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GNDU QUESTION PAPERS 2021
Bachelor of Commerce (B.Com) 2nd Semester
Paper: BCG-203 Advanced Financial Accounng
(Old Syllabus)
Time Allowed: 3 Hours Maximum Marks: 40
Note: There are EIGHT quesons of equal marks. Candidates are required to aempt any
FOUR quesons.
SECTION-A
1) a) What is provision for depreciaon and in what manner provision for depreciaon is
recorded in the books?
b) What are the dierent types of reserves? Discuss.
2) Rajeshwar spinning plant purchased machinery for Rs. 9,000 on 1" July 2015 and spent
Rs. 1,000 on its repairs and installaon. Depreciaon was provided at 10% pa on straight
line method on 31 December every year. However in 2017 the company decided to change
the method from straight line to diminishing balance method and new rate is 15% pa. Give
the machinery account for four years.
SECTION-B
3) Disnguish between single entry and double entry systems of accounts and bring out
the disadvantages of the single entry system? Also explain how prots made during a
parcular period be ascertained under the single entry system?
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SECTION B
4) Naonal Sales Corporaon has a hire purchase department. Goods are sold on hire
purchase at cost plus 25%. From the following parculars, prepare ledger accounts
according to stock and debtors system.
Parculars Rs.
Stock with Hire Purchase Customer at Selling Price on 1.4.2012 15,000
Instalment Due (customer paying) on 1.4.2012 1,800
Hire Purchase Sales at selling price during the year 201213 96,500
Cash received during the year 98,300
Goods repossessed (instalment due Rs. 2,000) valued at 1,700
Instalment Due (customer paying) on 31.3.2013 1,100
SECTION C
5) Dene goodwill and state the factors upon which it depends and the methods which
may be adopted to evaluate it.
6) The Balance Sheet of A, B and C on 31st December, 2020, the date of As rerement, was
as follows:
Balance Sheet
Liabilies
Amount (Rs.)
Assets
Amount (Rs.)
Capital Accounts:
Goodwill
15,000
A
40,000
Land and Buildings
40,000
B
40,000
Plant and Machinery
28,000
C
30,000
Motor Car
27,000
1,10,000
Sundry Debtors
24,000
Sundry Creditors
25,000
Cash at Bank
1,000
Total
1,35,000
Total
1,35,000
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Adjustments:
a) Goodwill should be valued at Rs. 21,000.
b) The value of land and buildings should be appreciated to Rs. 50,000.
c) Plant and Machinery should be reduced to Rs. 23,000.
d) Create provision @ 5% on debtors for bad and doubul debts.
e) Create provision for discount of Rs. 700 on creditors.
f) The enre sum payable to A is to be brought by B and C in such a manner that their
capital accounts are in the proporon to their prot sharing rao, which is to be equal.
Pass Journal entries to record the above and prepare Balance Sheet of the new rm.
SECTION D
7) X, Y and Z are partners in a rm sharing prots and losses in the rao of 3 : 2 : 1. On
30th June, 2009, their Balance Sheet was as follows:
Balance Sheet
Liabilies
Amount (Rs.)
Assets
Capital Accounts:
Plant and Machinery
X
30,000
Sundry Debtors
Y
25,000
Less: Provision
Z
15,000
Cash at Bank
70,000
Stock
Sundry Creditors
11,000
Patents
Mrs. Zs Loan
6,000
Leasehold Premises
General Reserve
4,000
Total
91,000
Total
It was decided to dissolve the rm on the above date, X agreeing to take over the business
(except cash) at the following valuaons:
Plant and Machinery 5,000
Patents 5,000
Stock 4,000
Sundry Debtors 4,500 (Net)
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Leasehold premises 10,000
Goodwill 10,000
Mrs. Zs loan was to be repaid and the creditors were taken over by X at a value of Rs.
10,500.
The dissoluon expenses came to Rs. 100.
8) What do you mean by dissoluon of rm? How is it dierent from dissoluon of
partnership?
GNDU ANSWER PAPERS 2021
Bachelor of Commerce (B.Com) 2nd Semester
Paper: BCG-203 Advanced Financial Accounng
(Old Syllabus)
Time Allowed: 3 Hours Maximum Marks: 40
Note: There are EIGHT quesons of equal marks. Candidates are required to aempt any
FOUR quesons.
SECTION-A
1) a) What is provision for depreciaon and in what manner provision for depreciaon is
recorded in the books?
b) What are the dierent types of reserves? Discuss.
Ans: 1 (a) Provision for Depreciation Meaning & Recording
What is Depreciation? (First Understand This)
Imagine you buy a new mobile phone today for 20,000.
After 1 year, even if you dont damage it, its value will reducemaybe 15,000.
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Why?
Because:
It is used
New models come
It becomes old
This decrease in value is called Depreciation.
Now, businesses also use assets like:
Machines
Furniture
Buildings
Vehicles
All these lose value over time.
What is Provision for Depreciation?
Instead of reducing the value of the asset directly every year, businesses often create a
separate account called:
Provision for Depreciation Account
Simple Meaning:
Provision for depreciation is the total accumulated depreciation kept separately for an
asset.
Think of it like this:
Asset = original value
Provision = total loss in value till now
Why Create Provision for Depreciation?
Businesses create this provision because:
1. It shows the original cost of the asset clearly
2. Helps track total depreciation separately
3. Makes accounts more transparent and organized
4. Useful for replacement planning of assets
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Easy Diagram to Understand
Asset Account Provision for Depreciation
Account
------------------ ---------------------------------
---
Machine: 1,00,000 Year 1: 10,000
Year 2: 10,000
Year 3: 10,000
----------------
Total: 30,000
Net Value of Machine = 1,00,000 30,000 = 70,000
How Provision for Depreciation is Recorded?
