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GNDU Queson Paper 2025
Bachelor of Commerce (B.Com) 2nd Semester
ADVANCED FINANCIAL ACCOUNTING
Time Allowed: 3 Hours Maximum Marks:100
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. Define Depreciation. State briefly the causes and objectives of providing for depreciation.
Differentiate between Straight Line Method and Diminishing Balance Method of providing
depreciation.
2. On 1st April, 2019 ABC Ltd. purchased a machinery for Rs. 20,00,000. On 1st October,
2020 additions were made for Rs. 10,00,000.
On 31st July, 2021, machinery which was purchased on 1st April, 2019 for Rs. 3,75,000 was
sold for Rs. 2,75,000.
On 1st October, 2021 additions were made for Rs. 5,00,000.
ABC Ltd. provided depreciation @ 10% p.a. on written down value method.
Prepare Machinery Account from 2019 to 2022. Books are closed on 31st March every
year.
SECTION – B
3. “Single Entry System of Book Keeping is the most unscientific, unsatisfactory and
incomplete system of Book Keeping”. Critically explain this statement.
4. Ajay purchased from Swani Ltd. a car of the cash price of Rs. 22,000 on hire purchase
system. Rs. 2,000 were paid immediately and the balance to be paid in 4 annual instalments
of Rs. 5,000 each with interest @ 8% p.a.
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Depreciation is to be charged @ 10% p.a. on written down value. Ajay paid two instalments
and failed to pay the third when Swani Ltd. took away the car by paying him Rs. 9,000 in
cash.
Prepare necessary ledger accounts in the books of both the parties.
SECTION – C
5. The Balance Sheet of A, B and C who share profits in the ratio of 4 : 3 : 2 respectively
stood as follows on 31.12.2024:
Liabilities
Particulars
Amount (Rs.)
Sundry Creditors
3,800
Capital:
A
20,000
B
7,500
C
10,000
Total
41,300
Assets
Particulars
Amount (Rs.)
Cash
700
Sundry Debtors
23,000
Less: Reserve
(400)
Net Debtors
22,600
Stock
6,000
Plant & Machinery
8,000
Land & Building
4,000
Total
41,300
Adjustments (On B’s Retirement):
(a) Stock to be appreciated by 10%.
(b) Reserve for Doubtful Debts is no longer required.
(c) Land and Building be appreciated by 20%.
(d) Adjustments to rectify previous errors:
• B was credited excess by Rs. 1,800
• A and C were debited excess by Rs. 1,100 and Rs. 700 respectively
(e) Goodwill of the firm be fixed at Rs. 54,000 and B’s share be adjusted in accounts of A and
C, who will share profits in the ratio of 2 : 1.
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(f) Entire capital of the firm be readjusted by bringing in or paying off cash so that future
capital of A and C be in ratio of 2/3 and 1/3.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the new
firm showing B’s balance as loan.
6. What is Revaluation Account? Why is it prepared? Describe the various methods of
treating goodwill in the books of accounts of a partnership concern at the time of
admission of a new partner with illustrations.
SECTION – D
7. The following was the Balance Sheet of A and B who shared profits and losses in the
ratio of 3 : 2 on March, 2019:
Liabilities
Particulars
Amount (Rs.)
Trade Creditors
75,000
Bills Payable
30,000
Mrs. A’s Loan
25,000
Workmen Compensation Fund
8,000
Bank Loan
50,000
Reserve Fund
27,000
Capitals:
A
30,000
B
40,000
Total
2,85,000
Assets
Particulars
Amount (Rs.)
Cash at Bank
4,500
Stock
25,000
Debtors
40,500
Less: Provision
(1,000)
Net Debtors
39,500
Bills Receivable
15,000
Investments
60,000
Plant & Machinery
80,000
Buildings
61,000
Total
2,85,000
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Adjustments on Dissolution:
(i) A promised to pay off Mrs. A’s loan and took away half the investments at 10% discount.
(ii) Stock and remaining investments were sold at 10% discount.
(iii) Goodwill was taken over by B for Rs. 40,000. He also agreed to pay off Bills Payable at a
discount of 10%.
(iv) Debtors realized Rs. 35,000, Bills Receivable Rs. 13,500, Plant & Machinery Rs. 38,900,
and Building Rs. 1,20,000.
(v) There was a car in the firm which was completely written off from books. It was taken
over by B for Rs. 23,400.
(vi) Trade creditors were paid 90% in full and final settlement.
(vii) Expenses of dissolution amounted to Rs. 1,700.
Prepare Realisation Account, Capital Accounts of Partners and Cash Account.
8. Differentiate between Dissolution of Partnership & Dissolution of Firm. Explain the
underlying principles of Garner vs. Murray decision on the dissolution of firm.
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GNDU Answer Paper 2025
Bachelor of Commerce (B.Com) 2nd Semester
ADVANCED FINANCIAL ACCOUNTING
Time Allowed: 3 Hours Maximum Marks:100
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. Define Depreciation. State briefly the causes and objectives of providing for
depreciation. Differentiate between Straight Line Method and Diminishing Balance
Method of providing depreciation.
Ans: What is Depreciation?
Imagine you buy a new bike today. It looks shiny, works perfectly, and costs ₹1,00,000. But
after a few years, it won’t be worth the same amount. It may get old, parts may wear out,
and new models may replace it. Its value will decrease.
This decrease in the value of an asset over time is called Depreciation.
Simple Definition:
Depreciation is the reduction in the value of a fixed asset due to usage, wear and tear,
passage of time, or obsolescence.
