DAV International School

Amritsar

Support material for students

Accountancy- XII
2024-25

DAV International School, Amritsar

 Under the guidance of
Dr. Anjana Gupta
ARO Punjab Zone- C
&
Principal DAV International School, Amritsar

Editor:
Mr. Adesh Nanda (HOD-Commerce)

Contributors:
Mr. Vikas Mehra (Commerce Faculty)
Mr. Pankhur Sehgal (Commerce Faculty)

DAV International School, Amritsar

 Unit-wise Marking Scheme

S.No. Unit Marks

Part-A Accounting for Partnership firms and
Companies
I. Accounting for Partnership firms 36

II. Accounting for Companies 24

Total 60

Part-B Financial Statement Analysis

III. Analysis of Financial statements 12

IV. Cash Flow Statement 08
Total 20

Part-C Project Work 20

DAV International School, Amritsar

 Fundamentals of Partnership

Partnership – When two or more persons joint together to carry on the business and to share the
profit / loss arising thereon.
According to Section 4 of Indian Partnership Act, 1932 –“Partnership is the relation between two
or more persons who have agreed to share profits of business carried on by all or any one of them
acting for all.”
Maximum No. of members as per Section 464 of Companies Act 2014 is 100 but Central Govt.
has prescribed maximum no. of partners as 50 as per Rule 10 of Companies Rules 2014.
Minimum No. of Members- 2
Partnership Deed: It is the written agreement among partners which specifies the terms and
conditions that govern the partnership.
Contents of Partnership Deed:
1. Firm’s Description 2. Partner’s description 3. Principal Place of Business 4. Nature of
Business 5. Rate of Interest on Loan , on Capital and on drawings. 6. Profit Sharing Ratio
7.Partner’s Salary 8. Settlement of Accounts in case of reconstitution
Provisions/Rules in the absence of partnership deed.
1. Profit / Losses are shared equally by the partners.
2. Interest on capital is not allowed.
3. Interest on drawings is not charged from partners.
4. Interest on loan given by a partner to the firm @ 6% P.A. is allowed.
5. Remuneration (Salary/Commission) is not paid to any partners.
6. New partner cannot be admitted unless all the partners agree.
Limited Liability Partnership-It is a business vehicle like partnership with a additional
feature of partner’s liability being limited.
Interest on Partner’s loan
In absence of partnership deed interest on loan will be provided @ 6% P.A.
Nature – It is a charge against profit.
Charge against Profit and Appropriation of Profit
Charge against profit means that it is an expense for the firm and is paid whether the firm
earns profit or incurs loss.
Manager’s commission, Rent payable to partner and manager’s commission (MRI) etc.
are charge against profit and are payable whether the firm earns profit or incurs loss.
Appropriation of profit means distribution of net profit and interest on drawings among
partners as Salary/ Remuneration, Interest on capital etc. and transfer to reserves.
Accounting Treatment
Interest on Partner’s Loan Account – Dr.
To Partner’s Loan Account
Profit and Loss A/c………….Dr.
To Interest on Partner’s Loan A/c
Profit & Loss Appropriation A/c: It is an extension of Profit & Loss Account and is credited with
amount of net profit or debited with the amount of net loss.

Specimen of Profit & Loss Appropriation A/c-

Dr. Profit & Loss Appropriation A/c Cr.

To Profit & Loss A/c (Net Loss) By Profit & Loss A/c (Net Profit)
To Interest on Capital By Interest on Drawings
To Partner’s Salary
To Partner’s Commission
To Transfer to Reserve
To Share of Profit.
Note: It is a nominal nature account.
Remember
1. Profit that is transferred to Profit and Loss Appropriation A/c should be after charging
manager’s commission, rent payable to partner and interest on loan (MRI)
2. In case of loss we cannot provide interest on capital, salary, commission but interest on loan,
rent payable to partner and manager’s commission should be provided as these are charge
against profit.
Journal entries relating to Profit & Loss Appropriation A/c.
1. Transfer of profit from P&L A/c- Profit & Loss A/c. – Dr.
To P&L Appropriation A/c
2. Transfer of loss from P&L A/c Profit & Loss Appropriation A/c-Dr
To Profit and Loss A/c
3. For Partner’s salary/commission Partners Salaries/Commission A/c-Dr
To Partner’s Capital / Current Account
4. For Allowing interest on capital Profit & Loss Appropriation A/c – Dr
To Interest on Capital A/c
Interest on Capital A/c-Dr
To Partner’s Capital/Current A/c
5. For charging interest on Partner’s Capital/Current A/c – Dr
partner’s Drawing To Interest on Drawing A/c
Interest on Drawings A/c- ------- Dr
To Profit & Loss Appropriation
A/c
6. For transfer to reserve out of Profit & loss Appropriation – Dr
profit To Reserve A/c
7. For Transfer of credit balance of Profit & loss Appropriation – Dr
Profit and Loss Appropriation To Partner’s Capital/Current A/c
Account
 8. For Transfer of debit balance of Partner’s Capital/Current A/c---Dr
Profit and Loss Appropriation To Profit &Loss Appropriation A/c
Account
Example: A and B are partners sharing profits in the ratio of 3:2, with capitals of Rs. 5,00,000 and
Rs. 3,00,000 respectively. Interest on capital is agreed @6%p.a. B is to be allowed an annual
salary of Rs. 60,000. During the year 2022-23, profits prior to the calculation of interest on capital
but after charging B’s salary amounted to Rs. 1,80,000. A provision of 5% of the net profit is to
be made in respect of commission to the manager. Show the distribution of profit.
Solution:

Dr. Profit & Loss A/c for the year ended 31.3.2023 Cr.
Particulars Rs. Particulars Rs.
To Manager’s 12,000 By Profit for the 2.40,000
Commission year
(5% of Rs. 2,40,000) (Before B’s Salary)
To Net Profit Transferred 2,28,000
to Profit & Loss
Appropriation A/c
2,40,000 2,40,000
Dr. Profit & Loss Appropriation A/c for the year ended 31.3.2023 Cr.
Particulars Rs. Particulars Rs.
To B’s Salary 60,000 By Net Profit B/d 2.28,000
To Interest on Capital 48,000
A---------30,000
B---------18,000
To Profits transferred to: 1,20,000 2,40,000
A----------72,000
B---------48,000
2,28,000 2,28,000
Partner’s Capital Accounts may be maintained by following either:
(i) Fluctuating Capital Accounts
(ii) Fluctuating Capital Accounts
Under fluctuating capital accounts method only one account i.e. Capital A/c is maintained for
each partner.
Under fixed capital accounts method two accounts are maintained i.e. Current A/c and Capital
A/c . Transactions that are not related to Capital A/c are debited/ credited in the Current
Account of the partner.
 Fluctuating Capital
Dr. Partner’s Capital Account Cr.
Particular X Y Particulars X Y
To Cash Bank A/c - - By Balance B/d (in case of Cr. - -
Balance)
To Drawings A/c - - By Interest on Capital A/c - -
To Interest on - - By Commission A/c - -
Drawings A/c
To Profit & Loss - - By Partner’s Salary A/c - -
A/c
To Balance C/F - - By Profit & Loss Appropriation - -
(Profit)
Fixed Capital
Dr. Partner’s Current Account Cr.
Particular X Y Particulars X Y
To Balance B/d(in - - By Balance B/d (in case of Cr. - -
case of Dr. Balance) Balance)
To Drawings A/c - - By Interest on Capital A/c - -
To Interest on - - By Commission A/c - -
Drawings A/c
To Profit & Loss - - By Partner’s Salary A/c - -
Appropriations A/c
To Balance C/d - - By Profit & Loss Appropriation - -
(Profit)

Dr. Partner’s Capital Account Cr.

Particular X Y Particulars X Y
To Balance B/d (in - - By Balance B/d (in case of Cr. - -
case of Dr. Balance) Balance)
To Cash/Bank - - By Cash/Bank (Additional - -
(Drawings against Capital)
capital)
To Balance C/d - -
Remuneration to partners – It is allowed only if the partnership deed allows it to be paid
Nature – It is an appropriation of profit.
It is computed as follow:-
a) Percentage of Net Profit or Net profit Before commission x Rate
Distributable Profit before 100
charging commission
 b) Percentage of Net Profit or Net Profit Before Commission x Rate
Distributable profit after charging 100 + Rate
commission
Accounting Treatment –
Partner’s Salaries/Commission A/c – Dr
To Partner’s Capital/Current A/c
Profit & Loss Appropriation A/c – Dr
To Partner’s Salaries A/c
Partner’s Drawings----- It is of two types i.e. drawings out of capital and drawings against profit.
Drawings against capital is not considered for calculating interest on drawings
Case I- When drawings are made at irregular drawings then interest on drawings will be calculated
as per Product method.
Product Method
Date of Amount of Period for which amount is Product=
Drawings Drawings withdrawn Amount of
Drawings
x Period
for which
amount is
withdrawn

Interest on Drawings= Total of Product x Rate x 1

100 12
Case II-When uniform drawings are made at regular intervals then interest on drawings is calculated
as per average period method.
Average Period= Period after 1st drawings+ Period after last drawings
2

Formula for calculating interest on drawings= Total drawings x Rate x Average period
100 12
Table Showing Average period for uniform drawings at regular intervals in different cases:
Cases Average
period
1. When drawings are made in the beginning of 6.5
each month
2. When drawings are made in the end of each 6
month
3. When drawings are made in the mid of each 5.5
month
4. When drawings are made in the beginning of 7.5
each quarter
 5. When drawings are made in the mid of each 6
quarter
6. When drawings are made in the end of each 4.5
quarter

Points to remember
1. If the date of drawing is not given the interest on drawing for the year is calculated for
six month on the average basis.
2. When the rate of interest is given without the word per annum, interest is charged
without considering the time factor.
Accounting Treatment
Partner’s Capital/Current A/c--------Dr
To Interest on Drawing A/c
Interest on drawings A/c------Dr
To Profit & Loss Appropriation A/c
Example: P and Q are partners in a firm. You are required to find out amount of interest on drawings
if it is charged@,8% p.a.
(i) P drew Rs. 6000 in the beginning of every month for 6 months ending 31 st March 2022
(ii) Q drew Rs. 6,000 at the end of every month for 6 months ending 31 st March 2022
Solution:
P Q
Average Period =6+1 = 3.5 Months =5+0 = 2.5 Months
2 2
Interest on Drawings =36000 x 8 x 3.5= Rs. =36000 x 8 x 3= Rs. 720
840 100 x 12
100 x 12

Interest on Capital
Case – I : When the partnership deed does not exist or does not provide for interest on capital
- Interest on capital is not allowed.
Case – II : When the partnership deed provides for interest on capital but it is not mentioned
whether interest is a charge or appropriation---Interest on capital is accounted as appropriation
of profit. Interest on capital is allowed only if there is profit.
Situation Accounting Treatment
I. If Loss is incurred No interest on capital is
allowed
II. If interest on capital is equal to or more Interest on capital is allowed
than profit before interest to the extent of available
profit.
III. If Interest on capital is less than net Interest on capital is allowed.
profit
Case-III: When partnership deed provides for interest on capital as a charge. It is allowed whether
the firm has earned profit or has incurred loss.
Accounting Treatment –
Interest on Capital A/c. – Dr
To Partner’s Capital /Current A/c
Profit & Loss Appropriation A/c – Dr
To Interest on Capital A/c
Example: X and Y are partners sharing profits in the ratio of 2:3. Their capitals are Rs. 4,00,000
and Rs. 2,00,000 respectively. Interest is to be allowed on capitals @ 6%p.a. whether the firm earns
profit or incurs loss. Profit before allowing interest on capitals is Rs. 30,000.
Solution:
Dr. Profit & Loss A/c for the year ended------------- Cr.
Particulars Rs. Particulars Rs.
To Interest on Capital 36,000 By Profit(Before interest) 30,000
X-24,000 By Net Loss transferred 6,000
Y-12000 to Profit & Loss
Appropriation
36,000 36,000

Dr. Profit & Loss Appropriation A/c for the year ended----------
Particulars Rs. Particulars Rs.
To Profit and Loss A/c 6,000 By Loss Transferred to 6,000
Capital A/c
X-2400
Y-3600
6,000 6,000
Past Adjustments
While solving numerical of past adjustment first of all we have to analyze which items of partnership
deed has been omitted and errors have been committed. If interest on capital has been omitted then
we have to analyze whether opening capital has been given or not , if not then first of all we have to
calculate opening capital by using following formula:
Particulars A B C
Closing Capital Xxxx xxxx xxxx
+Drawings Xxx xxx xxx
-Additional Capital Introduced (xxx) (xxx) (xxx)
-Share of Profit (xxx) (xxx) (xxx)
+Share of Loss Xxx xxx xxx
Opening Capital Xx xx xx
Calculation of amount of adjustment entry:
Particulars A B C
Amount ought to be paid Xxx xxx xxx
 -Amount actually paid (xxx) (xxx) (xxx)
Net amount payable/ receivable
If net amount payable is –ve, then concerned Partner’s Capital/ Current A/c will be debited and vice-
versa.
Calculation of amount ought to be paid:
Particulars X Y Z
Interest on Capital Xxx xxx xxx
+Share of Profit Xxx xxx xxx
+Partner’s Salary Xxx xxx xxx
+Partner’s Remuneration Xxx xxx xxx
-Interest on Drawings (xx) (xx) (xx)
st
Example: On 31 March, 2023 balances in Capital Accounts of X,Y and Z after making
adjustments for profit and drawings were Rs. 3,20,000, Rs. 2,40,000 and Rs. 1,60,000 respectively.
Subsequently, it was noticed that interest on capital and drawings had been omitted.
(i) Profit for the year ended 31st March 2023 was Rs. 40,000
(ii) During the year, X and Y each withdrew total amount of Rs. 24,000 in equal installments in the
beginning of each month and Z withdrew total amount of Rs. 48,000 in equal installment at the
end of each month .
(iii) Interest on drawings was to be charged @ 5%p.a. and interest on capital was to be allowed
@10%p.a.
(iv) Profit sharing ratio among the partners was 2:1:1.
Showing your workings clearly, Pass necessary rectifying entry
Solution:
Calculation of Opening Capital and Interest thereon:
Particulars X Y Z
Closing Capital 1,60,000 1,20,000 80,000
+Drawings already debited 24,000 24,000 48,000
-Profit already Credited (20,000) (10,000) (10,000)
Opening Capital 1,64,000 1,34,000 1,18,000
Interest on Capital 1,64,000x10/100 1,34,000x10/100 1,18,000x10/100
16400 13,400 11,800
Total Interest on Capital= 16,400+13,400+11,800= Rs. 41,600
Interest on Drawings:
X = 24,000x5x13 = Rs. 650
100x24
Y = 24,000x 5x13 =Rs. 650
100x24
Z = 48,000x 5x11 = Rs. 1100
100x24
Total Interest on Drawings= Rs. 2400
Calculation of amount ought to be paid:
 Particulars X(Rs.) Y(Rs.) Z(Rs.)
Interest on Capital 16,400 13,400 11,800
-Interest on Drawings (650) (650) (1100)
+ Share of Profit 400 200 200
Net Amount ought to be paid 16,150 12,950 10,900
- Amount actually paid (20,000) (10,000) (10,000)
Net Effect (3850) 2950 900
Rectifying Entry:

X’s Capital A/c-------Dr 3850

To Y’s Capital A/c 2950
To Z’s Capital A/c 900
Guarantee of profit
Case-1. Guarantee of profit by all the remaining partners.
Step-1. Distribute profit as per profit sharing ratio is determined.
Step-2. Minimum guaranteed profit is determined.
The higher of above two amounts is given to the guaranteed partner. If the share of profit is less than
guaranteed amount, the difference in the amount of profit i.e. minimum guaranteed profit minus
share of profit of the guaranteed partner is borne by the remaining partner in agreed ratio.
Case-II. Guarantee of profit by one or more of the existing or old partners.
Step-1. Distribute the profit among the partners as per their profit sharing ratio.
Step-2. If share of profit of the guaranteed partner is less than the minimum guaranteed profit the
difference is deducted from the share of profit of the partner who has guaranteed and it is added to
the share of profit of the guaranteed partner.
Case –III. Guarantee in case of loss:
Step I Distribute loss among the partners in their profit sharing ratio.
Step II Capital A/c of guaranteed partner is credited with guaranteed minimum profit plus the
amount of loss. This amount is debited to remaining partners in their profit sharing ratio or to the
debit of the partner who has guaranteed minimum profit.
Example: M, N and O are partners sharing profits in the ratio of 6:4:1. O is guaranteed a minimum
profit of Rs. 4,00,000. The firm incurred a loss of Rs. 44,00,000 for the year ended 31 st March 2023.
Pass necessary journal entry regarding deficiency borne by M and N and prepare Profit and Loss
Appropriation A/c
Solution:
Dr. Profit & Loss Appropriation A/c for the year ended 31st March 2023 Cr.
Particulars Rs. Particulars Rs.
To Net Loss 44,00,000 By Loss Transferred to 44,00,000
M-24,00,000
N-16,00,000
O-4,00,000
 44,00,000 44,00,000
Loss of the Firm= Rs. 44,00,000
O’s Share of Loss= Rs. 44,00,000x1/11 = Rs. 4,00,000
Guaranteed Minimum Profit =Rs. 4,00,000
Therefore, O’s Capital A/c is to be credited by the amount of deficiency Rs. 8,00,000 which will be
borne by L and M in their profit sharing ratio.
L’s Capital A/c-------Dr. 4,80,000
M’s Capital A/c-------Dr. 3,20,000
To O’s Capital A/c 8,00,000
Points to remember:
1. Items that are charged against profit must be shown on the debit side of Profit & Loss
A/c.
2. In case of fixed capital of partners adjustment entries are made in Partner’s Current
Account.
3. In the absence of information regarding timing of drawings interest on drawings is
calculated for 6 months.
4. Interest on capital is calculated on opening balance of capital if there is no withdrawal
or addition of capital.
QUESTION BANK
True or False Statements
1. At least three persons are necessary for forming a partnership
2. Partners are mutual agents of each other so far as the business of the firm goes.
3.A partnership can be formed only for a legal business.
4. Interest on money advanced by a partner as loan to be firm shall be paid even if there
are losses in the business.
5. In the absence of any, agreement regarding profit sharing ratio, profit or loss must be
shared equally.
6. The business of the firm can be conducted even by one partner.
7 Partnership arises from status.
8. interest on drawings is always calculated for full year on total drawings,
9. It is necessary to have a partnership agreement in writing.
10.The right to share a profit is full proof of one being a partner.
11.In the absence of profit sharing ratio profit and losses are shared in the capital ratio.
12.Current account of Partners are maintained under fluctuating capital method.
13.Under fixed capital method, any addition to capital will be shown in Partner's
capital Account
14.Interest on partner's capital is allowed @ 6%.
Answers: True- 2,3,4,5,6,10,11,13 False: 1,7,8,9,12,14
 Multiple Choice Questions
Choose the correct alternative
Q1) Which of the following statement is true?
a. A minor can be admitted as a partner
b. A minor can be admitted only to the benefits of the partnership
c. A minor can be admitted as a partner with the consent of all the partners
d. A minor can be admitted as a partner but his rights and liabilities are same of adult partner.
Q2) Raman, Mohan and Shivam are partners in a firm. They want to expand their business for
which additional capital and more managerial experts were required. For this they want to admit
more members in their firm. What is the maximum number of additional, members that can be
admitted by them in the firm?
a. 02 b.50 c. 20 d. 47
Q3) In the absence of Partnership Deed, the interest is allowed on partner’s capital:
a. @6%p.a. b. @10%p.a.(c) @12%p.a. d. No interest is allowed
Q4) Madan and Mohan are partners in a firm without any agreement. Madan has given a loan of
₹1,00,000 to the firm. At the end of the year loss was incurred in the business. Following interest
may be paid to A by the firm: a. @5%p.a. b. @6%p.m. c. @6%p.a. d. Nil
Q5) If any loan or advance is given by firm to a partner then, balance of such loan account should
be transferred to:
a. Liability side of Balance Sheet c. Partner’s Current Account
b. Asset side of Balance Sheet d. Partner’s Capital Account
Q6) Which of the following items is not dealt through Profit and Loss Appropriation Account?
a. Partner’s Salary b. Partner’s Commission c. Manager’s Commission d. Interest on Partner’s
Capital
Q7) Vijay and Mukesh were partners in a firm with capitals of ₹1,00,000 and ₹2,00,000
respectively. The firm earned a profit of ₹45,000 during the year. Mukesh’s share of profit will be:
a. ₹45,000 b.₹15,000 c. ₹22,500 d. ₹30,000
Q8) Net profit of the firm is ₹9,90,000. Manager is entitled to a commission of 10% of the profits
after charging such commission. Manager’s commission will be:
a. ₹99,000 b.₹90,000 c. ₹1,10,000 d. ₹9,00,000
Q9) Which of the following items will appear on the debit side of partner’s capital account?
a. Drawings b. Share of profits c. Additional capital introduced d. Interest on Capital
Q10) If partner ‘Radhika’ withdrew ₹4,000in the beginning of each quarter during the year when
rate of interest on drawing is 7%p.a., then interest on drawings will be :
a. ₹560 b.₹420 c. ₹700 d. ₹175
Q11) If partner ‘Priyanka’ withdrew ₹18,000 evenly in the middle of every month during the year
,when rate of interest on drawings is 8%p.a., interest on drawings will be :
a. ₹720 b. ₹780 c. ₹760 d. ₹8,640
Q12) Interest on drawings is ₹560 when partner ‘Ashwani’ withdrew equal amount in the middle
of each quarter during the year @7%p.a..Amount of quarterly drawings will be:
a. ₹3,000 b. ₹4,000 c. ₹5,000 d. ₹6,000
Q13) In a partnership firm, partner Anuj is entitled monthly salary of ₹7,500. At the end of the
year, firm earned a profit of ₹75,000 after charging Anuj’s salary. If the manager is entitled a
commission of 10% on the net profit after charging his commission , Manager’s commission will
be: a. ₹7,500 b. ₹16,500 c. ₹8,250 d. ₹15,000
Q14) Ram and Shyam are partners in a firm sharing profits in the ratio of 2:1 with capitals of
₹1,00,000 and ₹2,00,000 respectively as on 1st April,2020. They introduced ₹20,000 each on 1st
October,2020 as additional capital and withdrew ₹10,000 and ₹5,000 respectively on 1 st
December, 2020. Calculate interest on capital of Ram and Shyam as on 31st March, 2021 if rate of
interest on capital is 10%p.a.:
a. ₹10,000 &₹20,000 respectively b. ₹10,667 &₹20,834 respectively c.₹10,600 &₹20,000
respectively d. ₹10,000 &₹20,834 respectively

Q15) Which of the following items are shown on debit side of current account?
I. Drawings against profits
II. Drawings against capital
III. Share of loss
IV. Interest on drawings
a. Only I b. Both I&II c. I,II and III d. I,III,IV
Q16) Which of the following is/are charge(s)?
I. Manager’s Commission
II. Partner’s Rent
III. Partner’s Commission
IV. Interest on Partner’s Loan
a. Only I b. Only II c. I, II and IV d. I,III and IV
Q17) If date of drawings is not given, then interest on drawings will be calculated for a period of
…………:a. 6.5 months b. 6 months c. 5.5 months d. No interest will be charged
Q18) Which of the following statement is not true for fixed capital account?
a. The capital account balance remains unchanged unless there is addition to or withdrawal of
capital
b. All adjustments for drawings, salary, interest on capital etc. are made in the current
accounts.
c. The capital accounts always show a credit balance.
d. Each partner has only one account, i.e. capital account, under this method
Q 19) In the absence of an agreement, partners shall:
(a) be paid salaries to those who work for the firm.(b) be paid salaries (c) not be paid
salaries(d) none of these
Q 20)Current accounts of the partners should be opened when the capitals are:
(a) fixed (b)either fixed or fluctuating ( c) fluctuating (d) none of above
Q 21) In the absence of an agreement profit and losses are divided by partners in the ratio of
(a)equally (b) capital (c) time devoted by each partner d) none of above
Q 22)In the absence of an agreement, interest a on loan advanced by a firm to the partner is
 allowed at the rate of:
a)12% (b) 6% (c )5% (d) As per prevailing rate
Q 23) In the absence of an agreement to the contrary, the partners
(a) are not entitled for any interest on their capitals
(b) are entitled for 6% interest on their capitals only when these are profits
(c) are entitle for 9% interest on their capitals, only when there are profits
(d) are entitled for interest on capital at the bank rate, only when there are profits.
Q 24) When interest is to be allowed on the capitals of the partners, it is calculated on the
(a) average capital (b) capital at the end less drawings if any
(c) capital in the beginning of the year (d) capital at the end of the year.
Q 25) The current account of a partner
(a) will always have a debit balance (b) may have a debit balance or a credit balance
(c) will always have a credit balance (d) both (a) and (c)
Q 26) When a partner is entitled to interest on capital subscribed by him, such interest will be
payable.
a)out of profits or out of capital (b) only out of profits (c)only out of capital (d) none of these
Q 27) When dates of withdrawals are not mentioned, interest on drawings is charged for:
(a) 12 months (b) 6 months (c) 6.5 months (d) 5 months
Q 28) Interest on capital is calculated on the
a) Closing balance less drawings b)Opening Capital Average capital d)Closing capital
Q 29) When guarantee is given to partner by some of the partners, deficiency on such guarantee
is borne by:
a) All of the partners (b) Partnership Firm (c) Partners who gave guarantee (d) none of the
partners
Q 30) A, B and C are partners sharing profits in the ratio of 5:4:1. C is given guarantee that his
share in a year will not be less than Rs. 5000. Profit for the year ended 31 st March 2023 is
Rs. 40,000. Deficiency in the guaranteed profit of C is to be borne by B. Deficiency to be
borne by B is:(a) Rs. 1500 (b) Rs. 1000 (c) Rs. 4000 (d) None of these
Q 31) X, Y and Z are partners in a firm sharing profits and losses in the ratio of 6:4:1. X is
guaranteed profit of Rs. 15,000 to Z . Net profit for the year ended 31 st March 2023 was Rs.
99,000. X’s share in the profit of the firm will be:
(a) Rs. 30,000 (b) Rs. 15,000 (c) Rs. 48,000 (d) Rs. 45,000
Q 32) Preeti, Mona and Nisha shared profits in the ratio of 3:2:1. Profits of the last three years
were Rs. 1,40,000 , Rs. 84,000 , Rs. 1,06,000 respectively. These profits were by mistake
shared equally in all the three years. Which of the following entry is necessary to correct
the above error?
(a) Nisha’s Capital A/c ----------------Dr. 55000
To Preeti’s Capital A/c 55000
(b)Preeti’s Capital A/c ----------------Dr. 55000
ToNisha’s Capital A/c 55000
 © Mona’s Capital A/c ----------------Dr. 55000
To Preeti’s Capital A/c 55000
(d) Preeti’s Capital A/c ----------------Dr. 55000
To Mona’s Capital A/c 55000
Q 33) X,Y and Z shared profits in the ratio of 2:2:1 whereas profit was Rs. 75,000 but the
partnership deed was silent regarding profit-sharing ratio . Which of the following is
necessary adjusting entry?
(a)Z’s Capital A/c--------------------Dr. 10,000
To X’s Capital A/c 5000
To Y’s Capital A/c 5000
(b) Y’s Capital A/c--------------------Dr. 10,000
To X’s Capital A/c 5000
To Z’s Capital A/c 5000
(C ) X’s Capital A/c--------------------Dr. 10,000
To Y’s Capital A/c 5000
To Z’s Capital A/c 5000
(d)X’s Capital A/c--------------------------Dr. 5000
Y’s Capital A/c--------------------------Dr. 5000
To Z ‘s Capital A/c 10,000
Q 34) Arif, Ravi and Ben are partners in a firm sharing profits and losses in the ratio of 6:4:1.
Arif guaranteed a minimum profit of Rs. 16,000 to Ben. The trading profit of the firm for
the year ended 31st March 2023 was Rs. 1,32,000. Arif’s share in the profits of the firm
will be:(a) Rs. 72,000 (b) Rs. 68,000 (c ) Rs. 69,600 (d) Rs. 16,000
Q 35) Pick the odd one out:
(a) Rent to Partner (b) Manager’s Commission (c ) Interest on Partner’s Loan d) Interest on
Partner’s Capital
Answer Key:
1(b), 2(d), 3(d), 4(c), 5(b), 6(c), 7(c), 8(b), 9(a), 10( c), 11(a) , 12(b), 13(d), 14(b),
15(d), 16(c), 17(b) ,18(d), 19(d),20(a ), 21(a),22 (d),23(a), 24 (c ),25(b), 26(b), 27(b),
28(b), 29( c), 30(b), 31( c), 32(b),33(a),34(b),35(d)