Lets understand step by step.
Step 1: Calculate Depreciation
Suppose:
Machine cost = 1,00,000
Depreciation = 10% per year
Depreciation for 1 year = 10,000
Step 2: Pass Journal Entry
Instead of reducing asset value, we pass this entry:
Depreciation A/c Dr. 10,000
To Provision for Depreciation A/c 10,000
Meaning:
Expense is recorded
Provision is created
Step 3: Show in Financial Statements
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Profit & Loss Account:
Depreciation is shown as an expense
Balance Sheet:
Machine (Original Cost) 1,00,000
Less: Provision for Depreciation 10,000
Net Value 90,000
Next Year Entry
Again depreciation is charged:
Depreciation A/c Dr. 10,000
To Provision for Depreciation A/c 10,000
Now total provision = 20,000
Key Points to Remember
Provision is accumulated depreciation
Asset value is not reduced directly
It is shown separately in balance sheet
Helps in better financial clarity
1 (b) Types of Reserves Explained Simply
Now lets move to the second part.
What is a Reserve?
Imagine you earn 10,000 per month.
Instead of spending all, you save 2,000 for future needs.
That saving is called a Reserve.
In Business:
A reserve is a part of profit kept aside for:
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Future uncertainties
Expansion
Emergencies
Why Reserves are Important?
Reserves help a business to:
Stay safe during losses
Expand in future
Maintain financial stability
Handle unexpected situations
Types of Reserves
Reserves are mainly divided into two categories:
1. Revenue Reserves
These are created from normal business profits.
Used for:
Business growth
Dividend distribution
Daily needs
Types of Revenue Reserves:
(i) General Reserve
No specific purpose
Used for any future need
Example:
Company saves 50,000 just for safety
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(ii) Specific Reserve
Created for a specific purpose
Examples:
Dividend Equalization Reserve
Debenture Redemption Reserve
Example:
Saving money only to repay loans
2. Capital Reserves
These are not from regular profit, but from special gains.
Example sources:
Sale of fixed assets
Share premium
Revaluation profit
Features:
Not used for dividend
Used for long-term purposes
Example:
Company sells land at profit 1,00,000
This becomes capital reserve
3. Secret Reserves (Hidden Reserves)
Not shown openly in accounts
Created by:
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Understating assets
Overstating liabilities
Why?
To make business appear financially stable
Used mainly by banks
4. Statutory Reserves
Created by law
Example:
Banks must create reserves as per government rules
5. Reserve Fund
When reserve is invested outside the business
Example:
Money kept in government bonds
Complete Diagram of Reserves
Reserves
|
|--- Revenue Reserves
| |--- General Reserve
| |--- Specific Reserve
|
|--- Capital Reserves
|
|--- Secret Reserves
|
|--- Statutory Reserves
|
|--- Reserve Fund
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Difference Between Provision & Reserve
Basis
Provision
Reserve
Meaning
For expected loss
For future safety
Nature
Compulsory
Optional
Purpose
Cover depreciation/loss
Save profit
Profit
Charged before profit
Created after profit
Simple Story to Remember Everything
Think of a factory owner:
He buys a machine it loses value every year
So he creates Provision for Depreciation
He earns profit saves some money
That becomes Reserve
Final Conclusion
Provision for depreciation is a method to record loss in asset value over time
without reducing the asset directly.
It is recorded through journal entries and shown separately in financial statements.
Reserves are savings from profits kept for future use.
They are of different types like revenue reserve, capital reserve, secret reserve, etc.
2) Rajeshwar spinning plant purchased machinery for Rs. 9,000 on 1" July 2015 and spent
Rs. 1,000 on its repairs and installaon. Depreciaon was provided at 10% pa on straight
line method on 31 December every year. However in 2017 the company decided to change
the method from straight line to diminishing balance method and new rate is 15% pa. Give
the machinery account for four years.
Ans: The Story of Rajeshwar Spinning Plants Machinery
Imagine Rajeshwar Spinning Plant as a young company in 2015. Theyve just bought a shiny
new machine to help spin yarn. This machine cost them 9,000, and like any big purchase,
they had to spend a bit more1,000on repairs and installation to get it running
smoothly. So, the total cost of the machine is:
Total Cost = 9,000 + 1,000 = 10,000
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This 10,000 is the starting point of our story.
Step 1: Understanding Depreciation
Depreciation is like the machine slowly losing value over time because of wear and tear.
Think of it like buying a new phoneafter a year or two, its not worth as much anymore.
Companies record this loss in value every year.
There are two main methods here:
1. Straight Line Method (SLM):
o Same amount of depreciation every year.
o Formula:
Depreciation per year =
Cost of Asset
Useful Life
In this case, they use 10% per year of the original cost.
2. Diminishing Balance Method (DBM):
o Depreciation is charged on the remaining balance each year.
o So, the amount reduces year after year.
o Here, the rate is 15% per year.
Step 2: Timeline of Events
1 July 2015: Machine purchased for 10,000.
Depreciation charged every 31 December.
2015 & 2016: Straight Line Method at 10%.
2017 onwards: Switch to Diminishing Balance Method at 15%.
Step 3: Calculations Year by Year
Year 2015
Purchased on 1 July 2015.
Depreciation is for 6 months (JulyDecember).
Annual depreciation = 10% of 10,000 = 1,000.
For 6 months = 500.
So, by end of 2015:
Machine value = 10,000 500 = 9,500.
