Partnership Acccouting

3

Advanced Issues in Partnership

Accounts
Unit - 1 : Dissolution of Partnership Firms

Learning Objectives
After studying this unit, you will be able to:
 Go through the circumstances in which a partnership is dissolved.
 Understand that on dissolution of a partnership all assets are sold out and all
liabilities are discharged. Learn the accounting technique relating to disposal of
assets and payment of liabilities.
 Learn how to settle the partner's claims in case of surplus and how to raise money
from partners in case of deficit.
 Deal with piecemeal distribution to partners of amount realized from assets net of
liabilities.
1.1 Introduction
Apart from readjustment of rights of partners in the share of profit by way of change in the
profit sharing ratio and admission of a new partner or for retirement/death of a partner, another
important aspect of partnership accounts is how to close books of accounts in case of
dissolution. In this Unit, we shall discuss the circumstances leading to dissolution of a
partnership firm and accounting treatment necessary to close its books of accounts. Also we
shall discuss the special problems relating to insolvency of partners and settlement of
partnership's liabilities.
1.2 Circumstances Leading to Dissolution of Partnership

A partnership is dissolved or comes to an end on:
(a) the expiry of the term for which it was formed or the completion of the venture for which it
was entered into;
© The Institute of Chartered Accountants of India

3.2 Advanced Accounting
(b) death of a partner;

(c) insolvency of a partner;
(d) retirement of a partner;
However, the partners or remaining partners (in case of death, insolvency or retirement) may
continue to do the business. In such case there will be a new partnership but the firm will
continue. When the business comes to an end then only it will be said that the firm has been
dissolved.
A firm stands dissolved in the following cases:
(i) The partners agree that the firm should be dissolved;
(ii) All partners except one become insolvent;
(iii) The business becomes illegal;
(iv) In case of partnership at will, a partner gives notice of dissolution; and
(v) The court orders dissolution.
The court has the option to order dissolution of a firm in the following circumstances :
(a) Where a partner has become of unsound mind;
(b) Where a partner suffers from permanent incapacity;
(c) Where a partner is guilty of misconduct of the business;
(d) Where a partner persistently disregards the partnership agreement;
(e) Where a partner transfers his interest or share to a third party;
(f) Where the business cannot be carried on except at a loss; and
(g) Where it appears to be just and equitable.
1.3 Consequences of Dissolution

On the dissolution of a partnership, firstly, the assets of the firm, including goodwill, are
realized. Then the amount realized, is applied first towards repayment of liabilities to outsiders
and loans taken from partners; afterwards the capital contributed by partners is repaid and, if
there is still surplus, it is distributed among the partners in their profit-sharing ratio.
Conversely, after payment of liabilities of the firm and repayment of loans from partners, if the
assets of the firm left over are insufficient to repay in full the capital contributed by each
partner, the deficiency is borne by the partners in their profit-sharing ratio.
According to the provisions contained in section 48 of the Partnership Act, upon dissolution of
partnership, the mutual rights of the partners, unless otherwise agreed upon, are settled in the
following manner:
(a) Losses including deficiencies of capital are paid, first out of profits, next out of capital

Advanced Issues in Partnership Accounts 3.3
and, lastly, if necessary, by the partners individually in the proportion in which they are
entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital have to be applied in the following manner and order:
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm in respect of
advances as distinguished from capital;
(iii) in paying to each partner what is due to him on account of capital; and
(iv) the residue, if any, to be divided among the partners in the proportion in which they
are entitled to share profits.
The death or retirement of a partner would not result in the dissolution of the partnership.
1.3.1 Dissolution before expiry of a fixed term
A partner who, on admission, pays a premium to the other partners with a stipulation that the
firm will not be dissolved before the expiry of a certain term, will be entitled to a suitable
refund if the firm is dissolved before the term has expired.
No claim in this respect will arise if:
(1) the firm is dissolved due to the death of a partner;
(2) the dissolution is mainly due to the partner’s (claiming refund) own misconduct; and
(3) the dissolution is in pursuance of an agreement containing no provision for the return of
the premium or any part of it. [Section 50]
The amount to be repaid will be such as is reasonable having regard to the terms upon which
the admission was made and to the length of period agreed upon and that already expired.
Any amount that becomes due will be borne by other partners in their profit- sharing ratio.
1.4 Closing of Partnership Books on Dissolution

We will illustrate the required journal entries to be made for closing the books of a firm with the
example given below:
Balance Sheet of Fast and Quick as at Dec. 31, 2011
Liabilities ` Assets `
Sundry Creditors 20,000 Plant and Machinery 40,000
Fast's Loan 10,000 Patents 6,000
General Reserve 10,000 Stock 25,000
Capitals: Sundry Debtors 19,000
Fast 30,000 Less: Prov. for doubtful debts (1,000) 18,000

Quick 25,000 55,000 Cash 6,000

95,000 95,000
Fast and Quick share profits in the ratio of 3:2. On 1st January, 2012 the firm was dissolved.
Fast took over the patents at a valuation of ` 5,000. The other assets realised as under:
`
Goodwill 15,000
Plant and Machinery 30,000
Stock 22,000
Sundry Debtors 18,500
Total 85,500
The Sundry Creditors were paid off at a discount of 5%. The expense amounted to ` 3,500.
The steps to close the books are given below:
I. Open a Realisation Account and transfer all assets except cash in hand or at bank at
book values. Realisation Account is debited and the various assets are credited and thus
closed. It should be remembered that Sundry Debtors and Provisions for Bad Debts
Accounts are two separate accounts and the gross amount of debtors should be
transferred. In the above example the entry will be:
` `
Realisation Account Dr. 90,000
To Plant and Machinery Account 40,000
To Patents Account 6,000
To Stock Account 25,000
To Sundry Debtors 19,000
(Transfer of various assets to the debit side of
Realisation Account)
II. Transfer of liabilities to outsiders and provisions and reserves against assets (e.g.,
Provision for Doubtful Debts) to the credit side of Realisation account. The accounts of
the liabilities and provisions will be debited and thus closed. The entry should be at book
figures. The entry will be:
` `
Sundry Creditors Account Dr. 20,000
Provision for Doubtful Debts Account Dr. 1,000
To Realisation Account 21,000
(Transfer of liabilities to outsiders and provision
against debtors to Realisation Account)

Note: Accounts denoting accumulated losses or profits should not be transferred to the
Realisation Account.
III. (i) The Realisation Account should be credited with the actual amount realised by
sale of assets. This should take no note of the book figures. Of course, Cash (or
Bank) Account will be debited. Thus:
` `
Cash Account Dr. 85,500
(Amount realised by sale of various assets)
(ii) If a partner takes over an asset, his Capital Account should be debited and
Realisation Account credited with the value agreed upon, Thus:
` `
Fast’s Capital Account Dr. 5,000
(Patents taken over by Fast at ` 5,000)
IV. Expenses of dissolution or realisation of assets are debited to the Realisation Account
and credited to Cash Account. Thus
` `
To Cash Account 3,500
(Payment of Expenses)
V. (i) The actual amount paid to creditors should be debited to the Realisation Account
and Cash Account is credited:
` `
(Payment of Sundry Creditors ` 20,000 less 5% )
(ii) If any liability is taken over by a partner, his Capital Account should be credited
and Realisation Account debited with the amount agreed upon.
VI. At this stage, the Realisation Account will show profit or loss. If the debit side is bigger,
there is a loss; if the credit side is bigger, there is a profit. Profit or loss is transferred to
the Capital Accounts of partners in the profit sharing ratio. In case of profit, Realisation
Account is debited and Capital Accounts credited. The entry for loss is, naturally, reverse
of this entry. The Realisation Account in the example given above shows a loss of
` 1,000 (see account below).

` `
Fast’s Capital Account Dr. 600
Quick's Capital Account Dr. 400
(Transfer of loss to Capital Account in the ratio of 3:2)
VII. Partner's Loans if any, should now be paid. The entry is to debit the Loan Account and
credit Cash Account. Thus:
` `
Fast’s Loan Account Dr. 10,000
(Repayment of Fast’s Loan)
VIII. Any reserve of accumulated profit or loss lying in the books (as shown by the Balance
Sheet) should be transferred to the Capital Account in the profit sharing ratio. Thus:
` `
General Reserve Dr. 10,000
To Fast’s Capital Account 6,000
To Quick’s Capital Account 4,000
(General Reserve transferred to Capital Account in
the ratio of 3:2)
IX. At this stage the Capital Accounts of partners will show how much amount is due to them
or from them. The partner owing money to the firm will pay; Cash Account will be debited
and his Capital Account credited and thus closed. Money owing to a partner will be paid
to him; his Capital Account will be debited and the Cash Account credited. This will close
the Capital Accounts as well as the Cash Account. The entry in the above example is
seen in the Capital Accounts below:
` `
Fast’s Capital Account Dr. 30,400
Quick’s Capital Account Dr. 28,600
(Amount paid to partners on Capital Account)

Ledger Accounts
Plant and Machinery Account
2012 ` 2012 `
Jan. 1 To Balance b/d 40,000 Jan. 1 By Realisation A/c - Transfer 40,000
Patents Accounts
2012 ` 2012 `
Stock Account
2012 ` 2012 `
Sundry Debtors Account
2012 ` 2012 `
Provision for Doubtful Debts Account
2012 ` 2012 `
Jan. 1 To Realisation A/c Jan. 1 By Balance b/d 1,000
Transfer 1,000
Sundry Creditors Account
2012 ` 2012 `
Jan. 1 To Realisation A/c Jan. 1 By Balance b/d 20,000
Transfer 20,000
Fast's Loan Account
2012 ` 2012 `
Jan. 1 To Cash Account 10,000 Jan. 1 By Balance b/d 10,000
General Reserve Account
2012 ` 2012 `
Jan. 1 To Capital Accounts Jan. 1 By Balance b/d 10,000
Fast 6,000
Quick 4,000 10,000
10,000 10,000

Realisation Account
2012 ` 2012 `
Jan. To Sundry Assets Jan. By Sundry Creditors 20,000
Plant and 40,000 By Provision for 1,000
Machinery Doubtful Debts
Patents 6,000 By Cash Account- 85,500
Stock 25,000 assets realised
Sundry Debtors 19,000 By Fast's Capital
To Cash Account- Account- patents
Exp. 3,500 taken over 5,000
To Cash Account- By Loss to :
Creditors paid 19,000 Fast 600
Quick 400 1,000
1,12,500 1,12,500
Cash Account
2012 ` 2012 `
Jan. 1 To Balance b/d 6,000 Jan. 1 By Realisation A/c-Exp. 3,500
To Realisation b/d 85,500 Jan. 1 By Realisation A/c- 19,000
Creditors
Jan. 1 By Fast's Loan Account 10,000
Jan. 1 By Fast's Capital A/c 30,400
Jan. 1 By Quick's Capital A/c 28,600
91,500 91,500
Fast's Capital Account
2012 ` 2012 `
Jan. 1 To Realisation A/c- Patents 5,000 Jan. 1 By Balance b/d 30,000
To Realisation A/c-Loss 600 Jan. 1 By General Reserve 6,000
36,000 36,000
Quick's Capital Account
2012 ` 2012 `
Jan. 1 To Realisation A/c-loss 400 Jan. 1 By Balance b/d 25,000
To Cash Account 28,600 By General Reserve 4,000
29,000 29,000
Note :
(1) If any of the assets is taken over by a partner at a value mutually agreed to by the partners,

debit the Partner’s Capital Account and credit Realisation Account with the price of asset
taken over.
(2) Pay off the liabilities, crediting cash and debiting the liability accounts, the difference
between the book figure and the amount paid being transferred to the Realisation Account.
(3) Liabilities to outsiders may also be transferred to the Realisation Account. In that case, the
amount paid in respect of the liabilities in cash should be debited to the Realisation
Account, Cash Account being credited. If liability is taken over by a partner, Realisation
Account should be debited and the Partners’ Capital A/cs credited at the figure agreed
upon.
(4) The balance of the Realisation Account will represent either the profit or loss on realisation.
Divide it between the partners in the proportion in which they shared profits and losses. In
the case of a loss, credit Realisation Account and debit various partners’ Capital Accounts;
follow the opposite course in the case of a profit.
(5) Pay off the partners’ loans or advances which are separate from the capital (if any)
contributed by them, after setting off against them any debit balance in the capital account
of the concerned partner.
(6) The balance of the cash account at the end will be exactly equal to the balance of capital
account, provided they are in credit; credit cash and debit the partners’ capital account with
the amount payable to them to close their accounts.
If the capital account of a partner is in debit, after his share of loss or profit has been adjusted
therein, the firm will not have sufficient cash or assets to pay off the amounts due to the other
partners, until the amount is repaid by the partner whose account is in debit. If however, the partner
is insolvent, the amount will not be realised. In such a case, the deficiency may be borne by the
solvent partners in their profit-sharing ratio or according to the principle settled in the well known
case of Garner vs. Murray. In the latter case, the deficiency would be borne by the solvent partners
in proportion to their capitals and not in the proportion in which they share profits and losses.
1.5 Consequences of Insolvency of a Partner

If a partner goes insolvent then the following are the consequences:
1. The partner adjudicated as insolvent ceases to be a partner.
2. He ceases to be a partner on the date on which the order of adjudication is made.
3. The firm is dissolved on the date of the order of adjudication unless there is a contract to
the contrary.
4. The estate of the insolvent partner is not liable for any act of the firm after the date of the
order of adjudication, and
5. The firm cannot be held liable for any acts of the insolvent partner after the date of the
order of adjudication.

