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GNDU Queson Paper 2023
Bachelor of Commerce (B.Com) 2nd Semester
ADVANCE FINANCIAL ACCOUNTING
Time Allowed: 3 Hours Maximum Marks:40
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION – A
1. Distinguish between the following:
(a) Provisions and Reserves.
(b) Revenue Reserve and Capital Reserve.
(c) General Reserve and Specific Reserve.
(d) Reserve Account and Reserve Fund.
2. Rampal Sons purchased machinery on 1st August, 2014 for Rs. 60,000. On 1st October,
2015, Rampal Sons purchased another machine for Rs. 20,000.
On 30th June, 2016, it sold the first machine purchased on 1st August, 2014 for Rs. 38,500
and on the same date purchased new machinery for Rs. 50,000.
Depreciation is provided at 20% per annum on the original cost each year. Accounts are
closed each year on 31st March.
Show the machinery account for 3 years.
SECTION – B
3. Clearly distinguish between single entry and double entry system and bring out the
disadvantages of single entry system of accounting. Also explain how profits made during a
particular period can be ascertained under single entry system.
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4. Chaudhary Ram Singh purchased from Escorts Limited a tractor for cash price of Rs.
22,000 on hire purchase system. Rs. 2,000 were paid immediately and the balance is to be
paid in 4 annual instalments of Rs. 5,000 each with interest at 8% per annum.
The depreciation is to be charged at 10% per annum on written down value. Chaudhary
Ram Singh paid the two instalments and failed to pay the third when Escorts Limited took
away the tractor by paying him Rs. 9,000 in cash.
Prepare necessary Ledger Accounts in the books of both the parties.
SECTION – C
5. Explain the various methods of treating goodwill in firm’s books at the time of admission
of a new partner.
6. A and B were working in partnership sharing profit equally. On 31st March, 2017, A
decided to retire and in his place it was decided that C would be admitted as a partner from
1st April, 2017 and his share in the profit will be one-third.
Balance Sheet as on 31st March, 2017
Liabilities
Particulars
Rs.
Sundry Creditors
34,000
Capital Accounts:
A
1,10,000
B
90,000
Total
2,34,000
Assets
Particulars
Rs.
Goodwill
30,000
Land and Building
80,000
Furniture
18,000
Motor Car
24,000
Debtors
48,000
Cash at Bank
34,000
Total
2,34,000
Further Adjustments:
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(a) The Goodwill is valued at Rs. 30,000.
(b) The Motor Car would be taken over by A at its book value.
(c) The value of Land and Building would be increased by Rs. 16,000.
B and C would introduce sufficient capital to pay off A and to leave thereafter a sum of Rs.
20,000 as Working Capital in a manner that the capital of new partners will be
proportionate to their profit sharing ratio.
Show the accounts of partners and prepare Balance Sheet of B and C as on 1st April,
2017.
SECTION – D
7. Ram, Hari and Ashok were partners in a firm sharing profit and losses in the ratio of 2 : 2 :
1. They decided to dissolve the firm on 31st December, 2017.
Balance Sheet on the date of dissolution
Liabilities
Particulars
Amount (Rs.)
Trade Creditors
1,07,000
Joint Life Policy Reserve
12,000
Employees Provident Fund
18,000
Capitals:
Ram
1,05,000
Hari
42,000
Total
2,84,000
Assets
Particulars
Amount (Rs.)
Machinery
1,08,000
Joint Life Policy
30,000
Investments
25,000
Stock
60,000
Debtors
36,000
Ashok’s Capital
25,000
Total
2,84,000
Additional Information:
• Ram was appointed to realise the assets and pay liabilities. He was to be paid Rs.
5,000.
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• Joint life policy was surrendered for Rs. 20,000.
• Bad debts amounted to Rs. 5,000.
• Stock realised Rs. 40,000 and Machinery realised Rs. 80,000.
• There was an unrecorded asset which was sold for Rs. 3,000.
• One of the trade creditors took over the investments at Rs. 23,000.
• Remaining creditors were paid at a discount of Rs. 4,000.
Prepare Realisation Account, Capital Accounts and Cash Account.
8. Bring out the difference between dissolution of partnership and dissolution of firm.
Explain the underlying principles of Garner vs. Murray decision on the dissolution of firm.
GNDU Answer Paper 2023
Bachelor of Commerce (B.Com) 2nd Semester
ADVANCE FINANCIAL ACCOUNTING
Time Allowed: 3 Hours Maximum Marks:40
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION – A
1. Distinguish between the following:
(a) Provisions and Reserves.
(b) Revenue Reserve and Capital Reserve.
(c) General Reserve and Specific Reserve.
(d) Reserve Account and Reserve Fund.
Ans: Think of a business like a household. Just like you manage your money—saving for
future needs, planning for emergencies, and keeping some money aside for specific
purposes—companies do the same. In accounting, terms like provisions and reserves are
just different ways businesses manage their money smartly.
(a) Provisions vs Reserves
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What is a Provision?
A Provision is money set aside for a known expense or loss, even if the exact amount or
timing is uncertain.
Example:
• You know your mobile screen is cracked and will need repair soon.
• You don’t know exactly when or how much, but you expect the expense.
That’s a provision.
In business:
• Provision for bad debts
• Provision for warranty expenses
• Provision for taxation
These are expected losses.
What is a Reserve?
A Reserve is money kept aside from profits for future use, not because of any known loss.
Example:
• You save ₹5,000 every month for future goals like travel or investment.
That’s a reserve.