ASSERTION-REASON BASED QUESTIONS:

Q1) Assertion (A): A partnership firm can have maximum 50 partners
Reason (R): Maximum limit of partners is prescribed in Companies Act, 2013
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q2) Assertion (A): Fixed capital Accounts of Partners always show credit balances even when the
firm suffers losses year after year.
Reason (R): Current Accounts of partners are maintained under fixed capital method
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q3) Assertion (A): Rent payable to a partner is debited to Profit and Loss Account and not debited
to Profit and Loss Appropriation Account.
Reason (R): Rent payable to a partner is an appropriation of profits and not a charge against
profits.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q4) Assertion (A): In case, the amount of drawings is not same or if drawings are made on
different dates, interest on drawings will be calculated using Average Period Method.
Reason (R): In such a case, interest on drawings is charged for the period it is drawn by a partner.
As such, average method cannot be used to ascertain the amount of interest on drawings.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q5) Assertion (A): Mohan and Shyam are partners in a firm. As per partnership deed interest on
drawings is to be charged @9% p.a. Mohan withdrew ₹50,000 per month at the end of each month
and Shyam withdrew ₹ 2,00,000 per quarter at the beginning of each quarter. The firm incurred a
loss of ₹2,00,000. Hence, interest will not be charged on drawings.
Reason (R): Interest on drawings will be charged @9% p.a. on ₹6,00,000 from Mohan for 5.5
months and @9% p.a. on ₹8,00,000 from Shyam for 4.5 months.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct
b. Both (A) and (R) are incorrect
c. Only (A) is correct.
d. Only (R) is correct.
Q6) Assertion (A): The fixed capital account balance of a partner may change due to additional
capital introduced or capital withdrawn or both, during the year.
Reason (R): Under fixed capital method, the partner’s capital accounts balance always remains
same
In the context of the above two statements, which of the following is correct?
 a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q7) Assertion (A): Commission provided to manager is shown in Profit and Loss Account.
Reason (R): Commission provided to partner is an appropriation of profits hence debited to Profit
and Loss Appropriation Account.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q8) Assertion (A): In the absence of Partnership Deed, Interest on Loan by partner is not
allowed.
Reason (R): Suresh, a partner in the firm gave a loan of ₹25, 00,000 to the firm without an
agreement as to rate of interest. Interest on loan by Suresh will be allowed @
6%p.a.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q9) Assertion (A): If the appropriation as per Partnership Deed are more than the amount of
profit available for distribution, profit is distributed in the ratio of appropriations.
Reason (R): Ashwani, Parmod and Mukesh are partners with capitals of ₹1,00,000;
₹2,00,000 and ₹3,00,000 respectively sharing profits in 5:3:2. The Partnership
Deed allowed interest on capital @10% p.a. to all partners. Net Profit for the
year is ₹50,000. Profit will be distributed among partners in the ratio of 1:2:3.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct
d. Only (R) is correct
Q10) Assertion (A): Reserves are the charge against profits.
Reason (R): Transfer to reserves is shown in Profit and Loss Appropriation Account.
In the context of the above two statements, which of the following is correct?
a. Both (A) and (R) are correct and (R) is the correct explanation of (A).
b. Both (A) and (R) are correct and (R) is not the correct explanation of (A).
c. Only (A) is correct
d. Only (R) is correct
Answer the following questions out of these options:

(a) Both (A) and ® are correct and (R ) is the correct explanation of A
(b) Both (A) and ® are correct and (R ) is not the correct explanation of A
(c) ( A) is correct but ® is incorrect
(d) Both (A) and (R ) are incorrect.
Q 11) Assertion (A) : A, B and C are partners sharing profits and losses in the ratio of 3:2:1. C is
given a guarantee that his share of profit in any year will not be less than Rs. 1,00,000 and
any deficiency will be met by A and B in the ratio of 2:1. Net profit for the year amounted
to Rs. 6,00,000 and after appropriations it was Rs. 5,10,000. A will be debited by Rs.
10,000 and B by Rs. 5,000 as shortfall in guaranteed profit to C.
Reason®: Profit share of C will be Rs. 85,000 (5,10,000x1/6) . Hence deficiency will be
Rs. 15,000 and as such A will be debited by Rs. 10,000 (15,000x2/3) and B will be debited
by Rs. 5,000.
Q 12) Assertion ( A): Transfer to reserves is shown in Profit and Loss Appropriation A/c.
Reason ( R ): Reserves are charge against Profit
Q 13) Assertion ( A): X, Y and Z are partners sharing profits in the ratio of 5:3:2. Y is
guaranteed minimum share of profit is Rs. 1,00,000 p.a. after appropriations to be
borne by X. Net profit for the year ended was Rs. 5,00,000 after appropriations, it was
Rs. 3,00,000. X’s Capital Account will be debited Rs. 10,000 shortfall in guaranteed
profit to Y.
Reason (R ): Profit share of Y will be Rs. 90,000(3,00,000x1/10). Therefore, X’s
Capital Account will be debited by Rs. 10,000 to meet shortfall.
Q 14) Assertion( A) : A,B and C are partners with capital of Rs. 3,00,000, Rs. 4,00,000 and
Rs. 5,00,000 respectively. The partnership deed provided to allow remuneration to each
partner of Rs. 50,000 p.a. and interest on capital@5%p.a. Profit for the year ended 31st
March 2023 of Rs. 2,10,000 was distributed without allowing remuneration and interest
on capital. Rectifying entry for the above will be Dr. A and Cr. C by Rs. 5000.
Reason (R ): Remuneration and interest to A, B and C are Rs. 65,000, Rs. 70,000 and
Rs. 75,000 respectively. Each partner was credited by Rs. 70,000. As a result, A was
excess credited by Rs. 5,000 and C was short credited by Rs. 5,000. Thus, A will be
debited and C will be credited by Rs. 5,000.
Q 15) Assertion(A): Each partner is a principal as well as an agent for all the other partners.
Reason ®: As per the definition of Partnership Act, partnership business may be carried
on by all the partners or any of them acting for all.(C.B.S.E. 2024)
Choose the correct option from the following:
(a) Both A and R are correct, but R is not the correct explanation of A.
(b) Both A and R are correct, but R is the correct explanation of A.
(c) A is correct, but R is incorrect.
(d) A is incorrect, but R is correct.
Answers to AR questions

1(a), 2(a), 3(c), 4(d), 5(b), 6(c), 7(b), 8(d), 9(a), 10(d) ,11 (a), 12(c ), 13(a),14(a), 15(b)

SHORT ANSWER TYPE QUESTIONS

1. Puneet and Raju are partners in clay toys making firm. Their capitals were Rs.5,00,000
and Rs.10,00,000 respectively. The firm allowed to get a commission of 10% on the net
profit before charging any commission and Raju to get a commission of 10% on the net
profit after charging all commission. Following is the Profit and Loss appropriation
account for the year ended 31st March, 2023. Find the missing values:

Dr. Profit and Loss Appropriation account for the year ended 31st March 2023 Cr.
Particulars Amoun Particulars Amount
To Puneet’s Capital t By Profit and Loss A/c …………
A/c (commission) 44,000 …
(……… * 10/100)
To Raju’s capital A/c
(Commssion) ……….
To Profit share .
transferred to:-
Puneet’s Capital A/c-
---- ……
Raju’s Capital A/c----
----
2. Vihaan and Mann are partners sharing profits and losses in the ratio of 3:2. The firm
maintains fluctuating capital accounts and balance of the same as on 31st March 2022 is
Rs. 4,00,000 and Rs. 4,65,000 for Vihaan and Mann respectively. Drawings during the
year were Rs. 65,000 each. As per partnership deed , interest on capital @10%p.a. on
Opening Capital has been allowed to them. Calculate the opening capital of partners
given that the divisible profits during the year 2021-22 was Rs. 2,25,000.(Answer:
3,00,000 and 4,00,000) C.B.S.E. Sample Paper 2023
3. Partnership Deed provides for interest on drawings @10%P.A. Calculate the amount of
quarterly drawings for the year ended 31st March, 2023 in each of the following cases:
(i) When he withdrew fixed amount in the beginning of each quarter and total yearly
interest on drawings was Rs. 1500
(ii) When he withdrew fixed amount at the end of each quarter and total yearly interest
on drawings was Rs. 900
(iii) When he withdrew fixed amount in the middle of each quarter and total yearly
interest on drawings was Rs. 1200
(Answers: Rs. 6,000 per quarter in each case)
4. The capitals of X,Y and Z as on 31st March, 2023 amounted to Rs 1,50,000; Rs 5,50,000
and Rs 11,00,000 respectively. Profit amounting to Rs 3,00,000 for the year 2022-23 was
distributed in the ratio of 4:1:1 after allowing interest on capital @ 10% p.a. During the
year, each partner withdrew Rs 5,000 per month in the beginning of each month. The
Partnership Deed was silent as to profit sharing ratio and interest on drawings but
provided for interest on capital @ 12% p.a. Showing your working clearly, pass the
necessary adjustment entry to rectify the above error.
5. A and B are partners sharing profits and losses in the ratio of 3:2. Their capital on 31st
March, 2023 after all adjustments stood at Rs 1,65,500 and Rs 1,27,600 respectively.
Profits amounting to Rs 50,000 for the year 2022-23 were distributed after charging
interest on drawings @ 12% p.a. During the year A withdrew Rs 15,000 at the beginning
of every quarter and B withdrew Rs 40,000 during the year. Partnership deed is silent on
interest on drawings but provides for interest on Capital @ 5 % p.a. Interest on Capital
has not been provided. What adjustment entry will be passed?
6. Himanshu and Vikrant are partners in a firm and share profits equally. Their Balance Sheet
as at 31st March, 2017 is as follow:
Balance Sheet as at March 31, 2017
Liabilities Rs. Assets Rs.
Capitals: 3,40,000 Fixed Assets 3,60,000
Himanshu 2,00,000 Current Assets 40,000
Vikrant 1,40,000
Creditors 60,000
4,00,000 4,00,000
During the year 2016-17, Himanshu’s drawings were Rs. 30,000 and Vikrant’s drawings
were Rs. 40,000. During the year 2016-17the firm earned profit of Rs. 1,00,000. While
distributing profits for the year 2016-17, interest on capital @ 5% p.a. and interest on
drawings @12%p.a. were ignored. Showing your workings clearly, pass necessary
rectifying entry. C.B.S.E. Sample Paper 2018
7. On 31st March 2023, the balances in Capital A/c of A, B and C after making adjustments
for profits and drawings were Rs. 8,00,000, Rs. 6,00,000 & Rs. 4,00,000 respectively.
Subsequently, it was discovered that interest on capital and and interest on drawings had
been omitted . The partners were entitled to interest on capital @10% p.a, and were to be
charged interest on drawings @6%p.a. The drawings during the year were A- Rs. 20,000
drawn at the end of each month. B- Rs. 50,000 drawn at the beginning of every half year
and C Rs. 10,000 withdrawn on 31st October 2022. The net profit for the year ended
31.3.2023 was Rs. 1,50,000. The profit sharing ratio was 2:2:1. Pass necessary adjusting
entry for the above adjustments in the books of the firm.(C.B.S.E. 2019)
(Answers: Dr. B’s Capital A/c Rs. 14,402, Cr. A’s Capital A/c Rs. 10,112 , C’s Capital
A/c by Rs. 4290)
8. A, B and C started a business in partnership and contributed Rs.1,00,000, Rs.80,000 and
Rs.60,000 respectively, as their capitals. They agreed to share profits and losses in the ratio
 of 3: 2: 1 after allowing interest on capital @ 10% p.a. and charging interest on drawings
@ 12% on drawings @ 12% p.a. The drawings of the partners during the year ended 31 st
March, 2023 were: A Rs. 12,000; B Rs.15,000 and C Rs. 6,000. C, to whom a salary of
Rs.1,000 P.M. was payable, had guaranteed that the firm would earn a profit of Rs.75,000
before charging or allowing interest and salary payable to the partners. The actual profit
before interest and salary amounted to Rs.70,000.Prepare Profit and Loss Appropriation
A/c and the Partner’s Capital Accounts.
9. Isha & Shilpi were partners sharing profits in the ratio of 3: 2. Mini was to receive a salary
of Rs.10,000 per annum plus a commission of 10% on the profits after charging such salary
1
and commission or th of the profits of the firm, whichever is larger. Any excess of latter
5
over the former is to be borne personally by Isha. Prepare the profit & Loss appropriation
Account if profit for the year ended 2023 was Rs.120000.
10.Manoj and Nitin were partners in a firm sharing profits and losses in the ratio of 2:1. On
31st March, 2023, the balances in their capital accounts after making adjustments for profits
and drawings were Rs. 90,000 and Rs. 80,000 respectively. The net profit for the year
ended 31st March 2023 amounted to Rs. 30,000. During the year Manoj withdrew Rs.
40,000 and Nitin withdrew Rs. 20,000. Subsequently, it was noticed that interest on capital
@10%p.a. was not provided to the partners. Also interest on drawings to Manoj Rs. 3,000
and Nitin Rs. 2,000 was not charged.
Pass necessary adjustment journal entry. (C.B.S.E. 2024)
11.L, M & N were partners. Their capitals were L 1,20,000; M 80,000 & N 40,000
respectively. Acc. to their deed, they were entitled to get interest on capital @ 5% p.a. ‘M’
& ‘N’ each were entitled to get salary of Rs. 1,000 p.m. L was entitled to a commission
of 10% on net profit after allowing interest on capital, but before charging such salary. The
net profits for the year ended 31st March, 2019 were Rs.4,80,000 & they were already
divided in their capital ratio without providing for the above adjustment. The profit were
to be shared in 2:2:1, pass necessary adjustment entry assuming capital of L & M to be
fixed & N’s share of profits being guaranteed not less than Rs.40,000 p.a.
12.Ahmad Bheem and Daniel are partners in a firm. On 1 st April, 2022 their capital accounts
stood at Rs.8,00,000, Rs.6,00,000 and Rs.4,00,000 respectively. They shared profits and
losses in the proportion of 5 : 3 : 2. Partners are entitled to interest on capital @ 5% per
annum and salary to Bheem @ Rs.3,000 per month and commission of Rs.12,000 to Daniel
respectively as per the provisions of the partnership deed. Ahmed’s share of profit
(excluding interest on capital but including salary) is guaranteed at a not less than of
Rs.25,000 P.A. Bheem’s share of profit, including interest on capital but excluding salary,
is guaranteed at not less than Rs. 55,000 p.a. Any deficiency on that account shall be met
by Daniel. The profits of the firm for the year ended 31 st March, 2023 amounted to Rs.
2,16,000. Prepare Profit & Loss Appropriation Account for the year ended 31 st March,
2023.
Competency Based Questions:
1.Read the following information carefully and answer the questions that follow:
X and Y are partners in 3:2. Their capital balances as on 1st April 2021 amounting to Rs
2,00,000 each. On 1st February, 2020, X contributed an additional capital of Rs 1,00,000.
Following are the terms of deed:
a) Interest on capital @ 6% per annum
b) Interest on drawings @ 8% per annum
c) Salary to X Rs 1500 per month
d) Commission to Y @10% on net profit after charging interest on capital, salary and his
commission. Drawings of the partners were Rs 20,000 and Rs 30,000 respectively during
the year. Net profit earned by the firm was Rs 2,08,000
Choose the correct option based on the above information:
1. What is the amount of Interest on capitals of X and Y:
a. Rs 12,000 each b. Rs 12,000 to X and Rs Rs13000 to Y
c. Rs 13,000 to X and Rs12000 to Y d. None of the above.
2. What is the amount of interest on drawings of X and Y:
a. Rs 1200 and Rs 1800 respectively b. Rs 800 and Rs 1200 respectively
c. Rs 1200 and Rs 800 respectively d. Rs 1600 Rs 2400 respectively
3. What is the amount of commission payable to Y?
a. Rs 15,000 b. Rs 16,500 c. Rs 20,800 d. None of these
4. What is X's share in the net divisible profit?
a. Rs 1,24,400 b. Rs 83,600 c. Rs 91,200 d. Rs 60,800
5. What will be the closing capital of X after all adjustments?
a. Rs 4,22,200 b. Rs 4,01,400 c. Rs 3,00,000 d. Rs 4,23,000

2.Read the following information carefully and answer the questions that follow:
A, B and C were partners sharing profits in the ratio of 1:2:3. Their fixed capitals on
1st April, 2020 were: A Rs 3,00,000; B Rs 4,50,000 and C Rs 10,00,000.
A provides his personal office to the firm for business use charging yearly rent of
Rs 1,50,000. Their partnership deed provided the following:
i. Interest on capitals @8% p.a. and interest on drawings @ 10% p.a.
ii. A was allowed a salary @ 10,000 per month.
iii. B was allowed a commission of 10% of net profit as shown by Profit and Loss
account, after charging such commission.
iv. C was guaranteed a profit of Rs 3,00,000 after making all adjustments.
The net profit for the year ended 31st march, 2021 was Rs 10,30,000 before all above
adjustments and rent to A .You are informed that A has withdrawn Rs 5,000 in the
beginning of each month, B has withdrawn Rs 5,000 at the end of each month and C
has withdrawn Rs 24,000 in the beginning of each quarter.
Choose the correct option based on the above information:
1. A’s rent will be shown in:
 a. Profit and loss account b. Profit and Loss Appropriation account
c. A’s Capital account d. A’s current Account
2. Net profit for the year is:
a. Rs 10,30,000 b. Rs 11,80,000 c. Rs 7,30,000 d. Rs 8,80,000
3. What will be the divisible profit?
a. Rs 5,56,000 b. Rs 5,50,000 c. Rs 5,52,000 d. Rs 5,53,000.
4. What will be the total interest on drawings?
a. Rs 24,000 b. Rs 12,000 c. Rs 36,000 d. 48,000.
5. What will be the commission of B?
a. Rs 8,00,000 b. Rs 96,000 c. Rs 80,000 d. Rs 72,000.
3. Tanuja and Renu were partners in trading in Hand Sanitizer. Their profit sharing ratio is
3:2. Their fixed capitals on 1-Apr-2020 were Rs. 3 lakhs and 6 lakhs respectively. During
the COVID pandemic, all partners decided to help the poor daily workers personally. For
this Tanuja took hand sanitizer amounting to Rs24000 from the firm. And distributed those
to the workers family. On the other hand, Renu withdrew Rs. 1 Lakh from her capital on 1-
Jan-2021 and provided a medical mobile Van in the containment zone. The Partnership deed
provides for charging interest on drawings @ 6% p.a.. and allowing interest on capital @ 9%
p.a.
Based on the above information, you are required to answer the following questions:
1. Interest on Tanuja’s drawings will be:
a. Rs. 1440 b. Rs. 720 c. NIL d. Rs. 240
2. Interest on Partners drawings will be debited to
a. Profit and Loss A/c b. Partners’ Capital A/c
c. Profit and Loss Appropriation A/c d. Partners Current A/c
3. Interest on Renu’s Capital will be ______________ .
 GOODWILL : NATURE AND VALUATION
Goodwill :- Goodwill is the value of the reputation of a firm in respect of the Profit expected in
future over and above the normal profit earned by other similar firms belonging to the same industry.
Features of goodwill
 There are certain features of goodwill which are as follows:-
 Goodwill is an intangible asset.
 It cannot be sold independently.
 It cannot have an exact cost as its value fluctuates from time to time.
 Its value is based on the Judgment of the valuer.
Nature of goodwill
Goodwill is an intangible asset. It means it does not have any physical existence.
Factors affective the value of goodwill
 Efficient Management:- By the efficient management, the firm earns higher profits which
increases the value of goodwill.
 Location:- Location also affects the goodwill by increasing the Sales & Profits.
 Favorable Contracts:- If a firm has favorable contracts with other reputed firms then the
value of goodwill would be high.
 Quality of products:- If the firm is supplying good quality of products, then the customer
will come again and again for the same and thus will create the goodwill and brand name for
the same.
 The longevity of the business:- An older business is better known to its customers, therefore
it is likely to have more goodwill.
 Monopoly & other rights:- If a business enjoys monopoly market, it will have assured
profits. Similarly, if it holds some special rights such as Patents, Trade Mark, Copy right etc.,
it will have more goodwill.
Other Factors affecting goodwill
 Favorable Government regulations.
 Stable Political conditions.
 Research and development efforts.
 Popularity of products in terms of quality.
Classification of goodwill
1.Purchased Goodwill:-It arises when a business unit is purchased by another business concern and
purchase price paid is in excess of the value of Net Assets.
2.Self-Generated Goodwill:-It is an internally generated goodwill which arises from number of
attributes that a running business possesses.
Need for valuation of goodwill:-
There are number of situation in which there is need for valuation of goodwill, which are as
follows:-
1.Change in the profit sharing ratio.
2.Admission of a new Partner.
3.Retirement or Death of a Partner.
4.Dissolution of firm.
5.Amalgamation of Partnership firms.
FORMULA BOX
Average Profit Average Profit = Sum of Profits
Method Number of years
Goodwill = Avg. Profits x Number of Years Purchased
Weighted Weighted Average Profit = Product of weighted
Average Profit average profit
Method Sum of weight
Super Profit Super Profits = Average Profits – Normal Profits
Method Normal Profits = Capital Employed x Normal Rate /
100
Average Profits = Sum of Profits
No. of years
Goodwill = Super Profit x No. of years purchase.
Capitalization a) Capitalization of Average Profits
Method Capitalized value of firm = Average Profits x 100
Normal Rate of Return
Net Assets/Capital Employed = Total Assets – Outside
Liabilities.
Goodwill = Capitalized value – Capital Employed
b) Capitalization of Super Profits
Goodwill = Super Profits x 100_______________
Normal Rate of Return

METHODS OF VALUATION OF GOODWILL

The methods of valuation of goodwill are as follows:-

Simple Average Profit Method:-The profit earned by a firm during previous accounting periods
on an average basis is called average profit goodwill is calculated on the basis of average profit
due to future expectations of earning capacity of the firm.
Weighted Average Profit Method:-In this method each and every year’s profit is assigned a
weight. Each year profits are multiplied by assigned weights. Products are added and divided by
total of weights. Weighted average is multiplied by agreed number of years of purchase.
Super Profit Method:- Super profit is the excess of actual profits over the normal profits, where
normal profits are profit earned by similar business.
Capitalization Method:- In this method capitalized value of the firm is calculated on the basis of
normal rate of return.
Capitalization of Average Profit Method.
Capitalization of Super Profit Method.
Q.1. The total capital of the firm of Saurabh, Mohit and Nikhil was Rs. 1,00,000. The net profits
for the last 3 years were : 2013-14 Rs. 40,000/-, 2014-15 Rs. 46,000/- and 2015-16 Rs. 52,000/-.
There was an abnormal loss of Rs. 3,000/- in 2014-15. Goodwill of the firm firm was to be valued
at 2 years purchase of the average profits of the last three years. Calculate the goodwill of the firm.
SOLUTION
Total Profits of last 3 years
2013-2014 40,000
2014-2015 (Rs. 46,000/- + Abnormal Loss Rs. 3,000/-) 49,000
2015-2016 52,000
1,41,000
Average Profit = Rs. 1,41,000 ÷ 3 = Rs. 47,000
Goodwill = Average Profit x Number of year’s purchase
= Rs. 47,000 x 2 = Rs. 94,000
Q.2. A and B are partners sharing profits equally. They agree to admit C for equal share. For this
purpose goodwill is to be valued at 150% of the average annual profits of the last 5 year’s profits
Profits were:
Year ended
31st March 2015 40,000
2016 60,000
2017 1,00,000
2018 20,000 (Loss)
2019 1,50,000
It was observed that:
During the year ended 31st March 2016, an asset of the original cost of Rs. 2,00,000/- with book
value of Rs. 1,50,000/- was sold for Rs. 1,24,000/-.
During the year ended 31st March, 2017, firm’s assets were not insured due to oversight. Insurance
premium being Rs. 20,000/-.
On 1st April, 2017, 2 Computer’s costing Rs. 1,00,000/- were purchased and were wrongly debited
to Travelling Expenses. Depreciation on Computers was to be charged @ 20% p.a. on written down
value basis.
Calculate the value of goodwill.
SOLUTION
Particulars 2015 2016 2017 2018 2019
Profits 40,000 60,000 1,00,000 (12,000) 1,50,000
ADD: Loss on Sale of - 26,000 - - -
Assets
LESS: Insurance - - (20,000) - -
Premium
 ADD” Cost of computers - - - 1,00,000 -
wrongly charged to P&L
A/c.
LESS: Depreciation on - - - (20,000) (16,000)
computers
Adjusted Profits 40,000 86,000 80,000 60,000 1,34,000

Average Profit = 40,000 + 86,000 + 80,000 + 60,000 + 1,34,000

5
= 400000/5
= Rs. 80,000
Value of Goodwill = 80,000 x 150 = Rs. 1,20,000
100
Working Note:
Depreciation on Computers for the year ended 31.3.2018 = 20% on Rs. 1,00,000
= Rs. 20,000
Depreciation on Computers for the year ended 31.3.2019
20% on (Rs.1,00,000/- Rs. 20,000) = Rs. 16,000
Q.3. A and B are partners in a firm sharing profits and losses in the ratio of 2:1. They decide to take
C into partnership for 1/5th share on 1st April 2017. For this purpose goodwill is to be valued at 80%
of the average annual profits of the previous three or four years, whichever is higher.
The average profits for the last four years are:
Year ending on 31st March 2014 98,000
st
Year ending on 31 March 2015 80,000
st
Year ending on 31 March 2016 76,000
st
Year ending on 31 March 2017 1,20,000
Calculate the value of goodwill
SOLUTION

Calculation of Average Profits

Based on 3 year’s Amount Based on 4 year’s Amount
profits profits
31st March 2015 80,000 31st March 2014 98,000
st
31 March 2016 76,000 31st March 2015 80,000
st
31 March 2017 1,20,000 31st March 2016 76,000
31st March 2017 1,20,000
2,76,000 3,74,000
Average Profit = 2,76,000 ÷ 3 = Rs. Average Profit = 3,74,000 ÷ 4 = Rs.
92,000 93,500
4 year’s average profit is higher than 3 year’s average profit. Hence, the value of goodwill will be
80% of Rs. 93,5000 = Rs. 74,800.
Q.4. A and B are partners sharing profits and losses in the ratio of 3 : 2. They agree to take C into
partnership for 1/3rd share. For this purpose, goodwill is to be valued at two year’s purchase of the
average profit of lost four years which were as follows :
Year ending on 31st March 2014 50,000 (profit)
st
Year ending on 31 March 2015 1,20,000 (profit)
st
Year ending on 31 March 2016 1,80,000 (profit)
st
Year ending on 31 March 2017 70,000 (Loss)
On Ist April, 2016 a motor bike costing Rs 5o, 000 was purchased and debited to travelling expenses
account, on which deprecation is to be charge @ 20% p.a. calculate the value of goodwill.
SOLUTION
Calculation of Average Profits
31st March 2014 50,000 (profit)
st
31 March 2015 1,20,000 (profit)
st
31 Mach 2016 1,80,000 (profit)
st
31 March 2017 30,000(profit)
3,20,000
Average profit = Rs3, 20,000÷4 = Rs80, 000
Goodwill = Average profit× Number of year’s purchase
= Rs80, 000×2 = Rs1, 60,000.
Note : (i) cost of motor bike was wrongly debited to travelling expenses account. After
rectification, the loss of 2017 will be reduced by Rs50,000.
(ii) Depreciation on motor bike Rs10,000 (20% of 50,000) was not charged to profit
and loss account of 2017 which will increase the loss of by Rs10,000.
Hence, the final loss will be Rs70,000-Rs50,000+Rs10,000=Rs.30,000.
Q.5. It was agreed to calculate the value of goodwill of a firm at three years’ purchase of the weighted
average profit of the past four years. The appropriate weights to be used to each year ended on 31 st
March are : 2012 – 1; 2013- 2; 2014- 3; 2015-4.
The profits for these years ended on 31st March are : 2012 Rs20,200; 2013 Rs24,800; 2014 Rs20,000;
and 2015 Rs30,000.
On a scrutiny of the account the following matters are revealed:-
On 1st December,2013 a major repair was made in respect of the plant incurring Rs6,000 which
amount was charged to revenue. The paid sum is agreed to be capitalized for goodwill calculation
subject to adjustment of depreciation of 10%p.a. on reducing balance method.
The closing stock for the year ending on 31st march was over-valued by Rs. 2,400.
To cover management cost an annual charge of Rs. 4,800 should be made for the purpose of goodwill
valuation.
SOLUTION
Calculation of Adjusted Profits
2012 2013 2014 2015
Rs. Rs. Rs. Rs.
Profits 20,200 24,800 20,000 30,000
Less: charge for management cost 4,800 4,800 4,800 4,800
15,400 20,000 15,200 25,200
Add: capital expenditure charged to 6,000
revenue 15,400 20,000 21,200 25,200

Less: depreciation (not provided) 200(1) 580(1)

15,400 20,000 21,000 24,620
Less: over valuation of closing 2,400
stock 15,400 17,600 21,000 24,620
2,400
Add: over valuation of opening 15,400 17,600 23,400 24,620
stock

Adjusted profits

Calculation of weighted average profits

Year Profits Weight Product
Rs.
2012 15,400 1 15,400
2013 17,600 2 35,200
2014 23,400 3 70,200
2015 24,620 4 98,480
10 2,19,280
Weighted average profits = 2,19,280 = 21,928
10
Goodwill at 3 year’s purchase = Rs. 21,928×3 = Rs.65,784
Working notes:
Depreciation for the year ending 31st March,2014 = 10% of Rs. 6,000 for 4 months
= 6,000× 10 ×4 = Rs200.
100 12
st
Depreciation for the year ending 31 March,2015 = 10% of Rs. 5,800(i.e., 6,000-200)
Closing stock of 2013 automatically becomes the opening stock of 2014.
`Multiple choice questions
1. The excess amount which the firm can get on selling its assets over and above the saleable
value of its assets is called:
a. (a) Surplus (b) Super Profits (c) Reserve (d) Goodwill
2. Which of the following is not true in relation to goodwill?
(a) It is an intangible assets (b) It is fictitious asset
(c) It has a realizable value (d) None of the above.
3. Goodwill is recorded in books of accounts if it is,
(a) Purchased goodwill (b) Self-generated goodwill c) Existing goodwill

4. The goodwill of the firm is not affected by

(a) Location of firm (b) Reputation of firm (c) Better customer service (d) Method of
calculating goodwill
5. If goodwill of firm on the basis of super profit two years purchase of super profit is Rs.
70000/- what is the amount of super profits.
a. 1,40,000 (b) 35,000 (c) 70,000 (d) 1,05,000
6. If normal profit is 45,000/- and normal rate of return is 15% p.a., find value of capital
employed. (a03,00,000 (b) 6,750(c) 51,750(d) 3,10,000
7. Goodwill is: (a) Tangible Asset (b) Intangible Asset(c) Wasting Asset(d) Fictitious asset
8. Under capitalization method, the formula for calculating goodwill is:
a. Super profits multiplied by rate of return
b. Average profits multiplied by rate of return
c. Super profits divided by rate of return d. Average profits divided by rate of return
9. Weighted average profit method of calculating goodwill is used when: (a) Profits are not
equal (b) Profits show a trend(c) Profits are fluctuating (d) None of the above.
10.Which accounting standard deals with the treatment of goodwill.
a. (a) AS-32 (b) AS-3 (c) AS-26 (d) AS-25

Answer 1 d,2 b, 3a, 4 d,5b,6a, 7b,8 c, 9 b, 10 c.