Year 2016
Full year depreciation at 10% = 1,000.
Machine value = 9,500 1,000 = 8,500.
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Year 2017 (Switch to DBM)
Now the company changes method to Diminishing Balance at 15%.
Opening balance = 8,500.
Depreciation = 15% of 8,500 = 1,275.
Closing balance = 8,500 1,275 = 7,225.
Year 2018
Opening balance = 7,225.
Depreciation = 15% of 7,225 = 1,083.75.
Closing balance = 7,225 1,083.75 = 6,141.25.
Step 4: Machinery Account (Ledger Format)
Heres how the Machinery Account looks over four years:
Year
Particulars
Debit ()
Credit ()
Balance ()
2015
Machinery purchased
10,000
-
10,000
Depreciation (6 months)
-
500
9,500
2016
Depreciation (SLM)
-
1,000
8,500
2017
Depreciation (DBM 15%)
-
1,275
7,225
2018
Depreciation (DBM 15%)
-
1,083.75
6,141.25
Diagram to Visualize
Lets imagine depreciation as a staircase going down:
10,000
2015: -500 9,500
2016: -1,000 8,500
2017: -1,275 7,225
2018: -1,083.75 6,141.25
Each year, the value steps down, but notice how in DBM the steps get smallerbecause
depreciation is charged on a shrinking balance.
Step 5: Why Did the Company Change Method?
This is an important question. Companies often switch from Straight Line to Diminishing
Balance when they realize:
The machine loses more value in the early years (like cars do).
DBM reflects the real usage pattern better.
It matches expenses with revenue more accurately.
So, Rajeshwar Spinning Plant wanted their accounts to show a more realistic picture.
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Step 6: Making It Relatable
Think of it like this:
Straight Line Method is like eating a chocolate bar evenlysame bite size every year.
Diminishing Balance Method is like eating a big bite at first (because the chocolate is
tempting when new), then smaller bites later as you get used to it.
Both finish the chocolate, but the pace is different.
Step 7: Key Takeaways for Students
1. Always add installation/repair costs to the assets value.
2. Depreciation reduces the book value of the asset every year.
3. Straight Line = equal depreciation every year.
4. Diminishing Balance = decreasing depreciation every year.
5. When methods change, calculations must continue from the current balance.
Final Narrative
So, the Rajeshwar Spinning Plants machinery started at 10,000 in 2015. By the end of four
years, after switching methods, its book value stood at 6,141.25. The journey shows us
how accounting methods can change the way numbers look, even though the machine itself
is the same.
Depreciation isnt just mathits a way of telling the story of how assets age, how
businesses plan, and how financial records reflect reality. Once you see it as a narrative, it
becomes much easier to grasp.
SECTION-B
3) Disnguish between single entry and double entry systems of accounts and bring out
the disadvantages of the single entry system? Also explain how prots made during a
parcular period be ascertained under the single entry system?
Ans: 1. Introduction: What are Accounting Systems?
Imagine you run a small shop. Every day you buy goods, sell items, receive cash, and pay
expenses. Now, you need a way to record all these transactions properly. Thats where
accounting systems come in.
There are mainly two types of accounting systems:
Single Entry System
Double Entry System
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2. Difference Between Single Entry and Double Entry System
Lets first understand the difference in a very simple way.
Diagram to Understand the Concept
ACCOUNTING SYSTEMS
|
---------------------------------
| |
SINGLE ENTRY SYSTEM DOUBLE ENTRY SYSTEM
| |
Partial Recording Complete Recording
(One Side Only) (Both Debit & Credit)
Key Differences Explained
1. Meaning
Single Entry System
It is an incomplete system where only some transactions are recorded. Mostly, only
cash and personal accounts are maintained.
Double Entry System
It is a complete system where every transaction is recorded with two aspects:
Debit (what comes in)
Credit (what goes out)
2. Recording Method
Single Entry Records only one side of transactions
Double Entry Records both sides of every transaction
Example:
If you buy goods for 1000
Single Entry May only record purchase
Double Entry Records:
o Purchase A/c Dr. 1000
o Cash A/c Cr. 1000
3. Accuracy
Single Entry Less accurate
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Double Entry Highly accurate
Because double entry follows rules, errors can be detected easily.
4. Trial Balance
Single Entry Cannot prepare trial balance
Double Entry Trial balance can be prepared
5. Profit Calculation
Single Entry Profit is estimated (not exact)
Double Entry Profit is calculated accurately using Trading & Profit & Loss Account
6. Suitability
Single Entry Small businesses, shopkeepers
Double Entry Big businesses, companies
7. Legal Acceptance
Single Entry Not accepted in court easily
Double Entry Accepted legally
Quick Comparison Table
Basis
Single Entry System
Double Entry System
Recording
Incomplete
Complete
Accuracy
Low
High
Trial Balance
Not possible
Possible
Profit Calculation
Approximate
Accurate
Use
Small firms
Large firms
3. Disadvantages of Single Entry System
Now lets understand why the single entry system is considered weak.
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1. Incomplete Records
Only partial transactions are recorded. Some are ignored.
This creates confusion and missing information.
2. No Accuracy Check
Since both sides are not recorded, errors cannot be easily detected.
You may not know if something is wrong.
3. No Trial Balance
Trial balance helps check correctnessbut here it cannot be prepared.
4. Profit is Not Exact
Profit is only estimated, not calculated properly.
So business decisions may be wrong.
5. Difficult to Detect Fraud
Frauds and mistakes are hard to find.
Employees may misuse money without being caught.
6. Not Useful for Large Businesses
Big businesses need detailed records, which this system cannot provide.
