri
I
nt for Interest on Capi tal and its sthi are part ners in : .
effec t: Sh
. the Bala nce ee o £ the firm as on 31st Mar ch, 2018:
Particulars 11 . t
P's Current Ne Fo owm g is
Q's Current Ne BALANCE SHEET asat 31st March, 2018
-
Interest on Capita/ (WN 1)
-
For Sharing the above loss (Equally~
- Dr. ro
...
_l,500
Cr. ro
10,00 0 D,.ro
...
7,500
Tc,'" D,: l
5,000 15,000
Firm
Cr.r o Liabilities
Mannu's Capital 30,000
10,000
~
40,00 0
Assets
Drawings:
Mannu 4,000
J
6,00_0
7,500 10,000 15,00 0 Shristhi's Capital Shristhi __2,QQ!l i
7,soo s.~~o - 15,00 0 Other Assets 34,009
Balance to be adjusted (Net effect) 15,00 0
2,500 (Cr.) ~ 00
2,500 (Dr.) 40,000
Nil
· -C~E~ . Chapter 1 · Accounting for Partnership Firms-Fundamentals 1.57
1.56 Double Entry Book Keeping ,hich was divided m the agreed ratj
ch 2018 was f S,OOO ~ . d tently omitted. Adjust · o, hut (ii) ~uring the _year, Eleen and Monu each withdrew a total su m of '{ 24,000 in equal
Profit for the year ended 31st Mar ' d vings was ma ver liltereston
Years) mstalments m the beginning of each month and Ahmad withdrew a total sum of'{ 48,000
interest @5% p.a. on capital and6% p.a. othn r~:ve the adjustment entry. (NCERT, Modified
5· in equal instalments at the end of each mon th .
· for 6 mon
drawings on an average basis (iii) The interest on drawings was to be charged @ 5% p.a. and interest on capital was to be
ADJUSTING JOURNAA~L~ENT'.:'.:RY: ___ - - -:--:-- --:---:=---,.-
-- -
L.F. Dr. R) C allowed @ 10% p.a.
Solution: - - -L r. Rj
(iv) The profit-sharing ratio among the partners w as 2 : 1 : 1.
Date
2018 r:;
Particulars
March 31 Shristhi's Capital A/c

To Mannu's Capital A/c . . of interest on
...Dr. 288
288
Showing your working notes clearly, pass the necessary rectifying entry.
Solution:
Date I Particulars
RECTIFYING ENTRY
(Del/ii 2015 C)
LF. Dr.('{) Cr.m