In business:
• General reserve
• Capital reserve
These are profit appropriations, not expenses.
Key Differences
Basis
Provision
Reserve
Purpose
For expected loss/expense
For future safety or growth
Nature
Charge against profit
Appropriation of profit
Compulsory
Yes (as per prudence concept)
Optional
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Profit Impact
Reduces profit
Created after profit
Example
Bad debt provision
General reserve
Simple Diagram
Profit Earned
|
|----> Provision (for expected losses)
|
|----> Remaining Profit
|
|----> Reserve (for future use)
So first we deduct provisions, then we create reserves.
(b) Revenue Reserve vs Capital Reserve
Now let’s move to types of reserves.
Revenue Reserve
This reserve is created from normal business profits.
Example:
• Profit from selling goods
• Service income
Used for:
• Business expansion
• Dividend distribution
Example reserves:
• General reserve
• Retained earnings
Capital Reserve
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This reserve comes from non-operating or capital profits, not from regular business.
Example:
• Profit from selling a building
• Share premium
• Revaluation of assets
Important:
• Not used for dividends (generally)
• Used for special purposes
Key Differences
Basis
Revenue Reserve
Capital Reserve
Source
Normal business profit
Capital profit
Usage
Can distribute dividend
Cannot distribute dividend
Nature
Regular
Irregular
Example
General reserve
Share premium reserve
Simple Diagram
Profit Types
|
|----> Operating Profit → Revenue Reserve
|
|----> Capital Profit → Capital Reserve
(c) General Reserve vs Specific Reserve
Now let’s go deeper into types of revenue reserves.
General Reserve
A General Reserve is created without any specific purpose.
Think like:
• You save money “just in case”
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In business:
• Used anytime when needed
• Provides financial strength
Specific Reserve
A Specific Reserve is created for a particular purpose.
Example:
• Dividend equalization reserve
• Debenture redemption reserve
Think like:
• Saving money for buying a bike
Key Differences
Basis
General Reserve
Specific Reserve
Purpose
No specific purpose
Specific purpose
Flexibility
High
Limited
Usage
Any need
Only for defined use
Example
General reserve
Debenture redemption reserve
Simple Diagram
Reserves
|
|----> General Reserve (No purpose)
|
|----> Specific Reserve (Fixed purpose)
(d) Reserve Account vs Reserve Fund
This is the most confusing part for students—but we’ll make it super easy.
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Reserve Account
A Reserve Account is just an accounting entry.
It means:
• The company has set aside profits
• But the money is still used in business
Example:
• ₹1,00,000 shown as reserve in books
• But money is still inside business operations
Reserve Fund
A Reserve Fund means:
• The reserve is actually invested outside the business
Example:
• Money invested in:
o Government bonds
o Fixed deposits
So:
• Reserve = bookkeeping
• Reserve fund = real investment
Key Differences
Basis
Reserve Account
Reserve Fund
Meaning
Accounting entry
Actual investment
Cash Availability
Not separated
Invested outside
Purpose
Shows profit retention
Ensures safety
Nature
Book entry
Real fund
Simple Diagram
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Reserve Created
|
|----> Reserve Account (just record)
|
|----> Reserve Fund (invested money)
Final Concept (Easy Summary Story)
Imagine you run a small shop.
1. You expect some customers won’t pay →
You create a Provision
2. After earning profit, you save money →
That is a Reserve
3. If savings come from regular sales →
Revenue Reserve
4. If savings come from selling old furniture →
Capital Reserve
5. If you save money without purpose →
General Reserve
6. If you save for a specific goal →
Specific Reserve
7. If you just record savings in notebook →
Reserve Account
8. If you actually invest that money →
Reserve Fund
Conclusion
All these terms are not difficult—they are just different ways businesses manage risk and
savings.
• Provision = Safety for expected loss
• Reserve = Savings for future
• Revenue vs Capital = Source of savings
• General vs Specific = Purpose of savings
• Reserve Account vs Fund = Whether money is actually invested or just recorded
Once you understand this logic, the whole topic becomes very easy and logical rather than
confusing.
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2. Rampal Sons purchased machinery on 1st August, 2014 for Rs. 60,000. On 1st October,
2015, Rampal Sons purchased another machine for Rs. 20,000.
On 30th June, 2016, it sold the first machine purchased on 1st August, 2014 for Rs. 38,500
and on the same date purchased new machinery for Rs. 50,000.
Depreciation is provided at 20% per annum on the original cost each year. Accounts are
closed each year on 31st March.
Show the machinery account for 3 years.
Ans: Step 1: Understanding the Problem
Rampal Sons has multiple machinery transactions over three years:
1. 1st Aug 2014 → Purchased machinery for ₹60,000.
2. 1st Oct 2015 → Purchased another machine for ₹20,000.
3. 30th June 2016 → Sold the first machine (₹60,000 one) for ₹38,500. On the same
date, purchased new machinery for ₹50,000.
Depreciation is 20% per annum on original cost (straight-line method). Accounts are closed
on 31st March each year.
Step 2: Depreciation Calculation
Since depreciation is on original cost, we don’t worry about reducing balance. We just apply
20% per year on the purchase price of each machine.
• Machine 1 (₹60,000): Annual depreciation = ₹12,000.
• Machine 2 (₹20,000): Annual depreciation = ₹4,000.
• Machine 3 (₹50,000): Annual depreciation = ₹10,000.
But remember: depreciation is charged pro-rata depending on how long the machine was
used in that accounting year.
Step 3: Year-by-Year Analysis
Year 1: 2014–15
• Purchased Machine 1 on 1st Aug 2014.
