Advance-Accounting

M.Com 1st Sem.
Subject- Advanced Accounting
SYLLABUS
Class – M.Com. I Sem.
Subject – Advanced Account
UNIT – I Advanced problems of Final Accounts
UNIT – II Advanced Problems of Bank Reconciliation Statement,

Rectification of Errors, Accounting for Non Profit Organisation.
UNIT – III Accounting from Incomplete Records, Accounting for

Insurance Claim.
UNIT – IV Investment A/c, Voyage A/c, Insolvency A/c.
UNIT – V Dissolution of partnership firm including sales of Firm and

Amalgamation.
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
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M.Com 1st Sem. Subject- Advanced Accounting
UNIT-I
FINAL ACCOUNTS
According to American Institution of Certified Public Accountant Committee:-

“Accounting as the art of recording, classifying and summarizing in a significant manner and in terms of
money transactions and events which are in part at least, of a financial character, and interpreting the
results thereof”.
From the above definition, it can be said that “Accounting is science of recording and classifying trading
transaction of financial nature and is an art in which financial results are summarized and interpreted.”
Characteristics of Accounting
1) Accounting is science as well as an art.
2) The transaction and events relating to financial nature are recorded in it.
3) All transaction and events are recorded in monetary terms.
4) It maintain complete, accurate, permanent and legible records of all transaction in a systematic
manner.
5) It analyses the results of all the transaction in detail.
Objectives of Accounting
1. To Maintain a Systematic Record
Accounting is done to maintain a systematic record of the monetary transactions of the firm which is
the initial step leading to the creation of the financial statements. Once the recording is complete, the
records are classified and summarized to depict the financial performance of the enterprise.
2. To Ascertain the Performance of the Business
The income statement also known as the profit and loss account is prepared to reflect the profits
earned or losses incurred. All the expenses incurred in the course of conducting the business are
aggregated and deducted from the total revenues to arrive at the profit earned or loss suffered during
the relevant period.
3. To Protect the properties of the Business
The information about the assets and liabilities with the help of accountancy, provides control over
the resources of the firm, because accounting gives information about how much the business has to
pay to others ? And how much the business has to recover from others?
4. To Facilitate Financial Reporting
Accounting is the precursor to finance reporting. The vital liquidity/solvency position is
comprehended through the Cash and Funds Flow Statement elucidating the capital transactions.
5. To Facilitate Decision making
Accounting facilitates in decision making. The American Accounting Association has explained this
while defining the term accounting, it says accounting is, the process of identifying measuring and
communicating economic information to permit informed judgments and decisions by users of the
information.
Accounting As Science and Art

Accounting is both a science and an art. Science as well we know is the systematical body of knowledge
establishing relationship between causes and their effects. In other words, science has its own
concepts, assumptions and principles which are universal and verifiable. Accounting as discipline has
also its own assumptions, concepts and principles, which have got universal application. Accounts have
systematically and scientifically developed accounting equation and rules of debit and credit. It makes
accounting, Science.
Art is the practical application of the knowledge. Accounting as discipline is used in the maintenance of
books of accounts practically in the real life situations and day-to day affairs of the business, so it is an
art also. It can now be safely concluded that Accounting is both science and an art.
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BOOK-KEEPING
Book-Keeping is the proper and systematic keeping or maintenance of the books of accounts. Book-
Keeping starts from the identification of business transactions. These transactions must be supported
by the documents and they must be financial in nature. For example, selling goods for cash in an
accounting transaction, because cash is received and goods are going outside the business. The
transaction will increase cash and reduce goods.
Book-Keeping involves the following process:
1. Identifying accounting transactions
2. Initial record of accounting transactions
3. Preparation of ledger accounts
4. Balance Ledger accounts
5. Preparation of trial balance
DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING

S.No Basis of Difference Book-Keeping Accounting
1 Transaction Trading transactions are recorded in Entries written in primary books
primary books. are checked and verified.
2 Posting Entries are posted in ledger from Posting are checked whether
journal and subsidiary books correctly posted or not.
3 Total and Balance It includes totaling of journal and On the basis of balances of ledger
finding of balances of ledger. final accounts are prepared
4 Objects The object of Book-keeping is to The object of accounting is to
write all trading transactions in a analyse the transactions written
reasonable manner. in the books.
5 Adjustments and In Book-keeping entries of
Rectification of adjustments and rectification of Accounting includes entries of
errors errors are not included. adjustments and rectification of
6 Scope of Book keeping is narrow. errors.
Scope Scope of Accounting is wide.
7 Final Account is not prepared in Final account preparation is
Final Accounts Book-Keeping. must.
Final Accounts
The final object of every businessman is to earn profit. He is interested to know how much profit he
has earned or how much loss he has incurred during the year. For the purpose income tax payment,
financial position, distribution of dividend and for the future planning it becomes necessary to
ascertain the profit or loss for the year. At the end of the year a trial balance is extracted from the
ledger balances and then on the basis of the trial balance, closing entries are passed and final Accounts
are prepared. The process of preparing Final Accounts from the original records is as under.
Recording of transaction in Journal or Subsidiary books


Postings into ledger from Journal or subsidiary books.

Preparation of Trial balance from ledger accounts

Preparation of Final Accounts on the basis of Trial balance and other information
To know the trading results (Profit or loss) for the accounting period and the financial position as it the
end of accounting period the final accounts are prepared. The final accounts consists of :
1. Manufacturing Account
2. Trading and Profit & Loss Account
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3. Balance sheet
The followings points must be considered while preparing final accounts from trial balance
1. Debit items of Trial Balance:- The items of expenses or assets appear on debit side of Trial balance.
The expenses (the benefit of which is derived within the accounting year in which they are incurred
are called revenue expenses. These are debited either to trading account or profit & Loss Account.)
Direct expenses such wages. Carriage inwards, freight etc. are debited to trading and indirect exp.
such as salaries, rent repairs etc. are debited to profit & Loss account.
The expenses the benefit of which is derived in many years are called capital expenditure. These
expenditure are called assets and they appear in the assets side of Balance sheet e.g. Building,
Machinery, Furniture, Vehicle etc.
2. Credit items of Trial Balance: The items of incomes, gains or liabilities appear in the credit side of
trial balance. The receipts are divided into two parts capital receipts and revenue receipts. Capital
receipts are liabilities items they are mentioned in the liabilities side or deducted from the assets
side of Balance sheet. Revenue receipts are called incomes. It is again divided into direct and
indirect incomes. Direct incomes means sale proceeds of the goods which is credited to Trading
Account. Indirect incomes are other incomes not directly related to the main business activities
such as rent commission, interest, dividend etc received. These are credited to profit and loss
account.
Trading Account
Trading Account is prepare to calculate gross profit. It can be prepared separately or combined with
profit and loss account. Normally it is prepared jointly with profit and loss account. It is the first part of
profit and loss account.
Trading Account A/c
For the Year ending…………………..
Rs. Rs.
To Opening Stock - By Sales -
To Purchase - Less: Returns Inward - -
Less: Ret. Outward - - --------
------ By Goods Sent on Consignment
To Wages - By Closing Stock -
To Carriage - By Gross Loss c/d -
To Fuel - (Balancing figure )
To Motive Power -
To Octroi -
To Import Duty -
To Clearing Charges -
To Dock Charges -
To Stores Consumed -
To Royalty based on Production - -
To Manufacturing Exp.
To Gross Profit c/d (Balancing figure) - -
Rs. - Rs. -
Profit and Loss Account

Profit and loss accounts is prepared to ascertain net profit or loss. This is the second stage of
ascertaining trading results. Gross Profit calculated as per trading account is credited to Profit and loss
account then all the indirect expenses are debited and all the indirect incomes are credited. The excess
of credits side over debit side is called net Profit and vice versa. The format of P & L account is as
under:
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Profit and Loss A/c

