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When assets and liabilities have to appear in the books at the revised values.

In such a case a Profit and Loss Adjustment Account or Revaluation Account is opened in the books. The following entries are to be passed.

(i) For increase in the value of an asset or decrease in the value of a liability: 

Asset/Liability A/c  Dr.

To P. & L. AdjustnientA/c

(ii) For decrease in the value of an asset or increase in the value of a liability. 

P. & L. Adjustment A/c Dr.

To Asset/Liability A/c

(iii) The profit on revaluation will be transferred to old partners’ capital accounts in the old profit sharing ratio. 

P. & L. Adjustment A/c  Dr.

To Old Partners Capital A/cs. (Individually)

In the event of loss, the entry will be reversed.

When assets and liabilities have to appear at old values in the books 

A Memorandum Profit and Loss Adjustment Account will be opened in the books. The increase in the value of assets or decrease in the value of liabilities will be credited to this account. The decrease in the value of assets or increase in the value of liabilities will be debited to this account. However only two entries will be passed:

(i) For credited in the profit on revaluation to old partners’ accounts: 

Memorandum P. & L. Adjustment A/c Dr.

To Old Partners’ Capital Accounts (in old ratio)

In case of loss the entry will be reversed.

(ii) For writing off the profit on revaluation to all partners’ capital accounts (including the new partner): 

Partners’ Capital Accounts (in the new ratio) Dr.

To Memorandum P& L. Adjustments A/c

In case of loss the entry will be reversed.

When the goodwill account is not appearing in the books. There can be several alternatives.

(i) The new partner may bring cash for his share of goodwill. The amount so brought in by the new partner will be credited to the old partners in the ratio in which they sacrifice on admission of the new partner.

Alternatively, the amount brought in cash for goodwill by the new partner be credited to the goodwill account. It may then be transferred to old partners’ capital accounts in the sacrificing ratio. However, thc method is not preferable to one discussed above.

Another alternative could be to credit the new partner’s capital account with the bash brought in by him for capital and goodwill. A goodwill account is raised in the books with full value and the amount is credited to the old partners in the old profit sharing ratio. The goodwill account is then written off to all partners in the new profit sharing ratio.

 

The following arc the points of distinction between a transaction of sale and a consignment transaction:

(i) Meaning: A contract of sale is a contract where the seller transfers or agrees to transfer the ownership of goods to the buyer for a consideration termed as “Price”. While consignment is despatbh of goods from one person to another at different place for the purpose of warehousing and ultimate selling.

(ii) Transfer of ownership: In case of sale, the ownership and risk ofthe goods passes to the buyerwliile in case of consignment, the ownership and theriskofgoodscontinues with the consignor till the consignee sells the goods to some other person.

(iii) Relationship: In case of sale, the relationship between the two parties is that of the seller and the buyer while in case of consignment, the relationship between the consignor and consignee is that of a principal and an agent.

 

 

 

AS 10 : Accountiug for Fixed Assets and Goodwill: It has already been stated while discussing treatment of goodwill in the preceding chapter, that goodwill account should be raised in the books only when it is paid for and not self-generated by the firm. Hence, the following treatment for goodwill should be preferred in case of retirement, death, change in profit sharing ratio or amalgamation of firms.

(i) Goodwill on Retirement: Death of a Partner: In the case of retirement of a partner, the continuing partners will gain in tenns of profit sharing ratio. Hence, the continuing partners have to share the burden ofthe share of goodwill of the retiring partner in their gaining ratio. In this case the retiring partner’s capital account should be credited with his share of goodwill and the continuing partners’ capital accounts should be debited with the amount in their gaining ratio. Alternatively, the total value ofhe goodwill may be raised by debiting the goodwill account and crediting all the partners’ capital account in the old profits sharing ratio. The goodwill may then be written off debiting the capital accounts of the remaining partners in the new ratio and crediting the goodwill account.

Accounting Problems 

The accounting problems in the event of retirement of a partner can be put as follows:

(i) Adjustment for Goodwill,

(ii) Revaluation of assets  and liabilities.