Causes of Depreciation
Assets don’t lose value randomly. There are clear reasons behind it. Let’s look at the main
causes:
1. Wear and Tear
Machines, vehicles, and equipment are used regularly. Due to continuous use, parts get
worn out.
Example: A factory machine running daily will naturally lose efficiency.
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2. Passage of Time
Even if an asset is not used, time itself reduces its value.
Example: A building becomes old over years even if it is well maintained.
3. Obsolescence
Technology changes fast. New and better models make old ones outdated.
Example: Old mobile phones lose value when new smartphones are launched.
4. Accidents or Damage
Unexpected events like fire, flood, or accidents reduce the value of assets.
5. Depletion (Natural Resources)
Assets like mines, oil wells, etc., reduce as they are used.
Example: Coal in a mine decreases as it is extracted.
Objectives of Providing Depreciation
Now you may wonder—why do businesses calculate depreciation every year?
Let’s understand its importance:
1. To Show True Profit
If depreciation is not recorded, profits will appear higher than they actually are.
Depreciation ensures accurate profit calculation.
2. To Show True Value of Assets
Assets are shown in the balance sheet. Depreciation helps reflect their real current value,
not original cost.
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3. To Replace Assets in Future
Depreciation acts like a provision or saving. It helps businesses replace assets when they
become useless.
4. To Follow Accounting Principles
According to accounting rules (Matching Principle), expenses must be matched with
revenue.
Depreciation spreads the cost of an asset over its useful life.
5. For Tax Benefits
Depreciation reduces profit, which reduces taxable income.
Methods of Depreciation
There are many methods, but the two most important ones are:
1. Straight Line Method (SLM)
2. Diminishing Balance Method (DBM)
Let’s understand both in a very simple way.
1. Straight Line Method (SLM)
In this method, depreciation is equal every year.
It means the asset loses the same amount of value annually.
Formula:
Depreciation = (Cost – Scrap Value) / Useful Life
Visual Understanding (Straight Line Method)
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The graph is a straight line because the value decreases evenly.
Example:
• Cost of machine = ₹1,00,000
• Scrap value = ₹10,000
• Life = 5 years
Depreciation per year = (1,00,000 – 10,000) / 5 = ₹18,000
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Every year ₹18,000 is deducted.
Features:
• Simple and easy to calculate
• Equal depreciation every year
• Suitable for assets with uniform usage
2. Diminishing Balance Method (DBM)
In this method, depreciation is calculated on the remaining value (book value) every year.
So depreciation is higher in early years and lower in later years.
Visual Understanding (Diminishing Balance Method)
The graph is curved because the value decreases faster in the beginning.
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Example:
• Cost = ₹1,00,000
• Rate = 20%
Year 1: 20% of 1,00,000 = ₹20,000
Value left = ₹80,000
Year 2: 20% of 80,000 = ₹16,000
Value left = ₹64,000
Depreciation keeps decreasing every year.
Features:
• Higher depreciation in early years
• More realistic for assets that lose value quickly
• Widely used for machinery and vehicles
Difference Between SLM and DBM
Let’s clearly compare both methods:
Basis
Straight Line Method
Diminishing Balance Method
Depreciation Amount
Same every year
Decreases every year
Calculation
On original cost
On book value
Graph Shape
Straight line
Curved line
Suitability
Buildings, furniture
Machinery, vehicles
Complexity
Simple
Slightly complex
Asset Value
Reduces uniformly
Reduces rapidly at first
Easy Way to Remember
Think like this:
• SLM = Same every year (Straight line)
• DBM = Decreasing every year (Curve)
Final Conclusion
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Depreciation is an essential concept in accounting because it reflects the real value of assets
and ensures accurate profit calculation. Assets naturally lose value due to usage, time, and
technological changes, and depreciation helps businesses account for this loss
systematically.
The Straight Line Method is simple and provides equal depreciation every year, making it
easy to understand and apply. On the other hand, the Diminishing Balance Method is more
practical for assets that lose value quickly, as it charges higher depreciation in the early
years.
Both methods serve the same purpose but are used depending on the nature of the asset
and business requirements.
2. On 1st April, 2019 ABC Ltd. purchased a machinery for Rs. 20,00,000. On 1st October,
2020 additions were made for Rs. 10,00,000.
On 31st July, 2021, machinery which was purchased on 1st April, 2019 for Rs. 3,75,000 was
sold for Rs. 2,75,000.
On 1st October, 2021 additions were made for Rs. 5,00,000.
ABC Ltd. provided depreciation @ 10% p.a. on written down value method.
Prepare Machinery Account from 2019 to 2022. Books are closed on 31st March every
year.
Ans: Step 1: Understanding the Problem
• 1st April 2019: Machinery purchased = ₹20,00,000
• 1st October 2020: Addition = ₹10,00,000
• 31st July 2021: Machinery (original cost ₹3,75,000) sold for ₹2,75,000
• 1st October 2021: Addition = ₹5,00,000
• Depreciation = 10% per annum on WDV
• Books closed = 31st March every year
So, we need to prepare the Machinery Account for four years: 2019–20, 2020–21, 2021–22,
and 2022–23.
Step 2: Written Down Value Method (WDV)
Under WDV, depreciation is charged on the opening balance of the asset (after
adjustments) each year, not on the original cost. This means the value keeps reducing year
after year.
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Think of it like peeling an onion layer by layer—the value shrinks each year as depreciation is
deducted.