(For the year ending)
To Gross Loss - By Gross Profit -
To Office Salaries & Wages - By Discount received -
To Office Rent, Rates and Taxes - By Bad debts recovered -
To Office Printing and Stationery - By Income from Investment -
To Office Lighting - By Commission received -
To Insurance Premium - By Interest on Deposits -
To Repairs & Maintanance - By Profit on sale of fixed assets -
To Postage & Telegram - By Apprenticeship Premium -
To Legal expenses - By Interest on Drawings -
To Trade expenses - By Net Loss (Transferred to -
To Audit fees - Capital Account)
To Telephone expenses -
To General expenses -
To Bank Charges -
To Discount allowed -
To Interest on Capital -
To Interest on loan -
To Discount of Rebate on bills of exchange -
To Carriage outward -
To Freight outward -
To Bad debts -
To Entertainment expenses -
To Travelling Expenses -
To Cost of Samples -
To Catalogue expenses -
To Salesmen’s salaries -
To Expenses and commission -
To Advertising expenses -
To Depreciation on fixed Assets -
To Loss on sale of fixed assets -
To Net Profit -
(Transferred to capital account)
Rs. Rs.
Balance Sheet
As on 31 March ………………
Liabilities Rs. Assets Rs.
Capital - Fixed Assets: -
Long term liabilities - Patent -
Debentures - Goodwill -
Bank Loan - Land and Building -
Current Liabilities: - Plant & Machinery -
Advance Income - Furniture and fixtures -
Outstanding expenses - Current Assets: -
Bank overdraft - Short terms Investment -
Bills Payable - Prepaid expenses) -
Creditors - Accrued Income --
Unearned Income - Debtors -
Closing Stock -
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Bank Balance -
Cash Balance -
Closing Entries
At the end of the year after preparing trial balance a list of unrecorded items is prepared which is called
list of adjustment for which adjustment entries are passed. Now closing entries will be passed. The
purpose of closing entries is to closed all those accounts which comes in trading and profit & Loss and
these accounts are mainly related to goods and expenses and incomes.
Procedure for closing entries- The accounts which are shown on the debit side of trading and profit &
Loss account are transferred to these account by writing “By Trading account/Profit and loss account”
in all those accounts. Similar in the accounts (appearing on the credit side of trading and profit and loss
account) To trading or profit & Loss account is written The major closing entries are as under:
(1) For opening stock, purchase, sales return and all direct expenses
Trading A/c Dr.
To Opening Stock A/c
To Purchases A/c
To Sales return A/c
To Wages a/c
To Carriage Inward A/c
(2) For sales and purchase return
Sales A/c Dr.
Purchase return Dr.
To Trading A/c
(3) For gross profit or loss:
(a) Profit Trading A/c Dr.
To Profit and Loss A/c
(b) loss Profit and loss A/c Dr.
To Trading Account
(4) For indirect expenses
Profit & Loss A/c Dr.
To Salaries A/c
To Commission a/c
To Discount allowed a/c
To Advertisement A/c
(5) For indirect in comes and gains
Interest eared a/c Dr.
Discount a/c Dr.
Commission a/c Dr.
Divident a/c Dr.
To Profit & Loss A/c
(6) For Net profit or net loss
(a) For Net Proift
P & L A/c Dr.
To Capital A/c
(b) For Net loss A/c
Capital A/c Dr.
To P & L Account
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Adjustments at a glance
S.No. Adjustments Entry Effects on Trading and Effects on
Profit & Loss Account Balance Sheet
1 Closing Stock Closing Stock A/c Dr. Credited to trading A/c Shown on
To Trading A/c assets side.
2 If closing Stock is given in - - Shown on
trial balance assets side.
Outstanding expenses Expenses A/c Dr. Add to the concerned exp. Shown on
(Expenses still un paid) To O/s Exp. A/c on debit side. liabilities side.
(i) O/S Exp. in trial Balance O/S Exp. A/c Deducted form the -
If they are of opening date To Expenses A/c concerned expenses on
i.e. of last year debit side.
(ii) If they are of closing date - - Shown on
i.e. of current year. liabilities side.
3 Prepaid Expenses: P.P. Expenses A/c Dr. Deducted from the Shown on Assets
(Expenses of next year paid To Expenses A/c concerned expenses on side
in advance this year) debit side.
(i) P.P. Exp. in trial balance. Expenses A/c Dr. Added to the concerned -
If they are of opening date i.e. To P.P. Exp. A/c expenses on debit side
of last year
(i) If they are of closing date i.e. - - Shown on assets
of last year side.
4. Accrued, Earned or Acc. Income A/c Dr. Added to the concerned Shown on assets
Receivable Income To Income A/c income on credit side of side.
P & L A/c
(i) If it is of op. date i.e. of last Income A/c Dr. Deducted from -
year To Acc. Income a/c concerned income on
credit side of P & L a/c.
(ii) If it is of closing date i.e. of - - Shown on assets
current year side.
5. Uncured, unearned or Income A/c Dr. Deducted from the Shown on
advanced income (Income of To Unacc. Income a/c concerned income on liabilities side.
next year received in advance the credit side of P & L
this year.) a/c
Unacc. Income in trial Unacc. Income A/c Dr. Added to concerned -
(i) balance- To Income a/c income on credit side of
If it is of op. date i.e. of last P & L A/c
year
(ii) If it is of closing date i.e. of - - Shown on
current year liabilities side.
6. Depreciation Depreciation A/c Dr. Shown on the debit side Deducted from
To Assets a/c of P & L A/c the concerned
assets side.
Dep. in trial balance - Debited to P & L A/c -
7. Interest on Capital/Loan Int. on Cap./loan A/c Shown on the debit side Added to
Dr. of P & L A/c capital/Loan on
To Cap./loan A/c liabilities side.
Interest on capital/Loan in - Shown on the debits side -
trial balance of P & L a/c
8. Interest on Drawings. Drawings. A/c Dr. Shown on the credit side Deducted from
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To Int. on Drawings of P & L A/c capital on

liabilities side.
9 Credit purchases not Purchase A/c Dr. Added to purchases on Added to
recorded To Creditor’s A/c the debit side of Trading creditors on
A/c liabilities side.
10. Credit purchases return not Creditor’s A/c Dr. Deducted from Deducted from
recorded. To P/R a/c purchases on the debit creditors on
side liabilities side.
11 Credit sales not recorded Debtor’s A/c Dr. Added to sales on the Added to debtors
To Sales A/c credit side of Trading on assets side.
A/c.
12. Credit sales returns not S/R A/c Dr. Deducted from sales on Deducted form
recorded. To Debtor’s A/c the credit side of debtors on assets
Trading A/c. side.
13. Goods given as charity or free Charity/Adv. A/c Dr. i. Deducted from -
samples To Purchases purchases/credited to
Trading A/c trading A/c
ii. Shown on the debit
side of P & L A/c
14. Drawings of goods by owner Drawings A/c Dr. Deducted from Deducted from
To Purchases/Trad. purchases credited to capital on
A/c trading A/c liabilities side.
15. Goods stolen/damaged by Ins. Co. A/c Dr. 6000 i. Rs. 10,000 deducted Rs. 6,000 shown
fire: P & L A/c Dr. 4000 from on assets side as
Example : Goods of Rs. To Purchases/ purchases/credited to Insurance Co.
10,000 stolen, claim accepted Trad. A/c 10,000 Trading A/c
6,000 ii. Rs. 4,000 debited to P
& L A/c
16. Goods in transit:
(Goods bought yet in transit)
i. If it is already included in Goods in transit A/c Credited to Trading A/c Shown on assets
purchases Dr. side.
To Trading A/c
ii. If it is not already included i. Purchases A/c Dr. ii. Credited to Trad. A/c ii. Shown on asse.
in Purchases. To Creditor’s A/c Side.
(Note: If nothing is cleared in ii. Goods in trans. A/c
the sum, a note must be Dr.
given. To Trading A/c
17. Goods sold on approval basis: i. Sales A/c Dr. 600 i. Rs. 600 deducted from i. Rs. 600
Example- Goods costing Rs. To Customer 600 sales on credit side of deducted from
500 sold on approval for Rs. Note- This entry is Trading A/c debtors on assets
600 which is recorded as passed by sale price. side.
actual sales.
ii. Stock on approval ii. Rs. 500 (Being lower ii. Rs. 500 (Being
a/c Dr. 600 of cost or market price) lower of cost or
To Trading A/c 600 are shown on credit side market price) are
Note- This entry is of Trading A/c shown on assets
passed by lower of the side.
cost or market price of
the goods sold.
18. Purchase of assets: - i. Shown on
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a. Not rerecorded at all Assets A/c Dr. assets side.

To vendor ii. Shown on lib.
Side
b. Wrongly included in Asset A/c Dr. Deducted from Shown on assets
purchases A/c To Purchases A/c purchases on debit side side.
of Trad. A/c
c. Installation charges included Asset A/c Dr. Deducted from wages on Added to the
in wages A/c To Wages A/c debit side of Trad. A/c concerned asset
on assets side.
d. Depreciation on the above Depreciation A/c Dr. Debited to P & L A/c Deducted from
asset. To Asset A/c the asset on
assets side.
19 Over/under valuation of The Difference is either The Difference is
stock: Capital A/c Dr. deducted from op. stock deducted from
a. Over valuation of Opening To Op. Stock/Trad. or credited to Trading capital on
Stock. A/c A/c liabilities side.
b. Under valuation of opening Op. stock/Trad. A/c The Difference is either The difference is
stock. Dr. added to op. stock or added to capital
To Capital A/c debited to Trading A/c on liabilities side
c. Over valuation of closing Trading A/c Dr. The Difference is either The difference is
stock. To Cost stock A/c deducted from clo. Stock added to closing
or debited to Trading stock.
A/c
20. Personal use of business Drawings A/c Dr. 700 P & L A/c – i. Liab. Rs. 700
assets: To Car Exp. A/c 500 To Car Exp. (2000×75%) deducted from
Example- 25% of the use of To Car Dep. A/c 200 1500 Cap.
business car is for personal To Car Dep. ii. Assets: Rs. 800
purposes. Car exp. Rs. 2000 (800×75%)600 deducted from
and deprecation Rs. 800 car.
21. Cheque/B/R/ received from Bank/B/R/ A/c Dr. Assets Side:
debtors: To Debtor’s A/c i. Deducted from
deb.
ii. Added to
Bank/B/R.
22. Dishonour of Cheque/ B/R Debtor’s A/c Dr. - Assets Side:
received from debtors To Bank/B/R A/c Add to debtor
deducted from
Bank.
23. Dishonour of Debtor’s A/c Dr. - i. Assets side :
discounted/endorsed B/R To Bank/Creditors’ added to debtors
ii. Deducted from
bank on assets
side/added to
creditors on
liabilities side.
24. Discounting of a B/R due - - Liabilities side :
next year. shown below
total in inner
column as
contingent
liabilities.
25. Deposit from debtor wrongly Debtor’s A/c Dr. - i. Assets side :
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deducted from debtor’s A/c To Deposit from Added to

debtors A/c debtors.
ii. Liabilities side
:
Added to
creditors
26. Settlement with creditors: - - -
Example: A creditor for Rs.
400 is settled at Rs. 320.
a. If it is assumed that payment Creditors A/c Dr. 80 P & L A/c: Liabilities side:
of Rs. 320 is recorded but To Discount 80 By Discount A/c 80 Rs. 400 deducted
discount is not recorded. from creditors.
b. If it assumed that whole the Creditors A/c Dr. 400 P & L A/c: Liabilities side:
transaction is omitted. To Bank A/c 320 By Discount A/c 80 Rs. 400 deducted
To Discount 80 from creditors.
Asset side : Rs.
320 deducted
from bank
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UNIT-II
Bank Reconciliation Statement
Theoretically speaking there should not any disagreement between cash book (Bank Balance) and pass
book Balance (Bank Statement), as all banking transactions are recorded in the both the books. But
generally it is found that bank balance as per cash book does not tally with bank balance as per pass
Book or Bank statement. Hence to reconcile (to match/to make compatible) the above balances and
explaining the reasons for the difference between them ‘Bank reconciliation statement is prepared.
Definitions
According to Batliboi
“A Reconciliation statement is, prepared at periodical intervals with a view to indicate the items which
cause such agreement between the balance as per the Bank columns of the cash Book and the Bank
pass book on any such date’.
According to R.G. Williams

‘A statement is prepared to tally balance shown by bank for customer and balance of bank shown by
cash book of the customer is called bank reconciliation statement.’
Characteristics/Features of Bank Reconciliation statement

1. It is prepared by the customer (trader), i.e., holder of the account.
2. It contains a complete and satisfactory explanation of the difference in balances as per the Cash
Book and Pass Book (Bank Statement)
3. Normally it is prepared on closing date of accounts, i.e., Dec. 31 or Jan. 30, or March 31.
4. Sometimes it is prepared at the end of the every month after preparing Cash Book or regularly
after certain interval to check the accuracy of Cash Book.
5. It is neither a journal nor a ledger.
6. It is prepared in a statement form with the vertical presentation of facts.
7. It starts with a given balance of any book and ends with balance of other book, e.g., if it starts
with Balance as per Cash Book, then ends with Balance as per Pass Book.
8. For arithmetical calculations all the reasons are grouped in ‘ADD’ and ‘LESS’ categories
respectively. It can be prepared by preparing plus Minus columns.
9. It shows causes of disagreement and amount thereof.
10. It is not legally compulsory to prepare Bank Reconciliation Statement.
11. It shows the bank balance as per Cash Book or Pass Book (Bank Statement) at the end of the
period.
Objectives/Importance/Need/Advantages of preparing B.R.S.