(Being the adjustment entry passed for omission -
capital and drawings) 2014
March 31
I -
Eleen's Capital Ale
To Monu's Capital A/e
-
...Dr. 3,850
2,950
rking Notes: . nin ca ital has to be calculated. To Ahmad's Capital Ale 900
1
For the calculati9n of Interest on Capital, firS t of all ope g p (Being the rectifying entry to correct the amounts of profits
/ CALCULATION OF OPENING CAPITAL AND INTERESTTHEREON ' transferred to Capital Accounts) I
- - - ~ ~ ~ ~::.:.::.:..::..-::=--- -r-~ :=:-- Shristhi
~~~
Mannu
' ' Working Notes:
1 Calculation of Opening Capirals and Interest on Capitals·
Ahmadm
30,000 10,000 Particulars Eleen('{) Monum
Closing Capital ----- -- >- ---
A. Closing Capitals 1,60,000 1,20,000 80,000
Add: Drawings alreadydebited' L- 30:000 -I-- 0,0;;,;0:,.
--,1,,- 0- -
B. Add: Drawings already Debited ~
.1!_000 24000 48000
3,000 2,000 1,84,000 1,44,000 1,28,000
Less: Profit of'{ 5,000 already credited in 3 : 2
Opening Capital --V,000-- _ S.0-00 - - - C. Less: Profit already Credited 20000 10000 10000
118,000
Interest on Capital @5%per annum '{ 27,000 x 5/100 = '{ 1,350 , 8,000 x 5/100 =, 400 D. Opening Capitals
E. Interest on Capital
1,64,000
'{ 1,64,000 x 10/100 I
1 34000
'{ 1,34,000 X 10/100 ~ 1,18,000 X 10/100
~ ~~r calculating opening capital, drawings are added. However, drawings of Man nu and Shristhi appear in th
= ~ 16400 = '{ 13 400 ={11800
? / Balance Sheet It means that their Capital Accounts have not been adjusted with respect to their drawin9: Total Interest on Capital='{ 16,400 + ~ 13,400 + ~ 11,800 = '{ 41,600.
,,/ So, their drawings have not been added back. ·
2. Interest on Drawings (For Eleen and Monu 6.5 Months and for Ahmod 5.5 Months):
2. Calcularion of lnrereH on_Drawings: Date of drawings is not given. So, interest on drawings will be char d 5 13
for the average period, 1.e., 6 months. ge Eleen ='{ 24,000 x - x - = ~ 650
100 24
Interest on Drawings:
Mannu = '{ 4,000 x 6/12 x 6/ 100 = '{ 120; Shristhi = '{ 2,000 x 6/12 x 6/100 60. =' Monu = '{ 24 000 x .2.._ x~ = '{ 650
' 100 24
5 11
3. ADJUSTMENTTABLE Ahmad = ~48,000 x -X-= ~1,100
100 24 - -
Particulars Mannu's Capital Ale
I
Total Interest on Drawings = ~ 2,400
Shristhi's Capital Ale Firm
:i
Di. ('{) Cr.('{) 0,:-('{J er.m- STATEMENT SHOWING ADJUSTMENTTO BE MADE
Interest on Capital not yet credited
1,350
Cr. C{J Dr. ~ .. 3.
Particulars I Eleen's Capital Ale Monu's Capital Ale I Ahm~s Ca11ital Ne Firm
Interest on Drawings not yet debited 400 1,7so I Cr.('{) Dr.('{) Cr.('{) Dr. m Cr.('{)
Profit_after Interest on Capital and Interest on
120 60 180 o,m J o7l[ Dr.('{) -
For Interest on Capital ... 16,400 ... 13,400 ... 11,800 41,600
Drawings 0 ,4_30 (i.e., '{ 5,000- '{ 1,750 + 180) ... 650 ... 1,100 ... ... 2,400
to be credited 1n the ratio of 3: 2 For Interest on Drawings 650
/
Profit of'{ 5,000 already distributed now tak 2,058 1,372 3,430 For Profit to be Shared ~ 8
back (debited) en (i.e., ~ 40,000- ~ 41,600 + ~ 2,400)I ...
3,000 ... 400 ... 200 ... 200 800
2,000 5,000 in the ratio of 2 : 1 : 1 .,
3,120 3,408 Profit of'{ 40,000 already
Net Effect
2,060 1,772 s,180 l 5,1 80 distributed in the ratio of
288 (Cr.) 2 : 1 : 1, now reversed 20,000 (__..._ ._10,000 I ... 1O,QQQ__ ... ... I 40000
42,400
288 (Dr.) Nil 10,650 13,600 11,100 12,000 42,400
Illus tration 39. On 31st Mar h 201 f 20,650 16,800
Ahmad after makin ad· c , 4, balances in the Ca it I 900 (Cr.) ...
' 80 ODO . g JUstments for profits and d p a Accounts of Eleen Mon u and Net Effect I 3,850 (Dr.) I 2,950 (Cr.)
dra~ings ~:s:~::~e!i!~ !sequently, it was disco:::~n~~ were r _l,60,000, '{ and L20,ooo Illustration 40 (Omission of lllterest, on Cnpital when Fixed Capitals are given). X, Y and Z are
. · at th e interest on capital and partners. They have omitted interest on capital @ 10% p.a. for three years ended 31st March,
(1) The profit for the year ended 31 t M 2018. Their fixed capitals on which interest was to be calculated throughout were: X-'{ 10,000;
s arch, 2014 was r 40,000.
• / ~ ' / ~{)-U,,-0.) (V.A__ ·· '' ;/1! t ci L
1.58 Double Entry Book Keeping-CBSE XII L_;>-~ , .~hr~r 1 · Accounting for Partnership Firms-FundJmentals 1.59
Y-t 8,000 and Z-t7,000 . Their

4 : 5 : 1. The firm earned profit
·
pro
oft
fit h
2,500
-s
.
m
ann
ea
. were· 2016-1 : 2: 2; 2017-5: 3: 2; 2018._
.
g ratios ·
ch ar Pass nece
ye ·
ssary adi·ustme ntJoumal enh-..
•· y. WorkingN~ tes: . · ~~°1./'
1. Interest IS allowed on opening capital. Therefore, capitals of the partners in the beginning of
the year, i.e.,
ADJUSTMENT JOURNAL ENTRY 1st April, 2017 are calculated as follows:
Solution: I L.F. I Dr.~) Cr.R)
Date ' Particulars CALCULATION OF CAPITALS IN THE BEGINNING
...Dr. 600 Particulars E M A
2018
March 31 Y's Current Ne 250 t t t
To X's Current Ne 350 - Q.. ""'--'
. • ted) Capital at the end of the year 8,00,000 6,00,000 4,00,000
To Z's Current Ne
(Being the interest on capital omitted to be provided, now adJUS Add: Drawings made during the year 2,00,000 150 000 I 90000
10,00,000 7,50,000 4,90,000
Working Notes:
1 Interest on capital@ 10% p.a: X-~ 1,000; Y-~ 800 and Z-~ 700. Less: Profit already credited 6,00,000 4,00,000 2,00,000
· Th e a bove ·interest on cap1·taI", 2,5oo (',.e., ,., 1,ooo +,.' 800 + ~ 700) has not been creditedthto the
fi partners
. · 4 OOJ)OO l 50 nnn 1,90,QOQ__
resulting in a loss of~ 2,500 to e ,rm whrch is Capital in the beginning
Now, it is to be Hedited to the Partners' Current Accounts
to be debited to the partners in their profit-sharing ratio.
2. PROFIT AND LOSS APPROPRIATION ACCOUNT
2. STATEMENT SHOWING THE ADJUSTMENT TO BE MADE Cr.
Dr. forthe earended31srMarch 2018
X Y Z
Particulars ~ t
~ Particulars Particulars
I. Amount already credited by way of Share of Profit: To Interest on Capital Ncs: By Profit and Loss Ne (Net Profit) 12,00,000
for the year ended 31st March, 2016 500 1,000 1,000
750 500 E('{ 4,00,000 x 5/100) 20,000 By Interest on Drawings A/cs:
for the year ended 31st March, 2017 1,250
1,250 250 M ({ 3,50,000 X 5/100) 17,500 E 5,000
for the year ended 31st March, 2018 1,000
-
I 52,000
2,750 3,000 1,750 A(~ 2,90,000 x 5/100) _ 14,50. M
...Dr.
- - To Profit transferred to: A 2 00 10,600
I II. Amount which should have been credited by way of Interest on Capital:
for the year ended 31st March, 2016 1,000 800 700 E's Capital Ne (3/6) 5,79,300 ~ oo -iv·d.t u JJvO~
1,000
1,000
800
800
700
700
M's Capital Ne (2/6)
A's Capital Ne (1/6)
3,86,200
193100 11 58 600 --?d.A. I~ 'v»-C - J.0,600
~
...Cr. 3,000 2,400 2,100 QQ_
2J.o,6_
Ill. Difference (I - 11) 250 (Cr.) 600 (Dr.) I 350 (Cr.)
Note : Since capitals of the partners are fixed, adjustment entry will be passed through Part , C 3. STATEMENT SHOWING THE ADJUSTMENT TO BE MADE
ners urrent Accounts.
,re . l M's Ca ital Ne A's Ca ital Ne Firm
Illustratio n 41 (Omission of Interest on Capital and Drawings when Closing B I
a ances o1 ap1ta are Particulars
. . CL.ill_
given). On 31st March, 2018, Capital Accounts of £, M and A after making ad1ustments .
for _lli.~
· E ,.
profi ts, d rawmgs, etc., were as - , 8,00,000; M-t 6,00,000 and A-~ 4 00 ODO Interest on Capital 20,000 17,500 14,500 52,000
ntly,
it was found that interest on capital and interest on drawings had bee ' '. · Subseque 5,000 3,600 2,000 10,600
The partners Interest on Drawings
were entitled to interest on capital @ 5% p.a. Drawings d: ~nutted. the year were: 6,00,000 4,00,000 2,00,000 12,00,000
Profit already distributed
E-t 2, 00,000; M - t 1,50,000 and A - t 90,000. terest on drawings ch nng 5,79,300 3,86,200 1,93,100 11,58 600
were: E-t 5,000; M=.t ]&00,.and-.A-t tooo. e ne profi"fa ur· ar~eable lo the partne+&_ Profit to be credited
I 4 QJ,600 4,03,700 2Ql,OOO 2 07 600 12 1.Q,600 12J0,600
~(T,000 :-The profit-sha ring ratio of the partners was 3 : 2: I. mg e year amounted to 6,05 000 5,22,300
5,700 100 5,600
Pass necessary adjustmen t entry for rectifying the above errors Om1ss1on Show of • • Balance to be adjusted
Cr. Cr.
'. RECTIFYING ENTRY . your workings. (Net Effect) Dr.
Solution:
Date I Particulars ~ ___
::--)--,... Illu stration 42 (Interest 011 Capital Provided at a Higher Rate). X, Y and Z are partners
in a firm
t 2,00'.000
Cr.({) sh aring profits and losses in the ratio of 5 : 3: 2 . Their fixed capitals were t 3,00,000;
1'
E's Capital Ne
2018
March 31 To M's Capital Ne ...Dr. l I 5,700
and t 1,00,000 respective ly. For the year ended 31st March, 2018, interest on capital was credited
To A's Capital Ne 100
(Being the adjustment entry recorded due to omission of to them @ 10% p.a. instead of 8% p.a.
5,600
Interest on Capital and Drawings)
Showing your ~orking notes clearly, pass necessary adjustmen t Journal entry.
1.60
Solution:
Date
Double Entry Book Keeping-CBSE XII
Particulars
ADJUSTMENT ENTRY
L.F. Dr. m Cr.RJ
"i II ftin
ft- I.-
~
k--
er 1 · Accounting for Partnership Firms-Fundament
44 (Interest on Cllpital Wrongly Provided in the Accou

Tho ..,-th;r e is no provision in the Partnership Deed
nts). A, Band Care partners in a firm.
for interest on capital, this has been provided
als 1.6 l
31st March, 2017 and 31st March, 2018. Their fixed

2018 ... Dr. 400 to the accounts @5% p.a. for the two years ended
twere :A-t'S0,000; B-HO,OOOand C-'{ 30,000.
April 1 Y's Current Ne 40o capitals on which interest was calculated throu ghou
s:
To l 's Current Ne
) Durin g the two years, they share d profit s as follow
(Being the interest on capital excessive charged, now rectified 5: 3 : 2
2016-17
2017-18 2:2:1
Working Note:
TABLE SHOWING THE ADJUSTMENTTO BE MADE as at 1st April, 2018.
You are requi red to pass an adjus tmen t entry
l 's Current Ne Firm
Particulars X's Current Ne Y's Current Ale ADJUSTMENT ENTRY
Cr.m Dr.~) Cr.R) Solut ion:
Dr.m
Interest on Capital wrongly

Dr.m Cr.m Dr.m Cr. m
- Date Particulars
L.F. Dr.m Cr.m
credited @10% p.a. 2018 ...Dr. 600

... 10,000 ... ... 60,000 April 1 C's Current Ne 400
reversed 30,000 ... 20,000
Cur~ 200
Interest on Capital credited ~ ~ C
@8%p.a. ... 24,000 ... 16,000 ... 8,000 48,000 ... (Being the interest on capital wrongly provided in the
accounts
Profit* credited to partners for two years, now adjusted)
in s :3:2 ... 6,000 ... 3,600 ... 2,400 12,000 ...
Working No te:
Total 30,000 30,000 20,000 19,600 10,000 10,400 60,000 60,000 STATEMENT SHOWING THE ADJUSTMENTTO BE MADE
Net Balance (Effect) ... Dr.400 31stMarch,2018 Net
Cr.400 ... Partners 31st March, 2017
the fi Adjustments
*Low rate of interest on capital will increase the p rofit of irm by f 12,000 (1.e., f 60,000- f 48,000) which is divisible
. Adj. Interest Profit Adj.
amon~ p~ Interest Profit
rr"i"on ~
1
on on
d). A, 8 and . . t f f
/ ~
Cj,. ation ~3 (Rectification of Interest on Capital Jess Allowe . Care partn ers m a firm Capital m t t Capital m
of 2 . . Th .
~ a-:::g profit s and losses in the ratio · 2 • 1• e1r capita1s (fixed) Y - 2,500 +2,400(2/5) - 100 + 400 (Cr.)
. t . are' 1,00,000; t 80,000 A - 2,500 + 3,000 (5/10) + 500
and t 70,000 respectively. For the year 2017_18, m erest on capital .
8 -2,000 + 1,800 (3/10) -200 -2,000 + 2,400 (2/5) +400 + 200 (Cr.)
@ 9 o/c . entry was credited to them -600 (Dr.)
p .a. instea d of 12%. Give the adjustment Journal -300 - 1,500 + 1,200 (1/5) - 300
0
C -1,500 + 1,200 (2/ 10)
. (Foreign 2004, Modified) 6,000 ... ...
S I ti" -6,000 6,000 ... -6,000
o u on: ADJUSTMENT JOURNAL ENTRY
t. The
d, profit decreased by the total amou nt of interes
Date Particulars ..
--- --- --- --- 1 Cr.m
Note: Since the interes t on capital was allowe
intere st so allowed was taken by the partne rs in their profit- sharin g ratio. Therefore, interest on
2018 amou nt of interest) should be credited to partners
B's Current Ne capital should be written back and profit (i.e., total
April 1 ... D,. in their profit-sharing ratio.
To Cs Current Ne 600
(Being the interest less charged on capital, now rectified) 600 lustration 45 (Calculation ofInterest on Capital when
Closing Balances ofCapital are given). A, B, C and
~
ratio of 4 : 3 : 3 : 2 and their respective capitals on
D are partn ers sharing profits and losses in the
Working Note: and '{ 45,000. After closing and finalising the
12%. So, interest @3% should . 31st Marrh,..2Q18 were '{ 30,000; '{ 45,000; t 60,000
/nter_est on capita/ ha~ been credited @9% instead of p.a. was omitted. Instead of altering the signed
of this should be debited to partner s m their profit-sharing ratio because fi , be Credited to accounts, it was found that interest on capital @6%
irm s profit is reduced u::rtners and the total entry on 1st April, 2018 crediting or debiting the
accounts it was decided to pass a single adjus tment
o that extent.
TABLE SHOWING ADJUSTMENT TO BE MADE respective Partners' Capit al/Cu rrent Accounts.
Partners Amount that should be credited (Cr.) Amount that should be deb· ned(Dr.) ADJUSTMENT ENTRY
Solut ion:
A ~ 1,00,000 X 3/ 100) = fJ,000 If 7,500 X 2/5) =f "iooo-- L.F. Dr.m Cr. m
(f 80,000 X 3/100) = f 2,400 {f 7,500 X 2/5) = f 3.000 Date Particulars
8
C (U0,00 0 x 3/100) = u ,100 If 7,500 X 1/5) = f 1,SOQ 2018 1,800
-::---.:... ...Dr.
f 7,S0O April 1 A's Current A/c 900
f 7,s00
=====,, To C's Current Ne 900
To D's Current Ne
now adjusted)
(Being the interest on capital omitted in the accounts,
amentals 1.63
Chapter 1 • Accounting for Partnership Firms-Fund
bl m states the closing balance of capital. Sine capita ls were A-t 30,000; B- t 20,000 and
. Illust ration 47. A, Band C were partn ers. Their
orking Note:
pro e ossible to ascertain the opening capitafs. n, e, ershi p Deed , they were entitl ed to an intere st
terest on capital is calculated on the opening balanc_e. Th~ eon opening and dosing dat )at C-t 10,000 respe ctivel y. Acco rding to the Partn
tis notp d (' ed to draw a salary oft 500 per mont h. C was
eamountof profit credited to capitals has not been g1ven;i s are fixe i.e.,l~ '{ es . on capita l at 5% p.a. In addit ion, B was also entitl