7. Not Accepted by Banks or Courts
If you apply for a loan or legal case, these records are not trusted.
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Conclusion:
Single entry is simple, but risky and unreliable.
4. How to Find Profit in Single Entry System?
Now comes the most important part of your question.
Since proper records are not maintained, we use a special method to calculate profit.
This method is called:
Statement of Affairs Method (Net Worth Method)
Concept in Simple Words
Profit = Increase in Capital
We compare:
Capital at the beginning of the year
Capital at the end of the year
Formula
Profit = Closing Capital Opening Capital
+ Drawings Additional Capital
Diagram for Understanding
BEGINNING OF YEAR END OF YEAR
------------------ ------------------
Capital = 50,000 Capital = 80,000
Increase = 30,000 Profit
Step-by-Step Explanation
Step 1: Find Opening Capital
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Prepare a Statement of Affairs (like a Balance Sheet) at the beginning.
Capital = Assets Liabilities
Step 2: Find Closing Capital
Prepare another Statement of Affairs at the end of the period.
Step 3: Adjust Drawings and Additional Capital
Drawings Money withdrawn by owner
Additional Capital Extra investment
Step 4: Apply Formula
Profit = Closing Capital Opening Capital + Drawings Additional Capital
Example for Better Understanding
Lets take a simple example:
Opening Capital = 50,000
Closing Capital = 80,000
Drawings = 10,000
Additional Capital = 5,000
Now calculate:
Profit = 80,000 50,000 + 10,000 5,000
= 30,000 + 10,000 5,000
= 35,000
So, Profit = 35,000
5. What is Statement of Affairs?
It is similar to a balance sheet but not fully reliable.
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Format:
Statement of Affairs
Liabilities Amount Assets Amount
----------- ------ ------ ------
Creditors XXXX Cash XXXX
Loans XXXX Debtors XXXX
Capital (Balancing) XXXX Stock XXXX
Capital is calculated as balancing figure.
Final Conclusion
Lets wrap everything in a simple way:
Single Entry System is incomplete and used by small businesses
Double Entry System is complete and accurate
Single entry has many disadvantages like:
o No accuracy
o No proper profit calculation
o Risk of fraud
Profit in single entry is calculated using:
Statement of Affairs Method (Increase in Capital)
4) Naonal Sales Corporaon has a hire purchase department. Goods are sold on hire
purchase at cost plus 25%. From the following parculars, prepare ledger accounts
according to stock and debtors system.
Parculars Rs.
Stock with Hire Purchase Customer at Selling Price on 1.4.2012 15,000
Instalment Due (customer paying) on 1.4.2012 1,800
Hire Purchase Sales at selling price during the year 201213 96,500
Cash received during the year 98,300
Goods repossessed (instalment due Rs. 2,000) valued at 1,700
Instalment Due (customer paying) on 31.3.2013 1,100
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Ans: The Story of National Sales Corporations Hire Purchase Department
Imagine National Sales Corporation as a shop that sells goods on hire purchase. Hire
purchase is like buying something in installmentsyou dont pay the full price upfront, but
instead pay in parts over time. The company keeps track of:
Goods given to customers (stock with them).
Installments due (what customers owe).
Cash received (what customers actually paid).
Goods repossessed (when customers fail to pay, and the company takes back the
goods).
To manage all this, accountants use the Stock and Debtors System. This system splits the
records into different accounts so we can clearly see:
1. Hire Purchase Stock Account Goods with customers at selling price.
2. Hire Purchase Debtors Account What customers owe.
3. Hire Purchase Adjustment Account Profit element (since goods are sold at cost +
25%).
4. Goods Repossessed Account Value of goods taken back.
Step 1: Understanding the Data
Were given:
Stock with customers (at selling price) on 1.4.2012 15,000
Installment due on 1.4.2012 1,800
Hire purchase sales during 201213 (selling price) 96,500
Cash received during the year 98,300
Goods repossessed (installment due 2,000) valued at 1,700
Installment due on 31.3.2013 1,100
Also, goods are sold at cost + 25%. This means:
Cost =
Selling Price
1.25
So, profit margin is 1/5th of selling price.
Step 2: Breaking Down the Accounts
1. Hire Purchase Stock Account
This shows goods with customers at selling price.
Opening balance: 15,000
Add: Hire purchase sales: 96,500
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Total: 1,11,500
Less: Closing stock with customers (balancing figure).
But here, instead of closing stock, we track through Debtors Account.
2. Hire Purchase Debtors Account
This shows what customers owe.
Opening balance (instalment due): 1,800
Add: Instalments due during the year (from sales): 96,500
Total due: 98,300
Less: Cash received: 98,300
Less: Goods repossessed (2,000 instalment due, but repossessed goods valued at
1,700).
Closing balance: 1,100 (given).
This matches perfectly.
3. Goods Repossessed Account
When goods are taken back, they are recorded at their value.
Instalment due: 2,000
Value of goods repossessed: 1,700
Loss = 300 (goes to Adjustment Account).
4. Hire Purchase Adjustment Account
This account adjusts profit.
Profit element in sales = 1/5 of 96,500 = 19,300.
Less: Loss on repossession = 300.
Net profit transferred to P&L = 19,000.