(i) To know the accuracy of entries in the Cash Book and the Pass book
(ii) To know the errors in Cash Book and Pass Book.
(iii) Check on the embezzlement of cash
(iv) Mechanism of Internal control
(v) Trace the ignorance, mistakes done by employees of bank who prepare pass book and
cashier who prepares Cash Book
(vi) Control time lag of transactions taking place.
Nature of Balance
Positive Balance = Debit balance of cash book Credit balance of Pass Book
Negative Balance (overdraft) = ● Credit balance of Cash Book Debit balance of Pass Book
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Preparation of Bank Reconciliation Statement

Taking Balance as per cash book: When we start with the balance as per cash Book we have to see
the impact on Pass Book balance. The items which increase pass book balance are added and which
reduce pass book balance are deducted.
Taking Pass Book Balance-
When we start with Pass Book Balance we have to see the impact on Cash Book. The items/transactions
which increase cash book balance are added and transactions which reduce cash book balance are
deducted.
Causes of difference between the Balances of cash book and Pass Book
I. Transactions which have been recorded in cash book but not in Pass Book.
(i) Cheques/drafts issued but not presented for payment
(ii) Cheques/Bills/drafts etc sent to bank for collection but not collected.
(iii)
II. Transactions which have been recorded in Pass Book but not recorded in Cash Book.
(i) Interest allowed on credited by Bank
(ii) Bank commission, Bank charges, interest on overdraft charged by Bank.
(iii) Collection of dividend and interest and receipt of direct payment from Debtors.
(iv) Direct payment by Bank
(v) Dishonour of Discounted Bill
(vi) Bills receivable directly collected by Bank
(vii) Retiming a bill under rebate
III. Error in Cash Book
(i) Error of omission such as cheque/cash deposited into Bank but not recorded in the cash
book, cheques issued but not entered in the Cash Book, Cash withdrawn from the bank but
not entered in the cash book.
(ii) Error of recording such as cheque deposited into bank but entered in the cash
column/Discount column, cheque deposited into bank but recorded in the Bank column on
the payment side of cash book, amount of deposit differs from actual amount of cash or
cheque in cash book.
(iii) Error of over/under casting of bank column of cash book.
(iv) Error of carry forward of balance
(v) Cheque received from debtor recorded in cash book but not deposited into bank for
collection.
IV Error in Pass Book

(i) Error of omission such as cheques & bills collection by bank but not entered in pass book on
wrong posting in another customer’s account.
(ii) Error of recording such as Deposit recorded on withdrawal side and vice versa, amount of
deposit differs from actual amount in Pass Book.
(iii) Error of under/overcastting of Deposit column/withdrawal column.
(iv) Error of carrying forward.
(v) Cheque received from customer but not recorded in customer’s Account.
RECTIFICATION OF ERRORS
Financial Accounts are prepared at the final stage to give the financial position of the business on the
basis of information supplied by the trail balance. Thus, the accuracy of the trail balance determines to
a great extent. Trial balance provides only proof of the arithmetical accuracy of the books of accounts.
But it is not a conclusive proof.
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It can be concluded, therefore, that if the trial balance does not agree, there are errors, and if
trial balance does agree there may be errors in the account books.
TYPES OF ERRORS
The types of errors can be illustrated in the following chart:
ERRORS
Errors of Errors of Errors of Compensating

Principle Omission Commission Errors
Complete Partial
Omission Omission
Rectification of Errors –
The errors must be rectified at the earliest from the point of view of rectification, the errors may be
classified into the following two categories :
(a) Error which do not affect the Trail balance
(b) Errors which affect the Trail balance
This distinction is relevant because the errors which do not affect the trial balance usually take place in
two accounts in such a manner that is can be easily rectified through a journal entry whereas the errors
which affect the trial balance usually affect one account and a journal entry is not possible for
rectification unless a suspense account has been appended.
Rectification of Errors which do not affect the trail Balance –

These errors are committed in two or more accounts. Such errors are also known as two sided errors.
They can be rectified by recording a journal entry giving the correct debit and credit to the concerned
accounts.
These errors are explained below:
1. Errors of Omission- An errors of omission is one where a transaction has not been recorded in the
books of account.
For example omission to record goods sold to Rajesh, the rectify entry is
Rajesh A/c Dr.

To Sales
(Being goods sold was not passed through books)
2. Error of Recording – Errors of recording means a wrong amount is recorded in the subsidiary
books.
For e.g. a purchase of Rs. 8,000 to Mahesh is recorded as Rs. 800.
The rectifying entry will be –
Purchases A/c Dr. 7,200

To Mahesh 7200
3. Errors of Posting to wrong Account- Following are the errors of posting to
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wrong account.
(a) Correct Amount on the correct side to wrong account
(b) Wrong Amount on the correct side to wrong account
(c) Wrong Amount on the wrong side to wrong account
(d) Correct Amount on the wrong side to wrong account
For e.g. Sales to Ravina Rs. 10,000 is posted to Ravi’s A/c Rectify entry is
Ravina Dr. 10,000

To Ravi 10,000
4. Error of Principle- Sometimes errors of recording are made due to ignorance of principles, i.e.,
correct distinction is not made between capital receipt and revenue receipt, between capital
expenditure and revenue expenditure, between capital losses and gains and revenue losses and gains
etc.
For e.g. Furniture purchased on credit wrongly recorded in purchases book

Rectify entry is –
Furniture A/c Dr.
To Purchases A/c
Rectification of Errors which affect the trial balance :-.

There are some errors due to which the trail balance does not agree. These are the errors which are
disclosed by the trial balance. These errors are also called one-sided errors.
Such errors should first be located and then rectified by giving an explanatory note or by giving a
journal entry with the help of a suspense account
Following are some errors responsible for disagreement of trial balance
(1) Errors of Casting – Casting is the process of totaling the transactions at the end of a period. An
error of casting may be due to over casting or under casting. This type of errors may arise in any
subsidiary book.
For e.g. If the sales book has been under cast by Rs. 100 The rectification of the error will be
done by crediting sales account.
(2) Errors of Posting – Errors of posting means a posting of wrong amount or posting in the wrong
side.
For e.g. Raj’s account is debited with Rs. 750 instead of Rs. Rs. 705 the mistake lies only in this
account. This will rectified by crediting Raj’s A/C with 45. If there is a suspense A/c, the entry
will be
Suspense A/c Dr. 45

To Raj 45
(3) Errors of Carry forward - The errors occurs when total of one page is wrongly copied on the
next page. In order to rectify such errors, an explanatory note is given and if the suspense A/c is
opened, then the correction is through a journal entry with the help of a suspense Account.
SUSPENSE ACCOUNT
When the Trial Balance does not tally, efforts are made to make the trail balance tally, but if these
efforts fail, then temporarily the difference of Trail Balance is transferred to an account which is
called “Suspense Account”.
14
Suspense Account. Will be shown in the Balance Sheet on asset aside if debit balance or on the
liabilities side if credit balance.
During the course of preparation of final accounts errors are located, they are corrected through the
suspense A/c
Effect on Profit and Losses Account

All such rectifying entries which are related to normal account, affect profit or loss, hence after
making rectifications, all nominal account which are affected should be taken into consideration
and their amounts be considered for assessing the exact amount of loss or profit.
Effect on Balance Sheet

All such rectifying entries which are related with personal and real accounts affect the Balance
Sheet.
Rectifying entries related with nominal account affect profit or loss and this profit or loss is taken to
Balance Sheet. Hence, these entries also affect Balance Sheet.
15
UNIT-III
ACCOUNTS RELATED WITH INCOMPLETE RECORDS
Accounts from incomplete records is an incomplete inaccurate, unscientific and unsystematic style of
account keeping. Incomplete account records are those records which fall short of complete double
entry system. These records contain either both the aspects of a transaction or only one aspect or no
aspect at all of a transaction.
Definitions
According to kohlar
“A system of book keeping in which as a rule only records of cash and of personal accounts are
maintained, it is always incomplete double entry system, varying with circumstances.”
According to J.R. Botaiboi

“The term single entry system is applied to a style of book-keeping under which only the personal
account of the debtors and creditors are kept. It is not any particular system of book-keeping, but the
Double Entry system is an incomplete and disjoined form.”
Characteristics of Accounts from incomplete Records

 Maintenance of personal account
 Maintenance of cash book
 Dependence on original vouchers
 Preparation of financial statements.
 Accuracy of financial statements.
 Lack of uniformity
 Suitability for small traders, petty shop keepers and other professionals
 Less expensive
 Lack of Legal recognition
 Flexibility
Advantages of Single Entry System

 Easy & simple system
 Economical
 Flexibility in nature
 Time saving
 Suitability
Disadvantages of Single Entry System

 Tax evasion possible
 No record of impersonal accounts
 Difficulty in ascertaining net profit & financial position
 Encourages fraud
 Lack of business statistics
 Difficulty in comparison
DIFFERENCE BETWEEN DOUBLE ENTRY & SINGLE ENTRY SYSTEM ON THE BASIS OF
 Recording of both aspects
 Types of Accounts
 Preparation of Trial Balance
 Preparation of Trading and Profit & Loss a/c
 Financial Position
16
 Adjustments
 Utility
 Proof
 Assumptions and Principles
 Reliability
 Expensive
 Fraud
ACCOUNTING IN SINGLE ENTRY SYSTEM