Assertion-Reason Based Questions:

1. Assertion(A): Goodwill is an intangible but not a fictitious asset.

Reason(R) : Goodwill is an intangible asset because it does not have a physical existence
but it is a valuable asset because it is helpful in earning profits.
In the context of above two statements, which of the following is correct?
(a) Both (A) and (R) are correct and (R) is not the correct explanation of (A).
(b) Both (A) and (R) are correct and (R) is the correct explanation of (A).
 (c) Both (A) and (R ) are false.
(d) (A) is false , but (R) is true.
2. Assertion(A): Value of Goodwill is subjective and not an exact value under any method.
Reason(R) : Value of Goodwill is subjective because it is based on estimates as to number
of years’ purchase or rate of return on capital employed .
In the context of above two statements, which of the following is correct?
(a) Both (A) and (R) are correct and (R) is not the correct explanation of (A).
(b) Both (A) and (R) are correct and (R) is the correct explanation of (A).
(c) Both (A) and (R ) are false.
(d) (A) is false , but (R) is true.
3. Assertion(A): Goodwill exists only when a firm earns more profits than normal profits.
Reason(R) : Self generated Goodwill is shown in the books because consideration in
money’s or money’s worth has been paid for it.
In the context of above two statements, which of the following is correct?
(a) Both (A) and (R) are correct and (R) is not the correct explanation of (A).
(b) Both (A) and (R) are correct and (R) is the correct explanation of (A).
(c) Both (A) and (R ) are false.
(d) (A) is true , but (R) is false
4. Assertion(A): Value of Goodwill is subjective and not an exact value under any method.
Reason(R) : Value of Goodwill is subjective because it is based on estimates as to number
of years’ purchase or rate of return on capital employed .
In the context of above two statements, which of the following is correct?
(a) Both (A) and (R) are correct and (R) is not the correct explanation of (A).
(b) Both (A) and (R) are correct and (R) is the correct explanation of (A).
(c) Both (A) and (R ) are false.
(d) (A) is false , but (R) is true.
5. Assertion(A): Goodwill is valued on the basis of normal business profit. For ascertaining
normal business profit, abnormal losses are added and abnormal profits are deducted.
Reason(R) : Abnormal losses and abnormal profits are adjusted to net profit because they
may or may not happen in future.
In the context of above two statements, which of the following is correct?
(e) Both (A) and (R) are correct and (R) is not the correct explanation of (A).
(f) Both (A) and (R) are correct and (R) is the correct explanation of (A).
(g) Both (A) and (R ) are false.
(h) (A) is true , but (R) is false.

Answers: 1(b), 2(b),3 (d),4(b),5(b)

 COMPETANCY BASED QUESTIONS
1. Bhanu, Partap and Pawan are partners in retail trade of electronic goods sharing profits
equally. Partap started a new business of Departmental Stores and therefore was unable to
devote any time to existing business. Partap withdrew Rs. 2,00,000 out of his capital for
investment in new business. All the partners decided that there was a need to agree on new
terms of partnership.
The decisions taken were as follows:
Future profits will be shared in the ratio of 2:1:2; Monthly salary will be allowed to Bhanu
and Pawan of Rs. 5000 each and interest on capital @5% per annum will be allowed to all
the partners.
As a result of this change, Goodwill was to be valued for which information as to net profits
of the business for the past five years was made available as follows:
Year I II III IV V
Profits(Rs.) 70,000 65,000 80,000 75,000 60,000
Capital investment of the firm is Rs. 4,00,000 . A fair return on capital in a similar business
is 12%. It was agreed to value goodwill at 3 year’s purchase of super profits of past five
year.
On the basis of above information, answer the following:
(i) The profit earned by Partap in the new business
(a) Will be shared by all the partners
(b) Will not be shared by all the partners, it being an independent business venture of Partap,
it being in knowledge of other partners.
(c) May be shared at the discretion of Partap
(d) Will be shared because new business is started with withdrawl of capital from existing
business.
(ii) Average maintainable business profit will be
(a) Rs. 60,000 (b) Rs. 80,000 (c) Rs. 90,000 (d) Rs. 70,000
(iii) Normal business profit will be
(a) Rs. 40,000 (b) Rs. 48,000 (c) Rs. 50,000 (d) Rs. 46,000
(iv) Value of goodwill of the business will be
(a) Rs. 76,000 (b) Rs. 56,000 (c)Rs. 66,000 (d) Rs. 86,000
2. Amit, Aman and Raman are partners sharing profits and losses in the ratio of 2:2:1. On 1st
April , 2021 they changed their profit sharing ratio to share future profits equally. Amit and
Aman demanded that since they will be sacrificing their profit share, they should be
compensated by Raman, the only Gaining partner to which he agreed.
On the date of reconstitution , the firm had assets of Rs. 3,00,000 including cash of Rs.
20,000. The Capital Accounts of partners totaled Rs. 2,40,000 and General Reserve being
the rest. Normal rate of return in a similar business is 10%. Goodwill of the firm was valued
at Rs. 96,000 at 4 years’ purchase of Super Profit.
On the basis of above information, choose the correct the correct option to the questions.
 (i) Normal Profit of the firm is
(a) Rs. 15,000 (b) Rs. 25,000 (c) Rs. 30,000 (d) Rs. 20,000
(ii) Average Super Profit will be
(a) Rs. 15,000 (b) Rs. 25,000 (c) Rs. 24,000 (d) Rs. 20,000
(iii) Average profit will be
(a) Rs. 50,000 (b) Rs. 52,000 (c) Rs. 54,000 (d) Rs. 60,000
(iv) Raman will compensate Amit and Aman by paying Goodwill
(a) Rs. 8400 each (b) Rs. 7400 each (c) Rs. 6400 each (d) Rs. 5400 each
3. S and M are partners for the past 10 years. Due to external factors, i.e. pandemic business
got severely affected. Markets being closed and customers not coming to the outlet and also
internal factors, i.e. partners being not willing to invest further capital, the decision making
being affected by uncertain conditions of pandemic, business has been showing downward
trend since last 2 years and net profits or losses in the last 3 years are as follows:
2018-19 2019-20 2020-21
Rs. 4,25,000 Rs. 1,50,000 Rs. (1,25,000)
They are considering of admitting a partner who can bring capital to meet funds shortage.
They discussed with R to be a partner who agreed but was of the opinion that he should not
be paying any goodwill to get the share. However, S and M were of the opinion that they
should get Goodwill since they will be sacrificing their profit share. Thus, they decided to
value goodwill by capitalization of super profit. Average capital employed in the business is
Rs. 5,00,000. The rate of return expected from capital invested is 15%. Management cost is
estimated at Rs. 5000 per month.
On the basis of above information, choose the correct option to the given questions.
(i) Goodwill at 3 years purchase of Average Profit will be
(a) Rs. 1,35,000 (b) Rs. 2,70,000 (c) Rs. 5,40,000 (d)Rs. 6,00,000
(ii) Goodwill at 3 years purchase of Super Profit will be
(a) Rs. 45,000 (b) Rs. 90,000 (c)Rs. 30,000 (d) Rs. 60,000
(iii) Goodwill under Capitalisation of Super Profit will be
(a) Rs. 1,50,000 (b) Rs. 2,00,000 (c) Rs. 1,00,000 (d) Rs. 50,000
4. A and B are partners in an unregistered firm sharing profits and losses equally . On 1st April
2021 they agreed to change their profit sharing ratio to 3:2. For this purpose, goodwill of the
firm is valued at 3 years’ purchase of the weighted average profit of the last 4 years. Profits
for the year ended 31st March were as follows:
2017-18 2018-19 2019-20 2020-21
Rs. 1,05,000 Rs. 1,50,000 Rs. 80,000 Rs. 44,200
Weights allotted to each year are as follows:
2017-18 2018-19 2019-20 2020-21
1 2 3 4
Off late, their trading business is not showing any growth so they planned to do online
business for which they have to register their partnership. For this reason, they hired the
 services of a Chartered Accountant firm, which after close scrutiny of the accounts gave the
following information:
1. On 1st November, 2018, a theft occurred in the warehouse resulting in a loss of stock
costing Rs. 50,000
2. On 31st December , 2019, a major upgradation work was carried out to the air-
conditioning unit for Rs. 80,000 , which was charged as an expense. It was agreed to be
capitalized for valuation of goodwill subject to depreciation @20%p.a. on WDV
3. The closing stock on 31st March 2020 was overvalued by Rs. 11,000.
Based on the above information,
(i) Adjusted profit for the year ended 31st March , 2020 is
(a) Rs. 1,45,000 (b) Rs. 1,20,000 (c) Rs. 1,16,000 (d) Rs. 1,09,000
(ii) Adjusted profit for the year ended 31st March 2021 is
(a)Rs. 40,000 (b)Rs. 55,200 (c)Rs. 29,000 (d) Rs. 44,200
(iii) Weighted average profit will be
(a) Rs. 1,10,000 (b) Rs. 90,000 (c) Rs. 1,05,800 (d) Rs. 1,00,000
(iv) Goodwill calculated on 3 years’ purchase of weighted average profit is
(a) Rs. 3,70,300 (b) Rs. 3,30,000 (c) Rs. 3,50,000 (d) Rs. 4,20,000
 Change in Profit Sharing Ratio Among Partners
Key Notes
1) Change in Profit- sharing ratio among existing partners leads to reconstitution of the
partnership firm.
2) When there is change in profit-sharing ration among existing partners, one or more
partner(s) must sacrifice because total share remains same.
3) Sacrificing share = Old share- New share
4) Existing goodwill (goodwill appearing on Asset side of the Balance Sheet) is to be written
off among partners in their old profit-sharing ratio.
Partner’s Capital A/c…….Dr. (Old ratio)
To Goodwill A/c
5) Goodwill valued at the time of change in profit-sharing ratio among existing partners will
treated by passing an adjustment entry.
Gaining Partner’s Capital A/c……Dr. (Gaining share)
To Sacrificing Partner’s Capital A/c (Sacrificing share)
6) Reserves (General reserve, Workmen Compensation Reserve, Investment Fluctuation
Reserve and Contingency Reserve) are to be distributed among partners in their old profit-
sharing ratio.
7) Third party fund or amount (Employee Provident Fund, ESI Payable) are not distributed
among partners as these are not related to partners.
8) In case of Workmen Compensation Reserve:
a. When there is no claim, whole reserve will be distributed among partners in their old
profit-sharing ratio.
b. When claim is less than reserve, after adjusting the claim, remaining reserve will be
distributed among the partners in their old profit-sharing ratio. Amount of claim will
be shown on the liabilities side of Balance Sheet.
c. When claim is more than reserve, Whole reserve will be adjusted against claim and
extra amount of claim will be debited to Revaluation Account. Amount of claim will
be shown on liabilities side of Balance Sheet.
9) In case of Investment Fluctuation Reserve:
a. When market value of investment is same as book value, whole reserve will be
distributed among partners in their old profit-sharing ratio.
b. When fall in the market value of investment is less than Investment Fluctuation
Reserve, the fall in the value of investment will be adjusted against reserve and
balance reserve will be distributed among partners in their old profit-sharing ratio.
Investment will be shown at market value in reconstituted Balance Sheet.
 c. When fall in the market value of investment is more than Investment Fluctuation
Reserve, whole reserve will be adjusted against fall in value of investment, no
distribution of reserve at all. Amount of excess fall in value of investments than
available reserve, will be debited to Revaluation A/c. Investment will be shown at
market value in reconstituted Balance Sheet.
10) If reserves or accumulated profits / losses are not to be distributed, Adjustment entry
will be passed
In case of credit balance or profits, entry will be
Gaining Partner’s Capital A/c……Dr. (Gaining share)
To Sacrificing Partner’s Capital A/c (Sacrificing share)
In case of debit balance or losses, entry will be
Sacrificing Partner’s Capital A/c……Dr. (Sacrificing share)
To Gaining Partner’s Capital A/c (Gaining share)
11) Revaluation A/c is a nominal account (also known as P&L Adjustment Account)
Therefore, Increase in assets and decrease in liabilities are credited to Revaluation Account
Decrease in assets and increase in liabilities are debited to Revaluation Account.

12) If firm doesn’t want to show assets and liabilities at revised values, an adjustment
entry will be passed
In case of credit balance or profits, entry will be
Gaining Partner’s Capital A/c……Dr. (Gaining share)
To Sacrificing Partner’s Capital A/c (Sacrificing share)

In case of debit balance or losses, entry will be

Sacrificing Partner’s Capital A/c……Dr. (Sacrificing share)
To Gaining Partner’s Capital A/c (Gaining share)

MULTIPLE CHOICE QUESTIONS

Q1) A, B, C are partners in a firm sharing profits in the 5:3:2. With effect from 1 st April, 2021,
they decided to change their ratio to 1:1:1. What will be the sacrificing/ gaining share?
a. A’s gaining share 5/30, B’s sacrificing share 1/30 and C’s sacrificing share 4/30
b. A’s sacrificing share 5/30, B’s gaining share 1/30 and C’s gaining share 4/30
c. A’s gaining share 5/30, B’s sacrificing share 5/30
d. A’s sacrificing share 5/30, B’s gaining share 5/30

Q2) Increase and decrease in the value of assets and liabilities are recorded through:
a. Profit & Loss Account
b. Profit & Loss Appropriation
 c. Partner’s Capital Account
d. Profit & Loss Adjustment Account

Q3) A, B and C are partners sharing profits in the ratio 5:3:2. As per the new agreement, A agreed
to give 1/2 of his share to B and C in the ratio 3:2. The new profit sharing ratio will be:
a. 3:2:1
b. 6:3:3
c. 5:9:6
d. None of these
Q4) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1st April, 2021,
they decided to change their ratio to 1:1:1. On the date of change, their books showed General
Reserve amounted to ₹20,000. What will be the journal entry for the same?
a. Dr. General Reserve A/c by ₹ 20,000 and Cr. Partner’s Capital A/c by ₹20,000 in old ratio
b. Dr. Partner’s Capital A/c by ₹ 20,000 in old ratio and Cr. General Reserve A/c by ₹20,000
c. Dr. General Reserve A/c by ₹ 20,000 and Cr. Partner’s Capital A/c by ₹20,000 in new ratio
d. Dr. Partner’s Capital A/c by ₹ 20,000 in new ratio and Cr. General Reserve A/c by ₹20,000
Q5) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1 st April, 2021,
they decided to change their ratio to 2:3:5. On the date of change, their books showed General
Reserve amounted to ₹20,000. Partners decided not to distribute the General Reserve What will be
the journal entry for the same?
a. Dr. A’s Capital A/c and Cr. C’s Capital A/c by ₹6,000
b. Dr. C’s Capital A/c and Cr. A’s Capital A/c by ₹6,000
c. Dr. A’s Capital A/c and Cr. C’s Capital A/c by ₹20,000
d. Dr. C’s Capital A/c and Cr. A’s Capital A/c by ₹20,000

Q6) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1 st April, 2021,
they decided to change their ratio to 1:1:1. On the date of change, their books showed Workmen
Compensation Reserve amounted to ₹40,000. What will be the journal entry for the same?
a. Dr. Workmen Compensation Reserve A/c by ₹ 40,000 and Cr. Partner’s Capital A/c by
₹40,000 in old ratio
b. Dr. Partner’s Capital A/c by ₹ 40,000 in old ratio and Cr Workmen Compensation Reserve
A/c by ₹40,000
c. Dr. Workmen Compensation Reserve A/c by ₹ 40,000 and Cr. Partner’s Capital A/c by
₹40,000 in new ratio
d. Dr. Partner’s Capital A/c by ₹ 40,000 in new ratio and Cr Workmen Compensation Reserve
A/c by ₹40,000

Q7) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1 st April, 2021,
they decided to change their ratio to 1:1:1. On the date of change, their books showed Workmen
Compensation Reserve amounted to ₹40,000 and claim on account of Workmen Compensation
Reserve is ₹ 10,000. What will be the journal entry for the same?
 a. Dr. Workmen Compensation Reserve A/c by ₹ 40,000 and Cr. Partner’s Capital A/c by
₹40,000 in old ratio
b. Dr. Partner’s Capital A/c by ₹ 40,000 in old ratio and Cr. Workmen Compensation Reserve
A/c by ₹40,000
c. Dr. Workmen Compensation Reserve A/c by ₹ 40,000 and Cr. Workmen Compensation
Claim by ₹10,000 & Partner’s Capital A/c by ₹30,000 in new ratio
d. Dr. Workmen Compensation Reserve A/c by ₹ 40,000 and Cr. Workmen Compensation
Claim by ₹10,000 & Partner’s Capital A/c by ₹30,000 in old ratio

Q8) A, B & C are partners sharing profits are losses in the ratio of 4:3:2, decided to share future
profit & losses in the ratio of 2:3:4, w.e.f. 1st April, 2021. Workmen Compensation Reserve
appearing in the balance sheet is 45,000 and a claim on account of Workmen Compensation is
estimated at 54,000,Then -
a. 45,000 is debited amongst partner in old profit sharing ratio
b. 54,000 is credited amongst partner in new profit sharing ratio
c. 54,000 is shown as Claim on Workmen Compensation in new balance sheet
d. 9,000 is debited amongst partner in their Capital ratio

Q9) X, Y and Z are partners sharing profit in the ratio of 1:2:3 On April 1st, 2023, they decided to
share the profits equally on that date there was a credit balance of 1,20,000 in their Profit & Loss
Account and a balance of 1,80,000 in General Reserve Account. Instead of closing the General
Reserve Account and Profit and Loss Account, it is decided to record an adjustment entry which
will be:-
a. Dr. X's Capital A/c by 50,000: Cr. Y's Capital A/c by 50,000
b. Dr. X's Capital A/c by 50,000:Cr. Z's Capital A/c by 50,000
c. Cr. X's Capital A/c by 50,000: Dr. Y's Capital A/c by 50,000
d. Cr. X’s Capital A/c by 50,000: Dr. Z’s Capital A/c by 50,000

Q10) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1 st April, 2021,
they decided to change their ratio to 1:1:1. On the date of change, their books showed Investment
Fluctuation Reserve amounted to ₹30,000. What will be the journal entry for the same?
a. Dr. Investment Fluctuation Reserve A/c by ₹ 30,000 and Cr. Partner’s Capital A/c by
₹30,000 in old ratio
b. Dr. Partner’s Capital A/c by ₹ 30,000 in old ratio and Cr. Investment Fluctuation Reserve
A/c by ₹30,000
c. Dr. Investment Fluctuation Reserve A/c by ₹ 30,000 and Cr. Partner’s Capital A/c by
₹30,000 in new ratio
d. Dr. Partner’s Capital A/c by ₹ 30,000 in new ratio and Cr. Investment Fluctuation Reserve
A/c by ₹30,000
Q11) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1st April, 2021,
they decided to change their ratio to 1:1:1. On the date of change, their books showed Investment
Fluctuation Reserve amounted to ₹40,000 and Investments (book value) ₹5,00,000. Market value
of investment is ₹4,90,000. What will be the journal entry for the same?
a. Dr. Investment Fluctuation Reserve A/c by ₹ 40,000 and Cr. Partner’s Capital A/c by
₹40,000 in old ratio
b. Dr. Partner’s Capital A/c by ₹ 40,000 in old ratio and Cr. Investment Fluctuation Reserve
A/c by ₹40,000
c. Dr. Investment Fluctuation Reserve A/c by ₹ 40,000 and Cr.Investments by ₹10,000 &
Partner’s Capital A/c by ₹30,000 in new ratio
d. Dr. Investment Fluctuation Reserve A/c by ₹ 40,000 and Cr. Investments by ₹10,000 &
Partner’s Capital A/c by ₹30,000 in old ratio.

Q12) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1 st April, 2021,
they decided to change their ratio to 1:1:1. On the date of change, their books showed Investment
Fluctuation Reserve amounted to ₹40,000 and Investments (book value) ₹5,00,000. Market value
of investment is ₹5,10,000. What will be the journal entry for the same?
a. Dr. Investment Fluctuation Reserve A/c by ₹ 40,000 and Cr. Partner’s Capital A/c by
₹40,000 in old ratio
b. Dr. Partner’s Capital A/c by ₹ 40,000 in old ratio and Cr. Investment Fluctuation Reserve
A/c by ₹40,000
c. Dr. Investment Fluctuation Reserve A/c by ₹ 40,000 and Cr.Investments by ₹10,000 &
Partner’s Capital A/c by ₹30,000 in new ratio
d. Dr. Investment Fluctuation Reserve A/c by ₹ 40,000 and Cr. Investments by ₹10,000 &
Partner’s Capital A/c by ₹30,000 in old ratio

Q13) Choose the correct order to match the following with their correct meaning.
Column Column B
A
(i)Gaining (1) Ratio in which partners share profits and losses
Ratio before reconstitution of firm.
(ii)Old Ratio (2) Ratio is which partners acquire the share from
other.
(iii)Sacrificing (3) Ratio in which partners surrender their share in
Ratio favour of other partner.
(4) Ratio in which partners share future profits and
losses.
a. (i) 2, (ii) 3, (iii) 4
b. (i) 4, (ii) 2, (iii) 1
 c. (i) 2, (ii) 1, (iii) 3
d. (i) 1, (ii) 2, (iii) 3

Q14) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1st April, 2021,
they decided to change their ratio to 1:1:1. Their balance sheet showed Building at
₹5, 00,000 and Stock at ₹50,000 and revalued figures were ₹5, 50,000 and ₹40,000.
a. Gain on revaluation ₹40,000 will be distributed among partners in 5:3:2.
b. Gain on revaluation ₹40,000 will be distributed among partners in 1:1:1.
c. Loss on revaluation ₹40,000 will be distributed among partners in 5:3:2.
d. Loss on revaluation ₹40,000 will be distributed among partners in 1:1:1.

Q15) A: B: C were partners in a firm sharing profits in the 5:3:2. With effect from 1st April, 2021,
they decided to change their ratio to 2:3:5. Their balance sheet showed Building at
₹5, 00,000 and Stock at ₹50,000 and revalued figures were ₹5, 50,000 and ₹40,000. They did not
want to show the revised values.
a. Dr. A’s Capital A/c and Cr. C’s Capital A/c by ₹40,000
b. Dr. C’s Capital A/c and Cr. A’s Capital A/c by ₹40,000
c. Dr. A’s Capital A/c and Cr. C’s Capital A/c by ₹12,000
d. Dr. C’s Capital A/c and Cr. A’s Capital A/c by ₹12,000

ASSERTION REASON BASED QUESTIONS

Which of the following is correct?
Codes:
a. Both (A) and (R) are correct and (R) is the correct reason of (A).
b. Both (A) and (R) are correct but (R) is not the correct reason of (A).
c. Only (A) is correct.
d. Only (R) is correct.
Q1) Assertion (A): Change in Profit-sharing ratio is part of reconstitution of partnership.
Reason (R): Winding-up of the firm is reconstitution of partnership.
Q2) Assertion (A): Change in Profit-Sharing Ratio means one or more partners have
foregone their profit share in favour of one or more partners.
Reason (R): Change in Profit-Sharing Ratio brings a change in profit-sharing ratio
among the partners. Thus, profit share of one or more partners reduces while profit share of one or
more partners increases.
Q3) Assertion (A): General Reserve is distributed in the old profit-sharing ratio of the
partners when the profit-sharing ratio is changed.
Reason (R): General Reserve was set aside out of past profits and at that time they were
sharing profits in their old profit-sharing ratio. If it is not distributed in their old profit-
sharing ratio, it will place some partners at an advantage and same at disadvantage.
Q4) Assertion (A): Brij, Shanker and Raghav are partners sharing profits equally.
Workmen Compensation Reserve existed in the books of accounts at ₹4,00,000. A
claim of ₹1,00,000 was made by a worker. They changed their profit-sharing ratio
to 3:2:5. ₹3,00,000, the balance was transferred to the Partner’s Capital Accounts
crediting by ₹1,00,000 each.
Reason (R):Workmen Compensation Reserve to the extent of ₹3,00,000 is a free
reserve and is transferred to the Partner’s Capital Accounts in their old-profit sharing
ratio, it being a reserve set aside from past profits.
Q5) Assertion (A): In the books of Tanish, Rishi and Chaitanya, Deferred Revenue
Expenditure existed at ₹90,000. Profit-sharing Ratio was changed from equal profit
sharing ratio to 2:2:1. ₹90,000 will be written off in 2:2:1.
Reason (R): Deferred Revenue Expenditure is written off in the old profit sharing ratio when the
profit-sharing ratio changes.

Q6) Assertion (A): Increase in asset is credited to Revaluation Account whereas decrease in asset
is debited to Revaluation Account.
Reason (R): Revaluation is a nominal account.

Q7) Assertion (A): Gain on revaluation is credited to Partner’s Capital Account.

Reason (R): Gain on revaluation decreases the amount of capital.

Q8) Assertion (A): Share of General Reserve is debited to Partner’s Capital Account.
Reason (R): Partner’s Capital Account is a personal account.

Q9) Assertion (A): Sacrificing share is the difference between old share and new share where old
share is more than new share.
Reason (R): Gaining share is the difference between new share and old share where old share is
less than new share.

Q10) Assertion (A): Existing goodwill is to be written-off between or among partners in old ratio.
Reason (R): Goodwill is a fictitious asset and should be written-off at the time of reconstitution.

