Category: Accounting

ADMISSION OF PARTNER 

Section 31 of the Partnership Act deals with the statutory provision regarding admission of a new partner. These provisions are summarised below:

(a) A new partner cannot be admitted without the consent of all the partners unless otherwise agreed upon.

(b) A new partner admitted to an existing firm, is not liable to any debts of the firm incurred, before he conies in as a partner. The new partner cannot be held responsible for the acts of the old partners unless it is proved that

(i) the reconstituted firm has assumed the liability to pay the debt; and

(ii) that the creditor concerned has agreed to accept the reconstituted finn as his debtor and to discharge the old firm from liability.

However, a minor adMitted to the benefits of partnership, who, if he elects to become partner in the firm after attaining majority, shall become personally liable for all the acts of the finn done since he was admitted to the benefits of partnership.

A newly admitted partner shall be liable only for the debts incurred or transactions entered into by the fimi subsequent to his becoming a partner.

Provisions affecting accounting treatment

The partnership deed is usually very elaborate. It covers all matters affecting the partnership business. However, in the absence of any provision to the contrary in the partnership deed/agreement, the following provisions govern the accounting treatment of certain items:

1. Right to share profits: Partners are entitled to share equally in the profits earned and to contribute equally to losses incurred.

2. Interest on capital: No interest is payable on the capitals contributed by them. Similarly no interest is to be charged on drawings. However, where partnership agreement provides for payment of interest on capital, such interest is payable out of profits of the business unless otherwise provided.

3. Interest on advances: A partner who makes an advance of money to the firm beyond the amount of his capital for the purpose of business, is entitled to get interest thereon at the rate of 6% p.a.

4. Right to share subsequent profits after retirenent: Where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them, the outgoing partner or his estate is entitled, at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.

5. No remuneration for firm’s work: A partner is required to attend diligently to his duties in conducting the business of the finn. He has no right to receive remuneration or salary for taking part in the conduct of the business.

MEANING OF PARTNERSHIP

Partnership form of business organisation came into existence on account of limitations of sole proprietary concerns. The major limitations of sole proprietary concerns are those of shortage of funds, uncertainty about existence, unlimited personal liability etc. In case of a partnership business two or more persons join hands together to do a business. Thus, the risk, funds, responsibility all are shared. The Indian Partnership Act, 1932 is applicable to contracts of Partnership. According to Section 4 of the said Act partnership is “the relation between persons who have agreed to share the profits of a business carried on by all or any ofthcmacting for all”. Persons who have entered into partnership with one another are called individually ‘partncrs’ and collectively a ‘firm’ and the name undcr which the business is carried on is called the ‘firm’s name’.

The term ‘firm’ is merely a commercial notion. Law does not invest the firm with legal personality apart from its partners except for the purposes of assessment of income-tax. A ‘firm’ cannot become a member of another partnership firm though its partners can join any other firm as partners.

Highest in First Out Method (HIFO)

According to this method, the inventory of materials or goods should be valued at the lowest possible prices. Materials or goods purchased at the highest prices are treated as being first issued/sold irrespective of the date of purchase. This method is very suitable when the market is constantly fluctuating because cost of heavily priced materials or goods is recovered from the production or sales at the earliest However, the method involves too many calculations as is the case of FIFO or LIFO method. The method has therefore, not been adopted widely.

Base Stock Method

The method is based on the contention that each enterprise maintains at all times a minimum quantity of materials or finished goods in its stock. This quantity is termed as base stock. The base stock is deemed to have been created out of the first lot purchased and, therefore, it is always valued at this price and is carried forward as a fixed asset. Any quantity over and above the base stock is valued in accordance with any other appropriate method. As this method aims at matching current costs to current sales, the LIFO method will be most suitable for valuing stock of materials or finished goods other than the base stock. The base stock method has the advantage of charging out materials/goods at actual cost Its other merits or demerits will depend on the method which is used for valuing materials other than the base stock.

Next if First out Method (NIFO)

The method attempts to value materials issues or goods sold at an actual price which is as near as possible to the market price. Under this method the issues are made or cost of goods sold is taken ai the next price, i.e., the price of materials or goods which has been ordered but not yet received. In other words, issues of goods for further processing or sale are at the latest price at which the company has been committed even though materi.als’goods have not yet been physically received. This method is bettetthan marked price method under which every time when materials or goods are issued or sold, their market price will have to be ascertained. In case of this method materials or goods will. be issued at the price at which anew order has been placed and this price will hold good for all future issues till a next order is placed. For example, 100 units of material A purchased @ Re I per unit are lying in the store and an order for another 100 units @ Rs 1.25 has already been placed. If a requisition of 50 units from a department is made, they will be issued to the department at Rs 1.25 per unit (i.e., the price at which the materials are yet to be received).

The value of inventory on a particular date is ascertained by deducting the cost of materials issued or goods sold from the total value of materials or goods purchased. Calculations of issue prices are complicated in this method and therefore the method is not widely used.

Weighted Average Price Method

This method is based on the presumption that once the materials are put into a common bin, they lose their separate identity. Hence, the inventory consists of no specific batch of goods. The inventory is thus priced on the basis of average prices paid for the goods, weighted according to the quantity purchased at each price.

Weighted Average Price Method is very popular on account of its being based on the total quantity and value of malcrials purchased besides reducing number of calculations. As a matter of fact the new average price is to be calculated only when a fresh purchase of materials is made in place of calculating it every now and then as is the case with the FIFO, L!FQ, NIFO or HIFO methods. However, in case of this method different prices of materials are charged from production particularly when the frequency of purchases and issues/sales is quite large and the concern is following perpetual inventory system.

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.

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.

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.

Recognition proportionately over the performance of the contract According to this basis, revenue is recognised even in those cases where the work has not been completed in all respects. This is particularly true in case of long-term contracts which may take few years to complete. In case of such contracts, revenue is recognised on the basis of the work which has becn completed and approved by the contractee (technically known as work certified). This is done on the basis of certain accepted norms which are given below:

(i) When less than one-fourth ofthe contract is completed, no profit should be taken to the Profit and Loss Account,

(ii) When one-fourth or more but less than one-half of the contract is completed. one-third of the profit made to date should be taken to the Profit and Loss Account. This may, further, be reduced on the basis of cash received by the contractor from the coniractee. This is technically known as reducing profit on cash basis.

(iii) If half or more of the contract has been completed, two-third of the profit as reduced on cash basis maybe taken 10 the Profit and Loss account.