is why the only assumption is that the capitals of the partner th
- - . c-? 3 600 and D- 2,700). DONo after charg ing the,_interest on capita l, but befor
e
ts to- ~
-
f0,800 (A-? 1,800; 8-? 2• '
700 ' d'tI d (distributed) to the rt e entitl ed to a comm ission of 5% on the profi ts
Interes t on capital amoun
s profit has been ere e, . pa. ners the year was '{ 30,0; distr ibute d in the ratio of
omissio ft is interest, an excess amount on' 1O,B~a
. 'b d · the capitalv'ratio (I.e.,. as intere st on capital) • charg ing the salary payab le to B. Net profi t for
. adjus tmen ts. The rofits were t ~in
. . .
•m • armg ratio which should have been 1stn ute m capita ls witho ut provi ding for any of the above
s in the profit-sharing ratio and thereafter ~ (
H 1 ,BOO should be written back by debiting the partner
the ratio of 5 : 2 : 3.
to them in the capital ratio.
Pass necessary adjus tmen t entry show ing the
work ings clearl y. ~ l
Delhi 201f)
STATEMENT SHOWING THE ADJUSTMENT TO BE MADE
terest to e owe ADJUSTMENT ENTRY ~ _µ} I
artners Solut ion:

Credit({} LF. Dr. (f) Cr. (f)
Date Particulars
' ~mrr o;m ' --ro,OOOXoffilO=T,8 - ... Dr. 3,675
/45:000 X 6/1~1,7-00 Nil A's Current Ne 930
8 2,700 (3/12 of 10,800)
60,000,x'6fl()()a:-3,600 900 (Cr.) To B's Current Ne 2,745
C 2,700 (3/12 of 10,800)
45,000...)(..6/100.=2,ZOO 900 (Cr.) To Cs Current Ne
D 1,800 (2/12 of 10,800)
Nil (Being the adjustment entry passed)
10,800 10,800
Working Notes:
Their Capital Accounts stood at '{ 30 000· As a result, interest on capitals has been calculated on
Illust ration 46. P, Q and R are partn ers in a firm. ' ' 1. It is presumed that capita ls of the partners are fixed.
t 15,000 and '{ 15,000 respec tively on 1st April, 2017. /IC) ~ '
given balances of capitals.
~ per the pro~sions of the Deed: (!) R was to be allowed a
(u) Interest @5 ¾, p.a. was to be provi ded on capita l and (iii)
remuneration of'{ 3,000 per annum ,
Profits were to be divide d · th
18,000 for the year ended 31st March ~01~ ra
ti
o
2. Net Profit 4 ~ ;:>
t ,oe,->
?' · 30,~00
3,000
,2:
o'. 2 : 1. Ignoring the above terms, net profit oH , was Less: lnteret on Capital ~ 1,SQQ +? 1,000 1
equall y. 27,000
distri buted amon g the three partne rs Pruflt afte1 Ch.irging Interest on Capital
Pass an adjus tment entry to rectify the error. Show
the workings clearly. Cs Commission = 5/100 x t 27,000 = t 1,350.
Solut ion: ADJUSTMENT ENTRY 3. STATEMENT SHOWING ADJUSTMENTTO BE MADE

B's Current Ne ,C's Current Ne Firm
Date Particulars L.F. Particulars A's Current Ne
Dr.(t) Cr. ('{) Dr.(f) Cr.(f)
Dr.R) Cr.~) Dr. (f) Cr. (f) Dr. (f) Cr.('{)
20
April Q's Capital Ale ...Dr.
To P's Capital A/c 450 Profit already wrongly distributed ... ... 30,000
(3 : 2 : 1) now taken back 15,000 ... 10,000 ... 5,000
To R's Capital Ne 300
(Being the adjustment made for omissions in previou s year) 150 Profit as should be distributed: ...
Interest on Capital ... 1,500 ... 1,000 ... 500 3,000
... ... 6,000 ... ... 6,000 ...
Working Note: Salary ...
STATEMENT SHOWING THE ADJUSTMENT TO BE MADE ... ... ... ... ... 1,350 1,350 ...
Commission ...
... 9,825 ... 3,930 ... 5,895 19,650
Particulars P's Capital Ale Q's Capital Ale Net Profit Distributed (5 : 2 : 3)
10,000 10,930 5,000 7,745 30,000 30,000
DTm r. 15,000 11,325
;;
1-:-lYrofit already dfilri'l'muti;e,r-- ,O"'O""O--+- --./- -,..
+,c, 3,675 (Dr.) 930 (Cr.) 2,745 (Cr.) Nil
Balance to be Adjusted (Net Effect)
(in the ratio of 1 : 1 : 1) 1s:ooo
When Ihe Cnp;t,t, m F1"ct"'6ng "'d
2. Profit as should be distributed
- Remuneration to R
~ lus i,alio n 48 (lnle mt on C,pH,1 Al/owed ,t Lowe, R,te
and Z as on 31st Marc h, 2018 amou nted
of X, Y
3,ooo ~ ti;ibution ofProfit in Wrong Ratio). The capita ls
- Interest on Capita/ 1,500 750
y. The profi ts amou nting to '{ 3,00,000 for
o t 1,50,000, t 5,50,0 00 and t 11,00,000 respe
750 ,oo0 ...
33.0lo ctivel
- Net Profit distributed 4,800 4,800 l
of 4 : 1 : 1 after allow ing intere st on capita
(2: 2: 1) 2.400 12,00 ... the year 2017- 18 were distri buted in the ratio
6,000 6,300 6,000 5,550
0
partn er withd rew'{ 50,00 0 fer mont h in thebe
gl~ cb-
@ 10% p.a. Durin g the year, each
18,ooo profi t shari ng ratio and intere st on draw ings but
3. Net Effect (Dr./Cr.J 300
mont h. The Partn ershi p Deed was silent as to
(Cr.) .__
-
18,ooo
provi ded for intere st on capita l @ 12% p .a. Show
adju stmen t entry to rectif y the above error.
ing your work ing clearl y, p ass the neces sary
Chapter 1 · Accounting for Partnership Firms-Fundamentals 1.65
ADJUSTMENT ENTRY Accoun ting Entries

Solution : Dr.m Cr.m o gh Profit and Loss Adjust ment Account:
LF. Follow ing Journa l entries shall be passed
Date \ Particulars are to be credited to the Partners' Capita//Cu"ent Accounts:
(i) Adjustment entries for the items w ·
2018 1,10,000 Profit and Loss Adjustment Ne ... Dr.
...Dr. so,ooo
March 31 X's Capital A/c To Partners' Capital/Current Ncs
To Y's Capital A/c 60,000
(Being the adjustment made for previously omitted, now recorded)
I To ls Capital Ale
\ (Being the interest on capital allowed at lower rate and profits distributed , (ii) Adjustment entries for the items which are to be debited
to the Partners' Capital/Cu"en t Accounts:
1 ') • ,, r, ... Dr.
in wrong ratio, now rectified) Partners' Capital/Current Ncs
'){11..LICI- ~ ·; ') ·-- - 1,l, · ent Ne
Working Notes: ; ~ t,C.,,' , ' {Y~ . To Profit and Loss Adjustm
(Being the adjustment ma.de for previously omitted, now recorded)
Capital:
1. Calculation of Interest on Capital already provided and Opening
xm rm ;, zm or Net Profit/Loss due to above adjustments:
Particulars (a) For Profit
5,50,000 11,00,000 ... Dr.
A. Closing Capitals 1,50,000 Profit and Loss Adjustment Ne
6,00,000 6,00,000
8. Add: Drawings already debited ~ 50,(XX) x 12) 6,00,000 To Partners' Capital/ Current Ncs
11,50,000 17,00,000 Accounts)
7,50,000
50,000 50,000 (Being the profit on adjustment credited to ~artners' Capital/Current
C. Less: Profit already credited (4 : l : 1) 2,00,000
11,00,000 16,50,000 (b) For Loss
D. Opening Capital Plus Interest on Capital 5,50,000
1,50,000 ... Dr.
E. Less: Interest on Capital (D x 10/11 0) 50,000 1,00,000 Partners' Capital/Current Ncs
F. Opening Capital (D- E) .. ..-==
- 5,00,000 10,00,000 15,00,000 To Profit and Loss Adjustment Ne
Accounts)
(Being the loss on adjustment transferred to Partners' Capital/Current
are fixed, adjustment entries are passed through Partners' Current Accounts.
2. ~ ADJUSTMENTTABLE Note: If capitals of the partners
l 's Capital Ale Firm Accoun ts stood at t 3,00,000;
Particulars X's Capital Ale Y's Capital A/c ,
Illustra tion 49. P, Q and R are partner s in a firm. Their Capital
Dr. m Cr. (f) Dr. m Cr.~) I I
Dr. m Cr. m Dr. (f) Cr.m t 1,50,000 and ~ 1,50,000 respect ively on 1st April, 2017.
d a remune ration of t 36,000 per
I. Amount already credited, now As per the provisi ons of the Deed: (i) R was to be allowe
taken back: I : annum , (ii) lnterest @5% p .a. was to be provid ed on capital and
(iii) Profits were to be distribu ted
• Interest on Capital @ 10% p.a. 50,000 1,00,000 ... , 1,50,000 3,00,000 of t 1,80,000 for the year ended
2,00,000 50,000 ... 50,000 in the ratio of 2 : 2 : 1. Ignorin g the above terms, net profit
• Share of Profit (4 : l : 1) 3,00,000
s equally .
31st March, 2018 was distrib uted among the three partner
II. Amount which should have
been credited: Pass the Journa l entries to rectify the above errors.
• Interest on Capital @ 12% p.a. 60,000 ... 1,20,000 ... 1,80,000 3 JOURNAL
Solutio n:
• Share of Profit• Credited to
Partners In the ratio of 1: 1 : 1 80,000 ... so.ooo I .. : ao.ooo 2~::::: . . Date Particulars
,!J ..
LF. Dr. (f) Cr. m
2,50,000 1,40,000 1,50,c:~·(~,000 I 2,00,000 I 2,60,000 I 6,00,000 ... 2018

1,10,000 (Dr.) r.) 60,000 (Cr.) - Ni\6,00,000 ...Dr. 60,000
Ill. Net Effect (Dr. - Cr.) , April 1 P's Capital Ne
...Dr. 60,000
Q's Capital Ne
~ 3 60 000 . ... Dr. 60,000
~ 2,40,000 (i.e., ~ 3 00 000 + ~ 3 00 000 R's Capital A/c 1,80,000
AdJ'u t To Profit and Loss Adjustment Ne
(B) When Adjust ment Journal Entries (in Place of a Single s ment Ent ) (Being the share of profit wrongly credited to partners, now reversed)
m b ry are passed :
In place of a single Journal adjustm ent entry, Journal entries Profit and Loss Adjustment Ne ... Dr. 36,000
al tab! ayt e required to be passed 36,000
for each adjustm ent separately. In this situation, analytic e odete · To R's Capital Ale
are rrnine the net effect (Being the remuneration credited to R's Capital Account)
of all the adjustm ents is not prepare d instead Journal entries
Loss Adjustrn e t A Passed for each erro ...Dr. 30,000
omissio n by debitin g or creditin g Profit and n ccount r or Profit and Loss Adjustment A/c 15,000
. . . h
and omissions, Profit and Loss Ad· · After pass· To P's Capital Ne 7,500
entries fot adjustm ent of errors
. . . . . mg t e
.. )Ustrnent Ac . To Q's Capital A/c 7,500
closed by debitin g or creditin g (as the situatio n 1s) with the corresp . count 1s To R's Capital Ne
f
Curren t Accounts, if fixed capital method 1·s o1Io °nding cred't
to the Partne rs'
I or d b · t (Being the interest on capitals @ 5% p.a. credited to
Wed or Partn , e 1
Accoun ts if fluctua ting capital method is followed. Capital Accounts of respective partners)
>c a ._ ._
ers Capital
'
&_
rI 1.67
Double Entry Book Keeping-CBSE XII Chapter 1 · Accounting for Part~ershlp Firms- Fundamentals
1.66 1,14,000
... Dr. /
45,60() Working Notes: 1.
I Profit and Loss Adjustment Ne 45,600 6 7
To P's Capital Ale 1 2 3 4 5
To Q's Capital Ne
22,soo Profit/(Loss) Interest on Loan Salary paid as Interest on capital Salary as (2+ 3+4 -5-6)
Year
I To R's Capital Ne
(Being the divisible profit credited to Partners' Capital Accounts
ended
31st March t
paid as Manager
f
Manager
f
payable as partner
t
partner
f
Adjusted profit
t
in the ratio of 2: 2: 1) 45,000 18,000 35,000 4,22,000
2016 4,00,000 30,000
2017 (2,00,000) 30,000 45,000 ... ... (1,25,000)
M~ {er Admitted as Partner with Retrospective Effect 45,000 18,000 35,000 6,22,000
V- . . tn r with retrosp ective effect. If it is so, 2018 6,00,000 30,000
as a par e 70,000 9,19,000
The partne rs may deade to adnut the Manager ·c the terms 8,00,000 90,000 1,35,000 36,000
· · · t 1·s ad1·usted to give . . . .to
. effect ~
profits for those years, interest paid on loan, 1 any, e c., t
be passe~. But a simple metho d
of partner ship. A separat e entry for each adjustment may I. C's Total S hare (As a Partner): 1,83,800
nt compu ting the net effect can be Cs share in pccfit (adj11sted) as partner p /f wf 91~0:000J
would be to pass a single entry for the net effect. A stateme 36,000
Interest on capital eayable to C as partner 70,000
prepar ed by following the steps given below: .-Salary-
the Manager. 2,89,800
Step 1. Compu te the amoun t paid as remuneration to
the Manager,on becom ing a partne r. II. Paid to C (As Manager):
Step 2. Compu te the amount which should be allowed to Salary (for 3 years) 1,35,000
2 above is more, it is credite d to 90,000 2,25,000
Step 3. Determ ine the difference and if am01.µ1t as per Step ~ ( f or3years)
his accoun t and debited to old partner s in their old profit-sharing ratio. In case, the
lll~ Gredittcrlfe"gTven ioc to be borne by A and 8
amoun t as per Ste 1 above is more, it is debited to his account and credite d to Old ~ !.RWJit:sharing ratio of 3 : 2 (I - II)
Par apital Accounts, in their old profit-sharing r.atio (will not get interest on capital and also salary for the
<::. 2. _In the year ended 31st March, 2017, the firm incurred loss. Hence,
Illustration 50 (Manager to be Treated as a Partner). A and
Bare partners sharin g profits and year ended 31st March, 2017.
March, 2018, (after divisio n of the
losses in the ratio of 3 : 2. At the end of the year, i.e., on 31st
effect from 1st April, 2015. As C was
yea~ s profit), they decide d to take Cinto partnership with
~OOO to the firm by way of a Joan on firm with minim um guaran teed profit
ge~g aru:iuaJ s~ary_oft 45,000, he had also adv a n ft A new partne r (or partne rs) may be admitt ed in the
which he 1s getting interes t @ 10% p.a. Duri!ig the tHrfe financial years firm's proft
, I s a er from the busine ss. The profit may be guaran teed to an
existin g or incom ing (new) partne r by:
ad. tin a1 t C . interest on the capital of the partner s were:
JUS g s ary o , interest on loan and (a) all the remain ing partne rs in an agreed ratio; ,or
Year Ended j!?) one or more of the existin g or old partne rs.
more tlzan t/~11aranteed amount, his
31st March, 2016 Profit t 4,00,000 Cl:Ybt11 the guaranteed partner's or 11ew partner's share ofprofit is
teed amoun t of prOJ}'.-/1{
31st March, 2017 Loss t 2,00,000 actual share of profit is given lo him instead of the guaran
p fi
.
31st March, 2018 ro t t 6,00,000 (a) Guarantee of Profit by all the Remai ning Partners
I 1 guaran teed partne r), guaran tee that the
Accord mg to the new agreem ent, C is to be given ann When all the remain ing partne rs (i.e., other than the
eg,as his ua_tas~ ~ .o ft 35,000 and 1/Sth share in um amoun t of profit, following steps
the profits of the firm. C's loan shaJJ bejJeat
~·~~~ .. i.to
- · and sirniJ,aJ g uaranteed partne r (or partne rs) shall be given a minim
. . . .
other partne rs, his ca_p1taJ will carrv interest @60',op.a.
· glllnmg
are follow ed:
_,,- - -.,_
determined, and
Recor d necess ary entries
·
to give effect to the abo; e- arrangement. Step 1. Share of profit as per profit- sharing ratio is
. ined.
Soluti on: JOURNAL Step 2. Minim um guaran teed profit is determ
I ted as per Step 1 and Step 2) is given
Date Particulars The higher of the above two amoun ts (amou nts calcula
is less than the guaran teed amoun t, the
Cs Loan Ne