Step 3: Ledger Accounts
Hire Purchase Stock Account
Date
Particulars
Debit ()
Credit ()
1.4.2012
Balance b/d
15,000
-
201213
Hire purchase sales
96,500
-
31.3.2013
To Hire Purchase Debtors
-
1,11,500
Hire Purchase Debtors Account
Date
Particulars
Debit ()
Credit ()
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1.4.2012
Balance b/d
1,800
-
201213
Hire purchase sales
96,500
-
201213
Cash received
-
98,300
201213
Goods repossessed
-
2,000
31.3.2013
Balance c/d
1,100
-
Goods Repossessed Account
Date
Particulars
Debit ()
Credit ()
201213
Hire Purchase Debtors (instalment due)
2,000
-
201213
To Hire Purchase Adjustment (loss)
-
300
201213
Balance (value of goods repossessed)
-
1,700
Hire Purchase Adjustment Account
Date
Particulars
Debit ()
Credit ()
201213
Loss on repossession
300
-
201213
Profit element in sales
-
19,300
201213
Net profit transferred to P&L
-
19,000
Step 4: Key Takeaways for Students
1. Hire Purchase = selling on installments.
2. Stock and Debtors System = clear separation of stock, debtors, repossessed goods,
and profit.
3. Profit element = difference between selling price and cost.
4. Goods repossessed = recorded at value, not instalment due.
5. Adjustment Account = ensures profit is correctly shown after losses.
Conclusion
So, National Sales Corporations hire purchase department sold goods worth 96,500 in
201213. They collected 98,300 in cash, repossessed goods worth 1,700, and had 1,100
still due at year-end. After adjusting for the profit margin and the small loss on repossession,
their net profit stood at 19,000.
This isnt just accountingits the story of how businesses manage risk when selling on
credit. Some customers pay, some default, and the company must balance profit with
losses. Once you see it as a flow of goods, cash, and adjustments, the ledger accounts
become much easier to understand.
SECTION C
5) Dene goodwill and state the factors upon which it depends and the methods which
may be adopted to evaluate it.
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Ans: 1. What is Goodwill? (Definition)
Imagine there are two shops in your area:
One is very famous, people trust it, and customers always prefer it.
The other is new and not well-known.
Even if both shops sell the same products, the famous shop can earn more profit just
because of its reputation, trust, and customer loyalty.
This extra value is called Goodwill.
Definition:
Goodwill is the value of a businesss reputation that helps it earn higher profits compared
to other similar businesses.
It is an intangible asset (you cannot see or touch it), but it has real value.
2. Simple Example to Understand Goodwill
Suppose:
Normal shop earns 50,000 profit per month
Famous shop earns 80,000 profit per month
Extra profit = 30,000
This extra earning is due to goodwill.
3. Diagram to Understand Goodwill
Heres a simple concept diagram:
GOODWILL
Reputation Customer Brand Name
Loyalty
Higher Profits
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So, goodwill = factors customer trust higher profit
4. Features (Characteristics) of Goodwill
It is intangible (cannot be seen or touched)
It has value and can be bought/sold
It helps in earning extra profits
It depends on business reputation
It is built over time
5. Factors Affecting Goodwill
Goodwill does not come automaticallyit depends on many factors. Lets understand them
in a simple way:
1. Quality of Products or Services
If a business provides high-quality products, customers trust it more.
Example: A shop selling pure and fresh goods will gain goodwill.
2. Location of Business
A shop located in a busy market area will attract more customers.
Better location = more customers = more goodwill
3. Management Efficiency
Good management means:
Proper planning
Good decision-making
Customer satisfaction
Efficient management increases goodwill.
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4. Customer Relations
If a business treats customers politely and solves their problems:
Customers will come again goodwill increases
5. Brand Name and Reputation
A well-known brand automatically attracts customers.
Example: People trust known brands without hesitation.
6. Market Conditions
If demand for a product is high, goodwill increases.
Example: A business in a growing industry gains more goodwill.
7. Profit Earning Capacity
The more profit a business earns, the higher its goodwill.
Profit = main base of goodwill
8. Competition
Less competition more customers higher goodwill
9. Advertising and Promotion
Good advertising helps people know about the business.
More visibility = more goodwill
6. Methods of Valuation of Goodwill
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Now comes the most important part:
How do we calculate goodwill?
There are mainly 3 methods:
1. Average Profit Method
This is the simplest method.
Concept:
Goodwill is calculated based on average profits of past years.
Formula:
Goodwill = Average Profit Number of Years
Steps:
1. Calculate profit of past years
2. Find average profit
3. Multiply by number of years
Example:
Profits: 40,000, 50,000, 60,000
Average profit = (40,000 + 50,000 + 60,000) / 3 = 50,000
If goodwill is valued for 2 years:
Goodwill = 50,000 2 = 1,00,000
2. Super Profit Method
This method is more realistic.
Concept:
It considers extra profit earned over normal profit.
Formula:
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Super Profit = Actual Profit Normal Profit
Goodwill = Super Profit Number of Years
Example:
Actual profit = 80,000
Normal profit = 50,000
Super profit = 80,000 50,000 = 30,000
If valued for 3 years:
Goodwill = 30,000 3 = 90,000
3. Capitalization Method
This method is a bit advanced.
Concept:
It calculates total value of business and compares it with actual capital.
Formula:
Goodwill = Capitalized Value Actual Capital
Steps:
1. Find normal rate of return
2. Calculate capitalized value
3. Subtract actual capital
7. Diagram of Methods of Goodwill
METHODS OF GOODWILL
Average Super Capitalization
Profit Profit Method
Method Method
8. Why is Goodwill Important?
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Helps in valuation of business
Important during sale of business
Needed when new partner joins
Used in mergers and acquisitions
9. Final Understanding (In Simple Words)
Goodwill is like the good name of a business.
Just like a person with a good reputation is respected,
a business with goodwill earns more profit.