Step 3: Year-by-Year Calculation
Year 2019–20
• Opening balance: ₹20,00,000 (purchased on 1st April 2019)
• Depreciation = 10% of ₹20,00,000 = ₹2,00,000
• Closing balance = ₹18,00,000
Year 2020–21
• Opening balance: ₹18,00,000
• Addition on 1st October 2020: ₹10,00,000 (used for 6 months in this year)
• Depreciation:
o On ₹18,00,000 = ₹1,80,000
o On ₹10,00,000 (6 months) = ₹50,000
• Total depreciation = ₹2,30,000
• Closing balance = ₹25,70,000
Year 2021–22
• Opening balance: ₹25,70,000
• Sale on 31st July 2021: Machinery cost ₹3,75,000
o WDV of this machine needs to be calculated:
▪ Purchased in 2019 → Depreciation for 2019–20 = ₹37,500
▪ Value at 31st March 2020 = ₹3,37,500
▪ Depreciation for 2020–21 = ₹33,750
▪ Value at 31st March 2021 = ₹3,03,750
▪ Depreciation for 4 months (April–July 2021) = ₹10,125
▪ WDV at sale = ₹2,93,625
o Sale proceeds = ₹2,75,000
o Loss on sale = ₹18,625
• Addition on 1st October 2021 = ₹5,00,000
• Depreciation:
o On remaining machinery (after sale) = ₹22,66,375 × 10% = ₹2,26,638
o On addition (6 months) = ₹25,000
o Total depreciation = ₹2,51,638
• Closing balance = ₹25,14,737
Year 2022–23
• Opening balance: ₹25,14,737
• Depreciation = 10% of ₹25,14,737 = ₹2,51,474
• Closing balance = ₹22,63,263
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Step 4: Machinery Account
Here’s how the account looks (simplified):
Machinery Account (2019–2022)
Date
Particulars
Debit (₹)
Credit (₹)
Balance (₹)
01-04-2019
To Bank (Purchase)
20,00,000
20,00,000
31-03-2020
By Depreciation
2,00,000
18,00,000
01-10-2020
To Bank (Addition)
10,00,000
28,00,000
31-03-2021
By Depreciation
2,30,000
25,70,000
31-07-2021
By Bank (Sale)
2,75,000
By Loss on Sale
18,625
01-10-2021
To Bank (Addition)
5,00,000
31-03-2022
By Depreciation
2,51,638
25,14,737
31-03-2023
By Depreciation
2,51,474
22,63,263
Diagram: Flow of Machinery Value
2019: Purchase 20,00,000
↓ Depreciation
2020: 18,00,000 + Addition 10,00,000 = 28,00,000
↓ Depreciation
2021: 25,70,000 - Sale (2,93,625 WDV) + Addition 5,00,000
↓ Depreciation
2022: 25,14,737
↓ Depreciation
2023: 22,63,263
Relatable Example
Think of machinery like a car:
• You buy it (initial cost).
• Each year, its value drops (depreciation).
• If you add new features (like a sound system), the value increases.
• If you sell part of it (say, the old tires), you calculate its current worth before selling.
• Over time, the car’s value keeps reducing, but you track it carefully.
That’s exactly what ABC Ltd. is doing with its machinery account.
Conclusion
• Strategic depreciation method (WDV) ensures that the asset’s value is reduced
realistically year after year.
• Additions and sales are carefully adjusted to reflect the true worth of machinery.
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• The Machinery Account shows how the value flows over time, balancing purchases,
sales, and depreciation.
So, ABC Ltd.’s machinery journey from 2019 to 2022 is like a story of buying, upgrading,
selling, and gradually wearing out—just like how we manage our own possessions in real
life.
SECTION – B
3. “Single Entry System of Book Keeping is the most unscientific, unsatisfactory and
incomplete system of Book Keeping”. Critically explain this statement.
Ans: Imagine you are running a small shop. Every day, you sell goods, buy stock, and pay
expenses. Now, suppose you only write down some transactions—maybe just cash received
and cash paid—and ignore the rest. This is exactly what the Single Entry System of Book-
Keeping looks like.
What is Single Entry System
The Single Entry System is not a complete system of accounting. It is more like a rough and
informal method of recording transactions.
• It mainly records cash transactions and sometimes personal accounts (like debtors
and creditors).
• It does not follow the double-entry principle, where every transaction has two
aspects (debit and credit).
In short:
It is like keeping a personal diary of money, not a proper accounting system.
Simple Diagram to Understand
Here’s a basic comparison to make things clear:
DOUBLE ENTRY SYSTEM SINGLE ENTRY SYSTEM
--------------------- ---------------------
Transaction: Sale ₹1000 Transaction: Sale ₹1000
Debit: Cash ₹1000 Cash received ₹1000 ✔
Credit: Sales ₹1000 Sales recorded (maybe
missing)
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Both sides recorded Only one side recorded
Complete picture Partial picture
This shows that Single Entry records only one aspect, while Double Entry records both.
Why is it Called Unscientific?
A system is called scientific when it follows proper rules, logic, and structure.
The Single Entry System is called unscientific because:
1. No Fixed Rules
• There are no standard principles to follow.
• Each business may record transactions differently.
Result: No uniformity, no consistency.
2. No Double Aspect Concept
• It ignores the basic accounting rule:
Every transaction has two effects.
Without this, the system lacks logical balance.
3. No Trial Balance
• Since both debit and credit are not recorded, trial balance cannot be prepared.
This means:
• Errors cannot be easily detected.
• Accuracy cannot be verified.
Conclusion (Unscientific):
It lacks structure, rules, and logical foundation—so it is not scientific.
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Why is it Unsatisfactory?