1.6 Loss Arising from Insolvency of a Partner

When a partner is unable to pay his debt due to the firm he is said to be insolvent and the
share of loss is to be borne by other solvent partners in accordance with the decision in the
English case of Garner vs. Murray.
According to this decision, solvent partners have to bear the loss due to insolvency of a
partner and have to categorically put that the normal loss on realisation of assets to be borne
by all partners (including insolvent partner) in the profit sharing ratio but a loss due to
insolvency of a partner has to be borne by the solvent partners in the capital ratio.
The determination of capital ratio for this has been explained below. The provisions of the
Indian Partnership Act are not contrary to Garner vs. Murray rule. However, if the partnership
deed provides for a specific method to be followed in case of insolvency of a partner, the
provisions as per deed should be applied.
Capital Ratio on Insolvency
 The partners are free to have either fixed or fluctuating capitals in the firm.
 If they are maintaining capitals at fixed amounts then all adjustments regarding their
share of profits, interest on capitals, drawings, interest on drawings, salary etc. are done
through Current Accounts, which may have debit or credit balances and insolvency loss
is distributed in the ratio of fixed capitals.
 But if capitals are not fixed and all transactions relating to drawings, profits, interest, etc.,
are passed through Capital Accounts then Balance Sheet of the business shall not
exhibit Current Accounts of the partners and capital ratio will be determined after
adjusting all the reserves and accumulated profits to the date of dissolution, all drawings
to the date of dissolution, all interest on capitals and on drawings to the date of
dissolution but before adjusting profit or loss on Realisation Account.
 If some partner is having a debit balance in his Capital Account and is not insolvent then
he cannot be called upon to bear loss on account of the insolvency of other partner.
Insolvency of all Partners
 When the liabilities of the firm cannot be paid in full out of the firm's assets as well as
personal assets of the partners, then all the partners of the firm are said to be insolvent.
Under such circumstances it is better not to transfer the amount of creditors to
Realisation Account.
 Creditors may be paid the amount available including the amount contributed by the
partners.
 The unsatisfied portion of creditor account is transferred to Capital Accounts of the
partners in the profit sharing ratio. Then Capital Accounts are closed. In doing so first
close the Partners’ Capital Account which is having the worst position. The last account
will be automatically closed.

Illustration 1
P, Q and R were partners sharing profits and losses in the ratio of 3 : 2 : 1, no partnership
salary or interest on capital being allowed. Their balance sheet on 30th June, 2012 is as
follows:
Fixed Capital Fixed assets :
P 20,000 Goodwill 40,000

Q 20,000 Freehold Property 8,000
R 10,000 50,000 Plant and Equipment 12,800
Current Accounts : Motor Vehicle 700
P 500 Current Assets
Q 9,000 9,500 Stock 3,900
Loan from P 8,000 Trade Debtors 2,000
Trade Creditors 12,400 Less : Provision (100) 1,900
Cash at Bank 200
Miscellaneous losses
R's Current Account 400
Profit and Loss Account 12,000
79,900 79,900
On 1st July, 2012 the partnership was dissolved. Motor Vehicle was taken over by Q at a
value of ` 500 but no cash passed specifically in respect of this transaction. Sale of other
assets realised the following amounts:
`
Goodwill nil
Freehold Property 7,000
Plant and Equipment 5,000
Stock 3,000
Trade Debtors 1,600
Trade Creditors were paid ` 11,700 in full settlement of their debts. The costs of dissolution
amounted to ` 1,500. The loan from P was repaid, P and Q were both fully solvent and able to
bring in any cash required but R was forced into bankruptcy and was only able to bring 1/3 of
the amount due.

You are required to show:

(a) Cash and Bank Account,
(b) Realisation Account, and
(c) Partners Fixed Capital Accounts (after transferring Current Accounts’ balances).
Solution
Cash / Bank Account
` `
To Balance b/d 200 By Realisation A/c-Creditors 11,700
To Realisation A/c- By Realisation A/c-Expenses 1,500
Freehold property 7,000 By P’s Loan A/c 8,000
Plant and Equipment 5,000 By P’s Capital A/c 14,200
Stock 3,000 By Q’s Capital A/c 24,200
Trade Debtors 1,600
To Capital Accounts:
P 25,500
Q 17,000
R 300 42,800
59,600 59,600
Realisation Account
` `
To Goodwill 40,000 By Trade Creditors 12,400
To Freehold Property 8,000 By Provision for Bad Debts 100
To Plant and Equipment 12,800 By Bank :
To Motor Vehicle 700 Freehold Property 7,000
To Stock 3,900 Plant and Equip. 5,000
To Sundry Debtors 2,000 Stock 3,000
To Bank (Creditors) 11,700 Debtors 1,600 16,600
To Bank (Expenses) 1,500 By Q (Car) 500
By Capital Accounts: (Loss)
P 25,500
Q 17,000
R 8,500 51,000
80,600 80,600

Partners’ Capital Accounts

P Q R P Q R
` ` ` ` ` `
 
To Current A/c 5,500 — 2,400 By Balance b/d 20,000 20,000 10,000
(Transfer)
To Realisation A/c 25,500 17,000 8,500 By Current A/c — 5,000 —
(Loss) (Transfer)
To Realisation A/c — 500 — By Bank - — 300
(Car) By Bank 25,500 17,000 -
To R's Capital A/c 300 300 — (realization
(Deficiency) loss)
To Bank 14,200 24,200 — By P & Q — — 600
(Deficiency)
45,500 42,000 10,900 45,500 42,000 10,900
Note:
1. P, Q and S will bring cash to make good their share of the loss on realization. In actual
practice they will not be bringing any cash; only a notional entry will be made.
2. On following Garner Vs. Murray rule, solvent partners P and Q have to bear the loss due
to insolvency of a partner R in their fixed capital ratio.
Illustration 2
Amal and Bimal are in equal partnership. Their Balance Sheet stood as under on 31st March,
2012 when the firm was dissolved:
` `
Creditors A/c 4,800 Plant & Machinery 2,500
Amal's Capital A/c 750 Furniture 500
Debtors 1,000
Stock 800
Cash 200
Bimal's drawings 550
5,550 5,550
Current account balances have been arrived after adjusting profit and loss account debit balance as follows:

` 6,000 - ` 500 = ` 5,500

` 2,000 + ` 400 = ` 2,400

` 9,000 - ` 4,000 = ` 5,000

The assets realised as under:

`
Plant & Machinery 1,250
Furniture 150
Debtors 400
Stock 500
The expenses of realisation amounted to ` 175. Amal's private estate is not sufficient even to
pay his private debts, whereas Bimal's private estate has a surplus of ` 200 only.
Show necessary ledger accounts to close the books of the firm.
Solution
In the books of M/s Amal and Bimal
Realisation Account
` `
To Sundry Assets : By Cash A/c :
Plant & Machinery 2,500 Plant & Machinery 1,250
Furniture 500 Furniture 150
Debtors 1,000 Debtors 400
Stock 800 Stock 500 2,300
Cash A/c-expenses 175 By Partners' Capital A/c
Loss on realisation (Bal.fig.)
Amal 1,337
Bimal 1,338 2,675
4,975 4,975
Cash Account
` `
March 31, 2012 March 31, 2012
To Balance b/d 200 By Realisation A/c- expenses 175
To Realisation A/c By Sundry Creditors A/c (Bal.fig.) 2,525
- Sale of sundry assets 2,300
To Bimal's Capital A/c 200
2,700 2,700

Sundry Creditors Account

` `
To Cash A/c 2,525 By Balance b/d 4,800
To Deficiency A/c-transfer (bal.fig.) 2,275
4,800 4,800
Partners' Capital Account
Amal Bimal Amal Bimal
` ` ` `
To Balance b/f — 550 By Balance b/f 750 —
To Realisation A/c By Cash A/c — 200
- loss 1,337 1,338 By Deficiency
A/c- transfer (bal.fig.) 587 1,688
1,337 1,888 1,337 1,888
Deficiency Account
` `
To Partners' Capital A/c By Sundry Creditors A/c 2,275
Amal 587
Bimal 1,688
2,275 2,275
Illustration 3
A, B, C and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their partnership on
31st March 2012 when their balance sheet was as under:
Creditors 15,700 Bank 535
Employees Provident Fund 6,300 Debtors 15,850
Capital Accounts :- Stock 25,200
A 40,000 Prepaid Expenses 800
B 20,000 60,000 Plant & Machinery 20,000
Patents 8,000
C’s Capital A/c 3,200
D’s Capital A/c 8,415
82,000 82,000
Following information is given to you :-
1. One of the creditors took some of the patents whose book value was ` 5,000 at a
valuation of ` 3,200. Balance of the creditors were paid at a discount of ` 400.
2 There was a joint life policy of ` 20,000 (not mentioned in the balance sheet) and this
was surrendered for ` 4,500.

3 The remaining assets were realised at the following values:- Debtors ` 10,800; Stock
` 15,600; Plant and Machinery ` 12,000; and Patents at 60% of their book-values.
Expenses of realisation amounted ` 1,500.
D became insolvent and a dividend of 25 paise in a rupee was received in respect of the firms
claim against his estate. Prepare necessary ledger accounts.
Solution
Realisation Account
` `
To Sundry Assets :- By Creditors 15,700
Debtors 15,850 By Employee’s Provident 6,300
Stock 25,200 Fund
Prepaid Expenses 800 By Bank A/c :-
Plant & Machinery 20,000 Joint Life Policy 4,500
Patents 8,000 69,850 Debtors 10,800
To Bank-Creditors: (` 15,700 – Stock 15,600
` 3,200-` 400 ) 12,100 Plant and Machinery 12,000
To Bank A/c Employee’s (P.F) 6,300 Patents
To Bank A/c (expenses) 1,500 60% of (` 8,000 –
` 5,000) 1,800 44,700
By Loss transferred to :-
A’s Capital A/c 9,220
B’s Capital A/c 6,915
D’s Capital A/c 2,305 23,050
89,750 89,750
Capital Accounts
A B C D A B C D
` ` ` ` ` ` ` `
To Bal. b/d — — 3,200 8,415 By Bal. b/d 40,000 20,000 — —
To Realisation By Bank
A/c 9,220 6,915 4,610 2,305 (Realisation 9,220 6,915 4,610 —
loss)
To D’s Capital By Bank
(Deficiency) 5,360 2,680 — — (Recovery) — — — 2,680
To Bank 34,640 17,320 — — By A’s Capital
2/3 — — — 5,360
By B’s Capital
1/3 — — — 2,680
By Bank A/c — 3,200 —
49,220 26,915 7,810 10,720 49,220 26,915 7,810 10,720

Bank Account
` `
To Balance b/d 535 By Realisation A/c 12,100
To Realisation A/c 44,700 By Realisation A/c 6,300
To A’s Capital A/c 9,220 By Realisation A/c 1,500
To B’s Capital A/c 6,915 By A’s Capital A/c 34,640
To D’s Capital A/c 2,680 By B’s Capital A/c 17,320
To C’s Capital A/c (4,610 + 7,810
3,200)
71,860 71,860
Working Note :-
D’s loss will be borne by A and B only as solvent partners having credit balance only has to
bear the loss on account of insolvency. C will bring his share of loss in cash.
Illustration 4
M/s X, Y and Z who were in partnership sharing profits and losses in the ratio of 2:2:1
respectively, had the following Balance Sheet as at December 31, 2012:
Liabilities ` ` Assets ` `
Capital : X 29,200 Fixed Assets 40,000
Y 10,800 Stock 25,000
Z 10,000 50,000 Book Debts 25,000
Z’s Loan 5,000 Less : Provision (5,000) 20,000
Loan from Mrs. X 10,000 Cash 1,000
Sundry Trade Creditors 25,000 Advance to Y 4,000
90,000 90,000
The firm was dissolved on the date mentioned above due to continued losses. After drawing
up the balance sheet given above, it was discovered that goods amounting to ` 4,000 have
been purchased in November, 2012 and had been received but the purchase was not
recorded in books.
Fixed assets realised ` 20,000; Stock ` 21,000 and Book Debt ` 20,500. Similarly, the
creditors allowed a discount of 2% on the average. The expenses of realisation come to
` 1,080. X agreed to take over the loan of Mrs. X. Y is insolvent, and his estate is unable to
contribute anything.
Give accounts to close the books; work according to the decision in Garner vs. Murray.