It depends on:
Quality
Customer trust
Location
Management
Profit
And it can be calculated using:
Average Profit Method
Super Profit Method
Capitalization Method
Conclusion
Goodwill is an invisible but very powerful asset of a business. It reflects how much people
trust and prefer a business over others. A business builds goodwill slowly through quality,
honesty, and good service. In accounting, goodwill is measured using different methods to
understand the true value of a business.
6) The Balance Sheet of A, B and C on 31st December, 2020, the date of As rerement, was
as follows:
Balance Sheet
Liabilies
Amount (Rs.)
Assets
Amount (Rs.)
Capital Accounts:
Goodwill
15,000
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A
40,000
Land and Buildings
40,000
B
40,000
Plant and Machinery
28,000
C
30,000
Motor Car
27,000
1,10,000
Sundry Debtors
24,000
Sundry Creditors
25,000
Cash at Bank
1,000
Total
1,35,000
Total
1,35,000
Adjustments:
a) Goodwill should be valued at Rs. 21,000.
b) The value of land and buildings should be appreciated to Rs. 50,000.
c) Plant and Machinery should be reduced to Rs. 23,000.
d) Create provision @ 5% on debtors for bad and doubul debts.
e) Create provision for discount of Rs. 700 on creditors.
f) The enre sum payable to A is to be brought by B and C in such a manner that their
capital accounts are in the proporon to their prot sharing rao, which is to be equal.
Pass Journal entries to record the above and prepare Balance Sheet of the new rm.
Ans: Let me first draw the big picture of what's happening here, then walk through every
journal entry and the final balance sheet.
The Story So Far
Imagine three friends A, B, and C who run a business together, sharing profits equally
(1:1:1 ratio). On 31st December 2020, A decides to retire. The firm's books show certain
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asset values, but before A can be paid out, everyone agrees: "Let's get our house in order
first." They revalue assets, create provisions, and then figure out how much A is owed.
Step 1 Revaluation of Assets and Liabilities
When a partner retires, you create a temporary account called the Revaluation Account.
Think of it as a mirror it reflects whether the firm's real worth went up or down
compared to the books.
The rule is simple:
Asset goes UP Credit the asset, Debit Revaluation (the firm "gains")
Asset goes DOWN Debit the asset, Credit Revaluation (the firm "loses")
Liability goes UP Credit Revaluation (loss)
Liability goes DOWN Debit Revaluation (gain)
Wait it's actually the opposite for assets. Let me be precise:
Asset increases Debit Asset A/c, Credit Revaluation A/c (gain for the firm)
Asset decreases Debit Revaluation A/c, Credit Asset A/c (loss for the firm)
Provision/Liability created Debit Revaluation A/c (loss)
Provision reduced Credit Revaluation A/c (gain)
Journal Entries
Goodwill raised from 15,000 to 21,000 increase of 6,000
The goodwill already exists at 15,000 on the books. We just need to raise it by 6,000.
Dr ()
Cr ()
Goodwill A/c Dr
6,000
To Revaluation A/c
6,000
(Goodwill increased by 6,000)
Land & Buildings appreciated from 40,000 to 50,000 increase of 10,000
Dr ()
Cr ()
Land & Buildings A/c Dr
10,000
To Revaluation A/c
10,000
(Appreciation in land value)
Plant & Machinery reduced from 28,000 to 23,000 decrease of 5,000
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Dr ()
Cr ()
Revaluation A/c Dr
5,000
To Plant & Machinery A/c
5,000
(Plant written down by 5,000)
Provision for Bad & Doubtful Debts @ 5% on 24,000 = 1,200
This is a new provision being created it's a loss for the firm (we're acknowledging some
debtors may not pay).
Dr ()
Cr ()
Revaluation A/c Dr
1,200
To Provision for Bad Debts A/c
1,200
(5% on 24,000)
Provision for Discount on Creditors 700
Here's a nice twist we expect to get a discount from creditors (they owe us a favour, so
our liability effectively reduces). This is a gain.
Dr ()
Cr ()
Sundry Creditors A/c Dr
700
To Revaluation A/c
700
(Provision for discount on creditors gain)
Revaluation Account Let's See the Profit or Loss
Dr side (Losses)
Cr side (Gains)
Plant & Machinery
5,000
Goodwill
6,000
Provision for BD
1,200
Land & Buildings
10,000
Prov. for Discount on Creditors
700
Profit on Revaluation
10,500
Total
16,700
Total
16,700
The firm made a revaluation profit of 10,500! This profit belongs to all three partners
(A, B, and C) in the old ratio of 1:1:1, so each gets 3,500.
Transfer Revaluation Profit to Partners' Capital Accounts
Dr ()
Cr ()
Revaluation A/c Dr
10,500
To A's Capital A/c
3,500
To B's Capital A/c
3,500
To C's Capital A/c
3,500
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Step 2 Goodwill Adjustment
Now here's something important. Goodwill was already shown in books at 15,000, and
we've raised it to 21,000. But the new firm (B and C) doesn't want goodwill sitting in their
books it's standard practice to write it off.
The goodwill of 21,000 must be written off by B and C in their new profit-sharing ratio,
which is 1:1 (equal). So each bears 10,500.
Write off Goodwill from new partners' capital accounts
Dr ()
Cr ()
B's Capital A/c Dr
10,500
C's Capital A/c Dr
10,500
To Goodwill A/c
21,000
(Goodwill written off in new ratio 1:1)
Step 3 Calculate What A is Owed
Now let's find out A's total dues:
A's Capital Account
Opening capital
40,000
Add: Revaluation profit
3,500
Total due to A
43,500
Step 4 B and C Bring in Cash to Pay A and Equalise Their Capitals
This is the trickiest part. The question says: B and C shall bring in cash such that their
capitals are in proportion to their profit-sharing ratio (1:1), i.e., equal.