SHORT ANSWER TYPE QUESTIONS

Q1) A, B and C are partners in a firm sharing profits in 5:3:2. With effect from 1 st April, 2022, they
decided to change their profit sharing ratio to 2:3:5. Calculate gaining ratio, sacrificing ratio.

Q2) Radha, Raman and Vallabh are partners in a firm sharing profits in 5:3:2.Calculate Sacrificing
ratio, gaining ratio and new profit-sharing ratio in following cases:
Case 1. As per the new agreement, Vallabh acquires 2/5th share from Radha.
Case 2. As per the new agreement, Vallabh acquires 2/5th share equally from Radha and Raman.
Case 3. As per the new agreement, Radha, Raman and Vallabh will share future profits and losses
equally.
Case 4. As per the new agreement, Vallabh acquires 1/10th share of Radha and 1/2 share of Raman.
Case 5. As per the new agreement, Vallabh acquires 1/10th share of Radha and 1/10 share from
Raman.

Q3) A, B and C are partners in a firm sharing profits in 5:3:2. With effect from 1 st April, 2022,
they decided to change their profit sharing ratio to 2:3:5. On the date of change, their balance sheet
showed the following:
Particulars Amount (₹)
General Reserve 1,00,000
Investment Fluctuation Reserve 2,00,000
Workmen Compensation Reserve 1,00,000
Profit and Loss Account 2,00,000
Pass necessary journal entries.
Q4) A, B and C are partners in a firm sharing profits in 5:3:2. With effect from 1 st April, 2022,
they decided to change their profit sharing ratio to 2:3:5. On the date of change, their balance sheet
showed the following:
Particulars Amount (₹)
General Reserve 1,00,000
Investment Fluctuation Reserve 2,00,000
Workmen Compensation Reserve 1,00,000
Profit and Loss Account (Dr.) 2,00,000
Pass necessary journal entries.

Q5) A, B and C are partners in a firm sharing profits in 5:3:2. With effect from 1 st April, 2022,
they decided to change their profit sharing ratio to 2:3:5. They do not want to distribute the
reserves. On the date of change, their balance sheet showed the following:
Particulars Amount (₹)
General Reserve 1,00,000
Investment Fluctuation Reserve 2,00,000
Workmen Compensation Reserve 1,00,000
Advertisement Suspense 2,00,000
Pass an adjustment entry.

Q6) A, B and C are partners in a firm sharing profits in 5:3:2. With effect from 1st April, 2022,
they decided to change their profit sharing ratio to 2:3:5. They do not want to distribute the
reserves. On the date of change, their balance sheet showed the following:
Particulars Amount (₹)
General Reserve 1,00,000
 Investment Fluctuation Reserve 2,00,000
Workmen Compensation Reserve 1,00,000
Advertisement Suspense 5,00,000
Pass an adjustment entry.

Q7) P, Q and R sharing profits and losses in the ratio of 3:2:1, decide to share profits and losses
equally with effect from 1st April, 2021. Following is an extract of their Balance Sheet as at 31st
March, 2021:
Liabilities ₹ Assets ₹
Investment Fluctuation 60,000 Investments (cost) 6,00,000
Reserve
Show the accounting treatment under the following alternative cases:
Case1. If there is no other information.
Case2. If the market value of investments is ₹ 6,00,000
Case3. If the market value of investments is ₹ 5,82,000
Case4. If the market value of investments is ₹ 5,40,000
Case5. If the market value of investments is ₹ 4,20,000
Case6. If the market value of investments is ₹ 7,20,000

Q8) P, Q and R sharing profits and losses in the ratio of 6:3:1, decide to share profits and losses
equally with effect from 1st April, 2021. Following is an extract of their Balance Sheet as at 31 st
March, 2021:
Liabilities ₹ Assets ₹
Workmen Compensation 60,000
Reserve
Show the accounting treatment under the following alternative cases:
Case1. If there is no other information.
Case2. If claim on account of workmen compensation is estimated at ₹10,000
Case3. If claim on account of workmen compensation is estimated at ₹60,000
Case4. If claim on account of workmen compensation is estimated at ₹70,000

Q9) A, B and C are partners sharing profits and losses in the ratio of 5:3:2. From 1 st April, 2021,
they decide to share future profits and losses equally. Their Balance Sheet as at 31 st March, 2021
stood as follows:
Liabilities ₹ Assets ₹
Sundry Creditors 50,000 Land & Buildings 4,00,000
Salaries Payable 25,000 Computers 60,000
Outstanding expenses 20,000 Stock 2,00,000
General Reserve 50,000 Sundry Debtors
3,00,000 2,75,000
 Less: Provision
25,000
Workmen Compensation 70,000 Cash at Bank 30,000
Reserve
Capital Accounts: Cash in Hand 10,000
A 4,00,000
B 2,50,000
C 1,50,000 8,00,000
Advertisement 40,000
Suspense
10,15,000 10,15,000

Partners agreed that:

i. Value of Land and Building be increased to ₹5,00,000 and stock be decreased by ₹20,000.
ii. Provision for doubtful debts to be written back, since all debtors are good.
iii. Out of salaries payable, ₹15,000 was not payable.
iv. Outstanding expenses are to be written back, being not payable.
v. A provision for Workmen Compensation Claim be made for ₹30,000
vi. Goodwill is valued at ₹60,000
vii. B was to carry out the work for reconstitution of the firm at a remuneration (including
expenses) of ₹10,000. Expenses paid by B amounted to ₹4,000.
Q10) Abhay, Bikram and Chahat are sharing profits and losses in the ratio of 3:1:1. They decided
to share profit w.e.f 1st April,2023 in the ratio of 2:2:1. They also decided not to change the values
of assets and liabilities in the books of accounts. The book values and revised values of assets and
liabilities as on the date of change were as follows:
Particulars Book values (₹) Revised values(₹)
Land 3,00,000 2,50,000
Machinery 1,50,000 1,70,000
Creditors 30,000 50,000
Outstanding wages 10,000 8,000
Pass an adjustment entry.

Long Answer Type Questions

Q1) R, S and T were partners in a firm sharing profits in the ratio of 1:2:3. Their Balance Sheet as
on 31.3.2021 was as follows:
Liabilities ₹ Assets ₹
Creditors 50,000 Land 50,000
Bills Payable 20,000 Building 50,000
General Reserve 30,000 Plant 1,00,000
Capitals: Stock 40,000
 R
1,00,000 1,75,000
S
50,000
T
25,000
Debtors 30,000
Bank 5,000
2,75,000 2,75,000
R, S and T decided to share the profits equally with effect from 1.4.2021. For this purpose it was
agreed that:
a. Goodwill of the firm be valued at ₹1,50,000.
b. Land be revalued at ₹ 80,000 and building be depreciated by 6%.
c. Creditors of ₹ 6,000 were not likely to be claimed and hence be written off.
Prepare Revaluation Account, Partner’s Capital Accounts and the Balance Sheet of the
reconstituted firm.

Q2) A, B and C were partners in a firm sharing profits in the ratio of 5:3:2. Their Balance Sheet as
on 31.3.2021 was as follows:
Liabilities ₹ Assets ₹
Creditors 1,00,000 Goodwill 50,000
Bills Payable 40,000 Profit and Loss 20,000
Reserve Fund 60,000 Building 2,00,000
Employees Provident Fund 20,000 Plant 1,00,000
Workmen Compensation 10,000 Stock 80,000
Reserve
Capitals: Debtors
R 1,20,000 1,00,000
2,00,000 Less: Provision
S 3,50,000 (20,000)
1,00,000
T 50,000
Cash 30,000
5,80,000 5,80,000
A, B and C decided to share the profits 2:3:5 with effect from 1.4.2021. For this purpose it was
agreed that:
a. Goodwill of the firm be valued at ₹1, 00,000.
b. Stock is undervalued by 20%
c. Claim on account of Workmen Compensation amounted to ₹12,000.
d. All debtors are good.
Prepare Revaluation Account, Partner’s Capital Accounts and the Balance Sheet of the
reconstituted firm.

ANSWEK KEY/HINTS TO THE QUESTIONS

MCQs
1 (b) ,2 (d), 3 (c), 4 (a), 5 (b), 6 (a), 7 (d), 8 (c), 9 (b), 10 ( a), 11 (d), 12 (a), 13 (c), 14 (a), 15
(d)

Assertion Reason Questions

1 (c), 2 (a), 3(a), 4 (a), 5 (d), 6 (a), 7 (c), 8 (d), 9 (b), 10 (c)

Short Answer Type Questions

1) A’s sacrifice 3/10, C’s gain 3/10
2)
Case Sacrificing ratio Gaining ratio New ratio
1 Radha’s share 2/5 Vallabh’s share 1:3:6
2/5
2 Radha , Raman Vallabh’s share 3:1:6
1:1 2/5
3 Radha’s share Raman: Vallabh 1:1:1
5/30 1:4
4 Radha:Raman 1:3 Vallabh’s share 9:3:8
1/5
5 Radha:Raman 1:2 Vallabh’s share 9:4:7
3/20

3) Debit General Reserve by 1,00,000, IFR by 2,00,000 , WCR by 1,00,000 and P&L by
2,00,000
Credit A, B and C’s Capital A/c by 3,00,000; 1,80,000 and 1,20,000 respectively
4) (a)Debit General Reserve by ₹1,00,000, IFR by₹ 2,00,000 , WCR by ₹1,00,000
Credit A, B and C’s Capital A/c by ₹2,00,000; ₹1,20,000 and ₹80,000 respectively
(b)Debit A,B and C’s Capital A/c by ₹1,00,000 , ₹60,000 and ₹40,000 respectively
Credit Profit & Loss A/c by ₹2,00,000

5) Debit C’s Capital A/c and Credit A’s Capital A/c by ₹60,000
6) Debit A’s Capital A/c and Credit C’s Capital A/c by ₹30,000
7) Refer Point no. 9 from key notes
8) Refer Point no. 8 from key notes
9) Gain on Revaluation ₹1,30,000
10) Debit Abhay’s Capital A/c, Credit Bikram’s Capital A/c by ₹9,600

Long Answer Type Questions

1) Gain on Revaluation ₹33,000, Closing Capitals ₹88,500, ₹71,000 , ₹81,500; Total of
Balance Sheet ₹3,02,000
2) Gain on Revaluation ₹38,000, Closing Capitals ₹2,44,000, ₹1,08,400 , ₹25,600; Total of
Balance Sheet ₹5,50,000
 ADMISSION OF PARTNER
Admission of a partner is a mode of reconstituting the firm. According to section 31 of the Indian
Partnership Act 1932, a person can be admitted as a new partner.
(i) If it is so agreed in the partnership deed.
(ii) In the absence of the above, if all the partners agree for the admission
Adjustments required on admission of a partner.
1. Change in Profit Sharing Ratio.
2. Valuation and Adjustment of Goodwill
3. Revaluation of assets and reassessment of liabilities.
4. Adjustment of Fictitious Assets.
5. Adjustment of Reserves, Accumulated profits and losses.
6. Adjustment of Capital on the basis of new profit sharing ratio.
7. Adjustment of Capital on the basis of new profit – sharing ratio
Case-I: If New Partner’s share of profit is given
Example: A&B are partners and sharing ratio of 3:1.They admitted C with 1/5 share of profit.
Sol. Let the future profit be l
Remaining profit (After c’s share) = 1 – 1/5 = 4/5
A’s new share = ¾ x 4/5 = 3/5
B’s new share = ¼ x 4/5 = 1/5
C’s share = 1/5
New profit + sharing ratio 3:1:2
Sacrificing Ratio = Old Share – New Share
¾ - 3/5 : ¼ - 1/3
15 – 12 : 5 – 4
20 20
3/20 : 1/20
3:1
Case-II: When new partner’s share is given and also new profit – sharing ratio of old
partners is given.
Example: A & B are partners. They admit C for ¼ the share. In future, profit sharing ratio
between A & B would be 2:1. Calculate new profit sharing ratio.
Sol. Let the future profit be 1
Remaining profit = 1 – ¼ = ¾
A’s new share = 2/3 x ¾ = 6/12
B’s new share = 1/3 x ¾ = 3/12
New profit sharing ratio
6: 3: 1x3
12 12 4 x 3

6:3:3=2:1:1
Case-III: When new or incoming partner acquires his share from the old or existing partners
equally.
Example: A&B are partners sharing profit in the ratio of 5:4. They admit C for 1/10th share of
profits which be acquires, in equal proportion from both. Find the new profit sharing ratio.
Sol. A’s share acquired by C : ½ x 1/10 = 1/20
B’s share acquired by C = ½ x 1/10 = 1/20
A’s new share = 5 – 1 =100 – 9 = 91
9 20 180 180
80−9
B’s new share = 4/9– 1/20 = = 71/180
180

C’s share = 1 x 18= 18

10 x18 180
New profit sharing ratio : 91:71:18
Case-IV: When new or incoming partner acquires his share in a particular fraction of old or
existing partners.
Example. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. A surrenders
1/5th of his share, whereas B surrenders 2/5th of his share in favor of C, the new partner. Calculate
new profit sharing ratio.
Sol. A’s surrendered share = 3/5 x 1/5 = 3/25
B’s surrendered share = 2/5 x 2/5 = 4/25
A’s new share = 3/5 – 3/25 = 15-3 = 12
25 25
B’s new share = 2/5 – 4/25 = 10 – 4 = 6
25 25
C’s share = 3/25 + 4/25 = 7/25
New Profit + Sharing Ratio = 12/25 : 6/25 – 7/25
Sacrificing ratio- It is the ratio in which holder existing partners forego i.e. sacrifice their share of
profit in favor of new or incoming partner. Sacrificing ratio = old share – new share
Purpose for which sacrificing ratio is calculated.
1. To determine amount of compensation by way of goodwill.
2. When old partners decide not to distribute accumulated profits & reserves.
Valuation and adjustment of goodwill- goodwill is an intangible asset which enables a firm to
earn higher profit than the normal profit. At the time of admission of a partner, new partner who
acquires the share in future profit from the existing partners should compensate sacrificing partners
by paying them an amount termed as goodwill or premium for goodwill.
Accounting treatment of Goodwill
Case I When new partner brings his share of goodwill in cash
Cash/Bank A/c--------------Dr.
To Premium for Goodwill A/c
Premium for Goodwill A/c --------- Dr.
To Sacrificing Partner’s Capital/Current A/c
But if any old partner gains:
Premium for Goodwill A/c --------- Dr.
Gaining Partner’s Capital/Current A/c—Dr.
To Sacrificing Partner’s Capital/Current A/c
If old partners withdraw their Share of goodwill
Sacrificing Partner’s Capital/Current A/c------- Dr.
To Cash / Bank A/c
Case II When new partner brings a part of his goodwill in cash
Cash A/c --------- Dr.
To Premium for Goodwill A/c
Premium for goodwill A/c-------------- Dr.
New Partner’s Capital/Current A/c---- Dr.(with the portion of his part of goodwill not brought by
him)
To Sacrificing Partner’s Capital/Current A/c
(in sacrificing ratio)
Case III When goodwill already existed
Old Partner’s Capital/Current A/c------ Dr.
(in old ratio)
To Goodwill A/c
Case IV When goodwill is paid privately by new partner
No entry
Case V When new partner brings goodwill in kind.
Asset A/c------- Dr.
To Premium for Goodwill A/c
Premium for Goodwill A/c--------------------Dr.
To Sacrificing Partner’s Capital/Current A/c
Case VI: When goodwill is raised and written off:
When Goodwill is raised:
Goodwill A/c----------Dr. (with full value of goodwill)
To Old Partner’s Capital/ Current A/c(in old ratio)
When Goodwill is written off:
All Partner’s Capital/ Current A/c-------Dr.
To Goodwill A/c (in new ratio)
Note: Goodwill A/c is raised when specifically asked in the question
Hidden/ Inferred goodwill – Sometimes, the value of goodwill of the firm is not given, it has to
be inferred on the basis of net worth the firm.
Net worth of the firm (including goodwill) of the firm on the basis of capital brought by the
incoming partner= New partner’s Capital x Reciprocal of New partner’s share of profit
Less: Net worth (excluding goodwill)
(All partner’s Capital + Net Accumulated profits & Reserves -Fictitious assets- Accumulated
Losses)
=Value of Goodwill
Example: Aina & Binod are two partners in 3:2 ratios. Their capitals are ₹ 1, 20,000 and ₹ 1,
00,000 respectively. Chand is admitted for 1/5th share and he is brings ₹ 80,000 as his capital.
Calculate the value of goodwill.
Value of Goodwill = (C‘s Capital x 5/1) – (Aina's Capital + Binod's Capital + Chand's Capital)
= (₹ 80,000 x 5/1) – (₹ 1, 20,000 + ₹ 1, 00,000 + ₹ 80,000)
= ₹ 4, 00, 000 – ₹ 3, 00,000
= ₹ 1, 00,000
So, Chand's share of Goodwill = ₹ 1, 00,000 x 1/5 = ₹ 20,000
*Note: It means new partner Chand doesn‘t bring his share of goodwill in cash.
3. Revaluation of assets and reassessment of liabilities :
Assets and Liabilities are revalued if there is reconstitution of firm. Such change belongs to
the period prior to change in Profit-Sharing Ratio. The profit or loss of it must be shared by
the old partners in their old Profit-Sharing ratio. When revised values are to be recorded in
the books, the profit/loss of revaluation is transferred to the old partners’ capital or current
accounts in their old profit sharing ratio. When revised values are not to be shown in the
books, a single adjustment entry is passed based on Gain/Sacrifice of partners.
Another name – Profit & Loss Adjustment Account
Nature of Revaluation A/c. – Nominal nature
Objective to prepare – To know the gain/loss on revaluation of assets and reassessment of
liabilities.
Format of Revaluation A/c.
Dr. Revaluation A/c. Cr.
To Liability A/c(Increase) By Liability A/c(
Decrease)
To Assets A/c( Decrease) By Assets A/c(Increase)
To provision (Create/Increase) By Provision
(Cancel/Decrease)
To share of profit By share of loss
Increased to/decreased to/valued at – with difference amount.
Increased by/decreased by – with same amount
Journal entries in case of Revaluation A/c
Increase in the value of assets
Asset A/c……Dr.
To Revaluation A/c
Decrease in the value of Assets
Revaluation A/c……Dr.
To Asset A/c
Increase in the value of Liability
 Revaluation A/c…..Dr.
To Liability A/c
Decrease in the value of liability
Liability A/c…….Dr.
To Revaluation A/c.
Creation of provision/increase in provision
Revaluation A/c……Dr.
To Provision A/c.
Cancellation of provision/decrease in provision
Provision A/c….Dr.
To Revaluation A/c
In case of revaluation profit
Revaluation A/c…..Dr.
To Old Partner’s Capital/Current A/c (in old ratio)
In case of revaluation loss
Old Partner’s Capital/Current A/c….Dr. (in old ratio)
To Revaluation A/c
Situation-I:- When revised value are to be recorded in the books – in such case, revaluation of assets
and liabilities is done with the help of revaluation account and profit or loss on revaluation A/c and
profit or loss on revaluation is transferred to partner’s capital account or current in their old ratio.
Situation-II: When revised values are not to be recorded in the books – if the partners decide to
record the net effect of revaluation of assets & liabilities without affecting their old figures, then a
single adjusting entry involving the capital accounts/current account of gaining partners and
sacrificing partners is passed.
Some Important Points Regarding Revaluation Account :-
1. Investment taken over by partner at Rs. 6400 where as in Balance Sheet its value was Rs. 10000.
Revaluation A/c----------- Dr. 3600
Partner’s Capital A/c------- Dr. 6400
To Investment A/c 10000
2. Accrued Income Rs. 5000 does not appear in the book.
Accrued Income A/c----------Dr 5000
To Revaluation A/c 5000
3. Provident Fund be raised by Rs. 1000
Revaluation A/c-------- Dr. 1000
To Provident Fund A/c 1000
4. Creditors are to be paid Rs. 2000 more.
Revaluation A/c--- Dr. 2000
To Creditors A/c 2000
5. Machinery is over – valued by Rs. 5000
Revaluation A/c------- Dr. 5000
To Machinery A/c 5000
6. A liability of Rs. 20,000 included in creditors is not likely to arise.
Creditors A/c-----Dr. 20,000
To Revaluation A/c 20,000
7. Debtors of Rs. 2000 will be written off as bad debts and a provision of 4% will be created on
debtors for bad & doubtful debts (where as Debtors given in Balance Sheet Rs. 36000 &
Provision for Bad Debt is Rs. 4000)
Provision for doubtful debts A/c – Dr. 2640
To Debtors A/c 2000
To Revaluation A/c 640
8. Patents are valueless.
Revaluation A/c-------- Dr
To Patents A/c
9. Provision for Discount on Creditors is to be made :-
Provision for Discount on Creditors A/c – Dr.
To Revaluation A/c
10.Stock is over – valued by 10% (Value given in Balance Sheet Rs. 99,000)
Revaluation A/c -------- Dr. 9000
To Stock A/c 9000
11.A Debtor whose dues of Rs. 5000 was written off as bad debts paid Rs. 4000 in full settlement.
Cash A/c/ Bank A/c-------- Dr.4000
To Bad Debt Recovered A/c 4000
Bad Debt Recovered A/c----Dr. 4000
To Revaluation A/c 4000
12.Depreciation of Rs. 30,000 had been emitted on plant
Revaluation A/c---------- Dr. 30,000
To Plant A/c 30,000
13.Creditors include a contingent liability of Rs. 50,000 which has been decided by the court Rs.
43,000
Creditors A/c----------- Dr. 7000
To Revaluation A/c 7000
14.A creditors for Rs. 3000 is not traceable for a number of years and the amount is to be written
off.
Creditors A/c--------- Dr. 3000
To Revaluation A/c 3000
15.Unearned Income of Rs. 4000 is to be provided for
Revaluation A/c --------- Dr. 4000
To Unearned Income A/c 4000
16.An old customer, whose account was written off as bad, has promised to pay Rs. 2000 in full
settlement of his debt.
Debtors A/c-------- Dr. 2000
To Revaluation A/c 2000
17.20% of the reserve is to remain as a provision against bad doubtful debts.
Reserve A/c--------- Dr.
To Provision for Bad & Doubtful Debts
18.Out of insurance which was entirely debited to Profit & Loss A/c Rs. 870 to be carried forward
as Unexpired Insurance.
Prepaid Insurance A/c – Dr. 870
To Revaluation A/c 870
Treatment of Bad Debts and Provision for Doubtful Debts in Revaluation A/c in
different Situations
Case-1 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Create a provision for doubtful debts @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 10,000

Case-2 Balance Sheet as at…………….

Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Create a provision for doubtful debts should be @ 15% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 5,000
Reason: As per statement PFDD @ 15% on 1,00,000 = Rs.15,000
Less: Existing PFDD =10,000
Remaining = Rs. 5,000 Loss Dr. To Revaluation A/c
Case-3 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Create a provision for doubtful debts should be @ 8% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
By PFDD 2,000
Reason: As per statement PFDD @ 8% on 1,00,000 =8,000 Less: Existing
PFDD =10,000 Remaining
= 2,000
Profit Cr. To Revaluation A/c
Case-4Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Bad Debts Rs. 12,000
Create a provision for doubtful debts should be @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To Bad Debts 2,000
To PFDD 8,800
Reason: As per statement Bad Debts is 12,000 and We have PFDD =10,000 so loss of
Rs. 2,000 will be Dr to Revaluation A/c/
And PFDD @ 10% on Reaming Debtors (1,00,000 – 12,000 = 88,000) is
Rs. 8,800 is loss Dr to Revaluation A/c
Case-5 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Bad Debts Rs. 6,000
Create a provision for doubtful debts should be @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 8,800
 Reason: As per statement Bad Debts is 6,000 and We have Old PFDD 10,000 so
remaining PFDD we have Rs. 4,000.
And New PFDD @ 10% on Reaming Debtors (1,00,000 – 6,000 = 94,000) is Rs.
9,400
So Excess PFDD i.e. Rs. 9,400 – 4,000 = Rs. 5,400 Dr to Revaluation A/c
Case-6 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 20,000 80,000
Bad Debts Rs. 8,000 .Create a provision for doubtful debts should be @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
By PFDD 2,800
Reason: As per statement Bad Debts is 8,000 and We have Old PFDD 20,000 so
remaining PFDD we have Rs. 12,000.
And New PFDD @ 10% on Reaming Debtors (1,00,000 – 8,000 = 92,000) is Rs.
9,200
So Excess PFDD i.e. Rs. 9,200 – 12,000 = - Rs. 2,800 Cr. to Revaluation A/c
Case-7 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 20,000 80,000
Bad Debts Rs. 15,000
Create a provision for doubtful debts should be @ 10% on Debtors
Treatment
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 3,500
Reason: As per statement Bad Debts is 15,000 and We have Old PFDD 20,000 so
remaining PFDD we have Rs. 5,000.
And New PFDD @ 10% on Reaming Debtors (1,00,000 – 15,000 = 85,000) is Rs.
8,500
So Excess PFDD i.e. Rs. 8,500 – 5,000 = Rs. 3,500 (Loss) Dr. to Revaluation A/c
Workmen Compensation Fund –
Case I If no liability arises against it
Workmen Compensation Fund A/c------Dr.
To Old Partner’s Capital/Current A/c
Case II If Liability arises against W.C.F. > Amount of W.C.F.
Workmen Compensation Fund A/c-----Dr.
Revaluation A/c----------------------------Dr (with the amount of diff.)
To Liability against W.C.F.
Old Partner’s Capital/ Current A/c --------Dr
To Revaluation A/c
Case III If Liability arises against W.C.F. less than Amount of W.C.F.
Workmen Compensation Fund A/c------------- Dr.
Old Partner’s Capital/ Current A/c--------------------Dr.
To Liability against W.C.F.
Investment Fluctuation Reserve

If reduction in the value If reduction in value If value of investment is

of Investment is less of investment is more increased
than I.F.R. than I.F.R.
I.F.R.A/c------------Dr. I.F.R. A/c---------Dr. Investment A/c – Dr.
To Investment A/c Revaluation A/c-----Dr. To Revaluation A/c
To Old Partner’s (With the amount of
Capital/ Current A/c diff.)
To Investment A/c
Old Partner’s Capital/ I.F.R. A/c------------Dr.
Current A/c--------Dr. To Old Partner’s
To Revaluation A/c Capital/ Current A/c
Revaluation A/c--------Dr.
To Old Partner’s
Capital/ Current A/c

4. Adjustment of Deferred Revenue Expenditure deferred reserve expenditure are reserve

expenditure in nature but are written off in more than one accounting period considering that its
benefit will accrue to the business. For the period in which it is written off examples of deferred
reserve expenditure are (i) large advertisement and marketing expenses incurred to introduce new
product in the market, called advertisement suspense
Deferred revenue expenditure is written off at the time of admission of a partner by debiting old
partner’s capital/ current account is case of fixed capital in their old ratio.
Old Partner’s Capital/ Current A/c
To Advertisement Suspense A/c
5. Reserves & accumulated profits /Losses -------
Accumulated Profits /Reserve A/c------- Dr.
To Old Partner’s Capital/Current A/c
Old Partner’s Capital/Current A/c Dr.
To Accumulated Losses A/c
If partners decided not to distribute reserves/ accumulated profits
New Partner’s Capital/Current A/c------- Dr.
To Sacrificing Partner’s Capital/Current A/c
Format of partner’s capital account
Dr. Partner’s Capital A/c Cr.
X Y Z X Y Z
To Revaluation A/c - - By balance b/d - -
(Loss) (As per B/S)
To Deferred By Revaluation A/c
Revenue expenditure - - (profit) - -
To Advertisement - - By Accumulated profit /
Suspense A/c Reserves
To Accumulated losses - - By Premium for goodwill - -
To Goodwill A/c A/c
(Already existed) - -- (if new partner brings - -
To Cash/Bank - - goodwill in cash)
To balance C/d - - By Z’S Current A/c
(if new partner does not bring - -
goodwill in cash )
Adjustment of capital and New Balance Sheet.
After the admission of a partner, the capitals of all partners may be adjusted as per
agreement. The adjustment may take any of the following forms:
I-Adjustment of the capitals of the old partners on the basis of new partner's capital.
Steps:
(i) Calculate the total capital of the firm on the basis of new partner's capital and his share
in profits. Total Capital/ New Capital= New partner's capital x Reciprocal of the
proportion of his share in profit.
(ii) Calculate the new capitals of all partners by dividing total capital in new ratio.
(iii) Prepare old partners' capital A/c‘s (after all adjustments regarding Revaluation,
General Reserve, Goodwill etc.) and find out the actual balances of their capitals.
(iv) Compare the new capitals as in (ii) with old capital balances as in (iii) and work
out surplus or deficiency.
(v) Surplus will be paid back to the old partners and if there is deficiency the same will be
contributed in cash by the old partners.(If it is specifically required under agreement, the
 surplus can be Cr. to their current A/c‘s & deficiency can be Dr. to their current A/c‘s)
(vi) If goodwill is not brought in cash, it can be adjusted either (i) through new partner's
capital A/c – this will reduce his original capital contributed by him or (ii) if it is
adjusted through new partner's current A/c – this will not affect the original capital
contributed by him.
II. Finding the new partner's sufficient capital on the basis of the old partners'
capital or the total capital of the firm:
Steps:
(i) Prepare Old Partners' Capital A/c‘s (after all adjustments regarding Revaluation, General
Reserve, Goodwill etc.)
(ii) Calculate the total Capital of the new firm as follows:
Total Capital of the firm = Combined adjusted x Capital of old partners Reciprocal of the
Combined Proportion of their share of profit.