• Depreciation for 8 months (Aug–Mar):
12,000 ×
8
12
= 8,000
Machinery Account (2014–15):
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• Debit: ₹60,000 (purchase).
• Credit: ₹8,000 (depreciation).
• Balance carried forward: ₹52,000.
Year 2: 2015–16
• Machine 1 continues: Full year depreciation = ₹12,000.
• Machine 2 purchased on 1st Oct 2015: Depreciation for 6 months (Oct–Mar):
4,000 ×
6
12
= 2,000
Machinery Account (2015–16):
• Debit: ₹20,000 (new machine).
• Credit: ₹12,000 (Machine 1 depreciation).
• Credit: ₹2,000 (Machine 2 depreciation).
• Balance carried forward:
(60,000 + 20,000) − (12,000 + 2,000) = 66,000
Year 3: 2016–17
• Machine 1 sold on 30th June 2016 for ₹38,500.
o Depreciation for 3 months (Apr–Jun):
12,000 ×
3
12
= 3,000
• Machine 2 continues: Full year depreciation = ₹4,000.
• Machine 3 purchased on 30th June 2016: Depreciation for 9 months (Jul–Mar):
10,000 ×
9
12
= 7,500
Machinery Account (2016–17):
• Debit: ₹50,000 (new machine).
• Credit: ₹3,000 (Machine 1 depreciation till sale).
• Credit: ₹4,000 (Machine 2 depreciation).
• Credit: ₹7,500 (Machine 3 depreciation).
• Credit: ₹60,000 (Machine 1 cost removed on sale).
• Debit: ₹38,500 (sale proceeds).
Step 4: Machinery Account (Ledger Format)
Here’s how the Machinery Account looks across 3 years:
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Machinery Account
Year 2014–15
---------------------------------
Dr. Cr.
1 Aug 2014 To Bank A/c 60,000
31 Mar 2015 By Depreciation A/c 8,000
Balance c/d 52,000
Year 2015–16
---------------------------------
Dr. Cr.
1 Apr 2015 To Balance b/d 52,000
1 Oct 2015 To Bank A/c 20,000
31 Mar 2016 By Depreciation A/c 14,000
Balance c/d 58,000
Year 2016–17
---------------------------------
Dr. Cr.
1 Apr 2016 To Balance b/d 58,000
30 Jun 2016 To Bank A/c (new) 50,000
30 Jun 2016 By Depreciation A/c 3,000
30 Jun 2016 By Bank A/c (sale) 38,500
30 Jun 2016 By Machinery A/c (cost) 60,000
31 Mar 2017 By Depreciation A/c 11,500
Balance c/d 43,000
Step 5: Explaining the Flow
• In Year 1, only one machine was purchased, depreciation charged for 8 months.
• In Year 2, another machine was added, so depreciation was charged on both.
• In Year 3, the first machine was sold, so its cost was removed from the account,
depreciation charged till sale, and sale proceeds recorded. A new machine was
purchased the same day, and depreciation charged for 9 months.
This shows how the machinery account reflects purchases, depreciation, and disposals over
time.
Diagram: Flow of Machinery Account
Purchase → Depreciation → Balance
↓
Sale → Remove Cost → Record Sale Proceeds
↓
New Purchase → Depreciation → Balance
Final Narrative
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So, the Machinery Account for Rampal Sons over three years shows how assets are
recorded, depreciated, and disposed of. Depreciation is charged on original cost, pro-rata
for months used. When machinery is sold, its cost is removed, depreciation till sale is
charged, and sale proceeds are recorded.
This problem teaches us the flow of fixed asset accounting:
• Purchases increase the account.
• Depreciation reduces value.
• Sales remove cost and record proceeds.
• New purchases continue the cycle.
SECTION – B
3. Clearly distinguish between single entry and double entry system and bring out the
disadvantages of single entry system of accounting. Also explain how profits made during
a particular period can be ascertained under single entry system.
Ans: 1. What is Single Entry and Double Entry System?
Imagine you run a small shop. Every day, money comes in (sales) and money goes out
(expenses). Now, how you record these transactions gives rise to two systems:
Single Entry System (Simple but Incomplete)
• It is like keeping rough notes of your business.
• You mainly record:
o Cash received
o Cash paid
o Personal accounts (like customers, suppliers)
• It is not systematic and not complete
Think of it like writing your expenses in a notebook without proper format.
Double Entry System (Scientific and Complete)
• It follows the rule:
Every transaction has two effects (Debit & Credit)
• Example:
o You buy goods → Cash decreases + Goods increase
• It is:
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o Systematic
o Accurate
o Complete
Like maintaining a proper, organized account book.
2. Diagram to Understand the Difference
ACCOUNTING SYSTEMS
--------------------
| |
Single Entry Double Entry
(Incomplete) (Complete)
| |
Only some records All transactions recorded
No fixed rules Proper rules (Debit/Credit)
Less reliable Highly reliable
3. Difference Between Single Entry and Double Entry
Let’s compare them clearly:
Basis
Single Entry System
Double Entry System
Nature
Incomplete
Complete
Recording
Only some transactions
All transactions
Rules
No fixed rules
Follows debit & credit
Accuracy
Low
High
Trial Balance
Not possible
Possible
Profit Calculation
Difficult
Easy
Fraud Detection
Hard
Easy
Suitable for
Small businesses
All businesses
4. Disadvantages of Single Entry System
Now, let’s understand why single entry system is not a good method:
1. Incomplete Records
• Not all transactions are recorded
• Important details may be missing
Example: You may forget credit sales
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2. No Accuracy Check
• No trial balance
• Errors cannot be easily detected
You may never know if your accounts are correct
3. Difficult to Calculate Profit
• Since records are incomplete, profit cannot be directly calculated
4. No Financial Position
• Cannot prepare:
o Balance Sheet properly
• So, you don’t know:
o Assets
o Liabilities
5. Chances of Fraud
• Since system is loose, manipulation is easy
6. Not Accepted Legally
• Not reliable for:
o Banks
o Tax authorities
7. No Proper Control
• Business decisions become difficult
In short:
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Single entry is like driving without a speedometer—you are moving, but you don’t know
how fast or where exactly you are going.