Ascertainment of profit/Loss under incomplete Rerecords
There are two methods which can be used for ascertaining profit/losses
1. Net worth/statement of Affairs methods
2. Conversion method
Net worth/Statement of Affairs Methods
To find out profit or loess by this method firstly capital in the beginning and at the and of the year is
calculated by preparing two statement of Affairs, one in the beginning of the year and second at the end
of the year. Then after a statement of profit is prepared to find out profit or loss of the period.
Statement of profit or loss

Capital at the end of the year (Closing capital) xxx
Add: Total drawing during the year xxx
Add: Capital withdrawn xxx
Add: Interest on drawings xxx
Less: Additional capital introduced during the year xxx
Less: Capital at the beginning of the year (initial capital) xxx
Less: Interest on capital, xxx
Less: Any remuneration payable to proprietor xxx
Profit (+) or Loss (-) for the year xxx
Note: Other possible adjustments to be done in statement of profit so at to calculate Net profit are as
follows
Add:-
(i) Interest on investments
(ii) Interest on drawings, Deposits
(iii) Prepaid expenses
(iv) Appreciation of fixed Assets
(v) Undervaluation of Assets
Less:-
(i) Outstanding expenses
(ii) Depreciation on fixed assets
(iii) Overvaluation of assets
(iv) Bad debts
(v) Provision for bad debts
(vi) Interest on capital
(vii) Interest on loan
Conversion Method
Conversion method involves conversion of single entry into double entry. In this method proper profit
and loss a/c and balance sheet is prepared. It can be done by two methods
1. Full conversion method
2. Abridged conversion method
17
In practice conversion of records maintained on single entry system into double entry records is a
lengthy and time consuming task and hence the firms mostly adopt abridged conversion method.
In order to convert single entry into double entry all the information are not there hence it is necessary
to calculate missing items/figures. Various missing figures to be calculated are opening capital, cash
and bank balance opening or closing Debtors, opening or closing creditors, Bills receivable, Bills
payable, Cash purchases, Cash sales, Opening or closing stock, Credit purchase, Credit sales etc.
Practically conversion into dual aspect is done by the above procedure but from exam. Point of view
this would be lengthy procedure. In the exam, information given in the questions are solved without
preparing any Trial Balance, directly accounts are opened for ascertaining the balances. There would be
certain missing information which are ascertained by preparing related accounts. Students should open
the following accounts from which missing information will be ascertained:
1. Cash Book – Cash book is prepared according to the information of receipts and payments given in
the question. If transactions related to Bank are also given then two column, one for cash and other
for bank are opened in the Cash Book. For finding missing figure from cash book following points
should be taken into the consideration:
a. Opening cash or bank balance and closing cash or bank balance are given in the question. If any
one of the opening or closing balance is not given, and if difference is this account is credit
balance then it would be opening cash balance and if debit balance then it would be closing cash
balance.
b. If both opening and closing balances are given and even them there may be difference in the
cash book. If credit side is shorter than debit side then difference amount may be treated as
payment to creditors and if debit side is shorter than credit side then difference amount may be
treated as receipt from debtors.
c. If both opening and closing balance along with amount of payment to creditors and receipt from
debtors are given in the question, even then there is a difference in debit side then difference
amount will be treated as cash sales and if difference is in credit side, then difference amount
will be treated as cash purchases.
d. Also the cash book may contain information regarding sundry income or expenses which are
credited or debited into profit & loss a/c accordingly. There would be withdrawal by the
proprietor which should be debited to the capital account of the proprietor as drawings.
e. Opening cash balance is written on the debit side and closing cash balance is written on the side
of the cash book, but in cash of overdraft, opening balance should be written on the credit side
while closing balance should be written on the debit side.
Cash Book
Receipts Cash Bank Payments Cash Bank
To Balance b/d By Balance b/d (op. Overdraft)
To Debtors By Creditors
To Sales (Cash sales) By Purchases (Cash purchase)
To Bills Receivables By Bills Payable
To Capital (Additional) By Drawings
To Sundry income By Expenses
To Balance c/d (Clos. Overdraft) By Assets Purchase
By Balance c/d
2. Bills Payable A/c – If any information is given regarding bills payable in the question, then bills
payable account should be opened to find out the missing figure. If difference is in the credit side, it
means it can be –
a. Opening balance
b. Bills Payable issued to creditors during the year
18
If difference is in the debit side, it means it can be –

a. Payment of bills.
b. Amount of dishonoured bills
c. Closing balance.
Bills Payable Account
To Cash Bank (Payment of B/P) By Balance b/d
To Creditors (Dishonoured) By creditors (B/P issued)
To Balance c/d
3. Creditors Account – According to the information given in the question, creditor’s accounts should
be prepared. Amounts which are written on the credit sides are –
a. Opening balance
b. Credit purchase
c. Amount of bills payable dishonoured or cancelled. Amount which are written on the debit sides
are –
a. Payments made to the creditors during the year
b. Bills payable accepted during the year
c. Purchase Return
d. Discount or allowances received from creditors
e. Closing balance.
Normally opening balance, closing balance, credit purchases and payments not are given in the
question can be found by preparing creditors account.
Creditors
To Cash By Balance b/d
To Bank By Purchase A/c
To B/P A/c (issued) By B/P (Dishonoured)
Tp Purchases return
To Discount received
To Balance c/d
4. Bills Receivables Account – Bills Receivable account should be prepared from the bills received by
the Debtors
Items which are taken on debit side are –
a. Opening Balance
b. Bills received from Debtors during the year
Item which are taken on credit side are –
a. Payment received against the bill
b. Amount of bill dishonoured by the debtors during the year.
c. Closing balance
If any one of the above information is not available in the question then it can be found by preparing
Bills Receivables A/c
Bills Receivable Account

To Balance b/d By Cash / Bank (Payment of B/R)
To Debtors (B/P received) By Creditors (endorsed)
By Debtors (Dishonoured)
By Balance c/d
19
5. Debtors Account – Usually credit sales, opening debtors, closing debtors and amount received from
debtors are given in the question. If any one of the above information is not given then it should be
found by preparing debtors account.
Debit side items are –
a. Opening balance
b. Credit purchase
a. Amount of bills dishonoured
Credit side items are –
a. Amount received from debtors
b. Bills drawn during the year
c. Sales Return
d. Discount or allowances given to debtors
e. Closing balance.
Debtors
To Balance b/d By Cash
To Sales A/c By Bank
To B/R (Dishonoured) By B/R A/c
By Sales return
By Discount allowed
By Allowance
By Balance c/d
Insurance claims
Introduction
A contract of insurance is a contract under which one party known as insurer undertakes to indemnify
the other party known as insured on the happening of an unforeseen event in consideration for a fixed
amount known as premium. Though the liability of the insurer to indemnify arises on the happening of
an event the liability is limited to the amount of actual less suffered by the insured. However in case of
under insurance, the insurance liability is limited to the extent of the coverage.
There are four main types of stock:

 Raw materials and components - ready to use in production
 Work in progress - stocks of unfinished goods
 Finished goods ready for sale
 Consumables - for example, fuel and stationery
Claim for Loss of Stock

When the subject matter of fire insurance is subjected to risk of loss the claim for such loss can be
calculated as follows:
1. Where proper stock records are maintained and such records are not destroyed by fire. The
following steps are involved:
a. Ascertain the value of stock on the date of occurrence of fire by referring to stock record.
b. Ascertain the amount of stock lost by fire. The following formula is used.
Amount of stock lost by fire o Value of stock on the date of fire -Value of stock saved or
salvaged
c. Apply the average clause if applicable. The following formula is used.
Sum Insured
Claim = Loss suffered x Actual Insurable Value
2. Where proper records are not maintained or such records are destroyed by fire:
20
As records are not maintained it is somewhat difficult to know the value of stock lost and consequently
the claim on such loss of stock. The following steps are involved:
a. Determine the estimated value of stock on the date of occurrence of fire by preparing a
memorandum trading account for the period of commencement of accounting year to the date
of occurrence of fire. This is shown under the following Performa.
Memorandum Trading A/c
Particulars Amount Particulars Amount
To opening stock xx By sales xx
To purchases xx By closing stock xx
To manufacturing expenses xx
To gross profit (Calculated as
percentage of sales) xxx xxx
b. Ascertain the amount of stock lost by the occurrence of fire. The following formula is used:
Amount of stock lost by fire = Value of stock as shown by Memorandum Trading a/c – Value of
stock saved or salvaged.
c. Apply the average clause, if applicable.
Claim Settling Process

1. Intimation to Insurance Company: The insured must give immediate intimation to the
insurance company regarding the loss. The necessary details like the day, date, time and causes
of fire and in case of marine insurance, ship and voyage taken should be mentioned.
2. Assessment of the loss: The insured makes an assessment of the actual loss. Such assessment
is required to fill the claim forms correctly in respect of the loss of goods or property.
3. Submission of the claim form: the insured must fill all possible details in the claim form. He
must lodge the claim form within 15 days of the fire to claim compensation. In case of marine
insurance, the insured should lodge a claim with the following documents:
 Original Insurance Policy
 Copy of pill of Lading
 A copy of commercial Invoice
 A copy of packing list
 Survey report
 Claim Bill
Delay in submission of claim form may result in non-acceptance of the claim.