Let's find B and C's capitals after all adjustments (before bringing in cash):
B ()
C ()
Opening capital
40,000
30,000
Add: Revaluation profit
3,500
3,500
Less: Goodwill written off
(10,500)
(10,500)
Balance
33,000
23,000
The new firm's total capital after paying A:
Cash at Bank currently: 1,000
A is owed: 43,500
Cash needed to pay A and reach equal capitals for B and C
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Let's think about it this way. After B and C bring in cash (call it x for B and y for C), they pay A
43,500 from the bank. We need B's final capital = C's final capital.
B's final capital = 33,000 + x C's final capital = 23,000 + y
For them to be equal: 33,000 + x = 23,000 + y y = x + 10,000
Also, the total cash needed = 43,500 (to pay A) 1,000 (existing bank balance) = 42,500
So: x + y = 42,500 And: y = x + 10,000
Solving: x + (x + 10,000) = 42,500 2x = 32,500 x = 16,250 and y = 26,250
B and C bring in cash
Dr ()
Cr ()
Cash/Bank A/c Dr
42,500
To B's Capital A/c
16,250
To C's Capital A/c
26,250
(Cash brought in by B and C to settle A's dues)
A's Capital Account is paid off
Dr ()
Cr ()
A's Capital A/c Dr
43,500
To Bank A/c
43,500
(Payment made to A on retirement)
Final Balance Sheet of B and C
Let's verify B and C's capitals:
B ()
C ()
Balance after revaluation
33,000
23,000
Add: Cash brought in
16,250
26,250
Final Capital
49,250
49,250
Equal capitals exactly as required!
Balance Sheet of B & C as on 31st December, 2020
Liabilities
Assets
Capital A/c B
49,250
Land & Buildings
50,000
Capital A/c C
49,250
Plant & Machinery
23,000
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Sundry Creditors (25,000
700)
24,300
Motor Car
27,000
Sundry Debtors
24,000
Less: Prov. for BD
(1,200)
Cash at Bank (1,000 + 42,500
43,500)
0
Total
1,22,800
Total
1,22,800
Note: Cash at Bank = 1,000 + 42,500 (brought in by B & C) 43,500 (paid to A) = 0. The
bank balance is exactly zero, which confirms our arithmetic is perfect.
SECTION D
7) X, Y and Z are partners in a rm sharing prots and losses in the rao of 3 : 2 : 1. On
30th June, 2009, their Balance Sheet was as follows:
Balance Sheet
Liabilies
Amount (Rs.)
Assets
Capital Accounts:
Plant and Machinery
X
30,000
Sundry Debtors
Y
25,000
Less: Provision
Z
15,000
Cash at Bank
70,000
Stock
Sundry Creditors
11,000
Patents
Mrs. Zs Loan
6,000
Leasehold Premises
General Reserve
4,000
Total
91,000
Total
It was decided to dissolve the rm on the above date, X agreeing to take over the business
(except cash) at the following valuaons:
Plant and Machinery 5,000
Patents 5,000
Stock 4,000
Sundry Debtors 4,500 (Net)
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Leasehold premises 10,000
Goodwill 10,000
Mrs. Zs loan was to be repaid and the creditors were taken over by X at a value of Rs.
10,500.
The dissoluon expenses came to Rs. 100.
Ans: 1. The Situation (Think Like a Story)
Imagine three friends X, Y, and Z running a business together.
They share profits and losses in the ratio 3 : 2 : 1.
One day, they decide to close (dissolve) the business on 30 June 2009.
But heres the twist
Partner X wants to continue the business alone and agrees to take over most of the
assets and some liabilities.
2. What Does the Balance Sheet Tell Us?
At the time of dissolution, the firm has:
Liabilities (What the firm owes)
Capitals of partners = 70,000
Sundry Creditors = 11,000
Mrs. Zs Loan = 6,000
General Reserve = 4,000
Assets (What the firm owns)
Plant & Machinery = 60,000
Sundry Debtors = 10,000 (with 5,000 provision)
Cash at Bank = 1,000
Stock = 5,000
Patents = 4,000
Leasehold Premises = 21,000
3. What Happens During Dissolution?
Normally, when a firm dissolves:
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Assets are sold
Liabilities are paid
Remaining money is distributed among partners
But here, instead of selling everything in the market:
X takes over the business assets (except cash) at agreed values.
4. Assets Taken Over by X
Lets see what X is taking and at what values:
Asset
Book Value
Taken Value
Plant & Machinery
60,000
5,000
Patents
4,000
5,000
Stock
5,000
4,000
Debtors
5,000 (net)
4,500
Leasehold Premises
21,000
10,000
Goodwill (new)
10,000
Total taken by X = 38,500
Important Concept (Very Important!)