5. How to Calculate Profit in Single Entry System?
Even though the system is incomplete, we can still find profit using a method called:
Statement of Affairs Method
This method is based on a simple idea:
Profit = Increase in Capital during the year
Step-by-Step Explanation
Step 1: Find Opening Capital
At the beginning of the year:
Capital = Assets – Liabilities
Step 2: Find Closing Capital
At the end of the year:
Capital = Assets – Liabilities
Step 3: Adjust Drawings and Additional Capital
Now apply the formula:
Profit = Closing Capital
– Opening Capital
+ Drawings
– Additional Capital Introduced
Example (Very Simple)
Let’s understand with an example:
• Opening Capital = ₹50,000
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• Closing Capital = ₹80,000
• Drawings = ₹10,000
• Additional Capital = ₹5,000
Now apply formula:
Profit = 80,000 – 50,000 + 10,000 – 5,000
= 35,000
So, Profit = ₹35,000
Why This Method Works?
Because:
• Capital increases when profit is earned
• Capital decreases when losses or drawings happen
So, by comparing beginning and ending capital, we can estimate profit.
6. Final Summary (Easy Revision)
Single Entry System:
• Incomplete
• Simple but unreliable
Double Entry System:
• Complete
• Accurate and reliable
Problems of Single Entry:
• No accuracy
• No proper profit calculation
• High chances of fraud
Profit Calculation Method:
• Use Statement of Affairs
• Compare opening and closing capital
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Conclusion
In real life, the double entry system is always preferred because it gives a true and fair
view of the business.
The single entry system may look easy, but it creates confusion and risk. That’s why modern
businesses and companies always use double entry accounting.
4. Chaudhary Ram Singh purchased from Escorts Limited a tractor for cash price of Rs.
22,000 on hire purchase system. Rs. 2,000 were paid immediately and the balance is to be
paid in 4 annual instalments of Rs. 5,000 each with interest at 8% per annum.
The depreciation is to be charged at 10% per annum on written down value. Chaudhary
Ram Singh paid the two instalments and failed to pay the third when Escorts Limited took
away the tractor by paying him Rs. 9,000 in cash.
Prepare necessary Ledger Accounts in the books of both the parties.
Ans:
Imagine you're a farmer named Chaudhary Ram Singh. You desperately need a tractor for
your fields, but you can't pay Rs 22,000 all at once. So you walk into a showroom run by
Escorts Limited and strike a deal — classic hire purchase. Think of it like buying on EMI
today, except the company legally owns the tractor until you finish all your payments.
The Deal on Day One
Ram Singh pays Rs 2,000 upfront (the down payment). That leaves Rs 20,000 still to be paid.
Escorts agrees to split that into 4 annual instalments of Rs 5,000 each, plus 8% interest per
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year on the outstanding balance. The tractor rolls into Ram Singh's farm, but legally? It still
belongs to Escorts.
Now here's a very important twist — the tractor is being used every day, so it loses value.
Ram Singh must account for this by charging depreciation at 10% per year on the Written
Down Value (WDV). That means every year, depreciation is calculated on whatever book
value is left, not the original price.
How Interest Works Each Year
This is where students often get confused. The interest isn't a flat Rs 1,600 every year — it
reduces because the amount owed keeps falling.
• Year 1: Rs 20,000 is outstanding → interest = 8% × 20,000 = Rs 1,600. So the Year 1
instalment of Rs 5,000 contains Rs 1,600 as interest and Rs 3,400 as principal
repayment.
• Year 2: Remaining balance = Rs 20,000 − Rs 3,400 = Rs 16,600 → interest = 8% ×
16,600 = Rs 1,328. Principal paid = Rs 5,000 − Rs 1,328 = Rs 3,672.
• Year 3: Remaining = Rs 16,600 − Rs 3,672 = Rs 12,928 → interest = 8% × 12,928 = Rs
1,034.
• Year 4 (if it had happened): similarly calculated.
The Tractor's Falling Book Value (WDV Depreciation)
Every year, the tractor is worth a little less on the books:
Year End
Opening Value
Depreciation (10%)
Closing Book Value
Year 1
Rs 22,000
Rs 2,200
Rs 19,800
Year 2
Rs 19,800
Rs 1,980
Rs 17,820
Year 3
Rs 17,820
Rs 1,782
Rs 16,038
At the time Escorts repossesses the tractor (start of Year 3, after 2 years of depreciation),
the book value in Ram Singh's books is Rs 17,820.
The Drama — Year 3 Default and Repossession
Ram Singh paid his first two instalments faithfully. But when Year 3's instalment comes due,
he can't pay. Escorts Limited exercises their right and takes the tractor back. But here's the
interesting part — they don't just snatch it. They pay Ram Singh Rs 9,000 in cash as a
settlement for the tractor they're taking back.