l.F. Dr. ~) Cr. (~) to the guaran teed parh1er. If the share of profit
2018 um guaran teed profit mi1111s share of profi t of the
...Dr. differe nce in the amoun t of profit, i.e., minim
--
April To Cs Capital Ne 3,00,000
ing partne rs in the agreed ratio and
(Being Cs loan converted into his capital) 3,00,000 guaran teed partne r (called 'deficit') is borne by the remain
where the agreed ratio is not g iven the deficit is borne
by them in.JaL,cirprofwslraTirrg'l'aHtr.""
A's Capital Ne (f 64,800 x 3/5)
April
B's Capital Ale ~ 64,800 x 2/5) ...Dr. - ~
...Dr. 38,880 Accou nting Entries
To Cs Capital Ne ent:
1. 011 Dislrib11tins the Profit as if there is 110 Guarantee Agreem
25,920
(Being the excess credit given to C bome by Aand B .. .Dr.
in the ratio of 3 : 2) (WN) 64,800 Profit and Loss Appro priatio n Ale
To All Partne rs' Capita l A{cs
__ _- --J
r Chapter 1 · Accounting for Partnership Firms- Fundamentals 1.69
1.68 Double Entry Book Kee piV' XII . .
in the ratio of 5: 3. On 1st April,
Illustration 52.. P and Q were partne rs in a firm sharin g profits
2. On C/rarging Deficiency to Guaranteemg Partner(s).
Guaranteeing Partners' Capital A/cs_
To Guaranteed Partner's Ca~1tal ~ d l
'>
sin the ratio of 4 . 2.
.. .Dr.
2014 they adrrutted R as a new partne r for 1/8th share in the
profits
f 75,000. The n~~ profit-sharing ratio betwee n P and Q will remain
with a guaranteed profit of
the same but they agreed
an SoOsOseTh f't f th . . 1. ratio 3: 2. The profit of the firm for
Illustration 51. A, Band Care partners in a firm shanng profits
th f 37 . e pro 1 or e ye to bear any deficiency on account of guaran tee to R in the
' ar
It is provided that C's share in profit would not be less an the year ended 31st March, 2015 wast 4,00,00(2.
ended 31st March, 2018 amounted to f 1,57,500. R for the year ended 31st March, 2015.
. p fit and Loss Appropriation Accou nt. Prepare Profit and Loss Appropriation Accou nt of P, Q and
. (Delhi 2016)
Pass Journal entnes in the books of firm and prepare ro
Soluti on: JOURNAL Solutio n: PROFIT AND LOSS APPROP RIATION ACCOUNT
I L.F. Dr. ~) Cr.(~
for rhe year ended 31sr March, 2015 Cr.
Date Particulars - Dr.
2018
March 31 Profit and Loss Ne
To Profit and Loss Appropriation Ne
c)_ _
__
... Dr.
I 1,57,500
1,57,500
Particulars
To Net Profit transferred to:
P's Capital Ne 2, 18,75,0 ,
Particulars
By Profit and Loss Ne (Net Profit) 4,00,000
(Being the net profit transferred to Profit and Loss AppropriationN Less: Deficiency in R's Share 15,000 2,03,750
... Dr. 1,57,500 1,31,250
Profit and Loss Appropriation Ne Q's Capital Ale
90,000 10,000 1,21,250
ITo A's Capital Ne 45,000
Less: Deficiency in R's Share
, ~ o
To B's Capital Ale R's Capital Ne
22,500 /
To Cs Capital Ale Add: Deficiency in Profit Share\.,,,--"" 25,000 75,000
4,00,000
Being the distribution of Profit as if there is no guarantee) 4,00,000
s Capital A/c ...Dr. 10,000
s Capital Ale ...Dr. 5,000 L'/;;, ~.'. ·g Notes:
To C's Capital Ale 15,000 1. Calculation of New Profit-sharing Ratio of P, Q and R:
~(Being the deficiency of C, met by A and 8 in their profit-sharing Let the total share be 1
ratio, 1.e., 2 : 1) Share of incoming partner R = 1/8
Remaini ng Share= 1 - 1/8 = 7/8
PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2018 Cr. P's New Share = 7/8 x 5/8 = 35/64
Q's New Share= 7/8 x 3/8 = 21 /64
Particulars / t Particulars R's Share = 1/8 or 8/64
To A's Capital Ale 90,000 By Profit and Loss Ne 1,57,500 Thus, New Ratio of P, Q and R = 35/64: 21 /64 : 8/64, i.e., 35 : 21 : 8.
Less: Cs Share of Deficiency 10,000 80,000 -Net Profit 2. R's Share of Profit = 1/8 off 4,00,000 = t 50,000; whereas
, R's guaranteed profit = f 75,000.
To B's Capital Ale 45,000
Deficiency in R's share (f 25,000) is to be borne by P and Q in the ratio of 3 : 2. Thus, P and Q will meet
Less: Cs Share of Deficiency 1900 40,000
To C's Capital Ale 22,500 the deficiency of'{ 15,000 and '{ 10,000 respectively.
Add: Deficiency Recovered from: g or Old Partners
A 10,000 (b) Guarantee of Profit by one or more of the Existin
-f cases more than one partne r) guarantee a
B 5,000 37,500 When one of the existing or old partne rs (in some
h the Partner s' Capital Accounts. The following
I
1,57,500 minimum profit, the adjustment is made throug
1,57,500
= steps are to be followed:
Working Notes: their profit-sharin g ratio.
1. DISTRIBUTION OF PROFIT St"n I. Distribute the profit among the partne rs as per
minim um guaranteed profit
,, Particulars SlLp, If share of profit of the guaran teed partne r is less than the
8 - - - - - -- - the partne r (or partners) who
the difference is deducted from the share of profit of
A
Divide Net Profit on 1,57,5001 t 1,57,500 x 4{1 = t 90,000 t 1 57 500 x 217 = ~ 45 ooo
r C
of the guaranteed partner.
' '
' f 1,57,500 X 1/7 = f 22,500 has guaran teed and it is added to the share of profit
in 4: 2: 1. ' .. - -- ~ -- - ency) is shared by them in the
However Cs Minimum Guaranteed Profit= f 37,500. Thus, deficienc y is off .......
37,500 - f22500 When two or more partne rs guarantee, the shortfall (defici
- - • =f 15,000. agreed ratio or in their profit-sharing ratio as the case may
be.
Deficiency borne by A and 8 I f 15,000 x 2/3 = f 10,000 f 15,000 x 113 f 5,000 I
_
in 4 : 2 or 2 : 1 j - 11 "J' tioP ~ P, Q and R are partners sharin g profits in the ratio of 5 : 4 : 1 respectively. R is
f 90,000 - t 10,000 any year will not be less than f 50,000. The profit for the
Share of Profit I t - guaran teed that his share of profit in
=tso,ooo 500 year ending 31st March, 2018 is t 3,50,000. Amou nt of shortfa
ll in the profits of R will be borne
ti . . . . h' h h d fi · · ,
}s' o H lO,ooo (A)
' , 00 (8) =f 37
-
Journal entry regarding deficiency
2. Since no speci c ratio is 91ven in w 1c t e e 1C1ency 1s to be bor
11 ,soo by P and Qin the ratio of 3 : 2 respectively. Pass necessary
ne, means A and C h
deficiency in their profit-sharing ratio, i.e., 4: 2 or 2 : 1. s all bear the borne by P and Q.
r 1.7 0 Double Entry Book Keeping-CBSE XII
In the Books of the Firm
Sol ution :
Chapter 1 · Accounting for Partnershi
p Firms- Fundamentals 1.71
Solution : JOURNAL
L.F. Dr.m Cr. R)
3,12,000
Particulars To Interest on Capital A/c: (Net Profit)
Date Anwar 48,000
9,000
...Dr. Biswas 36,000
2018 6,000 -2.4,000 1,08,000
March 31 P's Capital Ne ...Dr. Divya
1s,ooo
Q's Capital Ne To Partner's Salary Ale:
Biswas ft 4,000 x 12) 48,000
To R's Capital Ne 72,000
(Being the shortfall in the share of profit of
R, borne by Divya ft 6,000 X 4) ---2.§.
To Profit transferred to:
Pand Qin the ratio of 3 : 2) 66,000
Anwar's Capital Ale
. . 0 f 5 . 4 . 1 R ets t 35,00_
o ft 1,32,000 X 3/6)
Working Note: partners rn the ratio _ · 5· ' 9 3 Biswas' Capital Ale 44,000
When the net profi t of'{ 3,50,000 is distributed amongst the 15,000 (,.~, '{ o,~OO; ~ ~oio) is
(i.e.,'{ 3,50,000 x 1/10). But his guar
anteed profit is t 50,000. The shortfall,'{ ,000 ft 1,32,000 X 2/6)
of 3 : 2 respective ly. In effect, shortfall orne Y is Add: Deficiency to be
to be borne by P and Q in the ratio borne by Divya (Note) -2,000 46,000
(i.e.,'{ 15,000 x 3/5) and shortfall born
e by Q is'{ 6,000 (i.e.,' { 15,000 x 2/5). 22,000
Divya's Capital Ale
firm . Their_~rofit-
Illustration 54 (Guarantee of Profits by
one Partner). X, Y and Z are partners in a ft 1,32,000 X 1/6)
it of '{ 10,000 ever y year . Any defi aenc y Less: Deficiency borne ___2,_Q.QQ
000
ed a minimum prof
shar ing ratio is 5 : 3 : 2. Z is guarante h, 2017 and 2018 were
its for the two years ended 31st Marc
arising is to be met by Y. The prof the two years. = t 44,000
it and Loss Appropriation Aa:ount for Note: A. Biswas's Share of Profit
t 40,000 and ~ 60,000 respectively. Prepare Prof Add: Interest on Capital
=-~ ,00 0-
Solu tion: PROFIT AND LOSS APPROPRIATION ACCOUNT
forthe earendedJlstMarch, 2017
Cr.
B. Guaranteed Profit
= -;- ::~ ✓
Dr.
a (8 -A) = '{ 82,000 - '{ 80,000 = '{ 2,000.
Particulars C. Deficiency to be borne by Divy and Z entered into
Particulars partnership starts during the year). X, Y
I
40,000 !ration 56 (Guarantee of Profit when X pers onal ly guar ante ed
To Profit transferred to: it and Losses in the ratio of 3 : 2 : 1.
X's Capital Ale (5/10) 20,000 (Net Profit) artnership on l_g.!u lv ?Ptli le sl~are Prof per ann um wou ld not be less than
qjng jnter est on capital @ 6%
Y's Capital Ale (3/10) 12,000 ·1 f) /' Jba Z 's s areo {fro fit a#er cba 1,00,000. Prof it for
Less: Deficiency in l's Share 2.000
8,000
I 10,000
.,..:..------06,00 .a e capi tal cont ribu ted by X- t 2,00,
000; Y-t 1,00, 000 and
was f 1,38,000. Prepare Profit and Loss App
Z-f
ropr iatio n Account.
l 's Capital Ale (2/10) ) the year ende d on 31st March, 2017
Add: Deficiency Recovered from Y -1,QQO Solu tion : PROFIT AND LOSS APPROPRIATION ACCOUNT
40,000
'{
forrhe ear ended 31st March, 2018
Particulars , - - -- - - - -- --+ -- -- +- -- -- -- -- --
-- --+ -- -
Dr.
Particulars
- -- transf
'{ Particulars
-- --to:-- -- -- +- -- - By Profit and Loss Ale
I, f
CR.
-
To Interest on Capital (WN 1):
X
{Net Profit)
1,38,000
erred 60,000
To Profit
30,000 (Net Profit) I y
I 0<3 'DO ()
X's Capital Ne (5/1 O)
al Ale (3/1 0) 18,000 l
18,000
I r
Y's Capit
l's Capital Ale (2/1OJ 12 000
60000
I To Profit transferred to (WN 2):
X's Capital Ale
Y's Capital Ale
. - l 's Capital Ale
th~ minimum guaranteed amount, so there is no need for an
Note : l's share in profits is more than
.
/ . . yadJustment.
Divya are partners .in a t·irm. Theu Ca . I
[JJu strah on 55.A nwa r, Biswas and pita Acc ount s stoo d
,000 respectively on 1st Ap .
at t 8,00,000; f 6,00,000 and t 4,00 1 2013
. · They shared prof its and Working Notes:
on:
ely. Partners are entitl erdi 'to inter 1. Calculation ofInterest on Capital
loss es in the ratio of 3: 2:• 1 respectiv . t on capi tal @60'
D1vya @ '{ 4' 000 per month d es 10 per X's Capital = '{ 2,00,000 x ~ x .2.. = t 9,000
ann um and sala ry to B1swas and an f 6,000 per quart er 100 Ip--
ision s of Part ners hip Deed
resp ectiv ely as per the prov ·
'{ 4,500
interest on capital but e I . Y's Capital='{ 1,00,000 x ~ x - =
Bisw as's shar e of prof it inclu ding y is gua 100 12
iency arising on that a Xe uding salar _,r- -
min imu m oft 82,000 p.a. Any defic be met by ~~n teed at a
6
= t 4,500
2014 pmo unte d to f ~c~u nt shall Z's Capital = f 1,00,000 x 100 x 12
for the year end ed 31st March, 2 Prof ivya. Prof it
el'lded 31st March, 201' ,000. Prepare Total Interest on Capita~ !.18,0illL
App ropr iatio n Acc ount for the year 4. it and Loss
(D;/1,j 2013)
I
d
r 1.72 Double Entry Book Keeping-CBSE XII
2. (i) Profit after interest on Capital= t

1,38,0 00- t 18,000 = t 1,20,000
. , Chapter 1 · Accounting for Partnership Firm
s-Fundamentals 1.73
Cr.
betw een X, Y and Zin the ratio 3: 2 : 1, t.e., X s Share of Profit PARTNERS' CAPITAL ACCOUNTS
Profit oft 1,20,000 will be distributed Dr
and l's Share of Profit= t 20,000. A ft) 8 ft) (('{)
= t 60,000; Y's Share of Profit = t 40,000; (i.e., t 36,000_x 9/J 2) Particulars Am am
C(t) Particulars
to guarantee, Zhas to get minimum t 27,CJ?<)* 10,00,000 B,00,000 6,00,000
(ii) l's Share of Profit= t 20,000. However, due paid by X. Afte~ adjusting To Profit and Loss App. Ne 1,50,000 1,50,000 ... By Balance bi d
...
(i.e., t 27,000 - t 20,000) will be ... 50,000
of profit for 9 months. So, deficiency oft 7,000 (i.e., t 60,000 - t 7,000 ) and Zs Share of To Cs Capital Ne 50,000 50,000 ... By A's Capital Ne
... 50,000
of profit will bet 53,00 0 By B's Capital Ne ...
/ \the deficiency of profit by X, X's Share (Guaranteed Profit)
'-.,, .. _Profit= t 20,000 + t 7,000 = t 27,00
0. To Balance cld 8,00,000 6,00,000 7,00,000
proportiona fe/5asis from the rtare-uradmission-cf..Gualilllle~ 10,00,000 8,00,000 7,00,000
Guaranteed amount-is--ealculated-on 10,00,000 8,00,000 7,00,000
to the closing date of accounting year. shar ing profits
of min imu m prof it to a part ner in case
of Loss
Illus trati on 58 (Guarantee ofProfit by
the Firm). A, Band Care partn ers in a firm
Acco unti ng treat men t of Guafant ee prof it is to be paid to the ner C is guar ante ed a mini mum prof
it off 50,000 p.a. by
It is poss ible that the firm has incu rred
Joss but minimum guar ante ed and losse s in the ratio of 12 : 8: 5. Part 6-Profit f 2,00, 000;
mum profit. In such case, adju stme nt
is mad e thro ugh the year s ende d 31st Mar ch were: 201
part ner who has been guar ante ed mini the firm . The prof its and losses for
• s t 2,00,000.
wing manner: 201 7-Pr ofit t 3,00,000, and 2018 -Los
Part ners' Capital Acco unts in the follo ring ratio. book s of tl;le firm.
(i) Dist ribut e loss amo ng the part ners
in their profi t-sha Pass necessar y Journal entri es in the
min imu m prof it
Capi tal acco unt of the guar ante ed part ner is credited with guaranteed
(ii) ining part ners in their Solu tion:
unt is debited to rema 2017-18 ('{)
plus the amo unt of loss. This amo guar antee d min imu m prof it. Particulars
2015-16('{) 2016- 17('{)
the partner who has
prof it-sh aring ratio or to the debi t of 50,000 50,000 50,000
havi ng capitals (i) Guaranteed Profit to C
Illus trati on 57 (Guarantee ofProfit to a
Partner in Case ofwss). A, Band Care partners
prof its and losse s (ii) C's Actual Share of Profit as per (40,000) Loss
000 resp ectively in a firm and sharing 40,000 60,000
of t 10,00,000; t 8,00,000 and t 6,00, t ever y year. The firm profit-sharing ratio 12 :8 :S 5/25) (i.e., t 2,00,0 00 X Sl25)
prof it oft 1,00,000 as share of profi (i.e.,'{ 2,00,000 X 5/25) (i.e., t 3,00,000 X
equa lly. C is guar ante ed a mini mum are requ ired to show the ... 90,000
ende d 31st March, 2018. You (iii) Deficiency [(i) - (ii)]
10,000
incu rred a loss oft 3,00,000 for the year to minimum guar ante ed prof it to C.
and giving effect the prof it of the firm
nece ssary accounts for divis ion of loss is to be born e by the firm. Thus, out of