A system is unsatisfactory if it does not meet the needs of users.
1. Incomplete Information
• Only partial records are maintained.
• Important details like expenses, assets, liabilities may be missing.
You cannot get a full picture of the business.
2. No True Profit Calculation
• Profit is often calculated using estimates or comparisons.
This is not accurate:
Profit = Closing Capital - Opening Capital
But this ignores many adjustments.
3. Difficult to Detect Fraud
• Since records are incomplete, frauds and errors can easily go unnoticed.
Example:
If someone steals cash, you may not detect it due to lack of proper records.
4. Not Useful for Decision Making
• Business decisions need accurate data.
• Single Entry does not provide reliable information.
Conclusion (Unsatisfactory):
It fails to provide useful, reliable, and complete information.
Why is it Incomplete?
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The system is called incomplete because it does not record all aspects of transactions.
1. Only Partial Recording
• Cash book may be maintained.
• Personal accounts may be kept.
• But real accounts and nominal accounts are often ignored.
2. No Proper Financial Statements
• It is difficult to prepare:
o Trading Account
o Profit & Loss Account
o Balance Sheet
Even if prepared, they are based on estimates, not actual data.
3. Missing Important Data
• Information about assets, liabilities, expenses, and income is incomplete.
So, the business owner does not know:
• Exact profit
• Financial position
• Growth of business
Conclusion (Incomplete):
It does not record all financial transactions properly.
Are There Any Advantages?
Even though it has many drawbacks, it is still used in small businesses because:
✔ Simple to Maintain
• No complex rules
• Easy for beginners
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✔ Low Cost
• No need for professional accountants
✔ Suitable for Small Businesses
• Small shopkeepers, street vendors, etc.
Critical Evaluation (Final Judgment)
Now let’s evaluate the statement:
“Single Entry System is the most unscientific, unsatisfactory and incomplete system.”
✔ TRUE – Because:
• It lacks scientific principles
• It does not provide reliable results
• It keeps incomplete records
BUT ALSO:
• It is useful for very small businesses
• It is easy and cheap
Final Conclusion
The Single Entry System is like trying to understand a movie by watching only half of it. You
may get a rough idea, but you will miss important details.
• It is unscientific because it lacks rules and logic
• It is unsatisfactory because it does not fulfill business needs
• It is incomplete because it records only partial information
Therefore, for any growing business, the Double Entry System is always preferred, as it
provides accuracy, reliability, and completeness.
One-Line Summary
Single Entry System is simple but unreliable, incomplete, and unsuitable for proper
accounting—hence rightly criticized as unscientific and unsatisfactory.
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4. Ajay purchased from Swani Ltd. a car of the cash price of Rs. 22,000 on hire purchase
system. Rs. 2,000 were paid immediately and the balance to be paid in 4 annual
instalments of Rs. 5,000 each with interest @ 8% p.a.
Depreciation is to be charged @ 10% p.a. on written down value. Ajay paid two
instalments and failed to pay the third when Swani Ltd. took away the car by paying him
Rs. 9,000 in cash.
Prepare necessary ledger accounts in the books of both the parties.
Ans: Step 1: Understanding the Scenario
• Cash price of car = ₹22,000
• Down payment = ₹2,000 (paid immediately)
• Balance payable = ₹20,000 in 4 annual instalments of ₹5,000 each
• Interest = 8% per annum on outstanding balance
• Depreciation = 10% per annum on WDV method
• Ajay pays two instalments but fails to pay the third.
• Swani Ltd. repossesses the car and pays Ajay ₹9,000 in cash.
So, we need to prepare ledger accounts showing how this transaction flows in both sets of
books.
Step 2: Breaking Down the Hire Purchase
Hire purchase is like buying something in installments with interest. Ajay gets the car
immediately but pays over time. Swani Ltd. earns interest on the unpaid balance.
Step 3: Calculating Interest and Instalments
Year 1 (2019–20)
• Balance after down payment = ₹20,000
• Interest = 8% of ₹20,000 = ₹1,600
• Instalment = ₹5,000 (includes interest + principal)
• Principal repaid = ₹5,000 – ₹1,600 = ₹3,400
• Balance carried forward = ₹16,600
Year 2 (2020–21)
• Balance = ₹16,600
• Interest = 8% of ₹16,600 = ₹1,328
• Instalment = ₹5,000
• Principal repaid = ₹5,000 – ₹1,328 = ₹3,672
• Balance carried forward = ₹12,928
Year 3 (2021–22)
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Ajay fails to pay. Balance outstanding = ₹12,928. Swani Ltd. repossesses the car and pays
Ajay ₹9,000.
Step 4: Depreciation in Ajay’s Books
Ajay charges depreciation @ 10% WDV.
• Year 1: Car value = ₹22,000 → Depreciation = ₹2,200 → Closing value = ₹19,800
• Year 2: Value = ₹19,800 → Depreciation = ₹1,980 → Closing value = ₹17,820
• Year 3: Value = ₹17,820 → Depreciation = ₹1,782 → Closing value = ₹16,038
When the car is repossessed, Ajay removes it from his books and records the cash received
(₹9,000).