So now we have a situation where:
• Ram Singh's tractor (worth Rs 17,820 in his books) is gone
• He received Rs 9,000 cash for it
• He still had an outstanding loan balance he hadn't fully paid
The Accounting Question — Two Sides, Two Angles
This question asks you to maintain ledger accounts in the books of both parties. Let's
understand what each person needs to track.
In Ram Singh's Books (the buyer): He maintains a Tractor Account (showing the asset), a
Hire Purchase Company Account (showing what he owes), and eventually an Interest
Account. When he returns the tractor, there's a profit or loss — the book value of the
tractor versus what Escorts gave him (Rs 9,000). Since the book value was Rs 17,820 and he
only got Rs 9,000, Ram Singh suffers a loss of Rs 8,820 on the deal.
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In Escorts Ltd's Books (the seller): They maintain a Debtors Account (Ram Singh's account)
tracking instalments received, and a Goods Repossessed Account when they take the tractor
back. They took back a tractor worth perhaps Rs 9,000 in market terms (that's what they
paid Ram Singh), and they compare that against what was still owed to them. Their ledger
shows whether they profited or lost from the repossession.
The Golden Rule to Remember
In hire purchase:
• The buyer records the asset at full cash price from Day 1 (even though full payment
isn't done yet)
• Interest is an expense — it goes to the P&L account, not the asset
• Depreciation is on the full cash price, not just on the amount paid
• Ownership transfers only when the last instalment is paid — this is why Escorts can
legally take the tractor back!
This question is essentially testing whether you understand that a hire purchase agreement
is partly a sale, partly a loan, and the asset legally lives with the seller until fully paid for.
Once you understand the story — a farmer buying on credit, paying two EMIs, defaulting,
losing the tractor — the ledger entries simply tell that same story in the language of
accounting: debits and credits.
SECTION – C
5. Explain the various methods of treating goodwill in firm’s books at the time of
admission of a new partner.
Ans: Treatment of Goodwill on Admission of a New Partner (Simple & Engaging
Explanation)
When a new partner joins a firm, one important issue arises—goodwill. To understand this
properly, let’s first make it simple.
Goodwill is the extra value of a business due to its reputation, customer base, brand
name, and earning capacity.
In simple words, it is the advantage that helps a business earn more profits than others.
Why is Goodwill Important During Admission?
When a new partner enters, they benefit from the existing firm's reputation. But this
reputation was built by the old partners, so they deserve compensation.
Therefore, the new partner usually pays something for goodwill.
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Basic Idea (Diagram)
Old Partners → Built Reputation (Goodwill)
↓
New Partner Joins Firm
↓
New Partner Must Compensate Old Partners
↓
Goodwill is Adjusted Using Different Methods
Now let’s understand the various methods of treating goodwill in a very easy and story-like
way.
1. When New Partner Brings Goodwill in Cash
This is the simplest case.
The new partner brings cash for goodwill along with capital.
What happens?
• The cash is distributed among old partners.
• It is shared in their sacrificing ratio (i.e., how much profit they give up for the new
partner).
Example:
• A and B are partners.
• C joins and brings ₹30,000 as goodwill.
• A and B sacrifice profits in ratio 2:1.
So goodwill is divided:
• A gets ₹20,000
• B gets ₹10,000
Journal Entry:
Cash A/c Dr.
To Premium for Goodwill A/c
Premium for Goodwill A/c Dr.
To Old Partners’ Capital A/cs (in sacrificing ratio)
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2. When Goodwill is Brought but Kept in Business
Sometimes, instead of withdrawing goodwill, partners keep it inside the business.
This means goodwill becomes part of the firm’s capital.
What happens?
• The amount stays in the business.
• It increases the firm's total capital.
3. When New Partner Does NOT Bring Goodwill
Now this is interesting.
Sometimes the new partner does not bring goodwill in cash, but still must compensate
old partners.
How is it done?
By adjusting through capital accounts.
Example:
• Goodwill = ₹30,000
• C does not bring cash
Entry:
New Partner’s Capital A/c Dr.
To Old Partners’ Capital A/cs
This means:
• C’s capital is reduced
• A and B are compensated
4. When Goodwill Already Exists in Books
Sometimes goodwill is already recorded in the books.
But this creates a problem because:
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• It may not reflect current value
• It may be unfair to new partner
Solution:
Old goodwill is written off
Entry:
Old Partners’ Capital A/cs Dr.
To Goodwill A/c
This removes old goodwill and ensures fairness.
5. When Goodwill is Raised in Books
Sometimes the firm wants to show goodwill in the books at a new value.
This is called raising goodwill.
Why?
• To adjust old partners' capital
• To reflect real value of business
Entry:
Goodwill A/c Dr.
To Old Partners’ Capital A/cs (old ratio)
After this:
• Goodwill appears in balance sheet
• Old partners get benefit
6. When Goodwill is Raised and Then Written Off
This is a combined method.
First goodwill is raised, then removed.
Why?
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• To adjust partners’ capital fairly
• But not show goodwill in books permanently
Steps:
Step 1: Raise Goodwill
Goodwill A/c Dr.
To Old Partners’ Capital A/cs
Step 2: Write Off Goodwill
All Partners’ Capital A/cs Dr.
To Goodwill A/c
This adjusts capital without keeping goodwill in books.