(iii) New partner's capital will be equal to his share of the Total Capital.
(iv) If goodwill is not brought in cash by the new partner, it should be better Dr. to his
Current Account. This will make the calculation of his sufficient capital more
accurate & simple.
Point to remember:
1. Pass a single adjustment entry – if the partners decide that the reserves should continue
to appear at the same amount in the balance sheet, even after reconstitution of the firm,
the net effect of accumulated profits/losses and reserves is recorded by passing an
adjustment entry wherein gaining partners are debited and sacrificing partners are
credited with net effect.
2. Machinery replacement fund – It is just like accumulated depreciation that’s why it is
not distributed among the partners.
3. Employees’ Provident Fund – It is statutory liability of the firm towards the employees.
Hence it is not an accumulated profit & is not distributed among the partners.

MULTIPLE CHOICE QUESTION :-

1. Sita and Geeta are partners in a firm sharing profits and losses in the ratio of 3:1. On 1st April
2023 they decided to admit Leena as a partner with 1/5th share of profit. On that date, Plant
and Machinery was appearing in the Balance Sheet at Rs. 99,000. At the time of admission ,
it was found to be overvalued by 10%. At what value will it be shown in the new Balance
Sheet? a)Rs.88,600 (b) Rs.87,800 (c) Rs. 90,000 (d) Rs. 89,100
2. Mona and Tina were partners in a firm sharing profits in the ratio of 3:2. Naina was admitted
with1/6th share in the profits of the firm. At the time of admission, Workmen Compensation
Reserve appeared in the Balance Sheet of the firm at Rs. 32,000. The claim on account of
Workmen’s Compensation was determined at Rs. 40,000. Excess of claim over the reserve
will be
(a) Credited to Revaluation A/c (c) Debited to Revaluation A/c
(b) Credited to old Partner’s Capital A/c (d) Debited to old Partner’s Capital A/c
 3. X and Y are partners sharing profits in the ratio of 4:3. Z is admitted for 1/5th share and he
brings in Rs 140000 as his share of goodwill in cash of which Rs 120000 is credited to X
and remaining amount to Y. New profit sharing ratio will be :
a) 4:3:5 b)2:2:1 c) 1:2:2 d) 2:1:2
4. A and B are partners sharing profits in the ratio of 2:3. Their Balance Sheet shows
Machinery at Rs 200000; Stock at Rs 80000 and Debtors at Rs 160000.C is admitted and
new profit sharing ratio is agreed at 6:9:5. Machinery is revalued at Rs 140000 and a
provision is made for doubtful debts @5%. A’s share in loss on revaluation amount to Rs
20000. Revalued value Stock will be :a) Rs 62000 b) Rs 100000 c) Rs 60000 d) Rs .
98000
5. A, B and C are partners sharing profits in ratio of 3:2:1. They agree to admit D into the
firm . A, B and C agreed to give 1/3rd, 1/6th 1/9th share of their profit. The share of profit of
D will be : a) 1/10 b) 11/54 c) 12/54 d) 13/54
6. Which of the following are not debited to Revaluation Account at the time of admission of
a partner? A. Increase in Provision for Doubtful Debts B. Dishonor of Discounted Bills
Receivable C. Make Provision for Damages D. Bad Debts Recovered
7 . Which of the following are credited to old Partners' Capital Accounts at the time of
admission of a partner?
A. Gain (Profit) on Revaluation Account B. Premium for Goodwill Account
C. Profit & Loss Account (Dr.) D. Employees' Provident Fund
8. Kavi is admitted into partnership for 1/4th share of profits. Total Capital of the old partners
stood at Rs.4,50,000 after carrying adjustment of Goodwill, revaluation of Assets and
Liabilities and transfer of reserve and surplus. Proportionate Capital that will be brought by
Kavi at the time of admission will be (Rs.) (1) 1,50,000. (2) 1,12,500. (3) 1,22,500 (4)
1,00,000.
9. Abha and Binay are partners sharing profits and losses in the ratio of 3: 2. On 1st April,
2022, they admitted Chitra as a partner who contributes Rs.2,50,000 as capital for 1/5th
share of profits. Adjusted capitals of Abha and Binay are Rs. 6,50,000 and Rs.3,50,000
respectively. Capitals of Abha and Binay are to be adjusted on the basis of Chitra's Capital.
Amount to be paid or brought by the old partners will be:
(1) Cash to be paid to Binay Rs. 90,000; Cash to be brought by Abha Rs. 50,000.
(2) Cash to be paid to Binay Rs. 20,000; Cash to be brought by Abha Rs.20,000.
(3) Cash to be paid to Abha Rs. 50,000; Cash to be brought by BinayRs.50,000.
(4) Cash to be paid to Abha Rs.20,000; Cash to be brought by Binay Rs. 20,000.
10.When goodwill is not recorded in the books at all on admission of a partners
(a) If paid privately (c) If brought in cash
(b) If not brought in cash (d) If brought in Kind
11. There is a need of revaluation of assets and liabilities on admission of a partner because
(a)Assets and Liabilities should appears at revised values
(b) Any profit and loss an account of change in values belong to old partners
(c) All unrecorded assets and liabilities get recorded (d)None of Above
 12.On admission of a partner, which of the following items in the Balance Sheet is transferred
to the credit of Capital Accounts of old partners in the old Profit-sharing Ratio, if Capital
Accounts are maintained following Fluctuating Capital Accounts Method
a. Deferred Revenue Expenditure; (b) Profit and Loss Account (Debit Balance);
(c) Profit and Loss Account (Credit Balance); (d) Balance in Drawings Account of
partners.
1 3 If the new partner brings his share of goodwill in cash , it will shared by old partner in :
(a) Sacrificing ratio (b) Old profit sharing Ratio
(c) New Ratio (d) Capital ratio
14.Revaluation Account is a :
(a) Real Account (b) Nominal Account
(c) Personal Account (d) None of the Above

14. When new partner brings cash for goodwill , the amount is credited to :
(a) Realisation Account (b) Cash account
(c) Premium for Goodwill Account (d) Revaluation Account
15. The Credit Balance of Profits and Loss appears in the books at the time of admission of partner
will be transferred to :
(b) Profit and Loss Appropriation Account (b) All Partners Capital Account
(c) Old Partners Capital Account (d) Revaluation Account
16. Goodwill of the firm is valued at ₹ 1, 00,000. Goodwill also appears in the books at ₹ 50,000.
C is admitted for1/4th Share. The amount of goodwill to be brought in by C will be :
(a) ₹ 20,000 (b) ₹ 25,000 (c) ₹ 30,000 (d) ₹ 40,000
17.If the new partner brings any additional amount of cash other than his capital
contributions then it is termed as :
a. Capital (b) Reserves (c) Profits (d) Premium for Goodwill
18.X & Y are partners sharing profits and losses in the ratio of 3 : 2. Z is admitted for 1/5th
share in profits which he gets from X. New profit sharing ratio will be
(a) 12 : 8 : 5 (b) 8 : 12 : 5 (c) 2 : 2: 1 (d) 2 : 2 : 2
19.A & B are partners sharing profits in the ratio of 7 : 3. C is admitted as a new partner.
A gave 1/7th of his share and B gave 1/3rd of his share to C. New Profit-sharing Ratio
will be:
(a) 6 : 2 : 2 (b) 4 : 1 : 1 (c) 3 : 2 : 2 (d) None
20.X & Y share profits & losses in the ratio of 4: 3. The admit Z in the firm for 3/7th share
which he gets 2/7th from X and 1/7th from Y. New Profit-sharing Ratio will be :
(a) 7 : 3 : 3 (b) 2 : 2 : 3 (c) 5 : 2 : 3 (d) 2 : 3 : 3
21. A & B are partners, sharing profits in the ratio of 5: 3. They admit C for 1/5 th share in
profits, which he acquires equally from both A and B. New profit sharing ratio will be:
(a) 21 : 11 : 8 (b) 20 : 10 : 4 (c) 15 : 10 : 5 (d) 10 : 5 : 4
 22.Arun and Vijay are partners in a firm sharing profits and losses in the ratio of 5:1.
Balance Sheet (Extract)
Liabilities Rs. Assets Rs.
Machinery 40,000
If the value of Machinery reflected in the Balance Sheet is overvalued by 331/3% Find out the
value of Machinery to be shown in the new Balance Sheet:

(a) Rs. 44,000 (b) Rs. 48,000 (c) Rs. 32,000 (d) Rs. 30,000
23. Asha and Nisha are partners sharing profits in the ratio of 2:1. Kashish was admitted for ¼
share out of which 1/8th was gifted by Asha. The remaining was contributed by Nisha .
Goodwill of the firm is valued at Rs. 40,000. How much amount for goodwill will be credited
to Nisha’s Capital Account?
(a) Rs. 2500 (b) Rs. 5000 (c) Rs. 20,000 (d) Rs. 40,000
24. Niyati and Aisha were partners in a firm sharing profit and losses in the ratio of 4:3. They
admitted Bina as a new partner. Niyati sacrificed ¼ th from her share and Aisha sacrificed 1/7 th
from her share in favour of Bina. Bina’s share in the profits of the firm will be:
(a) 2/7 (b) 10/49 (c) 11/28 (d) 7/16
25. P, R and A were partners in a firm sharing profits and losses equally. S was admitted as a
new partner for an equal share. S brought his share of goodwill in cash. The premium for
goodwill amount will be divided among: (C.B.S.E. 2024)
(a) Old partners in old ratio (b) New partners in new ratio (c) New partners in sacrificing ratio
(d) Old partners in sacrificing ratio
26. In case of admission of a partner, the entry for unrecorded investments will be :
a) Debit partners capital a/c and credit investment a/c
b) Debit revaluation a/c and credit investment a/c
c) Debit investment a/c and credit revaluation a/c
d) None of the above
27.Goodwill of a firm of A and B is valued at Rs 30000. It is appearing in the books at Rs
12000. C is admitted for ¼ share. What amount he is supposed to bring for goodwill ?
a) Rs 3000 b) Rs 4500 c) Rs 7500 d) Rs 10500
28.A and B are in partnership sharing profits in the ratio of 3:2 . They take
C as a new partner. Goodwill of the firm is valued at Rs 300000 and C
brings Rs 30000 as his share of goodwill in cash which is entirely
credited to the Capital A/c of A. New profit sharing ratio will be :
a) 3:2:1 b) 6:3:1 c) 5:4:1 d) 4:5:1
29.X and Y are partners sharing profits in the ratio of 4:3. Z is admitted for 1/5th share and he
brings in Rs 140000 as his share of goodwill in cash of which Rs 120000 is credited to X
and remaining amount to Y. New profit sharing ratio will be :
a) 4:3:5 b)2:2:1 c) 1:2:2 d) 2:1:2
30.A and B are partners sharing profits in the ratio of 2:3. Their Balance Sheet shows
Machinery at Rs 200000; Stock at Rs 80000 and Debtors at Rs.
 160000.C is admitted and new profit sharing ratio is agreed at 6:9:5.
Machinery is revalued at Rs 140000 and a provision is made for
doubtful debts @5%. A’s share in loss on revaluation amount to Rs
20000. Revalued value Stock will be :a) Rs 62000 b) Rs 100000 c)
Rs 60000 d) Rs 98000
31. A, B and C are partners sharing profits in ratio of 8:7:5. They agree to
admit D into the firm with 1/5th share in profits which she acquired
entirely from A . The new profit sharing ratio after D’s admission will
be : a) 7:7:5:1 b) 4:7:5:4 c) 8:7:5:4 d) 7:5:8:4(C.B.S.E. 2024)

Statement Based Questions:

Given below are two statements:
1.Statement (A): For decrease in the value of assets, Revaluation A/c is
debited at the time of admission of a partner.
Statement (B): It is considered important to calculate sacrificing ratio of old
partners at the time of admission of a partner.
In the context of above two statements, which of the following is correct?
(a)Only A is correct (b)Only B is correct (c)Both A and B are correct (d)Both
A and B are wrong
2. Given below are two statements:
Statement (A): At the time of admission of a partner, General Reserve is
distributed among the old partners only.
Statement (B):General Reserve prior to admission belongs to the old partners
as they have sacrificed a part of their profits to create it.
Choose the correct alternative from the following:
(a)Both statement A and B are correct
(b)Statement A is correct and Statement B is incorrect
©Statement A is incorrect and Statement B is correct
(d)Both statement A and B are incorrect
 Assertion Reason Based Questions:
1. Assertion(A): General Reserve is generally distributed among the old
partners and not carried forward in the Balance Sheet prepared after
admission of a partner.
Reason (R) : General Reserve is set aside out of past profits and
therefore, it is distributed among old partners in their old profit sharing
ratio.
In the context of above two statements, which of the following is
correct?
(a) Assertion (A) and Reason (R ) are correct but the Reason (R ) is not
the correct explanation of Assertion (A)
(b) Assertion (A) and Reason (R ) are correct but the Reason (R ) is
the correct explanation of Assertion (A)
(c) Only Assertion (A) is correct.
(d) Assertion (A) is not correct but the reason (R ) is correct.
2. Assertion(A): Ajay and Akanksha are partners sharing profits in the ratio
of 3:2. General Reserve existed in the books at Rs. 1,00,000. They admit
Amit as a partner for 2/5th share in profits. Out of General Reserve Rs.
50,000 was
transferred to Provision for Claim for Workmen Compensation while
the
balance was transferred to Capital Accounts of Ajay and Akanksha in
the
ratio of 3:2.
Reason (R) :General Reserve is a free reserve and can be used for any
purpose as is decided by the partners. The partners may transfer Rs.
50,000 to Claim for Workmen Compensation Reserve and transfer the
balance Rs. 50,000 to the Capital Accounts of Ajay and Akansha in the
ratio of 3:2.
In the context of above two statements, which of the following is
correct?
(a) Assertion (A) and Reason (R ) are correct but the Reason (R ) is
not the correct explanation of Assertion (A)
(b) Assertion (A) and Reason (R ) are correct but the Reason (R )
is the correct explanation of Assertion (A)
(c) Assertion (A) is correct but the Reason ® is not correct.
(d) Both Assertion (A) and Reason (R ) are incorrect.
3. Assertion(A): Accrued income not recorded earlier ,is shown in the
credit of Revaluation Account ,on admission of a partner.
Reason (R) :It being an income that relates to the period before
admission of a partner. Thus,it is credited to Revaluation Account and
net gain or loss of Revaluation A/c is transferred to old partner’s capital
accounts in their old profit sharing ratio.
 In the context of above two statements, which of the following is
correct?
(a) Assertion (A) and Reason (R ) are correct but the Reason (R ) is
not the correct explanation of Assertion (A)

(b) Assertion (A) and Reason (R ) are correct but the Reason (R
) is the correct explanation of Assertion (A)
(c) Only Assertion (A) is correct
(d) Assertion (A) is not correct but the Reason (R ) is correct.
4. Assertion(A): X and Y are partners sharing profits in the ratio of 1:1.
They admit Z as partner for 1/6th share in future. Their profit sharing ratio
after admission is 3:2:1. As a result of this , profit –share of Y has not
changed.
Reason (R) :Profit share of X before and admission has not changed.
Before admission of Z, his profit – share was ½ and after admission also
it is 3/6 or ½. In the context of above two statements, which of the
following is correct?
(a)Assertion (A) and Reason (R ) are correct but the Reason (R ) is not
the correct explanation of Assertion (A)
(b)Assertion (A) and Reason (R ) are correct but the Reason (R ) is the
correct explanation of Assertion (A)
©Only Assertion (A) is correct
(d)Both Assertion (A) and Reason (R ) are incorrect.
CASE BASED QUESTIONS
1. Vikas and Pankhur are teachers in a premire school teaching Accountancy and
Business Studies respectively. After teaching for 17 years together and gaining
experience in their respective subjects, they both decided to quit their jobs and
open a YouTube channel called 'VIKAS SIR ACCOUNTANCY AMRITSAR’
as a registered partnership firm where they will teach their respective subjects.
They decided to share profits in the ratio of 5: 4. After receiving request from
students and parents, they decide to introduce Economics as one of the subjects
to their YouTube channel. For this, they admitted their ex-colleague and a well
experienced teacher, Shivam as a partner for 1/5th share in the profits. Vikas and
Pankhur decided to share profits equally in future . Shivam brings Rs.1,20,000 as
capital and Rs. 54,000 as his share of goodwill in cash. At the time of admission
of Shivam, Goodwill existed in their books of account at Rs.36,000. Based on the
above information, answer the following questions:
A. Journal entry passed for funds brought by Shivam would be:
(i) Cash A/c ...Dr.1,74,000
To Shivam's Capital A/c 1,20,000
To Premium for Goodwill A/c 54,000
(ii)Revaluation A/c ...Dr.1,74,000
To Shivam's Capital A/c 1,20,000
 To Premium for Goodwill A/c 54,000
(iii)Bank A/c Dr. 1,74,000
To Shivam's Current A/c 1,20,000
To Premium for Goodwill A/c 54,000
(iv)Revaluation A/c ...Dr. 1,74,000
To Shivam's Current A/c 1,20,000
To Premium for Goodwill A/c 54,000
B. New profit-sharing ratio of Vikas, Pankhur and Shivam will be
1. 1:1:1 2. 5:4:1. 3. 2:2:1. 4. 5:4:5.
C. In what ratio would Vikas and Pankhur sacrifice their shares?
1. 1:1 2. 7:2 3. 5:4 4. 2:1
D. Journal entry for treatment of Goodwill appearing in the books will be:
1. Vikas's Capital A/c...Dr. 18,000
To Pankhur’s Capital A/c 18,000
2. Goodwill A/c ...Dr. 18,000
To Vikas's Capital A/c 14,000
To Pankhur’s Capital A/c 4,000
3.Vikas's Capital A/c...Dr. 14,000
Pankhur's Capital A/c Dr. 4,000
To Shivam's Capital A/c 18,000
4. Vikas's Capital A/c ...Dr. 20,000
Pankhur's Capital A/c Dr. 16,000
To Goodwill A/c 36,000
Numericals:
1. ‘J’ & ‘P’ are partners sharing 2:1. They admit ‘S’ for ¼ share. The adjusted
capital of ‘J’ & ‘P’ were Rs. 2, 00,000 & & 1,60,000. Fill in the missing
figure to record goodwill and capital, if goodwill is to be calculated on the
basis of S’s share of profit and his capital contribution:
Date Particulars L. F. Dr.(Rs.) Cr.(Rs.)
(a) Cash A/c-------------------------------------Dr. ---------
To S’s Capital A/c -----------
(Being S brought Rs. 1, 50, 000 as his
(b) share of capital)
S’s Capital A/c---------------------------Dr. ---------
To _______________ A/c -----------
To ________________A/c ----------
(Being goodwill share is distributed among
old partners)
2. A, B and C are partners sharing in the ratio of 3:2:1. They admit D for ¼ th
share . It is agreed that B would retain his original share. New ratio will be—
---. (C.B.S.E. 2019)
3. A and B were partners in a firm sharing profits and losses in the ratio of 4:3.
They admitted C as a new partner. The new profit sharing ratio between A, B
 and C was 3:2:2. A surrendered ¼ th of his share in favour of C. Calculate
B's sacrifice. (C.B.S.E. 2017)
4. Sahil and Charu entered into partnership for sharing profits in the ratio of 4:3.
They admitted Tanu as a new partner for ⅕ th share which she acquired
equally from Sahil and Charu. Sahil, Charu and Tanu earned profits at a higher
rate than normal rate of return. Therefore they decided to expand their business
. To meet their requirements of additional capital they admitted Puneet as a
new partner for 1/7 th share in profits which he acquired from Sahil and Charu
in 7:3 ratio.Calculate new profit sharing ratio between Sahil, Charu, Tanu and
Puneet. ( C.B.S.E.2015)
5. Kiya and Leela are partners sharing profits in the ratio of 3:2. Kiran was
admitted as a new partner with ⅕ th share in profits and she brought in Rs.
24,000 as her share of goodwill respectively with Rs. 18,000 and Rs. 6000.
Calculate new profit sharing ratio of Kiya, Leela and Kiran. ( C.B.S.E.2019)
6. A, B , C and D were partners in a firm sharing profits and losses equally. E
was admitted as a new partner for ⅓ rd share in profits of the firm which he
acquired equally from C and D. On E's admission the goodwill of the firm was
valued at Rs. 3,00,000. Calculate new profit sharing ratio. Also pass necessary
journal entry on E's admission assuming that he failed to bring his share of
goodwill in cash. (C.B.S.E. 2018)
7. A and B are partners sharing profits equally. They admit C into partnership ,
C paying only Rs. 60,000 for premium out of his share of premium of Rs.
1,08,000 for ¼ th share of profit. Goodwill account appears in the books at Rs.
3,00,000. Give the necessary journal entries.
8. A and B are partners sharing profits and losses in the ratio of 4:1. They admit
C into partnership for 1/6th share for which he pays Rs. 20,000 for goodwill.
A, B and C decide to share future profits in the ratio of 3:2:1 respectively.
Give necessary journal entries.
9. Hari, Ravi and Kavi were partners in a firm sharing profits in the ratio of 3:2:1.
They admitted Guru as a new partner for 1/7th share in profits. The new profit
sharing ratio will be 2:2:2:1 respectively. Guru brought Rs. 3,00,000 for his
capital and Rs. 45,000 for his 1/7th share of goodwill. Showing your working
clearly, pass the necessary Journal entries in the books of the firm for the
above mentioned transactions.
10.E and F were partners in a firm sharing profits in the ratio of 3:1. They
admitted G as a new partner for ⅓ Rd share. It was decided that E, F and G
will share future profits equally. G brought Rs. 50,000 in .cash and machinery
 worth Rs. 70,000 for his share of premium for goodwill. Showing your
calculations clearly, pass necessary journal entries in the books of the firm.
( C.B.S.E 2023)
11.J and R are partners. V is admitted as a new partner for ¼ th share of profit
but is unable to contribute premium for goodwill in cash amounting to Rs.
80,000 and so it is decided to raise a loan in the name of V. You are required
to pass a single journal entry in order to give effect to the above problem.
( C.B.S.E.2023)
12.Deepika and Rajshree are partners in a firm sharing profits and losses in the
ratio of 3:2. On 31st March 2022, their Balance Sheet was as under:
Liabilities Amount Assets Amount
Sundry Creditors 16,000 Cash in Hand 1200
Public Deposits 61,000 Cash at Bank 2800
Bank Overdraft 6,000 Stock 32,000
Outstanding Liabilities 2,000 Prepaid Insurance 1,000
Capital A/c 88,000 Sundry Debtors 28,000
28,800
Less Provision For Doubtful
Debt 800
Deepika Plant and Machinery 48,000
48,000
Rajshree Land and Building 50,000
40,000
Furniture 10,000
1,73,000 1,73,000
On the above date, the partners decide to admit Anshu as a partner on the
following terms:
(i) The new profit sharing ratio of Deepika, Rajshree and An, stated in
the above Balance Sheet. shu will be 5:3:2.
(ii) Anshu will bring Rs. 32,000 as his capital.
(iii) Anshu is unable to bring in any cash for his share of goodwill.
Partners, therefore decided to calculate goodwill on the basis of
Anshu’s share in the profits and the capital contribution made by him
to the firm.
(iv) Plant and Machinery would be increased by Rs. 21,000
(v) Stock would be increased to Rs. 40,000
(vi) Provision for Doubtful Debts is to be maintained at Rs. 4,000. Value
of Land and Building has appreciated by 20%. Furniture has
depreciated by 10%
 (vii) There is an additional liability of Rs. 8,000 being outstanding salary
payable to employees of the firm. This liability is not included in the
outstanding liabilities, stated in the above Balance Sheet. Partners
decided to show this liability in the books of new firm.
Prepare relevant accounts and Balance Sheet of new firm.
(Ans: Revaluation Profit Rs. 17,800, Balance of Deepika’s Capital
A/c Rs. 60,900, Rajshree’s Capital A/c Rs. 49,340, Anshu’s Capital
A/c Rs. 32,000, Balance Sheet Rs. 2,29,240)
2. Ishu and Vishu are partners sharing profits in the ratio of 3:2. Their Balance
Sheet as at 31st
March 2022 was as follows:
Liabilities Amount Assets Amount
Creditors 66,000 Cash at Bank 87,000
General Reserve 9,000 Debtors 35,000
42,000
Less Provision for Doubtful
Debt 7000
Investment Fluctuation 5,000 Investment (Market Price 21,000
Fund 19,000)
Capitals: 2,31,000 Buildings 98,000
Ishu : 1,19,000 Plant and Machinery 70,000
Vishu: 1,12,000
3,11,000 3,11,000
st th
Nishu was admitted on 1 April 2022 for 1/6 share on the following terms:
(i) Nishu will bring Rs. 56,000 as his share of capital
(ii) Goodwill of the firm is valued at Rs. 84,000 and Nishu will bring his
share of goodwill in cash.
(iii) Plant and Machinery be appreciated by 20%.
(iv) All debtors are good.
(v) There is a liability of Rs. 9800 included in creditors that is not likely
to arise.
(vi) Capital of Ishu and Vishu will be adjusted on the basis of Nishu’s
capital and any excess or deficiency will be made by withdrawing or
bringing in cash by the concerned partner.
Prepare relevant accounts and Balance Sheet of new firm. (C.B.S.E.
2019( Ans: Revaluation Profit Rs. 30,800, Balance of Partner’s
Capital A/c : Ishu Rs. 1,68,000, Vishu Rs. 1,12,000, Nishu Rs.
56,000, Balance Sheet Rs. 3,92,200)
3 .P and K are partners in a firm. On 31st March 2017, their Balance Sheet was
as under:
 Liabilities Amount Assets Amount
Sundry Creditors 50,000 Shares in K Ltd. 65,000
General Reserve 1,00,000 Cash at Bank 18000
Profit and Loss A/c 55,000 Stock 19,000
(Profit for 2016-17)
Outstanding Liabilities 8,000 Unexpired Insurance 5,000
Capital A/c 5,00,000 Sundry Debtors 20,500
22,000
Less Provision For Doubtful
Debt 1500
P Plant and Machinery 1,45,500
3,00,000
K Land and Building 5,60,000
2,00,000
C’s Loan A/c 1,20,000 Furniture
8,33,000 8,33,000
st th
On 1 April 2017, the partners decide to admit C as a partner for 1/4 share in
profits on the following terms:
(i) C’s Loan will be converted into his capital.
(ii) C will bring his share of goodwill premium by cheque. Goodwill of
the firm will be calculated on the basis of Average profits of previous
three years. Profits for the year ended 31st March 2015 and 31st March
2016 were Rs. 55,000 and Rs. 1,00,000 respectively.
(iii) 10% depreciation will be charged on Plant and Machinery and Land
and Building will be appreciated by 5%.
(iv) 5% of General Reserve to transferred to Provision for Doubtful Debt
Account.
(v) Capitals of P and K will be adjusted on the basis of C’s Capital .
Adjustment be done through bank and if required , overdraft facility
be availed.
Pass necessary Journal entries on C’s admission. (C.B.S.E. 2024)
4. Madhuri and Arsh were partners in a firm sharing profits and losses in the
ratio of 3:1. Their Balance Sheet as at 31st March 2019 was as follows:
Liabilities Amount Assets Amount
Capitals 5,00,000 Machinery 4,70,000
Madhuri Investment 1,10,000
3,00,000
Arsh Debtors 1,10,000
2,00,000 1,20,000
Less Provision for Doubtful
Debts10,000
 Workmen 60,000 Stock 1,35,000
Compensation Reserve
Creditors 1,90,000 Cash 35,000
Employees’ Provident 1,10,000
Fund
8,60,000 8,60,000
st
On 1 April 2019 they admitted Jyoti into partnership for ¼ th share in the
profits of the firm. Jyoti brought proportionate capital and Rs. 40,000 as her
share of goodwill.
The following terms wetre agreed upon:
(i) Provision for doubtful debts was to be maintained at 10% on debtors.
(ii) Stock was undervalued by 10%
(iii) An old customer whose account of Rs. 25,000 was written off as bad,
has promised to pay Rs. 10,000 in full settlement of his debt.
(iv) 20% of the investments were taken over by Arsh at book value.
(v) Claim on account of Workmen’s Compensation amounted to Rs.
70,000
(vi) Creditors included a sum of Rs. 27,000 which was not likely to be
claimed.
Prepare relevant accounts and Balance Sheet of new Firm.(C.B.S.E.
2020)
5. Madhuri and Arsh were partners in a firm sharing profits and losses in the
ratio of 3:1. Their Balance Sheet as at 31st March 2019 was as follows:
Liabilities Amount Assets Amount
Capitals 5,00,000 Machinery 4,70,000
X 3,00,000 Investment 1,10,000
Y Debtors 1,10,000
2,00,000 1,20,000
Less Provision for Doubtful
Debts10,000
Workmen 60,000 Stock 1,35,000
Compensation Reserve
Creditors 1,90,000 Cash 35,000
Employees’ Provident 1,10,000
Fund
8,60,000 8,60,000
st
On 1 April 2019 they admitted Z into partnership . Z brought1/4 of total capital
of X and Y and Rs. 40,000 as her share of goodwill.
The following terms wetre agreed upon:
(vii) Provision for doubtful debts was to be maintained at 10% on debtors.
(viii) Stock was undervalued by 10%
(ix) An old customer whose account of Rs. 25,000 was written off as bad,
has promised to pay Rs. 15,000 in full settlement of his debt.
(x) 20% of the investments were taken over by Y at book value.
(xi) Claim on account of Workmen’s Compensation amounted to Rs.
70,000
(xii) Creditors included a sum of Rs. 27,000 which was not likely to be
claimed.
Prepare relevant accounts and Balance Sheet of new Firm
 Retirement and Death of a partner
Meaning :- Retirement of a means retiring from the partnership i.e. ceasing to
be a partner may retire from the firm .
(i) If there is an agreement to that effect .
(ii) If all the partners agree to his retirement .
(iii) If the partnership is at will , by giving a written notice to the remaining
partners of his decision to retire .
Liability of a retiring partner :-
Liability for the acts before retirement :-A retiring partner remains liable for
all the acts of the firm up to the date of his retirement . however a retiring
partner may be discharged from his liability by an agreement .
Liability for the act after retirement :- A retiring partner also contuse be
liable to third parties for the acts of the firm even after his retirement until
public notice of his retirement until a public notice of his retirement is given
adjustment required on retirement of a partner
(i) Change in profit sharing ratio .
(ii) Valuation and adjustment of goodwill
(iii) Revaluation of assets and re-assessment of liability .
(iv) Reserves & undistributed profits .
(v) Computation of retiring partner’s interest & payment to the retiring
partner .
(vi) Adjustment of capital .
1.) Change in profit sharing ratio :- Retirement of a partner loads to change
in profit sharing ratio of the remaining or continuing partner because share
of retiring or deceased partner is taken by them .
New share of a partner :- Old share + Acquired Share
CASE 1) When one partner retire and new Partner profit sharing ratio among
the remaining partner is not given .
Example: Suppose A,B And C were partner sharing profit in the ratio of ½ ,2/5
and 1/10 . Find the new profit sharing ratio of the partners.
Sol. Old ratio is 1x 5 : 2x2 : 1
2x 5 5x2 10
5:4:1
New ratio is 4:1
Gaining ratio = New ratio – Old ratio
=4/5 -4/10 : 1/5 – 1/10
= 8-4 /10 =4/10 : 2-1/10 = 1/10
CASE 2) When the remaining partner take share of the retiring partner in an
agreed ratio .
Example:Suppose A.B,C are the profits and losses in the ratio of 5: 3 :2 . B
retires. Her share is taken by A and C in the ratio of 2:1 . Calculate new profit
sharing ratio .
 Solution:B's share taken by A = 3/10 *2/3= 2/10
A's new share = old share + gain
=5/10 +2/10 =7/10
B's share taken by C = 3/10 x1/3 = 1/10
C's new share = 2/10 +1/10 = 3/10
New ratio =7:3.
2.Valuation and Adjustment of Goodwill - Share of profit of the
retired or deceased partner is taken by the continuing partners for which
the compensate to him . the compensation paid is known as goodwill. In
other words , the retiring or deceased partner entitled to his share of
goodwill at the time of retirement , death because goodwill has been
earned by the firm at the time when he was a partner .
Accounting treatment of Goodwill:
CASE I- When Goodwill does not exist in the Books
Gaining Partner’s Capital A/c-------Dr.
To Retiring Partner’s Capital A/c
CASE II- When Goodwill exists in the books
All Partner’s Capital/ Current A/c-----Dr.(In old ratio)
To Goodwill A/c
CASE III- When Sacrifice by a Continuing Partner or Partners
along with Retiring Partner
Gaining Partner’s Capital/ Current A/c-----Dr.
To Retiring Partner’s Capital A/c
To Sacrificing Partner’s Capital/ Current A/c
CASE IV- When Goodwill is raised and written off
(a) Goodwill is raised at its full value and written off:
Goodwill A/c-------------Dr.
To All Partner’s Capital A/c (In old ratio)
Continuing Partner’s Capital A/c----Dr.(In new ratio)
To Goodwill A/c
(b) Goodwill is raised to the extent of retiring partner’s share and
is written off:
Goodwill A/c-------------Dr.
To Retiring Partner’s Capital A/c
Gaining Partner’s Capital A/c----Dr.(In gaining ratio)
To Goodwill A/c
3) Revaluation of assets and reassessment of liability
Assets and Liabilities are revalued if there is reconstitution of firm. Such
change belongs to the period prior to change in Profit-Sharing Ratio. The
profit or loss of it must be shared by the old partners in their old Profit-
Sharing ratio. When revised values are to be recorded in the books, the
profit/loss of revaluation is transferred to the old partners’ capital or current
accounts in their old profit sharing ratio. When revised values are not to be
 shown in the books, a single adjustment entry is passed based on
Gain/Sacrifice of partners.
Another name – Profit & Loss Adjustment Account
Nature of Revaluation A/c. – Nominal nature
Objective to prepare – To know the gain/loss on revaluation of assets and
reassessment of liabilities.
Format of Revaluation A/c.
Dr. Revaluation A/c. Cr.
To Liability A/c(Increase) By Liability A/c(
Decrease)
To Assets A/c( Decrease) By Assets A/c(Increase)
To provision (Create/Increase) By Provision
(Cancel/Decrease)
To share of profit By share of loss
Increased to/decreased to/valued at – with difference amount.
Increased by/decreased by – with same amount
Journal entries in case of Revaluation A/c
Increase in the value of assets
Asset A/c……Dr.
To Revaluation A/c
Decrease in the value of Assets
Revaluation A/c……Dr.
To Asset A/c
Increase in the value of Liability
Revaluation A/c…..Dr.
To Liability A/c
Decrease in the value of liability
Liability A/c…….Dr.
To Revaluation A/c.
Creation of provision/increase in provision
Revaluation A/c……Dr.
To Provision A/c.
Cancellation of provision/decrease in provision
Provision A/c….Dr.
To Revaluation A/c
In case of revaluation profit
Revaluation A/c…..Dr.
To Old Partner’s Capital/Current A/c (in old ratio)
In case of revaluation loss
Old Partner’s Capital/Current A/c….Dr. (in old ratio)
To Revaluation A/c
Situation-I:- When revised value are to be recorded in the books – in such case,
revaluation of assets and liabilities is done with the help of revaluation account
and profit or loss on revaluation A/c and profit or loss on revaluation is transferred
to partner’s capital account or current in their old ratio.
Situation-II: When revised values are not to be recorded in the books – if the
partners decide to record the net effect of revaluation of assets & liabilities
without affecting their old figures, then a single adjusting entry involving the
capital accounts/current account of gaining partners and sacrificing partners is
passed.
Some Important Points Regarding Revaluation Account :-
19.Investment taken over by partner at Rs. 6400 where as in Balance Sheet its
value was Rs. 10000.
Revaluation A/c----------- Dr. 3600
Partner’s Capital A/c------- Dr. 6400
To Investment A/c 10000
20.Accrued Income Rs. 5000 does not appear in the book.
Accrued Income A/c----------Dr.
To Revaluation A/c 5000
21.Provident Fund be raised by Rs. 1000
Revaluation A/c-------- Dr. 1000
To Provident Fund 1000
22.Creditors are to be paid Rs. 2000 more.
Revaluation A/c--- Dr. 2000
To Creditors A/c 2000
23.Machinery is over – valued by Rs. 5000
Revaluation A/c------- Dr. 5000
To Machinery A/c 5000
24.A liability of Rs. 20,000 included in creditors is not likely to arise.
Creditors A/c-----Dr. 20,000
To Revaluation A/c 20,000
25.Debtors of Rs. 2000 will be written off as bad debts and a provision of 4% will
be created on debtors for bad & doubtful debts (where as Debtors given in
Balance Sheet Rs. 36000 & Provision for Bad Debt is Rs. 4000)
Provision for doubtful debts A/c – Dr. 2640
To Debtors A/c 2000
To Revaluation A/c 640
26.Patents are valueless.
Revaluation A/c-------- Dr.
To Patents A/c
27.Provision for Discount on Creditors is to be made :-
Provision for Discount on Creditors A/c – Dr.
To Revaluation A/c
28.Stock is over – valued by 10% (Value given in Balance Sheet Rs. 99,000)
Revaluation A/c -------- Dr. 9000
To Stock A/c 9000
 29.A Debtor whose dues of Rs. 5000 was written off as bad debts paid Rs. 4000
in full settlement.
Cash A/c/ Bank A/c-------- Dr.4000
To Bad Debt Recovered A/c 4000
Bad Debt Recovered A/c----Dr. 4000
To Revaluation A/c 4000
30.Depreciation of Rs. 30,000 had been emitted on plant
Revaluation A/c---------- Dr. 30,000
To Plant A/c 30,000
31.Creditors include a contingent liability of Rs. 50,000 which has been decided
by the court Rs. 43,000
Creditors A/c----------- Dr. 7000
To Revaluation A/c 7000
32.A creditors for Rs. 3000 is not traceable for a number of years and the amount
is to be written off.
Creditors A/c--------- Dr. 3000
To Revaluation A/c 3000
33.Unearned Income of Rs. 4000 is to be provided for
Revaluation A/c --------- Dr. 4000
To Unearned Income A/c 4000
34.An old customer, whose account was written off as bad, has promised to pay
Rs. 2000 in full settlement of his debt.
Debtors A/c-------- Dr. 2000
To Revaluation A/c 2000
35.20% of the reserve is to remain as a provision against bad doubtful debts.
Reserve A/c--------- Dr.
To Provision for Bad & Doubtful Debts
36.Out of insurance which was entirely debited to Profit & Loss A/c Rs. 870 to
be carried forward as Unexpired Insurance.
Prepaid Insurance A/c – Dr. 870
To Revaluation A/c 870
Treatment of Bad Debts and Provision for Doubtful Debts in
Revaluation A/c in different Situations
Case-1 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Create a provision for doubtful debts @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 10,000