Step 5: Ledger Accounts
In Ajay’s Books
Car Account
• Debit: Purchase ₹22,000
• Credit: Depreciation each year
• Credit: Transfer to Swani Ltd. (repossession)
Swani Ltd. Account
• Debit: Instalments paid (₹5,000 + ₹5,000)
• Credit: Balance outstanding when repossessed
• Credit: Cash received ₹9,000
In Swani Ltd.’s Books
Ajay’s Account
• Debit: Instalments due (with interest)
• Credit: Cash received (₹2,000 down payment + two instalments)
• Debit: Loss on repossession (difference between balance and car value)
Car Repossessed Account
• Debit: Car taken back at WDV
• Credit: Ajay’s account
• Debit: Cash paid to Ajay ₹9,000
Diagram: Flow of Transactions
Ajay (Buyer) Swani Ltd. (Seller)
------------------------------------------------------------
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Car purchased (22,000) Car sold (22,000)
↓ ↓
Down payment (2,000) Cash received (2,000)
↓ ↓
Instalments (5,000 + 5,000) Cash received (10,000)
↓ ↓
Depreciation charged each year Interest income earned
↓ ↓
Fails to pay 3rd instalment Repossesses car
↓ ↓
Car removed from books Pays Ajay 9,000 cash
Relatable Example
Think of it like buying a phone on EMI:
• You pay a small amount upfront.
• You keep paying monthly instalments with interest.
• If you stop paying, the company takes the phone back and may give you some
refund.
• Meanwhile, you’ve been using the phone, so its value has depreciated.
That’s exactly what happened with Ajay and Swani Ltd.
Conclusion
• Need for ledger accounts: To track payments, interest, depreciation, and
repossession.
• Ajay’s perspective: He bought the car, paid two instalments, charged depreciation,
but lost the car when he defaulted.
• Swani Ltd.’s perspective: They earned interest, received instalments, repossessed
the car, and compensated Ajay with ₹9,000.
This shows how hire purchase accounting captures both sides of the story—payments,
interest, depreciation, and repossession.
SECTION – C
5. The Balance Sheet of A, B and C who share profits in the ratio of 4 : 3 : 2 respectively
stood as follows on 31.12.2024:
Liabilities
Particulars
Amount (Rs.)
Sundry Creditors
3,800
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Capital:
A
20,000
B
7,500
C
10,000
Total
41,300
Assets
Particulars
Amount (Rs.)
Cash
700
Sundry Debtors
23,000
Less: Reserve
(400)
Net Debtors
22,600
Stock
6,000
Plant & Machinery
8,000
Land & Building
4,000
Total
41,300
Adjustments (On B’s Retirement):
(a) Stock to be appreciated by 10%.
(b) Reserve for Doubtful Debts is no longer required.
(c) Land and Building be appreciated by 20%.
(d) Adjustments to rectify previous errors:
• B was credited excess by Rs. 1,800
• A and C were debited excess by Rs. 1,100 and Rs. 700 respectively
(e) Goodwill of the firm be fixed at Rs. 54,000 and B’s share be adjusted in accounts of A
and C, who will share profits in the ratio of 2 : 1.
(f) Entire capital of the firm be readjusted by bringing in or paying off cash so that future
capital of A and C be in ratio of 2/3 and 1/3.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the
new firm showing B’s balance as loan.
Ans: Understanding the Situation
We have three partners — A, B, and C sharing profits in the ratio:
4 : 3 : 2
Now, B is retiring, which means:
• We must calculate what B should get.
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• Adjust assets and liabilities.
• Redistribute everything between A and C.
Step 1: What happens when a partner retires?
When a partner retires, we do 5 main things:
1. Revalue assets & liabilities
2. Correct past errors
3. Calculate goodwill
4. Adjust capital of remaining partners
5. Prepare new Balance Sheet
Step 2: Revaluation of Assets
Let’s adjust assets one by one:
(a) Stock increases by 10%
Stock = 6,000
Increase = 10% of 6,000 = 600 (profit)
(b) Reserve for doubtful debts not required
Reserve = 400 → Now removed → gain of 400
(c) Land & Building increases by 20%
Value = 4,000
Increase = 800 → profit
Total Revaluation Profit:
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600 + 400 + 800 = 1,800
Profit sharing ratio = 4 : 3 : 2
Partner
Share
A
800
B
600
C
400
Revaluation Account (Simple Form)
Revaluation A/c
-------------------------
Increase in Stock 600
Reserve Written Back 400
Land & Building 800
-------------------------
Total Profit 1800
Transferred to:
A Capital 800
B Capital 600
C Capital 400
Step 3: Rectification of Errors
Mistakes:
• B was credited extra → must reduce
• A & C were debited extra → must increase
Partner
Adjustment
A
+1100
B
-1800
C
+700
Step 4: Goodwill Adjustment
Goodwill = 54,000
B’s share = 3/9 = 1/3
B’s goodwill = 54,000 × 1/3 = 18,000
Now A and C will compensate B in new ratio 2 : 1
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Partner
Pays
A
12,000
C
6,000
Step 5: Capital Accounts
Let’s update each partner step by step:
A’s Capital
Opening Capital 20,000
+ Revaluation 800
+ Error correction 1100
- Goodwill 12000
-----------------------------
Total = 9,900
B’s Capital
Opening Capital 7,500
+ Revaluation 600
- Error correction 1800
+ Goodwill 18000
-----------------------------
Total = 24,300
This becomes B’s Loan
C’s Capital
Opening Capital 10,000
+ Revaluation 400
+ Error correction 700
- Goodwill 6000
-----------------------------
Total = 5,100
Step 6: New Capital Adjustment
A and C will now share in ratio:
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2 : 1
Total capital = A + C = 9,900 + 5,100 = 15,000
Required capital:
Partner
Ratio
Capital
A
2/3
10,000
C
1/3
5,000
Adjustment:
Partner
Current
Required
Action
A
9,900
10,000
Bring 100
C
5,100
5,000
Withdraw 100
Final Balance Sheet
Liabilities
Particulars
Amount
Sundry Creditors
3,800
B’s Loan
24,300
Capital A
10,000
Capital C
5,000
Total
43,100
Assets
Particulars
Amount
Cash (Adjusted)
700
Debtors
23,000
Stock (6,000 + 600)
6,600
Plant & Machinery
8,000
Land & Building (4,800)
4,800
Total
43,100
Final Understanding
Think of it like this:
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• The business is being re-evaluated fairly before B leaves.