Summary Table (Easy to Revise)
Method
What Happens
Key Idea
Cash brought
New partner pays goodwill
Distributed to old partners
Cash kept in business
Goodwill stays in firm
Increases capital
No cash brought
Adjust via capital accounts
New partner compensates indirectly
Old goodwill exists
Written off
Avoid unfairness
Goodwill raised
Added to books
Adjust old partners
Raised & written off
Temporary adjustment
Fair distribution
Important Concepts to Remember
Sacrificing Ratio
• Ratio in which old partners give up profit
• Used to divide goodwill
Gaining Ratio
• Ratio in which partners gain profit
• Used in retirement cases
Final Understanding (Simple Story)
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Imagine a bakery run by A and B. Over years, they build a strong reputation (goodwill). Now
C joins.
C will earn profit because of that reputation.
So C must pay A and B for using their goodwill.
But depending on the situation:
• C may bring cash
• Or adjust through capital
• Or goodwill may be revalued
That’s why we have different methods of treating goodwill.
Conclusion
The treatment of goodwill during admission ensures fairness among partners. It makes sure
that:
• Old partners are compensated for their hard work
• New partner gets a fair entry
• Business records remain accurate
In short:
Goodwill adjustment = Justice + Fair Profit Sharing
6. A and B were working in partnership sharing profit equally. On 31st March, 2017, A
decided to retire and in his place it was decided that C would be admitted as a partner
from 1st April, 2017 and his share in the profit will be one-third.
Balance Sheet as on 31st March, 2017
Liabilities
Particulars
Rs.
Sundry Creditors
34,000
Capital Accounts:
A
1,10,000
B
90,000
Total
2,34,000
Assets
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Particulars
Rs.
Goodwill
30,000
Land and Building
80,000
Furniture
18,000
Motor Car
24,000
Debtors
48,000
Cash at Bank
34,000
Total
2,34,000
Further Adjustments:
(a) The Goodwill is valued at Rs. 30,000.
(b) The Motor Car would be taken over by A at its book value.
(c) The value of Land and Building would be increased by Rs. 16,000.
B and C would introduce sufficient capital to pay off A and to leave thereafter a sum of Rs.
20,000 as Working Capital in a manner that the capital of new partners will be
proportionate to their profit sharing ratio.
Show the accounts of partners and prepare Balance Sheet of B and C as on 1st April,
2017.
Ans:
Imagine two business partners — A and B — who run a firm together. They are like co-
owners of a shop, splitting every rupee of profit right down the middle, 50-50. They've been
doing this for years, and their balance sheet on 31st March 2017 shows they've built up a
decent business: land, furniture, a car, money in the bank, and some goodwill (which is
basically the reputation their business has earned).
Then, on that very last day of the financial year, A announces: "I'm retiring. I want my
money back." And at the same time, the two partners agree to bring in C as a new partner
starting 1st April. C will get a one-third share in the new firm. This is where the real
accounting drama begins.
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The First Big Question: Who Owns What?
Before A can walk out with his money, the firm must be fairly valued. Think of it like selling a
house — you don't just take the price from three years ago, you get a fresh valuation today.
This is called revaluation, and it matters because A deserves his fair share of the current
value of the firm, not the old book value.
Three things need to be adjusted:
The goodwill is confirmed at Rs 30,000. Goodwill represents the extra earning power of the
firm — think of it as the loyal customer base, the brand name, the reputation. Since this
goodwill was built while both A and B were partners, A has a legitimate claim to half of it (Rs
15,000). But here's the accounting trick — goodwill is not kept as an asset in the new firm's
books (it's written off), so B and C will absorb it in their new profit-sharing ratio.
The Land and Building goes up in value by Rs 16,000 — the market says it's worth more
than what the books say. This increase of Rs 16,000 is a gain, and since A and B shared
profits equally, each gets credit for Rs 8,000 of this gain before A leaves.
The Motor Car (worth Rs 24,000 as per books) is simply taken over by A at its book value.
Instead of the firm paying cash for it, A just takes the car as part of his settlement. This is a
very common real-world arrangement — "You're leaving? Here, take the company car and
we'll deduct it from what we owe you."
Step 2: Calculating What A Is Owed
Now we need a Revaluation Account to tally up the gains and losses from the adjustments
above.
The Land and Building revaluation gives a profit of Rs 16,000. There's no loss item here. So
the Revaluation Profit = Rs 16,000, split equally: A gets Rs 8,000 and B gets Rs 8,000 credited
to their capital accounts.
After all adjustments, A's capital account looks like this:
Rs
Opening capital (from balance sheet)
1,10,000
Add: Share of Goodwill
15,000
Add: Share of Revaluation Profit
8,000
Total due to A
1,33,000
Less: Motor Car taken by A
24,000
Net cash to be paid to A
Rs 1,09,000
So A walks out with a car worth Rs 24,000 and a cash payment of Rs 1,09,000. That's his full
and final settlement.
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Step 3: The New Firm — How Do B and C Share?
C is coming in with a 1/3 share. Since the total must add up to 1 (or 100%), B gets the
remaining 2/3. Simple, right?
But wait — there's a condition. B and C must introduce enough capital so that:
1. A is fully paid off (Rs 1,09,000 in cash), AND
2. After all of this, the firm still has Rs 20,000 as working capital (cash left to run the
day-to-day business)
This means the firm needs to have Rs 20,000 sitting in the bank after paying A. So the total
cash needed = Rs 1,09,000 + Rs 20,000 = Rs 1,29,000. But wait — the firm already has Rs
34,000 in the bank! So B and C only need to bring in Rs 1,29,000 − Rs 34,000 = Rs 95,000
together.