Case-2 Balance Sheet as at…………….

Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Create a provision for doubtful debts should be @ 15% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 5,000
Reason: As per statement PFDD @ 15% on 1,00,000 = Rs.15,000
Less: Existing PFDD =10,000
Remaining = Rs. 5,000 Loss Dr. To Revaluation A/c
Case-3 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Create a provision for doubtful debts should be @ 8% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
By PFDD 2,000
Reason: As per statement PFDD @ 8% on 1,00,000 =8,000
Less: Existing PFDD =10,000
Remaining = 2,000
Profit Cr. To Revaluation A/c
Case-4Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Bad Debts Rs. 12,000
Create a provision for doubtful debts should be @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
 Particulars Rs. Particulars Rs.
To Bad Debts 2,000
To PFDD 8,800
Reason: As per statement Bad Debts is 12,000 and We have PFDD
=10,000 so loss of Rs. 2,000 will be Dr to Revaluation A/c/
And PFDD @ 10% on Reaming Debtors (1,00,000 –
12,000 = 88,000) is Rs. 8,800 is loss Dr to Revaluation
A/c
Case-5 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 10,000 90,000
Bad Debts Rs. 6,000
Create a provision for doubtful debts should be @ 10% on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 5,400
Reason: As per statement Bad Debts is 6,000 and We have Old
PFDD 10,000 so remaining PFDD we have Rs. 4,000.
And New PFDD @ 10% on Reaming Debtors (1,00,000 –
6,000 = 94,000) is Rs. 9,400
So Excess PFDD i.e. Rs. 9,400 – 4,000 = Rs. 5,400 Dr to Revaluation A/c
Case-6 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 20,000 80,000
Bad Debts Rs. 8,000 .Create a provision for doubtful debts should be @ 10%
on Debtors
Treatment:
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
By PFDD 2,800
Reason: As per statement Bad Debts is 8,000 and We have Old
PFDD 20,000 so remaining PFDD we have Rs. 12,000.
 And New PFDD @ 10% on Reaming Debtors (1,00,000 –
8,000 = 92,000) is Rs. 9,200
So Excess PFDD i.e. Rs. 9,200 – 12,000 = - Rs. 2,800 Cr. to Revaluation A/c
Case-7 Balance Sheet as at…………….
Liabilities Rs. Assets Rs.
S. Debtors 1,00,000
Less: PFDD 20,000 80,000
Bad Debts Rs. 15,000
Create a provision for doubtful debts should be @ 10% on Debtors
Treatment
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To PFDD 3,500
Reason: As per statement Bad Debts is 15,000 and We have Old
PFDD 20,000 so remaining PFDD we have Rs. 5,000.
And New PFDD @ 10% on Reaming Debtors (1,00,000 –
15,000 = 85,000) is Rs. 8,500
So Excess PFDD i.e. Rs. 8,500 – 5,000 = Rs. 3,500 (Loss) Dr. to Revaluation
A/c
Workmen Compensation Fund –
Case I If no liability arises against it

Workmen Compensation Fund A/c------Dr.

To Old Partner’s Capital/Current A/c
Case II If Liability arises against W.C.F. > Amount of W.C.F.
Workmen Compensation Fund A/c-----Dr.
Revaluation A/c----------------------------Dr (with the amount of diff.)
To Liability against W.C.F.
Old Partner’s Capital/ Current A/c --------Dr
To Revaluation A/c
Case III If Liability arises against W.C.F. less than Amount of W.C.F.
Workmen Compensation Fund A/c------------- Dr.
To Old Partner’s Capital/ Current A/c
To Liability against W.C.F.

Investment Fluctuation Reserve

If reduction in the If reduction in value If value of investment is

value of Investment is of investment is more increased
less than I.F.R. than I.F.R.
 I.F.R.A/c------------Dr. I.F.R. A/c---------Dr. Investment A/c – Dr.
To Investment A/c Revaluation A/c----- To Revaluation A/c
To All Partner’s Dr.
Capital/ Current (With the amount of
A/c diff.)
To Investment A/c
All Partner’s Capital/ I.F.R. A/c------------Dr.
Current A/c--------Dr. To All Partner’s
To Revaluation Capital/ Current A/c
A/c
Revaluation A/c--------
Dr.
To All Partner’s
Capital/ Current A/c