The defic ienc y in C's shar e of prof it e of prof it, which
PROFIT AND LOSS APPROPRIATION ACCOUNT mum guar ante ed prof it or his shar
Solu tion : 31st March, 2018
for the year ended
Cr. C's Acc ount will be cred ited with mini B in their prof it-sh aring ratio .
Dr.
ever is higher and thereafter, balance
will be distributed to A and
'{ Particulars , deficiency in
Particulars -, ners' Capital Acco unts and there after
3,00,000 By Loss transferred to: In case of loss, loss will be debited to Part unts .
To Profit and Loss Ne (Net Loss) A's Capital Ne · I 1,00,000 guar ante ed part ner's shar e will be
debi ted to rema ining Part ners ' Capi
tal Acco
B's Capital Ne 1,00,000 JOURNAL
I C's Capital Ne 1,00,000 Dr. ~) Cr.('{)
3,oo.ooo I 3,00,000
Date Particulars
L.F.
- 2,00,000
Dr.
PARTNERS' CAPITAL ACCOUNTS Cr. 2016 ...Dr.
March 31 Profit and Loss Ne 2,00,000
A~) am 1
C('{) ' Particulars Am am cm priation Ne
Particulars To Profit and Loss Appro
Appropriation Account)
To Profit and Loss
By Balance bid l0,00,000 8,00,000 6,00,000 (Being the net profit transferred to Profit and Loss 2,00,000
1,00,000 1,00,000 1,00,000 By A's Capital Ne ...Dr.
Appropriation Ne 1,00,000 Profit and Loss Appropriation Ne 90,000
1,00,000 1,00,000 By B's Capital Ne 1,00,000
To C's Capital Ne To A's Capital Ne 60,000
(Guaranteed Profit) To B's Capital Ne 50,000
To Balance dd 8,00,000 6,00,000 7,00,000
10,00,000 8,00,000 8,00,000 To Cs Capital Ne
1i,oo,ooo 8,00,000 8,00,000 rs and Ccredited
l By
Balance bid (Being the distribution of profit among partne
,OO,OOO 6,00,000 7,00,000 with his guara nteed profit)
00 p.a. Loss incurred by the firm is f 300
Note : C is guaranteed a profit of'{ 1,00,0
Capita l Accou nt is to be ed" ,OOO. Out of which { 1 00 ~ 15 ...Dr. 3,00,000
debited to Cs Capital Account Therefore, C's rted by the amount of ciefi~iency
2017 3,00,000
'{ 2,00,000 ~ 1,00,000 share of loss debited plus'{ 1,00,00 0 guaranteed p c~)
ro Whrch is sha ed March 31 Profit and Loss Ne
r equally by A and B. To Profit and Loss Appropriation Ale
Appropriation Account)
Alternate Solution: (Being the net profit transferred to Profit and Loss ...Dr. 3,00,000
1,44,000
Particulars
Total(~ A RJ Profit and Loss Appropriation Ne 96,000
nt to be debited to Aand B C(f) To A's Capital Ne (0,00,000 x 12/25)
Loss for the year as per Profit and Loss Accou To B's Capital Ne ~ 3,00,000 x 8/25)
60,000
equally as Cis guara nteed minim um profit (3,00,000J 11,so ooo1
8 equally ... (so'o 11,so,oooJ To Cs Capital Ne (t 3,00,000 x 5/25)
Guaranteed profit of Cto be shared by A and (so,oooi ers
IJ,oo,oooi (2 oo' ooi (2,00,0 1,00,000 (Being the net profit distributed among the partn
, ,000) 00)
1,00,000 in the ratio of 12: 8 : 5)
I
Chapter 1 • Accounting for Partnership Firms-Fundamentals 1.75
2,000 will be borne by Xand Yin
1.74 Double Entry Book Keeping-CBSE XII zwas guaranteed a minimum sum on 30,000. Hence, the deficiency of'{
96,000
...Dr. 64,000 the ratio of 3 : 2 as follows:
2018 ... Dr. 40,000 X = '{ 2,000 x 3/5 = '{ 1,200; Y = f 2,000 x 2/5 = f 800
March 31 A's Capital A/c ...Dr. 2,00,000 Thus, X's Share of Profit= f 84,000 - f 1,200 = '{ 82,800;
IB'sCapital A/c Y's Share of Profit='{ 56,000 - '{ 800 =f 55,200;
Cs Capital Ale
To Profit and Loss A/c . ) l 's Share of Profit= f 28,000 + f 1,200 (X) + f 800 (Y) = '{ 30,000.
54,000
(Being the distributio n of loss as if ther~ guarantee _ ...Dr:--/ profi~s in the ratio of 5 : 3 : 2.
36,000 Illus tration 60. Suresh , Sahli and Sumit are partn_ers sharing
... Dr. earned profit of { 3,50,00 0. Prepar e
~s CapitarATc 90,ooo During the year ended 31st March, 2018, the fmn
B's Capital Ale effect to the followi ng:
To Cs Capital Ale Profit and Loss Approp riation Accoun t giving
(i) Each of the partner is to get remune ration oft 60,000 p.a.
(Being the deficiency of C, met byA and Binthe ratio of 3: 2)
. artner (or partners) may guaran tee (ii) Interes t on Capital is to be allowed @ 10% p.a. Capital
s of Suresh, Sahil and Sumit as on
Minimum earnings guarant eed by a partner. A p . h f'rm In such a situatio n ; { 5,00,00 0 and t 7,50,000 respect ively.
. f' d/ tees a profit to t e I ' . Capital Accoun ts or, 1st April, 2017 were- t 5,00,000
minimum earnings to the irm an or guaran , Partners -{ 10,000; Sahil- t 20,000; and Sumit -t 25,000.
) - (iii) Interest on Drawings charged was: Suresh
shortfall in earnings 1s debited to the concerned Partners ( after above approp riations.
are fixed) . .J(! . . (iv) Sumit is guaranteed minimu m profit of { 1,50,000
~ rent Accounts (if capitals
·· b p f to the Firm and Mmzmum Pro;;/ ~• PROFIT AND LOSS APPROPRIATION ACCOUNT
(M,11111111111 earn111g Guara11teed y a ar 11er Solutio n: Cr.
t ti
us :rJ~ OJ\ 59 d Accoun tants x, y and Z form. .a partner ship, Or.
for the yeor ended 31st March, 2018
lll;Jllfifepi by the Firm to aPart11er) . Three Chartere Particulars
'{
rfo,ng profits and losses in the ratio of 3 : 2 : 1 subject to the following cond1t10ns:
'{
Particulars
By Profit and Loss Ale (Net Profit) 3,50,000
~ l 's share of profits is guaranteed to be not less than t 30,000 p.a. To Remuneration A/c:
him for the firm shall not be 60,000 By Interest on Drawings:
_ / _;)~ives a guarantee to the effect that the gross fee earned by Suresh
60,000 Suresh 10,000
W' less than the average gross fee earned by him during the
which
precedin
works
g fi ve years when he
out at t 50,000) .
Sahil
Sumit 60,000 1,80,000 5ahil 20,000
25,000 55,000
was carrying on the professi on alone (the average of
To Interest on Capitals: - Sumit
is t 1,50,000. The gross By Loss transferred to Capital A/cs:
Profit for the first year (year ended 31st March, 2018) of the partnership Suresh 50,000
Suresh 62,500
the firm is '{ 32,000. Sahil 50,000
fee earned by Y for 75,000 1,75,000 Sahil 37,500 1,00,000
the above. Sumit
Prepare Profit and Loss Appropriation Accoun t after giving effect to To Sumit's Capital Ale - 1,50,000
PROFIT AND LOSS APPROPR IATION ACCOUNT (Guaranteed Profit) 5,05,000
Solution: - 5,05,000
Dr. for rhe yeorended 31sr Morch, ]018 Cr.
Profit given by one Partner). X and
Particulars f Particulars
i:v2 ,
A/c • "-..7 f
Illustra tion 61 (Manager admitted as a partner a11d Guaran tee of
Y are partner s in a firm sharing profits in the ratio of 4 · 1 They decide to admit Z, their
To Profit transferred to: By Profit and Loss
:---,1,50,000 ~ share in profits.-Z, as a
effect from 1s t April, 2017 for 1/8th
X's Capital Ne 84,000 -Net Profit manage r, as a partner with
ssion 5% of the net profits after
of
Less: Deficiency in Zs Share 1,200 82,800 By Y's Capital Ne manage r, was getting salary oft 8,000 per month and commi
(WN2) (WN 1) / 18~
chargin g such salary and commis sion.
Y's Capital Ne 56,000 t which Z shall be entitled to
As per the terms of the Partner ship Deed, any excess amoun
\ , • I
Less: Deficiency in Zs Share 800 55,200 I J
t which h ave been due to h im as a manag er, would be
(WN2) receive as a partner over the amoun
.
l 's Capital Ne 28,000 borne by X out of his share of profit.
Add: Recovered From X 1,200 0 before salary and commis sion.
Profit for the year ended 31st March, 2018, amoun ted to { 13,56,00
Recovered From Y 800 30,000
period ending 31st March, 2018.
1,68,000 Prepare the Profit and Loss Approp riation Accoun t for the
1,68,000 PROFIT AND LOSS APPROPRIATION ACCOUNT
~,r,~
Working Notes: Solution : Cr.
Dr. for the year ended 31st March, 2018
1. Profit for the first year of partnership ~
Add: Difference between the guaranteed fee to be earned by
y
l,50,000 Particulars ~
and actual fee earned (f 50,000 - t 32,000)
Projected Gross Fee of the firm To Profit transferrecl to: C),/
.). X's Share = t 1,68,000 x 3/6 = t 84,000;
1s,ooo X's Capital A/c "j)) 9,46,500
1,6a,ooo-
l:' Y's Share = t J 68 ooo x 2/6 =; s:,~~~1and Y's Capital A/c 2,40,000
1,69,500
Z's Share = f 1,68,000 x 1/6 = 2 , . Zs Capital Ale
- -..!.\-/L .--_ ---- 1::: :~----£._.~ ¥ -~ H~

~,~ ~
, 1.76 Double Entry Book Keeping-CBSE XII
Chapter 1 · Accounting for Partnership Firms-Fundamentals
(iv) In the absence of an agreement to the contrary, the partners are

1 .77
, d · s1·on of Z as a partner:
Working Note: Distribution of Profit be,ore a mis 13,56,ooo (a) entitled for 6% interest on their capitals, only when there are profits.
Profit before Manager's Salary and Commission (b) entitled for 9% interest on their capitals, only when there are profits.
Less: Amount Due to Z as Manager: 96,000 ,,,- (c) entitled for interest on capital at the bank rate, only when there are profits.
Salary ~ 8,000 x 12)
Commission [5/1 05 ~ 13,56,000 - ~ 96,000]
60,000 ,~
~ 1,56,00o
· 12,00,000
~ n t itled for any interest on their capitals.
(v) Current Account of a partner
Net Divisible Profit ---= (a) will al ays have a credit balance. (b) will always have a debit balance.
X's Share in Profit = ~ 12,00,000 x 4/5 = ~ 9,60,000; and (c) Y have a debit balance or a credit balance. (d) can never have a debit balance.
Share in Profit=~ 12,00,000 x 1/5 = ~ 2,4o,ooo. fr 96 ooo and commission of~ 60 ooo (vi) Interest payable on the capitals of the partners is ~ to
z has been admitted as a partner, he is not entitled to get sa~ry 069 500_ ' ·
.__Jq).,-Mfit and Loss Account. (b) Profit and Loss Adjustment Account.
tead, he will get 1/8th share in the profit =~ 13,56,000 x 1/S - '{ 1• ' 11 (cl Realisation Account. ~ Profit and Loss Appropriation Account.
e deficiency oft 13,500 (i.e., r 1,69,500 - t 1,56,000) will be borne by X persona Y·
(vii) Interest on partners' drawings under Fluctuating Capital Accounts is debited to
Thus, Final share in Profits: , _ r 1 69 500
X's Share = t 9,60,000 - t 13,500 = ~ 9,46,500; Y's Share = ~ 2,40,000; and Zs Share - ' ' · faV Partner's Capital Account. (bl Profit and Loss Account.
(c) Drawings Account. (d) None of these. ...- 7
[Ans.: (i) (a); (ii) (c); (iii ) (d); (iv) (d); (v) (cQ_v"il i;il)(vii) (a).]
ANSWERS TO , . QUESTIONS
------..1.1
1 .1 No, Ido not advise them to have a Partnership Deed because the activity they are carrying is charitable
erv
1. _p.efin
T>'..E:LJlJ~iem;:--"7 6t) ~
in nature. Had they agreed to do business and share profits, I would have advised them to enter into :2. State any two essential features or chara _eristics of partnershibesides minimu@ nu,:n~ei,of partners
and profit sharing. ,L',,W"'i.c..,j~~.,.,,.,., ~ ,lO,.l..(/4.,V.I\J.,<:\
a Partnership Deed. 1
3, Does partnership firm h a separate legal entity? Give rea on in support of your answer,......-10~ / ~
Rajesh shall be paid share in profit as per the Partnership Deed.
1.2
1 .3 Dev can be inducted as a partner if and only if all the existing partners agree. ,( .~b.
~ What is the maximum number of partners that a partnership firm can have? Name the ke_! tha_t.,Jll2vides
1 .4 Action of the accountant is not correct because interest on loan is a charge against profit and not an \ "'I', '! ~ or the maximum number of partners in a partnership firm. ~~elfitb!'l!rrl,,eign 2016/
appropriation of profit and also it is a gain to a partner as a lender and not as a partner. Also at the time ' s ; 7l group of 40 people want to form a partnership firm.They want your advice regarding the maximum number of
of dissolution of the firm, partner's loan is payable before capital is repaid. Hence, it should have been \... . persons that can be there in a partnership firm and name of the Act under whose pLo.}(isB.'l ~ is givei:i.~ (Al Jej6iQ
debited to Profit and Loss Account and credited to Partner's Loan Account. :f\'i.)1s there any restriction on maximum number of partners? If yes, name the Act unaer w"lii~s prescribed.
1 .s Both Mahesh and Naresh are incorrect. In the absence of Partnership Deed, the provisions of the 7. Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not exist?
Indian Partnership Act, 1932 will apply. It provides that interest @6% p.a. will be paid on partner's loan, 8. State any two rights of a partner besides profits of business, participating in business and right to be
in the absence of Partnership Deed. Therefore, Mahesh is not correct in demanding interest@ 12% pa
consulted about affairs of the business. ~ - •- ~ A , , /-.,,..,,.,
and Naresh is not correct in denying interest. ··
1.6
9. What is a Partnership Deed? J,.~ d.).,C}fo1trgft.i(J6j,Delhi 2010/
1 O. Why is it considered better to make a partnership agreement in writin~ l>-j- ~ 'L ( (NCERT)
Asha is correct because there is an agreement between the two partners to pay rent from 1 t A ·1 201 S
1 .7 5I d · · · s pri, ,
a ary anh cohmm1ssfi1on to partners 1s a~ a?propriation of profit and not a charge. It is because of this
reason t at t e Pro 1t and Loss Appropriation Account should be debited. 11. ,yir<d Yare partners. Ywants t~mit his son Kint~business n K become the partner of the fi~ive
1 .8 Introducing capital or withd rawing capital. reason. I.A~ X - (De/hi2014CJ
1.9 The Partnership Deed should be amended to incorporate the clause to h . 12. Pratibha, partn~r ol\b firm, has vanced loan to he firm of , 1,00,000. The firm does not have a
is only then that the interest on drawings can be charged. c arge interest on drawings. It Partnership Deed. Will Pratibha get interest on the loan? If yes, at which rate and why? ( '/ •
13. Neha, a partner, owns a building in which the firm carries if,f ~usjness. The firm pays her~ 10,000 as rent
of the building. To which account rent will be debited? f
k'-' ~ V
14. What is meant by 'Fixed Capital' of a Partner? /Delhi2016O
, Select the Correct Alternative: 15. What is meant by 'Fluctuating Capital' of a Partner? ~ • ~ tJ ~ ~ Q l6 C/
(i)~artrs' Current Accounts are opened when their Capital Accounts are 16. Distinguish between 'Fixed Capital Account' and 'Fluctuating Capill Account' on Vie ~ sis of
O\)NJk/41 ~ 4 ~ ~M(A/2017/