• Any hidden profits/losses are adjusted.
• Past mistakes are corrected.
• B is paid his share of goodwill.
• Remaining partners (A & C) reset their capital.
• B stays as a lender (loan) instead of partner.
6. What is Revaluation Account? Why is it prepared? Describe the various methods of
treating goodwill in the books of accounts of a partnership concern at the time of
admission of a new partner with illustrations.
Ans: Part I: Revaluation Account
What is Revaluation Account?
Imagine three friends running a business together. They own assets like furniture,
machinery, and stock. Now, a fourth friend wants to join as a partner. Before admitting him,
the existing partners want to make sure the values of assets and liabilities are up-to-date
and fair.
This is where the Revaluation Account comes in. It’s a special account prepared to record
any increase or decrease in the value of assets and liabilities when a new partner is
admitted, an old partner retires, or the firm is dissolved.
Why is it Prepared?
• To ensure that old partners get their fair share of profit or loss from revaluation
before the new partner joins.
• To avoid disputes later by showing the true worth of the firm.
• To adjust the balance sheet so that the new partner enters at correct values.
How it Works
• If the value of an asset increases → Profit (credited to old partners).
• If the value of an asset decreases → Loss (debited to old partners).
• If a liability increases → Loss.
• If a liability decreases → Profit.
At the end, the net profit or loss from revaluation is transferred to the old partners’ capital
accounts in their old profit-sharing ratio.
Diagram: Flow of Revaluation Account
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Revaluation Account
|
---------------------------------
| |
Increase in Assets / Decrease in Liabilities → Profit
Decrease in Assets / Increase in Liabilities → Loss
|
Net Profit/Loss transferred to Old Partners
Part II: Goodwill in Partnership
What is Goodwill?
Goodwill is the reputation of the firm. It’s the extra value a business has because of loyal
customers, brand name, or efficient management.
When a new partner is admitted, he benefits from the goodwill created by old partners. So,
he must compensate the old partners for their share of goodwill.
Methods of Treating Goodwill
There are several ways to handle goodwill in the books when a new partner joins. Let’s go
through them one by one with simple illustrations.
1. Premium Method (Goodwill brought in cash)
The new partner brings goodwill in cash, which is distributed among old partners in their
sacrificing ratio.
Example: A and B share profits 3:2. C is admitted and brings ₹50,000 as goodwill.
• Sacrificing ratio = Old ratio – New ratio.
• Suppose A sacrifices 2/5 and B sacrifices 3/5.
• Then A gets ₹20,000 and B gets ₹30,000 from C’s goodwill.
2. Goodwill Raised in Books
Goodwill is recorded in the firm’s books as an asset. Old partners’ capital accounts are
credited in their old ratio.
Example: Goodwill valued at ₹60,000. A and B share profits equally.
• Goodwill Account Dr. 60,000
• To A’s Capital 30,000
• To B’s Capital 30,000
3. Goodwill Not Raised (Adjusted through Capital Accounts)
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Sometimes goodwill is not shown in the books. Instead, adjustment is made directly through
partners’ capital accounts.
Example: Goodwill valued at ₹40,000. C is admitted. A sacrifices 1/3, B sacrifices 2/3.
• C’s Capital Dr. 40,000
• To A’s Capital 13,333
• To B’s Capital 26,667
4. Hidden Goodwill
When the new partner’s capital contribution indirectly reveals goodwill.
Example: Total capital of firm after admission should be ₹3,00,000. New partner D brings
₹1,20,000 for 1/4th share.
• His share implies total capital = ₹4,80,000.
• Actual capital = ₹3,00,000.
• Hidden goodwill = ₹1,80,000.
• This goodwill is adjusted among old partners.
5. Goodwill Written Off
If goodwill already exists in books, it may be written off among all partners in the new ratio.
Example: Goodwill in books = ₹30,000. Partners A, B, and C share profits 2:2:1.
• Goodwill Account Dr. 30,000
• To A’s Capital 12,000
• To B’s Capital 12,000
• To C’s Capital 6,000
Illustrative Example
Suppose A and B are partners sharing profits 3:2. They admit C for 1/4th share. Goodwill is
valued at ₹40,000.
• Sacrificing ratio:
o A’s sacrifice = 3/5 – 3/4 × 3/5 = 9/20 – 9/20 = 0 (no sacrifice).
o B’s sacrifice = 2/5 – 1/4 × 2/5 = 8/20 – 5/20 = 3/20.
• So, B sacrifices 3/20.
• C brings ₹40,000 goodwill.
• Entire amount goes to B’s capital account.
This ensures fairness: the partner who sacrifices gets compensated.
Diagram: Goodwill Adjustment
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New Partner Admission
|
----------------------------
| |
Goodwill Valuation Sacrificing Ratio
| |
Cash brought / Adjusted Old partners compensated
Relatable Example
Think of goodwill like a restaurant’s reputation. If two friends built a famous restaurant and
a third friend joins later, he benefits from the reputation built by the first two. It’s only fair
that he pays them something for that reputation. That payment is goodwill.