(iii) Adjustment regarding Reserves and other undistributed profits.

(iv) Adjustments regarding profit sharing ratios.

(v) Payment to the retiring partner.

1. Goodwill. The retiring partner will be entitled to his share of goodwill in the (inn. The problem of goodwill can be dealt in the following two different ways:

(a) Where goodwill account is already appearing in the books:

In such a case if goodwill is properly valued, no further adjustment will be needed. The amount has already been credited to all the partners including the retiring partner.

(b) Where goodwill account is not appearing in lire book. 

According to AS 10 Goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. In other words no goodwill account should be raised in case of internally generated goodwill.

When the new partner brings a portion of the required amount of goodwill.  In such a case, the amount brought in by the new partner should be shared by the old partners in the sacrificing ratio nd the portion of amount of goodwill not brought in by the new partner thould be adjusted through the capital accounts of partners by debiting new partner’s capital account with the amount and crediting the old partners’ capital accounts in their sacrificing ratio.

Where the new partner privately pays the amount of goodwill to old partners: In this case, no entry should be passed in the books of the firm. The amount to be paid to each partner should be calculated as per the profit-sacrificing ratio.

RETIREMENT OF PARTNER 

Section 32 of the Partnership Act deals with the statutory provisions relating to retirement of a partner from partnership firm. These provisions are summarised below:

(i) A partner may retire from the firm

(a) in accordanc with an express agreement; or

(b) with consent of all other partners; or

(c) where the partnership is at will, by giving a notice in writing to all the other partners of his intention to retire.

(ii) A retiring partner may carry on business competing with that of the (in  and may advertise such business. Btt he has no right to:

(a) use the name of the firm,

(b) represent himself as carrying on the business of the firm,.or

(c) solicit the custom of the old customers of the firm except when he obtains these rights by an agreement with the other partners of the firm.

• A retiring partner will not be liable for liabilities incurred by the firm after his retirement.  However, he must give a public notice to that effect Such a public notice is not necessary in case of a sleeping or dormant partner.
• Retirement of a partner by death or insolvency also does not require, any public notice.

Abnormal loss. This loss should be debited to Abnormal Loss Account and credited to Consignment Account. Abnormal Loss Account may be closed by transferring to P & L Account.

The credit to the consignment account with the value of Abnormal Loss is given because it will make possible for the management to judge properly the profitability or otherwise of the consignnicnt.

The valuation of stock destroyed on account of abnormal reasons will be done on the same basis as valuation of Stock on Consignment i.e., proportionate cost price plus proportionate direct expenses incurred up to the date of loss.

While valuing abnormal loss, care should be taken of the stage where abnormal loss took place since only such expenses have to be included in the valuation oEsuch abnormal loss which have been incurred upto that stage. This will be clear with the help of the following illustration.

BALANCE SHEET 

Balance Sheet has two sides. On the left hand side, the “liabilities” of the business are shown while on the right hand side the assets of the business appear.

It will be useful here to quote definitions of the Balance Sheet given by some prominent writers. According to Palmer, “The Balance Sheet is a statement at a given date showing on one side the trader’s property and possessions and on the other side his liabilities.” According to Freeman, “A Balance Sheet is an itemised list of the assets, liabilities and proprietorship of the business of an individual at a certain date.” The definition given by the American Institute of Certified Public Accountants makes the meaning of Balance Sheet more clear. According to it, Balance Sheet is ‘a list of balances of the asset and liability accounts. This list depicts the position of assets and liabilities of a specific business at a specific point of time.”

Proforma of Balance Sheet

There is no prescribed form of Balance Sheet for a sole proprietary and partnerhip concern. However, the assets and liabilities may be shown in any of the following order.

1. Liquidity Order.

2. Permanency Order.

1. Liquidity order. In case a concern adopts liquidity order, the assets which are more readily convertible into cash come first and those which cannot be so readily converted come next and so on. Similarly those liabilities which are payable first come first, and those payable later, come next and so on.