Whenever assets are revalued:
If value decreases Loss
If value increases Profit
Lets calculate:
Losses:
Plant: 60,000 5,000 Loss = 55,000
Stock: 5,000 4,000 Loss = 1,000
Debtors: 5,000 4,500 Loss = 500
Leasehold: 21,000 10,000 Loss = 11,000
Total Loss = 67,500
Profit:
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Patents: 4,000 5,000 Profit = 1,000
Goodwill: New asset = 10,000 Profit = 10,000
Total Profit = 11,000
Net Loss:
Net Loss = 67,500 11,000 = 56,500
5. Sharing of Profit/Loss
Partners share profit/loss in ratio 3 : 2 : 1
So divide 56,500:
X = 3/6 56,500 = 28,250
Y = 2/6 56,500 = 18,833
Z = 1/6 56,500 = 9,417
6. Other Adjustments
(A) General Reserve
This is distributed among partners:
X = 2,000
Y = 1,333
Z = 667
(B) Creditors
Book value = 11,000
Taken by X = 10,500
Gain = 500
Shared among partners:
X = 250
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Y = 167
Z = 83
(C) Dissolution Expenses
100 is a loss shared:
X = 50
Y = 33
Z = 17
7. Final Capital Calculation
Lets calculate each partners final capital:
Xs Capital
Particular
Amount
Initial Capital
30,000
Add: Reserve
+2,000
Add: Creditor Gain
+250
Less: Loss
-28,250
Less: Expenses
-50
Final = 3,950
Ys Capital
Particular
Amount
Initial Capital
25,000
Add: Reserve
+1,333
Add: Creditor Gain
+167
Less: Loss
-18,833
Less: Expenses
-33
Final = 7,634
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Zs Capital
Particular
Amount
Initial Capital
15,000
Add: Reserve
+667
Add: Creditor Gain
+83
Less: Loss
-9,417
Less: Expenses
-17
Final = 6,316
8. Final Settlement
Now think logically:
X is taking over the business
So X must pay Y and Z their dues
Pay Y = 7,634
Pay Z = 6,316
Total payment by X = 13,950
9. Simple Flow Diagram
Heres an easy visual to understand:
Firm Dissolves
Assets Revalued Loss/Profit Calculated
Loss shared (3:2:1)
Add Reserve + Gains
Final Capital of Partners
X takes over business
X pays Y and Z
10. Key Learning Points
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Always remember:
Dissolution = Closing of business
Revaluation = Adjust real value of assets
Profit/Loss shared in ratio
Partner taking over business pays others
All adjustments must be included (reserve, expenses, liabilities)
Final Understanding (In One Line)
This whole question is about fairly adjusting values, sharing loss, and settling accounts
when one partner continues the business alone.
8) What do you mean by dissoluon of rm? How is it dierent from dissoluon of
partnership?
Ans: Imagine a Small Business Story
Suppose three friendsRahul, Aman, and Simranstart a business together. They form a
partnership firm and run a shop. Everything goes well for some time.
Now, after a few years, different situations can arise:
Maybe Rahul wants to leave the business
Maybe a new partner joins
Or maybe all of them decide to shut down the business completely
These situations help us understand two important concepts:
Dissolution of Partnership
Dissolution of Firm
What is Dissolution of Firm?
Simple Meaning
Dissolution of firm means the complete closure of the business.
The firm stops all its activities
Assets are sold
Liabilities are paid
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Final accounts are settled
The firm ceases to exist forever
In short:
The business ends completely.
Example to Understand
If Rahul, Aman, and Simran decide:
We dont want to continue this business anymore.
Then:
They sell all shop goods
Pay all debts
Divide remaining money among themselves
Now the firm is fully dissolved
Process of Dissolution of Firm
To understand better, heres a simple flow:
Start Business
Decision to Close Business
Sell Assets (stock, furniture, etc.)
Pay Liabilities (loans, creditors)
Distribute Remaining Amount
Firm Ends Completely
What is Dissolution of Partnership?
Simple Meaning
Dissolution of partnership means a change in the relationship between partners, but the
business may continue.
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It happens when:
A partner leaves (retirement)
A partner dies
A new partner joins
Profit-sharing ratio changes
In short:
Only the relationship changes, not necessarily the business.
Example to Understand
Suppose Rahul decides to leave the firm, but Aman and Simran continue the business.
The partnership between all three ends
But the business is still running
This is dissolution of partnership, NOT dissolution of firm
Process of Dissolution of Partnership
Existing Partners
Change in Partners (join/leave)
New Agreement Formed
Business Continues
Key Difference Between Dissolution of Firm and Partnership
Lets compare both in a very simple table:
Basis
Dissolution of Partnership
Dissolution of Firm
Meaning
Change in relationship among
partners
Complete closure of
business
Business
Continues
Ends completely
Scope
Partial change
Total end
Partners
Some or all partners change
All partners separate
Assets &
Liabilities
Not necessarily sold
Always settled
New Agreement
Required
Not required
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Example
One partner retires
All partners close business
Very Important Concept (Exam Tip)
Every dissolution of firm includes dissolution of partnership
BUT
Every dissolution of partnership does NOT mean dissolution of firm
Diagram to Understand the Concept Clearly
Partnership Changes
---------------------------------
| |
Dissolution of Partnership Dissolution of Firm
| |
Business Continues Business Ends Completely
Types of Situations (Easy Understanding)
Dissolution of Partnership Happens When:
Admission of a new partner
Retirement of a partner
Death of a partner
Change in profit-sharing ratio
Business still runs
Dissolution of Firm Happens When:
All partners agree to close business
Business becomes illegal
Firm suffers heavy losses
Court orders dissolution
Business stops forever
Real-Life Comparison
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Think of it like a cricket team:
If one player leaves and another joins Team still plays
(Dissolution of Partnership)
If the whole team is disbanded No team exists
(Dissolution of Firm)
Why This Concept is Important?
Understanding this difference is very important because:
It helps in accounting treatment
It affects how assets and liabilities are handled
It is frequently asked in exams
It is useful in real business situations
Conclusion
Dissolution of Partnership = Change in partners, business continues
Dissolution of Firm = Complete end of business
Remember this line:
Partnership dissolves when relationships change,
but firm dissolves when the business itself ends.
This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.