fi xed. (b) fi d c.!.e ditbalance.
(c) fluctuating. (d) ~xe and fluctuating both
.. . . one of these · 17. A firm maintains a Capital Account anij a &t?;nt Account for each partner. Wh tis the term used when
(11) The interest on Capital Accounts of Partners under the Fluctuatin . · this method of maintaining Capital Accounts is followed?
(a) Interest Account. (b~og CapitalAccount Method . .
18. State the two methods of maintaining Capital Accounts of partners.
artners' Capital Accounts. , lrl N fit and Loss Account is credited to
"--""" oneofthe · 19. If interest on capital, salary to the partner and share of profit are credited while interest on drawings,
( absence of an agreement to the contrary, partners share se.
drawings and share of loss are debited to the Pa~ers~pital Acco~nts, what is the method !ollowed to 1,.
(a) ratio of their capitals in the beginning of the year. profits and losses in th
maintain the Capital Accounts? _. ., 7 I ~ vl.M.f '
(b) ratio of their capitals at the end of the year. e
20. Interest on capital is credited to Partner's Current Account. Name the method of maintaining Capital Account.
(c) ratio f average capital. '-
21 . Under which Capital Account Method, Current Accounts of partners are maintained?
(d
22. Under which Capital Account Method, Current Accounts of partners are not maintained?
1j ;,..---- er-
U" -
" ~ T/' -..{ __z. ~ - grorf"d ' " ' <'' {.)
.~ l / o · o~- .- ~
11
•, ~ , I' ;,,- ,.J /\'- co un "
,15 • /I 1' •
0
1. 100 Double Entry Book Keeping-CBS£ XII t:f::J,' er ' . ccoY•· I , ··ooo
1
- o . _,. i-1
•#
~
e:;; cnaPr -A p1r/\L /\ . uiars
' '-'' ,-r,c
( 6 oo•,.,vo
' O"
u; ,. _,,., _.,
_,,., .._,,.,l (_,,..,, /
X'S LOAN ACCOUNT ;,> ,NfH'> pa 8,0 , -
fl!!-rl ((~/
Or. fVC 7
( 68J n: )
f\/ c ~ ,. [f (: )/ - •,, _.., •
Particulars
Particulars
,.,.--;:;;--r 9 (() • ,,J• 8 __... ~) ~
·r I o0,ooO✓,
I ? -;- -
Br. ----------- A (ti,. 7 0 /I , /' ? 00
v- l
To Balance c/d , ,
By?
-------
-
-
---
I .
r✓, , 7 3•oo,oo c·oUUf'IN~• s - I...';, o ooo 1,00,6 0 25
t') ·• o - r,.C ,:;:..;--- , 7 O!P-' 4
! ? - 6 oo,oo. ------- I
is
r
~ dd
Al'
- vc>
,
1-
oJ ,
-oo, 0:'.---
!.'.---- ---- ,-JEil
s' cuflfl
EN'
pa
rs
,-r;cula_
- est
on
- -
I ,,,.
-,_oO,
ooO
--
1 3,
o.
ooo
1,
6 !Y6.Z ~
94, . ""
pr,.Rf ((() 8.., 1nrer I r,. / C . n f\lC1 _. - :J, 0 •
So!,,tion: ,nee ____. - , caP'r" ;ssio_ oO ooo
Or. PROFIT AND LOSS ACCOUNTfor meyeor entfetlJl11llforc
I ( Particulars
4;p,, . ---------
,--
90,000
30,000
. A'sSJJ!?!!f\lC _.
8Y~_5iJl"''d 1-oss l -;o,oo - j
2,0 0,0
o ,V-----
5 ,55'
~
'(
Cf-
Particulars
To Interest on X's loan Ale

- 11ars f'./C
- I. 90,00O I
ao,ooo / 60,ooo,
ao,Ooo
, v1G,.-?, ,
8'f
8Y
8 fit ;in (Pro fit)
pro p./C
r,. pP· e c!d ~
II, __... -
_ -------- _
----
I By Net Profit ,awin9\;, 1,00,0~ / f,,~ e,,-- \ ? OJ 1anc ------------ 1 o,86,250
(r 4,00, 000 X 5/12 X 6/ 100)
To Net Profit Transferred to
I
I , awrn9s pJc
I aw'ngs I '1,1,93,875/
Q/'
I? 2 91,00
, o I s
8Y
_ _,.. courJ
- -r
Profit and Loss Appropriation Ale
I 8,50,000 /1:e,esr ~; 1,
000
~ 6
1,9~, : .. ~ A ,,orJ
8 ;7
_. ;;:;fic)
1
- - - - - - -- - - - -- - - - -- - ~- - -- - - -- -~ Batan
L 8,60, 000 Jra""'':egc1d oo;;t 5-:~
- -
I ~
- s AppRoPP.
D 1-0S
µ (1~
d J 1st - /1J f>
- --- IC 1r-l':~c>·
_. i , \- a>,..,
o, PROFIT AND LOSS APPROPRIATION ACCOUNTfortneyeor entlet/J/1t!lfo1r41.:; pROFI r r,.N eor _!!!5!.l!- ~ rirc t.J
_.:::::r:: __ _ _ _:_:__ _ _ _ _ _--:--_ __ 1 -:----:--:-- -- -- - -----___..- (t r the.f-- I'- r,r a,,d,, i 0o;J,.,;r•-
Particulars
_ _ _ _ __ __ _ _ _ _ _
I ( Particulars
_ _ _ _ _ __
!.------ . ------
~ ~ -
I BY pro o
,,re,e,r J'l t:J-ie
To Xs Capital Ale (Profit) 4,25,000 I By Profit andlossA/c (NetPro5M 1Juti• f1 , ~ -: _ "' - , ~
1
8>' ;I - I ; the
To Y's Capital Ale (Profit) .I ,/ ' .urn ,
I ~- 50,000
4, 2!!_000 L._!!__5 (!_,__0 00I
,r;,uJars - - ·ral Afcs:
~ _ _ -: ,.,. - / 1()0
JOO
'
C
B L
:,t r' - <
~• -
--,
- ---------------'------'-------- -- -- 7--tnteresr
- - on captr JOO () . - ;l : -- - on the
Or. PARTNERS' CAPITAL ACCOUNTS A 1.,( ' , -- ,- retufll the
f Particulars - - - - -- 1- - X-«.
:='J- , j - -Y:-:-(-:::
()')::- Particulars
-----,-_
I I B
C ' I
,, ,
~---- >
(:;.J vnole ove r
•Qt-.l ased -
1~00!;: :::;~~:,;s
- H
To Balance c/t l
/ 14,25,001 10,25,000 : ; /:~:::;~~;en/ - dpface-
~
001
- - he of F:Irl o n
09
,1~ -1-4,-2~5,~o-o~o - ~ ~
• _
Appropriation Ale / ' p,orir 1
~~
9'sCUI
'1 ---
ouN"!,5 -
- rs
--r-/
---~
, ~,.:;c-
c,.
n o•be
. 1 vrd
;ng able to
ta _ - - '~•' C ( ( J J 'I n ,cJ<•<: ce
-
Or. A"S LOAN ACCOUNT CS Cv
~; Al e ....J.- advantage
Particulars I (
E ular1 n k Afr 30, 000 fit It brings
p/1~ ·
To Balance c/tl ; 4,10,000 By Bank Ale (Given) ,..ooc orce w _re ss at i ts
..,.- bt1sr11e
By Interest on .K's loan Ale - 11eZV ,.JitCil
h =
4,10,000
_> '-'.- .\.·1J
1, 0...-:..c......:; _ Lo, J
11,f; , c f1 ,l .:,
-
(I t/A,
... .- _-: _-,_.J
Or.
, (Appropriation of Profit). Complete the missing figures(?) in the fo
P~rriculars
PROFIT AND LOSS APPROPRIATION ACCOUNTfor tl,eyeor endedJ /.ffMore/;,,
r Particulars
i t h ~-
--
To fnteresr on Capital Ales: / By Profit and loss Ale (Net Profit,'
A 50,0~o/ By Interest on Drawings Ales:
8 55,00o/ A
C 30,000 1,35,000 8
> A's ,nmmisslon Ne (A's Cullent Ale) ~ :,. o ,') o J C f the v aluer.
Ifs :;a/ary A/c (B' Cu1m1I Ale)
Pmfir rransfrw-d 10: I
ff
I
1 1
t) () o d
I
issn1e11 t o
-~'s C"urtent Ale l /
·s Curtent Air ? I
/ t:J_,/Vv v v ,._, '/ V VL ) ,.._ ~
~w-. ,,(,1,1
,_,. .,.,
j
'
1.102 Double Entry Book Keeping-CB
SE /) \, (~ / r.d.._ _i
" ;zC
u J 4l'1 ~
;; 0
-0
"..2' ~C f cl J.11\. :
Goodwill: Nature and Valuation
0.
,:, e
"f; u"
~"
u
;z
..
0.
-0
"'"
5 !
~
"'~
~
-0
u"
~E
!! o ·~s
0 "
c-
0 ~ a~
g ~
"j LEARNING OBJECTIV
E" ~£ ES
""
gg, !~ The study of this Chapter wou
E ld enable you to understand:
2 .1
.J Meaning and Characteristics
of Goodwill 2 .2
.J Nature of Goodwill
2 .2
.J Need for Valuing Goodwill
0 J Factors Affecting the Valu 2 .2
z e of Goodwill 2.3
,J Classification of Goodwill
.J Methods of Valuation of 2.4
Goodwi
z
0 ':I Difference between Average ll 2 .15
;:::
Profit and Super Profit
z::,
0
0
..<'e
0
0 C
< 0
u.. ;; Goodwill is
0
1 · · ·
0
Ja.ces ao eoterp rjle at
a l ' l ' I Atgher-pref~an advan1ageous_p ~!;ism._due to
1/)
..J ea. wh ~ i e - a l , ~
~
z
UJ
..
a.
effo rts made in the past put
the enterprise in
~t is so becaus
an advantageous position.
~ the
~ enterprise has rendered goo For exa mp le, 1£ the
<( d service to its custom ers, the
0
z::, quality of service, which in customers will be satisfied
all likeliho od will bri ng the from the
u.. q enterp rise will a'chieve hig m bac k to the ent erp rise.
In
her sales and , thus, higher tum , the
0.. Goodw ill is the presen t val profits.
i ue of expected future incom
1/)
a: investment in tangib le assets e in excess of a nor ma l ret
UJ or for the excess of price pai urn on the
book value or ove r the com d for a bus ine ss as a wh ole
~ puted or agreed val ue of all ove r the
a: tangible net assets pur cha
f "Goodwill is nothing more than sed.
the probability t/rat the old custom
ers will resort to tlte old place."
- Lord Eld on
"Wiren a 1111111 pays for goodwill,
Ire pays fo r something whiclr
earn more tlran he would be able places /rim in the position of bein
to do by l1is ow11 unaided efforts. g able to
"Goodwill is a tiring very easy " - Dicksee
to describe, very difficult to defi
of the good name, rep ufation and ne. It is the benefit and advant
connec tions of a business. It age
in c11s to111ers. It is one tirin g whi is tire attractive force wl1ich
ch dist ing uish es 1111 old establis brings
first start." lred business from a new busine
ss at its
.C
;;
- Lor d Macnaght en
..
Q CHARACTERISTICS OR
FEATURES OF GOODWIL
L
f l. It is an inta ngible asset,
i.e., an asset which can not be
"u 2. It does not have an exi seen and touched.
stence separa te from tha t
of an enterprise . Th us, it
has realisable . -
val~
3. The value of goodw ill is
the subjective assess me nt
of the valuer .
4. It helps in earning higher
profits.
2.2 Double Entry Book Keeping-CBSE XII Chapter 2 • Goodwill: Nature and Valuation 2.3
. . s in custome rs to the place of busines s.
1 . for the product s dealt in is
5 It is an attractive force whid bnng•ous factors such as location al advanta ges, favoUr b 8. Market Situatio n: If a firm is in a busines s wherein demand
· a le and higher profit. It will,
6. It comes into existence due to van t market reputati on, etc. higher than the supply, it will lead to lower capital require ment
contracts, brands, trademar ks, paten s, thus, increase the value of its goodwil l.
s are higher than normal,
9. Risks Associa ted with Busines s: If the risks faced by the busines
contrar y if the busines s faces lower
. NATURE OF GOODWILL! the busines s will have less value for goodwi ll. On the
., risks, it will have higher value of goodwi ll.
seen and touched ) like
Goodwill is a valuable intangible asset (an asset which cannot ~e where the produc ts dealt in
ed li_ke tangible asset~ but is amortise d 10. Nature of Busines s: If the busines s of a firm is of the nature
patents, trademarks, copyrights, etc. It is not deptt are in high demand no s ort iU up~ 1e profit will be higher. It will, thus,
Intangib le Assets prescnb es that goodwil)
ver its useful life. Accounting Standard -26 (AS--2 , increa ue of its goodwil l. ~
-~ 'ould not be recorded in the books of account unless conside
ration is pa~d hfor)J_. Thus year, will have better value
ough a saJ: 11. Past Perform ance: The firms showing higher profits year after
sold, t
-~ ::if-generated goodwill is not recorded in the books of account. It can be
for goodwil l as compare d to the firms earning lesser profits or incurrin g losses with similar
will be possible only along with the sale of the.-lnrsiness itse!f.J ' amount of capital employe d. _,,.
( .? I ~ ·1,
-.·~-· 12. Other Factors: (a) After sale services , (b) Good custom er
relation s, and (c) Good labour
I(IIM+H❖f&ilflii+t+Mi!,_. iJir3
.
~~-- relation s, etc.
The need for valuation of goodwil l arises in the following circums tances:
1. When there is a change in the profit-sh aring ratio.
Goodwi ll can be classifie d into two categori es:
2. When a new partner is admitte d. 1. Purchas ed Goodwi ll; and
3. When a partner retires or dies. 2. Self-gen erated Goodwi ll.
4. When partners hip firm is sold as a going concern. s cqui.rec i~¥-a £inn.for
1. Purchas ed Goodwi ll: Purchas ed Goodwi ll is that goodw i~~
example , when a busines s is purchas ed
II 5. When two or more firms amalgam ate. a conside ration, whe'Oter p~
-a:Ati pmd1as t couslde rafion is
asii1i,r.kiad ,,.For
more than the value of net assets (i.e., Assets - Liabiliti es),
the differen ce amount is the value of purchas ed goodwi ll.
n Busines s for a net
Let us take an example . AB Busines s H ouse acquire s Mahagu
ca acity of th f 20,00,000 and liabilitie s
Goodwill of a firm is affected by all the factors which increase the earning P e irm. conside ration of t 10,00,000. Assets acquire d were valued at '{
in excess of n et assets, t 8,00,000
These factors are: taken over were of '{ 12,00,000. '{ 2,00,000 paid
ll, which is purchas ed goodwi ll.
(i.e., t 20,00,000 - t 12,00,00 goodwi
I· 1. Efficient Manage ment If the management is experienced capable and compete nt, the firm
vill hi .
as compare d to other firms · It will th ·
. 0) is towards
AS-26, Intangib le Assets prescrib es that purchas ed goodwi ll should be recorde d in the
' earn gher profits. . ' us, mcrease the value of goodwiU. earliest.
F books of account and written off at the
le Location : If the busmess is located at a favourab le l . . .
2. avomab
e, increased sale th I f P ace, r_esultin g m increase d Features of Purchased Goodwi ll:
customer walk-in and, therefor
, e va ue o goodw11! will be h . h
3. Favomable Contracts: Sometim es a firm ente . 1 1
,g er. (i) Purchas ed goodwi ll arises on the purchas e of a busines s.
of account .
purchase of goods at favourable pri;es This "ll s
rl m ffo ong-term contract s for sale and (ii) Since the consiqe ration is paid for it, it is recorde d in the books
. w1 a so a ect profits and d ·11
. goo WI of the firm. (iii) It is shown in the Balance Sheet as an asset.
4. Longer Establis hment of Business·· 8 usmess established fo 1 . ned when both purchas er
. IS likely to have (iv) Value of Goodwi ll is a subjecti ve assessm ent but it is ascertai
extensive (broader) custome r base resulting . h" her sale and r ong t·
have h'igher value of goodwill. m ig pro It. As a result, it will and seller agree to its valuatio n.
(v) It is amortis ed at the earlies t but n o t later than its useful life.
5. Advantage of Patents: Normall y, patents a re necessary for th
f t . d the busines s of Shri Shivarn
o cer am ~pes of a~cles. A firm which possesses th e manufac ture or product ion Illustr.1 tion 1 (Purchased Goodwill). Amrit Daily Needs acquire
The assets acquire d and liabilitie s
value for its goodwil l. e necessar y patents wi·11 h ave a better for a net conside ration of t 5,00,000 payable by cheque.
. taken over are:
6. Access to Supplie s: When supplies of matenals are d 1'ff· t Liabilities: '{
. Assets:
val ue of goodwi!J for a firm which has good arrangem 1cult to get' there will be a high 10,000 Creditors 5,20,000
.
supp11·e Furnitu re
7. Quality: If a firm enjoys good reputation for the q .ents for getting s. Invento ry 7,50,000 Salaries Payable 75,000
d I d h of its goodwill ua 11ty of its prod 15,000
rea y sa e an t e value ucts, there will be a Debtors 1,50,000 Outstan ding Expense s
, U1erefore, will be high.
Pass the necessa ry Journal entries.
2.4 Double Entry Book Keeping- CBSE XII Chapter 2 • Goodwill: Nature and Valua
tion 2.5
Amrit Daily Needs lo earn the same

Solu tion: ber of years for which the firm is likely