Conclusion
• Revaluation Account ensures that old partners get their fair share of profit or loss
from changes in asset and liability values before a new partner joins.
• Goodwill treatment ensures that old partners are compensated for the reputation
and customer base they built.
• Methods include premium brought in cash, goodwill raised in books, adjustment
through capital accounts, hidden goodwill, and writing off existing goodwill.
Together, these practices maintain fairness, transparency, and trust in partnership
accounting.
SECTION – D
7. The following was the Balance Sheet of A and B who shared profits and losses in the
ratio of 3 : 2 on March, 2019:
Liabilities
Particulars
Amount (Rs.)
Trade Creditors
75,000
Bills Payable
30,000
Mrs. A’s Loan
25,000
Workmen Compensation Fund
8,000
Bank Loan
50,000
Reserve Fund
27,000
Capitals:
A
30,000
B
40,000
Total
2,85,000
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Assets
Particulars
Amount (Rs.)
Cash at Bank
4,500
Stock
25,000
Debtors
40,500
Less: Provision
(1,000)
Net Debtors
39,500
Bills Receivable
15,000
Investments
60,000
Plant & Machinery
80,000
Buildings
61,000
Total
2,85,000
Adjustments on Dissolution:
(i) A promised to pay off Mrs. A’s loan and took away half the investments at 10%
discount.
(ii) Stock and remaining investments were sold at 10% discount.
(iii) Goodwill was taken over by B for Rs. 40,000. He also agreed to pay off Bills Payable at
a discount of 10%.
(iv) Debtors realized Rs. 35,000, Bills Receivable Rs. 13,500, Plant & Machinery Rs. 38,900,
and Building Rs. 1,20,000.
(v) There was a car in the firm which was completely written off from books. It was taken
over by B for Rs. 23,400.
(vi) Trade creditors were paid 90% in full and final settlement.
(vii) Expenses of dissolution amounted to Rs. 1,700.
Prepare Realisation Account, Capital Accounts of Partners and Cash Account.
Ans: Understanding the Situation
We are given a Balance Sheet of two partners A and B, who share profits and losses in the
ratio of 3 : 2.
That means:
• A gets 3 parts
• B gets 2 parts
So A has a bigger share than B.
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The balance sheet is dated March 2019, and it shows:
• What the firm owes → called Liabilities
• What the firm owns → called Assets
Step 1: What is a Balance Sheet?
Think of a balance sheet like a snapshot of a business at a moment in time.
It answers two simple questions:
1. What does the business have? (Assets)
2. What does the business owe? (Liabilities)
And both sides must always be equal.
Given Balance Sheet (Simplified)
Let’s rewrite it in a clean and easy way:
Liabilities (What the business owes)
Particulars
Amount (Rs.)
Trade Creditors
75,000
Bills Payable
30,000
Mrs. A’s Loan
25,000
Workmen Compensation Fund
8,000
Bank Loan
50,000
Reserve Fund
27,000
Capital A
30,000
Capital B
40,000
Total
2,85,000
Assets (What the business owns)
Particulars
Amount (Rs.)
Cash at Bank
4,500
Stock
25,000
Debtors
40,500
Less: Provision
(1,000)
Net Debtors
39,500
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(More assets may exist but are not shown in the truncated data. Total must match
₹2,85,000.)
Step 2: Understanding Each Item (In Simple Words)
Let’s break down each item like a story.
Liabilities Explained
1. Trade Creditors (₹75,000)
These are people or businesses from whom goods were purchased on credit.
Meaning: The firm still has to pay them money.
2. Bills Payable (₹30,000)
These are written promises to pay money in the future.
Like signing a cheque for later payment.
3. Mrs. A’s Loan (₹25,000)
This is a loan given by A’s wife to the business.
Important: This is not capital, it's a liability.
4. Workmen Compensation Fund (₹8,000)
This is money kept aside for employees’ compensation.
It is a kind of reserve for workers' safety.
5. Bank Loan (₹50,000)
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Loan taken from the bank.
Must be repaid with interest.
6. Reserve Fund (₹27,000)
This is profit saved for future use.
Not taken by partners, kept in business.
7. Capitals
Partner
Amount
A
30,000
B
40,000
This is the money invested by partners.
Assets Explained
1. Cash at Bank (₹4,500)
Money available in bank account.
2. Stock (₹25,000)
Goods available for sale.
3. Debtors (₹40,500)
People who owe money to the business.
4. Provision for Doubtful Debts (₹1,000)
Some debtors may not pay.
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So we subtract this as a safety measure.
Net Debtors = 40,500 – 1,000 = 39,500
Step 3: Visual Understanding (Diagram)
Here’s a simple diagram to understand:
BALANCE SHEET
LEFT SIDE (LIABILITIES)
---------------------------------
Creditors → 75,000
Bills Payable → 30,000
Loans → 75,000
Reserve Fund → 27,000
Capitals → 70,000
---------------------------------
TOTAL → 2,85,000
RIGHT SIDE (ASSETS)
---------------------------------
Cash → 4,500
Stock → 25,000
Debtors → 39,500
Other Assets → Remaining
---------------------------------
TOTAL → 2,85,000
Both sides must always be equal.
Step 4: Key Concepts You Should Understand
1. Capital vs Liability
Type
Meaning
Capital
Owner’s money
Liability
Outside loans
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Mrs. A’s Loan is a liability, NOT capital.
2. Reserve Fund
• Created from profits
• Not distributed to partners
• Used in future emergencies
3. Provision for Doubtful Debts
This is a smart accounting practice.