Solution
Realisation Account
` `
To Sundry By Provision for Doubtful Debts 5,000

Fixed Assets (transfer) 40,000 By Cash 61,500
(20,000+21,000+20,500)
Stock 25,000 By Sundry Trade Creditors
Book Debts 25,000 (Discount) 580
To Cash—Expenses 1,080 By Loss : X (2/5) 9,600
Y (2/5) 9,600
Z (1/5) 4,800 24,000
91,080 91,080
Sundry Trade Creditors
` `
To Realisation A/c – Discount By Balance b/d 25,000
@ 2% on ` 29,000 580 By Sundry Capital Accounts
To Cash 28,420 (Purchase omitted) 4,000
29,000 29,000
Z’s Loan Account
` `
To Cash Account 5,000 By Balance b/d 5,000

Mrs. X’s Loan Account
` `
To X’s Capital A/c - transfer 10,000 By Balance b/d 10,000

Cash Account
` `
To Balance b/d 1,000 By Sundry Trade Creditors 28,420
To Realisation A/c- By Realisation A/c - expenses 1,080
assets realised 61,500 By Z’s Loan 5,000
To X’s Capital A/c* 9,600 By X’s Capital A/c 34,300

To Z’s Capital A/c* 4,800 By Z’s Capital A/c 8,100

76,900 76,900
*X and Z bring these amounts to make good their share of the loss on realisation. In actual
practice they will not be bringing any cash; only a notional entry will be made.
Capital Accounts
X Y Z X Y Z
` ` ` ` ` `
To Sundry Trade By Balance b/d 29,200 10,800 10,000
Creditors- 1,600 1,600 800
omission
To Balance c/d 27,600 9,200 9,200
29,200 10,800 10,000 29,200 10,800 10,000
To Advance - 4,000 - By Balance b/d 27,600 9,200 9,200
To Realisation A/c- 9,600 9,600 4,800 By Mrs. X’s Loan 10,000 - -
loss
To Y’s Capital A/c 3,300 - 1,100 By Cash (Realisation 9,600 - 4,800
loss)
By X’s Capital A/c- 3,300
To Cash 34,300 - 8,100 By Z’s Capital A/c - 1,100 -
47,200 13,600 14,000 47,200 13,600 14,000
Note : Y’s deficiency comes to ` 4,400 (difference in the two sides of his Capital Account); this has
been debited to X and Z in the ratio of 27,600 : 9,200 i.e., capital standing up just before dissolution
but after correction of error committed while drawing up the accounts for 2012.
Illustration 5
‘Thin’, ‘Short’ and ‘Fat’ were in partnership sharing profits and losses in the ratio of 2:2:1.
On 30th September, 2012 their Balance Sheet was as follows :
Capital Accounts : Premises 50,000
Thin 80,000 Fixtures 1,25,000
Short 50,000 Plant 32,500
Fat 20,000 1,50,000 Stock 43,200
Current Accounts : Debtors 54,780
Thin 29,700
Short 11,300
Fat (Dr.) (14,500) 26,500
Sundry Creditors 84,650
Bank Overdraft 44,330
3,05,480 3,05,480

‘Thin’ decides to retire on 30th September, 2012 and as ‘Fat’ appears to be short of private
assets, ‘Short’ decides that he does not wish to take over Thin’s share of partnership, so all
three partners decide to dissolve the partnership with effect from 30th September, 2012. It
then transpires that ‘Fat’ has no private assets whatsoever.
The premises are sold for ` 60,000 and the plant for ` 1,07,500. The fixtures realize
` 20,000 and the stock is acquired by another firm at book value less 5%. Debtors realise
` 45,900. Realisation expenses amount to ` 4,500.
The bank overdraft is discharged and the creditors are also paid in full.
You are required to write up the following ledger accounts in the partnership books following
the rules in Garner vs. Murray:
(i) Realisation Account;
(ii) Partners’ Current Accounts;
(iii) Partners’ Capital Accounts showing the closing of the firm’s books.
Solution
Realisation Account
` `
To Premises 50,000 By Sundry Creditors 84,650
To Plant 1,25,000 By Bank :
To Fixtures 32,500 Premises 60,000
To Stock 43,200 Plant 1,07,500
To Debtors 54,780 Fixtures 20,000
To Bank (Creditors) 84,650 Stock 41,040
To Bank (Expenses) 4,500 Debtors 45,900 2,74,440
By Loss on Realisation
transferred to
Partners’ Current
A/cs
Thin 14,216
Short 14,216
Fat 7,108 35,540
3,94,630 3,94,630
Partners’ Current Accounts
Thin Short Fat Thin Short Fat
` ` ` ` ` `
To Balance b/d – – 14,500 By Balance b/d 29,700 11,300 –
To Realisation 14,216 14,216 7,108 By Capital A/c
To Capital A/c Transfer – 2,916 21,608

transfer 15,484 – –
29,700 14,216 21,608 29,700 14,216 21,608

Thin Short Fat Thin Short Fat
` ` ` ` ` `
To Current A/c – 2,916 21,608 By Balance b/d 80,000 50,000 20,000
To Fat’s Capital A/c By Current A/c
Deficiency in the (transfer) 15,484 – –
ratio of 8:5 990 618 – By Bank 14,216 14,216
(Realisation loss)
To Bank 1,08,710 60,682 – By Thin & Short
Capital A/cs 1,608
1,09,700 64,216 21,608 1,09,700 64,216 21,608
Working Notes:
(i) Bank Account
` `
To Realisation A/c 2,74,440 By Balance b/d 44,330
To Thin’s Capital A/c 14,216 By Realisation A/c (Creditors) 84,650
To Short’s Capital A/c 14,216 By Realisation A/c (Expenses) 4,500
By Thin’s Capital A/c 1,08,710
By Short’s Capital A/c 60,682
3,02,872 3,02,872
(ii) Fat’s deficiency has been by borne Thin & Short in the ratio of their fixed capitals i.e., 8:5
following the rule in Garner vs. Murray.
1.7 Piecemeal Payments

Generally, the assets sold upon dissolution of partnership are realised only in small
instalments over a period of time. In such circumstances, the choice is either to distribute
whatever is collected or to wait till the whole amount is collected. Usually, the first course is
adopted. In order to ensure that the distribution of cash among the partners is in proportion to
their interest in the partnership concern either of the two methods described below may be
followed for determining the order in which the payment should be made.

1.7.1 Maximum Loss Method

Each instalment realised is considered to be the final payment i.e., outstanding assets and
claims are considered worthless and partners’ accounts are adjusted on that basis each time
when a distribution is made, following either Garner vs. Murray Rule or the profit-sharing ratio
rule.
Illustration 6
The following is the Balance Sheet of A, B, C on 31st December, 2012 when they decided to
dissolve the partnership:
Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
Capital Accounts :
A 15,000
B 18,000
C 9,000
49,000 49,000
The assets realised the following sums in instalments:
I 1,000
II 3,000
III 3,900
IV 6,000
V 20,100
34,000
The expenses of realisation were expected to be ` 500 but ultimately amounted to ` 400 only.
Show how at each stage the cash received should be distributed between partners. They
share profits in the ratio of 2:2:1.
Solution
First of all, the following table will be constructed to show the amounts available for
distribution among the various interests:
Statement showing Realisation and Distribution of Cash Payments
Realisation Creditors Partners’ Partners’
Loan Capitals
` ` ` `
1. After taking into account 1,000 1,000 - -

cash balance and amount

set aside for expenses
2. 3,000 1,000 2,000 -
3. 3,900 - 3,000 900
4. 6,000 - - 6,000
Including saving in expenses 20,100 - - 20,100
34,000 2,000 5,000 27,000
To ascertain the amount distributable out of each instalment realised among the partners, the
following table will be constructed:
Statement of Distribution on Capital Account
(1) Calculation to determine the mode of distribution of ` 900
Total A B C
` ` ` `
Balance 42,000 15,000 18,000 9,000
Less: Possible loss, should remaining
assets prove to be worthless (41,100) (16,440) (16,440) (8,220)
+ 900 – 1,440 + 1,560 + 780
Deficiency of A’s capital written off
against those of B and C in the ratio of
their capital, 18,000 : 9,000 (Garner vs. (960) (480)
Murray)
Manner in which the first ` 900
should be distributed + 600 + 300
(2) Distribution of ` 6,000
Balance after making payment of
amount shown in step (1) 41,100 15,000 17,400 8,700
Less : Possible Loss assuming remaining
asset to be valueless (35,100) (14,040) (14,040) (7,020)
Balance available and to be distributed 6,000 960 3,360 1,680
(3) Distribution of ` 20,100
Balance after making payment of

amount shown in step (2) 35,100 14,040 14,040 7,020

Less : Possible loss, assuming remaining
assets to be valueless (15,000) (6,000) (6,000) (3,000)
Manner of distribution of ` 20,100 20,100 8,040 8,040 4,020
Summary :
Balance 42,000 15,000 18,000 9,000
Total amounts paid 27,000 9,000 12,000 6,000
Loss 15,000 6,000 6,000 3,000
1.7.2 Highest Relative Capital Method
According to this method, the partner who has the higher relative capital, that is, whose capital
is greater in proportion to his profit-sharing ratio, is first paid off. This method is also called as
proportionate capital method.
For determining the amount by which the capital of each partner is in excess of his relative
capital, partners’ capitals are first divided by figures that are in proportion to their profit-
sharing ratio; the smallest quotient will indicate the basic capital. Having ascertained the
partner who has the smallest basic capital, the amount of capital of other partners
proportionate to the profit-sharing ratio of the basic capital is calculated. These may be called
as their hypothetical capitals. The amount of hypothetical capital of each partner is then
subtracted from the amount of his actual capital; the resultant figure will be the amount of
excess capital held by him. By repeating the process once or twice, as may be necessary
between the partners having excess capital, the amount by which the capital of each partner is
in excess will be ascertained. The partner with the largest excess capital will be paid off first,
followed by payment to the other or others who rank next to him until the capitals of partners
are reduced to their profit-sharing ratio.
The illustration given above is now worked out according to this method.
A B C
Capital ` 15,000 18,000 9,000
Profit-sharing ratio 2 2 1
Capital divided by the profit-sharing ratio 7,500 9,000 9,000
Proportionate Capital of B and C, taking
A’s capital as the base ` 15,000 15,000 7,500
Excess of actual over proportionate capital ` nil 3,000 1,500
This indicates that A should not get anything till ` 3,000 is paid to B and ` 1,500 is paid to C.
Since capital of B and C are already according to their mutual profit-sharing ratio (2:1), they
will share the available cash in this ratio.

After paying off creditors and A’s loan, the available amount will be distributed as below in this
method:
Total A B C
` ` `
Third Instalment 900 - 600 300
Fourth Instalment (i) 3,600 - 2,400 1,200
(ii) 2,400 960 960 480
Fifth Instalment 20,100 8,040 8,040 4,020
Total 27,000 9,000 12,000 6,000
Total payment made to each partner will, of course be same under both the methods.
Illustration 7
The partners A, B and C have called you to assist them in winding up the affairs of their
partnership on 30th June, 2012. Their Balance Sheet as on that date is given below :
Sundry Creditors 17,000 Cash at Bank 6,000
Capital Accounts : Sundry Debtors 22,000
A 67,000 Stock in trade 14,000
B 45,000 Plant and Equipment 99,000
C 31,500 Loan-A 12,000
Loan-B 7,500
1,60,500 1,60,500
(1) The partners share profit and losses in the ratio of 5:3:2
(2) Cash is distributed to the partners at the end of each month
(3) A summary of liquidation transactions are as follows:
July 2012
` 16,500 – collected from Debtors; balance is uncollectable.
` 10,000 – received from sale of entire stock.
` 1,000 – liquidation expenses paid.
` 8,000 – cash retained in the business at the end of the month.
August 2012
` 1,500 – liquidation expenses paid. As part payment of his Capital, C accepted a
piece of equipment for ` 10,000 (book value ` 4,000).
` 2,500 – cash retained in the business at the end of the month.

September 2012
` 75,000 – received on sale of remaining plant and equipment.
` 1,000 – liquidation expenses paid. No cash retained in the business.
Required : Prepare a schedule of cash payments as of September 30, showing how the cash
was distributed.
Solution
Statement showing distribution of cash
Creditors Capitals
` ` A (` ) B (` ) C (` )
Balance Due after loan (W.N.(i)) 17,000 55,000 37,500 31,500
July
Balance available 6,000
Realisation less expenses
and cash retained 17,500
Amount available and paid 23,500 17,000 - - 6,500
Balance due — 55,000 37,500 25,000
August
Opening balance 8,000
Expenses paid and
balance carried forward 4,000
Available for distribution 4,000
Cash paid to ‘B’ and Equipment
given to C. — 4,000 10,000
(Excess paid to ‘C’ ` 7,333) 55,000 33,500 15,000
September
Opening balance 2,500
Amount realised less expenses 74,000
Amount paid to partners 76,500 41,500 25,400 9,600
13,500 8,100 5,400

Working Note:
(i) Highest Relative Capital Basis
A B C
` ` `
Scheme of payment for July
Balance of Capital Accounts 67,000 45,000 31,500
Less : Loans (12,000) (7,500) —
A 55,000 37,500 31,500
Profit sharing ratio 5 3 2
Capital Profit sharing ratio 11,000 12,500 15,750
Capital in profit sharing ratio, taking A’s capital as
base B 55,000 33,000 22,000
Excess of C’s Capital and B’s Capital (A-B) 4,500 9,500
Profit sharing ratio 3 2
Capital Profit sharing ratio 1,500 4,750
Capital in profit sharing
ratio taking B’s Capital as base 4,500 3,000
Excess of C’s Capital over B 6,500
(ii) Scheme of distribution of available cash:
A B C
` ` `
Scheme of payment for September
Balance of Capital Accounts (A) 55,000 33,500 15,000
Profit sharing ratio 5 3 2
Capital/Profit sharing ratio 11,000 11,167 7,500
Capital in profit sharing ratio taking C’s
capital as base (B) 37,500 22,500 15,000
Excess of A’s capital and B’s capital (A-B) 17,500 11,000 -
Profit sharing ratio 5 3
Capital in profit sharing ratio 3,500 3,667
Capital in profit sharing ratio taking A’s
capital as base 17,500 10,500 -
Excess of B’s capital over A’s capital  500 

Payment ` 500 (C) - (500) -

Balance of Excess 17,500 10,500
Payment ` 28,000 (D) (17,500) (10,500) -
Balance [A-C-D] 37,500 22,500 15,000
Payment (` 76,500 – ` 28,500) ` 48,000 (D) (24,000) (14,400) (9,600)
Loss 13,500 8,100 5,400
Total Payment ` 76,500 [A+C+D] 41,500 25,400 9,600
Illustration 8
The firm of LMS was dissolved on 31.3.2012, at which date its Balance Sheet stood as
follows:
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital
L 15,00,000
M 10,00,000
S 5,00,000
47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the
assets and distribute the cash after discharge of liabilities. Their fees which include all
expenses is fixed at ` 1,00,000. No loss is expected on realisation since fixed assets include
valuable land and building.
Realisations are:
S.No. Amount in `
1 5,00,000 (including cash and bank
2 15,00,000
3 15,00,000
4 30,00,000
5 30,00,000
The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital
Method’. You are required to prepare a statement showing distribution of cash with necessary
workings.