JOURNAL Number of years ' purchase means the num
l.F. I Dr. m IJ~use of the effor ts put in the past.
amo11nt of profit after change q(ozw zct!~ \/ ~
Date Particulars ,-
...Dr. 10,000 Number of Years' Purchase
Furniture Ne Reasons for Usin g Average Prof it and
...Dr. 7,50,000 whic h in tum, indi cate s
I cial perf orm ance (Sale and Prof it)
Inventory Ne .. .Dr. 1,50,000 Past profits show the tren d of finan re prof its for whic h
Debtors Ne
I busi ness wou ld like to estim ate futu
.. .Dr. 2.00.000 likely futu re prof its. Buy er of the year s busi ness is likel y
Good will Ne (Balancing Figure) 1 also like to estim ate the num ber of
To Creditors Ne 5,20,00o prof its are aver aged . Buy er wou ld
To Salaries Payable Ne 7s,ooo ts put in the pas t.
to earn that prof it because of the effor
To Outstanding Expenses Ne I s,oo,ao
15,00o
o
To Shivam Valuation of GoodwilI
consideration
(Being the business of Shivam acquired for a net t:
00 being towards goodw ill) Step 1: Calculate Normal Business Profi
I
off 5,00,000; f 2,00,0
Shivam .. .Dr. 5,00,000 It is calculated as follows:
nt) (Given):
To BankA/c s.oo.00o Profitl(Loss) ofPast Year (Before Adjustme
(Being the cheque issued to Shivam) 1 by fire, Loss by thef t, etc.)
Add: (i) Abn orm al Losses (e.g., Loss
h is n 0 t ch-
2. Self-generated Goodwil·l: Self-generated
goodwilJ is that goodwill whic · pur ased (ii) Loss on Sale of Fixed Asse ts (Sinc
e if is 11ot a normal business activity)
· b artn ersr .Ifis
fo 'd the efforts of the-mana [~me nu or-p k or Und erva luat ion of Clos ing Stoc
k
. r a cons 1 erabon ut IS e~rned by facto rs (suc h a· , an .Ov erv alu atio n of Ope ning Stoc
arises from a num ber of
internally generated goodwill whic h s ,avo urab J
ing b . e would /rave reduced the profit) fJ!!\>. J VC.
P.
l ti ffi · quality of prod ucts, etc.) that a runn (Si11ce it
oca on, e aent management, good usmess expenses are 110 / expe cted in fu ture)
possesses due to which it is able to earn
higher profit. (iv) Non -rec urrin g Expe nses (Such
Reve nue Exp endi ture
Features ofSelf-ge11erated Goodwill: (v) Capital Expendit ure char ged as
debi ted to Purc hases Acc ount)
(i) It is generated internally, generally
over the years. (e.g., Purc hase of Mac hine ry wro ngly
.
~ As per AS-2 unt.
ise
6, self-generated goodwill is not recogn d as an asse t, i.e., not reco rded in ¥ fit) on Sale of Fixe d Asse ts)
(... )
'( the book s of acco
(_Je;;;> (i) Abnormal Gain s (e.g., Gain (Pro
k (...)
(iii) I
ts valuation is subjective assessmen
t of the valuer. k or unde rval uati on of Ope ning Stoc
,. (ii) Ove rval uation of Closing Stoc
(As it would have i11creased the profit)
f
]m
~~~ !~•:
~~•
;~
til
~i
•~;
l
J ;
~ !·~~!
·~ ·
j
f~~ilil
~•~; ~ ~
•!~t
@ t.~:t~
• m
~~~
a ~;~~;:::::::::::::::::::::: (iii) Non -recu rring inco mes (S11ch incom
es are not expected in f11t11re)
(...)
~ Value of goodwill is·

personal assessment of the val
buye r and seller. However, following th uer and
.
is usua lly agreed betw een the
ree methods are foll owed for valu ing goodwill :
(iv) Inco me from Non-trad e Inve stme
nts
ities )
,,... -- - ) - - ---
- -
(...)
(As it is not related lo normal business activ
~
Ave rage Profit Method;
I\
•~ f) :y;-~ l Q..,oJ,A v"y (... )

I Supe r Profit Method; and
Part ners ' Rem uner ation, if it is not
(As ii is to be paid in f uture years).
dedu cted
, od> o
V~ f:. c n J ~
3. Capi talisation Method. /1 "'~ (. .)
I. Ave rage Prof it Method: Goodwill under Average p fi
A~ Any othe r futu re expe nse, lik insu
ranc e prem1. /
' U (!J_}i(.Jv
. . .
ro t Method can be cal cu Jated eithe r by: . • 1· (As ii is to be paid in f11/11re years )
(i) Sunp le Average Profit Meth 0 d·, or ;"
ii) . Adj us ted Prof it
( Wei ghted Average Profi t Method.
calc ulate d in Step 1) for
W Simp le Average Profit Metiiod: Under s·1 Add the norm al busi ness prof it (as
Step 2: Find Average Business Profit: whic h prof it is
. mple Average p rof'It M th d of it by the· num ber of year s for
profits earn ed by the business for tJ1e spe 'f1 · e O , n orm al busi ness all the year s and divi de the sum
CJ ed number ofy
are totalled and average is determi.ned Av ears arec 'd
dete rmin ed to calc ulate the aver age
profit.
. erageprofit ascalc I _ons1 ered . Prof its earn ed
of years' purc hase to determine th Med is multiplie d by an um ber mea ns the year s for
value of goodwill • I n uthe
ood will = Ave rage Profi t • Numbere of Ye , fo Step 3: Determine the Number of Year
s' Purchase: Num ber of year s' purc hase
rm of form ula, valu e of put in the past .
ars Purchase. muc h prof it beca use of the effo rts
which the firm is likely to earn that
2.6 Double Entry Book Keeping - CBSE
XII
- Chapter 2 • Goodwill: Nature and
Valuation 2.7
losses in the ratio of 3 : 2 : 1.

Goo dwi ll is calculated by app lyin g the foll owi ng fonnUla: Illu stra tion 3. A, Ban d Car e part
ners in a firm sha ring pro fits and
4: Find Value ofGoodwill: Value of I/4t h sha re in the prof its. For
Step D into part ners hip from 1st Apr il, 2018 for
Pur cha se (as per Step a). The y dec ide to take
ual pro fit of the prev ious three
per Step 2) x Number of Years' valu ed at twice the ave rage ann
Goo dwi ll= Average Profit (as this pur pos e, goo dwi ll is to be
~as e of fou r yea rs' average
goo dwi ll of a firm is to be valu ed at ~ee years' pur or fou r yea rs, whi che ver is high
er.
For exam ple, e t 15,000; t 11,00(). of goodwill fo,t he past : ; _
;:::er)e
firm in the previous four yea rs wer ujlS ,
ed by the The ann ual pro fit for t ~
J:, ~ --Ji1}V'!) [00_- ...... ·
profit. The prof its earn '
ll will be valu ed as follows: Year Ended C~
{ 18,000 and { 16,000. Goodwi 1
~
+ f_
16,000 -_ t 15, 000 31stMarch, 2018 ')
. t 15,000 + { 11,0 _+_
.:__00 { ........:.
18,0_ 00_ __ - - :::; ;;-- C,300
Average Profit = _ _..:.__ _ _ 31st March, 2017 - - --
----
4 31 ,200
ber of Years' Purchase

31st March, 2016
- ___ .J ,-42,20✓_.. - 1
Goodwill = Average Profit x Num 31st March, 2015
/,..~ ./
= t 15,QQQ X 3 = t 45,000. Calculate valu e of goo dwill. n : - -__ ..... -
CALCULATION OF AVERAGe-PJlOF
ran pur cha sed Anita's Solu tion : t
strati on 2 (Average Profit Method
when Past Adjustments are Made). Sim f Based on Past four years' Profits
~ yea rs' pur cha se of ave rage Based on Past three years' Profits
agreed to value goodwill at three 48,000
business on 1st April, 2018 . lt was for the last fou r yea rs were: 48,000 Year ended 31st March 2018 30,300
s. The profits of Anita's business Year ended 31st March, 2018
norm al profit of the last four year 30,300 Year ended 31st March 2017 31,200
f Year ended 31st March, 2017 Year ended 31st Ma rch 2016
31,200 42200
Year Ended Year ended 31st March, 2016 Year ended 31st March 2015
90,000 1,51,700
31 st March, 2015 1,09,500 Total Profit
1,60,000 Total Profit 4
31st March, 2016 3 Number of Years 37,925
1,80,000 Number of Years
31st March, 2017 36,500 Average Profit
2,20,000 Average Profit
31st March, 2018 it.
er than thre e yea rs' ave rage prof
of account that: Four yea rs' ave rage pro fit is high 25 x 2 = t 75,850.
It was observed from the books be two times of '{ 37,925, i.e., t
37,9
(profit) oft 10,000. Therefore, valu e of Goodwill will e). A, B and Car e par tner s
ch, 2015, an asset was sold at a gain hod when Past Adjustments are Mad
1. Du~ g the year end ed 31st Mar llus trat ion 4 (Average Profit Met
in accident and t 30 000 v equ al sha re. For this pur pos e,
ch, 2016, a machine got destroyed ally. The y agre e to adm it D for
2. Dun ng _the year end ed 31st Mar '
" sha ring prof its and losses equ
and Loss Account. fit of last five yea rs. Pro fits for
was wnt ten off as loss in Profit yea rs' pur cha se of ave rage pro
red d t . h goo dwill is to be valu ed at four
ch, 2017, firm's assets were not insu
3. During the year end ed 31stf Mar 00.
ue o overs1g t. the pas t five yea rs wer e:
Insurance premium being 10,0 31st March, 2017 31st March 2018
31st March 2015 31st March 2016
Year Ended 31st March 2014 (1,20,000)
1,40,000
Calculate the value of goodwill. Profit/(Loss) m 30,000 70,000 1,00,000
wrongly debited to Travelling
Sol utio n: CALCULATION OFNORMAL PROFIT
1st Apr il, 2017, 5 cycles costing t 20,000 were purchased and wer e
On alcu late valu e of ,f ~od wil l.
Profit m Adjustment m Normal Profit m es was.•t~>~ ~d~ 2.5.o/o.-C
Expe~ses. Dep reciatiQA,Do cycl
~vvo}J_ / ~ ~
Year Ended
31stMarch, 2015 90,000 (10,000) Sol uti~ of Normal Profit:

80,000 Profit/(Loss) ~)
31st March, 2016 1,60,000 30,000 Year Ended
1,90,000
31st March, 2017 1,80,000 (10,000) 30,000
1,70,000 31st March, 2014
31st March, 2018 2,20,000 70,000
l 2,20,000 31st March, 2015
31st March, 2016
1,00,000
-- -- 1-----.....:::==-=-=
Pr~ - f 6,60,00o
6,60,000
31st March, 2017
1,40,000
(1,05,000) (Note)
Average Profit= Toh/] Normal .:: = '{ 1 65,ooo
31st March, 2018
Number of Years - -..:......:.
4 , Total Normal Profit
2,35,000
Goo dwi ll= Average/Profit • N

r umber of Years' P Total Normal Profit '{ 2,35,000/5 = '{ 47,000
-
- '{ 1,65,000 x 3 = f 4,95,0oo
urchase Average Profit = N b fy
um ero ears
ber of Yea rs' Pur chase
1
).. •
I"
a_ a .
'Note: Insurance premium towa
rds insuring assets is a regular/ ·
from the profi t for the year ended
31st March, 2017 recurring expense
.Th,,.,,,,. I,
i, dedocted
Goo dwi ll = Average Profit x Num
= t 47,000 X 4 = '{ ] ,88,000.
r 2.8 Double Entry Book Keeping-CBSE XII
Note:
Calculation of adjusted loss for the year ended 31st
March,2018:
t
(1,20,000)
~ I
(ii) Weighted Average Profi t Method: Weig hted

weigh t is assign ed to each year and thereafter, norm
Chapter 2 • Goodwill: Nature and Valuation 2. 9
Avera ge Profit Meth od is a metho d where by

al busin ess profit of each year is multiplied
Loss for the year ended 31st March, 2018 20,000 . Recen t year's profit being more releva nt in
Loss Ne by the assign ed weigh t to determ ine the value
Add: Cost of Cycles wrongly debited to Profit and (1,00,000) r weigh t.
determ ining value of goodw ill, is assigned highe
(5,000)
Less: Depreciation @ 25°0 on t 20,000 (cycles) better as comp ared to Simp le Avera ge Profit
(1,05,000) Weigh ted Avera ge Profit Method is consi dered
s of recen t years.IThjs roetbod is pai:tiwJerly
Loss for the year Method as it gives more weightage to the profit
Illustration 5 emge Profit Method when Past Adjust
profi 'kquj . They admit C into partnership for equal
a , o ~et.'.
ments are Made). A and Bare partn ers shann
share. Goodwill was agree d to be value !
purchase of average profit of last four years. Profit
Yea,Jpded
s for the last four y ears Were:
t
--
effective when profits show; rising or falling t r
Steps invol ved in Valuation of Good will
Step 1: Calculate Normal Business Profit:
~
as follows:
~arch, 2015
70,000 , Profttl (Loss) for each of the Past Year: It is calculated
1,00,000 (1'!
(i) Take profit for each year.
31st March, 2016 55,000 (Loss) J
ed to Profit and Loss Acco unt. Such
31st March, 2017 ..J. (ii) Dedu ct abnormal gain (profit), if any, credit
1,50,000 . -
31st March, 2018 as gain (profit) on sale of fixed assets
follow s: g the year, if any.
The books of account of the firm revealed as (iii) Dedu ct recur ring expenses not incur red durin
the year ended 31st March, 2015. and Loss Account.
1. The firm had abnormal gain of'{ 10,000 during (iv) Add abnor mal loss, if any, debited to Profit
2. The firm incurred abnormal loss oft 20,000 during
the year ended 31st Mard1, 2016. past years by multip lying norm al p rofit by
Step 2: Calculate weigh ted Profit for each of the
ly debited to vehicles on 1st May, 2016. the respe ctive assigned weight.
3. Repairs t~ car amounting to t 50,000 was wrong
ht Line Method. the weigh ts.
Depre aation was charged on vehicles @ 10% on Straig Step 3: Calculate the total of the produ ct and also
-= off the year 2017-18.
in as follow s:
4. A Bad Debt oft 5,000 was omitted to be written Step 4: Calculate Weig hted Average Profit
Calculate the value of Goodwill. · ht d A verag e p ro fi t = --- of Weig--
Total --= Profit
hted-- -
W e1g e of Weig hts
Solution: CALCULATION OF NORMALPROFIT Total
YearEnded Profit/(Loss) m Adjustment' m Normal Profit m Step 5: Good will= Weig hted Average Profit x
Numb er of Years ' Purch ase.
31st March, 2015
31st March, 2016
31st March, 2017
31stMarch,2018
t 70,000
1,00,000
(55,000)
1,50,000
(10,000)
20,000
(45,000)
- - - --;,--
60,000 '
1,20,000
(1,00,000)
1,50,000
/ lllus tr,1tion 6. The profits of a firm for the last
Year Ended
Profit (t)
five years were:
31stMarch,2014 31stMarch,2015 31stMarch, 2016

40,000 48,000 60,000
31st March, 2017
50,000
31stMarch,2018
36,000
2,30,000 of three yea rs' purch ase of the weighted
Calcu late v~lue of g_oo~will on the basis
5 respe ctively to the profit s for years ended
Average Profit= Total Normal Profit_ t 2,30,000 avera ge profit after ass1grung weigh ts 1, 2, 3, 4 and
Number of Years - 4
= { 57,500 31st March, 2014, 2015, 2016, 2017 and 2018.
Value of Goodwill = Avera ge Profit , N b Solut ion:
- um er o~ ears' Purchase
- t 57,SQQ X 2 = '{ 1,15,000 Year Ended Profitm Weights Weighted Profit (t)
. . 8 C D=BxC
~~~~ A
d , 31st March, 2014 40,000 [ 1 40,000
I. Repairs expenses that should have been deb·t 1 e to Profit d 2 96,000
pend·t u an Loss Account 31st March, 2015 48,000
as expense but accounted a~ 31stMarch, 2016 60,000 3 1,80,000
debite d to Profit and ILo:;L oss to increa se by '{ 50,000 (50,000) 2,00,000
2. Depreciation wrongly 31stMarch,2017 50,000 4
Accou nt for the 5 1,80,000
Year ended 31st March, 201 7 31st March, 2018 36,000
1 ( Adjus tment
. .
3. Dep, ~•Mn
Bad Debts )
.
?.f.
to be made in profit for th e year en
yea<ended 31st M cl,dedJJ,t Matth 20!
ar ' 2018 (10%off 50,000') 7
5,000
(45,000)
5,000
Total
Weigh ted Avera ge Profi t= Total of Weig hted