4. Evidence of Claim: Along with the claim form, the insured must send certain proof of fire and other
records, if available and if necessary. The evidence should enable the insurance company to deter-
mine the amount of loss.
5. Verification of Form: The claim form along with the sup-porting evidence is verified by the
insurance company. The insurance company then appoints the surveyors to conduct an assessment
of the actual loss.
6. Survey: After the receipt of the form, and necessary verification, the insurance company appoints
the surveyors to assess the actual loss. The surveyors conduct the necessary investigations. They
investigate into the cause of fire, the actual amount of property lost and other relevant details. The
surveyors then make the report of their findings and assessment of the loss.
7. Landing Remarks: In case of marine insurance, the insured should obtain landing remarks, from
the port authorities, if survey report is not obtained.
8. Appointment of the arbitrator: There may be v dispute regarding the amount of claim. In such a
case, an arbitrator is appointed, acceptable to both the parties, to settle the amount of the loss.
9. Settlement of Claims: If there is no dispute between the two parties, as to the amount of loss, the
insurance company then makes necessary payment to the insured. In case of marine insurance, the
amount of money is paid to India Exporter in Indian rupees. If the claimant is not a resident of India,
payment maybe made in foreign currency.
21
UNIT-IV
Investment Accounts
Meaning of Investment
Investments are the amounts which are invested as capital or in some securities of Public or Private
sector for earning income.
Meaning of Investment Accounts- An account to find position of investment and profit and loss
on this investment
Type of Securities: (i) Central Govt. Securities, (ii) State Govt. Securities, (iii) Securities of local
authorities, (iv) Non-Govt. Securities or Securities of Private sector, Private Institutions or Persons. E.g.
bonds, shares debentures, etc.
TYPES OF INVESTMENTS
1. Fixed Investments: These investments are made with the sole object of making fixed income in
the shape of interest or dividend or both. Not to make profit by selling them.
2. Floating Investment: These investments are made with the sole object of making profit by
selling them when prices are favourable. They are valued at cost price or market price,
whichever is lower.
SALE AND PURCHASE PRICE OF INVESTMENTS

1. At Par Price: When investments are purchased or sold at face value. e.g. share of Rs. 100 at Rs.
100.
2. At Discount Price: When investments are purchased at less than face value, this is purchase at
discount, as share of Rs. 100 is purchased at Rs. 98.
3. At premium Price: When investments are purchased or sold at above face value, it is known as
purchase at Premium; as a share of Rs. 100 is purchased at Rs. 102.
INTEREST ON INVESTMENTS
Cum-interest and Ex-interest Purchase and Sale
If after sometime of the date of declaration of interest investments are purchased and buyer gets the
right of receiving interest on the next declaration date of interest for whole period, i.e., the period from
the last declaration date before the date of purchase upto the next declaration date which falls after the
date of purchase, such purchase is called cum-interest purchase. From sellers point of view, it is known
as cum-interest sale.
In case of ex-interest, the price quoted is exclusive of interest from the last date of interest payment to
the date of transaction i.e. in this case buyer has to pay to the seller the accrued interest in addition to
the price for the investment.
EXPENSES OF SALE AND PURCHASE OF INVESTMENT

Expenses of sale and purchase mostly are Brokerage, Commission and Stamp Fee, etc. These expenses
are always added in the purchase price whether these purchase are cum-int. or ex-int.
These expenses are always deducted from the sale price whether these sale are cum-int or ex-int.
Value of Investment at a Glance
Cum-int. Purchase Price + Purchase Expenses. – Interest for the period from last declaration date
Purchase upto date of purchase.
Ex-int. Purchase Price + Purchases Exps. – Interest is neither added nor deducted, but is paid
Purchase separately for the period from the last declaration date upto the date of purchase.
Cum-int. Sale Sale Price – Sales Exps. – Interest for the period from last declaration take up to date of
sale.
Ex-int. Sale Sale Price – Sales Exps. Interest is neither added nor deducted. Interest is taken
separately from the last declaration date upto the date of sale.
22
Journal entries for Investment Accounting:

a) For investment purchase:
Investment A/c dr.
Interest /dividendA/c dr.
To Bank A/c.
b) For investments sold:

Bank A/c dr.
To investment A/c
To interest/dividend A/c
c) Interest received on due date:

Bank A/c dr.
To interest /dividend A/c
d) Amount of interest or dividend transferred to P&L Ac at the end of the year:
Interest /dividend A/c dr.
To P&L A/c
Rules to be considered while preparing investment account.

1 .Interest on debentures or bonds is to be calculated twice in a year while dividend on shares is to be
calculated once in a year.
2. Interest/dividend is calculated on the face value of securities/shares.
3. Expenses and brokerage will also be calculated on face value of securities.
4. In case of purchases, expenses will be added and in case of sale, expenses will be deducted.
5. In case of cum-interest transaction, back-interest will be deducted, and in case of ex-interest
ransaction, back-interest will not be deducted but it will be calculated and recorded separately.
If nothing is mentioned, then it will always be considered as cum-interest transaction.
6. Due interest will be calculated on investments on due dates at given rates.
7. If the last date of interest and the date of year ending are not the same, then accrued interest will be
calculated from the last date of interest up to the date of year ending. The following entry is passed:
Accrued interest A/c Dr.
Interest A/c
Next year , the opening entry will be :
Interest A/c Dr.
To Accrued Interest A/c
8. Closing balances of the investments will be calculated on the following basis:
a) If investments are of fixed type , then at cost.
b) If investments are of floating nature , then they are valued at cost or market price ,
whichever is less.
9 .If the market price of debentures or bonds is given cum-interest and accrued interest is also
calculated then the amount of accrued interest will first be deducted from the market price and
remaining value will be compared with cost price.
METHODS OF KEEPING INVESTMENT ACCOUNT

Investment Account can be kept in two ways namely (i) To prepare Investment Account and Interest
Account separately, and (ii) To prepare Columnar Investment Account.
Investment Account: When investments are floating, then its balance is transferred to Profit and Loss
account. If all the investment are not sold, then closing balancing of investment is valued at cost price
or market price whichever is lower.
If Investments are fixed, then its balance is carried forward, at cost.
Closing of Interest Account : Balance of Interest Account is transferred to Profit and Loss Account.
23
Closing of Accrued Interest Account: Accrued interest is the interest for the period from that date of
declaration of interest (which is closer to closing date of the year) upto the closing date of the year.
Balance of this account is carried forward. This interest has been earned but has not been received.
INVESTMENTS ON WHICH DIVIDENDS ARE EARNED

1. Cum-div. Purchase and Sale
Dividend is the income which a shareholder receives on the shares of a company. This dividend is
based on the profit of whole year of the company.
If shareholder sells his shares cum-dividend after the date of declaration of dividend and before the
date of receipt of dividend, then buyer gets the right of getting dividend on these shares. Therefore,
seller takes the amount of dividend also in addition to the price of shares from the purchaser. Real
price of shares can be found out by deducting the amount of dividend from the market price of
shares.
2. Ex-div. Purchase and Sale
Under this case whatever amount is received by the seller for investment, same is treated as price
of investment. No amount of dividend is added to or deducted from it. 1
INSOLVENCY ACCOUNT
MEANING OF INSOLVENCY
Any person, who fulfils the following two conditions, is called insolvent:
i. His liabilities should be more than his assets; and
ii. He must be adjudged insolvent by a competent Court.
In India insolvency is governed by two acts, viz,
i. The Presidency Towns Insolvency Act, 1909, which applies to the persons residing in the
Presidency towns of Mumbai, Kolkata, Chennai. Delhi.
ii. The Provincial Insolvency Act, 1920, which applies to the persons residing in the rest of
India.
The insolvency proceeding will be conducted by the official assignee in presidency towns and by the
official receiver in other places.
INSOLVENCY PROCEDURE
1. Petition for adjudication as insolvent may be presented either by the debtor or by the creditor
in a Court having jurisdiction under this Act.
a. A creditor shall be entitled to present an insolvency petition against a debtor if the debts owing
by the debtors to the creditors, amounts to five hundred rupees, the debt is a liquidated sum
payable either immediately or at some certain future time; and the act of insolvency has occurred
within three months before presentation of petition.
b. A debtor shall be entitled to present an insolvency petition if he is unable to pay his debts, and :
(i) his debts amount to five hundred rupees;(b) he is under arrest to imprisonment in execution
of the decree of any Court for the payment of money, or (c) an order of attachment is subsisting
against his property.
2. When an insolvency petition has been accepted, the court shall make an order fixing a date for
hearing the petition .
3. It may appoint an interim receiver of the property of the debtor and may direct him to take
immediate possession thereof.
4. If the Court is satisfied that the petition the reasonable, it shall make an order of adjudication
and shall specify in such order the period within which the debtor shall apply for his discharge.
5. Effect of an Order of Adjudication (i) on making the order of adjudication, the whole of the
property of the insolvent shall become divisible among the creditors, (ii) the insolvent shall aid
to the utmost of his power in the realization of his property and the distribution of his
proceeds among his creditors.
24
Difference between both Acts

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

Net amount realizable from assets – Liquidation expenses
Rate of dividend = Amount payable to unsecured creditors
STATEMENT OF AFFAIRS
Gross Liabilities (as stated and Expected Assets (as stated and Estimated
Liabilities estimated by the Debtor) to Rank estimated by the Debtor) to Produce
Rs. Rs. Rs.
Unsecured Creditors as per list Property as per list E viz:
A Fully Secured Creditors as per a. Cash at Bankers
list B b. Cash in hand
Estimated value of Securities c. Cash deposited with
………………….. Solicit or for cost of
surplus Petition
Less: Amount thereof carried to d. Stock-in-Trade
list C…………. e. Machinery
Balance thereof to contra f. Trade Fixture Fittings,
Partly Secured Creditors as per Utensils, etc.
list C g. Furniture
Less: Estimated value of h. Life Ins.Policies
Securities Preferential Creditors i. Other Property
as per list D Book debts as per list F viz:
(Creditors for Rates, Taxes, Good
Salaries and Wages, etc. , Doubtful
payable, in full as per list D) Bad
Deducted as per contra Bills of exchange or other
similar Securities as per List
G
Surplus from Securities in
the hands of creditors fully
Secured (per contra)
Deduct: Creditors for
Preferential, Rates, Taxes,
Salaries and Wages, etc.
(per contra)
25
Deficiency as per List H
Rs
Rs.
SPECIMEN OF DEFICIENCY ACCOUNT

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

basis of difference Profit and Loss Account Deficiency Account
6. Date of This is often prepared at the It is prepared only once in life of
Preparation end of financial year. the business and that too, only if
7. Period of its It is prepared in all the year insolvency occurs.
Preparation during which business is
carried on
Capital is recorded in it.
8. Capital Capital is recorded in it.
Excess of the amount of right side
9. Difference Excess of debit over credit of over the amount of left side is
this account is a loss and excess called deficiency.
of credit over debit of this
account is profit. Its left hand side is for gains and
In this account left side is for right hand side is for losses.
10. Sides expenses and losses and right
hand side for gain and income.
Difference between Balance Sheet and Statement of Affairs