Solution
In the Books of M/s LMS
Statement of Piecemeal Distribution (Under
Higher Relative Capital method)
Particulars Amount Creditors Bank L’s loan Capital A/cs
Available Loan L M S
` ` ` ` ` ` `
Balance due 2,00,000 5,00,000 10,00,000 15,00,000 10,00,000 5,00,000
1st Instalment (including
cash and bank balances) 5,00,000
Less: Liquidator’s Expenses
and fee (1,00,000)
4,00,000
Less: Payment to Creditors
and repayment of Bank
Loan in the ratio of 2:5 (4,00,000) (1,14,286) (2,85,714) – – – –
Balance Due – 85,714 2,14,286 10,00,000 15,00,000 10,00,000 5,00,000
2nd Instalment 15,00,000
Less: Payment to Creditors
and repayment of bank loan in
full settlement (3,00,000) (85,714) (2,14,286) – – – –
Balance Due 12,00,000 Nil Nil 10,00,000 15,00,000 10,00,000 5,00,000
Less: Repayment of L’s Loan (10,00,000) (10,00,000) – – –
Balance Due 2,00,000 - 15,00,000 10,00,000 5,00,000
Less: Payment to Mr. L
towards relative higher capital
(W.N. 1) (2,00,000) (2,00,000) – –
Balance Due Nil Nil 13,00,000 10,00,000 5,00,000
3rd Instalment 15,00,000
Less: Payment to Mr. L
towards higher relative capital
(W.N. 2) (3,00,000) (3,00,000) – –

Balance Due 12,00,000 10,00,000 10,00,000 5,00,000

Less: Payment to Mr. L & Mr. M
towards excess capital (W.N.
1&2)
(10,00,000) (5,00,000) (5,00,000) –
Balance Due 2,00,000 5,00,000 5,00,000 5,00,000
Less: Payment to all the partners
equally (2,00,000) (66,667) (66,667) (66,666)
Balance due Nil 4,33,333 4,33,333 4,33,334
4th Instalment 30,00,000
Less: Payment to all the partners
equally (30,00,000) (10,00,000) (10,00,000) (10,00,000)
Realisation profit credited to
Partners 5,66,667 5,66,667 5,66,666
5th Instalment 30,00,000
Less: payment to all partners
equally (30,00,000) 10,00,000 10,00,000 10,00,000
Realisation profit credited to
partners 15,66,667 15,66,667 15,66,666
Working Notes:
(i) Scheme of payment of surplus amount of ` 2,00,000 out of second Instalment:
Capital A/cs
L M S
` ` `
Balance (i) 15,00,000 10,00,000 5,00,000
Profit sharing ratio (ii) 1 1 1
Capital taking S’s Capital (iii) 5,00,000 5,00,000 5,00,000
Excess Capital (iv) = (i) – (iii) 10,00,000 5,00,000
Profit Sharing Ratio 1 1
Excess capital taking
M’s Excess Capital as base (v) 5,00,000 5,00,000
Higher Relative Excess (iv) – (iv) 5,00,000
So, Mr. L should get ` 5,00,000 first which will bring down his capital account balance
from ` 15,00,000 to ` 10,00,000. Accordingly, surplus amounting to ` 2,00,000 will be
paid to Mr. L towards higher relative capital.

(ii) Scheme of payment of ` 15,00,000 realised in 3rd Instalment:

– Payment of ` 3,00,000 will be made to Mr. L to discharge higher relative capital.
This makes the higher capital of both Mr. L and Mr. M ` 5,00,000 as compared to
capital of Mr. S.
– Payment of ` 5,00,000 each of Mr. L & Mr. M to discharge the higher capital.
– Balance ` 2,00,000 equally to L, M and S, i.e., ` 66,667 ` 66,667 and ` 66,666
respectively.
Illustration 9
Daksh Associates is a reputed firm. On account of certain misunderstanding between the
partners, it was decided to dissolve the firm as on 31st December, 2011. Their Balance Sheet
as on 31st December, 2011 was follows:
Capitals: Land and Buildings 7,00,000
Daksh 3,00,000 Other Fixed Assets 3,00,000
Yash 2,00,000 Stock in Trade 2,00,000
Siddhart (Minor) 1,00,000 Debtors 4,00,000
6,00,000 Bills Receivable 1,50,000
Trade Loans 3,00,000 Goodwill 30,000
Bank Overdraft 3,00,000 Cash 20,000
Other Loans 2,00,000
Creditors 2,00,000
Siddhart’s Loan 2,00,000
18,00,000 18,00,000
It was decided that Mr. Daksh shall be in-charge of Realisation. He shall set apart ` 10,000
towards expenses. He shall be paid a remuneration of 5 percent on the amounts distributed to
the partners towards their contribution other than loans. Assets realized are as under:
`
1-1-2012 Debtors 3,50,000
15-1-2012 Fixed Assets 4,00,000
1-2-2012 Debtors 50,000
15-2-2012 Bills Receivable 1,40,000
1-3-2012 Fixed Assets 50,000
15-3-2012 Land and Buildings 8,00,000

Prepare a statement showing how the money received on various dates will be distributed
assuming:
(a) The actual expenses of realization amounted to ` 20,005.
(b) The firm is solvent.
(c) The profit sharing ratio was as under:
Profit Loss
Daksh 2 1
Yash 2 1
Siddhart 1 Nil
5 2
(d) The final dissolution is made on 15th March, 2012

Solution
It is assumed that trade loans, bank overdraft, other loans and creditors have equal priority at the time of payment. Therefore, they
all have been paid in the ratio of their dues outstanding.
Particulars Trade Bank Other Creditors Siddhart’s Daksh’s Yash’s Siddhart’s
Loans Overdraft Loans Loan Capital Capital Capital
` ` ` ` ` ` ` `
Amount due 3,00,000 3,00,000 2,00,000 2,00,000 2,00,000 3,00,000 2,00,000 1,00,000
Cash in hand 20,000
Less: Amount kept for
realization expenses (10,000)
10,000

Less: Distributed among
outsiders (3:3:2:2) (10,000) (3,000) (3,000) (2,000) (2,000) - - - -
Balance Due Nil 2,97,000 2,97,000 1,98,000 1,98,000 2,00,000 3,00,000 2,00,000 1,00,000
Debtors realised on 1-1-2012 3,50,000
outsiders (3:3:2:2) (3,50,000) (1,05,000) (1,05,000) (70,000) (70,000) - - - -
Balance Due Nil 1,92,000 1,92,000 1,28,000 1,28,000 2,00,000 3,00,000 2,00,000 1,00,000
Fixed Assets realized on
15-1-2012 4,00,000
outsiders (3:3:2:2) (4,00,000) (1,20,000) (1,20,000) (80,000) (80,000) - - - -
Advanced Issues in Partnership Accounts
Balance Due Nil 72,000 72,000 48,000 48,000 2,00,000 3,00,000 2,00,000 1,00,000
Debtors realized on 1-2-2012 50,000
3.33
outsiders (3:3:2:2) (50,000) (15,000) (15,000) (10,000) (10,000) - - - -
3.34
Balance Due Nil 57,000 57,000 38,000 38,000 2,00,000 3,00,000 2,00,000 1,00,000
Bills Receivable realised on 15-
2-2012 1,40,000
outsiders (3:3:2:2) (1,40,000) (42,000) (42,000) (28,000) (28,000) - - - -
Balance Due Nil 15,000 15,000 10,000 10,000 2,00,000 3,00,000 2,00,000 1,00,000
Fixed Assets realized on 1-3-
2012 50,000
Advanced Accounting
outsiders (3:3:2:2) (50,000) (15,000) (15,000) (10,000) (10,000) - - - -

Balance Due Nil - - - - 2,00,000 3,00,000 2,00,000 1,00,000

Land and Building realised on 8,00,000
15-3-2012
Less: Additional payment of
realization expenses
(20,005 – 10,000) (10,005)
7,89,995
Less: Payment of Siddhart’s
Loan (2,00,000) (2,00,000) - - -
Amount available for partners’
Capital 5,89,995 - 3,00,000 2,00,000 1,00,000
Less: Daksh’s Commission
5
(i.e. 5,89,995´ )
105
(28,095)
5,61,900
Less: Siddhart’s Capital is paid
first because he will not share
any loss on account of being
minor partner (1,00,000) (1,00,000)
4,61,900 3,00,000 2,00,000 -
Less: Paid to Daksh to make his
capital equal to that of Yash (1,00,000) (1,00,000)

3,61,900 2,00,000 2,00,000 -
Less: Distributed equally
between Daksh and Yash (3,61,900) (1,80,950) (1,80,950)
Balance Due 19,050 19,050 Nil*
*Siddhart will get 1/5 share (i.e., share of profit) of what remains after paying ` 19,050 to each Daksh and Yash out of the proceeds
of stock-in trade. If stock does not realize any amount, then amount unpaid to Daksh and Yash will become loss on realization.
Siddhart has been paid first because he is not to share any loss on realization.
Advanced Issues in Partnership Accounts
3.35
1.8 Issues Related to Accounting in Limited Liability Partnerships

The Limited Liability Partnerships (LLPs) in India were introduced by Limited Liability
Partnership Act, 2008 which lay down the law for the formation and regulation of Limited
Liability Partnerships.
Definitions :
Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines the following
terms as:
"limited liability partnership" means a partnership formed and registered under this Act;
"limited liability partnership agreement" means any written agreement between the partners of
the limited liability partnership or between the limited liability partnership and its partners which
determines the mutual rights and duties of the partners and their rights and duties in relation to
that limited liability partnership;
"foreign limited liability partnership" means a limited liability partnership formed,
incorporated or registered outside India which establishes a place of business within India.
"business" includes every trade, profession, service and occupation;
"designated partner" means any partner designated as such pursuant to section 7 of the
Act;
"partner", in relation to a limited liability partnership, means any person who becomes a partner
in the limited liability partnership in accordance with the limited liability partnership agreement;
Nature of Limited Liability Partnership
(1) A limited liability partnership is a body corporate formed and incorporated under this Act
and is a legal entity separate from that of its partners.
(2) A limited liability partnership shall have perpetual succession.
(3) Any change in the partners of a limited liability partnership shall not affect the existence,
rights or liabilities of the limited liability partnership.
Non-applicability of the lndian Partnership Act, 1932
Save as otherwise provided, the provisions of the Indian Partnership Act, 1932 shall not apply
to a limited liability partnership.
Minimum number of partners
As per section 5 of the LLP Act, any individual or body corporate may be a partner in a limited
liability partnership:
Provided that an individual shall not be capable of becoming a partner of a limited liability
partnership, if-

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending
As per section 6 of the LLP Act, every limited liability partnership shall have at least two
partners.
If at any time the number of partners of a limited liability partnership is reduced below two and
the limited liability partnership carries on business for more than six months while the number is
so reduced, the person, who is the only partner of the limited liability partnership during the
time that it so carries on business after those six months and has the knowledge of the fact that
it is carrying on business with him alone, shall be liable personally for the obligations of the
limited liability partnership incurred during that period.
Designated partners
As per Section 7 of the LLP Act, every limited liability partnership shall have at least two
designated partners who are individuals and at least one of them shall be a resident in India:
Provided that in case of a limited liability partnership in which all the partners are bodies
corporate or in which one or more partners are individuals and bodies corporate, at least two
individuals who are partners of such limited liability partnership or nominees of such bodies
corporate shall act as designated partners.
Explanation.-For the purposes of this section, the term "resident in India" means a person who has
stayed in India for a period of not less 182 days during the immediately preceding one year.
Subject to the provisions of sub-section (1),
(1) if the incorporation document-
(a) specifies who are to be designated partners, such persons shall be designated
partners on incorporation; or
(b) states that each of the partners from time to time of limited liability partnership is to
be designated partner, every such partner shall be a designated partner;
(2) any partner may become a designated partner by and in accordance with the limited
liability partnership agreement and a partner may cease to be a designated partner in
accordance with limited liability partnership agreement.
(3) An individual shall not become a designated partner in any limited liability partnership
unless he has given his prior consent to act as such to the limited liability partnership in
such form and manner as may be prescribed.