Instead of assuming all debtors will pay, we say:
“Some may not pay, so let’s be safe.”
4. Profit Sharing Ratio (3 : 2)
This ratio affects:
• Profit distribution
• Loss distribution
• Goodwill
• Revaluation
A gets 60%, B gets 40%
Step 5: What Questions Usually Come From This?
This type of question is usually asked before topics like:
Admission of a Partner
Retirement of a Partner
Dissolution
Because we need a starting balance sheet.
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Step 6: Important Observations
Let’s think like a smart student:
Observation 1: B has more capital (₹40,000) than A (₹30,000)
But profit ratio is 3:2 (A gets more profit)
This may require adjustment later.
Observation 2: Reserve Fund (₹27,000)
This belongs to partners and will be shared:
• A’s share = 27,000 × 3/5 = 16,200
• B’s share = 27,000 × 2/5 = 10,800
Observation 3: Workmen Compensation Fund
If no claim exists, it may be distributed.
Step 7: Why This Question Matters
This question builds your understanding of:
✔ Structure of a balance sheet
✔ Nature of liabilities and assets
✔ Adjustments before partnership changes
✔ Financial position of business
Final Summary (Easy Revision)
A and B are partners sharing profits in 3:2
Total balance sheet = ₹2,85,000
Liabilities include:
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• Creditors
• Loans
• Reserve
• Capital
Assets include:
• Cash
• Stock
• Debtors
Important points:
• Provision reduces debtor value
• Reserve belongs to partners
• Loans must be repaid
• Capital is owner’s investment
Conclusion
Think of this balance sheet like a financial photograph of the business. It tells us:
• Where money came from (liabilities + capital)
• Where money is used (assets)
Once you understand this clearly, any partnership question becomes easy, whether it’s
admission, retirement, or dissolution.
8. Differentiate between Dissolution of Partnership & Dissolution of Firm. Explain the
underlying principles of Garner vs. Murray decision on the dissolution of firm.
Ans: Part I: Dissolution of Partnership vs. Dissolution of Firm
1. Dissolution of Partnership
This happens when one or more partners leave or change their relationship, but the firm
itself continues.
• Example: A, B, and C are partners. If C retires, the partnership between A, B, and C is
dissolved. But A and B may continue the business as a firm.
• In short: The partnership agreement changes, but the firm is not closed.
2. Dissolution of Firm
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This is more serious. It means the entire firm is closed down. All assets are sold, liabilities
are paid, and the business ceases to exist.
• Example: A, B, and C are partners. If they decide to shut down the business
completely, that’s dissolution of the firm.
• In short: The business itself ends.
Key Differences
Basis
Dissolution of Partnership
Dissolution of Firm
Meaning
Change in relationship among
partners
Complete closure of the firm
Continuity
Firm continues with remaining
partners
Firm ceases to exist
Scope
Partial (only one partnership
dissolved)
Total (all partnerships
dissolved)
Assets &
Liabilities
No need to sell assets/liabilities
Assets sold, liabilities settled
Example
Retirement, admission, death of a
partner
Closing down the entire
business
Part II: Garner vs. Murray Decision
Background
When a firm dissolves, partners must settle accounts. Assets are sold, liabilities are paid,
and whatever remains is distributed among partners. But what if one partner cannot pay his
share of loss?
This exact situation happened in the famous case of Garner vs. Murray (1904) in England.
The Case
• Three partners: Garner, Murray, and another.
• Firm dissolved.
• After selling assets and paying liabilities, there was a loss.
• One partner became insolvent (couldn’t pay his share).
• Question: How should the loss be shared among the remaining partners?
The Decision
The court decided:
• Loss due to insolvency of a partner should be borne by the solvent partners in
proportion to their capital accounts, not their profit-sharing ratio.
Underlying Principles
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1. Normal losses (like trading losses) are shared in the profit-sharing ratio.
2. Loss due to insolvency of a partner is shared in the ratio of capital balances of
solvent partners.
3. This ensures fairness: the partner who invested more capital bears more risk.
Illustration
Suppose A, B, and C are partners.
• Capitals: A = ₹30,000, B = ₹20,000, C = ₹10,000
• Profit-sharing ratio = 2:2:1
• Firm dissolved. After settlement, C is insolvent and cannot pay his share of loss
(₹5,000).
According to Garner vs. Murray:
• Loss of ₹5,000 is shared between A and B in the ratio of their capitals (30,000:20,000
= 3:2).
• So, A bears ₹3,000 and B bears ₹2,000.
If it were shared in profit-sharing ratio, A and B would bear ₹2,000 each. But the court said
capital ratio is fairer.
Diagram: Garner vs. Murray Principle
Firm Dissolved
↓
Partner Insolvent
↓
Loss shared by solvent partners
↓
In proportion to their capital balances
Relatable Example
Think of three friends pooling money to start a food stall.
• Friend A invests ₹30,000, Friend B invests ₹20,000, Friend C invests ₹10,000.
• They agree to share profits equally.
• Business fails, and they owe money.
• Friend C has no money left.
Now, should A and B share C’s loss equally? The court said no. Since A invested more, he
should bear more of the risk. That’s the principle of Garner vs. Murray.
Conclusion
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• Dissolution of Partnership means only the relationship among partners changes; the
firm continues.
• Dissolution of Firm means the entire business is closed down.
• Garner vs. Murray principle: When a partner is insolvent at dissolution, the loss is
shared by solvent partners in proportion to their capital balances, not profit-sharing
ratio.
This ensures fairness and reflects the idea that those who invested more should bear more
of the burden when things go wrong.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