4. Adjustment of Deferred Revenue Expenditure deferred reserve

expenditure are reserve expenditure in nature but are written off in more than
one accounting period considering that its benefit will accrue to the business.
For the period in which it is written off examples of deferred reserve
expenditure are (i) large advertisement and marketing expenses incurred to
introduce new product in the market, called advertisement suspense
Deferred revenue expenditure is written off at the time of admission of a partner
by debiting old partner’s capital/ current account is case of fixed capital in their
old ratio.
All Partner’s Capital/ Current A/c
To Advertisement Suspense A/c
5. Reserves & accumulated profits /Losses -------
Accumulated Profits /Reserve A/c------- Dr.
To All Partner’s Capital/Current A/c
All Partner’s Capital/Current A/c Dr.
To Accumulated Losses A/c
If partners decided not to distribute reserves/ accumulated profits
Gaining Partner’s Capital/Current A/c------- Dr.
To Retiring Partner’s Capital/Current A/c
Format of partner’s capital account
Dr. Partner’s Capital A/c Cr.
X Y Z X Y Z
To Revaluation A/c - - - By balance b/d - - -
(Loss) (As per B/S)
To Deferred By Revaluation A/c - - -
Revenue expenditure - - - (profit)
To Advertisement - - - By Accumulated Profit / - - -
Suspense A/c Reserves
To Accumulated - - - By Gaining Partner’s -
losses - - Capital A/c
To Retiring Partner’s -
Capital A/c - - - By Concerned Partner’s - -
To Goodwill A/c Current A/c
(Already existed) -
To Cash/Bank -
To Retiring Partner’s
Loan A/c - -
To balance C/d
5) Computation of amount due to retiring partner :- Amount due to
retiring partner is determine by preparing capital of the retiring partner taking
into account of the following :-
1. Opening credit balance of capital and current accounts of retiring partner
2. Share in the gain of revaluation .
3. Share of reserves and accumulated profits.
4. Share of goodwill of the firm .
5. Share of the profit till the date of his retirement .
6. Salary interest on capital due to retiring partner till the date of his
retirement .
ITEMS DECREASING THE CLAIM ARE FOLLOWS:-
1. Opening debit balance of capital and current account .
2. Advance or loan taken by him from the firm .
3. Share in the accumulated losses.
4. Share in the revaluation on loss.
5. Drawings and interest there on .
6. If the equation is silent on payment to retiring partner , the amount
due to him is transferred to his loan account .
Retiring partner's capital A/c-----------Dr.
To Retiring Partner’s Loan A/c
Retiring partner is entitled to interest @6%p.a. till the amount due to him
is not paid
6) Adjusting of capital :-
Case I ) When total capital of new firm is given :-
Step I) Ascertain present capital of remaining partners after all
adjustment .
Step II ) Calculate proportionate capital of remaining partners on the
basis of total capital , the new firm earn profit sharing ratio .
Step III ) Find the surplus / deficit capital of each continuing partner by
comparing proportionate capital and present capital .
Step IV ) Adjust surplus capital by paying or by transferring it to credit
side of current account of the concerned partner . In the case of deficit
capital , the amount of deficiency is brought by the concerned partner .
 In case of Surplus :-
Concerned Partner's Capital A/c-----Dr.
To Cash/ Bank A/c/ Concerned Partner’s Current A/c .
In case of Deficit :-
Cash A/c / Bank A/c / Concerned Partner’s Current A/c------Dr.
To Concerned Partners Current / Capital A/c
Case II ) When total capital of remaining partner is to their new profit
sharing ratio .
Step I :- Calculate adjusted capital of remaining partners after all adjustment .
Step II :- Calculate total capital of the new firm by using formula total capital
of new firm = aggregate of adjusted capital of remaining partners .
Step III :- Calculate new capital of remaining partners by dividing total capital
of the new firm in their new profit sharing ratio.
Step IV :- Find surplus capital / deficit capital of each continuing partner by
comparing the new capital with the capital after adjustments .
Step V :- Pass necessary journal entry for adjusting surplus / deficit capital .
Case III ) :- When total capital of new firm is equal to total capital before
retirement of a partner .
Step I) Calculate new profit sharing ratio .
Step II ) Calculate adjusted capital of each of the remaining partner .
Step III ) Calculate new capital of each of the remaining partners are as
follows :-
Total capital of new firm X new profit sharing ratio .
Step IV ) Calculate surplus / deficit capital of each continuing partner by
comparing new capital and adjusted capital .
Step IV) Pass necessary journal entry for adjusting the surplus capital /
deficit capital .
CASE IV ) When the retiring partner is to be paid through amount brought
by the remaining partner in a manner to make their capital proportionate to
their new profit sharing ratio .
Step I ) Calculate adjusted capital of remaining partner after adjustment .
Step II ) Calculate total capital of new firm as follows .
Aggregate of adjusted capital of remaining partner . Shortage of
amount to be brought in by continuing partners to pay the retired
partner .
Step III ) Calculate new capitals of the remaining partner by dividing total
capital of new firm in their new profit sharing ratio .
Step IV ) Find surplus capital/ deficit capital of each continuing partner by
comparing new capital with the adjusted old capital .
Step V ) Pass necessary journal entry for adjusting surplus capital / deficit
capital .
CASE V) When the retiring partner is to be paid through amount brought by
the remaining / continuing partners in a manner to make their
 capital proportionate to their new profit sharing ratio and also leave
a desired cash balance .
Step I ) Calculate adjusted capital of remaining partner i.e. after making
adjustments for goodwill , reserves , profits / losses and gain or loss on
revaluation .
Step II ) Calculate total capital of new firm as follows :-
Aggregate of adjusted capital of the remaining partner + shortage of
amount to be brought in by remaining partner .
Step III ) Calculation new capital each remaining partner are as follows:-
Total capital of new firm * new share
Step IV ) Calculate surplus capital deficit capital by comparing new capital
& adjusted capital .
POINTS TO REMEMBER :-
1) Only retiring partners share of the goodwill is to be adjusted in gaining
ratio where as existing goodwill is in old ratio .
2) The amount due to retiring partner either pay in cash / through cheque
transfer to retiring partners loan .
3) If any of the remaining partner has also sacrificed part of his sharing
profits in the firm of retirement or dearth of the partner , his capital amount
credit along with the retiring partner with capital amount .
MCQ
Q-1 An account opened to ascertain the loss or gain in value of assets and
liabilities at the time of death of a Partner is called
(a) Realisation Account (b) Executors Account (c) Profit and Loss
Adjustment A/c (d) Deceased Partners capital account
Q-2 A, B and C are partners in a firm sharing profits and losses in the ratio of
2:2:1. On 1st July, 2023 C died. Accounts are closed on 31st March every year.
The sales for the year 2022 was Rs. 6,00,000 and the profits were Rs. 60,000.
The sales for the period for the period April 1, 2022 to March 31 st 2023 were
Rs.2,00,000. The share of deceased Partner in the current year’s profit on the
basis of sales is (a) Rs.20,000 (b) Rs. 8,000 (c) Rs. 3,000 (d) Rs. 4,000
Q-3 A, B and C were partners sharing profits and losses in the ratio of 2:2:1.
Books are closed on 31st March every year. C died on November 5, 2022. Under
the Partnership deed the executors of the deceased partner are entitled to his
share of profit to the date of death calculated on the basis of last year’s profit.
Profit for the year ended 31st March, 2022 was Rs. 2,14,000. C’s share of profit
will be (a) Rs.28,000 (b) Rs.25,680 (c) Rs.28,800 (d) Rs.48,000
Q-4 On death of a Partner, the remaining partner(s) who have gained due to
change in profit sharing ratio should compensate the
(a) Deceased partner only (b) Remaining partners (who have sacrificed) as
well as deceased partner (c) Remaining partners only (who have sacrificed)
(d) None of the above
Q-5 Which account is used to transfer deceased partner’s share of profit to his
capital account if date of death is 31st March of a year
(a) P&L Adjustment account (b) None of these
(c) P&L Suspense account (d) Profit and Loss Account
Q-6 Kiran, Umesh and Aditya were in Partnership firm. Suddenly on September
30,2021, Kiran died. Amount payable to her on that date amounted to Rs.
1,05,000. Rs. 5000 was paid immediately and balance was paid in 4 equal
annual instalments along with interest @ 12% p.a.starting from 1st October
2022. Calculate the interest due as on 31st March, 2023. Financial year was
followed as accounting year by the firm. (a) Rs. 2,500 (b) Rs.3,000 (c) Rs.4,500
(d) Rs. 3,750
Q-7 Karan, Aman and Girish were Partners with capitals of Rs. 3,00,000;
Rs.2,50,000 and Rs.2,00,000 respectively as on 31st March, 2018. Aman died,
partners decided to pay the entire amount to Aman’s Executor but they only had
Rs.50,000 cash and rest of the amount was to be brought in by Karan and Girish
in such a way that their future capital will be equal. Calculate the amount to be
brought in by Karan and Girish.
(a) Rs.50,000 by Karan and Rs.1,50,000 by Girish
(b) Rs.50,000 by Girish and Rs.1,50,000 by Karan
(c) Rs.25,000 by Karan and Rs.1,25,000 by Girish
(d) Rs.25,000 by Girish and Rs.1,25,000 by Karan
8. A, B and C are partners sharing in the ratio of in 3:4:2. B wants to retire from
the firm. The profit on revaluation on that date was Rs. 36,000. New ratio of A
and C is 5:3. Profit on revaluation will be distributed as:
(a) A Rs. 16,000, B Rs. 12,000 C Rs. 8,000
(b) A Rs. 12,000, B Rs. 16,000, C Rs. 8,000 c) A Rs. 22,500, C Rs. 13,500
(c) A Rs. 23,625, C Rs. 12,375
9.Retiring partner is compensated for parting with the firm’s future profits in
favour of remaining partners. The remaining partners contribute to such
compensation amount in------ ratio :
(a) Gaining Ratio (b) Capital Ratio (c) Sacrificing Ratio (d) Profit
sharing Ratio
10.What treatment of accumulated losses is made on the retirement of a partner
when capitals are fixed?
(a) Credited to all partner’s capital accounts in old ratio.
(b) Debited to all partner’s current accounts in old ratio.
(c) Credited to remaining partner’s current account in new ratio.
(d) Debited to all partner’s capital accounts in old ratio.
Assertion Reason Based Questions:
1. Assertion(A):Retirement of a partner results into dissolution of
partnership and new partnership among the remaining
partners come into existence.
 Reason(R): Retirement of a partner results into reconstitution of
partnership.
In the context of above two statements, which of the following is correct?
(a) (A) and (R ) both are correct and (R ) is the correct explanation of (A)
(b) (A) and (R ) both are correct and ® is not the correct explanation of (A)
(c) Both (A) and (R ) is true.(d)(A) is true but (R ) is false.
2. Assertion(A):In the event of retirement of a partner, the combined share
of profit of the remaining partners will increase.
Reason(R): Retirement of a partner results into reconstitution of
partnership.
In the context of above two statements, which of the following is
correct?
(a) (A) and ® both are correct and (R) is the correct explanation of (A)
(b) (A) and (R) both are correct and (R) is not the correct explanation of
(A)
(c) (A) is false but (R) is true. (d)(A) is true but (R) is false.
3. Assertion(A): In case of retirement of a partner, goodwill is credited to
all Partner’s Capital A/c in old ratio.
Reason(R ): In case of retirement of a partner, goodwill is credited to
retiring partner’s capital account and debited to continuing
partners in their sacrificing ratio.
In the context of above two statements, which of the following is
correct?
(a) (A) and (R) both are correct and (R) is the correct explanation of
(A)
(b) (A) and (R) both are correct and (R) is not the correct explanation
of (A)
(c) Only (R) is true. (d) Both (A) and (R ) is false.
4. Assertion(A): In case of retirement , the retiring partner is entitled to get
interest @6%p.a. till the amount due to him is paid off.
Reason(R ): At his option, the retiring partner , instead of interest, may
take that share of profits which has been earned by the firm
by the use of the amount due to him.
In the context of above two statements, which of the following is
correct?
(a) (A) and (R) both are correct and (R) is the correct explanation of
(A)
(b) (A) and (R) both are correct and (R) is not the correct explanation
of (A)
(c) Only (R) is true. (d) Both (A) and (R) is false.
Numerical:
1. X, Y and Z were partners in a firm sharing profits and losses in the ratio of
5:3:2. On 31.3.2022 X retired from the firm. On X ‘s retirement the firm had
 a balance of Rs. 90,000 in the General Reserve A/c. The revaluation of assets
and reassessment of liabilities resulted in a loss of Rs. 70,000 (C.B.S.E. 2022)
2. R, S and T were partners in a firm. On 31.3.2022 S retired. On S’s
retirement the balance sheet of the firm showed debtors at Rs. 1,95,000. It
was decided to record unrecorded debtors of Rs. 5,000 and create a
provision of 5% on debtors for bad and doubtful debts. Pass necessary
journal entries. (C.B.S.E. 2022)
3. The Balance Sheet of A, B and C who were sharing profits in proportion to
their capitals stood as follows as at 31st March, 2022 :
Liabilities Amount Assets Amount
Sundry Creditors 6,900 Cash at Bank 5500
Investment Fluctuation 7,500 Sundry Debtors 4,900
Reserve 5000
Capital Accounts: 40,500 Less: Provision 100
A-------18,000 Stock 8,000
B-------13,500 Investments 11,500
C-------9,000 Land and Building 25,000
54,900 54,900
st
B retired on 1 April 2022 and the following terms were agreed upon:
(i) Stock be depreciated by 6%.
(ii) That the Provision for Doubtful Debts be brought upto 5% on
Debtors.
(iii) Land and Buildings be appreciated by 20%.
(iv) That a provision of Rs. 770 be made in respect of outstanding legal
charges.
(v) Investments are brought down to Rs. 8,500
(vi) The Goodwill of the entire firm be fixed at Rs. 10,800 and B’s
share of goodwill be adjusted into the accounts of A and C who are
going to share future profits in the ratio of 5:3.
(vii) The entire capital of the firm as newly constituted be fixed at Rs.
28,000 between A and C in the proportion of 5:3(actual cash to be
brought in or paid off, as the case may be).
Pass Journal entries and Show the Balance Sheet after transferring
B’s share to a separate Account in his name.
(Ans: Capital Balances: A- Rs. 17,500, B-Rs. 10,500, Balance
Sheet Total Rs. 55,470)
4. The Balance Sheet of X,Y and Z as at 31st March 2022, who have agreed to
share profits and losses in proportion of their capitals.
Balance Sheet of X, Y and Z as at 31st March, 2022
Liabilities Amount Assets Amount
 Capitals: 7,00,000 Land and Building 2,00,000
X--------2,00,000 Machinery 3,00,000
Y--------3,00,000 Stock 1,00,000
Z--------2,00,000 Sundry Debtors 1,10,000 1,00,000
Less: Provision For
Doubtful Debts 10,000
General Reserve 35,000 Cash at Bank 1,00,000
Workmen 15,000
Compensation
Reserve
Sundry Creditors 50,000
8,00,000 8,00,000
st
On 31 March, 2022 X desired to retire from the firm and the remaining
partners decided to carry on the business. It was agreed to revalue the
assets and reassess the liabilities on the following basis:
(i) Land and Building to be appreciated by 30%
(ii) Machinery be depreciated by 20%
(iii) There were bad debts of Rs. 17,000.
(iv) The claim on account of Workmen’s Compensation was estimated
at Rs. 8,000.
(v) Goodwill of the firm was valued at Rs. 1,40,000 and X;s share of
Goodwill be adjusted against the Capital A/cs of the continuing
partners Y and Z who have decided to share future profits in the
ratio of 4:3 respectively.
(vi) Capital of the new firm in the total will be the same as before
retirement of X and will be in the new profit sharing ratio of the
continuing partners.
(vii) Amount due to X be settled by paying Rs. 50,000 in cash and the
balance by transferring to his loan account which will be paid later
on.
Prepare relevant accounts and Balance Sheet of new firm.
(Ans: Revaluation Loss Rs. 7,000, Capital Balances: Y- Rs.
2,95,000, Z-Rs. 1,90,000, X’s Loan A/c Rs. 2,00,000, Balance
Sheet Total Rs. 9,58,000)
5. K, L and M were partners in a firm sharing profits in the ratio of 5:3:2. On
31-03-2015 their Balance Sheet was as follows:
Balance Sheet of K, L and M as at 31st March, 2015
Liabilities Amount Assets Amount
Creditors 21,000 Land and Building 62,000
Investment 10,000 Motor Vans 20,000
Fluctuation Fund
Profit and Loss 40,000 Investments 19,000
Account
Capitals 1,10,000 Machinery 12,000
K -----------50,000 Stock 15,000
L------------40,000 Debtors 40,000 37,000
Less Provision 3,000
M-----------20,000 Cash 16,000
1,81,000 1,81,000
On the above date, L retired and K and M agreed to continue the business
On the following terms:
(a) Goodwill of the firm was valued at Rs. 51,000
(b) There was a claim of Rs. 4000 for workmen’s compensation.
(c) Provision for doubtful debts was to be reduced by Rs. 1,000.
(d) L will be Rs. 8200 in cash and balance will be transferred in his loan
account which will be paid in four equal yearly installments together
with interest @10%p.a.
(e) The new profit sharing ratio between K and M will be 3:2 and their
capitals will be in their new profit sharing ratio . The capital
adjustments will be done by opening current accounts. (C.B.S.E.2016)
Prepare relevant accounts and Balance Sheet of new firm.
(Ans: Revaluation Loss Rs. 3000, Capital Balances K-Rs. 52,560,
M-Rs. 35,040, L’s Loan A/c Rs. 61,200, K’s Current A/c Rs.
15,840(Dr. Side), M’s Current A/c Rs. 15,840(Cr. Side), Balance
Sheet Total Rs. 1,89,640)
6. The Balance Sheet of X, Y and Z who were sharing profits in the ratio of
5:3:2 as at March 31,2022:
Liabilities Amount Assets Amount
Creditors 50,000 Cash at Bank 40,000
Employee’s Provident 10,000 Sundry 1,00,000
Fund Debtors
Profit & Loss A/c 85,000 Stock 80,000
Capital A/cs: 1,35,000 Fixed Assets 60,000
X---------40,000
 Y---------62,000
Z---------33,000
2,80,000 2,80,000
X retired on March 31,20222 and Y and Z decided to share profits in
future in the ratio of 2:3 respectively.
The other terms on retirement were as follows:
(i) Goodwill of the firm is to be valued at Rs. 80,000
(ii) Fixed Assets are to be reduced to Rs. 57,500
(iii) Make a provision for doubtful debts @5% on debtors.
(iv) A liability for claim, included in creditors for Rs. 10,000 is settled
and paid at Rs.8000.
The amount to be paid to X by Y and Z in such a way that their Capitals
are proportionate to their profit sharing ratio and leave a balance of Rs.
15,000 in the Bank Account.
Prepare relevant accounts.
(Ans: Revaluation Loss Rs. 5500, Partner’s Capital Balances Y-Rs.
79,000 Z-Rs.1,18,500, Capital brought up by Y Rs.1150, Z Rs.
1,01,600,Amount paid to X Rs. 1,19,750)
7. A, B and C are partners sharing profits in the ratio of 5:3:7. A retires from
the firm. Y and Z decided to share profits in the ratio of 2:3. The adjusted
capital accounts of Y and Z at the time of X’s retirement showed the
balances of Rs. 33,000 and Rs. 70,500 respectively. The total amount to be
paid to X Rs. 90,500 which is paid in cash immediately by the firm , the
cash being contributed by Y and Z in such a way that their capital become
proportionate to their new profit sharing ratio .
You are required to pass journal entries to record:
(a) Payment made to retiring partner
(b) Cash brought in by remaining partners
8. Banwari, Girdhari and Murari are partners in a firm sharing profit and losses
in the ratio of 4:5:6. On 31st March 2014, Girdhari retired. On that date the
capitals of Banwari, Girdhari and Murari before necessary adjustments stood
at Rs. 2,00,000, 1,00,000 and Rs. 50,000 respectively. On Girdhari’s
retirement goodwill of the firm was valued at Rs. 1,14,000. Revaluation of
assets and reassessment of liabilities resulted in a profit of Rs. 6,000.
General Reserve stood at Rs. 30,000.The amount payable to Girdhari was
transferred to his loan account. Banwari and Murari agreed to pay Girdhari
two yearly instalments of Rs. 75,000 each including interest @10% p.a. on
the outstanding balance during the first two years and the balance including
interest in the third year. The firm closes its books on 31st March every year.
Prepare Girdhari’s loan Account till it is finally paid showing the working notes
clearly.(C.B.S.E. 2018)
9. R, S and T were partners in a firm sharing profits and losses in the ratio of
7:8:9. On 31st March 2022, their Balance Sheet was as follows:
Balance Sheet of R, S and T as at 31st March 2022
Liabilities Amount Assets Amount(Rs.)
(Rs.)
Creditors 1,41,000 Bank 27,000
General Reserve 24,000 Stock 91,000
Capitals: 15,43,000 Debtors 2,10,000 2,00,000
R-3,00,000 Less: Provision for
S- 4,00,000 Doubtful Debts
T-8,43,000 (10,0000
Machinery 3,00,000
Land and Building 10,00,000
Profit and Loss Account 90,000
17,08,000 17,08,000
st
On 31 March , 2022, S retired from the firm on the following terms:
(i) Goodwill of the firm was valued at Rs. 4,80,000
(ii) S’s share of goodwill will be credited to his capital account without
opening Goodwill Account.
(iii) Debtors of Rs. 10,000 will be written off and a provision of 10% for bad
and doubtful debts will be created on debtors.
(iv) Machinery will be depreciated by 10% and land and building will be
appreciated by 5%.
(v) The balance in S’s account will be transferred to his loan account.
Pass necessary journal entries. (C.B.S.E. 2022)
(Ans: Amount transferred to loan A/c Rs. 5,38,000)
10.On 31st March,2019 the Balance Sheet of A, B and C sharing profits and losses
in the ratio of 2:3:2, stood as follows:
Liabilities Rs Assets Rs
Capital Accounts: Goodwill 4,20,000
A 6,00,000 Land and Buildings 6,00,000
B 9,00,000 Machinery 10,20,000
C 6,00,000 Closing stock 3,00,000
Workmen Compensation Reserve 6,30,000 Sundry Debtors 3,60,000
Sundry Creditors 3,00,000 Cash and Bank 3,30,000
30,30,000 Balances 30,30,000
On the same date B desired to retire from the firm and the remaining partners
decided to carry on. It was agreed to revalue the Assets and Liabilities on that
date on the following basis:
a. Land and Buildings be appreciated by 30%.
b. Machinery be depreciated by 20%.
c. Closing stock to be valued at Rs.2,70,000.
d. Provision for doubtful debts be made at 5%.
e. Old credit balances of Sundry Creditors Rs.30,000 be written back.
f. Goodwill of the entire firm be valued at Rs.3,78,000 and B’s share of the
goodwill be adjusted in the accounts of A and C who share the future
profits and losses in the ratio of 3:2. No Goodwill account being raised.
g. The total capital of the firm is to be the same as before retirement.
Individual capitals be in their profit sharing ratio.
h. Amount due to B is to be settled on the following basis: 50% on retirement
and the balance 50% within one year.
Prepare relevant accounts.(C.B.S.E.2024)
CASE BASED QUESTIONS:
1. X , Y and Z are partners of chemicals manufacturing firm sharing profits
and losses in the ratio of 50%, 30% and 20%. X has expressed his desire
to retire as he was not keeping good health. Y and Z did not want him to
retire and offered that he should spend less time on business. In this
arrangement , he will have a regular income. They received a notice from
NGT about waste disposal; which was to be handled by X but due to his
ill health he could not procure latest water treatment equipment in time.
In spite of numerous warnings by the authorities, they kept dumping
chemicals into a nearby river. They required funds to repay X and to buy
the pollution control equipment so the remaining partners decided to
raise bank loan of Rs. 10,00,000.Out of this Rs. 6,00,000 were used to
pay X immediately and order was placed to buy equipment to treat waste
water. On the date of X’s retirement the balance sheet of firm was as
follow:
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capitals: 6,00,000 Plant and Machinery 5,50,000
X-3,00,000
Y-2,00,000
Z-1,00,000
Profit and Loss A/c 1,50,000 Stock 1,20,000
Sundry Creditors 1,10,000 Debtors 1,30,000
Cash 40,000
Advertisement 20,000
Expenditure
8,60,000 8,60,000
(i) Gaining ratio of Y and Z is
(a) 3:2 (b) 1:1 (c) 2:3 (d) 1:3
(ii) New profit sharing ratio of the partners will be
(a) 2:3 (b) 6:9 (c) 11:4 (d) 9:6
(iii) What will be the journal entry for raising bank loan?
(iv) Is the offer given to continue without attending the office valid or
not? Give reason.
 DEATH OF A PARTNER
Accounting treatment in the case of death is same as in the case of
retirement except the following:
 The deceased partner’s claim is transferred to his executor's account.
 Normally the retirement takes place at the end of the Accounting
Period but the death may occur at any time. Hence the claim of
deceased partner shall also include his share of profit or loss,
interest on capital and drawings if any from the date of the last
balance sheet to the date of his death.
 Calculation of Profits/ Loss for the intervening Period
It is calculated by any one of the two methods given below:
 On Time Basis: In this method proportionally profit for the time
period is calculated either on the basis of last year's profit or on the
basis of average profits of last few years and then deceased partner's
share is calculated based on his share of profits.
 On Turnover or Sales Basis: In this method the profits up to the
date of death for the current year are calculated on the basis of
current year's sales up to the date of death by using the formula.
Profits up to the date of death =Profits of Last year X Sales till date of death
Type equation here. Sales of Last Year
Then from this profit the deceased partner's share of profit is calculated.
Journal entry for Deceased Partner’s share of profit:
Profit and Loss Suspense A/c---------Dr.
To Deceased Partner’s Capital A/c
For Loss:
Deceased Partner’s Capital A/c --------Dr.
To Profit and Loss Suspense A/c
Note: If profit sharing ratio of remaining or continuing partner changes:
In Case of Profit:
Gaining Partner’s Capital A/c---------Dr.
To Deceased Partner’s Capital A/c
In Case of Loss:
Deceased Partner’s Capital A/c---------Dr.
To Gaining Partner’s Capital A/c
Example: R, M and J were partners in a firm. J died on 28 th February, 2019. His
share of profit from the closure of last accounting year till the date of death was to
be calculated on the basis of the average of three completed years of profits before
death. Profits for the years ended 31st March, 2016, 2017 and 2018 were Rs. 80,000/-
, Rs. 90,000/- and Rs. 1,00,000/- respectively.
Calculate J’s Share of profit till his death and pass journal entry.
Solution : Average Profits = 80,000 + 90,000 + 1,00,000
3
= 2,70,000 = 90,000/-
3
Estimated profit till the date of death (1st April to 28th Feb.) = 90,000x11/12
= 82,500/-
J’s share of estimated profit = 82,500 x 1/3 = Rs. 27,500/-
JOURNAL ENTRY
Profit and Loss Suspense A/c--------Dr. 27,500
To J’s Capital Account 27,500
(Being J’s share of profit credited to his account)
Example: A, B and C are sharing profits in the ratio of 2:2:1. B died on 30 th June,
2019. Accounts are closed on 31st March every year. Sales for the year ended 31st
March, 2019 was Rs. 3,00,000/- Sales of Rs. 1,00,000/- amounted between the
period from 1st April, 2019 to 30th June, 2019 was Rs. 30,000/- Calculate Deceased
partner’s share in profit of the firm.
Solution:- %age of profit to sales for the year ended 31st March 2019 =
30,000X 100
3,00,000 = 10%
Profit up to the date of B’s death = 10% of Rs. 1,00,000/-
= 10/100 x 1,00,000
= Rs. 10,000
B’s Share of profit = 10,000 x 2/5 = 4,000
Dr. Format of Deceased Partner’s Capital A/c Cr.
Particulars Amount Particulars Amount
To Partner’s Current A/c By Balance B/d
(Dr. Balance)
 To Loan to Partner A/c ByPartner’s Current A/c(Cr.
Balance)
To Revaluation A/c By Loan by Partner A/c
To Share in Accumulated By Profit and Loss Suspense
Profits A/c(Share in Profit)
To Drawings A/c By Revaluation A/c
(Share in Gain)
To Interest on Drawings A/c By Share in Accumulated
Profits/ Reserve
To Profit and Loss Suspense By Profit and Loss Suspense
A/c A/c(Interest on Capital)
(Share of Loss)
To Goodwill A/c By Salary/ Commission A/c
(Share in existing Goodwill)
To Deceased Partner’s By Gaining Partner’s Capital
Executor A/c A/c
(For Deceased Partner’s
share of Goodwill)
Payment for deceased partner :-
 When payment is made in full
Deceased Partner’s Capital A/c Dr.
To Bank A/c
When Payment to Executor is made in more than one installment; In this
case , the executors of deceased partners are entitled to interest @6%p.a. unless
agreed otherwise. The executors can opt to take share of profit instead of interest,
in case there is no agreement.
i)When interest is allowed
Interest A/c----------------Dr.
To Deceased Partner's Executors’ A/c
(ii) When installment is paid
Deceased Partner’s Executors’ A/c Dr.
To Bank A/c
Example:Following is the balance sheet of Ram, Mohan and Sohan as at 31st
March, 2020.
Liabilities Amount Assets Amount
Sundry Creditors 1,00,000 Tools 30,000
Workmen 75,000 Furniture 1,80,000
Compensation Reserve Stock 1,60,000
 Capital A/cs: Debtors 1,20,000
Ram 2,00,000/- Cash at Bank 80,000
Mohan 1,00,000/- Cash in hand 5,000
Sohan 1,00,000/-
5,75,000 5,75,000
Ram, Mohan and Sohan share profits and losses in the ratio of 2:2:1. Sohan died on
30th June, 2020. As per partnership deed, the executors of Sohan were to get.
Amount standing to the credit of his capital account.
Interest on capital which amounted to Rs. 1,500/-.
His share of goodwill Rs. 50,000/-
His share of profits from the closing of last financial year till the date of death
which was estimated at Rs. 7,500/-.Sohan’s executors were paid Rs. 14,000/- on 1st
July, 2020 and balance in two equal yearly installments from 30 th June, 2021 with
interest @ 6% p.a.
Draw up Sohan’s Capital Account to be rendered to his executors.
Dr. Sohan’s Capital A/c Cr.
Date Particulars Amount Date Particulars Amount
30.6.20 To Sohan’s 1,74,000 1.4.20 By Balance b/d. 1,00,000
Executors A/c.
Jun 30 By Interest on 1,500
Capital Account
Jun. 30 By Ram’s Capital 25,000
Account
Jun. 30 By Mohan’s 25,000
Capital Account
Jun. 30 By Profit & Loss 7,500
Suspense A/c.
Jun. 30 By Workmen 15,000
Compensation
Reserve A/c.
1,74,000 1,74,000
Working Note:
Share of workmen compensation Reserve = 75,000x 1/5 = 15,000/-
Sohan’s share of goodwill = 50,000/-
Ram – 50,000 x ½ = 25,000/- Gaining Share is
Mohan = 50,000 x ½ = 25,000/- 2:2, 1:1
 Dr. Sohan’s Executors’ A/c Cr.
Date Particulars Amount Date Particulars Amount
30.6.20 To Bank A/c 14,000 30.6.20 By Sohan’s 1,74,000
Capital A/c
31.3.21 To Balance C/d 1,67,200 31.3.21 By Interest A/c 7,200
1,81,200 1.81,200
30.6.21 To Bank A/c 89,600 1.4.21 By Balance B/d 1,67,200
31.3.22 To Balance C/d 83,600 30.6.21 By Interest A/c 2,400
31.3.22 By Interest A/c 3,600
1,73,200 1,73,200
30.6.22 To Bank A/c 84,800 1.4.22 By Balance B/d 83,600
30.6.22 By Interest A/c 1,200
84,800 84,800
1. As per Section 37 of Indian Partnership Act, 1932, the executors would be
entitled at their choice to the interest calculated from the death till the date of
payment of the final amount due to the deceased partner at the rate of: (a)
6%p.a. ( b) 7%p.a. (c) 8%p.a. (d) 10%p.a.
2. X,Y and Z were partners in a firm sharing profits and losses in the ratio of
5:2:3. On 30th June 2022, X died. The partnership deed provided that on the
death of a partner, her share of profit till the date of death of death was to be
calculated on the basis of average profit of the last three years less Rs.
10,000. Profits for the last three years were 2020 Rs. 1,20,000, 2021 Rs.
(50,000) 2022 Rs. 1,70,000. X’s share of profit till the date of her death was:
(a) Rs. 35,000 (b) Rs. 9,583 (c) Rs. 28,750 (d) Rs. 8,750
3. Given below are two statements- Statement (A) and Statement (B):
Statement (A): On the death of a partner, the representative of deceased
partner must be given his share of profit/ loss arising out of change due to
the revaluation of assets and Reassessment of Liabilities.
Statement(B): Gaining ratio is calculated at the time of death of partner .
Choose the correct alternatives from the following:
(a) Both Statement A and B are correct.
(b) Both Statement A and B are incorrect.
(c) Statement A is correct and Statement B is incorrect.
(d) Statement A is incorrect and Statement B is correct
4. There are two statements marked as Assertion (A) and Reason ( R) , mark
your answer as per the codes given below.
(a) Both A and R are correct, and R is the correct explanation of A.
 (b) Both A and R are correct, but R is not the correct explanation of A.
(c) A is correct, but R is incorrect
(d) A is incorrect but R is correct.
Assertion(A): A partnership will come to an end immediately whenever
a partner dies, although the firm may continue with the remaining
partners.
Reason®: The payment of deceased partner ‘s share will be received by
his heirs/ executors.
5. Name the account which is opened to credit the share of profit of the
deceased partner. (C.B.S.E.2013)
6. Differentiate between Profit and Loss Appropriation A/c and Profit and Loss
Suspense A/c. (C.B.S.E. 2015)
7. State any two deductions that may have to be made from the amount payable
to legal representative of a deceased partner.(C.B.SE. 2004)
8. Riyansh, Garv and Kavleen were partners in a firm sharing profits and loss
in the ratio of 8:7:5. On 2nd November 2018, Kavleen died . Kavleen’s share
of profits till the date of death of her death was calculated at Rs. 9,375. Pass
the necessary journal entry.
(C.B.S.E.2018)
9. In the absence of any agreement , the rate of interest payable on the amount
remaining unpaid to the executor of deceased partner is: (a) 8%p.a. (b)
6%p.a. (c) 9% p.a. (d) 12%p.a. (C.B.S.E. 2020)
10.Shiv, Mohan and Hari were partners sharing profits in the ratio of 2:1:1.
Mohan died on 31st March, 2020. Profit earned by the firm for the year
ended 31st March, 2020 was Rs. 1,44,000. Amount of profit to be credited to
Mohan’s Capital A/c will be : (a) Rs. 72,000 (b) Rs. 3,600 (c) Rs. 36,000 (d)
Rs. 18,000 (C.B.S.E. 2021)
11.----------- is opened to credit the share of profit of the deceased partner, till
the time of his death to his Capital A/c. (a) Profit and Loss Appropriation
A/c (b) Profit and Loss Suspense A/c (c) Profit and Loss A/c (d) Profit and
Loss Adjustment A/c
(C.B.S.E. 2021)
12.Ashok, Babu and Chetan were partners in a firm sharing profits in the ratio
of 4:3:3. The firm closes its books on 31st March every year. On 31st
December 2021, Ashok died. The partnership deed provided that on the
death of partner, his executors will be entitled for the following:
 (i) Balance in his capital account on 1st April 2021 was Rs. 90,000
(ii) Interest on capital @12%p.a.
(iii) His share in the profits of the firm in the year of his death will be
calculated on the basis of rate of net profit on sales of previous year,
which was 25%. The sales of the firm till 31st December 2021 were
Rs. 4,00,000.
(iv) His share in the goodwill of the firm . The goodwill of the firm on
Ashok’s death was valued at Rs. 4,50,000.
The partnership deed also provided for the following deductions from
the amount payable to the executor of the deceased partner:
(a) His drawings in the year of his death. Ashok’s drawings till 31-12-
2021 were Rs. 15,000.
(C.B.S.E.2022)
(b) Interest on drawings @12%p.a. which was calculated as Rs. 1,500.
The accountant of the firm prepared Ashok’s Capital A/c to be
presented to the executors of Ashok but in a hurry he has left it
incomplete. Ashok’s Capital A/c as prepared by the firm’s
accountant is given below:
Dr. Ashok’s Capital A/c
Cr.
Date Particular Amoun Date Particular Amoun
s t s t
31.12.2 ------------- 15,000 1.4.21 ------------- 90,000
1 ----- ----
31.12.2 ------------- -------- 31.12.2 ------------- 8,100
1 ----- 1 ----
31.12.2 ------------- -------- 31.12.2 ------------- 40,000
1 ----- 1 ----
31.12.2 ------------- 90,000
1 ----
31.12.2 ------------- 90,000
1 ----
3,18,10 3,18,10
0 0
You are required to complete Ashok’s Capital A/c.
13.Dinesh, Alvin and Pramod are partners in a firm sharing profits and losses in
the ratio of 5:3:2. Their Balance Sheet as at 31st March,2021 was as follows:
 Balance Sheet of Dinesh, Alvin and Pramod as at 31st March, 2021
Liabilities Amount Assets Amount
Sundry 50,000 Debtors 15,000
Creditors
General Reserve 40,000 Fixed Assets 67,000
Bills Payable 10,000 Investments 40,000
Dinesh’s 30,000 Stock 25,500
Capital
Alvin’s Capital 40,000 Cash in Hand 36,000
Pramod’s 30,000 Deferred Revenue 14,000
Capital Expenditure
Dinesh’s Loan A/c 2,500
2,00,000 2.00.000
Dinesh died on July 1, 2021. The executors of Dinesh are entitled to :
(i) His share of goodwill. The total goodwill of the firm is valued at Rs.
50,000
(ii) His share of profit up to his date of death on the basis of actual sales
till date of death. Sales for the year ended March 31, 2021 was Rs.
12,00,000 and profit for the same was Rs. 2,00,000. Sales shows a
growth trend of 20% and percentage of profit earning remains the
same.
(iii) Investments were sold at par. Half of the amount due to Dinesh was
paid to his executors and for the balance, they accepted a Bills
Payable.
Prepare Dinesh’s Capital A/c to be rendered to his executors.
(Ans: Amount due to Dinesh’s executors Rs. 95,500 C.B.S.E.
SAMPLE PAPER 2018-19)
14.A, B and C were partners in a firm sharing profits and losses in the ratio of
3:2:1. C died on 30th June, 2019. After all the necessary adjustments, his
capital account showed a credit balance of Rs. 70,600. C’s executor was paid
Rs. 10,600 on 1st July 2019 and balance was paid in three equal yearly
installments starting from 30th June, 2020 with interest @10% p.a. on the
unpaid amount. The firm closes its books on 31st March every year.
Prepare C’s Executor’s Account till the amount is finally paid.(C.B.S.E.
2019)
15.Azhar, Sumit and Rohit were partners in a firm sharing profits and losses in
the ratio of 3:1:1. Their Balance Sheet as at 31st March 2023 was as follows:
 Balance Sheet of Azhar, Sumit and Rohit as at 31st March 2023
Liabilities Amount Assets Amount
Creditors 90,000 Bank 20,000
General Reserve 60,000 Stock 40,000
Capitals Debtors 1,50,000
Azhar Fixed Assets 60,000
60,000
Sumit
40,000
Robit
20,000
2,70,000 2,70,000
Robit died on 3oth June 2023. According to the Partnership Deed, Robit’s
legal representatives were entitled to :
(i) Balance in his Capital A/c
(ii) His share of General Reserve
(iii) Interest on Capital @10%p.a.
(iv) His share of goodwill. Goodwill of the firm was valued on the basis of
of thrice the average of past four years’ profits.
(v) His share in profits upto the date of death on the basis of the profit for
the last year.
Profits for the previous years were:
2019-20 Rs.(3,000)
2020-21 Rs. 28,000
2021-22 Rs. 16,000
2022-23 Rs. 15,000
Prepare Robit’s Capital Account to be rendered to his legal
representatives.(C.B.S.E.2024)
 Dissolution of Partnership Firm
Key Notes
1) Dissolution of Partnership and Dissolution of Partnership firm are two
different Concepts.
2) Dissolution of Partnership means economic relation between or among
partners is changed whereas Dissolution of Partnership Firm means that
business comes to an end.
3) Under Dissolution of Partnership firm, all assets are to be realized and all
liabilities are to be paid.
4) Under Dissolution of Partnership firm, Realization A/c, Partner’s Capital A/c
and Cash A/c are prepared.
5) At the time of Dissolution of Partnership firm, all assets (except Cash balance,
bank balance, Profit and Loss (Dr.), Loan to partner, Current Account (Dr.))
are to be transferred to the debit side of Realization Account.
6) The most important point is GOODWILL is to be transferred to the debit
side of the Realization Account.
7) All liabilities except (Partner’s Capital A/c, Current A/c (Cr.), Profit and Loss
A/c (Cr.), Loan from Partner, Specific reserves) are to be transferred to the
credit of Realization Account.
8) Loan taken from partner will be paid directly through Cash/ Bank Account.
9) While transferring the reserve , students should keep this in mind that:
 General Reserve will not be transferred to Realization Account (it is a free
reserve), it will be distributed among partners in their profit-sharing ratio.
 Investment Fluctuation Reserve will only be transferred if Investments are
given on Asset side of Balance Sheet. If Investments are not given on Asset
side of Balance Sheet, whole reserve will be distributed among partners in
their profit-sharing ratio
 Workmen Compensation Reserve will only be transferred to the extent of the
amount of claim; rest will be distributed among partners in their profit-sharing
ratio.
 If claim on workmen compensation is more than available reserve then
amount of reserve will be transferred to Realisation Account and whole claim
will be paid through Realisation Account.
  If there is no information regarding the payment of any third liability
(transferred to Realisation Account), it will be paid at the book value (the
value at which, it is transferred).
 If there is no information regarding realisation of any tangible asset, it will be
realised at its book value.
 If there is no information regarding realisation of any intangible asset, it will
be realised as nil.
 All items which will increase the cash/bank will be shown on debit side of
Cash/Bank Account and items which will decrease the cash/bank balance will
be shown on credit side of Cash/Bank Account. Cash account will be tallied
automatically.