(4) Every limited liability partnership shall file with the registrar the particulars of every
individual who has given his consent to act as designated partner in such form and
manner as may be prescribed within thirty days of his appointment.
(5) An individual eligible to be a designated partner shall satisfy such conditions and
requirements as may be prescribed.
Liabilities of designated partners
As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated
partner shall be-
(a) responsible for the doing of all acts, matters and things as are required to be done by the
limited liability partnership in respect of compliance of the provisions of this Act including
filing of any document, return, statement and the like report pursuant to the provisions of
this Act and as may be specified in the limited liability partnership agreement; and .
(b) liable to all penalties imposed on the limited liability partnership for any contravention of
those provisions.
Changes in designated partners
A limited liability partnership may appoint a designated partner within thirty days of a vacancy
arising for any reason and provisions of sub-section (4) and sub-section (5) of section 7 shall
apply in respect of such new designated partner:
Provided that if no designated partner is appointed, or if at any time there is only one
designated partner, each partner shall be deemed to be a designated partner.
Distinction between an ordinary partnership firm and an LLP
Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership Act 1932 The Limited Liability
Partnerships Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement Created by Law
4 Body Corporate No Yes
5 Separate Legal Entity No Yes
6 Perpetual Succession Partnerships do not have It has perpetual
perpetual succession succession and individual
partners may come and
go
7 Number of Partners Minimum 2 and Maximum Minimum 2 but no
20 (subject to 10 for banks) maximum limit

8 Ownership of Assets Firm cannot own any assets. The LLP as an

The partners own the assets independent entity can
of the firm own assets
9 Liability of Partners / Unlimited: Partners are Limited to the extent of
Members severally and jointly liable their contribution towards
for actions of other partners LLP except in case of
and the firm and their intentional fraud or
liability extends to personal wrongful act of omission
assets or commission by a
partner.
10 Principal Agent Partners are the agents of Partners are agents of
Relationship the firm and of each other the firm only and not of
other partners
Formation of LLP
Two or more persons associated for the purpose of carrying on a lawful business with a view
to earn profits may subscribe their names to an incorporation document and file the same with
the Registrar of the state in which the Registered Office of the LLP is to be situated, in such
manner with such fees as may be prescribed along with a statement in the prescribed form
made by an advocate, a company secretary or a chartered accountant or a cost accountant
that all the requirements of the LLP Act 2008 and the rules made there under have been
complied with.
Limitation of Liability of an LLP and its partners
 Under section 27 (3) of the LLP Act, 2008 an obligation of an LLP arising out of a
contract or otherwise, shall be solely the obligation of the LLP;
 The Liabilities of an LLP shall be met out of the properties of the LLP;
 Under section 28 (1) a partner is not personally liable, directly or indirectly, for an
obligation referred to in Section 27 (3) above, solely by reason of being a partner in the
LLP;
 Section 27 (1) states that an LLP is not bound by anything done by a partner in dealing
with a person, if:
 The partner does not have the authority to act on behalf of the LLP in doing a
particular act; and
 The other person knows that the partner has no authority or does not know or
believe him to be a partner in the LLP
 Under section 30 (1) the liability of the LLP and the partners perpetrating fraudulent
dealings shall be unlimited for all or any of the debts or other liabilities of the LLP.

Financial Disclosures & Returns

Under section 34 (1) every LLP shall maintain such proper books of accounts as may be
prescribed relating to its affairs for each year of its existence on cash basis or accrual basis
and according to the double entry system of accounting and shall maintain the same at its
registered office for such period as may be prescribed;
Section 34 (2): Every LLP shall within six months of the end of each financial year prepare a
Statement of Account and Solvency for the said financial year as at the last day of the said
financial year, in such form as may be prescribed, and such statement shall be signed by the
designated partners of the LLP;
Section 34 (3): Every LLP shall file within the prescribed time, the Statement of Account and
Solvency with the Registrar every year in such form and manner and accompanied by such
fee as may be prescribed;
The accounts of an LLP must be audited in accordance with such rules as may be prescribed.
Under Section 35 (1) of the LLP Act every LLP is required to file an Annual Return which is
duly authenticated with the registrar within sixty days of the closure of its financial year in such
form and manner and with such fees as may be prescribed.
Assignment and Transfer of Partnership Rights
The rights of a partner to the share of profits and losses of an LLP and to receive distribution
in accordance with the LLP Agreement are transferable wholly or in part;
The transfer of any right by a partner as above does not by itself cause the disassociation of
the partner or a dissolution or winding up of the LLP;
Similarly the transfer of the right as above does not entitle the transferee to participate in the
management or the conduct of activities of the LLP, or give access to any information
concerning the transactions of the LLP.
Conversion of firm into Limited Liability Partnership
Section 55 of LLP Act: A firm may convert into a LLP in accordance with the provisions of the
Act and the Second Schedule to the Act.
Section 56 of LLP Act: A private limited company may convert into an LLP in accordance with
the provisions of the Act and the Third Schedule to the Act.
Section 57 of LLP Act: An unlisted public limited company may convert into an LLP in
accordance with the provisions of the Act and the Fourth Schedule to the Act.
Winding up and Dissolution
 Under section 63 of the LLP Act, 2008 an LLP may be wound up voluntarily or by the
Tribunal and such LLP so wound up may be dissolved
 Under section 64 and LLP may be wound up by the Tribunal:

 If the LLP decides that it should be wound up by the Tribunal;

 If for a period of more than six months, the number of partners of the LLP is
reduced below two;
 If the LLP is unable to pay its debts;
 If the LLP has acted against the interests of the integrity and sovereignty of India,
the security of the state or public order;
 If the LLP has defaulted in the filing of the Statement of Account and Solvency with
the Registrar for five consecutive financial years;
 If the Tribunal is of the opinion that it is just and equitable that the LLP be wound
up.
Summary
 Reasons for which a partnership could be dissolved are
 expiry of term for which its was formed
 death of a partner
 insolvency of a partner
 retirement of a partner.
 Reasons when a firm stands dissolved
 when partners mutually decide to dissolve
 partners except one becomes insolvent
 business becomes illegal
 if partnership is at will any partner can give notice for dissolution
 Court orders.
 On dissolution assets are realized and all liabilities are paid off
(if any liability remains unpaid then it is to be realized from partners in their profit sharing
ratio).
 Piecemeal distribution involves either of two methods
 Maximum loss method
 Highest relative capital method.

Unit – 2 : Amalgamation, Conversion and Sale of Partnership Firms

Learning Objectives
After studying this unit, you will be able to :
 Understand the procedure for amalgamation of partnership firms.
 Learn the accounting treatment when a partnership firm is converted in the form of a
company.
 Distribute the shares received as purchase consideration among the partners.
2.1 Amalgamation of Partnership Firms

When two or more partnership firms are amalgamated, the books of old firm are closed and
books of the new firm are opened.
The accounting procedures for the same are:
2.1.1 Closing the books of old firm
(a) Each firm should prepare a Revaluation Account relating to its own assets and liabilities
and transfer the balance to the partners’ capital accounts in the profit-sharing ratio.
(b) Entries for raising goodwill should be passed.
(c) Assets and liabilities not taken over by the new firm should be transferred to the
capital accounts of partners in the ratio of their capitals.
(d) The new firm should be debited with the difference between the value of assets and
liabilities taken over by it; the assets should be credited and liabilities debited.
(e) Partners’ capital accounts should be transferred to the new firm’s account;
2.1.2 Opening the books of the new firm
Debit assets taken out at the agreed values
Credit the liabilities taken over, and
Credit individual partner’s capital accounts with the closing balances in the erstwhile firm.
When one firm is merged with another existing firm, entries will be in the pattern of winding up
in the books of the firm which has ceased to exist. The other firm will record the transaction as
that of a business purchase.
Illustration 1
B and S are partners of S & Co. sharing profits and losses in the ratio of 3:1. S and T are
partners of T & Co. sharing profits and losses in the ratio of 2:1.
On 31st October, 2012, they decided to amalgamate and form a new firm M/s. BST & Co.

wherein B, S and T would be partners sharing profits and losses in the ratio of 3:2:1.
Their balance sheets on that date were as under:
Liabilities S & Co. T & Co. Assets S & Co. T & Co.
` ` ` `
Due to X & Co. 40,000  Cash in hand 10,000 5,000
Due to S & Co.  50,000 Cash at bank 15,000 20,000
Other Creditors 60,000 58,000 Due from T & Co. 50,000 
Reserves 25,000 50,000 Due from X & Co.  30,000
Capitals Other Debtors 80,000 1,00,000
B 1,20,000  Stock 60,000 70,000
S 80,000 1,00,000 Furniture 10,000 3,000
T  50,000 Vehicles  80,000
Machinery 75,000 
Building 25,000
3,25,000 3,08,000 3,25,000 3,08,000
The amalgamated firm took over the business on the following terms :
(a) Goodwill of S & Co. was worth ` 60,000 and that of T & Co. ` 50,000. Goodwill account
was not to be opened in the books of the new firm, the adjustments being recorded
through capital accounts of the partners.
(b) Building, machinery and vehicles were taken over at ` 50,000, ` 90,000 and
` 1,00,000 respectively.
(c) Provision for doubtful debts has to be carried forward at ` 4,000 in respect of debtors of
S & Co. and ` 5,000 in respect of debtors of T & Co.
You are required to:
(i) Compute the adjustments necessary for goodwill.
(ii) Pass the journal entries in the books of BST & Co. assuming that excess/deficit capital
(taking T’s Capital as base) with reference to share in profits are to be transferred to
current accounts.
Solution
(i) Adjustment for raising & writing off of goodwill:
Raised in old profit sharing Written off in Difference
ratio new ratio
S & Co. T & Co. Total
` ` ` ` `
B 45,000 - 45,000 Cr. 55,000 Dr. 10,000 Dr.

S 15,000 33,333 48,333 Cr. 36,666 Dr. 11,667 Cr.

T  16,667 16,667 Cr. 18,334 Dr. 1,667 Dr.
60,000 50,000 1,10,000 1,10,000
Books of BST & Co.
Journal Entries
Dr. Cr.
2012 ` `
Oct. 31 Cash Account Dr. 10,000
Bank Account Dr. 15,000
T & Co. Dr. 50,000
Sundry Debtors Dr. 80,000
Stock Account Dr. 60,000
Furniture Account Dr. 10,000
Machinery Account Dr. 90,000
Building Account Dr. 50,000
To Provision for Doubtful debts 4,000
To X & Co. 40,000
To Sundry Creditors 60,000
To B’s Capital Account 1,65,750
To S’s capital Account 95,250
(Sundry assets and liabilities of M/s S & Co. taken
over at the values stated as per agreement dated.....)
Cash Account Dr. 5,000
Bank Account Dr. 20,000
X & Co. Account Dr. 30,000
Sundry Debtors A/c Dr. 1,00,000
Stock Account Dr. 70,000
Furniture Account Dr. 3,000
Vehicles Account Dr. 1,00,000
To Provision for Doubtful Debts 5,000
To S & Co. 50,000
To Sundry Creditors 58,000
To S’s Capital Account 1,43,333
To T’s Capital Account 71,667
(Sundry assets and liabilities of M/s T & Co. taken
over at the values stated as per agreement dated...)

B’s Capital Account Dr. 10,000

T’s Capital Account Dr. 1,667
To S’s Capital Account 11,667
(Adjustment in capital accounts consequent on raising
goodwill of S & Co. for ` 60,000, T & Co. for ` 50,000
and writing off the same in the new ratio between
B,S,T as per agreement)
S & Co. 50,000
To T Co. 50,000
(Mutual indebtedness of S & Co. and T & Co.,
cancelled on taking over of the two firms)
B’s Current Account Dr. 54,250
To B’s Capital Account 54,250
(Amount credited to B’s Capital to bring capital in
profit-sharing ratio)
S’s Capital Account Dr. 1,10,250
To S’s Current Account 1,10,250
(Excess amount in S’s Capital Account transferred to
S’s current account to reduce the balance in capital
accounts in accordance with the profit sharing ratio)
Working Notes :
(i) Balance of Capital Accounts on transfer of business to M/s BST & Co.
(a) S & Co. B’s Capital S’s Capital
` ` `
As per Balance Sheet 1,20,000 80,000
Credit for Reserve 18,750 6,250
Profit on Revaluation 40,000
Less : Provision for doubtful debts (4,000) 27,000 9,000
1,65,750 95,250
(b) T & Co. S’s Capital T’s Capital
` ` `
As per Balance Sheet 1,00,000 50,000
Credit for Reserve 33,333 16,667
Profit on Revaluation 20,000
Less : Provision for doubtful debts (5,000) 10,000 5,000
1,43,333 71,667

(ii) Capital in the new firm

B S T
` ` `
Balance as taken over 1,65,750 95,250
- 1,43,333 71,667
1,65,750 2,38,583 71,667
Adjustment for Goodwill –10,000 +11,667 –1,667
1,55,750 2,50,250 70,000
Total capital, ` 4,20,000* in the new
ratio of 3:2:1, taking T’s Capital as the basis 2,10,000 1,40,000 70,000
Transfer to Current Account 54,250 (Dr.) 1,10,250 (Cr.) —
*T’s Capital is ` 70,000 and it is 1/6 of total. The total therefore is ` 4,20,000.
Illustration 2
On 31st March 2012, Sri Raman acquires on payment of ` 80,000 the business of
M/s Gupta and Singh taking over at book value the following assets and liabilities :
`
Debtors 35,000
Furniture 3,000
Stock 46,000
Creditors 10,000
There was no change between 1st January, 2012 and 31st March, 2012 in the book value of
the assets and liabilities not taken over.
The same set of books has been continued after the acquisition and no entries of the
acquisition have been passed except for the payment of ` 80,000 made by Sri Raman.
From the following balance sheet and trial balance prepare Business Purchase Account, Profit
and Loss Account for the year ended 31st December, 2012 and Balance Sheet at that date.
Balance Sheet as at December, 2011
Capital Accounts Furniture 3,000
Sri Gupta 30,000 Investments 5,000
Sri Singh 20,000 50,000 Insurance Policy 2,000
Bank Loan 18,000 Stock 40,000
Creditors 12,000 Debtors 30,000
80,000 80,000