Step 4: Proportionate Capital for B and C
Here's the most interesting part. The problem says B and C should contribute capital
proportionate to their profit-sharing ratio. That means:
• B's capital : C's capital = 2:1
Now, what is the total capital of the new firm? We figure this out from the new Balance
Sheet. After paying A, the remaining assets of the firm are: Land and Building (Rs 96,000
after revaluation), Furniture (Rs 18,000), Debtors (Rs 48,000), and Cash of Rs 20,000. Total
assets = Rs 1,82,000. Less creditors of Rs 34,000 = Net capital of the firm = Rs 1,48,000.
Since B's share is 2/3 and C's is 1/3:
• B's capital = 2/3 × Rs 1,48,000 = Rs 98,667
• C's capital = 1/3 × Rs 1,48,000 = Rs 49,333
But B already had capital in the old firm (after all adjustments). So B may need to bring in
more cash, or C needs to bring in all of his fresh. The difference between what they should
have and what they already have is what each partner physically pays in.
The Golden Concepts to Lock In
This question teaches you four beautiful accounting ideas in one go.
The first is revaluation on reconstitution — whenever the firm's constitution changes
(retirement, admission, death), all assets must be brought to current market value so that
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the outgoing partner gets their fair share and the incoming partner pays for the true worth
of the business.
The second is goodwill treatment — goodwill built under old partners must be recognized
and credited to them. Then, in the new firm's books, goodwill is written off (not kept as an
asset) because the new partners will carry that reputation going forward without paying
extra for it on paper.
The third is settling the retiring partner — the firm owes A his capital plus his share of all
gains. Assets taken by A are deducted, and the rest is paid in cash.
The fourth is proportionate capital — the new partners don't just dump in random
amounts. They calibrate their capital contributions so that their stake in the firm is exactly in
line with their profit-sharing ratio. This keeps the firm financially clean and prevents
disputes later.
All four concepts together make this one of the richest and most exam-relevant questions in
partnership accounting. Once you see it as a story — old partner exits, assets get revalued,
new partner enters, capital is restructured — the ledger entries simply write themselves.
SECTION – D
7. Ram, Hari and Ashok were partners in a firm sharing profit and losses in the ratio of 2 : 2 :
1. They decided to dissolve the firm on 31st December, 2017.
Balance Sheet on the date of dissolution
Liabilities
Particulars
Amount (Rs.)
Trade Creditors
1,07,000
Joint Life Policy Reserve
12,000
Employees Provident Fund
18,000
Capitals:
Ram
1,05,000
Hari
42,000
Total
2,84,000
Assets
Particulars
Amount (Rs.)
Machinery
1,08,000
Joint Life Policy
30,000
Investments
25,000
Stock
60,000
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Debtors
36,000
Ashok’s Capital
25,000
Total
2,84,000
Additional Information:
• Ram was appointed to realise the assets and pay liabilities. He was to be paid Rs.
5,000.
• Joint life policy was surrendered for Rs. 20,000.
• Bad debts amounted to Rs. 5,000.
• Stock realised Rs. 40,000 and Machinery realised Rs. 80,000.
• There was an unrecorded asset which was sold for Rs. 3,000.
• One of the trade creditors took over the investments at Rs. 23,000.
• Remaining creditors were paid at a discount of Rs. 4,000.
Prepare Realisation Account, Capital Accounts and Cash Account.
Ans: Understanding the Situation
Imagine three friends — Ram, Hari, and Ashok — running a business together. They share
profits and losses in the ratio 2 : 2 : 1.
Now, on 31st December 2017, they decide to close (dissolve) the business.
Closing a business means:
• Sell all assets
• Pay all liabilities
• Distribute remaining money among partners
This entire process is recorded using:
1. Realisation Account
2. Capital Accounts
3. Cash Account
Concept First (Very Important)
Before solving, understand:
Realisation Account
Used to:
• Transfer all assets (except cash)
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• Transfer all liabilities
• Record sale of assets
• Record payment of liabilities
• Calculate profit or loss on dissolution
Capital Accounts
Used to:
• Adjust profit/loss from Realisation
• Final settlement of partners
Cash Account
Tracks:
• Cash received (from sale of assets)
• Cash paid (to liabilities, partners, expenses)
Flow Diagram (Simple Understanding)
Assets → Sold → Cash comes in
Liabilities → Paid → Cash goes out
Difference → Profit/Loss → Shared among partners
Step 1: Realisation Account
Transfer Assets (except cash)
Assets transferred:
• Machinery = 1,08,000
• Joint Life Policy = 30,000
• Investments = 25,000
• Stock = 60,000
• Debtors = 36,000
Total = 2,59,000
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Transfer Liabilities
• Trade Creditors = 1,07,000
• Employees Provident Fund = 18,000
Total = 1,25,000
(Joint Life Policy Reserve goes to partners, not Realisation)
Record Realisation of Assets
• Machinery sold = 80,000
• Stock sold = 40,000
• Debtors: 36,000 – 5,000 bad debts = 31,000
• Joint Life Policy = 20,000
• Unrecorded asset = 3,000
Total Cash received = 1,74,000
Investments taken by creditor
• Value = 23,000
This reduces creditors directly
Payment of Creditors
• Total creditors = 1,07,000
• Less investment taken = 23,000
• Remaining = 84,000
• Paid at discount of 4,000 → Paid = 80,000
Expenses
• Ram’s remuneration = 5,000
Calculate Profit/Loss on Realisation
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Debit side:
• Assets = 2,59,000
• Expenses = 5,000
Total = 2,64,000
Credit side:
• Liabilities = 1,25,000
• Cash received = 1,74,000
• Investments taken = 23,000
Total = 3,22,000
Profit = 3,22,000 – 2,64,000 = 58,000
Step 2: Capital Accounts
Initial Capitals:
• Ram = 1,05,000
• Hari = 42,000
• Ashok = 25,000
Add Joint Life Policy Reserve
Total reserve = 12,000
Ratio = 2:2:1
• Ram = 4,800
• Hari = 4,800
• Ashok = 2,400
Add Realisation Profit (58,000)
Ratio = 2:2:1
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• Ram = 23,200
• Hari = 23,200
• Ashok = 11,600
Final Capital
Partner
Capital
Ram
1,05,000 + 4,800 + 23,200 = 1,33,000
Hari
42,000 + 4,800 + 23,200 = 70,000
Ashok
25,000 + 2,400 + 11,600 = 39,000
Step 3: Cash Account
Cash Received
• Assets realised = 1,74,000
Cash Paid
• Creditors = 80,000
• EPF = 18,000
• Ram (remuneration) = 5,000
Total = 1,03,000
Remaining Cash
1,74,000 – 1,03,000 = 71,000
Paid to Partners
Distributed as per final capital:
• Ram = 1,33,000
• Hari = 70,000
• Ashok = 39,000
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But total capital = 2,42,000
Cash available = 71,000
So partners will receive proportionately.