Profit
Tot_al of Weig hts
{ 6,96,000
15
15
= '{ 46,400
6,96,000
AdJUstmenf to b made in profit for th of Years' Purch ase

e year ended 31st M (5,0Q0) Good will= Weighted Avera ge Profit x Num ber
\ arch, 2018 = '{ 46,400 X 3 = '{ 1,39,200.
~I 2.1 0 Dou ble Entry Book Keeping- CBSE
Illu stra tion 7 (Weighted Aver

goo dwi ll of a firm on the basis of thre
XII
age Profit Met hod when Past Adju

s'.menls are Mad e).
of the wei ghte d ave rage pro fit of
e year s' purc hase
the last
C~c uiat e the
2. Sup er Pro fit Met hod : Cap ital
rs
emp
earn
Cha pter 2 . Goo dwil l: Natu re and
loye d in a bus ines s yiel ds prof it.

less prof it or incu r loss on the
Valu ation
sam e amo unt of cap ital

2.1 1
Som e of the ente rpri ses
pro fit, whi le othe

s end ed 31st March were: earn mor e enta ge of the ca ital
four years. Profits of these four year en a sim ilar type of bus ines s earn s rofi t at a cert ain perc
31stMarch,2014 emp loye d. in the exc ess of the nor mal
31st March, 2012 31st March, 2013 ca e n orm a retu rn. But a buy er's adv anta ge lies
Year Ended emp loye d, 1 1
y goo dwi ll. The exc ess of
49,600 40,000
cap ital emp loye a:-I fis only suc h ente rpri ses whi ch enjo
Profit (fl 40,400 retu rn on mpl e, a firm has cap ital
ed 31st March are: 201 2-1; 20l 3-
2; 2011 - 3 and 201 5-4.
ove r the norm al prof it is kno wn as sup er pro fit. For exa
The weights assigned to each year end actu al pro fit
retu rn on cap ital emp loye d is 15%
, i.e., f 1,50,000 . Nor maJ
g additional information : 10,0 0,00 0 and its
You are prov ided with the followin f 12,0 00 Whi ch Was
emp loye d off
bus ines s is 10%, i.e., f 1,00,000.
The firm has sup er pro fit
(1) On 31st March, 2014, a majo
r plan t repair was und erta ken for_ retu rn on cap ital emp loye d in sim ilar
goo dwi ll calc ulat ion subject ,000).
char ged to revenue. The said sum
is to be capi talised for oft 50,000 (i.e., f 1,50,000 - f 1,00
p.a. on Reducing Balance Met hod
1 thre e valu es:
valued on the bas is of foll owi ng
to adju stme nt of depreciation of 10% rvaJ ued/ by f 4,800. Goo dwi ll, und er this met hod, is t few yea rs adju sted for
year end ed 31st Mar ch, 2013 was ove its of the bus ines s for the pas
(i1) The Closing Stock for the e for the pur po (i) Ave rag e Pro fits: Ave rage prof me, whi ch are ded ucte d
al charge off 9,600 shou ld be mad inte rest , etc.) and abn orm al inco
~ To cover man agem ent cost an annu <~ ... se non-bus ines s inco me (div iden d,
abn orm al loss es are add ed.
'.:"\_ ~f goo dwill valuation. and non -bus ines s exp ense s and retu rn nor mal ly earn ed by
CALCULATION OF ADJUSTED PROFIT mal Rat e of Ret urn is the rate of
Solu tion ; (ii) Nor mal Rat e of Return: Nor
31st March, 2012 (fl 31st March, 2013 (fl
31st March, 2014 m othe r firm s of sim ilar size and
natu re.
Particulars ' in the firm to carr y on
emp loye d mea ns cap ital inve sted
40,400 49,600 40,000 (iii) Cap ital Em ploy ed: Cap ital owi ng two met hod s:
Given Profits be calc ulat ed by any of the foll
bus ines s. Cap ital emp loye d may
9,600 9,600 9,600
Less: Annual Management Cost
30,800 40,000 30,400 50,400 (a) Liab ilities Side Approach: de Inv estm ents .
12,000 erve s - Fict itiou s Ass ets - Non -tra
Add: Capital Expenditure on Plant
42,400 50,400
-1
Cap ital Em ploy ed= Cap ital + Res
Approach:
II Less: Unprovided Depreciation on Plant
30,800 40,000
1,200 ~ (b) Asse ts Side
~ Cap ital Em ploy ed= AIL.Ass ets
(exc ept goo dwi ll, fict itio us asse
ts and Non -tra de
es.
30,800 40,000 42,400 49,200 Inve stm ents ) - Out side Liab iliti
Less: Overvaluation of Closing Stock 4,800
help of foll owi ng Bal ~ce She et:
d w ith the
30,800 35,200 42,400 49,200 Calc ulat ion of Cap ital Emp loye
, Assets
Add: Overvaluation of Opening Stock ...--i--_ _:!'4,800
.! Liabilities
Adjusted Profits
:::=::0 ---t----=:.....
, -~30,80 35,200 0 Land and Building
1,50,000
47,20 49,200 Capital Ncs:
- --- -1-- -1!3 .,;~
0~00!,!!0L ::
A 1,00,000 a "-""- --
-.!~~ rn.e nts (Ncm,~- ':'-"' 50,0 00
CALCULATION OF WEIGHTED PROFIT 8 1,00,000 2,00,000 Inve stme nts (Trade)
50,000
90,000
Year Ended Profits Cf)
+-
Weights Weighted Profit m Reserves
90,000
S tock 70,000
I • 31st March, 2012 30,800 Sundry Creditors Debtors
10,000
1 30,800 Outstanding Expenses 10,000 Cash in Hand
31st March, 2013 35,200 20,00 0
31stMarch, 2014 . 47,200
2
3
I 70,400 Cash at Bank
31st March, 201 s 49,200 I 1,41,600 Adve · _M
--~ -Hi
,!.!!..,:~~~ --- --- -4- -~- ~
.,,
_IO..
_)(]
4_ -1,96,800 J---c--::7-::--c----J '-'~.E Ui=.!.!J, 3,90,000
Total I 3,90,000
10
hted Profi t f -
Weig~ted Average Profit= Total of Weig hts - = _ 4, 39,6_QQ _ Capital Em ploy ed
. Tota l of Wei
- f 43,960 ital (Lia bili ties Sid e App roa ch):
Goodwill = Weighted Averagge Profit • Numb
10 (i) Star ting , wit h_Par tner s' Cap
- Partners Cap ital f
43,960 • 3 = f 1,31,880. er of Years' Purchase
Working Notes: - ' A 1,00, 000
B 1,00,000 2,00,000
l . Depreciation on Plant for the year ended 3 st . .
March, 2014 itself. i March, 20 14 15 Add: Res erve s 90,0 00
out on _31st .
Nr/ as the rn aJor repa ·
2. Depr. ecration on Plant for th e year end d rrs Were carri ed 2,90 ,000
d e 31st March
3· Closrng Stock of the year end 2015 - 1
e 31st Ma reh, 2013 Will b - O% oft 12 ooo _
,
Less: Fict itiou s Ass ets (Ad vert
isem ent Sus pen se) 10, 000
h, 2014. ecorne o . ' - t 1' 200. ents 40,0 00
Pen,ng Stock Non -Tra de Inve stm 30,0 00
of th e year ende d
Cap ital Em ploy ed 2,50,000
2.12 Double Entry Book Keeping-CBSE XII Chapter 2 . Goodwill: Nature and Valuation 2.13
(ii) Starting with Total Assets (Assets Side Approach): Super Profit= Average Profit- Normal Profit
(iii)
Total Assets (Total of Assets Side) 3,90,00o = t 20,000 - t 6,000 = t 14,000
10,000
Less: Fictitious Assets (Advertisement Suspense) Goodwill= Super Profit x Number of Years' Purchase
30,000 (iv)
Non-Trade Investments 90,000 = t 14,000 X 3 = t 42,000.
. M de) Alok and Aakash are
Sundry Creditors lO,OOO J)lustration 9 (Super Profit M~thod when Past_ Adju~tments are a .f 1st A ril, 2018. They
Oustanding Expenses - -- ~ partners in M/s Mega Enterpnses. They admit Ashish as p~rtner w;·/
r whi~h they decided
a reed to value goodwill at 3 years' purchase by Super Profit ~etho o .
Capital Employed . Q~
tJ take average of last 5 years profits. The profits for the last five years were.
• average capital• employed 1s • cons1·dered for calculating value of goodwill· n.,_ "US IS
.
Sometimes
changes frolll Year ended t
because of the reason that profit is earned during the year and capital employed 2,00,000 (lncludl·ng gain oft 25,000 from sale of fixed asset)
31st March, 2014
time to time. Jlst March, 2015 1,70,000 (Including abnormal loss oft 50,000)
Goodwill under this method is calculated by multiplying super profit with lite agreed number ofyears'purcJrast. 31st March, 2016 2,10,000
For calculating goodwill under this method, the steps are: 31 st March, 2017 2,30,000
31st March, 2018 2,50,000
l. Calculate Average Capital Employed ns follows: 1-, Capital employed in the firm is t 15,00,000 and normal rate of return in similar business is 10%.
~ening Capital Employed+ Closing Capital Employed ) Calculate value of goodwill.
2
Solution:
Capital Employed =Capital+ Reserves - Non-trade Investments - Fictitious Assets (if any) CALCULATION OF NORMAL PROFIT
1.
Or
All Assets (other than goodwill, fictitious assets and non-trade
investments) - Outside Liabilities.
2. Calculnte adjusted average profit: Profit earned by a firm for the year is adjusted for abnormal
Year Ended
31st March, 2014
31st March, 2015
31st March, 2016
Profitm
2,00,000
1,70,000
2,10,000
7 Adjustment m
(25,000)
50,000
Normal Profit m
1,75,000
2,20,000
2,10,000
2,30,000
gains and losses, if any and recurring expenses that have not been incurred. The profit 50 31st March, 2017 2,30,000
31st March, 2018 2,50,000 2,50,000
determined is totalled and is averaged. 1---~o~,8·s,ooo
3. Calculate normal profit or retum 011 average cnpitnl employed by applying the following formula:
35
Normal Profit( Average Capfal Employel j Normal Rate of Return. Average Profit= '{ l0, ,000 = '{ 2,17,000.
5
d b h filOO .
Note: Normal Rate of Return means the rate of return normally ea 2. Cnlculntion of Normal Profit:
me Y ot er rrms ,n the same industry
4. Calculate Super Profit, i.e., Adjusted Average Profit_ Normal Profit. · Capital Employed x Normal Rate of Return
Normal Profit =
5. Calculate value ofgoodwill as follows: 100
Goodwill = Super Profit" Number of y ,p h t 15,00, 000xlO = '{I 50 OOO.
. ears urc ase 100 '
illustration B(Super Profit Method). A firm d . · I
eame net profit d .

Year I
s urmg the last three years as: 3. Cnlculation of Super Profit:
II Super Profit= Average Profit - Normal Profit
Profit m l B,OOO Ill
·t J ·
The cap1 a investment of the firm is f 20,000 22,000 = '{ 2,17,000 - '{ 1,50,000 = '{ 67,000.
60 000
value of goodwill on the basis of three ye:rs'. Normal return on the capital is 10% C J I t 4. Vn/11e of Goodwill= Super Profi t x Number of Years' Purchase
three years. purchase of the average o. a cu a e
super profit for the last = '{ 67,000 x 3 = '{ 2,01,000.
.
So 1u t10n:
lllus tration 10 (Super Profit Method). Average n et profit of XYZ expected in the future is
(i) Average Profit= ~ t 54,000 per year. The average capital employed in the business is '{ 3,00,000. Normal profit
expected from capital invested in this class of business is 10%. The remuneration of the partners
(ii) Normal Profit s t 60 000
3
• ~ 20,000 is estimated to be '{ 9,000 p .a.
I 101100
)( Q ~ 6,0oo
Find out the value of goodwill on the basis of two years' purchase of super profit.

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- · -CBSEXII

1.44 Double Entry Book Keeping

I 8 It) Particulars A~) -

Add. OrJwings made ur

d (credite d ) [1 /2 ('{ 60,000 - f 40,00 0)]

2. Profit during the year wast 60,000 out of which . .

Balance Sheet. Thus, in effect, only t 20,000 were distrib uted

ustration 31 (Calrnlation of Interes t on Capital, Drawi

- - - I r - CALCULATION OFOPENING CAPITAL

Working Nott: Profit to be distributed:

March 31 By Profit and Loss I

1.52 Doubl e Entry Book Keeping -CBSE XII Cr.

16,000 16,000 16,000 By Interest on Capital Ne

(A) When an Adjus tment Entry (Sing

March 31 Shristhi's Capital A/c

LF. Dr.('{) Cr.m

Y-t 8,000 and Z-t7,000 . Their

Ill. Difference (I - 11) 250 (Cr.) 600 (Dr.) I 350 (Cr.)

44 (Interest on Cllpital Wrongly Provided in the Accou

31st March, 2017 and 31st March, 2018. Their fixed

Interest on Capital wrongly

credited @10% p.a. 2018 ...Dr. 600

artners Solut ion:

Solut ion: ADJUSTMENT ENTRY 3. STATEMENT SHOWING ADJUSTMENTTO BE MADE

ADJUSTMENT ENTRY Accoun ting Entries

2,50,000 1,40,000 1,50,c:~·(~,000 I 2,00,000 I 2,60,000 I 6,00,000 ... 2018

2. (i) Profit after interest on Capital= t

- -..!.\-/L .--_ ---- 1::: :~----£._.~ ¥ -~ H~

(iv) In the absence of an agreement to the contrary, the partners are

To Interest on X's loan Ale

~~-- relation s, etc.

Amrit Daily Needs lo earn the same

~ Value of goodwill is·

(As it is not related lo normal business activ

•~ f) :y;-~ l Q..,oJ,A v"y (... )

losses in the ratio of 3 : 2 : 1.

ber of Years' Purchase

31stMarch, 2015 90,000 (10,000) Sol uti~ of Normal Profit:

Goo dwi ll= Average/Profit • N

(ii) Weighted Average Profi t Method: Weig hted

Avera ge Profit Meth od is a metho d where by

31stMarch,2014 31stMarch,2015 31stMarch, 2016

Weigh ted Avera ge Profi t= Total of Weig hted

AdJUstmenf to b made in profit for th of Years' Purch ase

Illu stra tion 7 (Weighted Aver

age Profit Met hod when Past Adju

loye d in a bus ines s yiel ds prof it.

sam e amo unt of cap ital

Som e of the ente rpri ses

pro fit, whi le othe

eame net profit d .

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