On 31st December 2012 the trial balance is:

` `
Stock 40,000
Furniture 3,000
Investment 5,000
Insurance Policy 2,000
Business Purchase Account 80,000
Bank Loan 18,000
Capital :
Gupta 30,000
Singh 20,000
Raman 30,000
Bank 3,000
Debtors 48,000
Creditors 15,000
Purchases 3,20,000
Expenses 12,000
Sales 4,00,000
5,13,000 5,13,000
Closing Stock ` 50,000
Solution
Business Purchase Account
2012 ` 2012 `
Dec. 31
To Balance b/d 80,000 By Bank Loan 18,000
To Investments 5,000 By Gupta’s Capital A/c 30,000
To Insurance Policy 2,000 By Singh’s Capital A/c 20,000
By Goodwill 6,000
By Profit & Loss A/c 13,000
(Balancing figure, profit upto
31st March, 2012)
87,000 87,000

Profit & Loss Account of Raman for the year ended 31st December, 2012
` `
To Opening Stock 40,000 By Sales 4,00,000
To Purchases 3,20,000 By Closing Stock 50,000
To Expenses 12,000
To Business Purchase
(Profit upto 31st March) 13,000
To Net Profit
Raman’s Capital A/c 65,000
4,50,000 4,50,000
Balance Sheet of Raman as on 31st December, 2012
Raman’s Capital A/c 30,000 Goodwill 6,000
Add : Profit 65,000 95,000 Furniture 3,000
Sundry Creditors 15,000 Stock in trade 50,000
Cash at Bank 3,000
1,10,000 1,10,000
Working Notes :
(1) Goodwill
`
Value of Assets taken over
Stock 46,000
Debtors 35,000
Furniture 3,000
84,000
Less : Creditors (10,000)
Net assets 74,000
Goodwill (Balancing figure) 6,000
Purchase Consideration 80,000

(2) Increase in net assets upto 31st March 2012 :
as on 1st January as on 31st March

` `
Debtors 30,000 35,000
Stock 40,000 46,000
Furniture 3,000 3,000
73,000 84,000
Less : Creditors (12,000) (10,000)
61,000 74,000
Profit, equal to net increase 13,000 –
74,000 74,000
Illustration 3
Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. The
firm Y & Co. consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.
On 31st March, 2012 it was decided to amalgamate both the firms and form a new firm XY &
Co., wherein A, B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.
Balance Sheet as at 31.3.2012
Liabilities X & Co. Y & Co. Assets X & Co. Y & Co.
` ` ` `
Capital: Cash in hand/bank 40,000 30,000
A 1,50,000 --- Debtors 60,000 80,000
B 1,00,000 75,000 Stock 50,000 20,000
C --- 50,000 Vehicles --- 90,000
Reserve 50,000 40,000 Machinery 1,20,000 ---
Creditors 1,20,000 55,000 Building 1,50,000 ---
4,20,000 2,20,000 4,20,000 2,20,000
The following were the terms of amalgamation:
(i) Goodwill of X & Co., was valued at ` 75,000. Goodwill of Y & Co. was valued at
` 40,000. Goodwill account not to be opened in the books of the new firm but adjusted
through the Capital accounts of the partners.
(ii) Building, Machinery and Vehicles are to be taken over at ` 2,00,000, ` 1,00,000 and
` 74,000 respectively.

(iii) Provision for doubtful debts at ` 5,000 in respect of X & Co. and ` 4,000 in respect of
Y & Co. are to be provided.
You are required to:
(i) Show, how the Goodwill value is adjusted amongst the partners.
(ii) Prepare the Balance Sheet of XY & Co. as at 31.3.2012 by keeping partners capital in
their profit sharing ratio by taking capital of ‘B’ as the basis. The excess or deficiency to
be kept in the respective Partners’ Current accounts.
Solution
(i) Adjustment for raising and writing off of goodwill
Raised in old profit sharing Total Written off in Difference
ratio new ratio
X & Co. Y & Co.
3:2 5:3
` ` ` ` `
A 45,000 --- 45,000 Cr. 46,000 Dr. 1,000 Dr.
B 30,000 25,000 55,000 Cr. 57,500 Dr. 2,500 Dr.
C --- 15,000 15,000 Cr. 11,500 Dr. 3,500 Cr.
75,000 40,000 1,15,000 1,15,000 Nil
(ii) Balance Sheet of X Y & Co.(New firm) as on 31.3.2012
Capital Accounts: Vehicle 74,000
A 1,72,000 Machinery 1,00,000
B 2,15,000 Building 2,00,000
C 43,000 Stock 70,000
Current Accounts: Debtors 1,31,000
A 22,000 Cash & Bank 70,000
C 18,000
Creditors 1,75,000
6,45,000 6,45,000
Working Notes:
1. Balance of Capital Accounts at the time of amalgamation of firms
A’s Capital ` B’s Capital `
X & Co. Profit and loss sharing ratio 3:2
Balance as per Balance Sheet 1,50,000 1,00,000

Add: Reserves 30,000 20,000

Revaluation profit (Building) 30,000 20,000
Less: Revaluation loss (Machinery) (12,000) (8,000)
Provision for doubtful debt (3,000) (2,000)
1,95,000 1,30,000
B’s Capital C’s Capital
Y & Co. Profit and loss sharing ratio 5:3 ` `
Balance as per Balance sheet 75,000 50,000
Add: Reserves 25,000 15,000
Less: Revaluation (vehicle) (10,000) (6,000)
Provision for doubtful debts (2,500) (1,500)
87,500 57,500
2. Balance of Capital Accounts in the balance sheet of the new firm as on 31.3.2012
A B C
` ` `
Balance b/d: X & Co. 1,95,000 1,30,000 --
Y & Co. -- 87,500 57,500
1,95,000 2,17,500 57,500
Adjustment for goodwill (1,000) (2,500) 3,500
1,94,000 2,15,000 61,000

Total capital ` 4,30,000 (B’s capital i.e.
` 2,15,000 x 2) to be contributed in 4:5:1
ratio. 1,72,000 2,15,000 43,000
Transfer to Current Account 22,000 --- 18,000
2.2 Conversion of Partnership Firm into a Company

At times partnerships also are reconstructed like joint stock companies, with the help of
creditors if they are satisfied that if by taking of further risk or forgoing a part of the debt, the
chances of recovery of their loan and capital would improve.
It usually entails preparation of Reconstruction Account for determining the past losses which
belong to old partners and writing them off to the debit of their capital accounts. If a creditor
agrees to join as a partner the whole or only a part of the account standing to the credit of his

B’s Capital ` 21,500 being one-half of the total capital of the firm.

loan account is transferred to his capital account. For the further development of the business,
usually some fresh capital/loan is required. The amount of loan is placed to the credit of the
party contributing the same on such terms and conditions as may have been agreed upon.
When the partnership firm is converted into a company, then the financial statements of the
new company will be prepared according to Schedule III to the Companies Act, 2013. The
general instructions for preparation of Balance sheet and the Statement of Profit and Loss of
the company are given in Schedule III to the Companies Act, 2013.
Illustration 4
The following is the Balance Sheet of Messers A and B as on 31st March 2011 :
A’s Capital 40,000 Land and Buildings 50,000
B’s Capital 50,000 90,000 Stock 30,000
A’s Loan 10,000 Debtors 20,000
General Reserve 10,000 Investment
Liabilities 20,000 6% Debentures in X Ltd. 20,000
Cash 10,000
1,30,000 1,30,000
It was agreed that Mr. C is to be admitted for a fifth share in the future profits from 1st April
2011. He is required to contribute cash towards goodwill and ` 10,000 towards capital.
The following further information is furnished :
(i) The partners A and B shared the profits in the ratio 3:2.
(ii) Mr. A was receiving a salary of ` 500 p.m. from the very inception of the firm in 1998 in
addition to share of profit.
(iii) The future profit ratio between A, B and C will be 3:1:1. Mr. A will not get any salary after
the admission of Mr. C.
(iv) (a) The goodwill of the firm shall be determined on the basis of 2 years’ purchase of the
average profits from business of the last 5 years. The particulars of the profits are
as under :
`
Year ended 31-3-07 Profit 20,000
Year ended 31-3-08 Loss 10,000
The above profits and losses are after charging the salary of Mr. A. The profit of the

year ended 31st March 2007 included an extraneous profit of ` 30,000 and the
loss of the year ended 31st March 2008 was on account of loss by strike to the
extent of ` 20,000.
(b) It was agreed that the value of the goodwill of the firm shall appear in the books of
the firm.
(v) The trading profit for the year ended 31st March, 2012 was ` 40,000 before depreciation.
(vi) The partners had drawn each ` 1,000 p.m. as drawings.
(vii) The value of the other assets and liabilities as on 31st March, 2012 were as under :
`
Building (before depreciation) 60,000
Stock 40,000
Debtors Nil
Investment 20,000
Liabilities Nil
(viii) Provide depreciation at 5% on land and buildings on the closing balance and interest at
6% on A’s loan.
(ix) They applied for conversion of the firm into a Private Limited Company i.e. ABC Pvt. Ltd..
Certificate received on 1-4-2012. They decided to convert Capital A/cs of the partners
into share capital in the ratio of 3 : 1 :1 on the basis of total Capital as on 31-3-2012. If
necessary, partners have to subscribe to fresh capital or withdraw.
Prepare the Statement of Profit and Loss for the year ended 31st March, 2012 and the
Balance Sheet of the company.
Solution
Messers A, B and C
Statement of Profit & Loss for the year ended on 31st March, 2012
` `
To Dep. Building 3,000 By Trading Profit 40,000
To Interest on A’s loan 600 By Interest on Debentures 1,200
To Net Profit to :
A’s Capital A/c 22,560
B’s Capital A/c 7,520
41,200 41,200

Balance Sheet of the ABC Pvt Ltd. as on 1-4-2012

Notes No. `
I Equity and Liabilities
Shareholders funds 1,59,120
Non-current liabilities
Long term borrowings 1 10,600
Total 1,69,720
Assets
Non-current assets
Fixed assets
Tangible assets 2 57,000
Intangible assets 3 39,600
Non-current investments 20,000
Current assets
Inventories 40,000
Cash and cash equivalents 13,120
Total 1,69,720
Notes to Accounts
`
1. Long term borrowings
Loan from A 10,600
2. Tangible asset
Land and Building 57,000
3. Intangible asset
Goodwill 39,600
4. Other income
Interest on debentures 1,200
5. Finance cost
Interest on A’s loan 600
Working Notes:
1. Calculation of goodwill:
Year ended March, 31
2007 2008 2009 2010 2011
` ` ` ` `
Book Profits 20,000 (10,000) 20,000 25,000 30,000
Adjustment for extraneous profit
2007 and abnormal loss 2008 (30,000) 20,000 — — —

(10,000) 10,000 20,000 25,000 30,000

Add Back: Remuneration of A 6,000 6,000 6,000 6,000 6,000
(4,000) 16,000 26,000 31,000 36,000
Less : Debenture Interest being
non-operating income* (1,200) (1,200) (1,200) (1,200) (1,200)
(5,200) 14,800 24,800 29,800 34,800
Total Profit from 2008 to 2011 1,04,200
Less : Loss for 2007 (5,200)
99,000
Average Profit 19,800
Goodwill equal to 2 years’ 39,600
purchase
Contribution from C, equal to 1/5 7,920
2. Partners’ Capital Accounts
A B C A B C
` ` ` ` ` `
To Drawings 12,000 12,000 12,000 By Balance b/d 40,000 50,000 —
To Balance 80,320 65,360 13,440 By General 6,000 4,000 —
c/d Reserve
By Goodwill 23,760 15,840 —
By Bank — — 17,920
By Profit & 22,560 7,520 7,520
Loss A/c
92,320 77,360 25,440 92,320 77,360 25,440
3. Balance Sheet as on 31st March, 2012
A’s Capital 80,320 Goodwill 39,600*
B’s Capital 65,360 Land & Building 60,000
C’s Capital 13,440 Less : Dep. (3,000) 57,000
A’s Loan 10,000 Investments 20,000
Add : Int. due 600 10,600 Stock-in-trade 40,000
Cash (Balancing figure) 13,120**
1,69,720 1,69,720

4. Conversion into Company

`
Capital : A 80,320
B 65,360
C 13,440
Share Capital 1,59,120
Distribution of share : A (3/5) 95,472
B (1/5) 31,824
C (1/5) 31,824
A should subscribe shares of ` 15,152 (` 95,472 – ` 80,320) and C should subscribe
shares of ` 18,384 (` 31,824 – ` 13,440) B withdraws ` 33,536 (` 65,360 –
` 31,824) subscribing to shares worth ` 31,824.
* It is shown in the books of the firm only to determine the closing capital of partners
inclusive of goodwill before conversion.
** Also the closing cash balance can be derived as shown below :
` `
Trading profit (assume realised) 40,000
Add: Debenture Interest 1,200
Add: Decrease in Debtors Balance 20,000
61,200
Less: Increase in stock 10,000
Less: Decrease in Liabilities 20,000 (30,000)
Cash Profit 31,200
Add: Opening cash balance 10,000
Add: Cash brought in by C 17,920
59,120
Less: Drawings 36,000
Less: Additions to Building 10,000 (46,000)
13,120
Illustration 5
Hari, Lal and Jay have been in partnership for a number of years, sharing profits/losses in the
ratio of 2:2:1 as wholesale stationers trading under the name ‘Hari Brothers’. They decide to
convert their partnership into a limited company (with effect from 1st January, 2013) to be
known as Hari Ltd.