Basis of difference Balance Sheet Statement of Affairs
1. Date of It is often prepared at the end of the It is prepared at the time of
Preparation year. insolvency.
2. Use of Lists Lists are not used for writing of assets Lists are used for assets and
26
and liabilities liabilities.
3. Records of Assets All real and fictitious assets are recorded Only real assets are recorded in it.
in it.
4. Value of assets Fixed assets are shown after deduction Fixed assets are shown at
of depreciation. realizable value.
5. Assets lodged as Assets as a security are shown in the The assets lodged as security are
security assets side. not shown in the assets side but
shown in the liability side along
with the concerning loan.
6. Record of Columns of gross liabilities and expected These columns are made in it.
Liabilities to rank are not made in it.
7. Total Total of liabilities is equal to total of Total liabilities are more than total
assets. of assets and this excess is called
deficiency.
8. Number It is prepared for all the year during It is prepared only once i.e. at the
which business is carried on. time of insolvency.
9. Object It is prepared for knowing the financial It is prepared to shoe the inability
position of the concern. of the debtor to pay this debts.
10. For whom It is prepared for the sake of proprietor It is prepared for the satisfaction
prepared and others. of the Court.
11. Def. A/c Deficiency Account is not prepared Deficiency Account is prepared
along with it. along with it.
12. Act In case of Sole Trader and Firm, there is It is prepared under the
no act for its preparation but in the case Presidency Towns insolvency Act
of Companies it is prepared according to or Provincial Insolvency Act.
the Companies Act.
13. Pref. Crs. Preferential Creditors are not deducted Preferential Creditors are
in the assets side. deducted in the assets side.
14. Capital Capital is shown in the liabilities side. Capital is not shown in the
liabilities side.
Voyage Account
Voyage accounts are maintained by shipping companies which undertakes transport of goods and
programmers from one part to another. The consideration charged is freight or fare. The service
rendered by shipping companies is commercial in nature and hence it is desirable to know the profit or
loss involved in every voyage.
Voyage accounting
It resembles to a profit & loss account. It is prepared for each voyage (i.e. inward and outward voyage
undertaken by a ship, unlike other organization which prepares Profit & Loss account at the end of
accounting year. On the debit side of voyage account all expenses incurred are recorded and on the
27
credit side at income are recorded. The difference between these two sides indicates profit or loss on a
particular voyage. This profit or loss is transferred to the profit & loss account of a shipping company or
the charter of a ship.
Expenses which appear on the Debit Side of Voyage Account

1. Address Commission – It is commission paid by a shipping company to agents who procure
business to it. This amount is fixed as certain percentage on the total freight (inward and
outward) earned.
2. Coal – Coal is used as a fuel by the ship. This can be recorded in any of the two ways. Firstly the
opening of coal and the purchases of the same are debited to voyage account and the closing
stock of coal credited to voyage account. Alternatively, the purchases of coal are added to
opening stock and closing stock of coal is deducted to get the cost of coal consumed.
3. Consumable or Sundry Stores – These include items such as cotton waste, oil grease etc. used
in a ship for as particulars voyages.
4. Insurance premium – This may relate to a ship or cargo carried. Proportionate amount of
premium applicable for the voyage is to be considered in the voyage a/c.
5. Depreciation on the Ship – Depreciation on the ship relating to voyage period is to be
considered in the voyage a/c.
6. Stevedoring Charges – It refers to loading and unloading charges incurred by a shipping
company during the voyage of a ship.
7. Dispatch money – The refund of excess freight collected by a shipping company to the shipper
of goods is known as dispatch money.
8. Salaries and wages payable to the crew of the ship are debited to voyage account.
9. Harbor and Port Charges – These are expenses incurred by a shipping company at various
ports.
10. Administration Expenses – This includes printing stationery, postage and such other
expenses.
Income which appear on the Credit

1. Freight earned – The charges collected by the shipping company form the shippers of goods for
carrying goods high seas are known as freight. It is earned on the outward and inward journey
of a ship.
2. Primage – The additional freight collected by a shipping company from the shippers of goods is
known as primage. In the earlier years primage was collected with a view to pay to the captain
of the ship to encourage him to take special care of cargo. In recent time the primage is returned
by the shipping company.
3. Passage money – It represents the fare collection by a shipping company from passengers
carried in a ship during a particular voyage.
Incomplete Voyage
When the journey is still progress at the end of the year it is regarded as incomplete voyage. The
proportionate expenses relating to incomplete voyage is treated as voyage in progress and carried
forward as Voyage in Progress. It appears on the credit side of voyage account as incomplete voyage
appears in the voyage account on the debit side as “To freight received in advance” or “passage money
received in advance”.
Suppose one voyage has to complete by going to Landon from Mumbai and then return from London to
Mumbai. At the end of year, if travelling from Landon to Mumbai is continuing, at that time, we have to
calculate expenses and incomes on incomplete voyage and treat according to accounting rule.
a. Receiving of Advance Income – We will deduct advance income of incomplete voyage from
total voyage income or show in the debit side of voyage account.
b. Paying of advance Expenses – We also will deduct advance expenses of incomplete voyage
from total expenses of show in credit side of voyage account
28
Performa of Voyage A/c

(Proforma of Voyage Account)
(From ….to….)
Particular Amount Particular Amount
To Banker Cost By Freight :
To Port Charges Outward
To Harbour Wages Add: Primage
To Stevendoring charges/Loading Inward
& unloading charges Add: Primage
To Salaries of Officers & Crew By Passage Money
To Commission and Brokerage By closing Stock of Disel stores etc.
To Depreciation By Voyage-in-progress (Exps. of
To Insurance: Incomplete Voyage)
Ship By Net Loss (
Freight (Balancing Figure)
To Standing Charges
To address Commission
To voyage-in-prog. (Freight of
Incomplete Voyage)
To Manager’s Commission
To Net Profit
(Balance Figure)
29
UNIT-V
DISSOLUTION OF PARTNERSHIP FIRM WITH INSOLVENCY
Dissolution of firm – The dissolution of partnership between all the partners of a firm is called the
dissolution of the firm. In the case of dissolution of a firm, the business of the firms is closed down and
its affairs are wound up. The assets are realized and the liabilities are paid off.
Model of dissolution of firm –

1) Dissolution without the intervention of the court
a) Dissolution by agreement
b) Compulsory dissolution
c) Dissolution on the happening of certain contingencies.
d) Dissolution by notice
2) Dissolution by the court
a) Insanity
b) Permanent incapacity
c) Misconduct
d) Breach of agreement
e) Transfer of interest
f) Loss in business
g) Just and equitable
Steps in the dissolution process –

Step 1 Prepare a balance sheet of the firm as on the date of the dissolution of the firm.
Step 2 Realize the non-cash assets which are not acceptable for distribution in their present form,
pay the debts of the firm to third parties. Realization account is prepared to calculate the
loss or profit on realization of assets and settlement of liabilities. Loss or profit on
realization of assets and settlement of liabilities is transferred to partners’ capital accounts.
Step 3 Pay the amount due to each partner ratably for advances (or Loan)
Step 4 Pay the available cash to the partners.
Accounting treatment on dissolution of firm –

In case of dissolution of firm the following accounts are prepared to close the books of the firm –
1) Realisation Account
2) Partners’ loan account
3) Parnters’ capital account
4) Cash or bank account
1) Realization account – This is a special type of account. It is a nominal account. The purpose of
preparing this account is to find out the result of realization of assets and discharge of liabilities.
The following steps involved in preparing this account.
Step 1. For Transfer of all accounts given in the balance sheet
a. For transfer of assets – All the assets except cash in hand, cash at bank, debit balance of
current accounts of partners and fictitious assets are transferred to debit of this account at
book values as under –
Realisation A/c Dr.
To Various assets (individually)
(For transfer of various assets to realization a/c)
b. For transfer of outside liabilities – All the external liabilities including partners loan are
transferred to the credit of realization account at book value as under –
Various Liabilities A/c Dr.
To Realisation A/c
(For transfer of various liabilities to realisation a/c)
30
Note: Liabilities have got credit balance, so debiting to close them.

Step 2. Disposal of assets
a. For sale of assets
Cash / Bank A/c Dr.
To Realisation A/c
(For assets realised in cash)
b. Asset taken over by partner
Partner's Capital A/c Dr.
To Relisation A/c
(For assets taken over by a partner)
Step 3. Entry for payment of dissolution expenses
a. For cash payment
Realisation A/c Dr.
To Cash / Bank A/c
(For payment of dissolution expenses)
b. For payment made by a partner
Realisation A/c Dr.
To Partner's Capital A/c
(For dissolution expenses paid by a partner)
Note : if any partner is to bear all expenses of realisation, no journal entry is required in the books of
the firm but in this case if the partner is paid the realisation expenses, the following entry will be made :
To Cash / Bank A/c
(For dissolution expenses paid on behalf of a partner.)
Step 4. Entry for payment of outside liabilities :
a. For cash payment
Realisation A/c Dr.
To Cash / Bank A/c
(For payment to outside liabilities)
b. For liabilities taken over by a partner
Realisation A/c Dr.
(For liabilities taken over by a partner)
Step 5. Entry for closing realisation account
a. In case of profit
Realisation A/c Dr.
To Partners' Capital A/c
(For profit on realisation transferred to partner's capital a/cs in their profit sharing ratio)
b. In case of loss
Partners' capital A/cs Dr.
To Realisation A/c
(For loss on realisation transferred to partners' capital a/cs in their profit sharing ratio)
Note : (1) Intangible assets such as goodwill, patents, copyrights, prepaid expense are normally value
less in case of dissolution. So if a question is silent it should be presumed that nothing could be realised
from such assets.
(2) If question is silent about the realisation of tangible assets it is presumed that their book values
have been realised.
2) Partner’s loan Account – This are transferred to the credit side of realization account and the
payments there of are shown on debit side of realization account. Alternatively the payment can be
credited directly to cash account.
3) Partner’s capital accounts – All the reserved and undivided profit or loss, realization profit or
loss, balance of current accounts. Now the difference is adjusted in cash if there is credit balance it
31
is surplus to be withdrawn by the concerned partner from their personal resources. Entry for
surplus withdrawn or deficiency brought in by the concerned partner from their personal
resources. Entry for surplus withdrawn or deficiency brought in are as under –
a. Cash/Bank A/c Dr.
To Partner’s capital A/c
(For deficit amount of capital brought in cash)
b. Partner’s Capital A/c
To cash/Bank A/c
(For final payment made to a partners)
4) Cash account – At first opening balance is written. Then cash at bank is also transferred to this
account. Amount realized from assets and deficiency brought in by partners is debited to this
account and payment of liabilities, realization expenses and surplus withdrawn by partners are
credited. Now both side of cash account will be equal. The agreement of both the sides of cash
account is the cross checks of accounting and arithmetical accuracy.
Formate of Accounts
Realisation A/c
To land and Building A/c By Creditors a/c
To Plant Machinery A/c By B/P A/c
To furniture A/c By Bad Debts Reserve A/c
To investment A/c By Bank Loan A/c
To stock A/c By Bank Overdraft A/c
To Debtors a/c By Loan A/c
To B/R A/c By Cash A/c (Assets Realised)
To cash A/c (Payment of Liabilities) By Capital A/c (Assets taken)
To Capital A/c (Liab. Taken by Partners) By Capital A/cs (Loss):
To Cash A/c (Realization Exps.)
To Capital A/cs (Profit):
Partner’s Capital A/cs