MULTIPLE CHOICE QUESTIONS

Q1) At the time of dissolution of firm, assets are ……………. to ………………..
account.
a) debited, Realisation
b) credited, Realisation
c) debited, Revaluation
d) credited, Revaluation

Q2) At the time of dissolution of firm, outside liabilities are …… to ……. Account.
a) debited, Realisation
b) credited, Realisation
c) debited, Revaluation
d) credited, Revaluation

Q3) At the time of dissolution of firm, Loan given by partners to the firm is paid out
of the amount realized from the asset:
a) After making payment of loans given by third party
b) After making the payment of balance of Capital Accounts of partners
c) After making the payment of above (a) and (b).
d) Before making payment of loans given by third party.
Q4) On dissolution of the firm, amount received from sale of unrecorded asset or
recorded asset is credited to:
a) Partner’s Capital Account
b) Profit & Loss Account
c) Realisation Account
d) Cash Account

Q5) On dissolution of the firm, payment made of unrecorded liability or recorded

liability is debited to:
a) Partner’s Capital Account
b) Profit & Loss Account
c) Realisation Account
d) Cash Account

Q6) Realisation Account is a :

a) Nominal Account
b) Real account
c) Personal Account
d) Real as well as Personal Account

Q7) At the time of firm’s dissolution, General Reserve shown in Balance Sheet is
credited to:
a) Realisation Account
b) Creditor’s Account
c) Partner’s Capital Account
d) Profit & Loss Account

Q8) On firm’s dissolution, goodwill account is transferred to:

a) Capital Accounts of partners
b) Credit of Cash Account
c) Debit of Realisation Account
d) Credit of Realisation Account

Q9) At the time of dissolution of partnership firm, fictitious assets are transferred to:
a) Capital Account of partners
b) Realisation Account
c) Cash account
d) Partner’s Loan Account
Q10) At the time of dissolution of partnership firm, the balance of profit & loss
account shown on the Assets side of Balance Sheet of the firm is transferred to:
a) Realisation Account
b) Cash Account
c) Capital Accounts of partners
d) Loan Account of partners

Q11) On dissolution of partnership firm, final balance of cash accounts are

transferred to:
a) Realisation Account
b) Cash Account
c) Profit & Loss Account
d) Loan Accounts of partners

Q12) On dissolution of a firm, a partner paid ₹1,000 for firm’s realization expenses.
Which account will be debited?
a) Realisation Account
b) Cash Account
c) Profit & Loss Account
d) Partner’s Capital Account

Q13) On dissolution of firm, while taking responsibility of payment of realization

expenses by a partner, the account credited will be:
a) Realisation Account
b) Capital Accounts of the partners
c) Cash Account
d) Loan Account

Q14) Profit or loss on realization will be transferred to:

a) Partner’s Capital Accounts
b) Loan Account
c) Realisation Account
d) Cash Account

Q15) Cash balance shown in the Balance Sheet is shown on dissolution of the firm
in :
a) Cash Account
b) Realisation Account
 c) Partner’ Loan Account
d) Partner’s Capital Account

Q16) If expenses are borne by partner ‘X’ and paid by partner ‘Y’, which account
will be debited?
a) Realisation Account
b) X’s Capital Account
c) Y’s Capital Account
d) X’s Loan Account

Q17) On dissolution of a firm, its Balance sheet revealed total creditors of ₹1,00,000;
Total Capital ₹96,000; Cash Balance ₹6,000. Its assets were realized at 10% less.
Loss/Gain on realization will be:
a) Gain of ₹19,000
b) Loss of ₹19,000
c) Gain of ₹81,000
d) Loss of ₹81,000

Q18) How much amount will be paid to Arunav, if his opening capital is ₹4,00,000
and his share of realization profit amounts to ₹20,000 and he has taken over assets
valuing ₹50,000 from the firm?
a) ₹4,70,000
b) 3,30,000
c) 4,00,000
d) 3,70,000

Q19) How much amount will be paid to creditors for ₹1,00,000 if ₹20,000 of the
creditors are not to be paid and the remaining creditors agreed to accept 10% less
amount?
a) ₹1,00,000
b) ₹80,000
c) ₹72,000
d) ₹8,000

Q20) Prabhu, a partner, is to bear all expenses of realization for which he is to be

paid ₹20,000. Prabhu had to pay realization expenses of ₹25,000. How much amount
will be debited to Realisation Account?
a) ₹20,000
b) ₹25,000
 c) ₹5,000
d) ₹45,000

Q21) At the time of dissolution of partnership firm, Creditors are ₹70,000; Partner’s
Capital is ₹1,20,000; Cash Balance is ₹10,000.Other assets realized
₹1,50,000.Profit/Loss in the realization account will be:
a) ₹60,000 (loss)
b) ₹80,000 (profit)
c) ₹40,000 (loss)
d) ₹30,000 (loss)

Q22) On dissolution of a firm, a partner took-over the investments of ₹30,000 at

₹38,000. By how much amount the Realisation Account will be credited?
a) ₹30,000
b) ₹38,000
c) ₹68,000
d) ₹8,000

Q23) On dissolution of the partnership firm:

A) Credit balance of Bank Account I) Partner’s Capital Account
is transferred to
B) Wife’s loan is transferred II) Bank Account
to(Husband is a partner in a firm)
C) General Reserve appearing on III) Realisation Account
liabilities side of Balance Sheet
a) A-I, B-II, C-III
b) A-II, B-III, C-I
c) A-III, B-II, C-I
d) A-II, B-I, C-III

Q24) On dissolution of partnership firm:

A) Creditor of ₹80,000 took over the I) Cash A/c Dr. 10,000
stock of ₹70,000 in full To Realisation A/c
settlement of his debt 10,000
B) Creditor of ₹80,000 took over the II) No Entry
stock of ₹70,000
C) Creditor of ₹80,000 took over the III) Realisation A/c Dr. 10,000
stock of ₹90,000 and paid the To Cash A/c
balance to the firm. 10,000
 a) A-II, B-III, C-I
b) A-I, B-II, C-III
c) A-III, B-II, C-I
d) A-II, B-I, C-III

Q25) At the time of dissolution of partnership firm, if a partner’s loan to the firm is
discharged by giving an unrecorded asset, which of the following entries will be
passed?
a) Partner’s Loan A/c Dr.
To Unrecorded Asset A/c
b) Unrecorded Asset A/c Dr.
To Revaluation A/c
c) Partner’s Loan A/c Dr.
To Realisation A/c
d) Unrecorded asset A/c Dr.
To Realisation
ASSERTION REASON BASED QUESTIONS

Which of the following is correct?

Codes:

e. Both (A) and (R) are correct and (R) is the correct reason of (A).
f. Both (A) and (R) are correct but (R) is not the correct reason of (A).
g. Only (A) is correct.
h. Only (R) is correct.

Q1) Assertion: Under Dissolution of partnership firm, all assets are realised and
liabilities are paid.

Reason: Dissolution of partnership firm means business comes to an end.

Q2) Assertion: Under Dissolution of partnership firm, while transferring assets to

Realisation
Account, Goodwill is also transferred.
Reason: Accounting Standard 62 states that purchased goodwill can be shown
in books of accounts.
Q3) Assertion: Under dissolution of partnership firm, loan taken by firm (other than
loan taken from partners) will be transferred to Realisation Account.
 Reason: Fictitious assets are not transferred to Realisation Account.

Q4) Assertion: On dissolution of partnership firm, bank overdraft is first transferred

to Realisation Account and then paid off.

Reason: Bank Overdraft is a third party liability and hence transferred to

Realisation Account.
Q5) Assertion: Partner’s private property can be used in paying off the firm’s debts.

Reason: In case of partnership firm, partner’s liability is unlimited.

Q6) Assertion: At the time of dissolution of partnership firm, Loan taken from
Partner’s brother is treated just like loan from partner.

Reason: Loan from partner is not transferred to Realisation Account.

Q7) Assertion: On dissolution of partnership firm, advertisement suspense
appearing on the assets side of balance sheet will not be transferred to Realisation
Account.
Reason: Advertisement Suspense Account is a fictitious asset and hence will be
transferred to the credit side of partner’s capital account.
Q8) Assertion: On dissolution , there will be no entry if creditors for ₹1,00,000 are
given
stock worth ₹1,20,000 in full settlement of their debt.
Reason: On dissolution, entry will be passed if Partner’s Loan to the firm
amounting to
₹1,00,000 is settled by giving him stock worth ₹1,20,000.
Q9) Assertion: Amount realised from sale of assets will be credited to Bank
Account.
Reason: According to modern approach for assets, debit the increase and credit
the
decrease.
Q10) Assertion: If asset is taken over by partner, his capital account is debited.
Reason: Capital has credit balance and it decreases when debited.
 SHORT ANSWER TYPE QUESTIONS

Q1) Chestha, Divya,Angela and Priya were partners in a firm. On 31-3-2021 the
firm was dissolved. After transferring assets (other than cash) and third party
liabilities to the ‘Realisation Account’ you are provided with the following
information:
i. Divya’s Loan of ₹1,00,000 to the firm was settled by paying ₹84,000
ii. Priya’s Loan of ₹80,000 was settled by giving an unrecorded asset of ₹90,000
iii. Loan to Chestha of ₹1,20,000 was settled by payment to Chestha’s brother
loan of the same amount.
iv. Angela’s Loan of ₹1,60,000 to the firm and she took over Machinery of
₹1,20,000 as part payment.
Pass necessary journal entries for the above transactions in the books of firm
at the time of dissolution.

Q2) B,C and D are partners in a firm sharing profits in the ratio of 2:1:2 respectively.
On 31-3-2021 the firm was dissolved. After transferring assets (other than cash) and
third party liabilities to the ‘Realisation Account’ you are provided with the
following information:
i. There was a debit balance of ₹24,000 in the firm’s profit and loss account.
ii. A piece of machinery not recorded in the books was sold at ₹4,000
iii. Creditors of ₹50,000 were paid ₹45,000 in full settlement of accounts.
Pass necessary journal entries for the above transactions in the books of firm
at the time of dissolution.
Q3) A and B were partners in a firm sharing profits and losses equally. The firm was
dissolved on 15-03-2021, which resulted in a loss of ₹30,000. On that date the capital
account of A showed a credit balance of ₹20,000 and that of B a credit balance of
₹30,000. The cash account had a balance of ₹20,000. You are required to pass
necessary journal entries for the:
i. Transfer of loss to the capital accounts of partners
ii. Making final payment to the partners

Q4) The firm of Raghav, Krishana and Sandhya was dissolved on 31-3-2021. Pass
necessary journal entries for the following after various assets (other than cash and
bank) and the third party liabilities had been transferred to realization account.
 i. Krishana agreed to pay off his wife’s loan of ₹60,000
ii. Total Creditors of the firm were ₹4,00,000. Creditors worth ₹1,00,000 were
given a piece of furniture costing ₹80,000 in full and final settlement.
Remaining creditors allowed a discount of 10%.
iii. A machine that was not recorded in the books of accounts was taken over by
Krishana at ₹30,000 whereas its expected value was ₹50,000.
iv. The firm had credit balance of ₹30,000 in the profit and loss account on the
date of dissolution.

Q5) Alpha, Beta and Gama were partners in a firm sharing profits in the ratio of
4:3:3. The firm was dissolved on 31-3-2021. Pass the necessary journal entries for
the following transactions after various assets (other than cash and bank) and thirt
party liabilities had been transferred to Realisation Account:
i. The firm had stock of ₹80,000. Alpha took over 50% of the stock at a discount
of 20% while the remaining stock was sold at a profit of 30% on cost.
ii. A liability under a suit for damages included in creditors were settled at
₹32,000 as against only ₹13,000 provided in the books. Total creditors of the
firm were ₹50,000.
iii. Beta’s sister’s loan of ₹20,000 was paid off along with the interest of ₹2,000
iv. Gama’s loan of ₹12,000 was settled at ₹12,500.

Q6) Lalit and Pandit were partners in a firm sharing profits in the ratio of 3:7. On 1-
4-2020 their firm was dissolved. After transferring assets (other than cash and bank)
and outsider’s liabilities to realization account, you are given the following
information:
i. A creditor of ₹3,60,000 accepted machinery valued at ₹5,00,000 and paid to
the firm ₹1,40,000.
ii. A second creditor for ₹50,000 accepted stock at ₹45,000 in full settlement of
his claim.
iii. A third creditor amounting to ₹90,000 accepted ₹45,000 in cash and
investments worth ₹43,000 in full settlement of his claim.
iv. Gain on dissolution was ₹15,000.
Pass necessary journal entries for the above transactions in the books of firm
assuming that all payments were made by cheque.
Q7) Pass necessary journal entries on the dissolution of partnership firm in the
following cases:
 i. Dissolution expenses amounted to ₹20,000
ii. Dissolution expenses amounted to ₹20,000 to be paid by Ram, a partner.
iii. Prabhu, a partner was appointed to look after the process of dissolution for
which he was allowed a remuneration of ₹14,000. Prabhu agreed to bear the
dissolution expenses. Actual dissolution expenses ₹8,000 were paid by
Prabhu.
iv. Nivaan, a partner was appointed to look after the process of dissolution for
which he was allowed a remuneration of ₹18,000. Nivaan agreed to bear the
dissolution expenses. Actual dissolution expenses ₹8,000 were paid by the
firm.
v. Bhavya, a partner , was appointed to look after the process of dissolution for
which he was allowed a remuneration of ₹36,000. Bhavya agreed to take over
the stock worth ₹36,000 as his remuneration. The stock had already been
transferred to Realisation Account.

LONG ANSWER TYPE QUESTIONS

Q1) Sharukh and Salman were partners in a firm sharing profits and losses in the
ratio of 3:2. On 31st March, 2022 the firm was dissolved. After the transfer of assets
(other than cash in hand and cash at bank) and third party liabilities to the Realisation
Account, the following information was provided:
i. Furniture of ₹1,40,000 was sold for ₹1,36,000 by auction and auctioneer’s
commission amounted to ₹4,000.
ii. Sharukh’s loan amounting to ₹70,000 was paid.
iii. Out of stock of ₹1,60,000, Salman took over 50% of the stock at a discount of
20% while the remaining stock was sold off at a profit of 30% on cost.
iv. A bills receivable of ₹6,000 under discount was dishonoured as per the
acceptor had become insolvent and hence the bill had to be met by the firm.
v. There were 1,000 shares purchased by the the firm at ₹20 per share which was
completely written-off from the books of the firm but now,these shares are
valued at ₹5 per share which are taken by Sharukh and Salman.
vi. Realisation expenses amounted to ₹4,000 which were to be paid by Sharukh.
Pass necessary journal entries for the above transactions on the dissolution of
the firm.
Q2) Pass journal entries for the following transactions at the time of dissolution of
the firm:
i. Assets of the firm realized at ₹1,25,000
ii. Creditors paid ₹28,000 in full settlement of their amount of ₹30,000
iii. X, a partner takes over an unrecorded asset (Printer) at ₹500
iv. Loan of ₹10,000 advanced by a partner Y to the firm was refunded
v. Undistributed balance of Profit and Loss Account ₹30,000. The firm has three
partners X,Y and Z.
vi. Partner Y who undertakes to carry out dissolution proceedings is allowed
₹2,000 remuneration for the same.

Q3) A, B and C are partners. They decided to dissolve their firm. Pass necessary
journal entries for the following after various assets (other than cash and bank) and
the third party liabilities have been transferred to Realisation Account:
i. There were total debtors of ₹86,000. A provision of bad and doubtful debts
also stood in the books at ₹6,000. ₹16,000 debtors proved bad and rest paid
the amount due.
ii. Partner ‘A’ agreed to pay off her husband’s loan of ₹10,000 at a discount of
5%.
iii. A machine which was not recorded in the books was taken over by Partner
‘B’ at ₹13,000 whereas its expected value was ₹15,000.
iv. A contingent liability (not provided for) of ₹42,000 was also discharged.
v. The firm had Contingency reserve of ₹30,000 on the date of dissolution.
vi. Partner ‘C’ paid realization expenses of ₹15,000 out of her pocket and she was
to get a fixed remuneration of ₹18,000 (including expenses) for completing
the dissolution process.

Q4) Hari and Govind were partners in a firm sharing profits in the ratio of 3:2. On
31st March, 2021 their Balance Sheet was as follows:
Liabilities ₹ Assets ₹
Creditors 36,000 Cash 47,000
Outstanding expenses 10,000 Bank 93,000
Govind’s Wife’s Loan 50,000 Debtors 76,000
Capitals: Stock 2,00,000
Hari 2,80,000
Govind 4,40,000
1,60,000
 Furniture 20,000
Leasehold Premises 1,00,000
5,36,000 5,36,000

On the above date the firm was dissolved. The various assets were realized and
liabilities were settled as under:
i. Govind agreed to pay his wife’s loan.
ii. Leasehold premises realized ₹1,50,000 and debtors ₹12,000 less
iii. Half of the creditors agreed to accept furniture of the firm as full settlement
of their claim and remaining creditors agreed to accept 10% less.
iv. 50% stock was taken over by Hari on payment by cheque of ₹90,000 and
remaining stock was sold for ₹94,000.
v. Realisation expenses of ₹10,000 were paid by Govind on behalf of the firm.
Prepare Realisation Account.

Q5) Following is the Balance Sheet of X and Y, who share profits and losses in the
ratio of 4:1, as at 31st March, 2023:
Liabilities ₹ Assets ₹
Sundry Creditors 8,000 Bank 20,000
Bank Overdraft 6,000 Debtors
17,000 15,000
Less: Provision
2,000
X’s Brother Loan 8,000 Stock 15,000
Y’s Loan 3,000 Investments 25,000
Investment Fluctuation 5,000 Furniture 6,000
Fund
Capital: Buildings 19,000
X 50,000
Y 40,000 90,000
Goodwill 10,000
Profit and Loss A/c 10,000
1,20,000 1,20,000
The firm dissolved on the above date and the following arrangements were decided
upon:
i. X agreed to pay off his brother’s loan.
ii. Debtors of ₹5,000 proved bad.
 iii. Other assets realized- Investments 20% less and Goodwill at 60%.
iv. One of the creditors of ₹5,000 was paid only ₹3,000.
v. Buildings were auctioned for ₹30,000 and the auctioneer’s commission
amounted to ₹1,000.
vi. Y took over part of stock at ₹4,000 (being 20% less than the book
value).Balance stock realized 50%.
vii. Realisation expenses amounted to ₹2,000.

Prepare Realisation Account, Partner’s Capital Account, Y’s Loan A/c and Bank A/c
Also pass necessary journal entries.

Q6) Pass journal entries for the following transactions:

i. Realisation expenses were ₹20,000.
ii. Realisation expenses of ₹15,000 were paid by Mohan, a partner.
iii. Realisation expenses of ₹15,000 were paid by the firm on behalf of Vallabh,
a partner.
iv. Gopinath, a partner was paid remuneration (including expenses) of ₹12,000
to carry out dissolution of the firm. Actual expenses were ₹8,000. Expenses
incurred were paid by Gopinath.
v. Dissolution expenses were ₹20,000. Out of the said expenses, ₹12,000 were
to be borne by the firm and balance by Raghav, a partner. ₹20,000 are paid by
the firm.
vi. Dissolution expenses were ₹20,000. Out of the said expenses, ₹12,000 were
to be borne by the firm and balance by Raghav, a partner. ₹20,000 are paid by
the Raghav.
vii. Realisation expenses of ₹5,000 were to be borne and paid by Kartik, a partner.
viii. Madhav, a partner is to carry out dissolution of the firm at an agreed
remuneration of ₹7,000.
ix. Kunjbihari, a partner, is paid remuneration of ₹30,000 for dissolution of the
firm. Realisation expenses of ₹10,000 are paid by the firm.
x. Realisation expenses of ₹15,000 were to be borne by Madanmohan, a partner.
However, it was paid by another partner ,Radharaman . It was to be recorded
in the books.

Q7) Anil ,Vishu and Manish are in partnership firm sharing in 6:3:1. They decided
to dissolve the partnership firm. At the date of dissolution their creditors amounted
to ₹32,000 and in course of dissolution an unrecorded liability of ₹2,500 not brought
into the accounts matured and had to be met. Their capitals stood at ₹20,000; ₹10,000
and ₹10,000 respectively. Vishu had lent to the firm, in addition to capital ₹20,000.
The assets realized ₹50,000.
Prepare realisation account, partner’s capital account and cash account.

ANSWERS/ HINTS TO THE ANSWERS

MCQs
1(b), 2 (a), 3 (a), 4 (c), 5 (c), 6 (a), 7 (c), 8 (c), 9 (a), 10 (c), 11 (b), 12 (a), 13 (b), 14
(a), 15 (a), 16 (b), 17 (b), 18 (d), 19 (c), 20 (a), 21 (d), 22 (b), 23 (b), 24 (a), 25 (c)
ASSERTION-REASON BASED QUESTIONS
1 (a), 2 (c), 3 (b), 4 (a), 5 (a), 6 (d), 7 (c), 8 (b), 9 (d), 10 (a)

SHORT-ANSWER TYPE QUESTIONS

Q1)
i. Dr. Divya’s Loan by ₹1,00,000, Cr. Bank and Realisation A/c by ₹84,000
and ₹16,000 respectively.
ii. Dr. Priya’s Loan A/c and Cr. Realisation A/c by ₹80,000
iii. Dr. Realisation A/c and Cr. Loan to Chestha by ₹1,20,000
iv. Dr. Angela’s Loan A/c by ₹1,60,000 and Cr. Realisation A/c and Bank A/c
by ₹1,20,000 and ₹40,000 respectively.

Q2)
i. Dr. B’s Capital A/c, C’s Capital A/c and D’s Capital Account by ₹9,600,
₹4,800 and ₹9,600 respectively and Cr. Profit and Loss A/c by ₹24,000
ii. Dr. Cash A/c and Cr. Realisation A/c by ₹4,000
iii. Dr. Realisation A/c and Cr. Cash A/c by ₹45,000

Q3)
i. Dr. A’s Capital A/c and B’s Capital A/c by 15,000 each and Cr. Realisation
A/c by ₹30,000
ii. Dr. A’s Capital A/c and B’s Capital A/c by ₹5,000 and ₹15,000 respectively
and Cr. Bank A/c by ₹20,000

Q4)
i. Dr. Realisation A/c and Cr. Krishana’s Capital A/c by ₹60,000
ii. Dr. Realisation A/c and Cr. Bank A/c by ₹2,70,000
iii. Dr. Krishana’s Capital A/c and Cr. Realisation A/c by ₹30,000
iv. Dr. Profit and Loss A/c by ₹30,000 and Cr. Raghav’s Capital, Krishana’s
Capital and Sandhya’s Capital A/c by ₹10,000 each.

Q5)
i. Dr. Alpha’s Capital A/c and Cr. Realisation A/c by ₹32,000
Dr. Bank A/c and Cr. Realisation A/c by ₹52,000
ii. Dr. Realisation A/c and Cr. Bank A/c by ₹69,000
iii. Dr. Realisation A/c and Cr. Bank A/c by ₹22,000
iv. Dr. Gama’s Loan A/c , Realisation A/c by ₹12,000 and ₹5,000 respectively
and Cr. Bank A/c by ₹12,500.

Q6)
i. Dr. Bank A/c and Cr. Realisation A/c by ₹1,40,000
ii. No Entry
iii. Dr. Realisation A/c and Cr. Bank A/c by ₹45,000
iv. Dr. Realisation A/c by ₹15,000 and Cr. Lalit’s Capital A/c and Pandit’s
Capital A/c by ₹4,500 and ₹10,500 respectively.

Q7)
i. Dr. Realisation A/c and Cr. Bank A/c by ₹20,000
ii. Dr. Realisation A/c and Cr. Ram’s Capital A/c by ₹20,000
iii. Dr. Realisation A/c and Cr. Prabhu’s Capital A/c by ₹14,000
iv. Dr. Realisation A/c and Cr. Nivaan’s Capital A/c by ₹18,000
Dr. Nivaan’s Capital A/c and Cr. Bank A/c by ₹8,000
v. No Entry

LONG-ANSWER TYPE QUESTIONS

Q1

i. Dr. Bank A/c and Cr. Realisation A/c by ₹1,32,000

ii. Dr. Sharukh’s Loan A/c and Cr. Bank by ₹70,000
iii. Dr. Salman’s Capital and Bank A/c by ₹64,000 and ₹1,04,000 respectively
and Cr. Realisation A/c by ₹1,68,000
iv. Dr. Realisation A/c and Cr. Bank A/c by ₹6,000
 v. Dr. Sharukh’s Capital A/c and Salman’s Capital A/c by ₹3,000 and ₹2,000
respectively and Cr. Realisation A/c by ₹5,000
vi. Dr. Realisation A/c and Cr. Sharukh’s Capital A/c by ₹4,000.

Q2

i. Dr. Bank A/c and Cr. Realisation A/c by ₹1,25,000

ii. Dr. Realisation A/c and Cr. Bank A/c by ₹28,000
iii. Dr. X’s Capital A/c and Cr. Realisation A/c by ₹500
iv. Dr. Y’s Loan A/c and Cr. Bank A/c by ₹10,000
v. Dr. Profit and Loss A/c by ₹30,000 and Cr. X’s Capital, Y’s Capital and Z’s
Capital A/c by ₹10,000 each.
vi. Dr. Realisation A/c and Cr. Y’s Capital A/c by ₹2,000

Q3

i. Dr. Bank A/c and Cr. Realisation A/c by ₹70,000

ii. Dr. Realisation A/c and Cr. A’s Capital A/c by ₹9,500
iii. Dr. B’s Capital A/c and Cr. Realisation A/c by ₹13,000
iv. Dr. Realisation A/c and Cr. Bank A/c by ₹42,000
v. Dr. Contingency Reserve A/c by ₹42,000 and Cr. A’s Capital A/c, B’s Capital
A/c, C’s Capital A/c by ₹14,000 each
vi. Dr. Realisation A/c and Cr. C’s Capital A/c by ₹18,000.

Q4) Gain on Realisation ₹11,800

Q5) Loss on Realisation ₹3,000; Final Payment X: ₹47,600, Y: ₹33,400; Total of

Bank Account ; ₹98,000
Q6)
i. Dr. Realisation A/c and Cr. Bank by ₹20,000
ii. Dr. Realisation A/c and Cr. Mohan’s Capital A/c by ₹15,000
iii. Dr. Vallabh’s Capital A/c and Cr. Bank A/c by ₹15,000
iv. Dr. Realisation A/c and Cr. Gopinath A/c by ₹12,000
v. Dr. Realisation A/c and Raghav’s Capital A/c by ₹12,000 and ₹8,000
respectively and Cr. Bank A/c by ₹20,000
vi. Dr. Realisation A/c and Cr. Raghav’s Capital A/c by ₹12,000
vii. No Entry
viii. Dr. Realisation A/c and Cr. Madhav’s Capital A/c by ₹7,000
ix. Dr. Realisation A/c by ₹30,000 and Cr. Kunjbihari A/c by ₹30,000
Dr. Realisation A/c and Cr. Bank A/c by ₹10,000
x. Dr. Madanmohan A/c and Cr. Radharaman A/c by ₹15,000.