Immediately prior to this conversion the balance sheet of partnership as at 31 st December

2012 was as follows:
Balance Sheet
As on 31st December 2012
Liabilities ` ` Assets `
Capital accounts Fixed assets
Hari 70,000 (at written down value)
Lal 30,000 Land & Buildings 50,000
Jay 20,000 1,20,000 Plant & Machinery 30,000
Current accounts Motor vehicles 20,000
Hari 7,000 Current Assets:
Lal 5,000 Inventories 60,000
Jay 3,000 15,000 Debtors 25,000
Current liabilities Axis Bank account 5,000
Creditors 25,000
Dena Bank
account 20,000 45,000
Long-term liabilities
Loan-Hari 3,000
Loan-Gopi Ltd. 7,000 10,000
1,90,000 1,90,000
The terms of conversion are that Hari Ltd. is to take over the assets and liabilities of Hari
Brothers as follows:
Valuation for take-over
`
Land and Building 96,000
Plant and Machinery 28,000
Motor vehicles 15,000
Inventories 60,000
Debtors 24,000
Creditors 25,000
Goodwill 10,000
The closing balance in Axis Bank account is to be transferred to Dena Bank account before all
the other dissolution entries are effected in the partnership ledgers.

Lal took over one of the motor vehicles at an agreed amount of ` 2,000. All other liabilities
were paid from the Dena Bank account.
The purchase consideration is discharged by an issue at par of ` 60,000 10% Debentures
(fully paid) to the partners in their capital account proportions as shown in the above balance
sheet plus equity shares in Hari Ltd. of ` 1 each (fully paid to make up the balance due to
each partner).
You are required to
(i) prepare (a) Realisation Account (b) Partners’ Capital Accounts (c) Bank account of Axis
Bank and Dena Bank in the books of Hari Brothers;
(ii) ‘Business purchase account’ and ‘Hari Brothers’ account in Hari Ltd.'s books.
Solution
(i) (a) In the books of Hari Brothers
Realisation Account
` ` `
To Land and buildings 50,000 By Creditors 25,000
To Plant and machinery 30,000 By Lal’s capital A/c 2,000
To Motor vehicles 20,000 By Dena Bank A/c 25,000
To Inventories 60,000 By Hari Ltd. 1,83,000
To Debtors 25,000
To Partners’ capital accounts
Hari (2/5) 20,000
Lal (2/5) 20,000
Jay (1/5) 10,000 50,000
2,35,000 2,35,000
(b) Partners' Capital Accounts
Particulars Hari Lal Jay Particulars Hari Lal Jay
` ` ` ` ` `
To Realisation 2,000 By Balance b/d 70,000 30,000 20,000
A/c(motor vehicle
takeover)
To 10% Debentures* 35,000 15,000 10,000 By Current A/c 7,000 5,000 3,000
To Equity shares 62,000 38,000 23,000 By Realisation A/c
Profit 20,000 20,000 10,000
97,000 55,000 33,000 97,000 55,000 33,000
* Debentures have been issued in proportion of capital account balances i.e.

in ratio of 7:3:2.

(c) Bank Account

Particulars Axis Dena Particulars Axis Dena
Bank Bank Bank Bank
` ` ` `
To Balance b/d 5,000 - By Balance b/d - 20,000
To Axis Bank - 5,000 By Loan (Gopi Ltd.) - 7,000
To Realisation A/c - 25,000 By Loan-Hari - 3,000
By Dena Bank 5,000
5,000 30,000 5,000 30,000
(ii) In the books of Hari Ltd.
Business Purchase Account
` `
To Creditors 25,000 By Land and buildings 96,000
To Dena Bank (overdraft) 25,000 By Plant and Machinery 28,000
To Hari Brothers 1,83,000 By Motor Vehicles 15,000
By Inventories 60,000
By Debtors 24,000
By Goodwill 10,000
2,33,000 2,33,000
Hari Brothers Account
` `
To 10% Debentures A/c 60,000 By Business purchase 1,83,000
To Equity share capital A/c 1,23,000
1,83,000 1,83,000
Partnership-Sale to a Company
Illustration 6
A and B were carrying on business sharing profits and losses equally. The firm’s Balance
Sheet as at 31.12.2011 was:
Sundry Creditors 60,000 Stock 60,000
Bank overdraft 35,000 Machinery 1,50,000
Capital A/cs: Debtors 70,000

A 1,40,000 Joint Life Policy 9,000

B 1,30,000 2,70,000 Leasehold Premises 34,000
Profit & Loss A/c 26,000
Drawings Accounts:
A 10,000
B 6,000 16,000
3,65,000 3,65,000
The business was carried on till 30.6.2012. The partners withdrew in equal amounts half the
amount of profits made during the period of six months after charging depreciation at 10% p.a.
on machinery and after writing off 5% on leasehold premises. In the half year, sundry
creditors were reduced by ` 10,000 and bank overdraft by ` 15,000.
On 30.6.2012, stock was valued at ` 75,000 and Debtors at ` 60,000; the Joint Life Policy
had been surrendered for ` 9,000 before 30.6.2012 and other items remained the same as at
31.12.2011.
On 30.6.2012, the firm sold the business to a Limited Company. The value of goodwill was
fixed at ` 1,00,000 and the rest of the assets were valued on the basis of the Balance Sheet
as at 30.6.2012. The company paid the purchase consideration in Equity Shares of ` 10
each.
You are required to prepare: (a) Balance Sheet of the firm as at 30.6.2012; (b) The Realisation
Account; (c) Partners’ Capital Accounts showing the final settlement between them.
Solution
(a) Balance Sheet as on 30.6.2012
Capital Accounts: Machinery 1,50,000
A’s balance as on Less: Depreciation @
1.1.2012 1,17,000 10% p.a. (7,500) 1,42,500
Add: Profit for 6 months 11,800 Leasehold premises 34,000
1,28,800 Less: Written-off @ 5% (1,700) 32,300
Less: Drawings for 6 Stock 75,000
months (5,900) 1,22,900
B’s balance as on Sundry Debtors 60,000
1.1.2012 1,11,000
Add: Profit for 6 months 11,800
1,22,800
Less: Drawings for 6

months (5,900) 1,16,900

Bank overdraft 20,000
3,09,800 3,09,800
(b) Realisation Account
Particulars ` Particulars `
To Machinery A/c 1,42,500 By Sundry Creditors A/c 50,000
To Leasehold Premises 32,300 By Bank Overdraft A/c 20,000
A/c
To Stock A/c 75,000 By Limited Company A/c 3,39,800
(W.N.2)
To Sundry Debtors A/c 60,000
To A’s Capital A/c 50,000
To B’s Capital A/c 50,000
4,09,800 4,09,800
(c) Partners’ Capital Accounts
Date Particulars A B Date Particulars A B
` ` ` `
1.1.12 To Profit & Loss 13,000 13,000 1.1.12 By Balance b/d 1,40,000 1,30,000
A/c
To Drawings A/c 10,000 6,000
29.6.12 To Balance c/d 1,17,000 1,11,000
1,40,000 1,30,000 1,40,000 1,30,000
30.6.12 To Drawings A/c 5,900 5,900 30.6.12 By Balance b/d 1,17,000 1,11,000
To Shares in 1,72,900 1,66,900 30.6.12 By Profit & Loss 11,800 11,800
Limited Appropriation
Company A/c A/c
By Realisation A/c 50,000 50,000
1,78,800 1,72,800 1,78,800 1,72,800
Working Notes:
(1) Ascertainment of profit for the 6 months ended 30th June, 2012
Closing Assets: ` `
Stock 75,000
Machinery less depreciation 1,42,500

Leasehold premises less written off 32,300

3,09,800
Less: Closing liabilities:
Bank overdraft 20,000 ( 70,000)
Closing Net Assets 2,39,800
Less: Opening combined capital:
A – ` (1,40,000 – 13,000 – 10,000) 1,17,000
B – ` (1,30,000 – 13,000 – 6,000) 1,11,000 (2,28,000)
Profit before adjustment of drawings 11,800
Add: Combined drawings during the 6 months (equal to profit) 11,800
Profit for 6 months 23,600
(2) Ascertainment of purchase consideration:
Closing net assets (as above) ` 2,39,800 + Goodwill ` 1,00,000 = ` 3,39,800.
Illustration 7
A, B and C were in partnership sharing profits and losses 3:2:1. There was no provision in the
agreement for interest on capitals or drawings.
A died on 31.12.2011 and on that date, the partners’ balance were as under:
Capital Account : A – ` 60,000; B- ` 40,000; C- ` 20,000
Current Account: A – ` 29,000; B – ` 20,000; C – ` 5,000 (Dr.).
By the partnership agreement, the sum due to A’s estate was required to be paid within a
period of 3 years, and minimum instalment of ` 20,000 each were to be paid, the first such
instalment falling due immediately after death and the subsequent instalments at half-yearly
intervals. Interest @ 5% p.a. was to be credited half-yearly.
In ascertaining his share, goodwill (not recorded in the books) was to be valued at ` 60,000
and the assets, excluding the Joint Endowment Policy (mentioned below), were valued at
` 36,000 in excess of the book values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets.
The Joint Assurance Policy shown in the books at ` 20,000 matured on 1.1.2011, realising
` 26,000; payments of ` 20,000 each were made to A’s Executors on 1.1.2011, 30.6.2011 and
31.12.2011. B and C continued trading on the same terms as previously and the net profit for the
year to 31.12.2011 (before charging the interest due to A’s estate) amounted to ` 32,000. During
that period, the partners drawings were: B- ` 15,000; and C- ` 8,000.

On 1.1.2012, the partnership was dissolved and an offer to purchase the business as a going
concern for ` 1,40,000 was accepted on that day. A cheque for that sum was received on
30.6.2012.
The balance due to A’s estate, including interest, was paid on 30.6.2012 and on that day, B
and C received the sums due to them.
You are required to write-up the Partners’ Capital and Current Accounts from 1.1.2011 to
30.6.2012. Show also the account of the executors of A.
Solution
Partners’ Current Accounts
Particulars A B C Particulars A B C
1.1.2011 ` ` ` 1.1.2011 ` ` `
To Balance b/d --- ---- 5,000 By Balance b/d 29,000 20,000 --
To A’s Current - 20,000 10,000 By B’s Current A/c – 20,000 -- --
A/c – goodwill
goodwill
To A’s Current - 12,000 6,000 By C’s Current A/c – 10,000 - -
A/c – goodwill
Revaluation
Profit
To A’s Capital 80,000 - - By B’s Current A/c – 12,000 - -
A/c – Revaluation profit
transfer
By C’s Current A/c – 6,000
Revaluation profit
By Joint Life Policy A/c 3,000 2,000 1,000
(` 26,000 –
` 20,000)
By Balance c/d 10,000 20,000
80,000 32,000 21,000 80,000 32,000 21,000
1.1.2011 31.12.2011
To Balance b/d 10,000 20,000 By Profit & Loss 17,617 8,808
Appropriation A/c
31.12.2011 By Balance c/d 7,383 19,192
To Drawings A/c 15,000 8,000
25,000 28,000 25,000 28,000
1.1.2012 30.6.2012
To Balance b/d 7,383 19,192 By Realisation A/c - 12,573 6,287
profit
To B’s Capital By C’s Capital A/c - --- 12,905
A/c – transfer
transfer 5,190 ---
12,573 19,192 12,573 19,192


Particulars A B C Particulars A B C
1.1.2011 ` ` ` 1.1.2011 ` ` `
To A’s Executors A/c 1,40,000 ---- --- By Balance b/d 60,000 40,000 20,000
To Balance c/d --- 40,000 20,000 By A’s Current A/c 80,000 -- --
1,40,000 40,000 20,000 1,40,000 40,000 20,000
31.12.2011 1.1.2011
To Balance c/d 40,000 20,000 By Balance b/d 40,000 20,000
40,000 20,000 40,000 20,000
30.6.2012 1.1.2012
To C’s Current A/c --- 12,905 By Balance b/d 40,000 20,000
– transfer
To Bank A/c 45,190 7,095 30.6.2012
By B’s Current A/c
– transfer 5,190 ---
45,190 20,000 45,190 20,000
A’s Executors Account
Date Particulars ` Date Particulars `
1.1.2011 To Bank A/c 20,000 1.1.2011 To A’s Capital A/c 1,40,000
1.1.2011 To Balance c/d 1,20,000
1,40,000 1,40,000
30.6.2011 To Bank A/c 20,000 1.1.2011 By Balance b/d 1,20,000
30.6.2011 To Balance c/d 1,03,000 30.6.2011 By Interest A/c 3,000
1,23,000 1,23,000
31.12.2011 To Bank A/c 20,000 1.7.2011 By Balance b/d 1,03,000
31.12.2011 To Balance c/d 85,575 31.12.2011 By Interest A/c 2,575
1,05,575 1,05,575
30.6.2012 To Bank A/c 87,715 1.1.2012 By Balance b/d 85,575
30.6.2012 By Interest A/c 2,140
87,715 87,715
Working Notes:
(1) Adjustment in regard to Goodwill
Partners A B C
Share of goodwill before death (` ) 30,000 20,000 10,000
Share of goodwill after death (` ) - 40,000 20,000
Gain (+)/Sacrifice (-) (` ) (30,000) 20,000 10,000
Cr. Dr. Dr.