Particulars Particulars
To Balance b/d By Balance b/d
To Current A/c By current A/c
To P & L A/c (Loss) By P & L A/c (Profit)
To Realisation A/c (Assets By General Reserve A/c
taken) By Realisation (Liab. Taken)
To Realisation A/c (Loss) By Realisation A/c (Profit)
To cash A/c (Surplus) (Bal. fig) By Cash A/c (Deficiency ) (Bal.
fig)
Cash A/c
To Balance b/d (cash in hand) By Realisation A/c (Paymnet of Liab.)
To Bank A/c (Cash at bank) By Realisation A/c (Exp.)
To Realisation A/c (Assets Realised) By Capital A/c (Surplus Refund)
To Capital A/c (Deficiency brought)
32
Insolvency of Partners
At the time of dissolution of a partnership firm, the capital account of a partner may show a debit
balance after his share of realisation loss or profit and accumulated profits or losses etc. have been
transferred to his capital account. In such a case, the partner is a debtor of the firm to the extent of debit
balance in his capital account and he has to bring in the necessary cash to make up the deficiency in his
capital account. If the partner is unable to bring in the necessary cash, e.g. when he cannot pay in full
the amount of debit balance in the capital account, he is said to be insolvent. The solvent partners have
to bear the capital deficiency of the insolvent partner. There is no provision in the Indian Partnership
Act., 1932 regarding this matter. Therefore, if there is a provision regarding this matter in the
partnership deed it would be decisive. The partners may provide in partnership deed that loss due to
insolvency of a partner will be shared by the solvent partners in their profit sharing ratio or any other
ratio. But the problem arises when there is no provision in the partnership deed regarding this matter.
Decision in Garner V/s Murray

In this case Garner, Murray and Wilkins were equal partners in England. Their capitals were unequal.
The Balance Sheet of the firm after satisfying all the liabilities were as follows:
Balance Sheet
Liabilities £ Asset £
Capital Accounts: Cash 1,916
Garner 2,500 Wilkins— Overdrawn 263
Murray 314 Deficiency (Realisation loss) 635
2,814 2,814
Wilkins was insolvent and unable to pay anything. Thus the assets of the firm were not sufficient to
repay the capitals in full. There was a dispute between the solvent partners regarding the method of
sharing of loss due to insolvency of Wilkings. Justice Joyce held in 1904 as follows:
"The solvent partners are only liable to make good their share of the deficiency, and that the remaining
assets should be divided among them in proportion to their capitals,"
In other words, the learned judge held as follows:

1. The solvent partners should bring in cash their share of the realisation loss.
2. The loss due to insolvency of a partner should be borne by the solvent partners in proportion to
their last agreed capitals.
It should noted that a partner having a debit balance or nil balance, will not have to bear the loss due to
insolvency of a partner.
The decision in the above case has taken into consideration only the book capital of the partners. It
ignores the private estate of the solvent partners.
Meaning of last agreed capitals

In case of fixed capital method, the expression, "Last Agreed Capitals" means the fixed capital. In case of
fluctuating capital method, it means the capitals after malting adjustment for accumulated profits and
losses, drawings, interest on capital, salary to a partner etc. to the date of dissolution but before
transferring realisation loss or profit.
Applicability of Garner V/s Murray to India

It is reasonable to assume that Garner v. Murray case will also apply to India as S. 48 of the Indian
Partnership Act., 1932 is almost identical with S.44 of the English Partnership Act and there has been
no case law which has examined the question of sharing of loss due to the insolvency of a partner.
However, some Accountants contend that the above decision is not inconformity with S.48 (a) of the
33
Indian Partnership Act., 1932. The students, in an examination problem, should indicate whether or not
the ruling in Garner v. Murray has been applied.
Piecemeal distribution of cash

It has been presumed so far that all the assets are realised on the date of dissolution and all the
liabilities are also simultaneously discharged on the same day itself. But usually this is not true in
practice. In actual practice, assets are realised gradually and liabilities are paid gradually depending
upon the amount realised from the sale of assets. Therefore, the realsiation loss or profit can be
ascertained only after the realisation of all assets and payment of all liabilities. Available cash is used in
the following order:
1. Payment of realisation expenses or a provision is made for realisation expenses.
2. Payment of outside liabilities i.e., bank loan, sundry creditors, bills payable, outstanding
expenses etc. It must be noted here that a secured creditor has priority whenever an asset
provided by way of security to the concerned creditor is realised. After satisfying the claim of
the secured creditor the surplus, if any, is paid to unsecured creditors. Amount realised from an
asset which is not charged or mortgaged is used to pay all the creditors, whether secured or
unsecured in the ratio of their claims.
3. Payment of partners' loan in the ratio of their respective loans.
4. Payment of partners capitals.
If there is any contingent liability an account of bills discounted, a provision should be made in the
beginning for the same and when provision is no longer required, the amount should be distributed.
Basis of distribution of cash among partners

The following are the two basis of distribution of cash among partners:
1. Proportionate or surplus capital method
2. Maximum loss method
Proportionate or surplus capital method

Under this method, the partner who have contributed more capital than his proportionate share are
paid off first. In other words, the partners who have surplus capital are given the payment first. The
following procedure should be adopted for calculation of surplus:
Step 1 Calculate adjusted capitals of all the partner after making adjustment for accumulated profits
and losses and transfer of balances of current accounts etc.
Step 2 Divide the adjusted capitals of all partners by their respective profit sharing ratio and treat the
smallest quotient as base capital.
Step 3 Calculate proportionate capitals by multiplying base capital and profit shaft ratio.
Step 4 Calculate surplus capitals by subtracting proportionate capital (step 3)from adjusted capital
(Step 1)
Step 5 If there is only one partner having surplus capital make payment to that partner first to the
extent of surplus capital. If there are two or more partner having surplus capitals and surplus capitals
are in profit sharing ratio, distribute cash among such partners to the extent of surplus capitals in the
profit sharing ratio. If there are two or more partners having surplus capitals and the surplus capitals
are not in profit sharing ratio, go to the next step.
Step 6 Divide surplus capital of the concerned partners (Step 4) by their profit sharing ratio and treat
the smallest quotient as revised base capital.
Step 7 Calculate the proportionate surplus by multiplying the revised base capital (Step 6).
Step 8 Calculate the excess surplus capital by subtracting revised proportionate surplus (Step 7) from
surplus capital (Step 4)
Step 9 See step 5 and repeat the process until there is only one partner having excess surplus.
34
The partner or partners having excess surplus are paid off first to the extent of excess surplus and after
that payment is made to the partners having surplus capitals to the extent of surplus capitals and lastly
payment is made to all the partners in the profit sharing ratio.
Maximum Loss Method

Under this method, it is assumed that every installment realised is a final realisation, i.e., the remaining
assets will realise nothing. The following procedure is adopted for distribution of cash among the
partners after the payment has been made for outside liabilities and partners’ loan :
Step 1. Calculate the adjusted capitals of the partners after making adjustments for accumulated profits
and losses, transfer of balance of current accounts etc.
Step 2. Calculate the maximum possible loss assuming that the remaining assets are worthless.
Maximum possible loss is calculated by subtracting cash available from the total of the balances of
adjusted capital accounts.
Step 3. Distribute the maximum possible loss among the partners in their profit sharing ratio.
Step 4. Calculate the balances of capital accounts of partners after distribution of maximum possible
loss.
Step 5. If the balances of capital accounts of all the partners (Step 4) show positive balances, distribute
the available cash among the partners equal to their respective balances of capital accounts (Step 4). On
the other hand, if balance of capital account of any partner (Step 4) shows a negative balance, transfer
the negative balance of that partner to the capital accounts of other partners having positive balances in
the ratio of capitals just before dissolution assuming the partner having negative balance as insolvent. If
the capitals are fixed the negative balance should be transferred in the fixed capital ratio and in case of
fluctuating capitals after adjusting for accumulated profits and losses. This process is repeated till the
negative balance is completely transferred. Distribute the available cash to the partners whose capital
balances after transfer of negative balance, show positive balances and the amount paid will be equal to
their respective balances of capital accounts.
Step 6. Calculate the balances due after subtracting the amount paid (Step 5) from the adjusted capitals
(Step 2)
Step 7. Calculate the maximum possible loss at the time of next realisation. Maximum possible loss at
this stage will be calculated by subtracting the available cash at this stage from the balances due (Step
6)
Step 8. Go to Step 5.
Step 9. Calculate the balance due at this stage after subtracting the amount paid (Step 8) from the
balances due (Step 6) and repeat the process till the final realisation.
This method is suitable when a partner is insolvent or is likely to be insolvent.
AMALGAMATION OF FIRM
In this modern age, it is very difficult for a trader to remain in the market due to increasing
competition in the field of business. When such competition becomes cut-throat competition,
it may give dangerous results. On the other hand, present age is the age of industries and
business with large scale operation. So, to get advantages of large scale production, to avoid
cut-throat competition, to have better control and management, reduction in cost and for
other similar reasons two or more than two firms join together to form a new firm, then such
combination of firms is known as Amalgamation.
. Amalgamation takes place not only with two or more firm, but it may be created in the
following three ways :
(1) By combination of two or more partnership firms.
(2) By combination of partnership firm and sole trader.
(3) By combination of two or more sole traders.
Hence, when two or more than two partnership firms or partnership firm and sole traders or two or
more sole trading firms, which are doing similar business or producing similar type of goods or similar
types of services, form a new firm then such combination or merger is called Amalgamation.
35
OBJECTS AND ADVANTAGES OF AMALGAMATION