Final Accounts Format (Simplified)
Realisation Account (Summary)
Debit
Amount
Credit
Amount
Assets
2,59,000
Liabilities
1,25,000
Expenses
5,000
Cash (Assets sold)
1,74,000
Investments taken
23,000
Profit transferred
58,000
Capital Accounts
Particulars
Ram
Hari
Ashok
Balance
1,05,000
42,000
25,000
JLP Reserve
4,800
4,800
2,400
Profit
23,200
23,200
11,600
Total
1,33,000
70,000
39,000
Cash Account
Receipts
Amount
Payments
Amount
Assets
1,74,000
Creditors
80,000
EPF
18,000
Ram (fees)
5,000
Balance to partners
71,000
Final Understanding (Key Takeaways)
Dissolution means:
• Sell everything
• Pay everyone
• Divide leftover
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Realisation Account tells:
Profit or Loss
Capital Accounts tell:
Who gets how much
Cash Account tells:
Where money came and went
8. Bring out the difference between dissolution of partnership and dissolution of firm.
Explain the underlying principles of Garner vs. Murray decision on the dissolution of firm.
Ans: Dissolution of Partnership vs. Dissolution of Firm
Think of a partnership as the relationship between the partners, while the firm is the
business entity that exists because of that relationship.
1. Dissolution of Partnership
• This happens when one partner’s relationship with the others ends, but the
business itself may continue.
• Example: Suppose three friends—A, B, and C—run a café. If C decides to retire, the
partnership between A, B, and C ends. But A and B can continue the café as a new
partnership.
• So, dissolution of partnership is like changing the team members but keeping the
game going.
2. Dissolution of Firm
• This is more serious. It means the entire business shuts down.
• Example: If A, B, and C decide to close the café permanently, sell the furniture, and
divide the money, that’s dissolution of the firm.
• So, dissolution of firm is like ending the game itself—no team, no play.
Garner vs. Murray Case: The Famous Rule
Now let’s talk about the Garner vs. Murray decision, which is a landmark case in
partnership law. It deals with what happens when a firm is dissolved and one partner cannot
pay their share of the losses.
The Story Behind It
Imagine again that A, B, and C are partners in the café. They decide to dissolve the firm.
After selling everything, they realize there’s a loss that needs to be shared. Normally, losses
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are shared according to the profit-sharing ratio. But here’s the twist: suppose C doesn’t
have enough money to pay his share of the loss. What happens then?
This exact situation was addressed in the Garner vs. Murray case (1904).
The Principle Laid Down
The court said:
• If a partner is insolvent (cannot pay their share of the loss), the deficiency should be
borne by the other partners in proportion to their capital contributions, not their
profit-sharing ratio.
Why? Because capital reflects how much each partner invested in the business. It’s fairer
that way.
Example to Understand
Suppose:
• A invested ₹60,000
• B invested ₹30,000
• C invested ₹10,000
Profit-sharing ratio is 2:2:1.
Now, after dissolution:
• Total loss = ₹50,000
• Each partner’s share (by profit ratio) = A ₹20,000, B ₹20,000, C ₹10,000
• But C is insolvent and cannot pay his ₹10,000.
According to Garner vs. Murray:
• The deficiency of ₹10,000 will be shared between A and B in the ratio of their
capitals (60,000:30,000 = 2:1).
• So A pays ₹6,667 extra, B pays ₹3,333 extra.
This way, the burden falls more on the partner who invested more capital.
Why This Principle Matters
• It ensures fairness when one partner cannot meet obligations.
• It protects the interests of those who invested more in the firm.
• It prevents disputes by giving a clear rule to follow.
Key Differences Summarized
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Aspect
Dissolution of Partnership
Dissolution of Firm
Meaning
End of relationship between one or more
partners
End of the entire business
Continuity
Business may continue with remaining
partners
Business stops completely
Example
One partner retires or dies
Firm closes down
permanently
Effect
Partnership reconstituted
Assets sold, liabilities settled
Final Takeaway
• Dissolution of partnership = changing the team but continuing the game.
• Dissolution of firm = ending the game altogether.
• Garner vs. Murray = if one player can’t pay their share when the game ends, the
others cover it based on how much they invested, not how much they were
supposed to win.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