(2) Adjustment in regard to revaluation of assets

Partners A B C
Share of profit on revaluation (` ) 18,000 12,000 6,000
credited to all the partners
Debited to the continuing partners (` ) - 24,000 12,000
(` ) (18,000) 12,000 6,000
Cr. Dr. Dr.
(3) Ascertainment of Profit for the year ended 31.12.2011
` `
Profit before charging interest on balance due to A’s executors 32,000
Less: Interest payable to A’s executors:
from 1.1.2011 to 30.6.2011 3,000
From 1.7.2011 to 31.12.2011 2,575 (5,575)
Balance of profit to be shared by B and C 26,425
(4) Ascertainment of Profit for the year ended 31.12.2011
Capital Account – B 40,000 Sundry Assets (balancing figure) 1,19,000
Capital Account – C 20,000 Partners’ Current A/cs –B 7,383
A’s Executors A/c 85,575 Partners’ Current A/cs- C 19,192
1,45,575 1,45,575
(5) Realisation Account
` `
To Sundry Assets A/c 1,19,000 By Bank A/c (purchase 1,40,000
To Interest A/c – A’s Executors 2,140 consideration)
To Partners’ Capital A/cs – B 12,573
To Partners’ Capital A/cs – C 6,287
1,40,000 1,40,000
2.2.1 Apportionment of shares amongst the partners

Sometime an examination problem may require the students to suggest equitable basis for
division of shares between the vendors, when they are partners, so as to preserve the rights
as previously existed between them, that is, to maintain the same profit-sharing ratio and to
preserve the priority in regard to repayment of capital.

Suppose A, B and C share profits and losses in the ratio 3 : 2 : 1 after allowing interest on
capital @ 9% p.a. Their capitals on 31st December, 2011 were: A ` 50,000, B ` 30,000 and C
` 20,000. On 1st January, 2012 the business was converted into a limited company and was
valued at ` 1,30,000. A scheme of capitalisation, whereby the mutual interest of partners may
remain intact as far as possible is suggested below:
The total capital being ` 1,00,000 and the value placed on the business being ` 1,30,000
there is goodwill of ` 30,000 to be shared by the partners in the ratio of 3:2:1 or A ` 15,000,
B ` 10,000 and C ` 5,000. The capital will now be: A ` 65,000, B ` 40,000 and C ` 25,000.
Taking B’s capital as the basis, A’s capital should be ` 60,000, i.e. 40,000 × 3/2 and C’s
capital should be ` 20,000. Both A and C have ` 5,000 excess. Since interest on capital is
meant to compensate those whose capital is in excess of proportionate limits and since in the
case of partners it is an appropriation of profit, it will be proper to give 9% preference shares
to A & C for ` 5,000 each and the remaining amount of ` 1,20,000 can be in the form of equity
shares to be divided among A, B and C in the ratio of 3 : 2 : 1. They will then share the
company’s profit in the ratio of 3 : 2 : 1 after allowing preference dividend.
Illustration 8
Prabhu & Co. is a partnership firm consisting of Mr. Prabhu, Mr. Bhola and Mr. Shiv who share
profits and losses in the ratio of 2:2:1 and Bhagwan Ltd. is a company doing similar business.
Following is the Balance sheet of the firm and that of the company as at 31.3.2012:
Liabilities Prabhu Bhagwan Prabhu Bhagwan
& Co. Ltd. & Co. Ltd.
` ` ` `
Equity share Capital: Plant & machinery 2,50,000 8,00,000
Equity shares of 10,00,000 Furniture & fixture 25,000 1,12,500
` 10 each Stock in trade 1,00,000 4,25,000
Partners’ capital: Sundry debtors 1,00,000 4,12,500
Prabhu 1,00,000 Cash at bank 5,000 2,00,000
Bhola 1,50,000 Cash in hand 20,000 50,000
Shiv 50,000
General reserve 50,000 3,50,000
Sundry creditors 1,50,000 6,50,000
5,00,000 20,00,000 5,00,000 20,00,000
It was decided that the firm Prabhu & Co. be dissolved and all the assets (except cash in hand
and cash at bank) and all the liabilities of the firm be taken over by Bhagwan Ltd. by issuing
25,000 shares of ` 10 each at a premium of ` 2 per share.
Partners of Prabhu & Co. agreed to divide the shares issued by Bhagwan Ltd. in the profit
sharing ratio and bring necessary cash for settlement of their capital.

The creditors of Prabhu & Co. includes ` 50,000 payable to Bhagwan Ltd. An unrecorded liability
of ` 12,500 of Prabhu & Co. must also be taken over by Bhagwan Ltd.
Prepare:
(i) Realisation account, Partners’ capital accounts and Cash in hand/Bank account in the
books of Prabhu & Co.
(ii) Pass journal entries in the books of Bhagwan Ltd. for acquisition of Prabhu & Co.
Solution
(i) In the books of Prabhu & Co.
Realisation Account
` `
To Plant & Machinery 2,50,000 By Sundry Creditors 1,50,000
To Furniture & Fixture 25,000 By Bhagwan Ltd. (Refer W.N.) 3,00,000
To Stock in trade 1,00,000 By Partners’ Capital Accounts (loss):
To Sundry Debtors 1,00,000 Prabhu’s Capital A/c 10,000
Bhola’s Capital A/c 10,000
Shiv’s Capital A/c 5,000
4,75,000 4,75,000
Prabhu Bhola Shiv Prabhu Bhola Shiv
` ` ` ` ` `
To Realisation A/c 10,000 10,000 5,000 By Balance b/d 1,00,000 1,50,000 50,000
To Shares in By General
Bhagwan Ltd. 1,20,000 1,20,000 60,000 Reserve 20,000 20,000 10,000
To Cash - 40,000 - By Cash 10,000 - 5,000
1,30,000 1,70,000 65,000 1,30,000 1,70,000 65,000
Cash and Bank Account
` ` ` `

To Balance b/d 20,000 5,000 By Cash A/c (Contra) 5,000
To Bank A/c (Contra)* 5,000 By Bhola 40,000
To Prabhu 10,000

It is assumed that cash at bank has been withdrawn to pay to Partner Bhola.

To Shiv 5,000
40,000 5,000 40,000 5,000
(ii) In the Books of Bhagwan Ltd.
Journal Entries
Dr. (`) Cr. (`)
1. Business Purchase Account Dr. 3,00,000
To Liquidators of Prabhu & Co. 3,00,000
(Being business of Prabhu & Co. purchased and
payment due)
2. Plant and Machinery A/c Dr. 2,50,000
Furniture and Fixture A/c Dr. 25,000
Stock in Trade A/c Dr. 1,00,000
Sundry Debtors A/c Dr. 1,00,000
To Sundry Creditors 1,50,000
To Unsecured Liability 12,500
To Business Purchase Account 3,00,000
To Capital Reserve (B.F.) 12,500
(Being take over of all assets and liabilities)
3. Liquidators of Prabhu & Co. Dr. 3,00,000
To Equity Share Capital Account 2,50,000
To Securities Premium Account 50,000
(Being purchase consideration discharged in the
form of shares of ` 10 each issued at a premium of
` 2 each)
4. Sundry Creditors Account Dr. 50,000
To Sundry Debtors Account 50,000
(Being mutual owing eliminated)
Working Note:
Computation of purchase consideration:
25,000 Equity shares of ` 12 each = ` 3,00,000
Equity shares to be given to partners :
Prabhu = 10,000 Shares @ ` 12 = ` 1,20,000
Bhola = 10,000 shares @ ` 12 = ` 1,20,000
Shiv = 5,000 shares @ ` 12 = ` 60,000

Illustration 9
P and Q were carrying on business sharing profits and losses equally. The firm’s Balance
Sheet as at 31.12.2013 was:
Capital Accounts: Plant 1,60,000
P 1,50,000 Building 48,000
Q 1,30,000 2,80,000 Debtors 75,000
Sundry Creditors 80,000 Stock 70,000
Bank Overdraft 45,000 Joint Life Policy 6,000
Profit & Loss A/c 30,000
Drawings Account:
P 9,000
Q 7,000 16,000
4,05,000 4,05,000
The operations of the business were carried on till 30.06.2014. P and Q both withdrew in equal
amount half the amount of profit made during the current period of six months after charging
depreciation at 10% per annum on plant and after writing off 5% on building.
During the current period of six months, creditors were reduced by ` 20,000 and bank
overdraft by ` 5,000.
The joint life policy was surrendered for ` 6,000 before 30th June 2014. Stock was valued at
` 84,000 and debtors at ` 68,000 on 30th June 2014. The other items remained the same as
at 31.12.2013.
On 30.06.2014, the firm sold its business to PQ Ltd. The value of goodwill was estimated at
` 1,30,000 and the remaining assets were valued on the basis of the balance sheet as on
30.06.2014.
PQ Ltd. paid the purchase consideration in equity shares of ` 10 each.
You are required to prepare:
(a) Balance sheet of the firm as at 30.06.2014,
(b) Realisation account,
(c) Partners' Capital Accounts showing the final settlement between them. (16 Marks)

Answer
(a) Balance sheet of the firm as at 30.06.2014
Capital Accounts: Plant :
P's Capital 1,33,800 Opening Balance 1,60,000
Q's Capital 1,15,800 Less: Depreciation @ 10% 8,000 1,52,000
Creditors 60,000 Building:
Bank Overdraft 40,000 Opening Balance 48,000
Less: Written-off @ 5% 2,400 45,600
Debtors 68,000
Stock 84,000
Total 3,49,600 Total 3,49,600
(b) Realisation Account

Dr. Cr.
Particulars Amount Particulars Amount
To Sundry Assets: By Creditors 60,000
Plant 1,52,000 By Bank Overdraft 40,000
Building 45,600
Stock 84,000 By PQ Limited A/c 3,79,600
Debtors 68,000 (working note 2)
To Profit:
P's Capital A/c 65,000
Q's Capital A/c 65,000
4,79,600 4,79,600
(c) Partner's Capital Accounts

Date Particulars P (` ) Q (`) Date Particulars P (` ) Q (` )
01.01.14 To Profit & 15,000 15,000 1.1.14 By Balance b/d 1,50,000 1,30,000
Loss A/c
01.01.14 To Drawing A/c 9,000 7,000 30.06.14 By Profit (W. N. 1) 15,600 15,600
30.06.14 To Drawing A/c 7,800 7,800
(W. N.1)
30.06.14 To Balance c/d 1,33,800 1,15,800
Total 1,65,600 1,45,600 Total 1,65,600 1,45,600
30.06.14 By Balance b/d 1,33,800 1,15,800

30.06.14 To Shares in 1,98,800 180,800 30.06.14 By Realisation A/c 65,000 65,000

PQ Limited (Profit)
1,98,800 1,80,800 1,98,800 1,80,800
Working Notes
(1) Ascertainment of profit for the period of 6 Months ended 30.06.2014
Amount (`)
Closing Assets:
Stock 84,000
Debtors 68,000
Plant Less Depreciation 1,52,000
Building Less Written off 45,600
Total 3,49,600
Less: Closing Liabilities:
Creditors 60,000
Bank Overdraft 40,000 1,00,000
Closing Net Assets 2,49,600
Less: Opening adjusted Capitals
P (`1,50,000 – `15,000 – `9,000) 1,26,000
Q (`1,30,000 – `15,000 – `7,000) 1,08,000 2,34,000
Profit Net of drawings 15,600
Actual Profit for Six Months before drawings(half of profit) = 15,600 x 2 31,200
Combined Drawing during six months (half of profit) 15,600
(2) Ascertainment of purchase consideration
`
Closing Net Assets (As above) 2,49,600
Add: Goodwill 1,30,000
Total Purchase Consideration 3,79,600

Summary
 Amalgamation of partnership firms includes
 Closing the old books of Amalgamating firms
 Opening the new books of Amalgamated firm
 When one firm is merged with another existing firm, entries will be in the pattern of
winding up in the books of the firm which has ceased to exist. The other firm will record
the transaction as that of a business purchase.
 Creditors play an important role in conversion of partnership firm into company.

Partnership Acccouting

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3

Advanced Issues in Partnership

Unit - 1 : Dissolution of Partnership Firms

1.2 Circumstances Leading to Dissolution of Partnership

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(b) death of a partner;

1.3 Consequences of Dissolution

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1.4 Closing of Partnership Books on Dissolution

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Quick 25,000 55,000 Cash 6,000

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1.5 Consequences of Insolvency of a Partner

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1.6 Loss Arising from Insolvency of a Partner

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P 20,000 Goodwill 40,000

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You are required to show:

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Partners’ Capital Accounts

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The assets realised as under:

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Sundry Creditors Account

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To Sundry By Provision for Doubtful Debts 5,000

To Cash Account 5,000 By Balance b/d 5,000

To X’s Capital A/c - transfer 10,000 By Balance b/d 10,000

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To Z’s Capital A/c* 4,800 By Z’s Capital A/c 8,100

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Partners’ Capital Accounts

1.7 Piecemeal Payments

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1.7.1 Maximum Loss Method

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cash balance and amount

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amount shown in step (2) 35,100 14,040 14,040 7,020

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Payment ` 500 (C) - (500) -

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Balance Due 12,00,000 10,00,000 10,00,000 5,00,000

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(ii) Scheme of payment of ` 15,00,000 realised in 3rd Instalment:

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© The Institute of Chartered Accountants of India