The main objects of amalgamation is to avoid competition so that the profit may be maximised.
The objects and advantages of amalgamation may be explained as under
(1) End of Competition; The competition between the firms can be avoided. Hence chances and
amount of profit will increase.
(2) Reduction in Expenses: Expenses related to management, administration and control will be
reduced by amalgamation.
(3) Arrangement of more Capital: The quantity of capital is increased by amalgamation
and the problems relating to finance reduces.
(4) Chances of Monopoly: Two or more firms when amalgamate will get monopoly in market
and their profit maximises due to monopoly.
(5) Advantages of Large Scale Production: The firms after amalgamation become financially more
sound. Hence they may do business on large scale and they may get all advantages of large scale
production.
(6) Increase in Efficiency, Capacity and Ability : In amalgamation, persons of various qualities join
together which increases efficiency, capability and capacity of the new firm.
(7) Possibilities of Research Work and Services of Experts Available: After amalgamation the
research work will be undertaken by the new firm and the services of experts will be obtained because
power and efficiency increases in every field.
(8) Increase in Political Pressure: After amalgamation, the political pressure increases
and many work are done without any difficulties.
DEMERITS OR DISADVANTAGES OF AMALGAMATION

The main disadvantages of amalgamation are as" under
(1) Fear of Over Capitalisation: There arises fear of over capitalisation due to
amalgamation and the bad effects of over capitalisation will be shared by the new firms.
(2) Defects of Monopoly: After amalgamation, the monopoly may be created which will
result in the various defects of monopoly in future.
(3) Evils of Large Scale Production: Amalgamation provides few advantages on one hand
and on the other hand many defects of large scale production e.g. labour problems, industrial
unrest, over production etc.
(4) Loss of Goodwill: After amalgamation, the existence of old independent units vanishes and
due to which there will be loss of goodwill also.
(5) Problem of Operation, Management and Control: After amalgamation, the size of trade or
industry increases, hence the concern may feel practical difficulties in management and control.
There remains lack of efficient, handwork and experienced persons.
ACCOUNTING FOR ON AMALGAMATION

There are two points in amalgamation:
(1) Dissolution of old units (Firms)
(2) Birth of a New firm
The following entries are made for closing the accounts of the firms:
(1) Revaluation of all assets and liabilities of the dissolved firms are made in
amalgamation. For this purpose, Revaluation A/c or Profit & Loss Adjustment A/c is opened. The
following journal entries are made in this connection:
(a) On revaluation increase in the value of assets; by the increased value:
Asset A/c Dr.
To Revaluation A/c
(b) On revaluation decrease in the value of assets, by the decreased value:
Revaluation A/c Dr.
To Asset A/c
36
(c) On revaluation increase in the value of liability, by the increased value:

Revaluation A/c Dr.
To Liability A/c
(d) On revaluation the value of liability, by the decreased value:
Liability A/c Dr.
To Revaluation A/c
(2) Assets not taken over by the new firm, will be transferred to the capital A/c of
Proprietor or in case of partnership they will be distributed among partners in their capital
ratio
The books of accounts of the firms under amalgamation shall be closed.

Proprietor's Capital A/c Dr.
or
Partners' Capital/Current A/c Dr.
To Particular Asset A/c
(a) On sale of asset in the market in cash:
Cash A/c Dr.
To Asset A/c
If sale price is equal to its book value, then no journal entry will be recorded. If sale price is
more than its book value, the following journal entry (Difference Amount) will be as under:
Asset A/c Dr.
To Revaluation A/c
If sale price is less than its book value, the journal entry (Difference Amount) made will be as
under:
Revaluation A/c Dr.
To Asset A/c
(b) On asset taken over by a partner:
Partner's Capital/Current A/c Dr.
To Asset A/c
If partner has taken asset on its book value, then there will be no entry, but if partner accepts
the asset on reduced value than its book value, the entry of difference amount will be as under:
Revaluation A/c . Dr.
To Asset A/c
If asset is taken over at higher price than the book value by the partner, the entry will be as
under :
Asset A/c Dr.
To Revaluation A/c
(3) On any liability not taken over by the new firm, being paid in cash or taken
over by any partner:
Liability A/c Dr.
To Cash A/c or
To Partner's Capital/Current A/c
If payment of liability is less than its book value, the entry by the difference amount will
be as under :
Liability A/c Dr.
To Revaluation A/c
If payment of liability is more than its book value, the entry will be as under:
Revaluation A/c Dr.
To Liability A/c
37
(4) On distributing General Reserve Fund and undistributed profits among partners in their
profit sharing ratio :
General Reserve Fund A/c Dr.
Profit & Loss A/c Dr.
To Partners' Capital/Current A/c
(5) For profit or loss on revaluation A/c is transferred to the Capital A/c of owner or to the Capital
A/c of partners in their profit sharing ratio. In this respect, following entries will be made:
In Case of Amalgamation of Sole Proprietorship
(i) In case of profit in Revaluation A/c
Revaluation A/c Dr.
To Proprietor's Capital A/c
(ii) In case of loss in revaluation A/c :
Proprietor's Capital A/c Dr.
To Revaluation A/c
In Case of Amalgamation of Firm
(i) If there is profit in Revaluation A/c :
Revaluation A/c Dr.
To Partner's Capital/Current A/c (ii) In
case of loss in Revaluation A/c
To Revaluation A/c
(6) (a) On the assets A/c taken over by new firm after revaluation :
New Firm's A/c Dr.
To Asset A/c
(b) On the liabilities taken over by the new firm after revaluation:
Liabilities A/c Dr.
To New firm's A/c
(7) On transferring balance of current A/c to capital A/c :
(a) In case of credit balance :
Partner's Current A/c Dr.
To Partner's Capital A/c.
(b) In case of debit balance:
To Partner's Current A/c
(8) At the end, the balance of partners capital account will be transferred to the
account of new firm and thus partner's capital account closes.
Before last entry the capital of old partners in the new firm should be decided before
amalgamation.
If any partner brings cash to cover the balance amount of capital, the entry will be as under;
Cash A/c Dr.
If there is surplus in capital account of any partner, then it will be returned then the following
entry will be made :
To Cash A/c
If the capital accounts of all partners show surplus, then the final entry made will be as under:
Partners' Capital A/c Dr.
To New Firms A/c
(9) Goodwill: (a) If goodwill is shown in balance sheet and its revaluation is equal to its book
value, then no need to pass any journal entry.
(b) If value of goodwill is more than its book value, entry for the amount of difference will be:
38
Goodwill A/c Dr.

(c) If value of goodwill is less than its book value, entry for the amount of difference will be :
4
To Goodwill A/c.
The capital A/cs of Partners of the old firm will be debited in their old profit sharing ratio.
(d) When there is no goodwill in the old firm and on amalgamation if amount of goodwill
is decided, the entry will be as under:
Goodwill A/c Dr.
II. Creation of Now Firm
In the accounts of new firm, separate entries will be recorded for each sole pro-
prietorship firm or partnership firm which are to be included in amalgamation.
The assets and liabilities taken over by the new firm is debited and credited
respectively at their agreed value. The balance of asset and liabilities taken over is credited
to capital of partners or proprietor. The entry will be as under:
Sundry Assets A/c Dr.
To Sundry Liabilities A/c
To Partners' Capital A/c
Similarly, same entry will be made for other firms which are amalgamating.
39

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Advance-Accounting

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M.Com 1st Sem.

Subject- Advanced Accounting

Subject – Advanced Account

UNIT – I Advanced problems of Final Accounts

UNIT – II Advanced Problems of Bank Reconciliation Statement,

UNIT – III Accounting from Incomplete Records, Accounting for

UNIT – IV Investment A/c, Voyage A/c, Insolvency A/c.

UNIT – V Dissolution of partnership firm including sales of Firm and

According to American Institution of Certified Public Accountant Committee:-

Accounting As Science and Art

DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING

Recording of transaction in Journal or Subsidiary books

Profit and Loss Account

Profit and Loss A/c

To Int. on Drawings of P & L A/c capital on

a. Not rerecorded at all Assets A/c Dr. assets side.

deducted from debtor’s A/c To Deposit from Added to

According to R.G. Williams

Characteristics/Features of Bank Reconciliation statement

Objectives/Importance/Need/Advantages of preparing B.R.S.

Preparation of Bank Reconciliation Statement

IV Error in Pass Book

Errors of Errors of Errors of Compensating

Rectification of Errors which do not affect the trail Balance –

Rajesh A/c Dr.

Purchases A/c Dr. 7,200

3. Errors of Posting to wrong Account- Following are the errors of posting to

Ravina Dr. 10,000

For e.g. Furniture purchased on credit wrongly recorded in purchases book

Rectification of Errors which affect the trial balance :-.

Following are some errors responsible for disagreement of trial balance

Suspense A/c Dr. 45

Effect on Profit and Losses Account

Effect on Balance Sheet

According to J.R. Botaiboi

Characteristics of Accounts from incomplete Records

Advantages of Single Entry System

Disadvantages of Single Entry System

ACCOUNTING IN SINGLE ENTRY SYSTEM

Statement of profit or loss

If difference is in the debit side, it means it can be –

Bills Receivable Account

There are four main types of stock:

Claim for Loss of Stock

Claim Settling Process

Delay in submission of claim form may result in non-acceptance of the claim.

SALE AND PURCHASE PRICE OF INVESTMENTS

EXPENSES OF SALE AND PURCHASE OF INVESTMENT

Journal entries for Investment Accounting:

b) For investments sold:

c) Interest received on due date:

Rules to be considered while preparing investment account.

METHODS OF KEEPING INVESTMENT ACCOUNT

INVESTMENTS ON WHICH DIVIDENDS ARE EARNED

Difference between both Acts

Rate if final dividend

Deficiency as per List H

SPECIMEN OF DEFICIENCY ACCOUNT

Difference between Profit and Loss Account and Deficiency Account

Difference between Balance Sheet and Statement of Affairs

and liabilities liabilities.

Expenses which appear on the Debit Side of Voyage Account

Income which appear on the Credit

Performa of Voyage A/c